ITEM 1. BUSINESS
Overview
The Company is one of the nation's leading integrated communications providers ("ICPs") of competitive communications services, based on estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to incumbent local exchange carriers ("ILECs"), long distance carriers, Internet service providers ("ISPs") and other communications service providers for a full range of communications services in the increasingly deregulated telecommunications industry. Through its competitive local exchange carrier ("CLEC") operations, the Company operates networks in four regional clusters covering major metropolitan statistical areas in California, Colorado, Ohio and the Southeast. The Company also provides a wide range of network systems integration services, maritime and international satellite transmission services, and subsequent to January 21, 1998, a variety of Internet connectivity and other value-added Internet services. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from approximately $111.6 million for fiscal 1995 to approximately $273.4 million for fiscal 1997.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act") and pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, the Company is now permitted to offer all interstate and intrastate telephone services, including competitive local dial tone. The Company is marketing and selling local dial tone services in major metropolitan areas in the following regions: California, which began service in late January 1997, followed by Ohio in February 1997, Colorado in March 1997 and the Southeast in May 1997. During fiscal 1997, the Company sold approximately 178,000 local access lines, of which approximately 141,000 were in service as of December 31, 1997. As a complement to its local exchange service, the Company has begun marketing bundled service offerings which include long distance, enhanced telecommunications services and data services. The Company has 19 operating high capacity digital voice switches and 15 data communications switches, and plans to install additional switches as demand warrants.
In developing its telecommunications service offerings, the Company continues to invest significant resources to expand its network. This expansion is being undertaken through a combination of constructing owned facilities, entering into long-term agreements with other telecommunications carriers, establishing strategic alliances with utility companies and through mergers and acquisitions. See "-Recent Developments."
Recent Developments
Merger with NETCOM On-Line Communication Services, Inc. On January 21, 1998, the Company completed a merger with NETCOM On-Line Communication Services, Inc. ("NETCOM") ("NETCOM Merger"). Located in San Jose, California, NETCOM is a provider of Internet connectivity and World Wide Web ("Web") site hosting services and other value-added services. For calendar years 1995, 1996 and 1997, NETCOM reported revenue of approximately $52.4 million, $120.5 million and $160.7 million, respectively, and EBITDA losses of approximately $(6.3) million, $(20.3) million and $(1.7) million, respectively. The Company will account for the business combination under the pooling of interests method of accounting.
At the effective time of the NETCOM Merger, each outstanding share of NETCOM common stock, $.01 par value, became automatically convertible into shares of ICG common stock at an exchange ratio of 0.8628 shares of ICG common stock per NETCOM common share. As a result of this transaction, the Company expects to issue an estimated 10.2 million shares of ICG common stock for the NETCOM common shares outstanding on January 21, 1998. Cash will be paid in lieu of any fractional shares.
The Company believes that the NETCOM Merger will create a full-service business communications company providing a single source for a complete range of voice, data, Internet, Web site hosting and other communications services over an extensive fiber optic network. Currently, approximately one-half of NETCOM's customers are located in the Company's existing network territory. It is anticipated that the NETCOM Merger will enable the combined entity to better utilize ICG's fiber and frame relay networks by providing NETCOM with extensive network infrastructure for the on-net transportation of its Internet traffic.
Announcement of New Service Offerings. In March 1998, the Company announced its plans to offer long distance service via Internet protocol ("IP") technology at rates as low as 5.9 cents per minute. This service will be offered in 166 cities across the nation, covering 90% of the U.S. long distance market, by the end of fiscal 1998. ICG and NETCOM will begin to market this service over the Internet and through its inbound telemarketing center in the second quarter of 1998. The Company also plans to offer by the end of fiscal 1998 competitively priced high-speed data transmission services via digital subscriber line ("DSL") technology to all business and end user customers within its existing regional clusters. DSL technology utilizes the existing twisted copper pair connection to the business or end user, giving the customer significantly greater bandwidth when connecting to the Internet.
Acquisition of Communications Buying Group, Inc. On October 17, 1997, the Company purchased approximately 91% of the outstanding capital stock of Communications Buying Group, Inc. ("CBG"), an Ohio based local exchange and centrex reseller (the "CBG Acquisition"). The Company paid total consideration of approximately $46.5 million, plus the assumption of certain liabilities. Separately, on October 17, 1997, the Company sold approximately $16.0 million of common stock, $.01 par value ("Common Stock"), to certain shareholders of CBG. The Company purchased the remaining approximately 9% interest of CBG on March 24, 1998 for approximately $2.9 million in cash.
CBG focuses its sales and marketing efforts on small to medium-sized businesses in certain cities in Ohio and provides a one-stop solution for the local and long distance needs of its customers. For calendar years 1996 and 1997, CBG's revenue was approximately $21.4 million and $33.8 million, respectively, and EBITDA losses were approximately $(1.0) million and $(3.2) million, respectively.
The Company believes that the business strategy of CBG is closely aligned with the Company's business strategy and that it can successfully leverage the services offered by CBG to enhance the Company's offering of similar services in its existing Ohio markets, including all those currently served by CBG. As of December 31, 1997, the acquisition of CBG has more than doubled the Company's sales presence in Ohio to approximately 91 people. In addition, the Company believes that its ability to migrate, over time, a portion of CBG's existing customer base to its fiber optic facilities offers significant cost savings. The Company believes that the transaction has significantly furthered its goal of becoming the dominant alternative to the ILEC in Ohio.
Network Expansion. The Company continues to expand its network footprint through several strategic initiatives with utility companies and other telecommunication carriers. In January 1997, the Company announced an agreement with a subsidiary of The Southern Company ("Southern") that will permit the Company to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In June 1997, the Company entered into an indefeasible right of use ("IRU") agreement with Qwest Communications Corporation for approximately 1,800 miles of fiber optic network and additional broadband capacity in California, Colorado, Ohio and the Southeast. The Company expects this new capacity will be used for the transmission of local, long distance and data communications services in and between the Company's markets.
CSW Strategic Alliance. In January 1997, the Company announced a strategic alliance with Central and South West Corporation ("CSW") which was formed for the purpose of developing and marketing telecommunications services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas. The venture entity, a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based in Austin, Texas. CSW holds 100% of the interest in ChoiceCom and the Company has an option to purchase a 50% interest at any time prior to July 1, 2003. Subsequent to July 1, 1999, if the Company has not exercised its purchase option, CSW will have the right to sell, at a price pursuant to the terms of the limited partnership agreement, either 51% or 100% of the partnership interest in ChoiceCom to the Company. CSW and the Company each have two representatives on the Management Committee of the general partner of ChoiceCom. ChoiceCom is currently offering local exchange, long distance and long haul services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and other selected areas of Texas and may offer these services as well as data communications and other services in Arkansas, Louisiana and Oklahoma.
Financings. In March 1997, the Company raised net proceeds of $192.4 million from the sale of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") of Holdings and 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") of Holdings. Cash interest on the 11 5/8% Notes accrues at 11 5/8% per annum beginning March 15, 2002 and is payable each March 15 and September 15, commencing September 15, 2002. The 14% Preferred Stock accrues dividends quarterly at a rate of 14% per annum. Dividends are payable quarterly in cash or, on or prior to March 15, 2002, at the sole option of Holdings, in additional shares of 14% Preferred Stock. The 11 5/8% Notes and the 14% Preferred Stock have been registered under the Securities Act.
In September and October 1997, the Company's new wholly owned subsidiary, ICG Funding, LLC, a Delaware limited liability company, completed a private placement of $132.25 million of Exchangeable Limited Liability Company Preferred Securities (the "6 3/4% Preferred Securities"). The 6 3/4% Preferred Securities are mandatorily redeemable November 15, 2009 at the liquidation preference of $50.00 per security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and, thereafter, in cash or shares of Common Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the option of the holder, into Common Stock at an exchange price of $24.025 per share, subject to adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any time on or after November 18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred Securities if the current market value of Common Stock equals or exceeds the exchange price, for at least 20 days of any consecutive 30-day trading period, by 170% prior to November 16, 1998; by 160% from November 16, 1998 through November 15, 1999; and by 150% from November 16, 1999 through November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable upon exchange of such securities have been registered under the Securities Act.
In February 1998, the Company raised proceeds, net of underwriting costs, of approximately $291.6 million from the sale of 10% Senior Discount Notes due 2008 (the "10% Notes") of ICG Services, Inc., a Delaware corporation and newly formed, wholly owned, unrestricted subsidiary of ICG ("ICG Services"). Cash interest on the 10% Notes accrues at 10% per annum beginning February 15, 2003 and is payable each February 15 and August 15, commencing August 15, 2003. The 10% Notes will be redeemable at the option of ICG Services, in whole or in part, on or after February 15, 2003. ICG Services is obligated to register the 10% Notes under the Securities Act.
ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment, Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG Equipment"). Holdings' subsidiaries intend to enter into arrangements with ICG Equipment to purchase or lease telecommunications equipment, software and capacity and related services. The equipment and services provided to Holdings' subsidiaries will be utilized to upgrade and expand its network infrastructure to take full advantage of the opportunities and cost savings available as a result of the acquisitions made by ICG Services. Any such arrangements will be on an arm's length basis and on comparable terms that Holdings' subsidiaries would be able to obtain from a third party.
Telecom Services
The Company operates local exchange networks in the following markets within its four regional clusters: California (Sacramento, San Diego and portions of the Los Angeles and San Francisco metropolitan areas); Colorado (Denver, Colorado Springs and Boulder); Ohio (Akron, Cleveland, Columbus, and Dayton) and the Southeast (Birmingham, Charlotte, Louisville, and Nashville). The Company plans to build a network in Atlanta, Georgia in conjunction with Southern. Through its strategic alliance with CSW, the Company is offering services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and other selected areas of Texas, and may offer services in Arkansas, Louisiana and Oklahoma in the future. See "-Recent Developments." The Company will continue to expand its network through construction, leased facilities and strategic alliances and through acquisitions. The Company's operating networks have grown from 627 fiber route miles at the end of fiscal 1995 to 3,043 fiber route miles as of December 31, 1997. Telecom Services revenue has increased from approximately $32.3 million for fiscal 1995 to approximately $177.7 million for fiscal 1997.
The Company's new subsidiary, NETCOM, is a leading provider of high quality Internet solutions to individuals and small and medium-sized businesses in the United States and also provides the same high quality Internet solutions in Canada and the United Kingdom. NETCOM offers a broad spectrum of Internet solutions designed to enhance customer productivity through the integration and application of technologies by providing a comprehensive software platform to interface with the Web, premium quality Internet access and support services and on-line tools to automate Web site creation and development. These offerings have led to significant growth, with revenue increasing from approximately $2.4 million for 1993 to approximately $160.7 million for the calendar year ended December 31, 1997. In January 1997, NETCOM announced plans to migrate its customer focus away from high volume, low margin consumer customers to higher margin products for small and medium-sized business customers.
Strategy
The Company's objective is to be a premier provider of high quality communications services to its targeted business, carrier and end user customers. The key elements of this strategy are:
Increase Revenue and Margins through Bundled Services to Business End Users. The Company believes that customers are increasingly demanding a broad, full service approach to providing telecommunications services. By offering integrated technology-based communications solutions, management believes the Company will be better able to capture business from telecommunications-intensive commercial accounts. To this end, the Company plans to complement its competitive local and long distance telecommunications offerings with its recently announced IP telephony service and the Internet products developed by NETCOM, and cross-market these combined products through ICG's direct sales force. Additionally, NETCOM intends to market ICG's telecommunications products to its small and medium-sized business customer base over the Internet. Management believes a targeted business end user strategy can better leverage ICG's network footprint and telecommunications investment.
Concentrate Networks in Regional Clusters. The Company believes that by focusing on regional clusters it will be able to more effectively service its customers' needs and efficiently market, operate and control its networks and expanded service offerings. As a result, the Company has concentrated its networks in regional clusters serving major metropolitan areas in California, Colorado, Ohio and the Southeast. The Company is expanding its network footprint to include certain cities in Texas through a strategic alliance with CSW and intends to further expand its network footprint to include Atlanta, Georgia through its agreement with Southern. In addition, NETCOM may be able to realize extensive cost synergies by focusing future growth within ICG's existing footprint. For example, a significant portion of NETCOM's customer base is located in California. To the extent feasible, NETCOM will route its Internet traffic over ICG's California network. NETCOM plans to continue to operate and grow its business in the United States outside of ICG's network footprint and in Canada and the United Kingdom. See "-Recent Developments."
Network Connectivity. Significant amounts of telecommunications traffic are carried within the Company's regional clusters. Management believes that integrating these clusters through the connection of individual networks will provide significant benefits, including cost advantages. These cost advantages would result from the Company's ability to carry regional traffic on-net, thereby improving operating margins by reducing payments to other carriers for the use of their facilities. Accordingly, the Company is in the process of connecting networks within each of its California, Colorado and Ohio clusters with intrastate fiber optic cable.
Alliances with Utilities. The Company has established strategic alliances with utility companies to take advantage of their existing fiber optic infrastructures and customer relationships. This approach affords the Company the opportunity to license or lease fiber optic facilities on a long-term basis, which is more timely and cost effective than constructing facilities. In addition, utilities possess conduit and other facilities that enable the Company to more easily install additional fiber to extend existing networks in a given market. Finally, management expects these strategic alliances to combine the Company's expertise in providing high quality telecommunications services with the utility's name recognition and customer relationships in marketing telecommunications products and services to the utility's customer base.
Integrate Investments and Expand. The Company expects to acquire telecommunications, Internet and related businesses that complement ICG's business strategy to offer a wide array of telecommunications, Internet and related services, primarily to business customers. Acquisition targets could include U.S. and foreign CLECs, ISPs and long distance companies, among others. The Company intends to make future acquisitions primarily through the use of Common Stock, cash on hand and the proceeds from securities offerings.
Telecom Services Networks
The Company's networks are generally comprised of fiber optic cables, switching facilities, advanced electronics, transmission equipment and related wiring and equipment. The Company typically designs a ring architecture with a view toward making the network accessible to the largest concentration of telecommunication intensive businesses in a given market.
The Company's networks are generally configured in redundant synchronous optical network ("SONET") rings that offer the advantage of uninterrupted service in the event of a fiber cut or equipment failure, resulting in limited outages and increased network reliability. The Company generally markets its services at prices below those charged by the ILEC. Management believes these factors combine to create a more reliable and cost effective alternative to ILEC networks and services.
The Company's networks are constructed to access long distance carriers as well as areas of significant end user telecommunications traffic in a cost efficient manner. The construction period of a new network varies depending upon the scope of the activities, such as the number of backbone route miles to be installed, the initial number of buildings targeted for connection to the network backbone and the general deployment of the network infrastructure. Construction is planned to allow revenue-generating operations to commence prior to the completion of the entire network backbone. When constructing and relying principally on its own facilities, the Company has experienced a period of 12 to 18 months from initial design of a network to revenue generation for such network. Based upon its experience of using ILEC facilities to provide initial customer service and the Company's agreements to use utilities' existing fiber, the Company has experienced revenue generation within nine months after commencing network design. After installing the initial network backbone, extensions to additional buildings and expansions to other regions of a metropolitan area are evaluated, based on detailed assessments of market potential. The Company is currently expanding all of its existing networks to reduce its reliance on the ILECs and evaluating development of new networks both inside and outside its existing regional clusters.
The Company's network monitoring center in Denver monitors and manages the Company's transport networks and provides high-level monitoring of the Company's local exchange switches. Additionally, the Company contracts with Lucent Technologies, Inc. for detailed performance monitoring of its local exchange switches. Centralized electronic monitoring and control of the Company's networks allows the Company to avoid duplication of this function in each city, thereby reducing costs.
Switched services involve the transmission of voice, video or data to long distance carrier-specified or end user-specified termination sites. By contrast, the special access services provided by the Company and other CLECs involve a fixed communications link or "pipe," usually between an end user and a specific long distance carrier's point of presence ("POP"). With a switch and interconnection to various carriers' networks, it is possible for the Company to direct a long distance carrier's traffic to any end user regardless of whether the end user is physically connected to the Company's owned or leased network. In addition, a switch is required in order for the Company to provide the full range of local telephone services. The Company is marketing and selling competitive local dial tone services in California, Colorado, Ohio and the Southeast. See "-Regulation-State Regulation."
NETCOM owns and operates a data communications network consisting of 17 hubs containing frame relay switches and high-performance routers connecting a backbone of leased Asynchronous Transfer Mode ("ATM") switches and leased high-speed dedicated data lines in the United States, Canada and the United Kingdom. NETCOM maintains 247 POPs in the United States and Canada and also offers virtual local access numbers in Canada and the United Kingdom. The design and architecture of the physical network permits NETCOM to offer highly flexible, reliable high-speed services to its customers and support significant subscriber growth. The NETCOM infrastructure is monitored by network operations centers ("NOCs") in San Jose, California, Dallas, Texas, Toronto, Canada and London, England.
Services
The Company's competitive local exchange services include local dial tone, long distance, data services, special access and interstate and intrastate switched access services. Competitive local dial tone services consist of basic local exchange lines and trunks for business, related line features (such as voice mail, Direct Inward Dialing (DID), hunting and custom calling features), local calling, and intraLATA, also called local toll, calling. The Company believes that having a full complement of communications services, including local and long distance services, will strengthen its overall market position and help the Company to better penetrate the local exchange marketplace. The Company has also developed long distance services, including calling and debit cards, to complement its local exchange services family of products. The Company recently announced plans to offer a bundled service of local, long distance and data services, including Internet services, delivered over a T-1 connection. This service will be offered primarily to ICG's larger business customers.
The Company announced its initial offering of long distance services in May 1997. The target customers for such services are the Company's existing and end user customers. The Company's existing switches have facilitated the entry into this business and reduced its cost of obtaining long distance transmission capacity. However, the Company has been reliant on other carriers to provide transmission and termination of long distance traffic. Therefore, the Company has entered into transmission agreements, which typically provide for transmission on a per minute basis, with long distance carriers to fulfill such needs. To reduce its cost of services, the Company may lease point-to-point circuits on a monthly or longer term fixed cost basis where it anticipates high traffic volume.
The Company recently announced its plans to offer IP long distance services priced as low as 5.9 cents per minute in 166 markets by the end of 1998. The Company plans to carry the IP traffic over NETCOM's data backbone network and terminate a large portion of the traffic via NETCOM's 238 POPs in the United States, thereby eliminating terminating access charges. If a call cannot be terminated over ICG's facilities, it will be billed at a rate of 7.6 cents per minute. The Company expects to begin offering this service during the second quarter of 1998, initially targeting NETCOM's existing customer base of over 500,000 customers. The Company plans to market this product via the Internet and through the Company's inbound telemarketing center.
The Company also announced that it will offer DSL services with speeds ranging from 144kbps to 9mbps to offer its customers high-speed Internet access. The Company plans to lease unbundled local loops from the ILEC in the respective market and install its DSL equipment in the ILEC central office and the customer's premises. This service will be offered primarily to the small business and work-at-home markets, which historically have been a large percentage of NETCOM's customer base.
To complement its telecommunications services offerings, the Company announced its initial offering of data communications services in California, Colorado and Ohio during the first quarter of 1997. These services targeted the Company's existing customers and other businesses with substantial data communications requirements. Although to date, the Company has not generated substantial revenue from such services, the Company expects that its new service offerings, including its IP telephony strategy and DSL technology, and NETCOM's extensive experience providing data transmission services, will allow the Company to significantly enhance its presence within the data communications market during fiscal 1998.
Private line services are generally used to connect the separate locations of a single business outside of local access and transport area ("LATA"). Special access services are generally used to connect end user customers to a long distance telephone carrier's facilities, to connect long distance carrier's facilities to the local telephone company's central offices, and to connect different facilities of the same long distance carrier or facilities of different long distance carriers all within the same local calling area or LATA. As part of its initial "carrier's carrier" strategy, the Company targeted the transport between long distance company facilities and the local telephone company central offices, and, for high volume customers, between the long distance company and the end user customer's office. In order to leverage its significant network investment, the Company has markets its services directly to end user business customers.
The Company's interstate and intrastate switched access services include the transport and switching of calls between the long distance carrier's facilities and either the local telephone company central offices or end users. By performing the switching services, the Company can reduce the long distance carriers' local access costs, which constitute their major operating expense. The Company has experienced negative operating margins from the provision of wholesale switched services because it relies on ILEC networks to terminate and originate customers' switched traffic. The Company has recently raised prices on its wholesale switched services product in order to improve margins and is de-emphasizing its wholesale switched services to free up switch port capacity for its higher margin dial tone product. In addition, as the Company provides a greater portion of the local segment of a call, the Company expects to experience improved operating margins.
The Company's Signaling System 7 ("SS7") services provide signaling connections between long distance and local exchange carriers, and between long distance carriers' networks. SS7, known as look-ahead routing, is used by local exchange companies, long distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up, resulting in a more efficient use of network resources. SS7 is now the standard method for telecommunications signaling worldwide. The Company has deployed signal transfer points ("STPs") throughout its networks to efficiently route SS7 data across the United States. SS7 is also the enabling technology for advanced intelligence network platforms, a set of services and signaling options that carriers can use to create new services or customer options. Carriers purchase connections into the Company's SS7 network, and also purchase connections to other carriers (local and long distance) on a monthly recurring basis.
In August 1996, the Company acquired the SS7 business of Pace Network Services, Inc., a division of Pace Alternative Communications, Inc. The Company has also developed a nationwide SS7 service with Southern New England Telephone ("SNET"), one of the nation's ten largest local exchange carriers. The Company believes that, together with SNET, it is one of the largest independent suppliers of SS7 services. The Company's STPs are integrated with two SNET "gateway" STPs in Connecticut.
NETCOM. Through its merger with NETCOM, the Company currently provides Internet solutions principally through dial-up, direct access and Web site hosting services. Direct access and Web site hosting services provide higher revenue per customer and higher margins than dial-up services. NETCOM also receives revenue from value-added services such as security, anti-virus and data storage.
Dial-Up Services. NETCOM's dial-up customers receive an integrated Internet solution consisting of high quality access, software and 24 hours a day, seven days a week, automated customer support. NETCOM dial-up customers connect directly to the Internet via NETCOM's network which provides high speed, reliable access. All NETCOM dial-up accounts allow access to the Internet's resources, including E-mail, the Web and USENET newsgroups. In addition, NETCOM dial-up customers can receive a one megabyte ("Mb") personal Web page, access to a daily customized newspage via E-mail, and access to on-line financial, corporate and market information and analytical tools. Enhanced services available to dial-up customers include features such as additional E-mail addresses, enhanced support offerings, software and virus updates, access to research libraries, domain name service, monthly back-up, 10 Mb data storage, 750 Mb per month data transfer capability and premium service and technology support.
NETCOM customers can quickly register using NETCOMplete software, available for both Windows and Macintosh platforms via compact disk, and set up a NETCOM account by following a sequence of simple, on-screen steps. All of the software needed to connect and access the Internet is automatically installed and configured, eliminating the need for complex set up procedures. NETCOMplete also provides an easy-to-use interface as well as software from leading industry participants, bookmark managers, off-line browsers and additional software that enhances a customer's Internet experience. Revenue from dial-up services increased from $102.9 million for the calendar year ended December 31, 1996 to $133.7 million for the calendar year ended December 31, 1997, representing approximately 85% and 83%, respectively, of total NETCOM revenue for such periods.
Direct Access Services. NETCOM offers a full suite of high-speed dedicated Internet connection and service products which provide its small and medium-sized business customers with direct access to the full range of Internet applications. These Internet services are offered to businesses over leased lines at various speeds, including 56 Kbps, T-1 and T-3 levels, depending upon the customer's needs. Through its direct access product line, NETCOM offers Internet access services including domain name and Internet protocol address, router configurations, on-line usage statistics and security consultation. There are generally no usage charges for any of NETCOM's dedicated customers, and E-mail service and USENET news feed are provided at no additional charge. Direct network connection requires the customer to obtain a leased line from ICG or another local telephone company. NETCOM provides an Internet connection based on frame relay technology provided by local telephone carriers. Revenue from direct access services increased from $16.3 million for the calendar year ended December 31, 1996 to $19.5 million for the calendar year ended December 31, 1997, representing approximately 14% and 12%, respectively, of total NETCOM revenue for such periods.
Web Site Hosting Services. NETCOM offers Web site hosting services to its small and medium-sized business customers as well as to individuals. Web site hosting services include client domain name registration, hosting and site maintenance. Services provided are fully scalable but would, in a typical package, include domain name registration, 10 E-mail addresses, access to NETCOM's on-line business center, CGI scripting (which enables visitors to the Web site to leave their names and addresses), weekly back-up service, 50 Mb of data storage, 1,000 Mb per month of data transfers, traffic logs and Web statistics and premium service and technology support. Revenue from Web site hosting services increased from $1.3 million for the calendar year ended December 31, 1996 to $6.3 million for the calendar year ended December 31, 1997, representing approximately 1% and 4%, respectively, of total NETCOM revenue for such periods.
Value-Added Services. As part of its dial-up, direct access and Web site hosting services, NETCOM offers its small and medium-sized business customers value-added business connectivity solutions package designed to address their needs of increased security, reliability, access speed and customer service. The Company believes that businesses are willing to pay premium prices for these premium services. One such feature is Automatic Reconnect which automatically re-routes customers' traffic to an alternate Integrated Services Digital Network ("ISDN") line so that in the event of certain kinds of service interruptions customers may remain connected. In order to provide a secure, private connection among multiple specific locations, NETCOM's SecureConnect product performs a security assessment and then implements, monitors and troubleshoots a flexible security solution to provide secure communication between central offices, branch offices and off-site employees without jeopardizing the integrity of the internal network. Another value-added service NETCOM offers is 24 hours a day, seven days a week support. For larger customers, NETCOM offers flexible, high-speed dedicated line service that is scalable to grow as traffic increases. Other value-added services offered include password protected Web sites, usage statistics, anti-virus software and additional domain names.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom") which operates an 800/888/900 number service bureau and a switch platform in the United States supplying information providers and commercial accounts with audiotext and customer support services.
Industry
The Company operates in the local telephone services market as an ICP. The Company is competing in the local, long distance and data communications markets, and subsequent to January 21, 1998, the Internet services market, to provide "full service" to its end user and carrier customers. The Company believes it can maximize revenue and profit opportunities by leveraging its extensive network facilities in providing multiple communications services to its customers.
Local telephone service competition was made possible by the Telecommunications Act and by deregulatory actions at the state level. Prior to passage of the Telecommunications Act, firms like the Company were generally confined to providing private line and special access services. These firms, including the Company, installed fiber optic cable connecting long distance telephone carriers' POPs within a metropolitan area and, in some cases, connecting end users (primarily large businesses and government entities) with long distance carrier POPs. The greater capacity and economies of scale inherent in fiber optic cable enabled competitive access providers to offer customers less expensive and higher quality special access and private line services than the ILECs.
The Telecommunications Act, subsequent FCC decisions and many state legislative and regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, CLECs are now legally able to offer all communications services, including local dial tone and all interstate and intrastate switched services, effectively opening up the local telephone market to full competition. Because of these changes in state and federal regulations, CLECs have expanded their services from providing competitive access and private line services to providing all local exchange services to become true competitors to the ILECs. See "-Regulation."
The Internet access services market is one of the fastest growing segments of the telecommunications services market. According to industry research analysts, the market for consumer and business Internet connectivity and enhanced services exceeded $3 billion in 1996, and is estimated to reach $18 billion in revenue by the year 2000, reflecting a compounded annual growth rate of approximately 50%. Business connectivity and value-added services are estimated to represent in excess of 50% of the overall market. The use of the Internet by small and medium-sized businesses in particular is expected to grow substantially from its current low levels of market penetration.
ISPs provide customers with a variety of services to meet their Internet-related needs. Internet services include the following categories: (i) access services (dial-up, direct access and Web site hosting); (ii) value-added services (security services, anti-virus and data storage); and (iii) content services (information creation, aggregation and delivery). Some ISPs offer all of these services while others specialize in only one or two. As the market continues to segment in these three areas, there are opportunities for both the specialists who can provide superior service in one area, as well as full-service providers who can bundle services and offer discounts. There were over 4,300 ISPs in the United States and Canada as of October 31, 1997 compared to just over 3,000 as of October 31, 1996. There have been some large acquisitions of ISPs as CLECs and others attempt to enter the industry. Because of low barriers to entry, there are local and regional ISPs entering the market, which has caused the level of competition to intensify.
The availability of an expansive variety of compelling business and consumer applications over the Internet has attracted a large number of consumer and business users. The total number of connections to ISP networks, according to International Data Corporation, was 17 million as of November 1997, and is predicted to reach over 30 million by the year 2000. Market trends contributing to the overall growth in connectivity include advancements in technologies required to navigate the Internet, the availability of Internet connectivity, and the rich consumer and business content available. The Company believes that ongoing development of access to and applications of the Internet will continue to attract a valuable consumer audience for businesses.
Network Services
Through the Company's wholly owned subsidiary, ICG Fiber Optic Technologies, Inc. ("FOTI"), the Company supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Revenue from Network Services was approximately $65.6 million for fiscal 1997.
The Company provides network infrastructures, systems and support services, including the design, engineering and installation of local and wide area networks, ("LANs/WANs") for its customers. These networks (within end user offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial and other network technologies. The Company specializes in turnkey network installations including cabling and electronics that address specific environments. The Company also provides professional network support services. These services include network move, add and change services and ongoing maintenance and support services. Network Services revenue is expected to constitute a smaller portion of the Company's future revenue as Telecom Services revenue increases.
The Company offers these network integration and support services through offices located within four regions. The regional headquarters are located in Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and data services to major cruise lines, commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms. The Company also owns a teleport facility which provides international voice and data transmission services. Revenue for Satellite Services operations was approximately $30.0 million for fiscal 1997. The Company intends to dispose of its Satellite Services operations to better focus its efforts on its core Telecom services unit, although it has not entered into a formal arrangement for such disposition.
MTN. In January 1995, the Company and an unaffiliated entity formed Maritime Telecommunications Network, Inc. ("MTN") which purchased the assets of a business providing digital wireless communications through satellites to the maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing an experimental radio frequency license issued by the FCC. MTN provides private communications networks to various cruise lines allowing for the transmission of data communications and allowing passengers to make calls from their cabins to anywhere in the world. MTN additionally provides its communications services to seismic vessels, to commercial shipping vessels and to the U.S. Navy in conjunction with a major long distance provider, which serves as the long distance carrier, while MTN provides the shipboard communications equipment. The Company believes that the radio spectrum employed under its experimental license and a recent grant of Special Temporary Authority ("STA"), which uses C-band radio frequencies, enables it to provide a higher quality maritime service than is available through the radio frequencies currently allocated to other maritime service providers.
In April 1996, the FCC issued a waiver allowing MTN to apply for a permanent FCC license to utilize the same C-band frequencies as are being used under the experimental license. MTN's application is pending. The Company's experimental license was renewed for an additional two-year period on November 21, 1997. Additionally, in January 1997, the FCC granted an STA which enables MTN to conduct operations as proposed in the pending application for a permanent license, for six-month periods. MTN filed for six-month renewals for the STA on July 25, 1997 and January 27, 1998 and the Company has received verbal grants of the six-month extensions. There can be no assurance that the Company will be granted a permanent license, that the experimental license and STA currently being used will continue to be renewed for future terms or that any license granted by the FCC will not require substantial payments from the Company. See "-Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in MarineSat Communications Network, Inc. ("MCN") (formally Maritime Cellular TeleNetwork, Inc.), a Florida-based provider of cellular and satellite communications for commercial ships, private vessels and land-based mobile units. This acquisition expands the Company's business from C-band satellite services for cruise ships and naval vessels to cover land-based units and smaller ships. In April 1997, the Company received the remaining 10% equity interest in MCN as a partial consideration for the sale of another of its subsidiaries.
Nova-Net. In May 1994, the Company acquired Nova-Net Communications, Inc. ("Nova-Net"), which provides private data networks utilizing very small aperture terminals ("VSATs") and specializes in data collection and in monitoring and control of customer production and transmission facilities in various industries, including oil and gas, electric and water utilities and environmental monitoring industries. Nova-Net designs, builds and manages private data networks that enable a variety of companies to transmit critical sensor and flow readings to key monitoring points from multiple locations. Nova-Net manages networks 24 hours a day, seven days a week through its network control center in Englewood, Colorado.
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the Company's acquisition of MTN, is located 20 miles south of Newark and specializes in international digital voice and data communications services with full fiber interconnect to the local telephone company facilities in New York City. Teleport services are also provided to the maritime industry, including support of the Company's cruise ship, U.S. Navy and offshore oil platform telephone and data services business. In addition, the Company markets the resale of services from the four teleports it sold in 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to offer a broad range of local and long distance communications services, including data communications, to the Company's business customers at cost-effective rates. Wholesale customers typically re-market the Company's services to the retailer's end user, under the retailer's brand name. The Company markets its services in regional clusters, which it believes is the most effective and efficient way to penetrate its markets.
The Company markets its Telecom Services products through direct sales to end users and wholesale accounts, and direct mail, to a limited extent. Telecom Services revenue from major long distance carriers and resellers constituted approximately 78%, 71%, 69% and 64% of the Company's Telecom Services revenue in fiscal 1995 and 1996, the three-month period ended December 31, 1996 and fiscal 1997, respectively. The balance of the Company's Telecom Services revenue was derived from end users. The Company anticipates revenue from end users will increase in the future as it continues to expand its bundled service offerings, increases its sales and marketing teams and focuses more on the end user segment of the market. In support of this strategy, the Company has substantially increased its direct sales and marketing staff. The Company's sales force has grown from 143 people at December 31, 1996 to approximately 356 people (including sales management, technical sales support and administrative support) at December 31, 1997. Telecom service agreements with its customers typically provide for terms of one to five years, fixed prices and early termination penalties.
The Company has telecommunications sales offices in: Irvine, Los Angeles, Oakland, Sacramento and San Diego, California; Denver and Colorado Springs, Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama; Louisville, Kentucky; Charlotte, North Carolina; and Nashville, Tennessee. The Company's marketing staff is located in Denver, Colorado.
NETCOM's primary focus is on providing high quality Internet solutions to individuals and to small and medium-sized businesses. In order to achieve this objective, NETCOM engages in marketing and advertising activities, alliances with key strategic partners, seminars in targeted regional markets, and distribution via both direct and indirect channels. NETCOM's current marketing efforts emphasize its strategy of focusing on providing premium services to businesses and individuals through integrated product offerings. The campaign incorporates the theme of productivity and efficiency and includes an emphasis on the full range of NETCOM solutions. NETCOM's current marketing and distribution channels include original equipment manufacturer arrangements, agreements with value-added resellers, retail distribution, direct marketing efforts, including trade shows and telesales, and the Web.
The Company markets its network systems integration products and services through a direct sales force located in the Rocky Mountains, Pacific Northwest, Texas and California regions. The Company also has entered into resale agreements with manufacturers of network integration products and services.
The Company offers satellite private line transmission services from its teleport to business customers that can benefit from the Company's international and domestic transmission capabilities. The Company also markets voice and data communications to the maritime industry, including cruise ships, U.S. Navy vessels, commercial vessels, private yachts, offshore oil platforms and mobile land-based units.
Competition
The Company operates in an increasingly competitive environment dominated by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE which are among the Company's current competitors. Also included among the Company's current competitors are other ILECs, other CLECs, network systems integration service providers, microwave and satellite service providers, teleport operators, wireless telecommunications providers and private networks built by large end users. Potential competitors (using similar or different technologies) include cable television companies, utilities, ILECs outside their current local service areas, and the local access operations of long distance carriers. Consolidation of telecommunications companies, including mergers
between certain of the RBOCs, and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to increased competition. One of the primary purposes of the Telecommunications Act is to promote competition, particularly in the local telephone market. Since enactment of the Telecommunications Act, several telecommunications companies have indicated their intention to aggressively expand their ability to address many segments of the telecommunications industry, including segments in which the Company participates and expects to participate. For example, AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI"), Time Warner Communications, Inc., Texas Utilities Company and other large companies are entering the local markets, as competitors of the Company. This may result in more participants than can ultimately be successful in a given market.
Telecom Services. The bases of competition in competitive local telecommunications services are generally price, service, reliability, transmission speed and availability. The Company believes that its expertise in developing and operating highly reliable, advanced digital networks which offer substantial transmission capacity at competitive prices enables the Company to compete effectively against the ILECs and other CLECs.
In every market in which the Company operates telecom service networks, the ILECs (which are the historical monopoly providers of local telephone services) are the primary competitors. The ILECs have long-standing relationships with their customers and provide those customers with various transmission and switching services. The ILECs also have the potential to subsidize access and switched services with revenue from a variety of businesses and historically have benefited from certain state and federal regulations that have favored the ILECs over the Company. In certain markets where the Company operates, other CLECs also operate or have announced plans to enter the market. Some of those CLECs are affiliated with major long distance companies. Current competitors also include network systems integration services providers, wireless telecommunications providers and private networks built by large end users. Additional competition may emerge from cable television operators and electric utilities. Many of the Company's actual and potential competitors have greater financial, technical and marketing resources than the Company.
The Company's networks compete most directly with the RBOCs and GTE. In general, the provision of interstate access services by the RBOCs and GTE, including the rates charged for such services, is regulated by the FCC, and the provision of intrastate access and local services, including the rates charged for such services, is regulated by the individual state regulatory commissions. See "-Regulation." In the past, FCC policies have constrained the ability of the RBOCs and GTE to decrease their prices for interstate access services, based on their status as dominant carriers. Although FCC regulatory approval for price reductions (beyond certain parameters) still must be obtained, the FCC has allowed all recently proposed access reductions to become effective and has granted the RBOCs flexibility in pricing their interstate access services on a central office by central office basis. This pricing flexibility resulted in certain RBOCs lowering their prices in high density zones, the probable arena of competition with the Company. In addition, the FCC has granted waivers of its access charge pricing rules to the RBOCs to allow them to further reduce certain access prices. In May 1997, the FCC released a decision amending and reforming many of its access charge rules and sought further comment on additional issues. In addition, the FCC released a separate decision in May 1997 reforming its rules on universal service subsidies pursuant to the requirements of the Telecommunications Act. As a whole, the FCC's decision reforming the access charge rules is not likely to have a material adverse impact on the Company's access services offerings, because the decision required relatively small decreases in total access prices charged by the ILECs. The major impact of the FCC's decision was to shift access cost recovery by the ILECs to flat-based charges from usage-sensitive (minute-of-use) charges. The continued lowering of access rates and increased pricing flexibility for the RBOCs and GTE may adversely affect the Company's ability to compete for certain services. If the RBOCs and GTE continue to lower access rates, there would be downward pressure on certain special access and switched access rates charged by CLECs, which pressure may adversely affect the Company's profitability. See "-Regulation." In addition, the Telecommunications Act and its implementation by the states and the FCC allows the RBOCs to seek permission to provide a broader range of services and likely will enable the RBOCs and GTE to more effectively compete against long distance carriers, which are the Company's primary customers for telecom services.
In addition, the long distance and data transmission businesses are extremely competitive and prices have declined substantially in recent years and are expected to continue to decline.
Network Services. The bases of competition in the network services market are primarily technological capability and experience, value-added services and price. In this market, the Company competes with a variety of local and regional system integrators.
Satellite Services. In the delivery of domestic and international satellite services, the Company competes with other full service teleports in the northeast region of the United States. The bases of competition are primarily reliability, price and transmission quality. Most of the Company's satellite competitors focus on the domestic video market. Competition is expected principally from a number of domestic and foreign telecommunications carriers, many of which have substantially greater financial and other resources than the Company. In the maritime telecommunications market, MTN competes primarily with COMSAT Corporation ("COMSAT") in providing similar telecommunications services. COMSAT has FCC licenses that are similar to MTN's, it owns its own satellites and it is the sole U.S. point of control for access to Intelsat satellites.
Internet Services. Beginning January 21, 1998, the Company also faces competition within the Internet services market. The market for Internet access and related services is highly competitive. There are no substantial barriers to entry and the Company anticipates that competition will continue to intensify as the use of the Internet grows. The tremendous growth and potential market size of the Internet access market has attracted many new start-ups as well as existing businesses from different industries. Current and prospective competitors include, in addition to other national, regional and local ISPs, long distance and local exchange telecommunications companies, cable television, direct broadcast satellite, wireless communications providers, and on-line service providers.
Regulation
The Company's services are subject to significant federal, state and local regulation. The Company operates in an industry that is undergoing substantial change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opened the local and long distance markets to additional competition and changed the division of oversight between federal and state regulators. Under previous law, state regulators had authority over those services that originated and terminated within the state ("intrastate") and federal regulators had jurisdiction over services that originated within one state and terminated in another state ("interstate"). State and federal regulators now share responsibility to some extent for implementing and enforcing the pro-competitive policies and the provisions for the Telecommunications Act.
The Telecommunications Act generally requires ILECs to negotiate agreements to provide interconnection and nondiscriminatory access to their networks on more favorable terms than were previously available in the past. However, such new agreements are subject to negotiations with each ILEC which may involve considerable delays and may not necessarily be obtained on terms and conditions that are desirable to the Company. In such instances, the Company may petition the proper state regulatory agency to arbitrate disputed issues. Ultimately, the terms of an arbitrated agreement are subject to review by the federal courts. There can be no assurance that the Company will be able to negotiate acceptable interconnection agreements or that, if state regulatory authorities impose terms and conditions on the parties in arbitration, such terms will be acceptable to the Company.
On August 8, 1996, in two separate decisions (the "First Report and Order" and the "Second Report and Order"), the FCC adopted rules and policies implementing the local competition provisions of the Telecommunications Act. The FCC, among other things, adopted national guidelines with respect to the unbundling of ILECs' network elements, resale of ILEC services, the pricing of interconnection services and unbundled elements, and other local competition issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit Court, and in October 1996 the Eighth Circuit Court stayed the implementation of many of the rules in the First Report and Order. On July 18, 1997, the Eighth Circuit Court issued a decision on the First Report and Order which upheld certain of the FCC's rules and reversed the FCC's rules on other issues, including the pricing rules. On August 22, 1997, the Eighth Circuit Court issued its decision on the Second Report and Order, which concluded that the FCC had exceeded its jurisdiction in issuing certain rules on dialing parity.
Separate petitions for rehearing of the July 18 decision were filed with the Eighth Circuit Court by a group of interexchange carriers, two groups of ILECs and a group of CLECs. On October 14, 1997, the Eighth Circuit Court granted the ILEC petitions for rehearing, and denied the CLEC and IXC petitions. The Court's decision on rehearing vacated an additional FCC rule that addressed the ability of new entrants to purchase ILEC network elements at cost-based rates on a bundled rather than an unbundled basis.
The FCC and other parties filed petitions for certiorari seeking review by the U.S. Supreme Court of the Eighth Circuit Court's decision, and the U.S. Supreme Court has granted the petitions for certiorari and agreed to review the case. It is anticipated that the case will be argued before the U.S. Supreme Court in the fall of 1998, with a final decision issued in 1999. The Eighth Circuit Court's ruling remains in effect pending final action by the U.S. Supreme Court.
On December 31, 1997, the United States District Court for the Northern District of Texas, in a case brought by SBC Communications, Inc., issued a decision holding that Sections 271 through 275 of the Telecommunications Act are unconstitutional. The decision addresses the restrictions contained in Sections 271 through 275 of the Telecommunications Act on the lines of businesses in which the RBOCs may engage, including establishing the conditions that the RBOCs must satisfy before they may provide interLATA long distance telecommunications services in their local telephone service areas. On February 11, 1998, a stay of the decision was issued by the United States District Court for the Northern District of Texas, which stay will remain in effect pending appeal of the decision by the Fifth Circuit Court of Appeals.
Federal Regulation. The Company generally operates as a regulated carrier with fewer regulatory obligations than the ILECs. The Company must comply with the requirements of the Telecommunications Act, such as offering service on a non-discriminatory basis at just and reasonable rates. The FCC treats the Company as a non-dominant carrier. The FCC has established different levels of regulation for dominant and non-dominant carriers. Of domestic common carriers, only GTE and the RBOCs are classified as dominant carriers for the provision of access services, and all other providers of domestic common carrier services are classified as non-dominant. Under the FCC's streamlined regulation of non-dominant carriers, the Company must file tariffs with the FCC for international services on an ongoing basis. The Company's provision of international long distance services requires prior authorization by the FCC pursuant to Section 214 of the Telecommunications Act, which the Company has obtained. The FCC recently eliminated the requirement that non-dominant interstate access carriers must file tariffs. The Company is not subject to price cap or rate of return regulation, nor is it currently required to obtain FCC authorization for the installation or operation of its fiber optic network facilities used for services in the United States. The Company may install and operate non-radio facilities for the transmission of domestic interstate communications without prior FCC authorization. The Company's use of digital microwave radio frequencies and satellite earth stations in connection with certain of its telecommunications services is subject to FCC radio frequency licensing regulation. See "-Federal Regulation of Microwave and Satellite Radio Frequencies."
State Regulation. In general, state regulatory agencies have regulatory jurisdiction over the Company when Company facilities and services are used to provide local and other intrastate services. Under the Telecommunications Act, states cannot effectively prohibit any entity from providing telecommunications services, but the states continue to have general authority to set criteria for reviewing applications to provide intrastate services (including local services). State regulators will continue to set the requirements for providers of local and intrastate services, including quality of services criteria. However, state regulators can no longer allow (or require) restrictions on the resale of telecommunications services. State regulators also can regulate the rates charged by CLECs for intrastate and local services and can set prices for interconnection by CLECs with the ILEC networks. The Company's provision of local dial tone and intrastate switched and dedicated services are classified as intrastate and therefore subject to state regulation. The Company expects that it will offer more intrastate services as its business and product lines expand. To provide intrastate service (particularly local dial tone service), the Company generally must obtain a Certificate of Public Convenience and Necessity ("CPCN") from the state regulatory agency prior to offering service. In most states, the Company also is required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate, and to update or amend its tariffs as rates change or new products are added. The Company may also be subject to various reporting and record-keeping requirements.
The Company currently holds CPCNs (or their equivalents) from the states of Alabama, California, Colorado, Florida, Georgia, Indiana, Kentucky, North Carolina, Ohio, Oklahoma, Tennessee and Texas. The Company has authority to provide local and intrastate long distance services in each of these states.
Local Government Authorizations. Under the Telecommunications Act, local authorities retain jurisdiction under applicable state law to control the Company's access to municipally owned or controlled rights of way and to require the Company to obtain street opening and construction permits to install and expand its fiber optic network. In addition, many municipalities require the Company to obtain licenses or franchises (which generally have terms of 10 to 20 years) and to pay license or franchise fees, often based on a percentage of gross revenue, in order to provide telecommunications services, although in certain states including California and Colorado, such fees may be imposed under current state law. Certain municipalities in Colorado, however, are continuing to charge franchise fees pending enforcement by the Colorado courts. There is no assurance that certain cities that do not impose fees will not seek to impose fees, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. In many markets, the ILECs have been excused from paying such franchise fees or pay fees that are materially lower than those required to be paid by the Company for access to public rights of way. However, under the Telecommunications Act, while municipalities may still regulate use of their streets and rights of way, municipalities may not prohibit or effectively prohibit any entity from providing any telecommunications services. In addition, the Telecommunications Act requires that local governmental authorities treat telecommunications carriers in a non-discriminatory and competitively neutral manner. If any of the Company's existing franchise or license agreements are terminated prior to their expiration dates or not renewed, and the Company is forced to remove its fiber from the streets or abandon its network in place, such termination could have a material adverse effect on the Company.
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC continues to regulate radio frequency use by both private and common carriers under the Telecommunications Act. Unlike common carriers, private carriers contract with select customers to provide services tailored to the customer's specific needs. The FCC does not currently regulate private carriers (other than their use of radio frequencies) and has preempted the states from regulating private carriers. The Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use of radio frequencies to provide satellite and wireless services. The Company holds a number of point-to-point microwave radio licenses that are used to provide telecommunications services in California. Additionally, the Company holds a number of satellite earth station licenses in connection with its operation of satellite-based networks. The Company also provides maritime communications services pursuant to an experimental license and a grant of a STA. In April 1996, the FCC issued a waiver to the Company which may allow it to obtain a permanent FCC license to provide these services using the same radio frequencies currently being used under the experimental license and STA. The Company has filed an application for a permanent license under the terms of the FCC's waiver decision, and the application is pending. The STA was granted on January 30, 1997 and enables the Company to conduct operations pursuant to such application during the FCC's review. Applications for six-month extensions of the STA were filed on July 25, 1997 and on January 27, 1998 and verbal grants of the extensions have been issued by the FCC. There can be no assurance that the Company will be granted a permanent license, that the experimental license and STA currently being used will continue to be renewed for future terms or that any license granted by the FCC will not require substantial payments from the Company.
Regulation of Internet Services. The Company is currently providing Internet access services through its recently acquired subsidiary, NETCOM, in part through data transmissions over public telephone lines. These transmissions are governed by regulatory policies establishing charges and terms for wire-line communications. Although the Company is not currently subject to direct regulation by the FCC or any other governmental agency (other than regulations applicable to businesses generally), due to the increasingly widespread use of the Internet, it is possible that additional laws and regulations may be adopted with respect to the Internet, covering issues such as content, user privacy, pricing, libel, intellectual property protection and infringement, and technology export and other controls. It also is possible that the Company could become subject to regulation by the FCC or another regulatory agency as a provider of basic telecommunications services. The FCC is currently reviewing its regulatory positions on whether to impose common carrier regulation on the network transport and communications facilities aspects of an enhanced or information service package. Such changes in the regulatory structure and environment affecting the Internet access market, including regulatory changes that directly or indirectly affect telecommunications costs or increase the likelihood of competition from the RBOCs or other telecommunications companies, could have an adverse effect on the Company's business. For example, the FCC is considering whether ISPs should be required to pay access charges to local telephone companies for each minute that dial-access users spend connected to ISPs through telephone company switches, and is also considering whether ISPs should be required to make monetary contributions to federal universal service funds. In addition, some telephone companies are seeking similar relief through state regulatory agencies. Such rules, if adopted at either the federal or state level, would have a material adverse effect on the Company. The Company cannot predict the impact, if any that future regulation or regulatory changes may have on its business.
Certain states have deemed the provision of Internet services to be taxable and in such states, NETCOM collects such taxes from its customers. Other states have not yet announced a policy in this regard or have affirmatively decided that such services are not taxable. If such states retroactively subject the provision of Internet services to sales tax or if customers are unwilling to pay sales tax that may be assessed in the future, such events could have a material adverse effect on the Company.
The Company believes it is entitled to receive reciprocal compensation from ILECs for the transport and termination of local traffic to ISPs from customers of the ILECs, pursuant to various interconnection agreements. These ILECs have not paid most of the bills they have received from the Company and have disputed substantially all of these charges, arguing that ISP traffic is not local traffic as defined by the various agreements and under state and federal laws and public policies. To date, there have been favorable rulings from 15 states and public utilities commissions and no unfavorable final rulings by any state public utilities commission or the FCC that would indicate that calls placed by end users to ISPs would not qualify as local traffic subject to the payment of reciprocal compensation. While the Company believes that future regulatory rulings on this issue will continue to treat such calls as local, there can be no assurance that such future rulings will continue to be favorable.
Employees
On December 31, 1997, the Company employed a total of 2,219 individuals on a full time basis. There are 48 employees in the Company's Oregon network systems integration services office who are represented by collective bargaining agreements which expire on May 31, 1998 and December 31, 2000. The Company believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for offices, storage and equipment rooms and collocation sites. Additional space may be purchased or leased by the Company as networks are expanded. The Company owns a 30,000 square-foot building located in the Denver metropolitan area which houses a portion of the Company's Telecom Services business. The Company leases approximately 176,000 square feet of office space for operations located in the Denver metropolitan area and approximately 262,000 square feet in other areas of the United States.
As of December 31, 1997, the Company had acquired property for and had partially constructed its new headquarters in Englewood, Colorado, which is planned to accommodate most of the Company's Colorado operations. In January 1998, the Company sold the substantially completed building to a third party and entered into an agreement to lease back the approximately 265,000 square foot facility under a long-term operating lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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 minority shareholders of Zycom, in the District Court of Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of their subsidiaries. This complaint alleges various statutory and common law claims. The Company is vigorously defending the claims. While it is not possible to predict the outcome of this litigation, management believes these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
A putative class action lawsuit was filed on July 15, 1997 in Superior Court of California, Orange County, alleging unfair business practice and related causes of action against NETCOM in connection with its offers of free trial periods and cancellation procedures and claiming damages of at least $10.0 million. The case is in the preliminary stages, the complaint has been answered and plaintiff has served initial requests for discovery. NETCOM believes it has meritorious defenses to such claims and intends to vigorously defend the action.
The Federal Trade Commission ("FTC") is conducting an inquiry regarding the advertising, marketing, subscription and billing practices of NETCOM. NETCOM believes that it has made reasonable efforts to comply with applicable laws. If the FTC were to conclude that NETCOM violated any applicable law, it could seek relief in the form of equitable relief, civil monetary penalties or other remedies.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996 to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996, Holdings-Canada's common shares had been listed on the AMEX under the symbol "ITR" from January 14, 1993 through February 28, 1996, and under the symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares ceased trading on the AMEX at the close of trading on August 2, 1996. Holdings-Canada Class A Common Shares, which were listed on the Vancouver Stock Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the close of trading on March 12, 1997.
The following table sets forth, for the fiscal periods indicated, the high and low sales prices of the Holdings-Canada Class A Common Shares as reported on the AMEX through August 2, 1996, and the VSE through March 12, 1997, and the high and low sales prices of the ICG Common Stock as reported on the AMEX from August 5, 1996 through March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated below. The table also sets forth the average of the monetary exchange rates on the last day of each such relevant fiscal period.
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's Class A Common Shares ceased trading on the AMEX and the ICG Common Stock commenced trading on the AMEX on August 5, 1996. Effective March 25, 1997, the ICG Common Stock ceased trading on the AMEX and commenced trading on the Nasdaq. ICG Common Stock has never traded on the VSE. The Class A Common Shares traded on the VSE through March 12, 1997 and all information reported on the above table from August 5, 1996 to March 12, 1997 with respect to the VSE relates only to the Class A Common Shares.
(2) The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997.
See the cover page of this Annual Report for a recent bid price and related number of shares outstanding of Common Stock. On March 26, 1998, there were 284 holders of record.
The Company has never declared or paid dividends on the Common Stock and does not intend to pay cash dividends on the Common Stock in the foreseeable future. The Company intends to retain future earnings, if any, to finance the development and expansion of its business. In addition, the payment of any dividends on the Common Stock is effectively prohibited by the restrictions contained in the Company's indentures and in the Second Amended and Restated Articles of Incorporation of Holdings, which prohibits Holdings from making any material payment to the Company. Certain of the Company's debt facilities contain covenants which also may restrict the Company's ability to pay cash dividends.
In September and October 1997, the Company's new wholly owned subsidiary, ICG Funding, LLC, a Delaware limited liability company, completed a private placement of $132.25 million of 6 3/4% Preferred Securities. The 6 3/4% Preferred Securities are mandatorily redeemable November 15, 2009 at the liquidation preference of $50.00 per security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and, thereafter, in cash or shares of Common Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the option of the holder, into Common Stock at an exchange price of $24.025 per share, subject to adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any time on or after November 18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred Securities if the current market value of Common Stock equals or exceeds the exchange price, for at least 20 days of any consecutive 30-day trading period, by 170% prior to November 16, 1998; by 160% from November 16, 1998 through November 15, 1999; and by 150% from November 16, 1999 through November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable upon exchange of such securities have been registered under the Securities Act. The 6 3/4% Preferred Securities are guaranteed by ICG on a full and unconditional basis.
In October 1997, the Company sold 687,221 shares of Common Stock (the "CBG Shares") to certain shareholders of CBG in connection with the acquisition of CBG for a purchase price of approximately $16.0 million. The sale of the CBG Shares was exempt from registration under Rule 4 (2) under the Securities Act because the offers and sales were made to a limited number of investors in a private transaction. Resale of the CBG Shares was subsequently registered on a Form S-3 registration statement which was declared effective on October 31, 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each fiscal year in the four-year period ended September 30, 1996, the three months ended December 31, 1996 and the fiscal year ended December 31, 1997 has been derived from the audited Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Annual Report. The Company's development and expansion activities, including acquisitions, during the periods shown below materially affect the comparability of this data from one period to another. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1) During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts to recognize revenue as services are provided. Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting Change."
(2) Revenue from Satellite Services is generated through the Company's satellite (voice and data) operations and, after January 1995, also includes revenue from maritime communications operations. The Company completed the sale of four of its teleports in March 1996, and has reported results of operations from these assets through December 31, 1995.
(3) Weighted average number of shares outstanding for fiscal years 1993, 1994 and 1995 represents Holdings-Canada common shares outstanding. Weighted average number of shares outstanding for fiscal 1996, the three months ended December 31, 1996 and fiscal 1997 represents Holdings-Canada common shares outstanding for the period October 1, 1995 through August 2, 1996, and represents ICG Common Stock and Holdings-Canada Class A common shares (not owned by ICG) outstanding for the periods subsequent to August 5, 1996.
(4) EBITDA consists of revenue less operating costs and selling, general and administrative expenses. EBITDA is provided because it is a measure commonly used in the telecommunications industry. EBITDA is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities as determined using GAAP are also presented in Other Data.
(5) Capital expenditures includes assets acquired under capital leases and through the issuance of debt or warrants, and excludes payments for construction of the Company's new headquarters which the Company sold in January 1998 and leased back under a long-term operating lease.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which are affected by important factors including, but not limited to, dependence on increased traffic on the Company's facilities, the successful implementation of the Company's strategy of offering an integrated telecommunications package of local, long distance, data and value-added services, continued development of the Company's network infrastructure and actions of competitors and regulatory authorities that could cause actual results to differ materially from the forward-looking statements. The results for the 12 months ended December 31, 1996 and the three months ended December 31, 1995 have been derived from the Company's Consolidated Financial Statements included elsewhere herein and the Company's unaudited Consolidated Financial Statements included in the Company's Forms 10-Q filed with the SEC. The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. All dollar amounts are in U.S. dollars.
Company Overview
The Company is one of the nation's leading competitive ICPs, based on estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to ILECs, long distance carriers, ISPs and other communications service providers for a full range of communications services in the increasingly deregulated telecommunications industry. Through its CLEC operations, the Company operates networks in four regional clusters covering major metropolitan statistical areas in California, Colorado, Ohio and the Southeast. The Company also provides a wide range of network systems integration services, maritime and international satellite transmission services and subsequent to January 21, 1998, a variety of Internet connectivity and other value-added Internet services. Network Services consist of information technology services and selected networking products, focusing on network design, installation, maintenance and support. Satellite Services consist of satellite voice and data services to major cruise lines, commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms. The Company intends to dispose of its Satellite Services operations to better focus its efforts on its core Telecom Services unit, although it has not entered into a formal arrangement for such disposition. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from approximately $111.6 million for fiscal 1995 to approximately $273.4 million for fiscal 1997. The Company's rapid growth is the result of the initial installation, acquisition and subsequent expansion of its fiber optic networks and the expansion of its communication service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been derived from Network Services. However, the Company's Network Services revenue (as well as Satellite Service revenue) will continue to represent a diminishing percentage of the Company's consolidated revenue as the Company continues to emphasize its core Telecom Services, including revenue generated by its newly acquired subsidiary, NETCOM. In March 1996, the Company completed the sale of four of its teleports which were used in the Company's Satellite Services operations.
The Telecommunications Act and pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, the Company is now permitted to offer all interstate and intrastate telephone services, including competitive local dial tone. The Company is marketing and selling local dial tone services in major metropolitan areas in the following regions: California, which began service in late January 1997, followed by Ohio in February 1997, Colorado in March 1997 and the Southeast in May 1997. During fiscal 1997, the Company sold 178,470 local access lines, of which 141,035 were in service as of December 31, 1997. In addition, the Company's operating networks have grown from 627 fiber route miles at the end of fiscal 1995 to 3,043 fiber route miles as of December 31, 1997. The Company has 19 operating high capacity digital voice switches and 15 data communications switches, and plans to install additional switches as demand warrants. As a complement to its local exchange services, the Company has begun marketing bundled service offerings which include long distance, enhanced telecommunications services and data services and plans to intensify the offerings of such services in the near term.
The Company will continue to expand its network through construction, leased facilities, strategic alliances and mergers and acquisitions. For example, in January 1998, the Company completed its merger with NETCOM, a provider of Internet connectivity and Web site hosting services and other value-added services, located in San Jose, California. For calendar years 1995, 1996 and 1997, NETCOM reported revenue of $52.4 million, $120.5 million and $160.7 million, respectively, and EBITDA losses of $(6.3) million, $(20.3) million and $(1.7) million, respectively. The Company will account for the business combination under the pooling of interests method of accounting and accordingly, the Company's financial statements will be restated to reflect the operations of NETCOM and the Company on a combined basis for all historical periods. Also, in two transactions occurring October 1997 and March 1998, the Company purchased 100% of the capital stock of CBG, an Ohio based local exchange and centrex reseller which had, at December 31, 1997, 48,256 local access lines in service, principally pursuant to various resale and other agreements with Ameritech, the ILEC in the markets it serves. Further, for the calendar years 1995, 1996 and 1997, CBG's revenue was approximately $15.4 million, $21.4 million and $33.8 million, respectively, and EBITDA losses were approximately $(1.3) million, $(1.0) million and $(3.2) million, respectively. The operations of CBG have been included in the Company's operations for the period subsequent to October 17, 1997, the acquisition closing date. In May 1997, the Company entered into an agreement with a subsidiary of Southern permitting the Company to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In addition, the Company expanded its geographic focus to include Texas (and may also expand to Arkansas, Louisiana and Oklahoma) through its strategic alliance with CSW that will develop and market telecommunications services, including local service, in these markets. In June 1997, the Company entered into an IRU agreement with Qwest for approximately 1,800 miles of fiber optic network and additional broadband capacity in California, Colorado, Ohio and the Southeast. This new capacity will be used for the transmission of local, long distance and communications services in and between the Company's markets.
Telecom Services revenue has increased from $32.3 million for fiscal 1995 to $177.7 million for fiscal 1997. The Company has experienced declining prices and increasing price competition for access services which, to date, have been more than offset by increasing network usage. The Company expects to continue to experience declining prices and increasing price competition for the foreseeable future.
In conjunction with the increase in its service offerings, the Company has and will continue to need to spend significant amounts on sales, marketing, customer service, engineering and support personnel prior to the generation of corresponding revenue. This has and will continue to have an adverse effect on operating margins until such time as sufficient volumes of customers' telecommunications traffic are attained. As the Company's customer base grows, the Company anticipates that operating margins will improve as incremental revenue will exceed incremental operating expenses. The preceding forward-looking statement is dependent upon the successful implementation of the Company local dial tone, data and long distance services strategy, continued development of the Company's network infrastructure, increased traffic on the Company's facilities, any or all of which may not occur, and upon actions of competitors and regulatory authorities.
Currently the Company has experienced and may continue to experience negative operating margins from its wholesale switched services while its networks are in the development and construction phases and while the Company relies on ILEC networks to carry a significant portion of its customers' switched traffic. The Company expects overall operating margins from switched services to improve as local dial tone, local toll, long distance and data communications services become a relatively larger portion of its business mix and the Company de-emphasizes its wholesale switched services. In addition, the Company believes that the unbundling of ILEC services and the implementation of local telephone number portability, which are mandated by the Telecommunications Act, will reduce the Company's costs of providing switched services and facilitate the marketing of local and other services. The Company has recently raised prices on its wholesale switched services product in order to improve margins and free up switch port capacity for its higher margin dial tone product.
The Company believes that the provisions of the Telecommunications Act, including the opening of the local telephone services market to competition, will facilitate the Company's plan to provide a full array of local, long distance and data communications services. In order to fully implement its strategy, the Company must make significant capital expenditures to provide additional switching capacity, network infrastructure and electronic components. The Company must also make significant investments and expenditures to develop, train and manage its marketing and sales personnel.
The continued development, construction and expansion of the Company's business requires significant capital, a large portion of which is expended before related revenue is generated. The Company has experienced, and expects to continue to experience, negative cash flows over the near term and significant losses while it expands its operations to provide a wide range of telecommunications services and establishes a sufficient revenue-generating customer base. There can be no assurance that the Company will be able to establish or retain such a customer base.
Results of Operations
The following table provides a breakdown of revenue and operating costs for Telecom Services, Network Services and Satellite Services and certain other financial data for the Company for the periods indicated. The table also shows certain revenue, expenses, operating loss and EBITDA as a percentage of the Company's total revenue.
*Less than 0.5%
(1) During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts to recognize revenue as services are provided. See "-Accounting Changes." Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant.
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
Fiscal 1997 Compared to 12 Months Ended December 31, 1996
Revenue. Revenue for fiscal 1997 increased $82.7 million or 43% from the 12 months ended December 31, 1996. Telecom Services revenue increased 63% to $177.7 million due to an increase in network usage for both switched and special access services, offset in part by a decline in average unit pricing. Switched services revenue increased from $48.1 million (44% of Telecom Services revenue) for the 12 months ended December 31, 1996 to $93.9 million (53% of Telecom Services revenue) for fiscal 1997. Switched access (terminating long distance) revenue represented approximately 77% of the Company's switched services revenue component for fiscal 1997, compared to 100% for the 12 months ended December 31, 1996. Special access revenue increased from $39.4 million (36% of Telecom Services revenue) for the 12 months ended December 31, 1996 to $55.4 million (31% of Telecom Services revenue) for fiscal 1997. Also included in Telecom Services revenue for fiscal 1997 is $28.3 million generated by Zycom, compared to $21.5 million for the same 12-month period in 1996. The increase in Zycom revenue for fiscal 1997 as compared to the same period in 1996 relates to changes in the classification of certain operating costs as a result of the Company entering into long-term contracts with its major customers. These costs were netted against revenue through April 1996 due to the uncertainty of renewal of short-term customer contracts. At December 31, 1997, the Company had 141,035 access lines in service compared to zero at December 31, 1996. Special access network usage reflected in voice grade equivalents ("VGEs") increased 49% from 748,528 VGEs at December 31, 1996, to 1,111,697 VGEs at December 31, 1997. At December 31, 1997, the Company had 2,321 buildings connected to its networks compared to 2,069 buildings connected at December 31, 1996. Additionally, switched minutes of use increased 43% from approximately 2.0 billion minutes during the 12 months ended December 31, 1996 to approximately 2.9 billion minutes during fiscal 1997. Revenue from long distance and data services did not generate a material portion of total revenue during either period. Network Services revenue increased 9% to $65.7 million for fiscal 1997 as compared to $60.4 million for the 12 months ended December 31, 1996. The increase in Network Services revenue is due to a single equipment sale during fiscal 1997 for $3.2 million as well as general increases in volume. Satellite Services revenue increased $8.7 million, or 41%, to $30.0 million for fiscal 1997, compared to the 12 months ended December 31, 1996. This increase is primarily due to the operations of MCN, which comprised $6.3 million of total Satellite Services revenue for fiscal 1997 compared to $1.8 million during the same 12-month period in 1996. The remaining increase can be attributed to the general growth of MTN and its increased sales of C-Band equipment to offshore oil and gas customers.
Operating costs. Total operating costs for fiscal 1997 increased $88.3 million, or 56%, from the 12 months ended December 31, 1996. Telecom Services operating costs increased from $101.3 million, or 93% of Telecom Services revenue, for the 12 months ended December 31, 1996 to $175.8 million, or 99% of Telecom Services revenue, for fiscal 1997. Telecom Services operating costs consist of payments to ILECs for the use of network facilities to support special and switched access services, network operating costs, right of way fees and other costs. The increase in operating costs in absolute dollars is attributable to the increase in switched access services and the addition of engineering and operations personnel dedicated to the development of local exchange services. The increase in operating costs as a percentage of total revenue is due primarily to the increase in switched access services revenue, and the investment in the development of local exchange services without the benefit of substantial corresponding revenue in the same period. The Company expects that the Telecom Services ratio of operating costs to revenue will further improve as the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities on satisfactory terms, any or all of which may not occur. Network Services operating costs increased 16% to $53.9 million and increased as a percentage of Network Services revenue from 77% for the 12 months ended December 31, 1996 to 82% for fiscal 1997. The increase is due to a substantially lower margin earned on equipment sales (which constituted a larger portion of 1997 revenue) relative to other services and certain indirect project costs included in operating costs during fiscal 1997 which were treated as selling, general and administrative expenses during the comparable 12-month period in 1996. Network Services operating costs include the cost of equipment sold, direct hourly labor and other indirect project costs. Satellite Services operating costs increased to $16.7 million for fiscal 1997, from $10.2 million for the 12 months ended December 31, 1996. Satellite Services operating costs as a percentage of Satellite Services revenue also increased from 48% for the 12 months ended December 31, 1996 to 56% for fiscal 1997. This increase is due to an increase in MCN's sales as well the increased volume of equipment sales, both of which provide lower margins than other maritime services. Satellite Services operating costs consist primarily of transponder lease costs and the cost of equipment sold.
Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses for fiscal 1997 increased $68.4 million, or 83%, compared to the 12 months ended December 31, 1996. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local and long distance telephone and data communications services. SG&A expenses as a percentage of total revenue increased from 43% for the 12 months ended December 31, 1996 to 55% for fiscal 1997. There is typically a period of higher administrative and marketing expense prior to the generation of appreciable revenue from newly developed networks or services. The Company expects SG&A expenses for Telecom Services to increase slightly over the near term as a result of hiring new staff to facilitate the marketing and development of local dial tone, local toll, long distance and data transmission services.
Depreciation and amortization. Depreciation and amortization increased $21.8 million, or 62%, for fiscal 1997, compared to the 12 months ended December 31, 1996, due to increased investment in depreciable assets resulting from the continued expansion of the Company's networks and services. The Company reports high levels of depreciation expense relative to revenue during the early years of operation of a new network because the full cost of a network is depreciated using the straight-line method despite the low rate of capacity utilization in the early stages of network operation.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on disposal of long-lived assets decreased from a net loss of $3.3 million for the 12 months ended December 31, 1996 to a net gain of $0.7 million for fiscal 1997. Net loss on disposal of long-lived assets for the 12 months ended December 31, 1996 includes the loss recorded on the sale of four of the Company's teleports used in its Satellite Services operations ($1.1 million), the loss recorded on the disposal of other operating assets ($2.7 million) and a write-off of an investment ($0.3 million), offset by a gain on the sale on sale of the Company's 50% interest in the Phoenix network joint venture ($0.8 million). For fiscal 1997, net loss on disposal of long-lived assets primarily relates to losses recorded on the disposal of the Company's investment in its Melbourne network.
Provision for impairment of long-lived assets. For fiscal 1997, provision for impairment of long-lived assets includes the write-down of the Company's investment in StarCom International Optics Corporation, Inc. ($5.2 million), MCN ($2.9 million), Zycom ($2.7 million) and Nova-Net ($0.9 million) as well as a write-down of other operating assets ($0.3 million). Provision for impairment of long-lived assets for the 12 months ended December 31, 1996 includes valuation allowances for the amounts receivable for advances made to the Phoenix network joint venture included in long-term note receivable ($5.8 million), the investments in the Melbourne network ($2.7 million) and the Satellite Services Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc. ($1.3 million). Provision for impairment of long-lived assets was recorded based on management's estimate of the net realizable value of the Company's assets at December 31, 1996 and 1997.
Interest expense. Interest expense increased $22.6 million, from $95.0 million for the 12 months ended December 31, 1996, to $117.5 million for fiscal 1997, which includes $105.5 million of non-cash interest. This increase was primarily attributable to an increase in long-term debt, primarily the 11 5/8% Notes issued in March 1997. In addition, the Company's interest expense increased, and will continue to increase, because the principal amount of its indebtedness increases until the Company's senior indebtedness begins to pay interest in cash.
Interest income. Interest income increased $0.4 million, from $21.5 million for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The increase is attributable to the increase in cash and invested cash balances from the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
Other, net. Other, net decreased from $3.9 million net expense for the 12 months ended December 31, 1996 to $0.7 million net expense for fiscal 1997. Other expense recorded for the 12 months ended December 31, 1996 consists primarily of the write-off of deferred financing costs associated with the conversion or repayment of debt and litigation settlement costs. For fiscal 1997, other, net consists primarily of litigation settlement costs and the loss on disposal of non operating assets.
Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries. Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries increased $10.7 million, from $27.1 million for the 12 months ended December 31, 1996 to $37.8 million for fiscal 1997. The increase is due primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6 3/4% Preferred Securities in September and October 1997. Offsetting this increase is $12.3 million recorded during the 12 months ended December 31, 1996 for the excess of the redemption price over the carrying amount of the 12% redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock") redeemed in April 1996. Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries recorded during fiscal 1997 consists of the accretion of issue costs ($0.9 million) and the accrual of the preferred security dividends ($38.9 million) associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"), offset by minority interest in losses of subsidiaries of $2.0 million.
Share of losses of joint venture and investment. Effective October 1, 1996, the Company sold its 50% interest in the Phoenix network joint venture. As a result, no share of losses in joint venture was recorded during fiscal 1997, as compared to the $1.6 million loss recorded during the comparable 12-month period in 1996.
Net loss. Net loss increased $128.4 million, or 64%, due to the increases in operating costs, SG&A expense, depreciation and amortization, interest expense and minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries noted above.
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31, 1995
Revenue. Revenue for the three months ended December 31, 1996 increased $21.6 million, or 61%, from the three months ended December 31, 1995. The increase in total revenue reflects continued growth in Telecom Services, Network Services and Satellite Services, offset slightly by the loss in revenue resulting from the sale of four of the Company's teleports during the second quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million due to an increase in network usage for both switched and special access services, offset in part by a decline in average unit pricing. Switched services revenue increased from $5.1 million (38% of Telecom Services revenue) for the three months ended December 31, 1995, to $16.4 million (47% of Telecom Services revenue) for the three months ended December 31, 1996. Switched access revenue represented substantially all of the Company's switched services revenue component for the three months ended December 31, 1996. Special access revenue increased from $7.5 million (56% of Telecom Services revenue) for the three months ended December 31, 1995 to $10.9 million (31% of Telecom Services revenue) for the three months ended December 31, 1996. Also, included in Telecom Services revenue for the three months ended December 31, 1996 is $7.5 million generated by Zycom, compared to $0.9 million for the three months ended December 31, 1995. Approximately $6.5 million of the increase in Zycom revenue for the three months ended December 31, 1996 as compared to the same period in 1995 relates to changes in the classification of certain operating costs as a result of the Company entering into long-term contracts with its major customers. Network usage as reflected in VGEs increased 53% from 488,403 VGEs on December 31, 1995 to 748,528 at December 31, 1996. On December 31, 1996, the Company had 2,069 buildings connected to its networks compared to 1,539 buildings connected on December 31, 1995. Consistent with expectations, Network Services revenue growth was moderate, increasing from $15.7 million to $16.0 million for the three months ended December 31, 1995 and 1996, respectively, while the Company repositioned its systems and operations to improve operating results. Satellite Services revenue remained relatively stable between the three-month periods ended December 31, 1995 and 1996 as a result of the offsetting effects of increased maritime minutes of use from cruise ships and no revenue in the three months ended December 31, 1996 from the four teleports sold in March 1996. On a pro forma basis to reflect the sale of the teleports, the Company's Satellite Services revenue for the three months ended December 31, 1995 and 1996 was $3.7 million and $6.2 million, respectively.
Operating costs. Total operating costs for the three months ended December 31, 1996 increased $22.8 million, or 84%, from the same period in 1995. Telecom Services operating costs increased from $11.9 million, or 88%, of Telecom Services revenue for the three months ended December 31, 1995, to $34.5 million, or 99%, of Telecom Services revenue for the three months ended December 31, 1996. The increase in operating costs in absolute dollars is attributable to the increase in switched access services and the addition of engineering and operations personnel dedicated to the development of local exchange services. The increase in operating costs as a percentage of revenue is due primarily to the increase in switched access services revenue. Network Services operating costs increased 2% to $12.3 million for the three months ended December 31, 1996 and increased as a percentage of Network Services revenue from 76% to 77% for the three month periods ended December 31, 1995 and 1996, respectively. Satellite Services operating costs decreased 2% to $3.2 million for the three months ended December 31, 1996. Satellite Services operating costs as a percentage of revenue declined to 51% of Satellite Services revenue during the three months ended December 31, 1996, from 52% during the three months ended December 31, 1995. The decrease in percentage of revenue as well as absolute dollars is attributable to the decline in revenue resulting from the sale of four of the Company's teleports in March 1996, offset by an increase in higher margin maritime services revenue at MTN. Revenue from teleport operations historically have yielded lower gross margins than maritime services revenue.
Selling, general and administrative expense. SG&A expenses for the three months ended December 31, 1996 increased $5.6 million, or 30%, compared to the three months ended December 31, 1995. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of the Company's CLEC operations. SG&A expenses as a percentage of total revenue was 43% for the three months ended December 31, 1996, compared to 53% for the same period in 1995. SG&A expenses for Network Services decreased both in absolute dollars and as a percentage of Network Services revenue due to approximately $0.7 million in non-recurring charges, primarily legal accruals, recorded during the three months ended December 31, 1995. Satellite Services SG&A expenses decreased in absolute dollars and as a percentage of Satellite Services revenue due to cost control efforts by the Company's management. Other corporate expenses increased from $4.0 million, or 11% of total revenue, for the three months ended December 31, 1995 to $5.7 million, or 10% of total revenue, for the three months ended December 31, 1996. This increase is primarily attributable to the addition of employees, principally human resources and regulatory personnel, for the purpose of managing the Company's growth and its expansion into new markets as allowed under the Telecommunications Act.
Depreciation and amortization expense. Depreciation and amortization expense increased $4.9 million, or 100%, for the three months ended December 31, 1996, as compared to the same period in 1995. Depreciation of fixed assets increased by approximately $2.3 million as a result of the shortening of estimated depreciable lives during fiscal 1996, as discussed in "-Accounting Changes," and an increase in depreciable fixed assets due to the continued expansion of the Company's networks. The increase in depreciation expense was offset slightly due to the sale of four of the Company's teleports in March 1996.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on disposal of long-lived assets decreased from a net loss of $1.0 million for the three months ended December 31, 1995 to a net gain of $0.8 million for the three months ended December 31, 1996. Net loss on disposal of long-lived assets for the three months ended December 31, 1995 includes the write-off of certain operating assets. For the three months ended December 31, 1996, net gain on disposal of long-lived assets consists of the gain on sale of the Company's 50% interest in the Phoenix network joint venture.
Interest expense. Interest expense increased by $9.3 million, from $15.2 million for the three months ended December 31, 1995 to $24.5 million for the three months ended December 31, 1996, which included $22.7 million of non-cash interest. This increase was attributable to an increase in long-term debt, primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in April 1996 and an increase in capitalized lease obligations to finance Telecom Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three months ended December 31, 1995 to $6.0 million for the three months ended December 31, 1996. The increase is attributable to the interest earned on the proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996.
Share of losses of joint venture and investment. As a result of the sale of the Company's 50% interest in the Phoenix network joint venture, no share of losses in joint venture was recorded during the three months ended December 31, 1996, as compared to the $0.2 million recorded during the same period in 1995.
Other, net. Other, net for the three months ended December 31, 1996 was $0.1 million net expense as compared to a minor net gain for the three months ended December 31, 1995. Other expense recorded during the three-month period ended December 31, 1996 consists of miscellaneous other expenses.
Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries. Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries increased $1.8 million, from $3.2 million for the three months ended December 31, 1995 to $5.0 million for the three months ended December 31, 1996. The increase is due primarily to the issuance of the 14 1/4% Preferred Stock in April 1996. Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries recorded during the current three-month period ended December 31, 1996 consists of the accretion of issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7 million) associated with the 14 1/4% Preferred Stock, offset by minority interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term telecom services contracts. The cumulative effect of change in accounting for revenue from long-term telecom services contracts recorded during the three months ended December 31, 1995 is due to the change in accounting principle as described in "-Accounting Changes." As the change in accounting was applied retroactively as of October 1, 1995, no similar amounts were recorded during the three months ended December 31, 1996.
Net loss. Net loss increased $15.2 million, or 44%, due to the increase in operating costs, SG&A expenses, depreciation and amortization and interest expense noted above.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal 1996 compared to the pro forma results of operations for fiscal 1995, assuming the change in accounting for long-term telecom services contracts described in "-Accounting Change" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from fiscal 1995. The increase in total revenue reflects continued growth in Telecom Services, Network Services and Satellite Services, offset slightly by the loss in revenue resulting from the sale of four of the Company's teleports. Telecom Services revenue increased 177% to $87.7 million due to an increase in network usage for both switched and special access services, offset in part by a decline in average unit prices. Switched services revenue, consisting solely of switched access services, increased from $5.8 million (18% of Telecom Services revenue) for fiscal 1995, to $36.7 million (42% of Telecom Services revenue) for fiscal 1996. Special access revenue increased from $25.1 million (78% of Telecom Services revenue) for fiscal 1995 to $36.1 million (41% of Telecom Services revenue) for fiscal 1996. Also included in Telecom Services revenue for fiscal 1996 is $14.9 million generated by Zycom, compared to $1.4 million in fiscal 1995. Approximately $10.6 million of the increase in Zycom revenue relates to changes in the classification of certain operating costs as a result of the Company entering into long-term contracts with its major customers. Network usage as reflected in VGEs increased 47% from 430,535 VGEs on September 30, 1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996, the Company had 2,067 buildings connected to its networks compared to 1,375 buildings connected on September 30, 1995. Consistent with expectations, Network Services revenue growth was moderate, increasing from $58.8 million to $60.1 million, while the Company repositioned its systems and operations to improve operating results. Satellite Services revenue increased 4% to $21.3 million for fiscal 1996 primarily due to increased maritime minutes of use from cruise ships offset in part by the decrease resulting from the sale of four of the Company's teleports. Satellite Services revenue for fiscal 1995 and 1996, on a pro forma basis to reflect the sale of teleports, was $11.4 million and $18.9 million, respectively. Satellite Services revenue decreased $0.4 million from the third quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in revenue was primarily due to three Navy vessels being in "dry dock."
Operating costs. Total operating costs for fiscal 1996 increased $56.4 million, or 72%, from fiscal 1995. Telecom Services operating costs increased from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7 million, or 90% of Telecom Services revenue for fiscal 1996. The increase in operating costs in absolute dollars is attributable to the increase in switched access services and the expansion in off-net special access service offerings. The increase in operating costs as a percentage of total revenue is due primarily to the increase in switched access services revenue. Network Services operating costs increased 1% to $46.3 million and decreased as a percentage of Network Services revenue from 78% for fiscal 1995 to 77% for fiscal 1996. Satellite Services operating costs decreased to $10.3 million for fiscal 1996, from $11.1 million for fiscal 1995. Satellite Services operating costs as a percentage of revenue also declined to 48% for fiscal 1996, compared to 54% for fiscal 1995. The decrease both in absolute dollars and as a percentage of revenue is attributable to the decline in revenue resulting from the sale of four of the Company's teleports, partially offset by an increase in higher margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expenses for fiscal 1996 increased $13.8 million, or 22%, compared to fiscal 1995. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, marketing and sales staff dedicated to the expansion of the Company's networks and implementation of the Company's switched services strategy and development of the Company's CLEC operations. A portion of the increase was also attributable to approximately $1.8 million of legal, accounting, and SEC filing fees incurred in the incorporation of a new U.S. publicly traded holding company, ICG Communications, Inc., and approximately $1.3 million of consulting fees related to various process improvement initiatives. SG&A expenses as a percentage of total revenue was 45% for fiscal 1996, compared to 57% for fiscal 1995. SG&A expenses for Network Services increased due to increased engineering, marketing and sales staff to support growth in network system installations. Satellite Services SG&A expenses increased primarily due to the growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased $13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of fixed assets increased by approximately $7.0 million as a result of the shortening of estimated depreciable lives discussed in "-Accounting Changes," and an increase in depreciable fixed assets due to the continued expansion of the Company's networks. The increase in depreciation expense was offset slightly due to the sale of four of the Company's teleports.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on disposal of long-lived assets increased to $5.1 million during fiscal 1996 from $0.2 million during fiscal 1995. Net loss on disposal of long-lived assets for fiscal 1996 includes the loss recorded on the sale of four of the Company's teleports used in its Satellite Services operations ($1.1 million), the loss recorded on the disposal of other operating assets ($3.7 million) and a write-off of an investment ($0.3 million).
Provision for impairment of long-lived assets. Provision for impairment of long-lived assets increased $3.0 million from fiscal 1995 to $10.0 million for fiscal 1996. The amount recorded during fiscal 1996 includes valuation allowances for the amounts receivable for advances made to the Phoenix network joint venture included in long-term notes receivable ($5.8 million), the investment in the Melbourne network ($2.7 million), the note receivable from NovoComm, Inc. ($1.3 million) and the Satellite Services Mexico subsidiary ($0.2 million). The fiscal 1995 amount includes an allowance for an investment ($2.0 million) and a write-down in the goodwill associated with the acquisition of Nova-Net ($5.0 million). Provision for impairment of long-lived assets was recorded based on management's estimate of the net realizable value of the Company's assets at September 30, 1995 and 1996.
Interest expense. Interest expense increased by $61.3 million, from $24.4 million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5 million of non-cash interest. This increase was attributable to an increase in long-term debt, primarily the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996, and an increase in capitalized lease obligations to finance the purchase of Telecom Services and Satellite Services equipment. Also included in interest expense is a charge of approximately $11.5 million for the payments made to holders of the 13 1/2% Notes with respect to consents to amendments to the indenture governing the 13 1/2% Notes in order to permit the offering of the 13 1/2% Notes in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995. The increase is attributable to the increase in cash from the proceeds of the issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4% Preferred Stock in April 1996.
Share of losses of joint venture and investment. Share of losses in the Phoenix network joint venture, in which the Company held a 50% equity interest, increased $1.1 million, or 145%, from fiscal 1995 to $1.8 million for fiscal 1996 due to increased losses resulting from the continued expansion and implementation of switched access services.
Other, net. Other, net increased from $0.5 million net expense for fiscal 1995 to $3.9 million net expense for fiscal 1996. Other expense recorded in fiscal 1996 consists primarily of settlement costs of certain litigation ($1.2 million) and the write-off of deferred financing costs upon conversion or settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries. Minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries increased $24.2 million, from $1.1 million for fiscal 1995 to approximately $25.3 million for fiscal 1996. The increase is due to the accretion of the unit warrants issued in connection with the 13% Notes ($14.4 million) and issue costs ($1.1 million) associated with the issuance of the 12% Redeemable Preferred Stock, of Holdings (the "12% Preferred Stock") accretion of issue costs associated with the 14 1/4% Preferred Stock ($0.3 million), accrual of the preferred stock dividend on the 12% Preferred Stock ($2.1 million) and the 14 1/4% Preferred Stock ($9.1 million) and the excess redemption price over the stated value of the convertible Series B Preferred Stock of Holdings-Canada ($1.0 million), partially offset by the minority interest in losses of subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million. The income tax benefit is due to an adjustment to the deferred tax liability as a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term telecom services contracts. The increase in cumulative effect of change in accounting for revenue from long-term telecom services contracts is due to the change in accounting as described in "-Accounting Changes."
Net loss. Net loss increased $107.5 million, or 140%, due to the increases in operating costs, SG&A expenses, depreciation and amortization, interest expense and minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries noted above.
Quarterly Results
The following table presents selected unaudited operating results for three-month quarterly periods, beginning with the three months ended December 31, 1995 and through the three months ended December 31, 1997. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the Company's Consolidated Financial Statements and related notes included elsewhere in this Annual Report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. ICG's development and expansion activities, including acquisitions, during the periods shown below materially affect the comparability of this data from one period to another.
(1) During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts to recognize revenue as services are provided. See "-Accounting Change." Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant.
(2) EBITDA consists of revenue less operating costs and selling, general and administrative expenses. EBITDA is provided because it is a measure commonly used in the telecommunications industry. EBITDA is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities as determined using GAAP are also presented in Other Data.
(3) Capital expenditures includes assets acquired under capital leases and excludes payments for construction of the Company's new headquarters which the Company sold in January 1998 and leased back under a long-term operating lease.
(4) Amounts presented are for three-month periods ended, or as of the end of, the period presented.
(5) Access lines in service at December 31, 1997 includes 66,346 lines which are provisioned through the Company's switch and 74,689 lines which are provisioned through resale and other agreements with various local exchange carriers. Resale lines typically generate lower margins and are used primarily to obtain customers. Although the Company plans to migrate lines from resale to higher margin on-switch lines, there are no assurances that it will be successful in executing this strategy.
(6) Hybrid buildings connected represent buildings connected to the Company's network via another carrier's facilities. Hybrid buildings declined from September 30, 1996 to December 31, 1996 due to the sale of the Company's 50% interest in the Phoenix joint venture.
(7) Customer circuits in service are measured in voice grade equivalents ("VGEs").
(8) Fiber route miles refers to the number of miles of fiber optic cable, including leased fiber. As of December 31, 1997, the Company had 3,043 fiber route miles, of which 171 fiber route miles were leased under operating leases. Fiber route miles under construction represents fiber under construction which is expected to be operational within six months.
(9) Fiber strand miles refers to the number of fiber route miles, including leased fiber, along a telecommunications path multiplied by the number of fiber strands along that path. As of December 31, 1997, the Company had 111,435 fiber strand miles, of which 3,278 fiber strand miles were leased under operating leases. Fiber strand miles under construction represents fiber under construction which is expected to be operational within six months.
(10) Wireless miles represents the total distance of the digital microwave paths between Company transmitters which are used in the Company's networks.
(11) C-Band installations service cruise ships, U.S. Navy vessels and offshore oil platform installations.
(12) L-Band installations service smaller maritime installations, and both mobile and fixed land-based units.
The Company's consolidated revenue has increased every quarter since the first fiscal quarter of 1992, primarily due to the installation and acquisition of new networks, the expansion of existing networks and increased services provided over existing networks. From the third quarter of fiscal 1993 until the sale of four teleports in the second quarter of fiscal 1996, Satellite Services also contributed to the quarterly revenue growth.
EBITDA, operating and net losses have generally increased immediately preceding and during periods of relatively rapid network acquisition and expansion activity. The increased quarterly losses from the first quarter of fiscal 1995 through the quarter ended December 31, 1997 resulted from a combination of increases in negative margin switched access services revenue and increases in personnel and other SG&A expenses to support the acquisition and expansion of Telecom Services networks, the implementation of the Company's switched access services strategy and development of local exchange services. Since the quarter ended June 30, 1996, EBITDA losses have improved for each consecutive quarter. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other SG&A expenses supporting its Telecom Services networks, any or all of which may not occur, the Company anticipates that EBITDA losses will continue to improve in the near term.
Individual operating units may experience variability in quarter to quarter revenue due to (i) the type and mix of services available to customers, (ii) the timing and size of contract orders, (iii) the timing of price changes and associated impact on volume, and (iv) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1997, the Company had net operating loss carryforwards ("NOLs") of approximately $353.0 million, which expire at various times in varying amounts through 2012. However, due to the provisions of Section 382, Section 1502 and certain other provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of a portion of the NOLs will be limited. In addition, the Company is also subject to certain state income tax laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as well as other tax attributes, following significant changes in ownership of a corporation's stock, as defined in the Code. Investors are cautioned that future events beyond the control of the Company could reduce or eliminate the Company's ability to utilize the tax benefits of its NOLs. Future ownership changes under Section 382 will require a new Section 382 computation which could further restrict the use of the NOLs. In addition, the Section 382 limitation could be reduced to zero if the Company fails to satisfy the continuity of business enterprise requirement for the two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt and lease financing. As of December 31, 1997, the Company had current assets of $310.2 million, including $217.0 million of cash, cash equivalents and short-term investments available for sale, which exceeded current liabilities of $99.3 million, providing working capital of $210.9 million. The Company invests excess funds in short-term, interest-bearing investment-grade securities until such funds are used to fund the capital investments and operating needs of the Company's business. The Company's short term investment objectives are safety, liquidity and yield, in that order.
Cash Used By Operating Activities
The Company's operating activities used $42.8 million and $43.4 million in fiscal 1995 and 1996, respectively, $4.6 million and $8.6 million for the three months ended December 31, 1995 and 1996, respectively, and $127.0 million for fiscal 1997. Cash used by operations is primarily due to net losses, which are partially offset by non-cash expenses, such as depreciation and amortization expense, deferred interest expense, preferred dividends on subsidiary preferred securities and changes in working capital items.
The Company expects to continue to generate negative cash flows from operating activities while it emphasizes the development, construction and expansion of its Telecom Services business. Consequently, it does not anticipate that cash provided by operations will be sufficient to fund operating activities, future expansion of existing networks or the construction and acquisition of new networks in the near term. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other SG&A expenses supporting its Telecom Services networks, any or all of which may not occur, the Company anticipates that cash used by operating activities will continue to improve in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $71.6 million and $135.2 million (net of $21.6 million received in connection with the sale of certain satellite equipment, including four teleports) in fiscal 1995 and 1996, respectively, $25.2 million (net of $21.1 million received in connection with the aforementioned equipment sale) and $82.3 million for the three months ended December 31, 1995 and 1996, respectively, and $429.9 million for fiscal 1997. Cash used by investing activities includes cash expended for the acquisition of property, equipment and other assets of $50.1 million and $122.3 million for fiscal 1995 and 1996, respectively, and $26.8 million and $50.8 million for the three months ended December 31, 1995 and 1996, respectively, and $269.6 million for fiscal 1997. Additionally, cash used by investing activities includes payments for construction of the Company's new headquarters of $1.5 million, $7.9 million and $29.4 million for fiscal 1996, the three months ended December 31, 1996 and fiscal 1997, respectively. The Company will continue to use cash in investing activities in 1998 and subsequent periods for the construction of new networks, the expansion of existing networks and potentially for acquisitions. The Company acquired assets under capital leases and through the issuance of debt or warrants of $38.7 million and $55.0 million in fiscal 1995 and 1996, respectively, $0.1 million and $19.5 million for the three months ended December 31, 1995 and 1996, respectively, and zero for fiscal 1997.
Cash Provided (Used) By Financing Activities
Financing activities provided $377.8 million and $360.2 million in fiscal 1995 and 1996, respectively, used $8.4 million and $0.2 million in the three months ended December 31, 1995 and 1996, respectively, and provided $315.7 million in fiscal 1997. Cash provided by financing activities primarily includes cash received in connection with the private placement of units consisting of the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants in August 1995, the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996, the 11 5/8% Notes and the 14% Preferred Stock in March 1997 and the 6 3/4% Preferred Securities in September and October 1997. Historically, the funds to finance the Company's business acquisitions, capital expenditures, working capital requirements and operating losses have been obtained through public and private offerings of ICG and Holdings-Canada common shares, convertible subordinated notes, convertible preferred shares of Holdings-Canada, capital lease financings and various working capital sources, including credit facilities, in addition to the private placement of the securities previously mentioned.
On March 11, 1997, Holdings completed a private placement of 11 5/8% Notes and 100,000 shares of 14% Preferred Stock for net proceeds of approximately $192.4 million. The Company believes the net proceeds of the private placement will improve its operating and financial flexibility over the near term because (a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and (b) Holdings has the option to pay dividends on the 14% Preferred Stock in additional shares of 14% Preferred Stock prior to 2002 and the Preferred Stock is not mandatorily redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per annum, beginning March 15, 2002, and is payable each March 15 and September 15, commencing September 15, 2002. Dividends on the 14% Preferred Stock are cumulative at a rate of 14% per annum and are payable quarterly in arrears each March 15, June 15, September 15 and December 15, commencing June 15, 1997. The 14% Preferred Stock has a liquidation preference of $1,000 per share, plus accrued and unpaid dividends, and is mandatorily redeemable in 2008. The 14% Preferred Stock is exchangeable, at the option of Holdings, into 14% senior subordinated exchange debentures of Holdings due 2008, at any time after the exchange is permitted under certain indenture restrictions.
On September 24 and October 3, 1997, ICG Funding completed a private placement (guaranteed by ICG) of 2,645,000 6 3/4% Preferred Securities for net proceeds, after underwriting costs, of approximately $127.6 million. Dividends on the 6 3/4% Preferred Securities are payable quarterly in arrears each February 15, May 15, August 15 and November 15, and commenced November 15, 1997. The dividend is payable in cash through November 15, 2000, and in cash or shares of ICG common stock, at the option of ICG Funding, thereafter. The 6 3/4% Preferred Securities have a liquidation preference of $50 per security, plus accrued and unpaid dividends, and are mandatorily redeemable in 2009. The 6 3/4% Preferred Securities are exchangeable at any time prior to November 15, 2009 into shares of ICG Common Stock at a rate of 2.0812 shares of Common Stock per preferred security or $24.025 per share.
As of December 31, 1997, an aggregate of approximately $60.2 million of capitalized lease obligations was due prior to December 31, 2001 and an aggregate accreted value of approximately $887.5 million was outstanding under the 13 1/2% Notes, the 12 1/2% Notes and the 11 5/8% 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 March 15, 2002 and mature on March 15, 2007. The 6 3/4% Preferred Securities require payments of dividends to be made in cash and are being paid currently through November 15, 2000. In addition, the 14% Preferred Stock and the 14 1/4% Preferred Stock require payment of dividends to be made in cash commencing June 15, 2002 and August 1, 2001, respectively. As of December 31, 1997, the Company had $7.9 million of other indebtedness outstanding. The Company may also have additional payment obligations prior to such time, the amount of which cannot presently be determined. The Company's cash on hand and amounts expected to be available through vendor financing arrangements will provide sufficient funds necessary for the Company to expand its Telecom Services business as currently planned and to fund its operating deficits through the first quarter of 1999. With respect to indebtedness outstanding on December 31, 1997, the Company has cash interest payment obligations of approximately $113.3 million in 2001, $158.0 million in 2002 and $168.1 million in 2003. With respect to preferred securities currently outstanding, the Company has cash dividend obligations of approximately $8.9 million in each of 1998, 1999 and 2000, $21.5 million in 2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company may have to refinance a substantial amount of indebtedness and obtain substantial additional funds prior to March 2001. The Company's ability to do so will depend on, among other things, its financial condition at the time, restrictions in the instruments governing its indebtedness, and other factors, including market conditions, beyond the control of the Company. There can be no assurance that the Company will be able to refinance such indebtedness, including such capitalized leases, or obtain such additional funds, and if the Company is unable to effect such refinancings or obtain additional funds, the Company's ability to make principal and interest payments on its indebtedness or make payments of cash dividends on, or the mandatory redemption of, its preferred securities, would be adversely affected.
On February 12, 1998, ICG Services completed a private placement of 10% Senior Discount Notes due 2008 for net proceeds, after underwriting costs, of approximately $291.6 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable each February 15 and August 15, commencing August 15, 2003. The Notes will be redeemable at the option of ICG Services, in whole or in part, on or after February 15, 2003.
Capital Expenditures
The Company expects to continue to generate negative cash flows from operating activities over the near term while it emphasizes development, construction and expansion of its business and until the Company establishes a sufficient revenue-generating customer base. The Company's capital expenditures (including assets acquired under capital leases and excluding payments for construction of the Company's new headquarters) were $88.7 million and $177.3 million for fiscal 1995 and 1996, respectively, $26.9 million and $70.3 million for the three months ended December 31, 1995 and 1996, respectively, and $269.6 million for fiscal 1997. The Company anticipates that the expansion of existing networks, construction of new networks and further development of the Company's products and services will require capital expenditures of approximately $450.0 million during 1998, including capital expenditure requirements of NETCOM. To facilitate the expansion of its services and networks the Company has entered into equipment purchase agreements with various vendors under which the Company must purchase a substantial amount of equipment and other assets, including a full range of switching systems, fiber optic cable, network electronics, software and services. Actual capital expenditures will depend on numerous factors, including certain factors beyond the Company's control. These factors include the nature of future expansion and acquisition opportunities, economic conditions, competition, regulatory developments and the availability of equity, debt and lease financing.
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require significant capital expenditures for development, construction, expansion and acquisitions 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 capitial expenditures, it has other cash commitments as described in the footnotes to the Company's audited Consolidated Financial Statements for the fiscal year ended December 31, 1997 included elsewhere herein.
In view of the anticipated negative cash flows from operating activities, the continuing development of the Company's products and services, the expansion of existing networks and the construction, leasing and licensing of new networks, the Company will require additional amounts of cash in the future from outside sources. Management believes that the Company's cash on hand and amounts expected to be available through vendor financing arrangements will provide sufficient funds necessary for the Company to expand its Telecom Services business as currently planned and to fund its operating deficits through the first quarter of 1999. Additional sources of cash may include public and private equity and debt financings, sales of non-strategic assets, capitalized leases and other financing arrangements. The Company may require additional amounts of equity capital in the near term. In the past, the Company has been able to secure sufficient amounts of financing to meet its capital expenditure needs. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company.
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.
Year 2000 Compliance
While the Company believes that its software applications are year 2000 complaint, there can be no assurance until the year 2000 occurs that all systems will then function adequately. Further, if the software applications of local exchange carriers, long distance carriers or others on whose services the Company depends are not year 2000 complaint, it could have a material adverse effect on the Company's financial condition and results of operations.
Accounting Change
During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts. Under the new method, the Company recognizes revenue as services are provided and continues to charge direct selling expenses to operations as incurred. The Company had previously recognized revenue in an amount equal to the noncancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer, to the extent of direct installation and selling expense incurred in obtaining customers during the period in which such revenue was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract had been recognized ratably over the remaining noncancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry.
As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995. The Company's results for fiscal 1996 include a charge of $3.5 million ($0.13 per share) relating to the cumulative effect of this change in accounting as of October 1, 1995. The effect of this change in accounting was not significant for fiscal 1996. If the new revenue recognition method had been applied retroactively, Telecom Services revenue would have decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995, respectively. See the Company's Consolidated Financial Statements and the related notes thereto contained elsewhere in this Annual Report.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128") which revises the calculation and presentation of Accounting Principles Board Opinion 15 and related interpretations. The Company adopted SFAS 128 for the fiscal year ending December 31, 1997, including the requirement for retroactive application. The adoption of SFAS 128 had no effect on the Company's reported loss per share.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page of this Annual Report. The financial statement schedule required under Regulation S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1 of this Annual Report.
Selected quarterly financial data required under this Item is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
ICG's corporate charter provides that Directors serve staggered three-year terms. The Directors of ICG will hold office until the designated annual meeting of stockholders and until their successors have been elected and qualified or until their death, resignation or removal.
There are currently four committees of the Board of Directors of ICG: Executive Committee, Audit Committee, Compensation Committee and Stock Option Committee. The Executive Committee provides Board oversight for the operations of the Company between Board meetings. The Audit Committee reviews the services provided by the Company's independent auditors, consults with the independent auditors on audits and proposed audits of the Company, reviews certain filings with the Securities and Exchange Commission, and reviews internal auditing procedures and the adequacy of internal controls. The Compensation Committee determines compensation for most executives and reviews transactions, if any, with affiliates. The Stock Option Committee determines stock option awards. The officers of ICG are elected by the Board of Directors and hold office until their successors are chosen and qualified or until their death, resignation or removal.
Set forth below are the names, ages and positions of Directors and executive officers of ICG.
Name Age Position - ---------------------------------- ----- --------------------------------------- William J. Laggett (2)(4)(5)(6)(7) 68 Chairman of the Board of Directors J. Shelby Bryan (2)(6) 52 President, Chief Executive Officer and Director Douglas I. Falk 48 Executive Vice President - Satellite and President of ICG Satellite Services, Inc. David W. Garrison (3)(4) 42 Director and President and Chief Executive Officer of NETCOM James D. Grenfell 46 Executive Vice President and Chief Financial Officer John Kane 45 Executive Vice President - Network and President of FOTI Marc E. Maassen 47 Executive Vice President - Strategic Planning Sheldon S. Ohringer 40 Executive Vice President - Telecom and President of ICG Telecom Group Inc. H. Don Teague 55 Executive Vice President, General Counsel and Secretary Harry R. Herbst (3)(4)(5)(7) 46 Director Leontis Teryazos (1)(5)(7) 55 Director Walter Threadgill (1)(5)(7) 52 Director
(1) Term expires at annual meeting of stockholders in 1998.
(2) Term expires at annual meeting of stockholders in 1999.
(3) Term expires at annual meeting of stockholders in 2000.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
(6) Member of Executive Committee.
(7) Member of Stock Option Committee.
Executive Officers of ICG
J. Shelby Bryan was appointed President, Chief Executive Officer and a Director in May 1995. He has 18 years of experience in the telecommunications industry, primarily in the cellular business. He co-founded Millicom International Cellular S.A. ("Millicom"), a publicly owned corporation providing cellular service internationally, served as its President and Chief Executive Officer from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since August 1996 and Executive Vice President - Satellite since October 1996. Prior to joining the Company, Mr. Falk held several positions in the cruise line industry, including President of Norwegian Cruise Line, Senior Vice President - Marketing and Sales with Holland America Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his work in the cruise line industry, Mr. Falk held executive positions with MTI Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning Associates and The Procter and Gamble Company.
James D. Grenfell, Executive Vice President and Chief Financial Officer, joined the Company in November 1995. Previously, Mr. Grenfell served as Director of Financial Planning for BellSouth Corporation and Vice President and Assistant Treasurer of BellSouth Capital Funding. A Chartered Financial Analyst, Mr. Grenfell has been a telephone industry financial executive for over 16 years. He was with BellSouth from 1985 through November 1996, serving previously as Finance Manager of Mergers and Acquisitions. He handled BellSouth's financing strategies, including capital market financings as well as public debt and banking relationships. Prior to BellSouth, Mr. Grenfell spent two years as a Project Manager with Utility Financial Services and six years with GTE of the South, a subsidiary of GTE Corporation, including four years as Assistant Treasurer.
John Kane has been Executive Vice President - Network and President of Fiber Optic Technologies, Inc. since March 1998. Prior to joining the Company, Mr. Kane had 25 years of industry experience. Most recently, Mr. Kane was Executive Vice President Business Development for AMNEX, Inc., a specialty telecommunications services company. From 1992 to 1995, Mr. Kane was Senior Vice President for WCT Communications, Inc. where he built a national fiber optic long distance network. Mr. Kane has also served as President of Americas Carriers Telecommunications Association (ACTA) and is a frequent speaker at industry conferences.
Marc E. Maassen has been Executive Vice President - Strategic Planning since August 1996. Prior to this position, Mr. Maassen was Executive Vice President - Network of ICG beginning in October 1995, and President of Fiber Optic Technologies, Inc. in April 1995. Mr. Maassen joined the Company in 1991 as Vice President of Sales and Marketing. Prior to joining the Company, Mr. Maassen held senior sales management positions at TelWatch, Inc., an integrated network management software company. Mr. Maassen previously worked for First Interstate as Director of Telecom and for AT&T Information Systems as an Account Executive and for U S WEST as a Major Accounts Manager.
Sheldon S. Ohringer has been Executive Vice President - Telecom of ICG and President of ICG Telecom Group, Inc. since September 1997. Prior to this position, Mr. Ohringer was Senior Vice President of Business Development and Strategic Planning for ICG Telecom Group, Inc. since November 1994. Prior to joining the Company, Mr. Ohringer was Senior Vice President of Sales and Business Development for US Long Distance from May 1991 until October 1994. From May 1984 until August 1990, Mr. Ohringer held key management and executive positions with Telecom* USA, a major long distance carrier which was acquired by MCI in 1990.
H. Don Teague joined the Company as Executive Vice President, General Counsel and Secretary in May 1997. Prior to this position, Mr. Teague was Senior Vice President, Administration and Legal with Falcon Seaboard Holdings, L.P. and its predecessors from April 1994 through April 1997. From 1974 to April 1994, Mr. Teague was a partner in the law firm of Vinson & Elkins L.L.P.
Directors of ICG
William J. Laggett has been Chairman of the Board of Directors since June 1995 and a Director since January 1995. Mr. Laggett was the President of Centel Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr. Laggett held a variety of management positions with Centel Corporation, including Group Vice President-Products Group, President-Centel Services, and Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett worked for New York Telephone Company.
David W. Garrison has been a Director of the Company since January 1998. In March 1996, Mr. Garrison was appointed Chairman of the Board of Directors of NETCOM and, since April 1995, Mr. Garrison has been NETCOM's Chief Executive Officer. He has served as its President and a Director since February 1995. Mr. Garrison also served as NETCOM's Chief Operating Officer from February 1995 to April 1995. Mr. Garrison also serves on the Board of Directors of Ameritrade Holding Corporation, Traveling Software, Inc. and the Internet Service Association. From December 1990 to September 1994, Mr. Garrison was President of SkyTel, a division of Mobile Telecommunications, Inc. ("MTEL"). During his association with MTEL (1990 to 1994), Mr. Garrison also held positions as Senior Vice President and Vice President. From 1986 to 1990, Mr. Garrison served successively as Chief Operating Officer, President, Chief Executive Officer and Chairman for Dial Page, a regional paging carrier based in Greenville, South Carolina.
Harry R. Herbst has been a Director since October 1995 and has been Vice President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since November 1995 and Vice President and Treasurer of Gulf Canada Resources Ltd. from January to November 1995. Previously, Mr. Herbst was Vice President of Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with Coopers & Lybrand.
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos, a Canadian resident, has headed Letmic Management Inc., a financial consulting firm, since 1993, and Letmic Management Reg'd., a real estate development and management company, since 1985.
Walter Threadgill has been a Director since December 1997 and is the Managing General Partner of Atlantic Coastal Ventures, L.P. Previously, Mr. Threadgill was the President and CEO of Multimedia Broadcast Investment Corporation. He also held tenures as Divisional Vice President of Fiduciary Trust Company in New York, and as Sr. Vice President and Chief Operating Officer of United National Bank in Washington D.C. Mr. Threadgill chaired the Presidential Small Business Advisory Committee and served the National Association of Investment Companies as Director, Treasurer, and Legislative Committee Chairman. Mr. Threadgill is a member of the Federal Communications Bar Association.
Directors and Executive Officers of ICG Funding, Holdings-Canada and Holdings
The Directors and executive officers of each of ICG Funding, Holdings-Canada and Holdings are set forth below. Biographical information regarding each individual is set forth above (except as to Mr. Gregory C.K. Smith, whose biographical information appears below).
ICG Funding
Common Member and Manager - ICG Communications, Inc.
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman) J. Shelby Bryan Harry R. Herbst Gregory C.K. Smith Leontis Teryazos
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer Douglas I. Falk - Executive Vice President - Satellite James D. Grenfell - Executive Vice President and Chief Financial Officer John Kane - Executive Vice President - Network Marc E. Maassen - Executive Vice President - Strategic Planning Sheldon S. Ohringer - Executive Vice President - Telecom H. Don Teague - Executive Vice President, General Counsel and Secretary
Gregory C.K. Smith, 39, has been a Director of Holdings-Canada since April 1994. Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver, British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon from June 1986 until he joined the partnership in April 1991.
Holdings
The Directors of Holdings are:
J. Shelby Bryan (Chairman) James D. Grenfell John Kane Mark E. Maassen Sheldon S. Ohringer
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer Douglas I. Falk - Executive Vice President - Satellite James D. Grenfell - Executive Vice President and Chief Financial Officer John Kane - Executive Vice President - Network Marc E. Maassen - Executive Vice President - Strategic Planning Sheldon S. Ohringer - Executive Vice President - Telecom H. Don Teague - Executive Vice President, General Counsel and Secretary
Compliance With Section 16(a) of the Exchange Act
The following table lists the Directors, officers and beneficial owners of more than 10% of the outstanding Common Stock (each a "Reporting Person") that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year, the number of late reports, the number of transactions that were not reported on a timely basis and any known failure to file a required Form by each Reporting Person.
(1) Former Executive Vice President - Network and President of FOTI
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee Directors $250 for telephonic meetings and $2,500 for each Board of Directors' meeting or committee meeting attended, or $500 for committee meetings attended in conjunction with a Board of Directors' meeting, plus reimbursement of expenses. In addition, the Chairman of the Board receives an annual fee of $80,000 payable in quarterly installments. In fiscal 1996, all non-employee Directors of ICG were granted options to purchase 20,000 shares of Common Stock under ICG's 1995 Stock Option Plan, and during the transition period from October 1, 1996 through December 31, 1996, all non-employee Directors of ICG were granted options to purchase 5,000 shares of Common Stock under ICG's 1996 Stock Option Plan (the "1996 Plan"). On January 1, 1997, all non-employee Directors of ICG were granted options to purchase 20,000 shares of Common Stock under the 1996 Plan, which vested as to 5,000 shares at the end of each fiscal quarter. On June 17, 1997, all non-employee Directors of ICG were granted an additional option to purchase 5,000 shares of Common Stock under the 1996 Plan. On January 1, 1998, all non-employee Directors of ICG were granted options to purchase 20,000 shares of Common Stock under the 1996 Plan, which vest as to 5,000 shares at the end of each fiscal quarter.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of four non-employee Directors: William J. Laggett, Chairman of the Board of Directors, Harry R. Herbst, Walter Threadgill and Leontis Teryazos.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") evaluates compensation levels of senior management and evaluates the various factors affecting compensation of the Company's highest paid officers. The Compensation Committee believes that compensation to the Company's executive officers should be designed to encourage and reward management's efforts to further strengthen the Company's business and to create added value for stockholders. Such a compensation program helps to achieve the Company's business and financial objectives and also provides incentives needed to attract and retain well-qualified executives. The Company operates in a competitive marketplace and needs to attract and retain highly qualified senior management and executive personnel in order for the Company to achieve its goals of continuing to develop new services and expanding into new businesses and markets. The Compensation Committee attributes a substantial portion of the Company's overall performance, as well as the individual contributions of the executive officers, to the executive officers' compensation.
The Company has employment agreements with several of its executive officers. See "Executive Employment Contracts" for descriptions of those agreements. All senior management, except for J. Shelby Bryan, President and Chief Executive Officer, are compensated with a base salary and an incentive bonus. The base salaries are intended to compensate these executives for their ongoing leadership skills and management responsibility. The incentive bonuses are dependent upon individual performance. For purposes of determining the bonuses, the Compensation Committee evaluates the accomplishment of goals set at the start of each fiscal year and compares the Company's performance in each year to the prior year. Based on the progress of the Company during fiscal 1997, Chairman Laggett recommended, and the Compensation Committee approved, bonuses for the named executive officers of the Company. See "Summary Compensation Table" for the bonuses paid to executive officers.
The compensation of the Company's President and Chief Executive Officer, J. Shelby Bryan, is set forth in his employment contract. His base salary is computed as: the sum of (x) one percent (1%) of the increase in Revenues of the Company for such month over Revenues of the Company for the immediately prior month and (y) three percent (3%) of the increase in Earnings Before Income Taxes, Depreciation and Amortization ("EBITDA") of the Company for such month over EBITDA of the Company for the immediately prior month. In addition, Mr. Bryan receives other benefits. See "Summary Compensation Table" for the type and amount of these payments. The Compensation Committee believes that the compensation paid to Mr. Bryan is a suitable compensation package based on Mr. Bryan's experience in the communications industry and because his compensation is directly tied to the performance of the Company.
In addition, the Stock Option Committee awarded stock options to certain employees of the Company, including executive officers. These grants were related to the executive officers' performance in fiscal 1996 and as incentives for continued efforts and success and were based on individual performance and responsibility. The Compensation Committee believes that stock options serve as important long-term incentives for executive officers by encouraging their continued employment and commitment to the Company's performance. The Compensation and Stock Option Committees do not consider the number of options currently held by all executive officers in determining individual grants because such consideration could create an incentive to exercise options and sell the underlying stock. See "Summary Compensation Table" for the stock options granted to the executive officers.
The Compensation Committee has reviewed the compensation of the Company's executive officers and has concluded that their compensation was reasonable in view of the Company's performance. The Compensation Committee observed that revenue increased $82.7 million, approximately 43%, in fiscal 1997 as compared with the 12 months ended December 31, 1996. The Company's networks have grown from approximately 2,385 operational fiber route miles at December 1996 to approximately 3,043 operational miles at the end of fiscal 1997. The Company also raised net proceeds of $320.0 million from the issuance of preferred securities and notes during fiscal 1997. These accomplishments exceeded the Company's objectives for fiscal 1997. The Compensation Committee believes that the Company appropriately awarded its executive officers for their short- and long-term efforts.
The Compensation Committee continually evaluates the compensation of the Company's executive officers, including assessing compensation reports for comparable companies and for the telecommunications industry. The Compensation Committee believes that maintaining suitable executive compensation programs is necessary to support the future development of the Company and growth in stockholder value.
William J. Laggett Harry R. Herbst Leontis Teryazos Walter Threadgill (Members of the Compensation Committee)
Executive Compensation
The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries, to or on behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer, the four other most highly compensated executive officers of the Company and one additional officer for whom disclosure would have been required but for the fact that the individual was not serving as executive officer at December 31, 1997 (the "Named Officers") for the fiscal years ended December 31, 1997, September 30, 1996 and 1995. Due to the Company's change in year end during 1996 from September 30 to December 31, additional amounts are shown below in the Summary Compensation Table for the 12 months ended December 31, 1996 and are referred to in such tables as "1996T." The Company has not maintained any long-term incentive plans and the Company has not granted stock appreciation rights.
(1) Consists of amount earned pursuant to the compensation formula in Mr. Bryan's employment agreement. (2) Consists of $40,777 for car allowance, $44,422 for housing expenses and Company contributions to 401(k) Defined Contribution Plan in the amount of $896. (3) Consists of $30,236 for car allowance, $49,683 for housing expenses and Company contributions to 401(k) Defined Contribution Plan in the amount of $11,893. (4) Consists of $25,991 for car allowance, $43,428 for housing expenses and Company contributions to 401(k) Defined Contribution Plan in the amount of $9,500. (5) Consists of $15,292 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $11,308. (6) Includes options regranted as a result of the repricing of the Company's options on April 16, 1997. See "-Ten-Year Option/SAR Repricings." (7) Consists of bonus earned during fiscal 1996 ($46,665) and bonus earned during the three months ended December 31, 1996 ($25,000). (8) Consists of relocation expense in the amount of $121,600, car allowance of $12,067 and Company contributions to 401(k) Defined Contribution Plan in the amount of $11,693. (9) Consists of relocation expenses in the amount of $117,295, car allowance of $11,640 and Company contributions to 401(k) Defined Contribution Plan in the amount of $9,500. (10) Consists of $7,000 for car allowance, $234 for club dues and Company contributions to 401(k) Defined Contribution Plan in the amount of $7,878. (11) Consists of bonus earned during fiscal 1996 ($28,945) and bonus earned during the three months ended December 31, 1996 ($13,920).
(12) Consists of $3,600 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $6,087. (13) Consists of $21,394 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $9,329. (14) Consists of bonus earned during fiscal 1996 ($22,500) and bonus earned during the three months ended December 31, 1996 ($20,625). (15) Consists of $18,072 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $7,172. (16) Consists of $16,428 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $8,913. (17) Consists of Company contributions to 401(k) Defined Contribution Plan. (18) Consists of $7,500 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $7,105. (19) Consists of bonus earned during fiscal 1996 ($47,625), bonus earned during the three months ended December 31, 1996 ($18,480) and hiring bonus ($25,000). (20) Consists of relocation expense of $65,973, car allowance of $2,932, and Company contributions to 401(k) Defined Contribution Plan in the amount of $8,732. (21) Consists of $11,000 for car allowance, $23,076 for vacation and Company contributions to 401(k) Defined Contribution Plan in the amount of $13,901. (22) Consists of bonus earned during fiscal 1996 ($117,160) and bonus earned during the three months ended December 31, 1996 ($30,720). (23) Consists of $11,300 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $18,022. (24) Consists of $9,200 for car allowance and Company contributions to 401(k) Defined Contribution Plan in the amount of $9,432.
Option/SAR Grants in Last Fiscal Year
The Company granted no stock appreciation rights during fiscal 1997 to the Named officers or to other employees. The following table provides information on option grants during fiscal 1997 to the Named Officers:
(1) In order to continue to provide non-cash incentives and retain key employees, all employee stock options outstanding on April 16, 1997 with exercise prices at or in excess of $15.875 were repriced by the Stock Option Committee of the Company's Board of Directors to $10.375, the closing price of the Common Stock on April 16, 1997. See "-Ten-Year Option/SAR Repricings."
(2) As a result of Mr. Maxwell's resignation on December 3, 1997, 43,750 of the options granted during fiscal 1997 have been canceled.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table provides information on options exercised during fiscal 1997 by the Named Officers and the value of such officers' unexercised options at December 31, 1997:
(1) Based on the closing price of Common Stock of $27.25 on December 31, 1997.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in Canadian dollars; value listed is based on the exchange rate of 1.4296 in effect on December 31, 1997.
Ten-Year Option/SAR Repricings
Report on Repricing of Options/SARs
The Stock Option Committee of the Board of Directors of the Company (the "Committee") is responsible for administering the Company's Stock Option Plans, as well as granting any stock options thereunder. The Committee is composed of four independent, non-employee directors.
In 1996, the Company established the 1996 Stock Option Plan (the "Plan"). Prior to that time, the Plan was known as the IntelCom Group Inc. Restated and Amended 1995 Stock Option Plan (the "IntelCom Plan"). Effective as of August 2, 1996, the Company assumed sponsorship of, and immediately thereafter amended and restated, the IntelCom Plan. The Plan constitutes a continuation of the IntelCom Plan, as assumed by the Company.
The purpose of the Plan is to promote success and enhance the value of the Company by linking the personal interest of participants to those of the Company stockholders by providing participants with an incentive for outstanding performance. The Plan is further intended to assist the Company in its ability to motivate, and retain the services of, participants upon whose judgement, interest and special effort the successful conduct of its operations is largely dependent. Stock options are awarded by the Committee according to the terms of the Plan. Up to an aggregate number of 2,500,000 shares may be granted under the Plan, reduced by the number of Common Shares of IntelCom represented by options granted to individuals under the IntelCom Plan prior to August 2, 1996. When awarding stock options, the Committee takes into consideration the individual's past performance and contribution to the Company, as well as future potential.
In April 1997, the Committee considered repricing certain existing stock options that, as a result of recent stock declines in the Company's industry, had an exercise price in excess of the then fair market value of the Company's Common Stock. Specifically, approximately 154,000 stock options granted on March 7, 1996 as part of employee bonus compensation had an exercise price of $15.875, approximately 219,000 options granted in connection with recent new hires had exercise prices ranging from $16.25 to $26.25, and approximately 225,000 options granted as part of employee bonus compensation on October 22, 1996 had an exercise price of $19.125 per share. At those prices, the Committee believed that the options were not able to effectively serve as incentives for the employees and that, in the current competitive market place, the Company needed to have a strong incentive compensation program in place in order to retain, keep and motivate its employees.
Consequently, the Committee approved the repricing of all outstanding employee stock options previously granted under the stock option plans of the Company (and its predecessor, IntelCom Group Inc.) which options were exercisable at prices at or in excess of $15.875 per share (the "Eligible Options"). The repricing was accomplished through an offer to all holders of Eligible Options to exchange the Eligible Options for new stock options (the "Repriced Options"), as of April 19, 1997, under the same terms and conditions (including vesting) contained in the stock option plan as originally granted the Eligible Option. The Repriced Options are exercisable at a price of $10.375 per share, which was the closing price of a common share of Common Stock, $.01 par value, of the company on the Nasdaq National Market on April 19, 1997.
William J. Laggett Harry R. Herbst Leontis Teryazos Walter Threadgill (Members of the Stock Option Committee)
The following provides information on the repricing of stock options of the Named Officers:
(1) Represents the closing price of the Common Stock on April 16, 1997.
Executive Employment Contracts
The Company and its subsidiaries have employment agreements with Messrs. J. Shelby Bryan, Douglas I. Falk, David W. Garrison, James D. Grenfell and H. Don Teague.
The Company's amended employment agreement with Mr. Bryan provides for a term of two years, which commenced June 1, 1997. As compensation, the Company will pay Mr. Bryan a salary equal to the sum of one percent of the monthly increase in Company revenue and three percent of the monthly increase in EBITDA. If Mr. Bryan's salary exceeds $1,500,000 in any fiscal year, the Company may elect to pay such excess in unregistered ICG Common Stock. Mr. Bryan is entitled to benefits as are generally provided to executive officers of ICG, including options under stock option plans, a leased automobile, private club membership fees and reimbursement of reasonable out-of-pocket expenses incurred on behalf of the Company. The employment agreement may be terminated by the Company with or without cause or after a disability continuing for a six-month consecutive period, or by Mr. Bryan for cause, including breach of the agreement or reduction in status or responsibilities, or change of control. If the employment agreement is terminated for any reason other than for cause, the Company is obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue benefits for a period equal to the greater of the remainder of the employment term or 18 months. After termination of the employment agreement, Mr. Bryan is subject to a confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Falk, dated August 14, 1996, has an initial one-year term commencing August 26, 1996 and continues from month-to-month thereafter until either party provides 30 days notice of termination. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Falk also receives stock options under the stock option plans. If the Company terminates the employment agreement without cause or if the Company or Mr. Falk terminates the employment agreement upon the occurrence of a major transaction involving the Company, then Mr. Falk will receive his salary and insurance benefits for a period of 12 months following the date of termination. Mr. Falk is subject to a confidentiality covenant and to a one-year non-competition commitment following the termination of his employment.
NETCOM's employment agreement with Mr. Garrison which commenced June 1, 1997 provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Garrison is entitled to such other benefits including stock options under the Company's stock option plans, car allowance and reimbursement or direct payment of reasonable out-of-pocket expenses incurred on behalf of the Company. The Company may terminate the employment agreement at any time and for any reason upon written notice. Mr. Garrison may terminate the employment agreement for any reason by giving the Company 30 days written notice. If termination without cause occurs six months after a change of control, Mr. Garrison will receive his salary, insurance benefits and his annual incentive bonus earned on a quarterly basis for a period of 12 months. If termination without cause occurs within six months after a change in control, Mr. Garrison will receive two times his salary, 200% of the greater of his prior year's incentive bonus or his annual incentive bonus earned on a quarterly basis and two years of life insurance. Mr. Garrison is subject to a confidentiality covenant.
The Company's employment agreement with Mr. Grenfell originally provided for an initial two-year term which commenced November 1, 1995. Upon completion of the first 12 months of the initial term, the agreement automatically renewed and will continue to automatically renew from month-to-month such that 12 months remain in the term. The agreement may be terminated upon 30 days written notice from either party or by the Company if Mr. Grenfell is unable to perform his duties for 140 days in any 180-day period due to illness or incapacity. Mr. Grenfell is entitled to such other benefits as are generally provided to executive officers of the Company, including options under the Company's stock option plans, use of a company car and reimbursement or direct payment of reasonable out-of-pocket expenses incurred on behalf of the Company. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. If the employment agreement is terminated without cause by the Company or by either party upon the occurrence of a change of control involving the Company, Mr. Grenfell will receive a termination fee equal to his current monthly salary times the number of months remaining in the term. Mr. Grenfell is also subject to a ten-year confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Teague provides for an initial two-year term which commenced May 19, 1997. Upon completion of the first 12 months of the initial term, the agreement automatically renews from month-to-month such that 12 months remain in the term. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Teague is also entitled to such other benefits as are generally provided to executive officers of the Company, including options under the Company's stock option plans, a car allowance and reimbursement of reasonable out-of-pocket expenses incurred on behalf of the Company. The agreement may be terminated by the Company upon 30 days written notice if Mr. Teague is unable to perform his duties for 140 days in any 180-day period due to illness or incapacity. The agreement may also be terminated by the Company or Mr. Teague upon 30 days written notice in certain other circumstances. If the employment agreement is terminated as a result of illness or incapacity or without cause by the Company or by either party upon the occurrence of a change of control involving the Company, Mr. Teague will receive a termination fee equal to his current monthly salary times the number of months remaining in the term. Mr. Teague is also subject to a ten-year confidentiality covenant and a one-year non-competition commitment.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, the number of shares of Common Stock owned by all executive officers and Directors of ICG individually and as a group, and each person who owned of record, or was known to own beneficially, more than 5% of the outstanding shares of Common Stock. The persons named in the table below have sole voting and investment power with respect to all of the shares of Common Stock owned by them, unless otherwise noted.
- ------------------ *Less than one percent of the outstanding shares of Common Stock.
(1) Based on 44,476,632 issued and outstanding shares of Common Stock on February 28, 1998, plus shares of Common Stock which may be acquired by the person or group indicated pursuant to any options and warrants exercisable, or pursuant to any shares vesting under the Company's 401(k) Plan within 60 days.
(2) Franklin Advisers, Inc. has reported on Schedule 13G that its parent holding company, Franklin Resources, Inc. ("FRI"), and Charles B. Johnson and Rupert H. Johnson, Jr., principal shareholders of FRI, beneficially own the shares reflected in this table.
(3) Represents shares which may be acquired pursuant to the exercise of outstanding stock options.
(4) Includes 15,000 shares of Common Stock held by Mr. Bryan, 2,000 shares of Common Stock held in Mr. Bryan's spouse's name for which Mr. Bryan disclaims beneficial ownership, 3,736 shares of Common Stock held by a 401(k) Plan in Mr. Bryan's name and 1,775,000 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(5) Includes 475 shares of Common Stock held by Mr. Falk, 729 unrestricted shares of Common Stock held by an Employee Stock Purchase Plan and 6,875 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(6) Includes 17,256 shares of Common Stock held directly by Mr. Garrison and 245,953 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(7) Includes 662 shares of Common Stock held by a 401(k) Plan, 427 unrestricted shares of Common Stock held by an Employee Stock Purchase Plan and 36,875 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(8) Includes 436 shares of Common Stock held by a 401(k) Plan, 322 unrestricted shares of Common Stock held by an Employee Stock Purchase Plan and 2,500 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(9) Includes 3,572 shares of Common Stock held by a 401(k) Plan, 334 unrestricted shares of Common Stock held by an Employee Stock Purchase Plan and 53,625 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(10) Includes 20,800 shares of Common Stock held directly by Mr. Ohringer, 1,057 shares of Common Stock held by a 401(k) Plan, 1,243 unrestricted shares of Common Stock held by an Employee Stock Purchase Plan and 39,375 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
(11) Includes 55,531 shares of Common Stock held directly by the executive officers and Directors of ICG as a group, 9,463 shares of Common Stock held by a 401(k) Plan, 3,055 shares of Common Stock held by an Employee Stock Purchase Plan and 2,388,934 shares of Common Stock which may be acquired pursuant to the exercise of outstanding stock options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and satellite services businesses which held common carrier radio licenses subject
to foreign ownership restrictions, the common carrier licenses used by the Company's teleports and the wireless competitive access networks were controlled, prior to November 30, 1997, by Teleport Transmissions Holdings Inc. ("TTH"), a corporation owned one-third each by U.S. Director William J. Laggett and two former Directors. TTH's subsidiaries gave 15-year promissory notes to ICG to acquire the FCC licenses. After receipt of approval from the FCC, the Company exercised its option on November 30, 1997 to have the common carrier licenses transferred back to the Company. Upon completion of the transfer of the licenses, the promissory notes were canceled. In fiscal 1997, the Company paid or accrued approximately $0.6 million to TTH's subsidiaries for common carrier services, and the Company received from TTH's subsidiaries approximately $2.4 million as payment in full on the promissory notes, management services, equipment leases and technical support. In addition, approximately $1.1 million of the note balances were canceled due to the sale of the licenses in conjunction with the sale of four of the Company's teleports. See "Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc. ("ICC") have entered into a three-year consulting agreement whereby ICC will provide various consulting services to the Company through December 1999 in exchange for approximately $4.2 million in consulting fees to be paid during the term of the agreement. During fiscal 1997, the Company paid approximately $1.1 million related to this consulting agreement. William W. Becker, a former Director and stockholder of the Company, is President and Chief Executive Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995 between the Company and the Becker Group of Companies (the "Becker Group"), a company founded by William W. Becker, the Company was assigned a note receivable in the amount of $200,000, which had previously been advanced to John D. Field, a former executive officer of the Company, by the Becker Group. The note receivable is evidenced by a promissory note from Mr. Field to the Company payable on demand, which bears interest at a rate of 7% per annum.
In order to facilitate the relocation of William J. Maxwell, a former executive officer of the Company, the Company advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory note payable on demand which bears interest at a rate of 7% per annum. In March 1998, the April 1994 promissory note was replaced with a new promissory note for $125,000 which is due in full on September 30, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included in Item 8 of Part II:
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . Consolidated Balance Sheets, December 31, 1996 and 1997. . . Consolidated Statements of Operations, Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995(unaudited) and 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows, Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements, December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . .
(2) Financial Statement Schedule. The following Financial Statement Schedule is submitted herewith:
Independent Auditors' Report . . . . . . . . . . . . . . . . S-2 Schedule II: Valuation and Qualifying Accounts . . . . . . . S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business Corporations Act. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)].
(3) Corporate Organization.
3.1: Memorandum and Articles of IntelCom Group Inc., as amended, filed with the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1992].
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as amended by Special Resolution passed October 7, 1994, filed with the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 10-K for the year ended September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated October 30, 1995. [Incorporated by reference to Exhibit 3.5 to IntelCom Group Inc.'s Annual Report on Form 10-K for the year ended September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc. dated April 11, 1996. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders, Including Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of Incorporation and copies of all Amendments thereto, filed with the Registrar of Companies for the Province of British Columbia, Canada [Incorporated by reference to Exhibit (i) to IntelCom Group Inc.'s Form 20-F for the fiscal year ending September 30, 1991].
4.2: Note Purchase Agreement dated September 16, 1993 [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
4.4: Form of Indenture between IntelCom Group Inc. and Bankers Trust Company for 7% Convertible Subordinated Redeemable Notes due 1998 [Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.5: Form of Indenture between IntelCom Group Inc. and Bankers Trust Company for 7% Simple Interest Convertible Subordinated Redeemable Notes due 1998 [Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among the Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley Group Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Investments Limited, PGI Sweden AB, and Gregor von Opel and Morgan Stanley Group, Inc., as Agent for the Purchasers [Incorporated by reference to Exhibit 4.1 to Form 8-K of IntelCom Group Inc., dated July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the Registrant, the Committed Purchasers, and IntelCom Group (U.S.A.), Inc., as Warrant Agent [Incorporated by reference to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated July 18, 1995].
4.8: First Amended and Restated Articles of Incorporation of ICG Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.), Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc. [Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
4.10:Indenture, dated August 8, 1995, among IntelCom Group (U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.) Inc., File Number 33-96540].
4.11:Indenture, dated April 30, 1996, among IntelCom Group (U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.14 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.) Inc., File No. 333-04569].
4.12:Indenture, dated March 11, 1997, among ICG Holdings, Inc., ICG Communications, Inc. and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.15 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-24359].
4.13:Written Action of the Manager of ICG Funding, LLC, dated as of September 24, 1997, with respect to the terms of the 6 3/4% Exchangeable Limited Liability Company Preferred Securities [Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495].
4.14:Amended and Restated Limited Liability Company Agreement of ICG Funding, LLC, dated as of September 23, 1997 [Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495].
(9) Voting Trust Agreement. None.
(10) Material Contracts.
10.1:Arrangement and Support Agreement dated June 27, 1996 between ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)].
10.2:Stock Purchase Agreement and Accord and Satisfaction Agreement dated June 24, 1993, between Joseph T. Buck III and William A. Byrd and TDI [Incorporated by reference to Exhibit 3.28 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.3:Full Payout Net Lease dated June 7, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.34 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993.]
10.4:Full Payout Net Lease dated June 18, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.35 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.5:Full Payout Net Lease dated July 16, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.36 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.6:Full Payout Net Lease dated November 10, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.37 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.7:Stock Purchase Agreement dated August 23, 1993, between Cliff Arellano, Nancy Arellano and TDI [Incorporated by reference to Exhibit 3.29 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.8:Asset Purchase Agreement dated November 18, 1993, between Mtel Digital Services, Inc. and IntelCom Group Inc. [Incorporated by reference to Exhibit 3.30 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated November 18, 1993, between IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor Bay, Inc., Bay Area Teleport, Inc., and Upsouth Corporation [Incorporated by reference to Exhibit 3.31 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.10: Agreement and Plan of Merger dated May 24, 1994, by and among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and FiberCAP, Inc. [Incorporated by reference to Exhibit 10.69 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.11: Note Sale and Purchase Agreement dated August 3, 1994, by and between IntelCom Group Inc., ICG Wireless Services, Inc., Noon Investments Ltd., Melco Investments Ltd. and Polera Overseas Inc. [Incorporated by reference to Exhibit 10.70 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.12: Agreement and Plan of Merger dated July 22, 1994, by and among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., DataCom Integrated Systems Corporation, Larry DiGioia and Richard Williams [Incorporated by reference to Exhibit 10.71 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.13: Share Exchange Agreement, dated May 31, 1994, between IntelCom Group Inc. and Worldwide Condominium Developments, Inc. [Incorporated by reference to Exhibit 10.71 to the Registration Statement on Form S-1, Amendment No. 7 of IntelCom Group Inc., File No. 33-76568, filed October 17, 1994.]
10.14: Incentive Stock Option Plan #2 [Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.15: Form of Stock Option Agreement for Incentive Stock Option Plan #2 [Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.16: Incentive Stock Option Plan #3 [Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.17: Form of Stock Option Agreement for Incentive Stock Option Plan #3 [Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.18: 1994 Employee Stock Option Plan [Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.19: Form of Stock Option Agreement for 1994 Employee Stock Option Plan [Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994].
10.20: PEDTS Acquisition Note 1994-1, dated April 29, 1994, by Pacific & Eastern Digital Transmission Services, Inc. ("PEDTS") to IntelCom Group (U.S.A.), Inc. ("ICG"), in the amount of $2,928,591 [Incorporated by reference to Exhibit 10.27 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.21: PEDTS Acquisition Note 1994-2, dated April 29, 1994, by PEDTS to ICG, in the amount of $1,230,475 [Incorporated by reference to Exhibit 10.28 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.22: PEDTS Acquisition Note 1994-3, dated April 29, 1994, by PEDTS to ICG, in the amount of $932,239 [Incorporated by reference to Exhibit 10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.23: TTC Acquisition Note, dated November 3, 1994, by Teleport Transmission Holdings, Inc. to ICG, in the amount of $125,242.33 [Incorporated by reference to Exhibit 10.30 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.24: Agreement and Assignment, dated July 24, 1995, by Teleport Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc., William W. Becker, Michael L. Glaser, William J. Laggett, Jay E. Ricks and Gary Bryson. [Incorporated by reference to Exhibit 10.26 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1995].
10.25: Employment Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.5 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.26: Stock Option Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.6 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.27: Indemnification Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.7 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.28: Letter Agreement, dated July 12, 1995, between IntelCom Group Inc. and Larry L. Becker [Incorporated by reference to Exhibit 10.8 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.29: Agreement and General Release, made effective July 12, 1995, between IntelCom Group Inc. and Larry L. Becker [Incorporated by reference to Exhibit 10.9 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.30: Subscription and Exchange Agreement, dated as of July 14, 1995, among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, and Gregor von Opel [Incorporated by reference to Exhibit 10.4 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.31: Security Agreement, dated July 18, 1995, from IntelCom Group (U.S.A.), Inc. as issuer, and the Grantors named therein, as grantors, to MS Group, as agent [Incorporated by reference to Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.32: Pledge Agreement, dated July 18, 1995, from IntelCom Group Inc., as a pledgor, to MS Group, as agent [Incorporated by reference to Exhibit 10.2 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.33: Subsidiary Guarantee, dated July 18, 1995, from the persons set forth on the signature pages thereof, as guarantors, in favor of the purchasers to the Note Purchase Agreement referred to therein, and MS Group, as agent [Incorporated by reference to Exhibit 10.3 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.34: Placement Agreement, dated as of August 3, 1995, among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan Stanley & Co. Incorporated [Incorporated by reference to Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on August 9, 1995].
10.35: Form of Exchange Agent Agreement between IntelCom Group (U.S.A.), Inc. and Norwest Banks [Incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.), Inc., File No. 33-96540].
10.36: Employment Agreement between IntelCom Group Inc. and James D. Grenfell, dated November 1, 1995. [Incorporated by reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1995].
10.37: Employment Agreement between Fiber Optic Technologies, Inc. and Mark S. Helwege, dated July 8, 1996 [Incorporated by reference to Exhibit 10.39 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.]
10.38: Purchase and Sale Agreement, dated as of October 19, 1995, by and among ICG Wireless Services, Inc., IntelCom Group (U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc. [Incorporated by reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1995].
10.39: Employment Agreement between ICG Satellite Services, Inc. and Douglas I. Falk, dated August 14, 1996 [Incorporated by reference to Exhibit 10.41 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.]
10.40: ICG Communications, Inc., 401(k) Wrap Around Deferred Compensation Plan. [Incorporated by reference to Exhibit 10.42 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.]
10.41: ICG Communications, Inc. 1996 Employee Stock Purchase Plan. [Incorporated by reference to the Registration Statement on Form S-8 of ICG Communications, Inc., File No. 33-14127, filed on October 14, 1996].
10.42: Consulting Services Agreement, by and between IntelCom Group Inc. and International Communications Consulting, Inc., effective January 1, 1996 [Incorporated by reference to Exhibit 10.44 to ICG Communications, Inc.'s Transition Report on Form 10-K/A for the three months ended December 31, 1996].
10.43: Confidential General Release and Convenant Not to Sue, by and between ICG Communications, Inc. and John D. Field, dated November 5, 1996 [Incorporated by reference to Exhibit 10.45 to ICG Communications, Inc.'s Transition Report on Form 10-K/A for the three months ended December 31, 1996].
10.44: Amendment, dated as of March 26, 1997, between ICG Communications, Inc. and J. Shelby Bryan, to Employment Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997].
10.45: 1996 Stock Option Plan [Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-8 of ICG Communications, Inc., File No. 333-25957, filed on April 28, 1997].
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock Option Plan.
10.47: Consulting Agreement, dated as of May 12, 1997, between ICG Communications, Inc. and Jay E. Ricks [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997].
10.48: Employment Agreement, dated as of April 22, 1997, between ICG Communications, Inc. and Don Teague [Incorporated by reference to Exhibit 10.2 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997].
10.49: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock Option Plan [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997].
10.50: Employment Agreement, dated October 17, 1997, between Communications Buying Group, Inc. and Robert Daly [Incorporated by reference to Exhibit 10.2 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997].
10.51: Employment Agreement, dated June 1, 1997, between NETCOM On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG Holdings, Inc. and TriNet Essential Facilities X, Inc., dated January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X, Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.53: Agreement and Plan of Merger, dated October 12, 1997, by and among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM On-Line Communication Services, Inc. [Incorporated by reference to Exhibit 2.1 to Form 8-K, dated January 21, 1998].
10.54: Amendment to Agreement and Plan of Merger, dated December 15, 1997, by and among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM On-Line Communication Services, Inc. [Incorporated by reference to Exhibit 2.2 to Form 8-K, dated January 21, 1998].
(11) Statement re Computation of per Share Earnings. Not Applicable
(12) Statement re Computation of Ratios. Not Applicable
(13) Annual Report to Security Holders. Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22, 1996 from KPMG Peat Marwick LLP to the Company [Incorporated by reference to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report on Form 10-Q/A for the quarter ended December 31, 1995].
(21) Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security Holders. Not Applicable
(23) Consent.
23.1: Consent of KPMG Peat Marwick LLP.
(24) Power of Attorney. Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1:Report by the FCC on Preliminary Statistics of Communications Common Carriers (1993 Edition) (pp. 39-40) [Incorporated by reference to Exhibit 99.8 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
99.2:In re Expanded Interconnection with Local Telephone Company Facilities (Phases I & II) (FCC 1992) [Incorporated by reference to Exhibit 3.46 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
99.3:In re Teleport Transmission Holdings, (FCC 1993) [Incorporated by reference to Exhibit 3.49 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
(B) Report on Form 8-K. The following report on Form 8-K was filed by the Registrants during the fiscal quarter ended December 31, 1997:
ICG Communications, Inc. Current Report on Form 8-K dated October ICG Holdings (Canada), Inc. 21, 1997, announcing the proposed merger ICG Holdings, Inc.: between ICG Communications, Inc. and NETCOM On-Line Communication Services, Inc.
(C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required by this Item is listed under Item 14(A)(2).
FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets, December 31, 1996 and 1997 . . . . .
Consolidated Statements of Operations, Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Years Ended September 1994, 1995 and 1996, the Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows, Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements, December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Auditors' Report
The Board of Directors and Stockholders ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the fiscal years ended September 30, 1995 and 1996, the three-month period ended December 31, 1996, and the fiscal year ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for the fiscal years ended September 30, 1995 and 1996, the three-month period ended December 31, 1996, and the fiscal year ended December 31, 1997, in conformity with generally accepted accounting principles.
As explained in note 2 to the consolidated financial statements, during the fiscal year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado February 19, 1998
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets December 31, 1996 and 1997
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
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See accompanying notes to consolidated financial statements.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended December 31, 1997
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Fiscal Years Ended September 30, 1995 and 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended December 31, 1997
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1996 and 1997 - -------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated on April 11, 1996, for the purpose of becoming the new publicly-traded U.S. parent company of ICG Holdings (Canada), Inc., a Canadian federal corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation ("Holdings"), and its subsidiaries. Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged their common shares on a one-for-one basis for either (i) shares of $.01 par value common stock of ICG (the "Common Stock"), or (ii) Class A common shares of Holdings-Canada (which are exchangeable at any time on a one-for-one basis into shares of ICG Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of the total issued and outstanding common shares of Holdings-Canada were exchanged for an equal number of shares of Common Stock of ICG. In accordance with generally accepted accounting principles, the Arrangement was accounted for in a manner similar to a pooling of interests since ICG and Holdings-Canada had common shareholders, and the number of shares outstanding and the weighted average number of shares outstanding reflect the equivalent shares outstanding for the combined companies. On September 17, 1997, ICG formed a new special purpose entity, ICG Funding, LLC, a Delaware limited liability company and wholly owned subsidiary of ICG ("ICG Funding"). ICG and its subsidiaries are collectively referred to as the "Company."
The Company's principal business activity is telecommunications services, including Telecom Services, Network Services and Satellite Services, and as of January 21, 1998, the Company also began providing Internet Services, through its recently acquired subsidiary, NETCOM On-Line Communication Services, Inc. ("NETCOM"). Telecom Services consists of the Company's competitive local exchange carrier operations which provide services to business end users, long distance carriers and resellers. Network Services supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Satellite Services provides satellite voice and data services to major cruise ship lines, the commercial shipping industry, yachts, the U.S. Navy and offshore oil platforms. The Company intends to dispose of its Satellite Services operations to better focus on its core Telecom Services unit, although it has not entered into a formal arrangement for such dispostion. Beginning in 1998, the Company's Internet Services
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1996 and 1997 - -------------------------------------------------------------------------------
(1) Organization and Nature of Business
includes Internet access, World Wide Web (the "Web") site hosting services and other value-added connectivity services, which are primarily targeted to small and medium-sized business customers in the United States, Canada and the United Kingdom.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of the Company and its majority and wholly owned subsidiaries. Financial information prior to the completion of the Arrangement on August 2, 1996 represents the financial position and results of operations of Holdings-Canada and Holdings, which are considered to be predecessor entities to ICG.
All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Change in Fiscal Year End
The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. References to fiscal 1995, 1996 and 1997 relate to the years ended September 30, 1995 and 1996 and December 31, 1997, respectively.
Unaudited consolidated statements of operations and cash flows for the three months ended December 31, 1995 have been included in the accompanying consolidated financial statements for comparative purposes.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests primarily in high grade short-term investments which consist of money market instruments, commercial paper, certificates of deposit, government obligations and corporate bonds, all of which are considered to be available for sale and generally have maturities of one year or less. The Company's short-term investment objectives are safety, liquidity and yield, in that order. The Company carries all cash equivalents and short-term investments at cost, which approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to be utilized in the installation of communications systems, services and networks for customers, is recorded at the lower of cost or market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity method, under which the Company's share of earnings or losses of the joint ventures are reflected in operations and dividends are credited against the investment when received. Losses recognized in excess of the Company's investment due to additional investment or financing requirements, or guarantees, are recorded as a liability in the consolidated financial statements. Other investments representing an interest of 20% or more, but less than 50%, are accounted for using the equity method of accounting. Investments of less than a 20% equity interest are accounted for using the cost method, unless the Company exercises significant influence and/or control over the operations of the investee company, in which case the equity method is used.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are capitalized, including interest costs related to construction. Equipment held under capital leases is stated at the lower of the fair value of the asset or the net present value of the minimum lease payments at the inception of the lease. For equipment held under capital leases, depreciation is provided using the straight-line method over the estimated useful lives of the assets owned, or the related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment are as follows: Office furniture and equipment 3 to 7 years Buildings and improvements 31.5 years Machinery and equipment 3 to 8 years Switch equipment 10 years Fiber optic transmission system 20 years
The Company capitalizes the direct costs associated with the installation of dial tone customers' service, including labor and an allocation of overhead costs, and amortizes these costs over two years, the estimated average customer contract term.
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses are recorded at cost and amortized over 20 years using the straight-line method. Goodwill results from the application of the purchase method of accounting for business combinations and is amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded at cost, and amortized using the straight-line method over the terms of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of the related financing agreement, the maximum term of which is 10 years.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
(i) Revenue Recognition
The Company recognizes Telecom Services and Satellite Services revenue as services are provided and charges direct selling expenses to operations as incurred. Revenue from Network Services contracts for the design and installation of communication systems and networks, which are generally short-term in duration, is recognized using the percentage of completion method of accounting. Maintenance revenue is recognized as services are provided. Uncollectible trade receivables are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion method, but has not been billed to the customer is included in receivables-revenue earned, but unbilled in the consolidated financial statements. Deferred revenue includes monthly advance billings to customers for certain services provided by the Company's Telecom Services and Satellite Services, as well as Network Services revenue which has been billed to the customer in compliance with contract terms, but not yet earned under the percentage of completion method.
Prior to January 1, 1996, the Company recognized Telecom Services revenue in an amount equal to the non-cancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer to the extent of direct installation and selling expenses incurred in obtaining customers during the period in which such revenue
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract was recognized ratably over the remaining non-cancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry. As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995, and has included in the results of operations for fiscal 1996 a charge of approximately $3.5 million relating to the cumulative effect of this change in accounting. Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant.
(j) Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding. Weighted average number of shares outstanding for fiscal year 1995 and the three months ended December 31, 1995 represents outstanding Holdings-Canada common shares. Weighted average number of shares outstanding for fiscal 1996, the three months ended December 31, 1996 and fiscal 1997 represents Holdings-Canada common shares outstanding for the period October 1,
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
1995 through August 2, 1996, and combined ICG Common Stock and Holdings-Canada Class A common shares outstanding for the periods subsequent to August 5, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share ("SFAS 128") which revises the calculation and presentation provisions of Accounting Principles Board Opinion No. 15 and related interpretations. Under SFAS 128, basic loss per share is computed on the basis of weighted average common shares outstanding. Diluted loss per share considers potential common stock instruments in the calculation. The Company adopted SFAS 128 for its fiscal year ending December 31, 1997, including the requirement for retroactive application. The adoption of SFAS 128 had no effect on the Company's previously reported loss per share. Potential common stock instruments, which include options, warrants and convertible subordinated notes and preferred securities, are not included in the loss per share calculation as their effect is anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee director compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations ("APB 25"). The Company has provided pro forma disclosures of net loss and loss per share as if the fair value based method of accounting for these plans, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had been applied. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1996, the three months ended December 31, 1996 and fiscal 1997.
(m) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets pursuant to Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121") which requires that long-lived assets and certain identifiable intangibles held and used by an
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to be generated by the asset is less than its carrying value. Measurement of the impairment loss is based on the fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows.
(n) Reclassifications
Certain prior period amounts have been reclassified to conform with the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisition During Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the outstanding capital stock of Communications Buying Group, Inc. ("CBG"), an Ohio based local exchange and centrex reseller. The Company paid total consideration of approximately $46.5 million, plus the assumption of certain liabilities. Separately, on October 17, 1997, the Company sold 687,221 shares of Common Stock for approximately $16.0 million to certain shareholders of CBG. Subsequent to December 31,1997, the Company purchased the remaining approximately 9% interest in CBG for approximately $2.9 million in cash.
The Company has accounted for the acquisition under the purchase method of accounting, and accordingly, the operations of CBG have been included in the Company's operations since the acquisition date. The excess of the purchase price over the fair value of the net identifiable assets acquired of $48.8 million has been recorded as goodwill and is being amortized on a straight-line basis over six years. Revenue, net loss and loss per share on a pro forma combined basis are not significantly different from the Company's historical results for the periods presented herein.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(b) Acquisitions and Investments During Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned subsidiary. Consideration for the purchase was approximately $2.0 million in cash and 66,236 common shares of Holdings-Canada valued at approximately $0.8 million, for total consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel California, L.P. ("Linkatel") and its other partners, Linkatel Communications, Inc. and The Copley Press, Inc., under which the Company acquired a 60% interest in Linkatel for an aggregate purchase price of $10.0 million in cash and became the general partner of Linkatel. In April 1996, the partnership was renamed ICG Telecom of San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat Communications Network, Inc. ("MCN"), (formally Maritime Cellular Tele-network, Inc.), a Florida-based provider of cellular and satellite communications for commercial ships, private vessels, offshore oil platforms and land-based mobile units, for approximately $0.7 million in cash and approximately $0.1 million of assumed debt, for total consideration of approximately $0.8 million. In April 1997, the Company received the remaining 10% interest in MCN as partial consideration for the sale of its investment in Mexico. In the fourth quarter of fiscal 1997, the Company recorded a provision for impairment of $2.9 million of its investment in MCN.
In August 1996, the Company acquired certain Signaling System 7 ("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of Pace Alternative Communications, Inc. SS7 is used by local exchange companies, long-distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up resulting in a more efficient use of network resources. The Company paid cash consideration of $1.6 million as of September 30, 1996 and an additional $1.0 million in January 1997, based on the operating results of the underlying business since the date of acquisition.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
The acquisitions described above have been accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations are included in the consolidated financial statements from the respective dates of acquisition. Revenue, net loss and loss per share on a pro forma basis are not significantly different from the Company's historical results for the periods presented herein. The aggregate purchase price of the 1996 acquisitions, in which the Company obtained a controlling interest, was allocated based on fair values of the underlying assets acquired as follows (in thousands):
Current assets $ 6,563 Property and equipment 7,542 Other assets, including goodwill 10,647 Current liabilities (775) Long-term liabilities (6,314) Minority interest (1,422) =================== $ 16,241 ===================
(c) Acquisitions and Investments During Fiscal 1995
In January 1995, the Company and an unaffiliated entity formed Maritime Telecommunications Network, Inc. ("MTN") to provide wireless communications through satellites to the maritime cruise industry, U.S. Navy vessels and offshore oil platforms. The Company acquired (i) approximately 64% of MTN, (ii) approximately $4.4 million in notes receivable from MTN and (iii) consulting and non-compete agreements valued at an aggregate of approximately $0.3 million in exchange for (i) approximately $9.0 million in cash, (ii) the surrender and cancellation of a note to the Company from the other entity for $0.6 million plus interest, (iii) 408,347 Holdings-Canada common shares valued at approximately $5.1 million (of which 256,303 common shares were issued in the fourth quarter of fiscal 1994), and (iv) the Company's commitment to provide additional convertible working capital advances to MTN as required by MTN. The other shareholder of MTN contributed the assets of a predecessor business to MTN.
MTN also assumed approximately $2.1 million of obligations of such predecessor business. The Company paid a $0.5 million finder's fee obligation of the predecessor to a third party. As part of the terms of the original purchase agreement, the
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company agreed to purchase, at fair market value, all of the shares of MTN that were owned by the minority shareholders, upon demand of the minority shareholders, if a transaction was not effected which converted the minority shares into publicly traded securities or cash by January 3, 1998. As of the current date, no such demand has been made by the minority shareholders.
During fiscal 1995, the Company purchased a 58% interest in Zycom Corporation ("Zycom"), an Alberta, Canada corporation whose shares are traded on the Alberta Stock Exchange. Consideration for the purchase was approximately $0.8 million in cash, the conversion of $2.0 million in notes receivable, and the assumption of approximately $0.7 million in debt for total consideration of approximately $3.5 million. In March 1996, the Company acquired an additional approximate 12% equity interest in Zycom by converting a $3.2 million receivable due from Zycom into common stock. In the fourth quarter of fiscal 1997, the Company recorded a provision for impairment of $2.7 million of its investment in Zycom.
The acquisitions described above were accounted for using the purchase method of accounting, and accordingly, the net assets and the results of operations are included in the consolidated financial statements from the respective dates of acquisition. Revenue, net loss and loss per share on a pro forma basis are not significantly different from the Company's historical results for the periods presented herein. The aggregate purchase price of the 1995 acquisitions, in which the Company obtained a controlling interest, was allocated based on fair values of the underlying assets acquired as follows (in thousands):
Current assets $ 1,835 Property and equipment 9,086 Other assets, including goodwill 16,986 Current liabilities (2,764) Long-term liabilities (6,779) Minority interest (4,850) ---------------------- $ 13,514 ======================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2 million ($3.9 million in cash, $1.1 million in common shares of Holdings-Canada, and the conversion of approximately $0.2 million in notes receivable) in StarCom International Optics Corporation ("StarCom"), for which the Company received a 25% equity interest in each of Starcom's wholly owned operating subsidiaries. In December 1997, a senior secured creditor of StarCom notified the Company that it intended to foreclose on its collateral in StarCom, and in January 1998, StarCom commenced bankruptcy proceedings. Based on management's estimate of the net realizable value of its investment, the Company recorded a provision for impairment of its investment of $5.2 million in fiscal 1997.
(d) Investments in Joint Venture and Affiliate
In September 1992, the Company entered into a joint venture agreement with Greenstar Technologies Inc. (now GST Telecommunications, Inc. ("GST")) to design, construct and operate a competitive access network in Phoenix. The Company and GST each had a 50% equity interest in the joint venture. All financing provided to the joint venture by the Company, as well as the recognition of the Company's share of the joint venture's losses, were recorded according to the equity method of accounting. During fiscal 1996, the Company recorded a valuation allowance of approximately $5.8 million for the amounts receivable arising from advances made to the Phoenix network joint venture, based on management's estimate of the net realizable value of the receivable.
In October 1996, the Company sold its interest in the joint venture to GST. The Company received approximately $2.1 million in cash, representing $1.3 million of consideration for its 50% interest and $0.8 million for equipment and amounts advanced to the joint venture. In addition, the Company received equipment with a net book value of $2.4 million and assumed liabilities of $0.3 million. A gain on sale of the joint venture of approximately $0.8 million was recorded in the consolidated financial statements during the three months ended December 31, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(e) Merger Subsequent to December 31, 1997
On January 21, 1998, the Company completed a merger with NETCOM. Located in San Jose, California, NETCOM is a provider of Internet connectivity and Web site hosting services and other value-added Internet services. At the effective time of the merger, each outstanding share of NETCOM common stock became automatically convertible into shares of Common Stock at an exchange ratio of 0.8628 shares of Common Stock per NETCOM common share. As a result of the transaction, the Company expects to issue an estimated 10.2 million shares of Common Stock for the NETCOM common shares outstanding on January 21, 1998. Cash will be paid in lieu of fractional shares. The Company will account for the business combination under the pooling-of-interests method of accounting and accordingly, the Company's financial statements will be restated to reflect the operations of NETCOM and the Company on a combined basis for all historical periods.
The following unaudited pro forma information presents the combined results of operations of the Company and NETCOM as if the business combination had been consummated on October 1, 1994. The Company does not anticipate any significant adjustments to conform the accounting policies of NETCOM with those of the Company.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(4) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31, ------------------------------------ 1996 1997 ---------------- --------------- (in thousands)
Money market investments $ 10,000 - Commercial paper 5,500 4,000 U.S. Treasury securities 17,101 94,181 ================ =============== $ 32,601 98,181 ================ ===============
At December 31, 1996 and 1997, the estimated fair value of the Company's money market instruments, commercial paper and U.S. Treasury securities approximated cost, and the amount of gross unrealized gains was not significant. All money market instruments, commercial paper and U.S. Treasury securities mature within one year.
(5) Notes Receivable and Due from Affiliate
In January 1997, the Company announced a strategic alliance with Central and South West Corporation ("CSW") which is developing and marketing telecommunications services in certain cities in Texas. The venture entity, a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based in Austin, Texas. CSW holds 100% of the interest in ChoiceCom, and CSW and the Company each have two representatives on the Management Committee of the general partner of ChoiceCom. The Company has committed to loan ChoiceCom $15.0 million under two promissory notes, which are payable on demand and earn interest at LIBOR plus 2% per annum (7.97% at December 31, 1997). Advances under these promissory notes were $10.0 million at December 31, 1997.
Additionally, the Company has agreed to perform certain administrative services for ChoiceCom and make certain payments to vendors on behalf of ChoiceCom, for which such services and payments are to be conducted on an arm's length basis and reimbursed by ChoiceCom. At December 31, 1997, amounts outstanding under this arrangement and included in due from affiliate were approximately $9.4 million, and were collected in full during the subsequent fiscal quarter.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(6) Property and Equipment
Property and equipment, including assets held under capital leases, is comprised of the following:
December 31, ------------------------------- 1996 1997 ------------- --------------- (in thousands)
Land $ 306 709 Buildings and improvements 2,300 2,238 Furniture, fixtures and office equipment 35,904 46,711 Machinery and equipment 10,764 31,630 Fiber optic equipment 143,133 156,255 Satellite equipment 19,408 29,760 Switch equipment 58,199 85,546 Fiber optic transmission system 117,281 192,756 Build out/site preparation 13,284 13,898 Construction in progress (see note 14) 59,642 178,985 ------------- --------------- 460,221 738,488 Less accumulated depreciation (56,545) (106,321) ============= =============== $ 403,676 632,167 ============= ===============
Property and equipment includes approximately $179.0 million of equipment which has not been placed in service at December 31, 1997, and accordingly, is not being depreciated. The majority of this amount is related to new network construction (see note 14).
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(6) Property and Equipment (continued)
Certain of the assets described above have been pledged as security for long-term debt and are held under capital leases at December 31, 1997. The following is a summary of property and equipment held under capital leases:
December 31, -------------------------------- 1996 1997 ------------- ---------------- (in thousands)
Machinery and equipment $ 1,842 3,926 Fiber optic equipment 7,514 6,314 Switch equipment 22,280 21,380 Fiber optic transmission system 55,746 58,806 Construction in progress 20,187 17,895 ------------- ---------------- 107,569 108,321 Less accumulated depreciation (4,424) (8,409) ============= ================ $ 103,145 99,912 ============= ================
(7) Other Assets
Other assets are comprised of the following:
December 31, -------------------------------- 1996 1997 ------------- ---------------- (in thousands)
Deposits $ 3,579 2,429 Pace customer base 2,581 2,805 Rights of way 1,739 425 Minutes of use agreement 1,421 - Non-compete agreements 902 1,386 Right of entry - 5,019 Other 1,063 839 ------------- ---------------- 11,285 12,903 Less accumulated amortization (1,547) (3,499) ============= ================ Other $ 9,738 9,404 ============= ================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(8) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC will provide various consulting services to the Company through December 1999 for approximately $4.2 million to be paid during the term of the agreement. During fiscal 1996, the three months ended December 31, 1996 and fiscal 1997, the Company paid approximately $1.3 million, $0.3 million and $1.1 million, respectively, related to this consulting agreement. William W. Becker, a stockholder and former director of the Company, is President and Chief Executive Officer of ICC.
At December 31, 1996 and 1997, receivables from officers and employees of approximately $1.0 million and $0.9 million, respectively, are primarily comprised of promissory notes from officers for relocation expenses, which are generally payable on demand and bear interest at 7% per annum, and are included in receivables-other in the accompanying consolidated financial statements.
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements for equipment. The future required payments under the Company's capital lease obligations subsequent to December 31, 1997 are as follows (in thousands):
Due December 31: 1998 $ 15,651 1999 13,782 2000 14,431 2001 16,350 2002 11,009 Thereafter 93,584 --------------------- Total minimum lease payments 164,807 Less amounts representing interest (92,231) --------------------- Present value of net minimum lease payments 72,576 Less current portion (5,637) ===================== $ 66,939 =====================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(10) Long-term Debt
Long-term debt is summarized as follows:
(a) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997 Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of $99.9 million and $100.0 million, respectively. Net proceeds from the 1997 Private Offering, after costs of approximately $7.5 million, were approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed by ICG) that mature on March 15, 2007, at a maturity value of $176.0 million. Interest will accrue at 11 5/8% per annum, beginning March 15, 2002, and is payable each March 15 and September 15, commencing September 15, 2002. The indenture for the
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------
(10) Long-term Debt (continued)
11 5/8% Notes contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions and effectively prohibits the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9 million. The discount on the 11 5/8% Notes and the debt issuance costs are being accreted over ten years until maturity at March 15, 2007. The accretion of the discount and debt issuance costs is included in interest expense in the accompanying consolidated financial statements.
(b) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996 Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Manditorily Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of $300.0 million and $150.0 million, respectively. Net proceeds from the 1996 Private Offering, after issuance costs of approximately $17.0 million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings (guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006, with a maturity value of $550.3 million. Interest will accrue at 12 1/2% per annum, beginning May 1, 2001, and is payable each May 1 and November 1, commencing November 1, 2001. The indenture for the 12 1/2% Notes contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions and effectively prohibits the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0 million. The discount on the 12 1/2% Notes and the debt issuance costs are being accreted over ten years until maturity at May 1, 2006. The accretion of the discount and debt issuance costs is included in interest expense in the accompanying consolidated financial statements.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private Offering were used to redeem the 12% redeemable preferred stock of Holdings (the "Redeemable Preferred Stock") issued in August 1995 ($30.0 million), pay accrued preferred dividends ($2.6 million) and to repurchase 916,666 warrants of the Company ($2.7 million) issued in connection with the Redeemable Preferred Stock. The Company recognized a charge to minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries of approximately $12.3 million for the excess of the redemption price of the Redeemable Preferred Stock over the carrying amount at April 30, 1996, and recognized a charge to interest expense of approximately $11.5 million for the payments made to noteholders with respect to consents to amendments to the indenture governing the 13 1/2% Notes to permit the 1996 Private Offering.
(c) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995 Private Offering") through the issuance of 58,430 units (the "Units"), each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995 Private Offering, after issuance costs of approximately $14.0 million, were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings (guaranteed by ICG and Holdings-Canada) that mature on September 15, 2005, with a maturity value of $584.3 million. Interest will accrue at the rate of 13 1/2% per annum, beginning September 15, 2000, and is payable in cash each March 15 and September 15, commencing March 15, 2001. The indenture for the 13 1/2% Notes contains certain covenants which provide for limitations on the indebtedness, dividends, asset sales and certain other transactions and effectively prohibits the payment of cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0 million, which represents the $300.0 million in proceeds less the approximate $6.0 million value assigned to the Unit Warrants, which is included in additional paid-in capital. The discount on the 13 1/2% Notes and the debt issuance costs are being accreted over five years until September 15, 2000, the date at which the 13 1/2% Notes can first be
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
redeemed. The value assigned to the Unit Warrants, representing additional debt discount, is also being accreted over the five-year period. The accretion of the total discount is included in interest expense in the accompanying consolidated financial statements. Holdings may redeem the 13 1/2% Notes on or after September 15, 2000, in whole or in part, at the redemption prices set forth in the agreement, plus unpaid interest, if any, at the date of redemption.
The Unit Warrants entitle the holder to purchase one common share of Holdings-Canada, which is exchangeable into one share of Common Stock, at the exercise price of $12.51 per share and are exercisable at any time between August 8, 1996 and August 8, 2005.
In connection with the issuance of the 13 1/2% Notes, the Company obtained $6.0 million of interim financing from the placement agent and certain private investors in exchange for the issuance of an aggregate of 520,000 Series A Warrants (see note 12 (c)). The $6.0 million was repaid with a portion of the proceeds from the 1995 Private Offering. As a result of the repayment of the interim financing, the value assigned to the Series A Warrants totaling approximately $3.0 million, representing debt discount, was charged to interest expense during the year ended September 30, 1995.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
Scheduled principal maturities of long-term debt as of December 31, 1997 are as follows (in thousands):
Due December 31: 1998 $ 1,784 1999 1,686 2000 1,290 2001 938 2002 938 Thereafter (a) 1,311,976 ----------------- 1,318,612 Less unaccreted discount on the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes (426,260) ================== $ 892,352 ==================
(a) Includes $176.0 million, $550.3 million and $584.3 million of 11 5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes, respectively, due at maturity.
(e) Private Placement of Senior Discount Notes Completed Subsequent to December 31, 1997
On February 12, 1998, ICG Services, Inc., a Delaware corporation and new wholly owned subsidiary of ICG ("ICG Services"), completed a private placement of 10% Senior Discount Notes due 2008 (the "10% Notes") for gross proceeds of approximately $300.6 million. Net proceeds from the offering, after underwriting costs of approximately $9.0 million, were approximately $291.6 million.
The 10% Notes are unsecured senior obligations of ICG Services that mature on February 15, 2008, at a maturity value of $490.0 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable each February 15 and August 15, commencing August 15, 2003. The indenture for the 10% Notes contains certain covenants which provide limitations on indebtedness, dividends, asset sales and certain other transactions.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
December 31, -------------------------------- 1996 1997 -------------- ----------------- (in thousands) 14% Exchangeable preferred stock, mandatorily redeemable in 2008 (a) $ - 108,022
14 1/4% Exchangeable preferred stock, mandatorily redeemable in 2007 (b) 159,120 184,420 ============== ================= $ 159,120 292,442 ============== =================
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000 shares of exchangeable preferred stock that bear a cumulative dividend at the rate of 14% per annum. The dividend is payable quarterly in arrears each March 15, June 15, September 15, and December 15, and commenced June 15, 1997. Through March 15, 2002, the dividend is payable at the option of Holdings in cash or additional shares of 14% Preferred Stock. Holdings may exchange the 14% Preferred Stock into 14% Senior Subordinated Exchange Debentures at any time after the exchange is permitted by certain indenture restrictions. The 14% Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000 shares of exchangeable preferred stock that bear a cumulative dividend at the rate of 14 1/4% per annum. The dividend is payable quarterly in arrears each February 1, May 1, August 1 and November 1, and commenced August 1, 1996. Through May 1, 2001, the dividend is payable, at the option of Holdings, in cash or additional shares of 14 1/4% Preferred Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4% Senior Subordinated Exchange Debentures at any time after the exchange is permitted by certain indenture restrictions. The 14 1/4% Preferred Stock is subject to mandatory redemption on May 1, 2007.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
(c) 6 3/4% Preferred Securities
During fiscal 1997, a new subsidiary of the Company, ICG Funding, completed a private placement of 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities") for gross proceeds of $132.25 million. Net proceeds from the private placement, after offering costs, were approximately $127.6 million. Restricted cash at December 31, 1997 of $38.7 million includes the proceeds from the offering which are designated for the payment of cash dividends on the 6 3/4% Preferred Securities through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable preferred securities of ICG Funding that bear a cumulative dividend at the rate of 6 3/4% per annum. The dividend is paid quarterly in arrears each February 15, May 15, August 15 and November 15, and commenced November 15, 1997. The dividend is payable in cash through November 15, 2000 and thereafter, in cash or shares of ICG Common Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the option of the holder, at any time prior to November 15, 2009 into shares of Common Stock at a rate of 2.0812 shares of Common Stock per preferred security, or $24.025 per share, subject to adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any time on or after November 18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred Securities if the current market value of Common Stock equals or exceeds the exchange price, for at least 20 days of any 30-day trading period, by 170% prior to November 16, 1998; 160% from November 16, 1998 through November 15, 1999; and 150% from November 16, 1999 through November 15, 2000. The 6 3/4% Preferred Securities are subject to mandatory redemption on November 15, 2009.
On February 15, 1998, ICG Funding used the remaining proceeds from the private placement of the 6 3/4% Preferred Securities to purchase $112.4 million of ICG Communications, Inc. Preferred Stock ("ICG Preferred Stock") which pays dividends each February 15, May 15, August 15 and November 15 in additional shares of ICG Preferred Stock through November 15, 2000. Subsequent to November 15, 2000, dividends are payable in cash or shares of Common Stock, at the option of ICG. The ICG Preferred Stock is exchangeable, at the option of ICG
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
Funding, at any time prior to November 15, 2009 into shares of Common Stock at an exchange rate based on the exchange rate of the 6 3/4% Preferred Securities. The ICG Preferred Stock is subject to mandatory redemption on November 15, 2009.
The accreted value of the 6 3/4% Preferred Securities is included in Company-obligated mandatorily redeemable preferred securities of subsidiary limited liability company which holds solely Company preferred stock in the accompanying consolidated balance sheet at December 31, 1997.
Included in minority interest in share of losses, net of accretion and preferred dividends on preferred securities of subsidiaries is approximately $1.3 million, $27.0 million, $5.8 million and $39.8 million for fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, respectively, associated with the accretion of issuance costs, discount and preferred security dividend accruals for the 6 3/4% Preferred Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the Redeemable Preferred Stock (issued in connection with the 1995 Private Offering and redeemed in April 1996). These costs are partially offset by the minority interest share in losses of subsidiaries of approximately $0.6 million, $2.7 million, $0.8 million and $2.0 million for fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, respectively.
(12) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at December 31, 1997 represents the issued and outstanding Common Stock of ICG and Class A common shares of Holdings-Canada (not owned by ICG) which are exchangeable at any time, on a one-for-one basis, for ICG Common Stock. The following table sets forth the number of shares outstanding for ICG and Holdings-Canada on a separate company basis as of December 31, 1997:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
Shares Shares not owned owned by ICG by ICG -------------------- ------------------- ICG Common Stock, $.01 par value, 100,000,000 shares authorized; 31,087,825 and 33,784,500 shares issued and outstanding at December 31, 1996 and 1997, respectively - 33,784,500 Holdings-Canada Class A common shares, no par value, 100,000,000 shares authorized; 31,795,270 and 31,822,756 shares issued and outstanding at December 31, 1996 and 1997, respectively: Class A common shares, exchangeable on a one-for-one basis for ICG Common Stock at any time - 23,700 Class A common shares owned by ICG 31,799,056 - ------------------- Total shares outstanding 33,808,200 ===================
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors approved incentive stock option plans and replenishments to those plans which provide for the granting of options to directors, officers, employees and consultants of the Company to purchase 285,000, 724,400 and 1,692,700 shares, respectively, of the Company's Common Stock, with exercise prices between 80% and 100% of the fair value of the shares at the date of grant. A total of 1,849,600 options have been granted under these plans with exercise prices ranging from approximately $2.92 to $14.03. Compensation expense has been recorded for options granted at an exercise price below the fair market value of the Company's Common Stock at the date of grant, pursuant to the provisions of APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant.
In fiscal years 1994, 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, the Company's Board of Directors approved incentive and non-qualified stock option plans and replenishments to plans which provide for the granting of options to certain directors, officers and employees to purchase 2,536,000 shares of
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the Company's Common Stock under the 1994 plan and an aggregate of 2,700,000 shares of the Company's Common Stock under the 1995 and 1996 plans. A total of 5,709,426 options have been granted under these plans at original exercise prices ranging from $7.94 to $27.06, none of which were less than 100% of the fair market value of the shares underlying options on the date of grant, and accordingly, no compensation expense was recorded for these options under APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant.
In order to continue to provide non-cash incentives and retain key employees, all employee stock options outstanding on April 16, 1997 with exercise prices at or in excess of $15.875 were canceled by the Stock Option Committee of the Company's Board of Directors and regranted with an exercise price of $10.375, the closing price of the Company's Common Stock on the Nasdaq National Market on April 16, 1997. A total of 597,600 options, with original exercise prices ranging from $15.875 to $26.25, were canceled and regranted. There was no effect on the Company's consolidated financial statements as a result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase Plan whereby employees can elect to designate 1% to 30% of their annual salary, to be used to purchase shares of the Company's Common Stock, up to a limit of $25,000 in Common Stock each year, at a 15% discount to fair market value. Stock purchases will occur four times a year on February 1, May 1, August 1 and November 1, with the price per share equaling the lower of 85% of the market price at the beginning or end of the offering period. The Company is authorized to issue a total of 1,000,000 shares of Common Stock to participants in the plan. During fiscal 1997, the Company sold 109,213 shares of the Company's Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its stock-based employee and non-employee director compensation plans of $0.2 million and $0.1 million for fiscal 1995 and 1996, respectively, pursuant to the intrinsic value based method of APB 25. Had compensation expense for the Company's plans been determined based on the fair market value of the options at the grant dates for awards
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
under those plans consistent with the provisions of SFAS 123, the Company's pro forma net loss and loss per share would have been as presented below. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: an expected option life of three years for directors, officers and other executives, and two years for other employees, for all periods; expected volatility of 50% for all periods; and risk-free interest rates ranging from 5.03% to 7.42% for fiscal 1995 and 1996 and the three months ended December 31, 1996, and risk-free interest rates ranging from 5.61% to 6.74% for fiscal 1997. Risk-free interest rates, as were currently available on the grant date, were assigned to each granted option based on the zero-coupon rate of U.S. Treasury bills to be held for the same period as the assumed option life. Since the Company does not anticipate issuing any dividends on its Common Stock, the dividend yield was assumed to be zero. The weighted average fair market value of options granted during fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997 was approximately $4.11, $5.28, $9.42 and $5.75 per option, respectively.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
As options outstanding at December 31, 1997 will continue to vest in subsequent periods, additional options are expected to be awarded under existing and new plans and options granted prior to 1995 have not been considered, the above pro forma results are not necessarily indicative of the impact on net loss and loss per share in future periods.
The following table summarizes the status of the Company's stock-based compensation plans:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding at December 31, 1997:
(c) Warrants
During fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, the Company's warrant activity was as follows:
(i) During fiscal 1993, the Company issued to a debt holder warrants to purchase 17,067, 3,255 and 11,039 common shares at exercise prices of $6.56, $7.38 and $7.88, respectively. During fiscal 1994, 17,067 warrants were exercised for proceeds of approximately $0.1 million. In addition, during fiscal 1994, the Company issued to the same debt holder additional warrants to purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada at $21.51, $20.01 and $11.80 per share, exercisable on or before November 10, 1998, March 24, 1999, and July 8, 1999, respectively. An additional 7,725 warrants were issued on July 10, 1995 at an exercise price of $14.50, which expire on July 9, 2000. Also issued on July 10, 1995 were 60,000 additional warrants to an affiliate of the debt holder at an exercise price of $14.50, which expire on July 9, 2000. During the three months ended December 31, 1996, 1,231 of
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the $11.80 warrants were canceled. During fiscal 1997, 2,024 of the $7.38 warrants, 6,583 of the $7.88 warrants, 1,450 of the $11.80 warrants and 17,429 of the $14.50 warrants were exercised in exchange for Holdings-Canada Class A common shares. In addition, 50,296 of the $14.50 warrants were canceled. At December 31, 1997, a total of 17,249 of these warrants remained outstanding.
(ii) During fiscal 1994, the Company issued to two financial advisors warrants to purchase 75,000 and 200,000 common shares of Holdings-Canada. These warrants have an exercise price of $7.94 and $18.00 and are exercisable for two- and five-year periods, respectively. During fiscal 1995 and 1996, 74,335 and 665 of the 75,000 warrants were exercised for total proceeds of approximately $0.6 million. During the three months ended December 31, 1996, 100,000 of the 200,000 warrants were exercised for proceeds of approximately $1.8 million. At December 31, 1997, 100,000 warrants remained outstanding.
(iii)Pursuant to a private placement of the Redeemable Preferred Stock and the interim financing arrangement during fiscal 1995, the Company issued 1,895,000 Series A Warrants and 1,375,000 Series B Warrants to purchase an equal number of common shares of Holdings-Canada with exercise prices of $7.94 and $8.73, respectively, which expire on July 14, 2000. During fiscal 1996, the Company repurchased 458,333 each of the Series A and Series B Warrants for $3.21 and $2.52, respectively (see note 10 (c)). In addition, 1,853,334 warrants were exercised in June 1996 through a cashless exercise in which 1,271,651 Holdings-Canada common shares were issued. During fiscal 1997, the remaining 500,000 warrants of the Series A and Series B warrants were exercised in exchange for 346,014 common shares of Holdings-Canada, which were in turn converted into an equal number of shares of ICG Common Stock.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
(iv) In connection with the 1995 Private Offering, the Company issued 1,928,190 warrants to purchase an equal number of common shares of Holdings-Canada. The warrants were exercisable beginning August 8, 1996 at $12.51 per share and expire on August 6, 2005. During fiscal 1997, 71,775 warrants were exercised for total proceeds of approximately $0.9 million and were in turn converted into an equal number of shares of ICG Common Stock. At December 31, 1997, 1,856,415 of these warrants remained outstanding.
The following table summarizes warrant activity for fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997:
Outstanding Price warrants range ------------------- ----------------------- (in thousands) Outstanding, October 1, 1994 310 $ 7.38 - 21.51 Granted 5,266 7.94 - 14.50 Exercised (74) 7.94 ------------------- Outstanding, September 30, 1995 5,502 7.38 - 21.51 Exercised (1,854) 7.94 - 8.73 Repurchased (917) 2.52 - 3.21 -------------------- Outstanding, September 30, 1996 2,731 7.38 - 21.51 Exercised (100) 18.00 Canceled (8) 7.38 - 11.80 -------------------- Outstanding, December 31, 1996 2,623 7.38 - 21.51 Exercised (599) 7.38 - 14.50 Canceled (50) 14.50 ==================== Outstanding, December 31, 1997 1,974 12.51 - 21.51 ====================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The warrants outstanding on December 31, 1997 expire on the following dates:
Outstanding Exercise Expiration date warrants price ----------------- ------------------ ---------------- (in thousands)
November 10, 1998 2 $ 21.51 December 17, 1998 100 18.00 March 24, 1999 15 20.01 August 6, 2005 1,857 12.51 ================== 1,974 ==================
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as partial payment for the sale of four of its teleports and certain related assets, and entered into a management agreement with the purchaser whereby the purchaser assumed control of the teleport operations. Upon approval of the transaction by the Federal Communications Commission ("FCC"), the Company completed the sale in March 1996 and received an additional $0.4 million due to certain closing adjustments, for total proceeds of $21.5 million. The Company recognized a loss of approximately $1.1 million on the sale. Revenue associated with these operations was approximately $9.1 million and $2.5 million for fiscal 1995 and 1996, respectively. The Company has reported results of operations from these assets through December 31, 1995.
(14) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company ("SCE") jointly entered into a 25-year agreement under which the Company will lease 1,258 miles of fiber optic cable in Southern California, and can install up to 500 additional miles of fiber optic cable. This network, which will be maintained and operated primarily by the Company, stretches from Los Angeles to southern Orange County. Under the terms of this agreement, SCE will be entitled to receive an annual fee for
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
ten years, certain fixed quarterly payments, a quarterly payment equal to a percentage of certain network revenue, and certain other installation and fiber connection fees. The aggregate fixed payments remaining under the agreement totaled approximately $144.7 million at December 31, 1997. The agreement has been accounted for as a capital lease in the accompanying consolidated balance sheets.
In May 1997, the Company entered into a long-term agreement with The Southern Company ("Southern") that will permit the Company to construct a 100-mile fiber optic network in the Atlanta metropolitan area. The Company paid $5.5 million upon execution of the agreement and is responsible for reimbursement to Southern for costs of network design, construction, installation, maintenance and repair. Additionally, the Company is also required to pay Southern a quarterly fee based on specified percentages of the Company's revenue derived from services provided over this network. Network construction on the initial 43-mile build is expected to be completed by May of 1998. The Company estimates costs to complete the initial build to be approximately $5.2 million. Other than the initial $5.5 million payment, no costs have been incurred as of December 31, 1997.
In January 1997, the Company announced the formation of ChoiceCom, a strategic alliance between the Company and CSW, which is expected to develop and market telecommunications services in certain cities in Texas. CSW holds 100% of the partnership interest in ChoiceCom and the Company has an option to purchase a 50% interest at any time prior to July 1, 2003. Subsequent to July 1, 1999, if the Company has not exercised its option, CSW will have the right to sell, at price pursuant to the terms of the limited partnership agreement, either 51% or 100% of the partnership interest in ChoiceCom to the Company. Additionally, the Company has committed to loan $15.0 million to ChoiceCom under two promissory notes, of which $10.0 million was advanced as of December 31, 1997 and the remaining $5.0 million was advanced during the first quarter of fiscal 1998.
In June 1997, the Company entered into an indefeasible right of use ("IRU") agreement with Qwest Communications Corporation ("Qwest") for approximately 1,800 miles of fiber optic network and additional broadband capacity in California, Colorado, Ohio and the Southeast. Network construction is ongoing and is expected to be complete by December 1998. The Company is responsible for payment on the construction as segments of the network are completed and has incurred
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
approximately $8.0 million as of December 31, 1997, with total costs anticipated to be approximately $35.0 million. Additionally, the Company has committed to purchase $6.0 million in network capacity from Qwest prior to the end of 1998.
(b) Company Headquarters
During the three months ended December 31, 1996, the Company acquired property for its new headquarters and commenced construction of an office building that will accommodate most of the Company's Colorado operations. The total cost of the project is expected to be approximately $44.2 million, of which $29.4 million had been incurred as of December 31, 1997 and is included in construction in progress. In January 1998, the Company sold the substantially completed building to a third party and entered into an agreement to lease back all of the office space under a 15-year operating lease which includes two ten-year renewal terms.
(c) Other Commitments
As part of the terms of the original purchase agreement, the Company was obligated to purchase, at fair market value, all of the shares of Maritime Telecommunications Network, Inc. ("MTN"), a 64% owned subsidiary of the Company, that were owned by the minority shareholders, upon demand of the minority shareholders, if a transaction was not effected which converted the minority shares into publicly traded securities or cash by January 3, 1998. As of the current date, no such demand has been made by the minority shareholders.
The Company has entered into various equipment purchase agreements with certain of its vendors. Under these agreements, if the Company does not meet a minimum purchase level in any given year, the vendor may discontinue for that year 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 $19.5 million at December 31, 1997.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(d) Leases
The Company leases office space and equipment under non-cancelable operating leases. Lease expense was approximately $2.8 million, $5.1 million, $1.3 million and $11.8 million for fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, respectively. Estimated future minimum lease payments for the years subsequent to December 31, 1997 are (in thousands):
Due December 31: 1998 $12,765 1999 9,563 2000 8,536 2001 8,003 2002 6,292 Thereafter 53,631 ================= $ 98,790 =================
(e) Reciprocal Compensation
The Company has recorded revenue of approximately $4.9 million for fiscal 1997 for reciprocal compensation relating to the transport and termination of local traffic to Internet service providers from customers of incumbent local exchange carriers pursuant to various interconnection agreements. These local exchange carriers have not paid most of the bills they have received from the Company and have disputed substantially all of these charges based on the belief that such calls are not local traffic as defined by the various agreements and under state and federal laws and public policies. The resolution of these disputes will be based on rulings by state public utility commissions and/or by the FCC. To date, there have been favorable rulings from 15 states and no unfavorable final rulings by any state public utilities commission or the FCC that would indicate that calls placed by end users to Internet service providers would not qualify as local traffic subject to the payment of reciprocal compensation. While the Company believes that all revenue recorded through December 31, 1997 is collectible and that future reciprocal compensation revenue will be realized, there can be no assurance that such future regulatory rulings will be favorable to the Company.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(f) Litigation
On April 4, 1997, certain shareholders of the Company's majority owned subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada corporation, filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of their subsidiaries. This complaint alleges that the Company and certain of its subsidiaries breached certain duties owed to the plaintiffs. The Company is vigorously defending the claims. While it is not possible to predict the outcome of this litigation, management believes these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
(15) Income Taxes
The components of income tax benefit for fiscal 1996 are as follows (in thousands):
Current income tax expense $ (198) Deferred income tax benefit 5,329 --------------------- Total $ 5,131 =====================
Current income tax expense for fiscal 1996 represents state income tax relating to operations of companies in states requiring separate entity tax returns. Accordingly, these entities' taxable income cannot be offset by the Company's net operating loss carryforwards. No income tax expense or benefit was recorded in fiscal 1995, the three months ended December 31, 1996 or fiscal 1997.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(15) Income Taxes (continued)
During fiscal 1996, the deferred tax liability was adjusted for the effects of certain changes in estimated lives of property and equipment as discussed in note 2 (j). As a result, the Company recognized an income tax benefit of $5.3 million.
Income tax benefit differs from the amounts computed by applying the U.S. federal income tax rate to loss before income taxes primarily because the Company has not recognized the income tax benefit of certain of its net operating loss carryforwards and other deferred tax assets due to the uncertainty of realization.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are as follows:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(15) Income Taxes (continued)
As of December 31, 1997, the Company has net operating losses ("NOLs") of approximately $353.0 million for U.S. tax purposes which expire in varying amounts through 2012. However, due to the provisions of Section 382, Section 1502 and certain other provisions of the Internal Revenue Code (the "Code"), the utilization of these NOLs will be limited. The Company is also subject to certain state income tax laws, which will also limit the utilization of NOLs.
A valuation allowance has been provided for the deferred tax asset relating to the Company's NOLs, as management cannot determine when the Company will generate future taxable income.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section 401(k) of the Code which the Company administers for participating employees. All full-time employees are covered under the plan after meeting minimum service and age requirements. The Company makes a matching contribution of its Common Stock (up to
(16) Employee Benefit Plans (continued)
a maximum of 6% of an employee's eligible earnings) which totaled approximately $0.5 million, $1.2 million, $0.5 million and $3.0 million during fiscal 1995 and 1996, the three months ended December 31, 1996 and fiscal 1997, respectively.
(17) Significant Customer
During fiscal 1995, the Company had revenue from a single customer which comprised 11% of total revenue and accounts receivable which comprised 8% of the total accounts receivable balance at September 30, 1995. There were no customers which accounted for greater than 10% of revenue or accounts receivable as of, or for the respective periods ended September 30, 1996, December 31, 1996 or 1997.
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997 are guaranteed by ICG. The 12 1/2% Notes and 13 1/2% Notes issued by Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be significant to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. However, summarized combined financial information for Holdings and subsidiaries and affiliates is as follows:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
December 31, --------------------------------------- 1996 1997 ------------------ ------------------ (in thousands)
Current assets $ 449,059 215,817 Property and equipment, net 403,676 632,167 Other non-current assets, net 88,439 122,768 Current liabilities 87,423 98,351 Long-term debt, less current portion 690,293 890,503 Due to parent 11,485 30,970 Other long-term liabilities 73,113 66,939 Preferred stock 159,120 292,442 Stockholders' deficit (80,260) (408,453)
(a) Holdings-Canada's 51% interest in FOTI was contributed to Holdings effective in February 1995 (the remaining 49% was purchased in January 1996) and, accordingly, FOTI's operations have been included in the consolidated amounts subsequent to that date.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31, --------------------------------------------- 1996 1997 --------------------- --------------------- (in thousands)
Current assets $ 165 162 Advances to subsidiaries 11,485 30,790 Non-current assets, net 2,793 3,800 Current liabilities 199 107 Long-term debt, less current portion 65 65 Due to parent 1,566 22,342 Preferred stock 127,729 - Share of losses of subsidiary 80,260 408,453 Shareholders' deficit (67,647) (396,035)
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc. (continued)
(20) Summarized Financial Information of ICG Funding, LLC
As discussed in note 11, the 6 3/4% Preferred Securities issued by ICG Funding during fiscal 1997 are guaranteed by ICG. The separate complete financial statements of ICG Funding have not been included herein because such disclosure is not considered to be significant to the holders of the 6 3/4% Preferred Securities. For fiscal 1997, the statement of operations of ICG Funding included only the preferred dividends paid and accrued on the 6 3/4% Preferred Securities and interest income earned on the proceeds from the offering of such securities. The summarized balance sheet information for ICG Funding is as follows:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Funding, LLC (continued)
Summarized Balance Sheet Information
December 31, ------------------------- (in thousands)
Cash, cash equivalents and short-term investments available for sale $ 94,182 Other current assets 19 Restricted cash 38,749 Dividends payable 1,116 Due to parent 4,642 Preferred securities 127,729 Member deficit (537)
(21) Condensed Financial Information of ICG Communications, Inc. (Parent company)
The primary asset of ICG is its investment in Holdings-Canada. Certain corporate expenses of the parent company are included in ICG's statement of operations and were approximately $1.2 million for fiscal 1997. At December 31, 1997, ICG had no operations other than those of ICG Funding, Holdings-Canada and its subsidiaries.
FINANCIAL STATEMENT SCHEDULE
ICG Communications, Inc. Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . S-2
S-1
Independent Auditors' Report
The Board of Directors and Stockholders ICG Communications, Inc.:
Under the date of February 19, 1998, we reported on the consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders= equity (deficit) and cash flows for the fiscal years ended September 30, 1995 and 1996, the three months ended December 31, 1996, and the fiscal year ended December 31, 1997 as contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as whole, presents fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the fiscal year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado February 19, 1998
S-2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts - -------------------------------------------------------------------------------
S-2
INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock Option Plan.
10.51: Employment Agreement, dated June 1, 1997, between NETCOM On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG Holdings, Inc. and TriNet Essential Facilities X, Inc., dated January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X, Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998.
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 March 30, 1998.
ICG Communications, Inc.
By: /s/J. Shelby Bryan J. Shelby Bryan President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998 - ----------------------- William J. Laggett President, Chief Executive Officer and /s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998 - ----------------------- J. Shelby Bryan Executive Vice President and Chief Financial Officer (Principal Financial /s/James D. Grenfell Officer) March 30, 1998 - ----------------------- James D. Grenfell Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1998 - ----------------------- Richard Bambach
/s/David W. Garrison Director March 30, 1998 - ----------------------- David W. Garrison
/s/Harry R. Herbst Director March 30, 1998 - ----------------------- Harry R. Herbst
/s/Leontis Teryazos Director March 30, 1998 - ----------------------- Leontis Teryazos
/s/Walter Threadgill Director March 30, 1998 - ----------------------- Walter Threadgill
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 March 30, 1997.
ICG Funding, LLC
By: ICG Communications, Inc. Common Member and Manager
By: /s/James D. Grenfell James D. Grenfell Executive Vice President and Chief Financial Officer
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 March 30, 1998.
ICG Holdings (Canada), Inc.
By: /s/J. Shelby Bryan J. Shelby Bryan President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998 - ----------------------- William J. Laggett President, Chief Executive Officer and /s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998 - ----------------------- J. Shelby Bryan Executive Vice President and Chief /s/James D. Grenfell Financial Officer(Principal Financial March 30, 1998 - ----------------------- Officer) James D. Grenfell Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1998 - ----------------------- Richard Bambach
Director - ----------------------- Harry R. Herbst
/s/Gregory C.K. Smith Director March 30, 1998 - ----------------------- Gregory C.K. Smith
/s/Leontis Teryazos Director March 30, 1998 - ----------------------- Leontis Teryazos
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 March 30, 1997.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan J. Shelby Bryan Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of Directors, President and Chief Executive Officer /s/J. Shelby Bryan (Principal Executive Officer) March 30, 1998 - ----------------------- J. Shelby Bryan Executive Vice President, Chief Financial Officer and Director(Principal Financial /s/James D. Grenfell Officer) March 30, 1998 - ----------------------- James D. Grenfell Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1998 - ----------------------- Richard Bambach Executive Vice President - Network and /s/John Kane Director Marc 30, 1998 - ----------------------- John Kane Executive Vice President - Strategic /s/Marc E. Maassen Planning and Director March 30, 1998 - ----------------------- Marc E. Maassen Executive Vice President - Telecom /s/Sheldon S. Ohringer and Director March 30, 1998 - ----------------------- Sheldon S. Ohringer