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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
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Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
Not applicable
Not applicable
Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
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Name of each exchange on which
Title of each class registered
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Common Stock, $.01 par value Nasdaq National Market
(48,582,035 shares outstanding on March 27, 2000)
Not applicable Not applicable
Not applicable Not applicable
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Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 27, 2000 the aggregate market value of ICG Communications,
Inc. Common Stock held by non-affiliates (using the closing price of $39.00 on
March 27, 2000) was approximately $1,894,699,365.
ICG Canadian Acquisition, Inc., a wholly owned subsidiary of ICG
Communications, Inc., owns all of the issued and outstanding common shares of
ICG Holdings (Canada) Co.
ICG Holdings (Canada) Co. owns all of the issued and outstanding shares of
common stock of ICG Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
of ICG Communications, Inc. to be filed with the Securities and Exchange
Commission not later than April 29, 2000 has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 of ICG Communications,
Inc.
TABLE OF CONTENTS
PART I.................................................................. 1
ITEM 1. BUSINESS............................................... 1
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Overview............................................... 1
Industry............................................... 3
Market Opportunities and Strategy...................... 4
Products Descriptions and Major Contracts.............. 6
Network and Facilities................................. 10
Customers and Marketing................................ 12
Competition............................................ 12
Regulatory Activity.................................... 14
Financing Activities................................... 17
Sale of Assets and Discontinuance of Certain Businesses 18
Employees.............................................. 20
Trademarks and Trade Names............................. 20
ITEM 2. PROPERTIES............................................. 21
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ITEM 3. LEGAL PROCEEDINGS...................................... 22
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
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HOLDERS................................................ 22
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PART II................................................................. 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
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RELATED STOCKHOLDER MATTERS............................ 23
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ITEM 6. SELECTED FINANCIAL DATA................................ 25
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 29
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
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MARKET RISK............................................ 50
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 51
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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ON ACCOUNTING AND FINANCIAL DISCLOSURES................ 52
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PART III................................................................ 53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS........ 53
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ITEM 11. EXECUTIVE COMPENSATION................................. 53
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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AND MANAGEMENT......................................... 53
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 53
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PART IV................................................................. 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT
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ON FORM 8-K............................................ 54
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Financial Statements................................... 54
Report on Form 8-K..................................... 64
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Exhibits............................................... 64
Financial Statement Schedule........................... 64
FINANCIAL STATEMENTS.................................................... F-1
FINANCIAL STATEMENT SCHEDULE............................................ S-1
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PART I
Unless the context otherwise requires, the term "Company" or "ICG" means
the combined business operations of ICG Communications, Inc. and its
subsidiaries, including ICG Holdings (Canada) Co. (Holdings-Canada), ICG
Holdings, Inc. (Holdings) and ICG Services, Inc. (ICG Services). All dollar
amounts are in U.S. dollars. The Business section and other parts of this
Report contain "forward-looking statements" intended to qualify as safe harbors
from liability as established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as such
because the context of the statement includes words such as "intends,"
"anticipates," "expects," "estimates," "plans" and "believes," and other similar
words. Similarly, statements that describe the Company's future plans,
objectives or goals also are forward-looking statements. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results or outcomes to differ materially from those currently
anticipated. Factors that could affect actual results include, but are not
limited to, the Company's ability to obtain financing necessary to fund its
planned expansion, its 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, enhanced
telephony, wholesale and retail data services, the successful implementation of
the Company's strategy to offer Internet access via emerging technologies,
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities.
ITEM 1. BUSINESS
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OVERVIEW
The Company is a facilities-based communications provider and, based on
revenue and customer lines in service, one of the largest non-incumbent
competitive communications companies in the United States. The Company primarily
offers voice and data services directly to business customers and offers network
facilities and data management to Internet service provider (ISPs) customers.
The Company's extensive network assets provide nationwide data services to an
estimated 700 cities with 227 data points of presence (POPs). At year-end 1999,
the Company had in service 730,975 customer lines and data access ports
(referred to throughout this report as "lines"). Also, at year-end 1999, the
Company had over 10,000 business customers and approximately 550 ISP customers.
The Company believes that through its ISP customers it serves approximately 10%
of the Internet users in the United States. The Company recognized $479.2
million of revenue in 1999, an increase of $175.9 million over 1998.
As of December 31, 1999, approximately two-thirds of lines in service were
for ISP customers. The Company provides data access and transport services to
ISPs that in many cases rely on the Company to provide network ownership and
management. During 1999, the Company began to implement its "Gateway Strategy,"
which includes meeting demand for multiple access methods to the Internet (such
as dial-up, wireless and digital subscriber lines, or DSL) and to provide
advanced network management and applications. The Company's current product
offerings to the ISP market include dial-up products such as primary rate
interface (PRI), remote access service (RAS) and Internet remote access
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service (IRAS) as well as broadband access services including T-1 and T-3
connections and DSL.
The Company also provides high quality voice and data communications
services to business customers, including local, long distance and enhanced
telephony services, through its Internet protocol, circuit switch and regional
fiber optic networks. In regional markets, ICG is a cost-efficient alternative
to the area's incumbent local telephone company (ILEC) for business customers.
The Company also provides interexchange services to long-distance carriers
(IXCs) and other customers. These "special access" services connect end-users
to long-distance carriers' facilities, connect a long-distance carrier's
facilities to the local telephone company central office and connect facilities
of the same or different long-distance carrier.
A focus of the Company's long-term strategy is to expand its national
network and facilities, based upon existing demand under contract. The Company
intends that this expansion will open major markets in which the Company can
then extend its local business service. Network expansion is undertaken through
a combination of constructing owned facilities and entering into long-term fiber
and capacity agreements with other telecom carriers. Network build-out is
designed to support increased future capacity demands.
During 1999, ICG made significant investments in network expansion and new
facilities. By year-end, the Company had:
. 18,000 miles of long-haul broadband capacity under long-term leases;
. 4,596 miles of local fiber capacity with an additional 531 miles under
construction;
. 71 voice and data switches, including 24 ATM switches (that deliver
advanced voice, data and video services) 16 frame relay switches and
31 voice switches;
. 147 collocation sites with incumbent telephone companies;
. 145 ISP customer collocation sites;
. connection of 8,078 buildings to its network;
. VoIP network capability from most POP sites; and
. 181 OC-48 and 3 OC-192 SONET transmission equipment systems.
During 1999, in connection with its high level of growth, ICG took steps to
streamline its business and focus on core operations. The Company sold non-core
assets for net cash proceeds in excess of $400 million. Sales included the
Company's retail ISP customer business and its Network Services and Satellite
Services divisions. See "Sale of Assets and Discontinuance of Certain
Businesses." The Company also centralized its provisioning process to maximize
economies of scale and opened two new provisioning centers that replaced 30
regional centers. Additionally, the Company is deploying a comprehensive
operating support system (OSS) from Telcordia Technologies, Inc. for quick and
simplified provisioning service and initiating use of a new billing system from
Saville, PLC, which the Company anticipates will be capable of managing a larger
customer base and consolidating customer billing.
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The Company's business continues to grow principally as a result of
increased Internet access demand, new technologies and increased market share
for customers traditionally served by incumbent telephone companies. The
Company's business plan calls for accelerated network expansion in 2000 into 22
new major metropolitan cities by year-end. The Company will continue to invest
in developing and delivering new products and services to complete its portfolio
of offerings to each market segment.
INDUSTRY
The markets for the Company's products and services are growing at a
substantial rate, driven in large part by new technologies and passage of the
Federal Telecommunications Act of 1996 (Telecommunications Act).
The U.S. Internet access market is expected to increase from approximately
$18 billion in 1999 to over $48 billion in 2002, reflecting expanded market size
as well as enhanced service offerings. Internet subscribers have grown
dramatically in the past two years and will continue rapid growth as forecast
for the coming three years. Growth in Internet use will come in the form of
dial-up modem access in the near-term and transition to higher growth from
emerging broadband access methods. Dial-up Internet access was estimated to
increase from approximately 37 million at year-end 1998 to approximately 43
million by year-end 1999. At the same time, residential
broadband subscribers were expected to grow from 1.5 million to 3.1 million.
Over the next three years, at year-end 2002, dial-up Internet accounts
are forecast to increase another 15% to nearly 50 million while
broadband subscribers are forecast to grow over 500% to 20 million. In
addition, the number of users per household and the time connected to the
Internet is expected to increase. (See Forrester Research, Inc. Reports from
1998 and 1999) More users and more time on the Internet are expected
to create continued, rapid increase in the demand for ISP access ports
nationwide.
Local telephone and data service is estimated to generate over $100
billion in annual revenues growing at approximately 3-5% per year. The local
incumbent telephone companies are estimated to have a 95% share of this revenue.
Competitive local exchange companies such as ICG are forecast to gain an
increasing share of this large market.
The Company is competing in the local, long distance, enhanced voice
telephony and data communications markets to provide service to its business,
ISP and interexchange customers. The Company believes it can maximize revenue
and profit opportunities by leveraging its extensive network facilities to
provide multiple communications services to its customers. The local voice
telephony sector of the telecommunications industry has long been dominated by
the ILECs. The Company's ability to compete in this industry has, however, been
enhanced due to the passage of the Telecommunications Act and various
competitive state regulatory initiatives. Due to these regulatory changes, non-
ILEC providers such as the Company are now legally able to offer many
communications services, including local dial tone and all interstate and
intrastate switched services. Notwithstanding these regulatory changes, the
ILECs have been slow to open their markets to competition, and the Company
continues to face significant barriers in gaining access to the local telephony
markets. See "Regulatory Activities."
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MARKET OPPORTUNITY AND STRATEGY
Geographical Expansion
In order to meet its customers' needs and maximize traffic across its
network, ICG is expanding its footprint nationwide to deliver basic and enhanced
voice and data services on Company-owned facilities. ICG's objective is to
supply communications infrastructure for its business and ISP customers while
adding new systems to serve application service providers (ASPs), a quickly
emerging group of companies that deliver advanced communication services over
the Internet.
The Company anticipates expanding into 22 new markets during 2000. As the
Company enters new markets, it is following a "smart build" network strategy.
Consistent with this strategy, the Company plans to build-out its network to
meet existing demand, yet the infrastructure and facilities are designed to
support significantly greater capacity demands. The Company's expansion into
new markets is supported by existing three- to five- year term contracts signed
in the second-half of 1999 for over 700,000 new Internet access ports. The
Company recently has begun offering Internet access services in six of these new
markets and expects that it will be capable of delivering service in all 22
markets utilizing its own switch facilities by year-end 2000. It is intended
that this expansion will enable the Company to deliver both voice and data
products to its ISP and business customers.
The Company's growth in the near term will be primarily driven from the ISP
segment. However, its expanded geographical footprint and new OSS systems are
intended to position the Company to accelerate growth in its business segment in
2001 and beyond.
Gateway Strategy
The Company is building its network to deliver a broad range of Internet
access methods and to support enhanced voice and data services to its customers
both directly and by partnering with other companies. Geographical expansion is
intended to be complemented with expanded product and service offerings as the
Company seeks to provide a portfolio capable of supplying the telecommunications
needs of its customers. The Company is developing bundled products,
applications and services to deliver to its ISP and business customers which
increases customer convenience and satisfaction. In turn, as customers demand
multiple products and services, the Company intends to maximize customer
retention and revenue per line while more efficiently employing facilities to
deliver profitable growth.
The Company's Gateway Strategy includes offering multiple access methods
and more advanced network management features to ISP and ASP markets. As
customers in these markets seek to grow their businesses, they frequently
require broad geographical coverage, more sophisticated facilities and network
management capabilities, as well as the capability to connect their end-use
customers to the Internet via dial-up or broadband methods.
In order to capture market share in the fast-growing Internet market, the
Company seeks to reach the end-user customer by partnering with third party
providers as well as through direct marketing channels. Today, the Company
delivers Internet access for dial-up customers through its ISP customers and has
partnered with Northpoint Communciations, Inc. (Northpoint) and
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Covad Communications Group, Inc. (Covad) to deliver DSL services during 2000,
and it plans to add additional partners to deliver DSL Internet access
nationwide. The Company plans to introduce additional Internet access
technologies as demand for new methods dictates.
The Company provides direct broadband connections to its ISP and business
customers through T-1 lines delivering 1.5 megabits of data per second (Mbps)
and T-3 lines at 44.7 Mbps. Of the 8,078 buildings connected to the Company's
switching facilities at year-end 1999, 963 were connected utilizing ICG
broadband fiber connections.
By adding new broadband customers or migrating existing dial-up customers
to broadband services, the Company can deliver additional value-added services
and applications that increase customer satisfaction, increase the value of each
customer and increase the customer's reliance on ICG.
Advanced Services
New products and technologies under the Gateway Strategy include advanced
network services such as managing content, providing applications and managing
Internet traffic. Advanced applications are intended to be offered both
directly through ICG and through partnerships with other application providers.
The Company is adding computing power within its network to support these new
services. By the end of the third quarter 2000, the Company intends to have
over 1000 central processing units, or servers, throughout its network including
traffic, application and content servers.
For example, traffic servers will enable the Company to provide caching
services for its customers, which can increase the download speed of data by as
much as 30% and improve network efficiency. The Company has already established
a relationship with a provider to deliver Unified Messaging on its network.
Other services that the Company plans to introduce in the year 2000 include
virus protection within ICG's network, reducing individual protection
requirements for customers, and Virtual Private Networks (VPNs) and Virtual
Private Dial-up Networks (VPDNs). These services combine the functionality of
private networks and employ the far reach and cost effectiveness of the
Internet.
With deployment of application and content servers on its network, the
Company anticipates offering its customers network infrastructure to support
services such as web and e-mail hosting, video and voice streaming applications
and other media applications. The Company plans to introduce these and other
advanced services in 2001 and beyond. With its extensive network, the Company
expects that it will be able to deliver these products nationwide, as they are
developed, providing revenue opportunities for ICG and its ISP and ASP partners.
During 2000, the Company intends to build a new on-line, web-based customer
management center. This center will allow ISPs to retain control over service
levels to their retail customers while at the same time outsourcing their
network requirements to ICG. Service level alerts and on-line reporting and
provisioning are expected to be a part of this initiative.
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Although several new applications are being added to ICG's network in 2000
and 2001, significant new revenue from these applications is not expected to
contribute meaningfully until 2002 and beyond. Additionally, the Company will
rely on certain third party vendors to provide technical support and equipment
to support these new applications and there can be no assurance that these
vendors will perform in a timely or adequate manner.
PRODUCTS DESCRIPTIONS AND MAJOR CONTRACTS
Product Offerings
Products and services offered by ICG as of year-end 1999 were the
following:
. Local telephone service . Remote access services (PRI/RAS /IRAS)
. Long distance telephone service . Dedicated Internet access
. Caller ID . DSL
. Voice messaging . Voice over IP
. Call waiting . Enhanced IP services (content management)
. Speed dialing . Integrated access services
. Toll free service . SS7 services
. Remote access . Special access
. Conferencing . Switched access service
. Calling cards
. Fax services
. Enhanced messaging
. Integrated Access Service
Products and Services to ISP Customers
In 1999, the Company complemented its PRI product with additional network
services to ISPs including RAS and IRAS. PRI has been the traditional product
that allows an ISP to connect to its customer by utilizing the Company's local
access network. The dial-up customer calls the ISP and the call is routed to
the Company through the public telephone service network. Using the Company's
switch network, the Internet call is routed via a signal to the ISP remote
access service modem bank, which is generally located at a collocation site
provided by the Company. The ISP can either route the call to the Internet or
to its network to terminate the call.
To further support the ISP in its network needs, the Company introduced the
RAS product. RAS utilizes the Company's switches and owned modem banks. This
service provides modem access at the Company's own switch location, eliminating
the need for ISPs to deploy modems physically at each of its POPs. RAS is a
"connect-and-send" approach, which enables the Company to act as an aggregator
for ISP traffic while limiting the ISP's capital deployment. RAS service
reduces the ISP's capital expenditures by eliminating the need for ISPs to
purchase separate modems, and transfers a portion of its network management
responsibilities to the
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Company. In 1999, the Company contracted for the provision of approximately
200,000 RAS lines.
The Company also provides Internet RAS, or IRAS, which combines access,
transport and routing services to deliver all Internet Protocol (IP) data
packets either directly to the ISP or directly to the Internet bypassing the
ISP. The IRAS product utilizes ICG's switch and data networks. The Company
estimates that more than 65% of all of ICG's ISP traffic is routed directly to
the Internet. IRAS enables regional or local ISPs to expand their geographical
footprint outside their current physical locations without significant capital
expenditures by carrying the ISP's out-of-region traffic on ICG's nationwide
data network. During the third and fourth quarters of 1999, the Company signed
long-term contracts to deliver approximately 500,000 IRAS lines.
Significant Contracts
During 1999, ICG entered into several significant contracts for the
provision of approximately 700,000 lines under its new ISP service offerings.
These contracts include new RAS and IRAS lines and the upgrade of PRI lines to
RAS. Primary contracts were:
. In June 1999, the Company entered into a five-year agreement with a
national integrated telecommunications provider, under which the
customer has agreed to purchase 100,000 RAS lines from the Company.
. In August 1999, the Company signed a long-term contract with a large
national ISP to provide a minimum of 100,000 RAS lines to the ISP for a
minimum five-year term.
. In September 1999, the Company signed a three-year agreement with a
leading provider of Internet access to provide IRAS. Throughout the term
of the agreement, the Company will install up to 100,000 IRAS lines for
the customer.
. In October 1999, the Company entered into a three-year IRAS contract
with a large e-commerce company. The customer is committed to purchase a
minimum of 200,000 IRAS lines.
. In November 1999, the Company signed an agreement with another national
ISP to provide IRAS for a three-year period. Under this agreement, the
ISP will purchase the use of a minimum of 150,000 RAS ports.
Of a total of approximately 700,000 RAS and IRAS lines contracted in the
second half of 1999, approximately 500,000 remained to be provisioned during
2000.
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Commercial Services
The services provided to the Company's commercial customers, to date
principally small and medium-sized businesses, include competitive local dial
tone, long distance, enhanced telephony features, data and dedicated or special
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 and custom calling features), calling card and long
distance services (intraLATA or local toll calling, interLATA, intrastate and
interstate). The Company believes that having a full complement of
communications services will strengthen its overall market position and help the
Company to better penetrate the local exchange marketplace.
Although the Company carries some of its long distance traffic on its own
switches, it also relies on obtaining long distance transmission capacity from
third party carriers to provide its services. To fulfill its capacity needs,
the Company has entered into transmission agreements that typically provide for
transmission on a per minute basis with other long distance carriers. To reduce
the cost of services, the Company leases point-to-point circuits on a monthly or
longer term fixed cost basis where it anticipates high traffic volume. Private
line services are generally used to connect the separate locations of a single
business outside of the local calling area or LATA.
Through a subsidiary, NikoNet, Inc., the Company also provides broadcast
facsimile services and enhanced messaging services to financial institutions,
corporate investor and public relations departments and other customers.
NikoNet also provides facsimile to e-mail and e-mail to facsimile translation
services. The NikoNet services leverage the Company's network and creates high
margin minutes of use.
On a limited basis, the Company is currently offering Integrated Access
Service (IAS) and, based on current plans, intends to expand this offering by
the second quarter of 2000. IAS is an enhanced service that can bundle local,
long-distance and data services to be carried over a dedicated T-1 connection.
Through equipment installed by the Company at the customers' premises and the
Company's central offices, IAS provides expanded bandwidth for small to medium-
sized business customers as an alternative to purchasing additional circuits.
Data traffic, including Internet traffic, from IAS service offerings is carried
over the Company's nationwide network.
The Company is preparing to provide high-speed data transmission services
through DSL technology primarily to business end-users. The Company currently
sells this product on a wholesale basis to ISPs. DSL technology utilizes the
existing ILEC twisted copper pair connection to the customer, which gives the
customer significantly greater bandwidth and speed when connecting to the
Internet. The Company has agreements to provide DSL services through third
party vendors, including NorthPoint and Covad. These third-party vendors will
provide DSL services to the Company and the Company's end-users in certain
markets within the Company's footprint. The Company's DSL traffic in the
specified markets will be routed by the third party DSL providers to the
Company's ATM switches and transported by the Company either to the ISP, via a
point-to-point connection or via IP technology, or directly to the Internet.
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To provide its voice telephony services, the Company operates local
exchange networks in approximately 30 metropolitan markets located within the
following regions: California (Sacramento, San Diego and portions of the Los
Angeles, San Francisco and Oakland metropolitan areas); Colorado (Denver
metropolitan area, Colorado Springs and Boulder); Ohio (Akron, Cincinnati,
Cleveland, Columbus, and Dayton); the Southeast (Atlanta, Georgia; Birmingham,
Alabama; Charlotte, North Carolina; Louisville, Kentucky; and Nashville,
Tennessee); and Texas (Austin, Corpus Christi, Dallas, Houston and San Antonio).
Interexchange Services
Special access
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Special access or dedicated 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 LATA. As
part of its "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 also markets these services directly to ISPs and end-
user business customers.
Switched access
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Switched access services include interstate and intrastate transport and
switching of calls between the long distance carrier's facilities and either the
local telephone company's 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's
Signaling System 7 (SS7) services provide signaling connections between long
distance and local exchange carriers, and between long distance carriers'
networks. SS7, sometimes referred to 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 that results in
more efficient use of network resources. SS7 is 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 purchase connections to other
local and long distance carriers on a monthly recurring basis. The Company has
also developed a nationwide SS7 service with Southern New England
Telecommunications Corporation (SNET), a subsidiary of SBC Communications, Inc.
The Company believes that, together with SNET, it is one of the largest
independent suppliers of SS7 services.
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NETWORK AND FACILITIES
Overview
The Company originally operated only local networks to service its business
and interexchange customers. The Company acquired an extensive data network as
part of its acquisition of NETCOM On-Line Communication Services, Inc. in 1998.
During 1999, the Company began providing Internet access services to ISPs and
other customers over its data network. The Company is currently expanding all
of its existing networks, including its data network, and evaluating development
of additional networks both inside and outside its existing footprint.
National Data Network
To service its ISP customers, the Company owns and operates a Tier I
nationwide data network which at December 31, 1999 included public and private
peering locations, 227 POPs, 16 frame relay switches and high-performance
routers connecting a backbone of 24 ATM switches and 18,000 miles of leased
long-haul fiber lines in the United States. The data network connects to major
public peering connections at MFS MAE East NAP (Washington, D.C.), MFS MAE West
NAP (Santa Clara, California), PacBell NAP (San Jose, California), Sprint NAP
(Newark, New Jersey) and Ameritech NAP (Chicago, Illinois). In addition, the
Company has several private peering relationships with major ISPs. The network
carries and will carry all IP data traffic associated with the Company's ISP
business. The design and architecture of the physical network permits the
Company to offer flexible, high-speed services to its customers.
Local Networks
Currently, the Company's local network supports traditional competitive
telephone and data services in five regions covering approximately 30
metropolitan areas in California, Colorado, Ohio, Texas and the Southeast.
Regional network infrastructure consists of fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. At year-end 1999, the voice network contained 31 5E Lucent switches.
The Company typically designs a ring architecture to make the voice network
accessible to the largest concentration of business end-users in a given market.
The Company's network is 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 in a cost efficient manner.
Switched telephony services involve the transmission of voice, video or
data to long distance carrier-specified or end-user-specified termination sites.
The switch is required in order for the Company to provide the full range of
local telephone services. By contrast, the special access services provided by
the Company and other competitive local access providers to IXCs (discussed
above under "Interexchange Services") involve a dedicated communications link or
"pipe," usually between an end-user and a specific long distance carrier's 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.
-10-
Planned Capacity Upgrades
In order to meet the requirements of its growing customer base, the Company
intends to continue increasing the capacity of its national data network.
During 2000, ICG plans to increase its data network capacity to OC-48, capable
of carrying 2,488 megabits of data per second, 16 times the OC-3 capacity the
Company had at year-end 1999. If required, the Company has an option to further
increase capacity on its network by a factor of four, to OC-192, prior to year-
end 2000. The Company also plans to install up to 36 new gigabit routers during
2000 to further increase the capacity and efficiency of its network.
ICG also intends to increase the number of voice and data switches on its
network. The Company plans to add up to 35 new voice and data switches to its
network during 2000. The Company will add a new switch in each of its 22
expansion markets and plans to add additional switches in its existing markets.
In each of its expansion markets the Company will install equipment that will
deliver Internet access and network management capabilities for its ISP
customers, that is also expected to be capable of delivering basic and enhanced
voice services for its ISP and business customers.
These new services will support ISP and business customers. Examples
include:
. Integrated Access Service;
. Voice Over DSL (VoDSL), that bundles voice and data services over an
existing copper line (the Company has signed a letter of intent with a
DSL provider to jointly develop a VoDSL product);
. Unified messaging, a service that integrates voice mail, e-mail and
"follow-me" services that also utilizes the Company's nationwide VoIP
network.
The Company plans to install Lucent 5ESS switches in many of its new
markets, capable of delivering both voice and data services. The Company is
also testing technology that can potentially deliver these services on a more
cost-effective basis using new "soft switch" technology. Assuming successful
completion of this testing, the Company could install up to eight soft switches
as part of its 35-switch expansion in 2000.
The Company's data and voice 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. 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.
-11-
CUSTOMERS AND MARKETING
The Company's major customers include national and regional ISPs, ASPs,
other telecommunications providers, businesses and long distance carriers.
The Company's primary marketing strategies to these customers are to offer
a broad range of local, long distance, data, enhanced telephony and
infrastructure provider services at cost-effective rates. The Company markets
its service offerings through direct sales to end-users and wholesale accounts,
through sales agents and, to a limited extent, by direct mail. The Company has
developed three distinct internal sales channels, including a staff that sells
and markets ISP services, one that targets telephony services to business
customers and a third sales organization that is directed toward wholesale sales
to IXC customers. The Company is focused on improving its customer service and
provisioning process, which is essential for attracting and retaining customers.
In addition to its customer care center and trained sales teams, the Company
recently initiated CustomerConnections.net. This program assigns a Company vice
president to each major account. These vice presidents work directly with the
customer and the customers' existing account team to assist and develop the
customer relationship with the Company. It is anticipated that through this
contact, the Company will be able to better understand and respond to the needs
of its customers.
Further efforts are being made to increase customer satisfaction by
improving the provisioning, billing and back office processes. With respect to
provisioning, over the last year, the Company has increased its provisioning
capacity with the addition of more than 200 new employees in network operations
and the centralization of the process in a new national provisioning center.
During 1999, the Company also began implementing a new billing technology from
Saville, PLC which the Company anticipates will enhance its collection
capabilities and improve customer service by providing customers with reliable,
easy to understand invoices.
Customer service and monitoring of the Company's network facilities and
infrastructure are provided 24 hours per day, seven days per week. The Company
has two network monitoring centers. The center in Englewood, Colorado monitors
and manages the Company's regional fiber networks and provides high-level
monitoring of the Company's local exchange switches and is also a back-up
monitoring site for the Company's data network. The center located in San Jose,
California specifically monitors and manages the Company's data network
facilities.
COMPETITION
The Company competes in several sectors of the telecommunications service
industry, all of which are highly competitive. With respect to its ISP
services, the Company expects that competition will continue to intensify as
customers seek additional capacity to satisfy the continued growth of the
Internet. In addition, numerous competitors, including major telecommunications
carriers, are rapidly expanding their network capabilities in order to service
the ISP industry. The Company believes that the primary competitive factors for
the provision of network services are quality of service, network coverage,
reliability, price and product innovation.
-12-
The Company's competitors in the Internet access market possess (or will
possess) significant network infrastructure enabling them to provide ISPs with
capacity and access to the Internet. The Company's primary competitors in this
segment include Level 3, UUNet, Verio, Concentric, PSINet and Splitrock. While
the Company believes that its network and products will enable it to compete in
this industry sector, some of the Company's competitors have significantly
greater market presence, brand recognition and financial, technical and
personnel resources than the Company. In addition, the Company believes that
new competitors with significant resources will enter this market and construct
networks similar to the Company's networks. There can be no assurance that the
Company will be able to compete effectively with these companies.
In the commercial sector, the Company competes in an environment dominated
by the ILECs and GTE, which are among the Company's current 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 provided the ILECs with advantages over the
Company. Also included among the Company's current competitors in this sector
are other CLECs, network systems integration service providers, microwave and
satellite service providers, teleport operators and private networks built by
large end-users. In addition to the ILECs, competitors in this industry sector
include AT&T, MCI WorldCom and Qwest. Further, potential competitors have arisen
using different technologies, including cable television companies, utilities,
ISPs, ILECs outside their current local service areas, and the local access
operations of long distance carriers. Many of the Company's actual and potential
competitors have greater financial, technical and marketing resources than the
Company.
The Company is aware that consolidation of telecommunications companies,
including mergers between certain of the ILECs, between long distance companies
and cable television companies and between long distance companies and CLECs,
and the formation of strategic alliances within the telecommunications industry,
as well as the development of new technologies, will 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, 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. This may result in more participants
than can ultimately be successful in a given market.
While strong competition currently exists in all sectors of the industry,
the Company believes that the demand for enhanced voice and data services by
business customers provides expanded opportunity for new providers such as the
Company. There can be no assurance, however, that sufficient demand will exist
for the Company's network services in its selected markets, that market prices
will not dramatically decline or the Company will be successful in executing its
strategy in time to meet new competitors, or at all.
-13-
REGULATORY ACTIVITY
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 of 1996.
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 that 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.
The Company executed interconnection agreements with many ILECs soon after
passage of the Telecommunications Act of 1996. The initial terms of those
agreements have expired or are soon expiring, and therefore the Company is in
the process of renegotiating and extending the terms of the interconnection
agreements. In certain instances, the Company has elected to arbitrate certain
disputed issues, or has elected to adopt a new interconnection agreement
based on an agreement previously executed between an ILEC and another CLEC. The
Company has completed arbitration proceedings with BellSouth before the state
commissions of Alabama, Florida, Georgia, Kentucky, North Carolina and Tennessee
and with Ameritech before the Ohio state commission. The Company recently filed
an arbitration petition with the Colorado state commission with respect to a
successor interconnection agreement with US West and also is in arbitration with
Southwestern Bell Telephone Company over certain disputed issues. Although the
arbitration decisions issued to date have been largely favorable to the Company
there can be no assurance that the Company will be able to continue to negotiate
and/or arbitrate acceptable new interconnection agreements.
On August 8, 1996, in two separate decisions, the Federal Communications
Commission (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 U.S. Court of Appeals for the Eighth Circuit (Eighth
Circuit Court), and in 1997, the Eighth Circuit Court issued a decision which
upheld certain of the FCC's rules but reversed many of the FCC's rules on other
issues, including the pricing rules.
-14-
On January 25, 1999, the United States Supreme Court (Supreme Court)
largely reversed the Eighth Circuit Court's decision and reestablished the
validity of many of the FCC's interconnection rules, including the FCC's
jurisdiction to adopt pricing guidelines under the Telecommunications Act. The
Supreme Court also upheld the FCC's "pick-and-choose" rules, which allow CLECs
to adopt individual rates, terms and conditions from agreements that an ILEC has
with other carriers. The Supreme Court did not, however, evaluate the specific
pricing methodologies adopted by the FCC, and the appellate court will further
consider those methodologies. Additionally, the Supreme Court vacated the FCC
rules defining what network elements must be unbundled and made available to the
CLECs by the ILECs. The Supreme Court held that the FCC must provide a stronger
rationale to support the degree of unbundling ordered. As a result, the FCC
conducted a new rulemaking proceeding that adopted new rules on unbundled
network elements. On November 5, 1999, the FCC issued a decision in this
rulemaking proceeding, which established a new list of unbundled network
elements that must be provided by the ILECs.
The Company believes that it is entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet traffic originated from
ILEC customers as local traffic pursuant to various interconnection agreements.
Certain of the ILECs have not paid most of the bills they have received from the
Company and have disputed substantially all of these charges based on the
argument that ISP traffic is not local traffic as defined by the various
interconnection agreements and under state and federal laws and public policies.
The resolution of these disputes has been and will continue to be based on
rulings by state public utility commissions and/or by the FCC, and/or by
negotiations between the Company and the ILECs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations, Liquidity -
Transport and Termination Charges."
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 the ILECs
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 currently must file tariffs with the FCC for domestic and international
long distance 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 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.
-15-
State Regulation
In general, state public utility commissions have regulatory jurisdiction
over the Company when Company facilities and services are used to provide local
and other intrastate telecommunications services. Under the Telecommunications
Act, state commissions continue to set regulatory requirements for providers of
local and intrastate long distance services, including quality of services
criteria. State regulators can set prices for interconnection by CLECs with the
ILEC networks and also have the authority to set prices for the provision of
unbundled network elements by the ILECs. In certain states, the state
commission has the authority to scrutinize the rates charged by CLECs for
intrastate long distance and local services. The Company's provision of local
dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state regulation. 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 regulated intrastate services, 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) to provide
competitive local services in the following states: Alabama, California,
Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky,
Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
Washington, D.C., West Virginia, and Wisconsin. Additionally, the Company holds
CPCNs (or their equivalents) to provide intrastate long distance services in the
following states: Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
Applications currently are pending for CLEC authority in Arizona, Connecticut,
Louisiana, Maryland, Michigan and New Mexico.
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, current state law prescribes the amount of such fees.
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
-16-
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.
The Company also engages in a variety of unregulated activities. Among the
unregulated activities is the provision of managed modem services.
Financing Activities
1999 Activities
On August 12, 1999, two of the Company's subsidiaries, ICG Equipment Inc.
(ICG Equipment) and NetAhead, entered into a $200.0 million senior secured
financing facility (Senior Facility) consisting of a $75.0 million term loan, a
$100.0 million term loan and a $25.0 million revolving line of credit. During
the year ended December 31, 1999, these subsidiaries borrowed $80.0 million
under the loans at interest rates ranging from LIBOR plus 3.125% to 3.5% or
9.35% to 9.67%. Quarterly repayments on the debt commence at various dates
beginning September 30, 1999 with remaining outstanding balances maturing on
June 30, 2005 for the $100.0 million term loan and the $25.0 million line of
credit and March 31, 2006 for the $75.0 million term loan. The terms of the
Senior Facility provide customary limitations on the use of proceeds, additional
indebtedness, investments, asset sales, dividends, prepayment of the Senior
Facility and other indebtedness and certain other transactions. Additionally,
ICG Services, ICG Equipment and NetAhead are subject to certain financial
covenants based on their results of operations. During 1999 and January 2000,
the credit agreement for the Senior Facility was amended to ensure that ICG
Services and its subsidiaries would remain in compliance with the financial
covenants of the Senior Facility.
Subsequent Activities
During the first quarter of 2000, ICG Services signed letters of intent
with its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.,
to obtain financing on future equipment purchases. The Company believes that
these financing agreements, if consummated, will better enable the Company to
fund its scheduled network expansion through the purchase of Lucent and Cisco
equipment. The Lucent credit agreement will provide ICG Services with up to
$250.0 million of capital which can be drawn down during the year following the
closing to purchase network equipment. Under the terms of the agreement, ICG
Services will commit to purchase a minimum of $175.0 million of equipment and
the remaining $75.0 million will be available to purchase equipment if and when
the Company obtains equity financing. The Lucent financing will provide for a
five-year repayment schedule and will require quarterly principal repayments
beginning in
-17-
June 2001. The Cisco credit facility will provide ICG Services with up to $180
million of capital lease financing with a three-year repayment term.
In February 2000, the Company announced that it had arranged to sell
approximately $750.0 (before estimated expenses and fees of $45.0 million)
million of convertible preferred stock in the Company to three investors:
affiliates of Liberty Media Corporation (Liberty), Hicks, Muse, Tate & Furst
Incorporated (Hicks Muse) and Gleacher Capital Partners (Gleacher). Under the
terms of the transaction, Liberty will invest $500.0 million, Hicks Muse will
invest $230.0 million and Gleacher will invest $20.0 million in exchange for a
total of 750,000 shares of Series A convertible preferred stock at $1,000 per
share. The preferred stock will be convertible into the Company's common stock
at a conversion rate of $28.00 per common share. The Company will also issue 10
million common stock warrants which will be exercisable at $34.00 per share. The
proceeds from this new equity investment will be used principally by the Company
to fund network expansion. It is expected that this equity financing will close
during the second quarter of 2000.
Also in February 2000, the Company and Teligent, Inc. (Teligent) agreed to
a common stock share exchange whereby the Company will purchase one million
shares of Teligent and Teligent will acquire 2,996,076 of the Company's shares.
The Company anticipates that this share exchange may create business
opportunities and improve operating efficiencies for both companies. The
pricing for each company's shares was based on the average closing price of the
shares of the respective company for the ten day period immediately prior to the
announcement of the transaction.
While the Company anticipates that the Lucent and Cisco debt financing
transactions, the preferred stock investment and the Teligent share exchange
will be consummated during the second quarter of 2000, there is no assurance
that the Company will be able to close these transactions on acceptable terms
and conditions. In the event the Company is not able to finalize one or more of
these transactions, its ability to undertake its network expansion and execute
its business plan could be materially adversely affected. See Part II,
"Liquidity and Capital Resources."
SALE OF ASSETS AND DISCONTINUANCE OF CERTAIN BUSINESSES
To better focus its efforts on its core operations, the Company has
disposed of certain assets which management believes did not complement its
overall business strategy. The Company will from time to time evaluate all of
its assets as to its core needs and, based on such analysis, may sell or
otherwise dispose of assets which management does not believe complement its
overall business strategy.
Sale of Operations of NETCOM
On January 21, 1998, the Company acquired NETCOM On-Line Communications
Services, Inc. (NETCOM), a provider of Internet connectivity and Web site
hosting services and other value-added services located in San Jose, California.
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc. (MindSpring), an ISP
located in Atlanta, Georgia. Total proceeds from the sale were $245.0 million,
consisting of $215.0 million in cash and 376,116 shares of unregistered common
stock of MindSpring, valued at approximately $79.76 per share at the time of the
transaction. Assets and liabilities sold to MindSpring included those directly
related to the domestic operations of NETCOM's Internet
-18-
dial-up, dedicated access and Web site hosting services. On March 16, 1999, the
Company sold all of the capital stock of NETCOM's international operations for
total proceeds of approximately $41.1 million. Specifically, MetroNET
Communications Corp. (MetroNET), a Canadian entity, and Providence Equity
Partners (Providence), located in Providence, Rhode Island, together purchased
the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9
million in cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Limited, NETCOM's subsidiary in the United Kingdom, for
approximately $12.2 million in cash. The Company realized a combined gain on the
NETCOM transactions of approximately $195.5 million, net of income taxes of
approximately $2.0 million. The Company's consolidated financial statements
reflect the operations of NETCOM as discontinued for all periods presented.
In conjunction with the sale to MindSpring, the legal name of the Company's
NETCOM subsidiary was changed to ICG NetAhead, Inc. (NetAhead). NetAhead
retained the domestic Internet backbone assets formerly owned by NETCOM which as
of December 31, 1999 included 227 POPs serving approximately 700 cities
nationwide. Commencing in the first quarter of 1999, NetAhead began to utilize
these retained network operating assets to provide wholesale Internet access and
enhanced network services to MindSpring. On February 17, 1999, the Company
entered into an agreement to provide IRAS, dedicated internet access and toll
free service to MindSpring for a one-year period. Under the Agreement, the
Company provides MindSpring with IRAS ports at a fixed fee in exchange for a
minimum of $27.0 million. MindSpring utilizes the capacity under the RAS ports
to provide Internet access to MindSpring's dial-up services customers. In
addition, under this agreement the Company receives for a one-year period 50% of
the gross revenue earned by MindSpring from the dedicated access customers
formerly owned by NETCOM. The MindSpring contract is currently operating under
a 90-day extension that ends in May 2000, and discussions are on going between
the Company and MindSpring to extend the business relationship beyond May 2000.
Discontinuance of Network Services and Satellite Services Businesses.
On July 15, 1999, the Company's board of directors adopted a formal plan to
dispose of the Company's wholly-owned subsidiaries, ICG Fiber Optic
Technologies, Inc. and Fiber Optic Technologies of the Northwest, Inc.
(collectively, Network Services) and ICG Satellite Services, Inc. and Maritime
Telecommunications Network, Inc. (collectively, Satellite Services), through the
sales of such businesses for cash proceeds. On October 22, 1999, the Company
completed the sale of all the capital stock of Network Services to an unrelated
third party for total proceeds of $23.9 million. On November 30, 1999, the
Company also completed the sale of all of the capital stock of Satellite
Services to an unrelated third party for cash proceeds of $98.1 million. The
Company recorded a loss on the disposal of Network Services of $10.9 million.
The Company recorded a gain on the disposal of Satellite Services of $48.7
million. For the years ended December 31, 1997, 1998 and 1999, Network Services
and Satellite Services combined reported revenue of $99.3 million, $94.3 million
and $104.2 million, respectively, and EBITDA losses (before non-recurring and
non-cash charges) of $1.3 million for the year ended December 31, 1997 and
EBITDA earnings (before non-recurring and non-cash charges) of $1.3 million and
$13.5 million for the years ended December 31, 1998 and 1999, respectively. The
-19-
Company's consolidated financial statements reflect the operations of Network
Services and Satellite Services as discontinued for all periods presented.
Discontinuance of Operations of Zycom.
Due primarily to the loss of a major customer, which generated a
significant obligation under a volume discount agreement with its call transport
provider, the board of directors of Zycom Corporation (Zycom), a 70%-owned
subsidiary of the Company, approved a plan on August 25, 1998 to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom completed
the transfer of all customer traffic to other providers and on January 4, 1999,
the Company completed the sale of the remainder of Zycom's long-lived operating
assets to an unrelated third party for total proceeds of $0.2 million. As
Zycom's assets were recorded at estimated fair market value at December 31,
1998, no gain or loss was recorded on the sale during the year ended December
31, 1999. For the years ended December 31, 1997 and 1998, Zycom reported
revenue of $28.3 million and $17.0 million, respectively, and EBITDA losses
(before non-recurring and non-cash charges) of $2.4 million and $2.9 million,
respectively. The Company reported no income or loss from operations for the
year ended December 31, 1999. The Company's consolidated financial statements
reflect the operations of Zycom as discontinued for all periods presented.
EMPLOYEES
As of December 31, 1999, the Company employed a total of approximately
2,853 individuals on a full-time basis. None of the Company's employees is
represented by a union. The Company has not experienced any strikes or work
stoppages and believes that relations with its employees are satisfactory.
The Company believes that its ability to successfully implement its
business strategy will depend on its continued ability to attract and retain
qualified employees, which in the current competitive environment is becoming
increasingly difficult. The Company expects to continue to add employees to the
organization, particularly in the areas of operations and sales. The Company
expects to employ an additional 300-400 employees during the next year. In
order to attract and retain highly qualified employees, the Company believes
that it is imperative to maintain a competitive compensation program. Included
in the Company's compensation program are non-cash benefit programs, including a
401(k) program, stock option grants and a bonus package which is based on both
individual and Company performance. The Company believes that it generally
offers compensation packages which are comparable with those of its competitors
who are similar in size and capital structure. Due to the existing labor
market, qualified personnel are difficult to recruit and retain and the Company
cannot guarantee that it will be able to attract and retain the personnel
necessary to implement its business strategy.
TRADEMARKS AND TRADE NAMES
The Company filed United States federal trademark applications for the
marks "ICG", "ICG Communications", "ICG Communications, Inc.", "ICG Telecom
Group, Inc.", "NetAhead", "ICG NetAhead" and "ICG NetAhead, Inc.". The Company
also filed a separate United States federal trademark application for the
diamond logo used in conjunction with ICG
-20-
on March 20, 1997. The trademark "ICG Communications, Inc." was registered on
December 7, 1999. The other applications are pending and the Company has no
assurance that they will be granted. In addition, the company filed United
States service mark applications for "Let's Talk About Your Business" on March
24, 1998 and "Hello, ICG" on March 4, 1999. These applications are pending and
the Company has no assurance that they will be granted. The domain name
icgcommunications.com was registered March 14, 1998.
ITEM 2. PROPERTIES
----------
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites and POPs. 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 Englewood, Colorado that
houses a portion of the Company's Telecommunications Services business.
As of December 31, 1999, the Company leased approximately 230,419 square
feet of office and operations space in the Denver metropolitan area and
approximately 1,531,498 square feet in other areas of the United States outside
of Denver. Further, NetAhead leased an additional 227,472 square feet for its
POP sites at over 270 locations across the country.
Effective January 1, 1999, ICG Services purchased the Company's corporate
headquarters building, land and improvements (collectively, the Corporate
Headquarters) for approximately $43.4 million. The Corporate Headquarters is
approximately 239,749 square feet. ICG Services financed the purchase primarily
through a mortgage granted in favor of an affiliate of the seller, which
encumbers the Corporate Headquarters. Effective May 1, 1999, the Corporate
Headquarters was transferred to ICG 161, L.P., a special purpose limited
partnership owned 99% by a subsidiary of ICG Services and 1% by an affiliate of
the mortgagee and seller, and ICG 161, L.P. assumed the loan secured by the
mortgage. The partnership agreement for ICG 161, L.P. grants to the one-percent
partner an option to acquire all of ICG Service's subsidiary's interest in the
partnership for a purchase price of $43.1 million, which option is exercisable
from January 1, 2004 through January 31, 2012.
Effective December 10, 1999, a subsidiary of ICG Services acquired an 8.36
acre parcel of vacant ground located adjacent to the Corporate Headquarters for
approximately $3.3 million. The Company plans to use this parcel in connection
with the expansion of its Corporate Headquarters.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On April 4, 1997, certain shareholders of Zycom, a discontinued subsidiary
of the Company, 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 against the
Company, Zycom and certain of their subsidiaries. The complaint, which has been
amended numerous times, alleges that the Company and certain of its subsidiaries
breached certain fiduciary duties owed to the plaintiffs. The plaintiffs were
denied
-21-
class certification by the trial court and this decision has been upheld
on appeal. A trial date has been set for May 2000. The Company is vigorously
preparing to defend against the plaintiffs' claims at trial. While it is not
possible to predict the outcome of litigation, management believes this
proceeding will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
In August 1999, the Company commenced litigation against International
Business Machines (IBM) in the United States District Court for District of
Colorado to recover approximately $19.0 million it paid for customization of
IBM's Integrated Customer Management System (ICMS). The Company has asserted
claims against IBM for breach of contract, unjust enrichment and breach of
warranty. IBM has asserted a counterclaim in the amount of $2.6 million for
non-payment of invoices for work it performed on the ICMS project. While it is
not possible to predict the outcome of this litigation, management believes that
it 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 that 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. The Company
is not involved in any administrative or judicial proceedings relative to an
environmental matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-22-
PART II
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 (the
Class A Shares) ceased trading on the AMEX at the close of trading on August 2,
1996. The Class A Shares, which were listed on the Vancouver Stock Exchange
(VSE) under the symbol "IHC.A," ceased trading on the VSE at the close of
trading on March 12, 1997. During 1998, all of the remaining Class A Shares
outstanding held by third parties were exchanged into shares of ICG Common
Stock.
The following table sets forth the high and low sales prices of ICG Common
Stock as reported on Nasdaq for the quarterly periods indicated:
Nasdaq National Market
---------------------------------------
High Low
----------------- -----------------
1998:
First Quarter $44.25 $24.38
Second Quarter 38.88 28.50
Third Quarter 36.63 15.50
Fourth Quarter 26.56 11.13
1999:
First Quarter $24.13 $15.25
Second Quarter 28.56 16.81
Third Quarter 28.13 15.00
Fourth Quarter 21.94 13.94
2000:
Through March 27, 2000 $39.25 $16.31
See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of ICG Common Stock. On March 27, 2000, there were
257 holders of record.
The Company has never declared or paid dividends on ICG Common Stock and
does not intend to pay cash dividends on ICG Common Stock in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on ICG Common Stock is effectively
-23-
prohibited by the restrictions contained in the Company's indentures relating to
its senior indebtedness and in the Second Amended and Restated Articles of
Incorporation of Holdings, which prohibit Holdings from making any material
payment to the Company. Certain of the Company's debt facilities also contain
covenants that restrict the Company's ability to pay cash dividends.
In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Senior Discount Notes
due 2008 (the 9 7/8% Notes). Morgan Stanley & Co. Incorporated acted as
placement agent for the offering and received placement fees of approximately
$7.5 million. In February 1998, ICG Services sold $490.0 million principal
amount at maturity ($300.6 million original issue price) of 10% Senior Discount
Notes due 2008 (the 10% Notes). Morgan Stanley & Co. Incorporated acted as
placement agent for the offering and received placement fees of approximately
$9.0 million.
In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company (ICG Funding),
completed a private placement of $132.3 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the 6 3/4%
Preferred Securities). The 6 3/4% Preferred Securities are mandatorily
redeemable November 15, 2009 at the liquidation preference of $50.00 per
security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred
Securities are cumulative at the rate of 6 3/4% per annum and are payable in
cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into ICG Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of ICG Common Stock equals or exceeds the
exchange price by 150%, for at least 20 days of any consecutive 30-day trading
period, through November 15, 2000. Morgan Stanley & Co. Incorporated and
Deutsche Morgan Grenfell Inc. acted as placement agents for the offering and
received aggregate placement fees of approximately $4.0 million.
In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007
(the 11 5/8% Notes) and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the 14% Preferred Stock), having a liquidation preference of
$1,000 per share. These securities are guaranteed by the Company on a full and
unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $7.5 million.
Each of the foregoing offerings was exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. The securities sold in each of the
foregoing offerings were subsequently registered under the Securities Act.
In October 1997, the Company issued 687,221 shares of ICG Common Stock (the
CBG Shares) to certain shareholders of Communications Buying Group, Inc. (CBG),
an Ohio based local exchange and Centrex reseller, in connection with the
acquisition of CBG for a purchase price of approximately $16.0 million. The
sale of the CBG Shares was exempt from registration
-24-
under Section 4(2) of the Securities Act because the offers and sales were made
to a limited number of investors in a private transaction. Resale of the CBG
Shares was subsequently registered on a Form S-3 registration statement which
was declared effective on October 31, 1997.
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice Network Services, L.L.C.
(DataChoice), valued at approximately $32.88 per share on the date of the sale
(the DataChoice Shares). The sale of the DataChoice Shares was exempt from
registration under Section 4(2) of the Securities Act because the offers and
sales were made to a limited number of investors in a private transaction.
Resale of the DataChoice Shares was subsequently registered on a Form S-3
registration statement which was declared effective on April 2, 1999.
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNet Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, NikoNet), valued at
approximately $30.03 per share on the date of the sale (the NikoNet Shares).
The sale of the NikoNet Shares was exempt from registration under Section 4(2)
of the Securities Act because the offer and sales were made to a limited number
of investors in a private transaction.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected financial data for the fiscal years ended September 30, 1995
and 1996, the three months ended December 31, 1996 and the years ended December
31, 1997, 1998 and 1999 has been derived from the audited consolidated financial
statements of the Company. The information set forth below should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto included elsewhere in this Annual Report. The Company's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another. The Company's consolidated financial statements reflect the operations
of Zycom, NETCOM, Network Services and Satellite Services as discontinued for
all periods presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-25-
Three
Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
-------------------------------------------------------------------------------------------------------
1995 1996 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Statement of Operations
Data:
Revenue (1) $ 30,906 72,731 27,307 149,358 303,317 479,226
Operating costs and expenses:
Operating costs 20,924 65,436 27,018 147,338 187,260 238,927
Selling, general and
administrative expenses 32,671 45,150 16,895 121,884 158,153 239,756
Depreciation and amortization 10,399 24,041 8,266 49,836 91,927 174,239
Provision for impairment of
long-lived assets 2,000 9,800 - 5,169 - 31,815
Restructuring costs - - - - 1,786 -
Other, net 241 1,030 (805) 292 4,877 387
-------- ------- -------- ------- ------ -------
Total operating costs
and expenses 66,235 145,457 51,374 324,519 444,003 685,124
Operating loss (35,329) (72,726) (24,067) (175,161) (140,686) (205,898)
Interest expense (23,190) (85,299) (24,441) (117,521) (170,015) (212,420)
Other income, net 3,398 14,182 5,885 21,404 27,283 13,778
-------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes, preferred
dividends, share of losses,
extraordinary gain and
cumulative effect of change in
accounting (55,121) (143,843) (42,623) (271,278) (283,418) (404,540)
Income tax benefit (expense) - 5,305 (1) - (90) (25)
Accretion and preferred dividends
on preferred securities of
subsidiaries net of minority
interest in share of losses (1,764) (27,598) (5,529) (39,019) (55,183) (61,897)
Share of losses of joint venture (741) (1,814) - - - -
--------------------------------------------------------------------------------------------------
Loss from continuing operations
before extraordinary gain and
cumulative effect of change in
accounting (57,626) (167,950) (48,153) (310,297) (338,691) (466,462)
Net (loss) income from
discontinued operations (33,086) (56,969) (13,161) (50,438) (79,354) 36,789
Extraordinary gain on sales of
operations of NETCOM - - - - - 195,511
Cumulative effect of change in
accounting (1) - (3,453) - - - -
-------- ------- -------- ------- ------ -------
Net loss $ (90,712) (228,372) (61,314) (360,735) (418,045) (234,162)
==================================================================================================
Loss per share from continuing
operations - basic and diluted $(1.87) (4.55) (1.15) (7.30) (7.49) (9.90)
===================================================================================================
Net loss per share - basic and
diluted $(2.94) (6.19) (1.47) (8.49) (9.25) (4.97)
===================================================================================================
Weighted average number of
shares outstanding - basic
and diluted (2) 30,808 36,875 41,760 42,508 45,194 47,116
===================================================================================================
(Continued)
-26-
Three
Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1996 1996 1997 1998 1999
----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Other Data:
Net cash (used) provided by
operating activities $ (41,947) (29,375) 200 (106,761) (100,060) 21,083
Net cash used by investing
activities (65,772) (137,148) (79,621) (422,585) (343,561) (186,971)
Net cash provided (used) by
financing activities 377,772 365,272 (1,741) 308,804 525,601 67,018
EBITDA (3) (24,930) (48,685) (15,801) (125,325) (48,759) (31,659)
EBITDA (before non-recurring and
non-cash charges) (3) (22,689) (37,855) (16,606) (119,864) (42,096) 543
Capital expenditures of
continuing operations (4) 82,623 162,510 67,515 261,318 356,036 735,233
Capital expenditures of
discontinued operations (4) 49,714 68,789 11,336 25,533 38,891 12,264
Balance Sheet Data:
Cash, cash equivalents and
short-term investments
available for sale $ 268,688 458,640 392,921 232,855 262,307 125,507
Net current assets (liabilities) of
discontinued operations (5) 135,419 62,173 68,950 58,586 66 (529)
Working capital (deficit) 381,006 499,810 415,247 263,674 294,934 (67,761)
Property and equipment, net 169,907 308,615 374,924 603,988 908,058 1,525,680
Net non-current assets of
discontinued operations (5) 108,604 149,378 154,481 128,206 102,774 -
Total assets 737,099 1,066,224 1,071,699 1,205,331 1,589,647 2,020,621
Current portion oflong-term debt and
capital lease obligations 17,509 7,661 24,877 7,096 4,892 8,886
Long-term debt and capital lease
obligations, less current
portion 397,168 739,308 761,135 957,508 1,661,944 1,969,249
Redeemable preferred
securities of subsidiaries 24,336 153,318 159,120 420,171 466,352 519,323
Common stock and additional paid
-in capital 420,516 504,851 508,182 534,290 577,940 599,760
Accumulated deficit (152,487) (380,859) (430,682) (791,417) (1,209,462) (1,443,624)
Stockholders' equity (deficit) 268,001 125,203 78,711 (256,983) (631,177) (843,864)
(1) During the fiscal year ended September 30, 1996, the Company changed its
method of accounting for long-term telecom services contracts to recognize
revenue as services are provided. Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) Weighted average number of shares outstanding for the fiscal year ended
September 30, 1995 represents Holdings-Canada common shares outstanding.
Weighted average number of shares outstanding for the fiscal year ended
September 30, 1996, the three months ended December 31, 1996, and the years
ended December 31, 1997 and 1998 represents Holdings-Canada common shares
outstanding for the period from October 1, 1995 through August 2, 1996, and
represents ICG Common Stock and HoldingsCanada Class A Shares (not owned by
the Company) outstanding for the periods from August 5, 1996 through
December 31, 1998. During the year ended December 31, 1998, all of the
remaining Class A Shares outstanding held by third parties were exchanged
into shares of ICG Common Stock and, accordingly, weighted average number
of shares outstanding for the year ended December 31, 1999 represents ICG
Common Stock only.
(3) EBITDA consists of loss from continuing operations before interest, income
taxes, depreciation and amortization, other expense, net and accretion and
preferred dividends on preferred securities of subsidiaries, net of
minority interest in share of losses, or, operating loss plus depreciation
and amortization. EBITDA (before non-recurring and non-cash charges)
represents EBITDA before certain nonrecurring charges such as the provision
for impairment of long-lived assets, restructuring costs and other, net
operating costs and expenses, including deferred compensation and net loss
(gain) on
-27-
disposal of long-lived assets. EBITDA and EBITDA (before non-recurring
and non-cash charges) are provided because they are measures commonly used
in the telecommunications industry. EBITDA and EBITDA (before non-recurring
and non-cash charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with generally accepted accounting
principles (GAAP) for the periods indicated. EBITDA and EBITDA (before non-
recurring and non-cash charges) are not measurements under GAAP and are not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities as
determined using GAAP are also presented in Other Data.
(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes payments for
construction of the Company's corporate headquarters and corporate
headquarters assets acquired through the issuance of long-term debt.
Capital expenditures of discontinued operations include the capital
expenditures of Zycom, NETCOM, Network Services and Satellite Services
combined for all periods presented.
(5) Net non-current assets of discontinued operations and net current assets
(liabilities) of discontinued operations represents the assets and
liabilities of Zycom, NETCOM, Network Services and Satellite Services
combined for periods presented prior to the respective dates of each sale.
-28-
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, the ability of
the Company to obtain adequate financing to fund expansion, the dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and enhanced telephony and network services, the
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the years ended
December 31, 1997, 1998 and 1999 have been derived from the Company's audited
consolidated financial statements included elsewhere herein. The Company's
consolidated financial statements reflect the operations of Zycom, NETCOM,
Network Services and Satellite Services as discontinued for all periods
presented. All dollar amounts are in U.S. dollars.
Company Overview
ICG Communications, Inc. (ICG or the Company) is a facilities-based
communications provider and, based on revenue and customer lines in service, one
of the largest competitive communications companies in the United States. The
Company primarily offers voice and data services directly to small- to medium-
sized business customers and offers network facilities and data management to
ISP customers. In addition, the Company offers special access and switched
access services to long-distance companies and other customers.
The Company began marketing and selling local dial-tone services in major
metropolitan areas in early 1997 subsequent to passage of the Telecommunications
Act, which permitted competitive interstate and intrastate telephone services
including local dial tone. In 1999, the Company offered competitive telephone
services in five regions within the United States. In early 1998, the Company
acquired NETCOM On-Line Communication Services, Inc. (NETCOM), which provided
the Company with a Tier 1 national data network that enabled the Company to
launch its business of providing network infrastructure to ISPs. By year-end
1999, the company had 730,975 customer lines and data access ports in service,
over 12,000 business customers and approximately 500 ISP customers.
As of December 31, 1999, the Company had 496,530 data access ports in
service for its ISP customers. The Company provides data access and transport
services to ISPs that in many cases rely on the Company to provide network
ownership and management. The Company's current product offerings to the ISP
market include dial-up products such as primary rate interface (PRI), remote
access service (RAS) and Internet remote access service (IRAS), as well as
broadband access services including T-1 and T-3 connections and DSL.
As of December 31, 1999, the Company had 234,445 business customer lines in
service. Voice and data communication services offered to business customers
include local, long distance and enhanced telephony services through its
Internet protocol, circuit switch and
-29-
regional fiber optic networks. In regional markets, the Company is a cost-
efficient alternative to the area's incumbent local telephone company for
businesses.
The Company provides interexchange services to long-distance carriers and
other customers including "special access" services that connect end-users to
long-distance carrier's facilities, connect a long-distance carrier's facilities
to the local telephone company central office and connect facilities of the same
or different long-distance carrier.
In 1999, the Company realized significant growth as demonstrated by a 58
percent increase in revenue over 1998 and a more than doubling of the number of
lines in service compared to December 31, 1998. In connection with its high
level of growth, the Company took steps to streamline its business and focus on
its core operations.
To better focus its efforts on its core business operations, the Company
disposed of certain assets which management believes do not complement its
overall business strategy. During the year ended December 31, 1999, the Company
sold non-core assets and related securities for net cash proceeds of
approximately $405 million, including the sale of the Company's retail ISP
customer business and its Network Services and Satellite Services divisions (see
Part IV, "Discontinued Operations and Divestitures," note 3). The Company also
centralized its provisioning process with two new provisioning centers that
replaced 30 regional centers and added new, comprehensive operating support
systems (OSS) from Telcordia for provisioning service and from Saville for
improved customer billing.
The Company owns and operates a Tier 1 nationwide data network, which at
December 31, 1999, included public and private peering locations, 227 POPs, 31
voice switches, 16 frame relay switches and high-performance routers
connecting a backbone of 24 ATM switches and 18,000 miles of leased long-haul
fiber lines. In addition, at year-end the Company had 4,596 miles of local fiber
and connections to 8,078 buildings.
The Company's business continues to grow as a result of increased Internet
demand, new technologies and increased market share for customers traditionally
served by incumbent telephone companies. The Company's business plan calls for
accelerated network expansion in 2000 into 22 new major metropolitan areas by
year-end. The Company will also invest in developing and delivering new
products and services to complete its portfolio of offerings to each market
segment.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on equipment, sales,
marketing, customer service, engineering and support personnel prior to the
generation of corresponding revenue. EBITDA losses, EBITDA (before non-recurring
and non-cash charges) losses and operating and net losses have generally
increased immediately preceding and during periods of relatively rapid network
expansion and development of new services. Since the quarter ended June 30,
1996, EBITDA losses (before non-recurring and non-cash charges) have improved
for each consecutive quarter, through and including the quarter ended June 30,
1999 for which the Company reported positive EBITDA (before non-recurring and
non-cash charges) of $15.2 million. Due to the Company's decision to suspend the
revenue recognition for certain elements of transport and termination services
provided to ILECs and a nonrecurring provision for certain of the Company's
accounts
-30-
receivable (see "Liquidity and Capital Resources - Transport and Termination
Charges"), the Company's EBITDA (before non-recurring and non-cash charges) for
the quarter ended September 30, 1999 was a loss of $45.7 million. For the
quarter ended December 31, 1999, the Company's EBITDA (before non-recurring and
non-cash charges) improved to $23.1 million. Operating costs and operating loss
in the fourth quarter were lower and therefore EBITDA and EBITDA (before non-
recurring and non-cash charges) were higher due to an in-depth management review
of network costs that was conducted during the fourth quarter of 1999 following
the centralization of network functions. The analysis identified $9.5 million in
costs from the first nine months of 1999 related to capital activities under the
existing Company capitalization policy.
Results of Operations
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating loss,
EBITDA and EBITDA (before non-recurring and non-cash charges) as a percentage of
the Company's revenue.
Years Ended December 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------------------------------------------------------------
$ % $ % $ %
------- ---------- ----------- ---------- ------- -------
(Dollars in thousands)
Statement of Operations Data:
Revenue 149,358 100 303,317 100 479,226 100
Operating costs 147,338 99 187,260 62 238,927 50
Selling, general and administrative 121,884 82 158,153 52 239,756 50
Depreciation and amortization 49,836 33 91,927 30 174,239 36
Provision for impairment of long-lived assets 5,169 3 - - 31,815 7
Restructuring costs - - 1,786 - - -
Other, net 292 - 4,877 2 387 -
------- ---------- ----------- ---------- ------- -------
Operating loss (175,161) (117) (140,686) (46) (205,898) (43)
Other Data:
Net cash (used) provided by operating activities (106,761) (100,060) 21,083
Net cash used by investing activities (422,585) (343,561) (186,971)
Net cash provided by financing activities 308,804 525,601 67,018
EBITDA (1) (125,325) (84) (48,759) (16) (31,659) (7)
EBITDA (before non-recurring and non-cash
charges) (1) (119,864) (80) (42,096) (14) 543 -
Capital expenditures of continuing operations (2) 261,318 356,036 735,233
Capital expenditures of discontinued operations 25,533 38,891 12,264
(2)
(1) See note 3 under "Selected Financial Data" for the definitions of EBITDA and
EBITDA (before non-recurring and non-cash charges).
(2) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
-31-
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Revenue increased $175.9 million, or 58%, from $303.3 million for the year
ended December 31, 1998 to $479.2 million for the year ended December 31, 1999.
Local services revenue increased from $159.2 million, for the year ended
December 31, 1998 to $299.9 million, for the year ended December 31, 1999
increasing from 52% to 63% of total revenue respectively. The increase in local
services revenue is primarily due to an increase in the number of customer lines
in service from 354,482 lines at December 31, 1998 to 730,975 lines at December
31, 1999. In addition, local access revenue includes revenue of approximately
$58.3 million and $124.1 million for the years ended December 31, 1998 and 1999,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic pursuant to various interconnection agreements. The
Company ceased recording revenue for tandem and transport reciprocal
compensation effective June 30, 1999. These agreements are currently under
renegotiation or are subject to renegotiation over the next several months.
While management believes that these agreements will be replaced by agreements
offering the Company some form of compensation for traffic, the renegotiated
agreements may reflect rates for reciprocal compensation, which are lower than
the rates under the current contracts. (See "Liquidity - Transport and
Termination Charges.") Special access revenue increased from $74.5 million, or
25% of revenue, for the year ended December 31, 1998 to $113.9 million, or 24%
of revenue, for the year ended December 31, 1999, due to increased sales and
$18.1 million of revenue recognized during the year ended December 31, 1999
under the Company's fiber optic lease agreement with a major interexchange
carrier. The Company expects to record a minimum of approximately $11.0 million
in additional revenue under this agreement during the first half of 2000.
Switched access (terminating long distance) revenue decreased to $46.7 million
for the year ended December 31, 1999, compared to $49.0 million for the year
ended December 31, 1998. The Company has raised prices on its wholesale switched
services product in order to improve margins. Revenue from long distance
services was $20.6 million and $18.7 million for years ended December 31, 1998
and 1999, respectively. The Company's long distance revenue for the year ended
December 31, 1999 was impacted by planned attrition of resale access lines which
had high long distance service penetration rates. Revenue from data services did
not generate a material portion of total revenue during either period.
Operating costs
Operating costs, which consist solely of operating costs from
telecommunications services, increased $51.6 million, or 28%, from $187.3
million for the year ended December 31, 1998 to $238.9 million for the year
ended December 31, 1999. Operating costs decreased as a percentage of revenue
from 62% for the year ended December 31, 1998 to 50% for the year ended December
31, 1999. Operating costs consist of payments to ILECs for the use of network
facilities to support local special and switched access services, network
operating costs, right of way fees and other costs. The increase in operating
costs in absolute dollars is attributable to the increase in volume of local and
special access services and the increase in network operating costs which
include engineering and operations personnel dedicated to the provision of local
exchange services. The Company expects the ratio of operating costs to revenue
will continue to
-32-
improve as the Company provides a greater volume of higher margin services,
principally RAS and local exchange services, carries more traffic on its own
facilities rather than the ILEC facilities and obtains the right to use
unbundled ILEC facilities on satisfactory terms, any or all of which may not
occur.
Selling, general and administrative expenses
Total selling, general and administrative (SG&A) expenses increased $81.6
million, or 52%, from $158.2 million for the year ended December 31, 1998 to
$239.8 million for the year ended December 31, 1999. Total SG&A expenses
decreased as a percentage of revenue from 52% for the year ended December 31,
1998 to 50% for the year ended December 31, 1999. SG&A expenses related to the
Company's communication services (Telecom Services) increased from $137.3
million, or 45% of revenue, for the year ended December 31, 1998 to $210.5
million, or 44% of revenue, for the year ended December 31, 1999. The increase
in absolute dollars is principally due to a provision of approximately $45
million recorded during the year ended December 31, 1999 for accounts receivable
related to certain elements of transport and termination services provided to
ILECs recorded in periods prior to June 30, 1999, which the Company believes may
be uncollectible. (See "Liquidity Transport and Termination Charges.") As the
Company benefits from the revenue generated by newly developed services
requiring substantial administrative and marketing expense prior to initial
service offerings, principally local exchange services, Telecom Services has
experienced declining SG&A expenses as a percentage of revenue, which more than
offset the effect of the provision for accounts receivable recorded during the
year ended December 31, 1999. From time to time, the Company will experience
increases in SG&A expenses as the Company prepares for offerings of newly
developed services, such as RAS. Corporate Services SG&A expenses increased $8.4
million, from $20.9 million for the year ended December 31, 1998 to $29.3
million for the year ended December 31, 1999, primarily due to an increase in
the number of employees necessary to support the Company's expanding operations.
Depreciation and amortization
Depreciation and amortization increased $82.3 million, or 90%, for the year
ended December 31, 1999, compared to the year ended December 31, 1998, primarily
due to increased investment in depreciable assets resulting from the continued
expansion of the Company's networks and services as well as a reduction in the
overall weighted-average useful life of depreciable assets outstanding. In
addition, amortization increased due to goodwill recorded in conjunction with
the acquisition of CSW/ICG ChoiceCom, L.P. (ChoiceCom) completed on December 31,
1998. The Company expects that depreciation and amortization will continue to
increase as the Company continues to invest in the expansion and upgrade of its
regional fiber and nationwide data networks.
Provision for impairment of long-lived assets
For the year ended December 31, 1999, provision for impairment of long-
lived assets of $31.8 million relates to the impairment of software and other
capitalized costs associated with Telecom Services' billing and provisioning
system projects under development. The provision for impairment of long-lived
assets was based on management's decision to abandon the billing
-33-
and provisioning systems under development and to select new vendors for these
systems, which vendors are expected to provide the Company with billing and
provisioning solutions with improved functionality and earlier delivery dates at
lower costs than what was proposed by the former vendors. Provision for
impairment of long-lived assets was recorded based on management's estimate of
the net realizable value of the Company's assets at December 31, 1999.
Restructuring costs
For the year ended December 31, 1998, restructuring costs of $1.8 million
include $0.3 million in costs, primarily severance costs, related to the
facility closure of a subsidiary of NikoNet, Inc. (NikoNet) and $1.5 million
related to the combined restructuring of Telecom Services and Corporate
Services, designed to support the Company's increased strategic focus on its ISP
customer base, as well as to improve the efficiency of operations and general
and administrative support functions. Restructuring costs under this plan
include severance and other employee benefit costs.
Other, net
Other, net operating costs and expenses decreased from $4.9 million for the
year ended December 31, 1998 to $0.4 million for the year ended December 31,
1999. Other, net operating costs and expenses for the year ended December 31,
1999 consists of deferred compensation expense of $1.3 million related to the
Company's deferred compensation arrangement with its chief executive officer,
offset by a net gain on disposal of miscellaneous long-lived assets of $0.9
million. Other, net operating costs and expenses for the year ended December
31, 1998 relates to the write-off of certain installation costs of disconnected
special access customers of $0.5 million, the write-off of certain costs
associated with an abandoned operating support system project of $0.8 million
and general disposal of furniture, fixtures and office equipment of $3.6
million.
Interest expense
Interest expense increased $42.4 million, from $170.0 million for the year
ended December 31, 1998 to $212.4 million for the year ended December 31, 1999,
which includes $197.2 million of non-cash interest. The Company's interest
expense increased, and will continue to increase, because the principal amount
of its indebtedness increases until the Company's fixed rate senior indebtedness
begins to pay interest in cash, beginning in 2001. Additionally, interest
expense increased due to the increase in long-term debt associated with the
Company's purchase of the corporate headquarters, effective January 1, 1999, and
the senior secured financing facility (Senior Facility) completed in August
1999.
Other income, net, including realized gains and losses on marketable trading
securities
Other income, net decreased $13.5 million from $27.3 million to $13.8
million from the year ended December 31, 1998 to the year ended December 31,
1999, respectively. The decrease is primarily due to a decrease in interest
income of $12.1 million from $28.4 million for the year ended December 31, 1998
to $16.3 million for the year ended December 31, 1999. The decrease is
attributable to the decrease in cash, cash equivalents and short-term
investments as the Company funds operating losses and continues to invest
available cash balances in
-34-
telecommunications equipment and other assets. Additionally, other income, net
decreased due to an increase in other expenses of $1.4 million from $1.1 million
net expense for the year ended December 31, 1998 to $2.5 million net expense for
the year ended December 31, 1999. Other expenses primarily consist of litigation
settlement costs offset by a gain on the sale of the common stock of MindSpring
for the year ended December 31, 1999. For the year ended December 31, 1998,
other expenses primarily consist of litigation settlement costs.
Accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses increased $6.7 million, from $55.2
million for the year ended December 31, 1998 to $61.9 million for the year ended
December 31, 1999. The increase is due primarily to the periodic payment of
dividends on the 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008
(the 14% Preferred Stock) and the 14 1/4% Exchangeable Preferred Stock
Mandatorily Redeemable 2009 (the 14 1/4% Preferred Stock) in additional shares
of 14% Preferred Stock and 14 1/4% Preferred Stock. Accretion and preferred
dividends on preferred securities of subsidiaries, net of minority interest in
share of losses recorded during the year ended December 31, 1999 includes the
accretion of issuance costs of $1.3 million and the accrual of the preferred
securities dividends of $60.6 million associated with the 6 3/4% Exchangeable
Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the
6 3/4% Preferred Securities), the 14% Preferred Stock and the 14 1/4% Preferred
Stock.
Loss from continuing operations
Loss from continuing operations increased $127.8 million, or 38%, from
$338.7 million for the year ended December 31, 1998 to $466.5 million for the
year ended December 31, 1999 due to the increases in operating costs, SG&A
expenses, depreciation and amortization, provision for impairment of long-lived
assets and interest expense, and a decrease in interest income, offset by an
increase in revenue, as noted above.
Net (loss) income from discontinued operations
Net (loss) income from discontinued operations improved to $116.2 million
from a $79.4 million net loss for the year ended December 31, 1998 to $36.8
million net income for the year ended December 31, 1999. Net loss from
discontinued operations for the year ended December 31, 1998 consists of the
combined net losses of Zycom, NETCOM, Network Services and Satellite Services.
Net income from discontinued operations for the year ended December 31, 1999
consists of the combined net losses of Network Services and net income of
Satellite Services. Zycom terminated its normal operations on October 22, 1998
and, accordingly, the Company reported no loss from discontinued operations of
Zycom for the year ended December 31, 1999. Since the Company expected to
report a gain on the disposition of NETCOM, the Company deferred the net losses
from operations of NETCOM from November 3, 1998 (the date on which the Company's
board of directors adopted the formal plan to dispose of the operations of
NETCOM) through the dates of the sales and, accordingly, the Company reported no
loss from discontinued operations of NETCOM prior to or subsequent to the dates
of the sales for the year ended December 31, 1999. Additionally, net income
from discontinued operations for the
-35-
year ended December 31, 1999 includes the gain on the sale of Satellite Services
of $48.7 million, offset by the loss on the sale of Network Services of $10.9
million. Net loss from discontinued operations for the year ended December 31,
1998 includes an estimated loss on the disposal of Zycom of $1.8 million.
Extraordinary gain on sales of operations of NETCOM
The Company reported an extraordinary gain on the sales of operations of
NETCOM during the year ended December 31, 1999 of $195.5 million, net of income
taxes of $2.0 million. Offsetting the gain on the sales is approximately $16.6
million of net losses of operations of NETCOM from November 3, 1998 through the
dates of the sales and $34.7 million of deferred sales proceeds from the sale of
certain of the domestic operating assets and liabilities of NETCOM to
MindSpring. The deferred proceeds were recognized on a periodic basis over the
term of the Company's network capacity agreement with MindSpring.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Revenue increased $153.9 million, or 103%, from $149.4 million for the year
ended December 31, 1997 to $303.3 million for the year ended December 31, 1998.
Local services revenue increased from $21.3 million, or 14% of revenue, for the
year ended December 31, 1997 to $159.2 million, or 52% of revenue, for the year
ended December 31, 1998, primarily due to an increase in local access lines from
141,035 lines in service at December 31, 1997 to 354,482 lines in service at
December 31, 1998. In addition, local access revenue includes revenue of
approximately $4.9 million and $58.3 million for the years ended December 31,
1997 and 1998, respectively, for reciprocal compensation relating to the
transport and termination of local traffic from customers of ILECs pursuant to
various interconnection agreements. Special access revenue increased from $55.4
million, or 37% of revenue, for the year ended December 31, 1997 to $74.5
million, or 25% of revenue, for the year ended December 31, 1998. Switched
access (terminating long distance) revenue decreased to $49.0 million for the
year ended December 31, 1998, compared to $72.7 million for the year ended
December 31, 1997. The Company raised prices on its wholesale switched services
product in order to improve margins. Revenue from long distance services was
$20.6 million for the year ended December 31, 1998, compared to no reported
revenue for the year ended December 31, 1997. Revenue from data services did
not generate a material portion of total revenue during either period.
Operating costs
Operating costs, which consist solely of operating costs from Telecom
Services, increased $40.0 million, from $147.3 million for the year ended
December 31, 1997 to $187.3 million, for the year ended December 31, 1998.
Additionally, operating costs decreased as a percentage of revenue from 99% for
the year ended December 31, 1997 to 62% for the year ended December 31, 1998.
The increase in operating costs in absolute dollars is attributable to the
increase in volume of local and special access services and the increase in
network operating costs which include engineering and operations personnel
dedicated to the development and
-36-
provision of local exchange services. The decrease in operating costs as a
percentage of revenue is due primarily to a greater volume of higher margin
services, principally local exchange services.
Selling, general and administrative expenses
Total SG&A expenses increased $36.3 million, or 30%, from $121.9 million
for the year ended December 31, 1997 to $158.2 million for the year ended
December 31, 1998, and decreased as a percentage of revenue from 82% for the
year ended December 31, 1997 to 52% for the year ended December 31, 1998.
Telecom Services SG&A expenses increased from $94.1 million, or 63% of revenue,
for the year ended December 31, 1997 to $137.2 million, or 45% of revenue, for
the year ended December 31, 1998. The increase in absolute dollars is
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, customer service, marketing and sales staffs dedicated to
the expansion of the Company's networks and implementation of the Company's
expanded services strategy, primarily the development of local and long distance
telephone services. As the Company benefits from the revenue generated by newly
developed services requiring substantial administrative and marketing expense
prior to initial service offerings, principally local exchange services, Telecom
Services has experienced declining SG&A expenses as a percentage of revenue.
Corporate Services SG&A expenses decreased $6.9 million, from $27.8 million for
the year ended December 31, 1997 to $20.9 million for the year ended December
31, 1998, primarily due to a change in the allocation of payroll costs
associated with the Company's information technology and human resources
personnel, which costs were allocated to Corporate Services for the year ended
December 31, 1997 and to Telecom Services for the year ended December 31, 1998.
Depreciation and amortization
Depreciation and amortization increased $42.1 million, or 84%, for the year
ended December 31, 1998, compared to the year ended December 31, 1997, primarily
due to increased investment in depreciable assets resulting from the continued
expansion of the Company's networks and services. Additionally, the Company
experienced increased amortization arising from goodwill recorded in conjunction
with the purchases of NikoNet and DataChoice Network Services, L.L.C.
(DataChoice) in July 1998 as well as the full year impact of goodwill
amortization from the purchase of Communications Buying Group, Inc. in October
1997.
Provision for impairment of long-lived assets
For the year ended December 31, 1997, provision for impairment of long-
lived assets relates to the write-down of the Company's investment in StarCom
International Optics Corporation, Inc. of $5.2 million. Provision for
impairment of long-lived assets was recorded based on management's estimate of
the net realizable value of the Company's assets at December 31, 1997.
Restructuring costs
For the year ended December 31, 1998, restructuring costs of $1.8 million
include $0.3 million in costs, primarily severance costs, related to the
facility closure of a subsidiary of
-37-
NikoNet and $1.5 million related to the combined restructuring of Telecom
Services and Corporate Services, designed to support the Company's increased
strategic focus on its ISP customer base, as well as to improve the efficiency
of operations and general and administrative support functions. Restructuring
costs under this plan include severance and other employee benefit costs.
Other, net
Other, net operating costs and expenses increased from $0.3 million for the
year ended December 31, 1997 to $4.9 million for the year ended December 31,
1998. Other, net operating costs and expenses for the year ended December 31,
1998 relates to the write-off of certain installation costs of disconnected
special access customers ($0.5 million), the write-off of certain costs
associated with an abandoned operating support system project ($0.8 million) and
general disposal of furniture, fixtures and office equipment ($3.6 million).
Other, net operating costs and expenses for the year ended December 31, 1997
primarily relates to losses recorded on the disposal of the Company's investment
in its Melbourne network.
Interest expense
Interest expense increased $52.5 million, from $117.5 million for the year
ended December 31, 1997 to $170.0 million for the year ended December 31, 1998,
which includes $162.7 million of non-cash interest. This increase was primarily
attributable to an increase in long-term debt, primarily the 10% Senior Discount
Notes due 2008 (the 10% Notes) and the 9 7/8% Senior Discount Notes due 2008
(the 9 7/8% Notes) issued in February 1998 and April 1998, respectively. In
addition, the Company's interest expense increased because the principal amount
of its indebtedness increases until the Company's fixed rate senior indebtedness
begins to pay interest in cash, beginning in 2001.
Other income, net
Other income, net increased from $21.4 million net income for the year
ended December 31, 1997 to $27.3 million net income for the year ended December
31, 1998. The increase is primarily due to an increase in interest income of
$6.5 million, from $21.9 million for the year ended December 31, 1997 to $28.4
million for the year ended December 31, 1998. The increase is attributable to
the increase in cash and invested cash balances from the proceeds from the
issuances of the 10% Notes and the 9 7/8% Notes in February 1998 and April 1998,
respectively. Additionally, for the year ended December 31, 1998, other income,
net consists of litigation settlement costs. For the year ended December 31,
1997, other income, net consists of litigation settlement costs and the loss on
disposal of non-operating assets.
Accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses increased $16.2 million, from $39.0
million for the year ended December 31, 1997 to $55.2 million for the year ended
December 31, 1998. The increase is due primarily to the issuances of the 6 3/4%
Preferred Securities in September and October 1997. Accretion and preferred
dividends on preferred securities of subsidiaries, net of minority interest
-38-
in share of losses recorded during the year ended December 31, 1998 consists of
the accretion of issuance costs of $1.3 million and the accrual of the preferred
securities dividends of $53.9 million associated with the 6 3/4% Preferred
Securities, the 14% Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations
Loss from continuing operations increased $28.4 million, or 9%, from $310.3
million for the year ended December 31, 1997 to $338.7 million for the year
ended December 31, 1998 due to the increases in operating costs, SG&A expenses,
depreciation and amortization, interest expense and accretion and preferred
dividends on preferred securities of subsidiaries, net of minority interest in
share of losses, offset by an increase in revenue, as noted above.
Net (loss) income from discontinued operations
Net (loss) income from discontinued operations increased $29.0 million, or
58%, from a $50.4 million net loss for the year ended December 31, 1997 to a
$79.4 million net loss for the year ended December 31, 1998. Net loss from
discontinued operations for the years ended December 31, 1997 and 1998 consists
of the combined net losses of Zycom, NETCOM, Network Services and Satellite
Services. Since the Company expected to report a gain on the disposition of
NETCOM, the Company deferred the net losses from operations of NETCOM from
November 3, 1998 (the date on which the Company's board of directors adopted the
formal plan to dispose of the operations of NETCOM) through the dates of the
sales. Net loss from discontinued operations for the year ended December 31,
1998 includes an estimated loss on the disposal of Zycom of $1.8 million.
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods during the years ended December 31, 1998 and 1999.
The Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Company's consolidated financial statements and related
footnotes included elsewhere in this Annual Report. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods. The Company's development and
expansion activities, including acquisitions, during the periods shown below
materially affect the comparability of this data from one period to another.
Operating costs and net loss in the fourth quarter were lower, and EBITDA
and EBITDA (before non-recurring and non-cash charges) were higher, due to an
in-depth management review of network costs that was conducted during the fourth
quarter of 1999 following the centralization of network functions. The analysis
identified approximately $9.5 million in costs from the first nine months of
1999 that related to capital activities under the existing Company
capitalization policy. Of the $9.5 million adjustment booked in the fourth
quarter, approximately $5.0 million related to expenses which should have been
capitalized in the second quarter and $4.5 million which should have been
capitalized in the third quarter.
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Three Months Ended Three Months Ended
-------------------------------------------------------------------------------------------------
Mar. 31, June 30 Sept. 30, Dec. 31, Mar. 31, June 30 Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------------------------------------------------------------------------------------------------
(Dollars in thousands except per share and statistical data amounts)
Statement of Operations Data:
Revenue $ 58,487 64,215 82,567 98,048 104,331 117,654 115,166 142,075
Operating loss (36,064) (35,509) (27,778) (41,335) (27,568) (59,160) (91,381) (27,789)
Loss from continuing operations (78,475) (82,416) (79,928) (97,872) (86,206) (123,759) (156,527) (99,970)
Net (loss) income from discontinued
operations (23,280) (18,420) (16,736) (20,918) (111) (8,651) 748 44,803
Net loss $(101,755) (100,836) (96,664) (118,790) 106,712 (132,410) (155,779) (52,685)
============= ======== ======== ============ ========== ========== ========== ==========
Loss per share from continuing
operations - basic and diluted $ (1.77) (1.84) (1.75) (2.13) (1.85) (2.63) (3.31) (2.10)
Weighted average number of shares ============= ======== ======== ============ ========== ========== ========== ==========
outstanding - basic and diluted 44,311 44,865 45,588 46,010 46,538 46,988 47,320 47,618
============= ======== ======== ============ ========== ========== ========== ===========
Other Data:
Net cash used (provided) by
operating activities $ (5,285) (25,568) (14,075) (55,132) (47,906) 25,910 (22,911) 65,990
Net cash provided (used) by
investing activities 36,846 (67,411) (148,579) (164,417) 133,100 (82,206) (130,758) (107,107)
Net cash provided (used) by
financing activities 294,816 238,725 (7,353) (587) (456) (4,390) 73,848 (1,984)
EBITDA (1) (23,058) (16,920) (5,063) (3,718) 8,807 (14,477) (46,302) 20,313
EBITDA (before non-recurring and
non-cash charges) (1) (22,553) (16,927) (5,063) 2,447 7,874 15,221 (45,676) 23,124
Capital expenditures of continuing
operations (2) 65,419 84,625 103,444 102,548 102,912 133,025 138,387 360,909
Capital expenditures of
discontinued operations (2) 6,840 11,237 8,685 12,129 2,805 3,354 4,970 1,135
Statistical Data (3):
Full time employees 3,050 3,089 3,251 3,415 2,665 2,753 3,054 2,853
Telecom services:
Access lines in service (4) 186,156 237,458 290,983 354,482 418,610 494,405 584,827 730,975
Buildings connected:
On-net 637 665 684 777 789 874 939 963
Hybrid (5) 3,294 3,733 4,217 4,620 5,337 5,915 6,476 7,115
------------- -------- -------- ------------- --------- ---------- ---------- ----------
Total buildings connected 3,931 4,398 4,901 5,397 6,126 6,789 7,415 8,078
Operational switches:
Circuit 20 20 21 29 29 29 29 31
ATM - - - - - - - 24
Frame relay 15 15 15 16 17 16 16 16
------------- -------- --------- ------------- --------- ---------- ---------- ----------
Total operational switches 35 35 36 45 46 45 45 71
Regional fiber route miles (6):
Operational 3,194 3,812 3,995 4,255 4,351 4,406 4,449 4,596
Under construction - - - - - - - 531
Regional fiber strand miles (7):
Operational 118,074 124,642 127,756 134,152 155,788 164,416 167,067 174,644
Under construction - - - - - - - 18,564
Long-haul broadhand fiber
route miles - - - - - - - 18,000
Collocations with ILECs 35 45 47 59 111 126 139 147
(1) See note 3 under "Selected Financial Data" for the definitions of EBITDA
and EBITDA (before non-recurring and non-cash charges).
(2) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
(3) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(4) Access lines in service at December 31, 1999 includes 666,227 lines which
are provisioned through the Company's switch and 64,748 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there is no assurance that it
will be successful in executing this strategy.
(5) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(6) Regional fiber route miles refers to the number of miles of regional fiber
optic cable, including leased fiber. As of
-40-
December 31, 1999, the Company had 4,596 regional fiber route miles, of
which 48 regional fiber route miles were leased under operating leases.
Regional fiber route miles under construction represents fiber under
construction which is expected to be operational within six months.
(7) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied by
the number of fiber strands along that path. As of December 31, 1999, the
Company had 174,644 regional fiber strand miles, of which 856 regional fiber
strand miles were leased under operating leases. Regional fiber strand
miles under construction represents fiber under construction which is
expected to be operational within six months.
Net Operating Loss Carryforwards
As of December 31, 1999, the Company had federal and foreign net operating
loss carryforwards (NOLs) of approximately $662.7 million, which expire in
varying amounts through December 31, 2019. However, due to the provisions of
Section 382 and certain other provisions of the Internal Revenue Code and
Treasury Regulations (the Code), the utilization of a portion of the NOLs may be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Liquidity and Capital Resources
The Company's growth to date has been funded through a combination of
equity, debt and lease financing and non-core asset sales. The Company has also
incurred losses from continuing operations since inception and, as of December
31, 1999, had a working capital deficit of $67.8 million. As of December 31,
1999, the Company had approximately $125.5 million of cash and short term
investments, $17.7 million of investments in U.S. Treasury securities with
maturities in excess of one year and approximately $120.0 million of credit
available under the Senior Facility. At year end 1999, the Company's capital
requirements under its year 2000 business plan well exceeded its liquidity and
capital resources indicating that additional financing will be required to meet
its financial objectives.
The Company has entered into several financing agreements during the first
quarter of 2000 to provide additional capital to support the Company's earnings
deficit and planned capital expansion, including:
i) The Company signed an agreement with affiliates of Liberty Media
Corporation, Hicks, Muse, Tate & Furst Incorporated and Gleacher
Capital Partners to sell 750,000 shares of Convertible Preferred Stock
and warrants (see Part IV, "Subsequent Events") for estimated proceeds
to the Company of approximately $750.0 million, (before estimated
expenses and fees of $45.0 million). This transaction is subject to
customary closing conditions including certain regulatory approvals
and is expected to close during the second quarter of 2000.
ii) The Company signed letters of intent with two major vendors, Lucent
Technologies, Inc. and Cisco Systems, Inc., to provide financing for
the acquisition of equipment. When completed, it is anticipated that
these financing agreements together will provide the Company with
$355.0 million of capital which will be used to support continued
growth, and an additional $75.0 million may also be provided if and
when the Company raises additional equity. The Company anticipates
that these transactions will close during the second quarter of 2000.
-41-
iii) The Company closed an IRU agreement with Qwest whereby the Company
will provide designated portions of the Company's local fiber network
over an initial 6-year term for approximately $126.0 million. The
$126.0 million is expected to be paid to the Company in installments
during the first six months of 2000.
Management believes that the preferred stock purchase and warrant agreement
discussed in (i) above, as well as the letters of intent for the $430.0 million
in debt and capital lease financing discussed in (ii) above, will close prior to
June 30, 2000 and that these transactions will provide the financing necessary
for the Company's 2000 business plan and into the year 2001.
Importantly, should the Company be unable to complete the above financing
arrangements, management would be required to obtain alternative sources of
financing or curtail or otherwise significantly modify its business plan for the
year 2000. Such modifications would likely result in a significant reduction in
planned capital expenditures, which could be material and affect its ability to
expand its network facilities within the time frame originally planned. Network
expansion is a key component of achieving the Company's targeted future growth.
While the Company believes that it could obtain requisite additional financing,
there can be no assurance that such financing would be available on a timely
basis or on acceptable terms.
Net Cash (Used) Provided By Operating Activities
The Company's operating activities used $106.8 million, $100.1 million, and
provided $21.1 million for years ended December 31, 1997, 1998 and 1999,
respectively. Net cash used by operating activities is primarily due to losses
from continuing operations and increases in receivables, which are partially
offset by changes in other working capital items and non-cash expenses, such as
depreciation and amortization, deferred interest expense, accretion and
preferred dividends on subsidiary preferred securities.
Net Cash Used By Investing Activities
Investing activities used $422.6 million, $343.6 million and $187.0 million
for the years ended December 31, 1997, 1998 and 1999, respectively. Net cash
used by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $261.3 million, $355.3 million and
$591.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Additionally, net cash used by investing activities of continuing
operations includes payments for construction of corporate headquarters of $29.4
million, $4.9 million and $3.3 million for the years ended December 31, 1997,
1998 and 1999, respectively. The Company used $45.9 million for the year ended
December 31, 1997 to acquire CBG and $67.8 million for the year ended December
31, 1998 for the acquisitions of ChoiceCom, NikoNet and DataChoice combined.
During the year ended December 31, 1998, the Company also used $9.1 million to
purchase the minority interest of two of the Company's subsidiaries. Offsetting
the expenditures for investing activities for the year ended December 31, 1998
are the proceeds from the sale of the Company's corporate headquarters of $30.3
million and the sale of the short-term investments of $60.3 million. During the
year ended December 31, 1999, the Company also used $28.9 million for the
purchase of long-term investments and $6.1 million to purchase the minority
interest of two of the Company's subsidiaries. Offsetting the expenditures of
investing
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activities for the year ended December 31, 1999 are the net proceeds
from the sales of NETCOM, Network Services and Satellite Services combined of
$404.9 million, including $30.0 million in proceeds from the sale of common
stock of MindSpring, which the Company received as partial consideration for the
sale of the domestic operations of NETCOM, and proceeds from the sales of short-
term investments available for sale of $29.8 million. The Company will continue
to use cash in 2000 and subsequent periods for the construction of new networks,
the expansion of existing networks and potentially, for acquisitions. The
Company acquired assets under capital leases of $0.8 million and $143.7 million
for the years ended December 31, 1998 and 1999, respectively.
Net Cash Provided By Financing Activities
Financing activities provided $308.8 million, $525.6 million and $67.0
million for the years ended December 31, 1997, 1998 and 1999, respectively. Net
cash provided by financing activities for these periods includes cash received
in connection with the private placement of the 11 5/8% Senior Discount Notes
due 2007 (the 11 5/8% Notes) and the 14% Preferred Stock in March 1997, the 6
3/4% Preferred Securities in September and October 1997, the 10% Notes and the 9
7/8% Notes in February 1998 and April 1998, respectively, and the Senior
Facility completed in August 1999. Historically, the funds to finance the
Company's business acquisitions, capital expenditures, working capital
requirements and operating losses have been obtained through public and private
offerings of the Company and Holdings-Canada common shares, convertible
subordinated notes, convertible preferred shares of Holdings-Canada, capital
lease financings and various working capital sources, including credit
facilities, in addition to the private placement of the securities previously
mentioned and other securities offerings. Net cash provided by financing
activities for the years ended December 31, 1997, 1998 and 1999 also include
proceeds from the issuance of common stock in conjunction with the exercise of
options and warrants and the Company's employee stock purchase plan, offset by
principal payments on long-term debt and capital leases and payments of
preferred dividends on preferred securities of subsidiaries.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility (Senior Facility) consisting of a
$75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. During the year ended December 31, 1999, the Company
borrowed approximately $80.0 million under the loans at interest rates ranging
from LIBOR plus 3.125% to 3.5% or 9.35% to 9.67% at December 31, 1999.
Quarterly repayments on the debt commence at various dates beginning September
30, 1999 with remaining outstanding balances maturing on June 30, 2005 for the
$100.0 million term loan and the $25.0 million line of credit and March 31, 2006
for the $75.0 million term loan.
As of December 31, 1999 the Company had an aggregate accreted value of
approximately $1.8 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the 13 1/2% Notes), the 12 1/2% Notes due 2006 (the 12 1/2% Notes),
the 11 5/8% Notes, the 10% Notes, and the 9 7/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require payments of interest to
be made in cash commencing November 1, 2001 and mature on May 1, 2006. The 11
5/8% Notes require payments of interest to be made in cash commencing September
15, 2002 and mature on March 15, 2007. The 10% Notes require payments of
-43-
interest in cash commencing August 15, 2003 and mature February 15, 2008. The 9
7/8% Notes require payments of interest in cash commencing November 1, 2003 and
mature May 1, 2008. With respect to fixed rate senior indebtedness outstanding
on December 31, 1999, the Company has cash interest payment obligations of
approximately $113.3 million in 2001, $158.0 million in 2002, $212.6 million in
2003 and $257.2 million in 2004.
As of December 31, 1999, an aggregate amount of $519.3 million was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock and
the 14 1/4% Preferred Stock. The 6 3/4% Preferred Securities require payments
of dividends to be made in cash through November 15, 2000. In addition, the 14%
Preferred Stock and the 14 1/4% Preferred Stock require payments of dividends to
be made in cash commencing June 15, 2002 and August 1, 2001, respectively. With
respect to preferred securities currently outstanding, the Company has cash
dividend obligations of approximately $8.9 million in 2000, for which the
Company has restricted cash balances of $8.7 million available for such dividend
payments, $10.7 million in 2001 and $35.4 million in 2002 and each year
thereafter through 2007.
Capital Expenditures
The Company's capital expenditures of continuing operations (including
assets acquired under capital leases and excluding payments for construction of
the Company's corporate headquarters) were $261.3 million, $356.0 million and
$735.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The Company anticipates that the expansion of existing networks
construction of new networks and further development of the Company's products
and services as currently planned will require capital expenditures of
approximately $1.0 billion for the year ended December 31, 2000. In the event
that the Company's efforts to acquire new customers and deploy new services are
more successful than planned, the Company may be required to expend capital
resources earlier in the year than expected to accommodate customer demands.
In the first quarter of 2000, the Company entered into letters of intent
with its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.
The Company believes that these financing agreements will better enable the
Company to fund its scheduled network expansion through the purchase of Lucent
and Cisco equipment. The Lucent credit agreement provides the Company with up
to $250.0 million of capital which can be drawn down during the year following
the closing date to purchase network equipment. The Company is currently
committed to purchase a minimum of $175.0 million of equipment under this
facility. The Lucent financing provides for a five-year repayment schedule and
requires quarterly principal repayments beginning in March 2001. The Cisco
credit facility provides for up to $180.0 million of capital lease financing
with a three-year repayment term. The Company anticipates that these
transactions will close during the second quarter of 2000. There is no
assurance, however, that these transactions will close during the second
quarter, or at all.
To facilitate the expansion of its services and networks, the Company has
entered into other equipment purchase agreements with various vendors under
which the Company has committed to purchase a substantial amount of equipment
and other assets, including a full range of switching systems, fiber optic
cable, network electronics, software and services. If the Company fails to meet
the minimum purchase level in any given year, the vendor may
-44-
discontinue certain discounts, allowances and incentives otherwise provided to
the Company. Further, the Company's ability to make capital expenditures to meet
its business plan will depend on numerous factors, including certain factors
beyond the Company's control. These factors include, but are not limited to,
economic conditions, competition, regulatory developments and the availability
of equity, debt and lease financing.
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capital expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited consolidated financial statements for the year ended December 31, 1999
included elsewhere herein.
In view of the continuing development of the Company's products and
services, the expansion of existing networks and the construction, leasing and
licensing of new networks, the Company will require significant additional
amounts of cash in the future from outside sources. Changes in the Company's
business plan may require additional sources of cash which may be obtained
through public and private equity and debt financings, credit facilities and
other financing arrangements. In the past, the Company has been able to secure
sufficient amounts of financing to meet its capital needs. There can be no
assurance, however, that additional financing will be available to the Company
or, if available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings until the Company establishes a sufficient revenue-generating
customer base could have a material adverse effect on the Company's liquidity.
Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million, $58.3
million and $124.1 million for the years ended December 31, 1997, 1998 and 1999,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic to ISPs from customers of ILECs pursuant to various
interconnection agreements. During this period, some of the ILECs have not paid
all of the bills they have received from the Company and have disputed these
charges based on the belief that such calls are not local traffic as defined by
the various agreements and not subject to payment of transport and termination
charges under state and federal laws and public policies. However, the Company
has resolved certain of these disputes with some of the ILECs.
The resolution of these disputes have been, and will continue to be, based
on rulings by state public utility commissions and/or by the Federal
Communications Commission (FCC), or
-45-
through negotiations between the parties. To date, there have been favorable
final rulings from 31 state public utility commissions that ISP traffic is
subject to the payment of reciprocal compensation under current interconnection
agreements. Many of these state commission decisions have been appealed by the
ILECs. To date, five federal court decisions, including two federal circuit
court of appeals decisions have been issued upholding state commission decisions
ordering the payment of reciprocal compensation for ISP traffic. On February 25,
1999, the FCC issued a decision that ISP-bound traffic is largely
jurisdictionally interstate traffic. The decision relies on the long-standing
federal policy that ISP traffic, although jurisdictionally interstate, is
treated as though it is local traffic for pricing purposes. The decision also
emphasizes that because there currently are no federal rules governing
intercarrier compensation for ISP traffic, the determination as to whether such
traffic is subject to reciprocal compensation under the terms of interconnection
agreements is properly made by the state commissions and that carriers are bound
by their interconnection agreements and state commission decisions regarding the
payment of reciprocal compensation for ISP traffic. The FCC has initiated a
rulemaking proceeding regarding the adoption of prospective federal rules for
intercarrier compensation for ISP traffic. In its notice of rulemaking, the FCC
expresses its preference that compensation rates for this traffic continue to be
set by negotiations between carriers, with disputes resolved by arbitrations
conducted by state commissions, pursuant to the Telecommunications Act. Since
the issuance of the FCC's decision on February 25, 1999, 19 state utility
commissions, have either ruled or reaffirmed that ISP traffic is subject to
reciprocal compensation under current interconnection agreements, and two state
commissions have declined to apply reciprocal compensation for ISP traffic under
current interconnection agreements. Additionally, 11 state commissions have
awarded reciprocal compensation for ISP traffic in arbitration proceedings
involving new agreements. One state has declined to order reciprocal
compensation in an arbitration proceeding, and two states have declined to
decide the issue in the arbitration until after the FCC and/or the state
commission reaches a decision in pending proceedings on prospective
compensation.
On March 24, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated and remanded the FCC's February 25, 1999 decision. The
Company does not believe that the Circuit Court's decision will adversely affect
the state decisions noted above with respect to reciprocal compensation. The
decision does, however, create some uncertainty and there can be no assurance
that future FCC or state rulings will be favorable to the Company.
The Company has aggressively participated in a number of regulatory
proceedings that address the obligation of the ILECs to pay the Company
reciprocal compensation for ISP-bound traffic under the Company's
interconnection agreements. These proceedings include complaint proceedings
brought by the Company against individual ILECs for failure to pay reciprocal
compensation under the terms of a current interconnection agreement; generic
state commission proceedings concerning the obligations of ILECs to pay
reciprocal compensation to CLECs, and arbitration proceedings before state
commissions addressing the payment of reciprocal compensation on a prospective
basis under the new interconnection agreements.
In 1999, the state utility commissions in Colorado issued a final
decisions granting a complaint filed by the Company against US West
Communications, Inc. (US West) and ruled that the Company is entitled to be paid
reciprocal compensation for ISP-bound traffic under the terms of the Company's
-46-
interconnection agreement in effect at the time of the complaint proceeding.
Additionally, in June 1999, the Alabama Public Service Commission ruled that the
Company is entitled to be treated the same as other CLECs for which the Alabama
commission had previously ordered the payment of reciprocal compensation for ISP
traffic by BellSouth Corporation (BellSouth). The ILECs filed for judicial
review in federal district court of each of these favorable commission rulings;
the appeals are pending. Also in 1999, the California PUC issued a decision
affirming a previously issued decision that held that reciprocal compensation
must be paid by Pacific Bell and GTE-California for the termination of ISP
traffic by CLECs under existing interconnection agreements. The ILECs also have
appealed the California PUC decision, and the appeal is pending.
Subsequent to the issuance of the favorable rulings by the Colorado,
Alabama and California state commissions, the Company has received payments from
US West, Pacific Bell and GTE-California for amounts owed for reciprocal
compensation. Pursuant to an earlier decision by the Ohio Commission, Ameritech
has been paying ICG reciprocal compensation for ISP traffic under its original
interconnection agreement which expired on February 15, 2000. Through December
31, 1999, the Company has received $65.8 million from Ameritech, $7.7 million
from Pacific Bell and $11.7 million from GTE-California in reciprocal
compensation payments. Additionally, in January and February 2000 the Company
received additional payments from Pacific Bell of $16.8 million, a portion of
which represents amounts previously placed in an escrow account by Pacific Bell
calculated as being owed to the Company for reciprocal compensation for ISP-
bound traffic. Also in January 2000, US West released to the Company $10.1
million in reciprocal compensation payments that had been in an escrow account.
Additionally, through December 31, 1999, Southwestern Bell Telephone
Company (SWBT) has remitted payment to the Company of $3.9 million for
reciprocal compensation owed to the Company for traffic from SWBT customers in
Texas to ISPs served by the Company. On December 29, 1999, SWBT initiated
commercial arbitration to determine whether the terms of the Company's current
interconnection agreement with SWBT require that the rates that the Company has
been billing SWBT for reciprocal compensation be reduced to rates established by
the Texas PUC in a 1998 consolidated arbitration with SWBT involving AT&T
Corporation, MCI Communications Corporation and other parties. Due to subsequent
procedural developments, this issue will be decided by the Texas PUC, rather
than in commercial arbitration, after the parties have completed dispute
resolution in accordance with the terms of the interconnection agreement.
On September 16, 1999, the CPUC rendered a decision against MFS/Worldcom, a
CLEC (MFS), in an arbitration between Pacific Bell and MFS. The California PUC
ruled that MFS should not be permitted to charge reciprocal compensation rates
for the tandem switching and common transport rate elements. Although the
California PUC's ruling did not involve the Company, the Company made a decision
effective for the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common transport
rate elements for services provided in California and in all other states where
the Company operates and such rate elements are included in the Company's
interconnection agreement with the ILEC. Additionally, the Company recorded a
provision of $45.2 million during the three months September 30, 1999 for
accounts receivable related to these elements recognized in periods through June
30, 1999, which the Company believes may be uncollectible. The Company continues
to bill Pacific Bell, SWBT and GTE for the tandem switching and common transport
rate elements, and will pursue collection of its accounts receivable, despite
any such provision. On
-47-
February 4, 2000, the California PUC initiated a new proceeding to examine, on
a prospective basis, compensation for ISP-bound traffic, including the tandem
and transport rate elements issue.
The Company has also recorded revenue of approximately $19.1 million and
$18.4 million for the years ended December 31, 1998 and 1999, respectively,
related to other transport and termination charges to the ILECs, pursuant to the
Company's interconnection agreements with these ILECs. Included in the
Company's trade receivables at December 31, 1998 and 1999 are $72.8 million and
$76.3 million, respectively, for all receivables related to reciprocal
compensation and other transport and termination charges. The receivables
balance at December 31, 1998 and 1999 is net of an allowance of $5.6 million and
$58.2 million, respectively, for disputed amounts and tandem switching and
common transport rate elements.
As the Company's interconnection agreements expire or are extended, rates
for transport and termination charges are being and will continue to be
renegotiated and/or arbitrated. Rates for transport and termination also may be
impacted by ongoing state and federal regulatory proceedings addressing
intercarrier compensation for Internet traffic on a prospective basis. In
addition to the FCC's pending rulemaking proceeding and the District of Columbia
Court of Appeals recent remand, of the states in which the Company currently
operates, the Ohio, Texas and California commissions currently are conducting
proceedings on prospective compensation.
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with BellSouth, Ameritech, GTE-California and Pacific
Bell. The Company has completed arbitration proceedings with Bell South before
the state commissions in Alabama, North Carolina, Georgia, Kentucky, Florida and
Tennessee and with Ameritech before the Ohio commission. Final decisions issued
by the Alabama, North Carolina, Kentucky and Georgia commissions awarded the
Company reciprocal compensation for ISP traffic in new agreements to be executed
by the parties, including the tandem and transport rate element. The arbitration
decisions of the Florida and Ohio commissions declined to rule on the merits of
whether the Company should be paid reciprocal compensation for ISP traffic. The
Florida decision ruled that the compensation provisions of the parties' current
interconnection agreement would continue to apply, subject to true up, until the
completion of the FCC's rulemaking on future compensation. The Ohio commission
deferred ruling on the merits until completion of the Ohio commission's generic
proceeding on prospective compensation, and ordered that in the interim period
until completion of the generic proceeding bill and keep procedures should be
followed, subject to true up once the commission proceeding is concluded.
Arbitration proceedings with US West before the Colorado commission and with
SWBT before the Texas commission are pending. The Company has negotiated an
extension of its current agreement with GTE-California until August 2000 that
provides that reciprocal compensation will be paid for ISP traffic, at rates
that are lower than the rates that previously applied under the agreement, and
the Company has adopted the MFS WorldCom/Pacific Bell interconnection agreement,
effective as of March 12, 2000, which agreement also provides for the payment of
the end office rate element of reciprocal compensation for ISP traffic, with the
tandem and transport rate elememts issue subject to further litigation.
Subsequent to completion of the arbitration proceedings with BellSouth, the
Company signed a three-year agreement with BellSouth that, among other issues,
addresses the payment of reciprocal compensation for Internet traffic. BellSouth
agreed to pay past monies due to the Company for reciprocal compensation for the
period beginning when ISP traffic was first recorded by the Company from
BellSouth and ending December 31, 1999, and the parties
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also agreed to the payment of reciprocal compensation for Internet and voice
traffic for the period from January 1, 2000 through December 31, 2002 at per-
minute rates that gradually reduce over the three year period. The agreement is
applicable to all nine states in the BellSouth operating territory.
While the Company intends to pursue the collection of all receivables
related to transport and termination charges as of December 31, 1999 and
believes that future revenue from transport and termination charges recognized
under the Company's interconnection agreements will be realized, there can be no
assurance that future regulatory and judicial rulings will be favorable to the
Company, or that different pricing plans for transport and termination charges
between carriers will not be adopted when the Company's interconnection
agreements continue to be renegotiated or arbitrated, or as a result of FCC or
state commission proceedings on future compensation methods. In fact, the
Company believes that different pricing plans will continue to be considered and
adopted, and although the Company expects that revenue from transport and
termination charges likely will decrease as a percentage of total revenue from
local services in subsequent periods, the Company's local termination services
still will be required by the ILECs and must be provided under the
Telecommunications Act, and likely will result in increasing volume in minutes
due to the growth of the Internet and related services markets. The Company
expects to negotiate and/or arbitrate reasonable compensation and collection
terms for local termination services, although there is no assurance that such
compensation will remain consistent with current levels. Additionally, the
Company expects to supplement its current operations with revenue, and
ultimately EBITDA, from new services offerings such as RAS, Internet RAS and
DSL, however, the Company may or may not be successful in its efforts to deploy
such services profitably.
New Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board (the FASB) issued
FASB Interpretation No. 43, Real Estate Sales, an interpretation of FASB
Statement No. 66 (FIN 43). FIN 43 establishes standards for recognition of
profit on all real estate sales transactions without regard to the nature of the
seller's business. Specifically, FIN 43 expands the concept of real estate to
include "integral equipment," which is defined in FIN 43 as "any physical
structure or equipment attached to the real estate that cannot be removed and
used separately without incurring significant costs." The provisions of FIN 43
are effective for all sales of real estate with property improvements or
integral equipment entered into after June 30, 1999.
The Company believes FIN 43 limits the application of sale-type lease
accounting to grants of indefeasible rights of use (IRUs) of constructed dark
fiber in exchange for cash unless the Company transfers ownership of the
underlying assets to the lessee as, under this interpretation, dark fiber is
considered integral equipment and accordingly title must transfer to a lessee in
order for a lease transaction to be accounted for as a sales-type lease. In the
event that sales-type lease accounting is not applicable to portions or all of
an IRU, the Company will apply operating lease accounting and recognize revenue
and operating costs ratable over the term of the agreement. Since the Company's
IRUs which were accounted for as sales-type leases and excluded ownership
transfer terms for underlying assets deemed to be integral equipment do not
represent a significant portion of the Company's historical revenue or operating
costs, the
-49-
Company does not expect the adoption of FIN 43 to have a material impact on the
Company's financial operations or results of operations in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its senior indebtedness.
The Company invests primarily in high-grade, short-term investments that
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. The Company's short-term investment objectives are safety,
liquidity and yield, in that order. As of December 31, 1999, the Company had
approximately $125.5 million in cash, cash equivalents and short-term
investments available for sale, at a weighted average fixed interest rate of
5.33% and approximately $17.7 million in available for sale investments in U.S.
Treasury Securities which mature in excess of one year at a weighted average
fixed interest rate of 4.58%. A hypothetical 10% fluctuation in market rates of
interest would not cause a material change in the fair value of the Company's
investment in marketable securities at December 31, 1999, and accordingly, would
not cause a material impact on the Company's financial position, results of
operations or cash flows.
At December 31, 1999, the Company's indebtedness included $1.8 billion
under the 13 1/2% Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9 7/8%
Notes and $519.3 million under the 14 1/4% Preferred Stock, 14% Preferred Stock
and 6 3/4% Preferred Securities. These instruments contain fixed annual
interest and dividend rates. Accordingly, any change in market interest rates
would have no impact on the Company's financial position, results of operations
or cash flows. Future increases in interest rates could increase the cost of
any new borrowings by the Company. The Company does not hedge against future
changes in market rates of interest.
On August 12, 1999, the Company entered into the Senior Facility,
consisting of two term loans and a revolving line of credit. All components of
the Senior Facility bear variable annual rates of interest, based on the change
in LIBOR, the Royal Bank of Canada prime rate and the federal funds rate.
Consequently, additional borrowings under the Senior Facility and increases in
LIBOR, the Royal Bank of Canada prime rate and the federal funds rate will
increase the Company's indebtedness and may increase the Company's interest
expense in future periods. Additionally, under the terms of the Senior
Facility, the Company is required to hedge the interest rate risk on $100.0
million of the Senior Facility if LIBOR exceeds 9.0% for 15
-50-
consecutive days. As of December 31, 1999, the Company had $79.6 million
outstanding under the Senior Facility. A hypothetical change in annual interest
rate of 1% per annum would result in a change in interest expense of
approximately $0.8 million.
Equity Price Risk
On March 30, 1999, the Company purchased for approximately $10.0 million in
cash, 454,545 shares of restricted Series D-1 Preferred Stock of NorthPoint
Communications Holdings, Inc. (NorthPoint) which was converted into 555,555
shares of Class B common stock of NorthPoint (the NorthPoint Class B Shares) on
May 5, 1999. The NorthPoint Class B Shares are convertible on or after March
31, 2000 on a one-for-one basis into a voting class of common stock of
NorthPoint. Accordingly, the Company will be subject to the effects of
fluctuations in the fair value of the common stock of NorthPoint until such time
when the Company is permitted to liquidate its investment in NorthPoint.
On August 11, 1999, the Company purchased 1,250,000 shares of Series C
Preferred Stock (the ThinkLink Preferred Stock) of International ThinkLink
Corporation (ThinkLink), for $1.0 million in cash. The ThinkLink Preferred
Stock will automatically convert to common stock upon the completion of the
initial public offering of the common stock of ThinkLink or upon election to
convert by the holders of a majority of the ThinkLink Preferred Stock. The
conversion rate from the ThinkLink Preferred Stock to common stock of ThinkLink
is initially one-for-one; however, such conversion is subject to adjustment.
The Company will be subject to the effects of fluctuations in the fair value of
the common stock of ThinkLink until such time when the Company may liquidate its
investment in ThinkLink. The Company has accounted for its investment in
ThinkLink under the cost method of accounting.
Although changes in the fair market value of the common stock of NorthPoint
and ThinkLink may affect the fair market value of the Company's investments in
NorthPoint and ThinkLink and cause unrealized gains or losses, such gains or
losses will not be realized until the securities are sold.
Market Price Risk
The fair value of the Company's Senior Discount Notes outstanding was
$1,504.1 million as of December 31, 1999 compared to the carrying value of
$1,793.0 million. A hypothetical 10% fluctuation in market rates of interest
would not cause a material change in the fair value of the Company's Senior
Discount Notes at December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements of the Company appear on page F-1 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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
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ICG Communications
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
The information required by Item 10 is incorporated by reference from the
Company's Proxy Statement to be used in connection with our 2000 Annual Meeting
of Shareholders and to be filed with the Securities and Exchange Commission (the
"Commission") on or prior to April 29, 2000. The Directors and executive
officers of each of Holdings-Canada and Holdings are set forth below.
Holdings-Canada
The Directors of Holdings-Canada are:
Harry R. Herbst
H. Don Teague
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer
Harry R. Herbst - Executive Vice President and Cheif Financial
Officer
H. Don Teague - Executive Vice President, General Counsel and
Secretary
Holdings
The Directors of Holdings are:
J. Shelby Bryan (Chairman)
William S. Beans
Harry R. Herbst
H. Don Teague
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
William S. Beans - Executive Vice President
Harry R. Herbst - Executive Vice President and Chief Financial
Officer
H. Don Teague - Executive Vice President, General Counsel and
Secretary
J. Shelby Bryan, 53, was appointed President and Chief Executive Officer of
Holdings-Canada and Holdings in May 1995. He has 19 years of experience in the
telecommunications industry, primarily in the cellular business. He co-founded
Millicom International Cellular S.A., a publicly owned corporation providing
cellular service internationally, served as its President and Chief Executive
Officer from 1985 to 1994 and has served as a Director through the present.
William S. Beans, Jr., 34, has been an Executive Vice President of Holdings-
Canada and Holding since January 2000. Prior thereto, he was Executive Vice
President of the Company and Executive Vice President Network Services of ICG
from June 1999. Prior to joining ICG, Mr. Beans held several positions in the
Teleport Communications Group, a division of AT&T Local Services. He was
National Vice President -Operations from November 1997 until June 1999, Vice
President Customer Care/Customer Service from October 1995 to November 1997 and
Vice President or Network Development from September 1993 to October 1995.
Harry R. Herbst, 47, was appointed Executive Vice President, Chief Financial
Officer and Director of Holdings-Canada and Holdings in August 1998 and has been
a member of the Board of Directors of Holdings-Canada and Holdings since October
1995. Prior to joining the Company, Mr. Herbst was Vice President of Finance
and Strategic Planning for Gulf Canada Resources Ltd. from November 1995 to June
1998 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
Cooper & Lybrand.
H. Don Teague, 56, joined the Company as Executive Vice President, General
Counsel, Secretary and Director of Holdings-Canada and Holdings 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.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement to be used in connection with our 2000 Annual Meeting
of Shareholders and to be filed with the Commission on or prior to April 29,
2000. Neither Holdings-Canada nor Holdings pays any form of compensation to any
of their respective Directors or Officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement to be used in connection with our 2000 Annual Meeting
of Shareholders and to be filed with the Commission on or prior to April 29,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by Item 13 is incorporated by reference from the
Company's Proxy Statement to be used in connection with our 2000 Annual Meeting
of Shareholders and to be filed with the Commission on or prior to April 29,
2000.
-53-
PART IV
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 - Report of KPMG LLP............................................. F-2
Report of Ernst & Young LLP, Independent Auditors for the Year Ended December 31,
1997........................................................................................ F-3
Consolidated Balance Sheets, December 31, 1998 and 1999....................................... F-4
Consolidated Statements of Operations, Years Ended December 31, 1997, 1998 and 1999........... F-6
Consolidated Statements of Stockholders' Equity (Deficit), Years Ended December 31, 1997,
1998 and 1999............................................................................... F-8
Consolidated Statements of Cash Flows, Years Ended December 31, 1997, 1998 and 1999........... F-9
Notes to Consolidated Financial Statements.................................................... F-12
(2) Financial Statement Schedule
The following Financial Statement Schedule is submitted herewith:
Independent Auditors' Report................................................................. S-1
Schedule II: Valuation and Qualifying Accounts............................................... S-2
(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., File No. 333-4226].
(3) Corporate Organization
3.1: 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].
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3.2: 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].
3.3: Agreement and Plan of Reorganization by and among ICG
Communications, Inc., ICG Canadian Acquisition, Inc., ICG
Holdings (Canada), Inc. and ICG Holdings (Canada) Co.,
dated November 4, 1998.
3.4: Order of Amalgamation between ICG Holdings (Canada), Inc.
and ICG Holdings (Canada) Co., dated December 22, 1998.
3.5: Memorandum and Articles of Association of ICG Holdings
(Canada) Co. filed with the Registrar of Joint Stock
Companies, Halifax, Nova Scotia.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.1: 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].
4.2: 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].
4.3: 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].
4.4: 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].
4.5: 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].
4.6: Indenture, dated March 11, 1997, among ICG Holdings, Inc.,
ICG
-55-
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].
4.7: 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].
4.8: 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].
4.9: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of February 12,
1998 [Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-4 of ICG Services, Inc.,
File No. 333-51037].
4.10: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of April 27,
1998 [Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-4 of ICG Services, Inc.,
File No. 333-60653, as amended].
4.11: Second Amended and Restated Articles of Incorporation of
ICG Holdings, Inc., dated March 10, 1997.
4.12: Loan Agreement, dated as of January 1, 1999, by and among
TriNet Realty Capital, Inc. and ICG Services, Inc.
[Incorporated by reference to Exhibit 10.3 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1999].
4.13: Promissory Note, dated as of January 1, 1999, by and among
TriNet Realty Capital, Inc. and ICG Services, Inc.
[Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1999].
4.14: Deed of Trust, Assignment of Rents and Security Agreement,
made as of January 1, 1999, granted by ICG Services, Inc.
for the benefit of TriNet Realty Capital, Inc.
[Incorporated by reference to Exhibit 10.5 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1999].
4.15: Amended and Restated Loan Agreement, dated as of May 1,
1999, by and among TriNet Realty Capital, Inc. and ICG
161, L.P. [Incorporated by reference to Exhibit 10.1 to
ICG
-56-
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
4.16: Credit Agreement, dated as of August 12, 1999, among ICG
Equipment, Inc. and ICG NetAhead, Inc., as Borrowers, ICG
Services, Inc., as Parent, the Initial Lenders and the
Initial Issuing Bank, as Initial Lenders and Initial
Issuing Bank, Royal Bank of Canada, as Administrative
Agent and Collateral Agent, Morgan Stanley Senior Funding,
Inc., as Sole Book-Runner and Lead Arranger and Bank of
America, N.A. and Barclays Bank Plc, as Co-Documentation
Agents [Incorporated by reference to Exhibit 10.11 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
4.17: Security Agreement, dated August 12, 1999, from ICG
Equipment, Inc. and ICG NetAhead, Inc., as Grantors to
Royal Bank of Canada, as Collateral Agent [Incorporated by
reference to Exhibit 10.12 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999].
4.18: Amendment No. 1 to Credit Agreement, dated as of September
30, 1999, among ICG Equipment, Inc. and ICG NetAhead,
Inc., as Borrowers, ICG Services, Inc., as Parent, certain
Initial Lender Parties thereto, Morgan Stanley Senior
Funding, Inc., as Sole Book-Runner and Lead Arranger,
Royal Bank of Canada, as Collateral Agent and as
Administrative Agent for such Lender Parties, and Bank of
America, N.A. and Barclays Bank Plc, as Co-Documentation
Agents [Incorporated by reference to Exhibit 10.8 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999].
4.19: Amendment and Waiver No. 2 to the Loan Documents, dated as
of December 29, 1999, among ICG Equipment, Inc., ICG
NetAhead, Inc., ICG Services, Inc., as Parent, certain
Initial Lender Parties party thereto, Morgan Stanley
Senior Funding, Inc., as Sole Book-Runner and Lead
Arranger, Royal Bank of Canada, as Collateral Agent and as
Administrative Agent for such Lender Parties, Bank of
America, N.A., as Documentation Agent and Barclays Bank
Plc, as Co-Documentation Agent.
4.20: Amendment No. 3 to the Loan Documents, dated as of
February 11, 2000, among ICG Equipment, Inc., ICG
NetAhead, Inc., ICG Services, Inc., as Parent, certain
Initial Lender Parties party thereto, Morgan Stanley
Senior Funding, Inc., as Sole Book-Runner and Lead
Arranger, Royal Bank of Canada, as Collateral Agent and as
Administrative Agent for such Lender Parties, Bank of
America, N.A., as Documentation Agent and Barclays Bank
Plc, as Co-Documentation Agent.
-57-
(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., File
No. 333-4226].
10.2: 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].
10.3: 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].
10.4: 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].
10.5: 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].
10.6: 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].
10.7: 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].
10.8: 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].
10.9: 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].
10.10: 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].
-58-
10.11: 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].
10.12: 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].
10.13: 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].
10.14: 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].
10.15: Confidential General Release and Covenant 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].
10.16: 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].
10.17: 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].
10.18: Amendment No. 1 to the ICG Communications, Inc. 1996
Stock Option Plan.
10.19: 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].
10.20: 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].
-59-
10.21a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.21b: First Amendment to Purchase Agreement, by and between
ICG Holdings, Inc. and TriNet Essential Facilities X,
Inc., dated January 15, 1998.
10.21c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.21d: Commercial Lease - Net between TriNet Essential
Facilities X, Inc. and ICG Holdings, Inc., dated
January 15, 1998.
10.21e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20,
1998.
10.21f: Continuing Lease Guaranty, by ICG Holdings (Canada),
Inc. to TriNet Essential Facilities X, Inc., dated
January 20, 1998.
10.22: 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].
10.23: 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].
10.24: Employment Agreement, dated July 1, 1998, between ICG
Communications, Inc. and Harry R. Herbst [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, 1998].
10.25: Employment Agreement, dated September 23, 1998, between
ICG Communications, Inc. and Douglas I. Falk
[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, 1998].
10.26: Asset Purchase Agreement by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication
Services, Inc., dated as of January 5, 1999
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Current Report on Form 8-K,
dated March 4, 1999].
10.27: ICG Communications, Inc. 1998 Stock Option Plan.
10.28: Form of Stock Option Agreement for 1998 Stock Option
Plan.
10.29: Amendment No. 1 to the ICG Communications, Inc. 1998
Stock Option Plan, dated December 15, 1998.
-60-
10.30: Form of Agreement regarding Gross-Up Payments, by and
between ICG Communications, Inc. and each of J. Shelby
Bryan, Harry R. Herbst, Douglas I. Falk and H. Don
Teague, dated December 16, 1998.
10.31: Extension and Amendment to Employment Agreement, dated as
of March 10, 1999, by and between ICG Communications,
Inc. and J. Shelby Bryan. [Incorporated by reference to
Exhibit 10.1 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1999].
10.32: Deferred Compensation Agreement, dated as of April 1,
1999, by and between ICG Communications, Inc. and J.
Shelby Bryan [Incorporated by reference to Exhibit 10.2
to ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999].
10.33: Purchase Agreement, dated as of January 1, 1999, by and
among TriNet Essential Facilities X, Inc. and ICG
Services, Inc. [Incorporated by reference to Exhibit 10.6
to ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999].
10.34: Assumption and Modification Agreement, dated as of May 1,
1999, by and among ICG Services, Inc., ICG 161, L.P. and
TriNet Realty Capital, Inc. [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, 1999].
10.35: Employment Agreement, dated as of May 19, 1999, between
ICG Communications, Inc. and Harry R. Herbst
[Incorporated by reference to Exhibit 10.3 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.36: Employment Agreement, dated as of May 19, 1999, between
ICG Communications, Inc. and H. Don Teague
[Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.37: Employment Agreement, dated as of May 19, 1999, between
ICG Communications, Inc. and John Kane [Incorporated by
reference to Exhibit 10.5 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999].
10.38: Employment Agreement, dated as of June 1, 1999, between
ICG Communications, Inc. and Douglas I. Falk
[Incorporated by reference to Exhibit 10.6 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
-61-
10.39: Amendment to Employment Agreement, dated as of June 9,
1999, between ICG Communications, Inc. and John Kane
[Incorporated by reference to Exhibit 10.7 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.40: Employment Agreement, dated as of June 28, 1999, between
ICG Communications, Inc. and William S. Beans, Jr.
[Incorporated by reference to Exhibit 10.8 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.41: Share Price Appreciation Vesting Non-Qualified Stock
Option Agreement, dated as of June 28, 1999, between ICG
Communications, Inc. and William S. Beans, Jr.
[Incorporated by reference to Exhibit 10.9 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.42: Employment Agreement, dated as of July 1, 1999, between
ICG Communications, Inc. and Michael D. Kallet
[Incorporated by reference to Exhibit 10.10 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999].
10.43: Amendment to the Stock Option Agreement between J. Shelby
Bryan and IntelCom Group, Inc. dated May 30, 1995, dated
as of March 10, 1999, between ICG Communications, Inc.
and J. Shelby Bryan [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,
1999].
10.44: Amendment to the Stock Option Agreement between J. Shelby
Bryan and IntelCom Group, Inc. dated November 13, 1995,
dated as of March 10, 1999, between ICG Communications,
Inc. and J. Shelby Bryan [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, 1999].
10.45: Promissory Note, dated as of August 6, 1999, between ICG
Telecom Group, Inc. and John Kane [Incorporated by
reference to Exhibit 10.3 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999].
10.46: Amendment to Employment Agreement, dated as of August 22,
1999, between ICG Communications, Inc. and John Kane
[Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999].
10.47: Amendment to Employment Agreement, dated as of August 22,
1999, between ICG Communications, Inc. and Don Teague
-62-
[Incorporated by reference to Exhibit 10.5 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999].
10.48: Amendment to Employment Agreement, dated as of August 22,
1999, between ICG Communications, Inc. and Harry R.
Herbst [Incorporated by reference to Exhibit 10.6 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999].
10.49: Amendment to Employment Agreement, dated as of September
14, 1999, between ICG Communications, Inc. and J. Shelby
Bryan [Incorporated by reference to Exhibit 10.7 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999].
10.50: Promissory Note, dated as of December 10, 1999, between
ICG Telecom Group, Inc. and John Kane.
10.51: General Release, Covenant Not to Sue and Agreement, dated
as of January 1, 2000, between ICG Communications, Inc.
and John Kane.
10.52: Letter of Understanding to Douglas I. Falk, dated
December 15, 1999, from ICG Communications, Inc.
regarding Section 4 of the Employment Agreement between
ICG Communications, Inc. and Douglas I. Falk.
10.53: Employment Agreement, dated as of July 1, 1999, by and
between ICG Communications, Inc. and Carla J. Wolin.
10.54: Amendment to Employment Agreement, dated as of August
22, 1999, by and between ICG Communications, Inc. and
Carla J. Wolin.
10.55: Employment Agreement, dated as of January 7, 2000, by and
between ICG Communications, Inc. and James Washington.
10.56: General Release, Covenant Not to Sue and Agreement, dated
as of January 17, 2000, between ICG Communications, Inc.
and Douglas I. Falk.
10.57: Employment Agreement, dated as of February 1, 2000, by
and between ICG Communications, Inc. and Cindy Z.
Schonhaut.
10.58: Employment Agreement, dated as of March 8, 2000, by and
between ICG Communications, Inc. and Pamela S. Jacobson
(11) Statement re Computation of per Share Earnings
Not Applicable.
(12) Statement re Computation of Ratios
Not Applicable.
-63-
(13) Annual Report to Security Holders
Not Applicable.
(21) Subsidiaries of the Registrant
21.1: Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security
Holders.
Not Applicable.
(23) Consents
23.1: Consent of KPMG LLP.
23.2: Consent of Ernst & Young LLP.
(24) Power of Attorney.
Not Applicable.
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Communications, Inc. for
the Year Ended December 31, 1999.
(B) Report on Form 8-K
The following report on Form 8-K was filed by the Registrants during the
quarter ended December 31, 1999:
ICG Communications, Inc. (i) Current Report on Form 8-K dated November
ICG Holdings (Canada) Co. 1, 1999 regarding the announcement of the
ICG Holdings, Inc.: Company's earnings information and
results ofoperations for the quarter
ended September 30, 1999.
(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).
-64-
FINANCIAL STATEMENTS
Page
-------
Independent Auditors' Report - Report of KPMG LLP................................................................. F-2
Report of Ernst & Young LLP, Independent Auditors, for the Year Ended December 31, 1997........................... F-3
Consolidated Balance Sheets, December 31, 1998 and 1999........................................................... F-4
Consolidated Statements of Operations, Years Ended December 31, 1997, 1998 and 1999............................... F-6
Consolidated Statements of Stockholders' Equity (Deficit), Years Ended
December 31, 1997, 1998 and 1999............................................................................... F-8
Consolidated Statements of Cash Flows, Years Ended December 31, 1997, 1998 and 1999............................... F-9
Notes to Consolidated Financial Statements........................................................................ F-12
F-1
INDEPENDENT AUDITORS' REPORT - REPORT OF KPMG LLP
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of NETCOM On-Line Communication
Services, Inc. (NETCOM), a discontinued wholly owned subsidiary of the Company,
for the year ended December 31, 1997, whose loss from operations constitutes
83.8 percent of the consolidated loss from discontinued operations in 1997.
Those consolidated financial statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for NETCOM in 1997, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ICG Communications, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Denver, Colorado
February 16, 2000
F-2
REPORT OF ERNST & YOUNG LLP, Independent Auditors
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of NETCOM On-Line Communication Services, Inc. for the year ended
December 31, 1997 (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of NETCOM On-Line Communication Services, Inc. for the year December
31, 1997, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
San Jose, California
February 13, 1998
F-3
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
- -------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------
Assets 1998 1998
- ------ ------------------- -------------
(in thousands)
Current assets:
Cash and cash equivalents $210,307 103,288
Short-term investments available for sale (note 5) 52,000 22,219
Receivables:
Trade, net of allowance of $14.4 million and $78.7 million
at December 31, 1998 and 1999, respectively (note 14) 113,030 167,273
Other 529 1,458
--------------- --------------
113,559 168,731
--------------- --------------
Prepaid expenses, deposits and inventory 11,530 11,388
Net current assets of discontinued operations (note 3) 66 -
-------------- -------------
Total current assets 387,462 305,626
-------------- -------------
Property and equipment (notes 6, 9, 10, 14 and 16) 1,064,112 1,805,378
Less accumulated depreciation (156,054) (279,698)
-------------- -------------
Net property and equipment 908,058 1,525,680
-------------- -------------
Restricted cash (note 11) 16,912 12,537
Investments (note 7) - 28,939
Other assets:
Goodwill, net of accumulated amortization of $12.4
million and $31.7 million at December 31, 1998 and
1999, respectively (note 4) 110,513 95,187
Deferred financing costs, net of accumulated
amortization of $9.6 million and $14.4 million at
December 31, 1998 and 1999, respectively (note 10) 35,958 35,884
Transmission and other licenses 5,646 -
Other, net (note 8) 22,324 16,768
-------------- -------------
174,441 147,839
-------------- -------------
Net non-current assets of discontinued operations (note 3) 102,774 -
-------------- -------------
Total assets (note 15) $ 1,589,647 2,020,621
============== =============
(Continued)
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- -------------------------------------------------------------------------------------------------------------
December 31,
Liabilities and Stockholders' Deficit ----------------------------
- ------------------------------------- 1998 1999
----------- --------------
(in thousands)
Current liabilities:
Accounts payable $ 30,424 112,291
Payable pursuant to IRU agreement (note 9) - 135,322
Accrued liabilities 51,565 85,709
Deferred revenue (note 14) 5,647 25,175
Deferred gain on sale (note 3) - 5,475
Current portion of capital lease obligations (notes 9 and 14) 4,846 8,090
Current portion of long-term debt (note 10) 46 796
Current liabilities of discontinued operations (note 3) - 529
------------- -------------
Total current liabilities 92,528 373,387
------------- -------------
Capital lease obligations, less current portion (notes 9 and 14) 62,946 63,348
Long-term debt, net of discount, less current portion (note 10) 1,598,998 1,905,901
Other long-term liabilities - 2,526
------------- -------------
Total liabilities 1,754,472 2,345,162
------------- -------------
Redeemable preferred stock of subsidiary ($346.2 million and $397.9 million
liquidation value at December 31, 1998 and 1999, respectively) (note 11) 338,310 390,895
Company-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company which holds solely Company preferred stock ($133.4
million liquidation value at December 31, 1998 and 1999) (note 11) 128,042 128,428
Stockholders' deficit (note 12):
Common stock, $.01 par value, 100,000,000 shares authorized; 46,360,185 and
47,761,337 shares issued and outstanding at December 31, 1998 and 1999,
respectively (notes 1 and 12) 464 478
Additional paid-in capital 577,940 599,282
Accumulated deficit (1,209,462) (1,443,624)
Accumulated other comprehensive loss (119) -
------------- -------------
Total stockholders' deficit (631,177) (843,864)
------------- -------------
Commitments and contingencies (notes 7, 9, 10, 11 and 14)
Total liabilities and stockholders' deficit $ 1,589,647 2,020,621
============= =============
See accompanying notes to consolidated financial statements.
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1998 and 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------------------------
1997 1998 1999
---------------- ---------------------- ---------------------
(in thousands, except per share data)
Revenue (notes 2, 14 and 15) $ 149,358 303,317 479,226
Operating costs and expenses:
Operating costs 147,338 187,260 238,927
Selling, general and administrative expenses 121,884 158,153 239,756
Depreciation and amortization (notes 6 and 15) 49,836 91,927 174,239
Provision for impairment of long-lived assets
(note 15 and 16) 5,169 - 31,815
Restructuring costs (note 17) - 1,786 -
Other, net 292 4,877 387
---------- ---------- ---------
Total operating costs and expenses 324,519 444,003 685,124
---------- ---------- ---------
Operating loss (175,161) (140,686) (205,898)
Other (expense) income:
Interest expense (notes 10 and 15) (117,521) (170,015) (212,420)
Interest income 21,828 28,401 16,300
Other expense, net, including realized gains and
losses on marketable trading securities (note 7) (424) (1,118) (2,522)
---------- ---------- ---------
(96,117) (142,732) (198,642)
---------- ---------- ---------
Loss from continuing operations before income
taxes, preferred dividends and extraordinary gain (271,278) (283,418) (404,540)
Income tax expense (notes 15 and 18) - (90) (25)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses (note 11) (39,019) (55,183) (61,897)
---------- ---------- ---------
Loss from continuing operations before $(310,297) (338,691) (466,462)
extraordinary gain ---------- ---------- ---------
(Continued)
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------------------------------
1997 1998 1999
----------------- ------------------- ------------------
(in thousands, except per share data)
Discontinued operations (notes 1 and 3):
Loss from discontinued operations $ (50,438) (77,577) (1,036)
(Loss) gain on disposal of discontinued
operations, net of income taxes of $4.7
million in 1999 - (1,777) 37,825
---------------- ---------------- -------------
(50,438) (79,354) 36,789
---------------- ---------------- -------------
Net loss before extraordinary gain (360,735) (418,045) (429,673)
---------------- ---------------- -------------
Extraordinary gain on sales of operations of
NETCOM, net of income taxes of
$2.0 million (notes 3 and 15) - - 195,511
---------------- ---------------- -------------
Net loss $ (360,735) (418,045) (234,162)
================ ================ =============
Other comprehensive loss:
Foreign currency translation adjustment (527) (263) -
Unrealized loss on short-term investments
available for sale (540) - -
---------------- ---------------- -------------
Other comprehensive loss (1,067) (263) -
---------------- ---------------- -------------
Comprehensive loss $ (361,802) (418,308) (234,162)
================ ================ =============
Net loss per share - basic and diluted:
Loss from continuing operations $ (7.30) (7.49) (9.90)
(Loss) income from discontinued operations (1.19) (1.76) 0.78
Extraordinary gain on sales of operations of
NETCOM - - 4.15
--------------- --------------- -------------
Net loss per share - basic and diluted $ (8.49) (9.25) (4.97)
================ ================ =============
Weighted average number of shares outstanding -
basic and diluted 42,508 45,194 47,116
=============== =============== ===========
See accompanying notes to consolidated financial statements.
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1997, 1998 and 1999
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Common stock Additional comprehensive stockholders'
------------------ paid-in Accumulated income equity
Shares Amount capital deficit (loss) (deficit)
-------- -------- --------- ----------- ------------ ----------
(in thousands)
Balances at January 1, 1997 41,930 $8,189 499,993 (430,682) 1,211 78,711
Shares issued for cash in connection with the exercise
of options and warrants (note 12) 938 5 4,111 - - 4,116
Shares issued in connection with business combination
(note 4) 687 7 15,953 - - 15,960
Shares issued for cash in connection with employee
stock purchase plan (note 12) 240 2 3,020 - - 3,022
Shares issued as contribution to 401(k) plan (note 19) 179 2 3,008 - - 3,010
Exchange of ICG Holdings (Canada), Inc. common shares
for ICG common stock - (7,456) 7,456 - - -
Reversal of unrealized gains on short-term investments
available for sale - - - - (540) (540)
Cumulative foreign currency translation adjustment - - - - (527) (527)
Net loss - - - (360,735) - (360,735)
-------- -------- --------- ----------- ------------ ----------
Balances at December 31, 1997 43,974 749 533,541 (791,417) 144 (256,983)
Shares issued for cash by subsidiary, net of selling
costs 127 1 3,384 - - 3,385
Shares issued for cash in connection with the exercise
of options and warrants (note 12) 1,519 15 19,268 - - 19,283
Shares issued in connection with business combinations
(note 4) 502 5 15,527 - - 15,532
Shares issued for cash in connection with the employee
stock purchase plan (note 12) 111 1 2,249 - - 2,250
Shares issued as contribution to 401(k) plan (note 19) 127 2 3,662 - - 3,664
Exchange of ICG Holdings (Canada), Inc. common shares
for ICG common stock - (309) 309 - - -
Cumulative foreign currency translation adjustment - - - - (263) (263)
Net loss - - - (418,045) - (418,045)
-------- -------- --------- ----------- ------------ ----------
Balances at December 31, 1998 46,360 464 577,940 (1,209,462) (119) (631,177)
Shares issued for cash in connection with the exercise
of options and warrants (note 12) 935 9 12,524 - - 12,533
Shares issued for cash in connection with the employee
stock purchase plan (note 12) 206 2 3,359 - - 3,361
Shares issued as contribution to 401 (k) plan (note 19) 260 3 5,457 - - 5,460
Shares issued upon conversion of long-term debt - - 2 - - 2
Reversal of cumulative foreign currency translation
adjustment - - - - 119 119
Net loss - - - (234,162) - (234,162)
-------- -------- --------- ----------- ------------ ----------
Balances at December 31, 1999 47,761 $ 478 599,282 (1,443,624) - (843,864)
======== ======== ========= =========== ============ ==========
See accompanying notes to consolidated financial statement
F-8
ICG COMMJNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------------------------
1997 1998 1999
----------------- ----------------- ------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (360,735) (418,045) (234,162)
Net loss (income) from discontinued operations 50,438 79,354 (36,789)
Extraordinary gain on sales of discontinued operations - (195,511)
Adjustments to reconcile net loss to net cash (used) provided
by operating activities:
Recognition of deferred gain - (29,250)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses 37,904 55,183 61,897
Depreciation and amortization 49,836 91,927 174,239
Provision for impairment of long-lived assets 5,169 31,815
Deferred compensation - 1,293
Net loss (gain) on disposal of long-lived assets 292 4,877 (906)
Provision for uncollectible accounts 3,573 11,238 60,019
Interest expense deferred and included in long-term
debt, net of amounts capitalized on assets under
construction 102,947 152,601 186,080
Interest expense deferred and included in capital lease
obligations 6,345 5,637 5,294
Amortization of deferred advertising costs included
in selling, general and administrative expenses - 1,795
Amortization of deferred financing costs included in
interest expense 2,514 4,478 4,860
Write-off of non-operating assets 200
Contribution to 401(k) plan through issuance of
common stock 3,010 3,664 5,460
Change in operating assets and liabilities, excluding the
effects of business combinations, dispositions and
non-cash transactions:
Receivables (24,257) (88,962) (120,857)
Prepaid expenses, deposits and inventory (5,426) (1,566) 3,474
Deferred advertising costs - (1,795)
Accounts payable and accrued and other liabilities 20,846 (2,288) 83,406
Deferred revenue 583 1,842 20,721
----------------- ----------------- ------------------
Net cash (used) provided by operating activities $ (106,761) (100,060) 21,083
----------------- ----------------- ------------------
(Continued)
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------------------------
1997 1998 1999
------------ ----------------- ------------------
(in thousands)
Cash flows from investing activities:
Proceeds from sales of discontinued operations, net of
selling costs and cash included in sales $ - - 374,897
Payments for business acquisitions, net of cash acquired (45,861) (67,841) -
Acquisition of property, equipment and other assets (261,318) (355,261) (591,518)
Payments for construction of corporate headquarters (29,432) (4,944) (3,300)
Purchase of corporate headquarters - - (528)
Proceeds from disposition of property, equipment and other
assets 14,574 168 4,300
Proceeds from sale of corporate headquarters, net of selling
and other costs - 30,283 -
(Purchase) sale of short-term investments available for sale (65,580) 60,281 29,781
Proceeds from sale of marketable securities, net of realized
gain - - 30,000
(Increase) decrease in restricted cash (25,416) 7,737 4,375
Increase in long-term notes receivable from affiliate and
others (9,552) (4,880) -
Purchase of investments - - (28,939)
Purchase of minority interest in subsidiaries - (9,104) (6,039)
-------------- ----------------- ------------------
Net cash used by investing activities (422,585) (343,561) (186,971)
-------------- ----------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sale by subsidiary - 3,385 -
Business combination 15,960 - -
Exercise of options and warrants 4,116 19,283 12,533
Employee stock purchase plan 1,319 2,250 3,361
Proceeds from issuance of redeemable preferred securities
of subsidiary, net of issuance costs 223,628 - -
Proceeds from issuance of long-term debt 99,908 550,574 80,000
Deferred long-term debt issuance costs (3,554) (17,591) (4,785)
Principal payments on capital lease obligations (29,735) (16,509) (14,662)
Principal payments on long-term debt (1,598) (6,864) (502)
Payments of preferred dividends (1,240) (8,927) (8,927)
-------------- ----------------- ------------------
Net cash provided by financing activities 308,804 525,601 67,018
-------------- ----------------- ------------------
Net (decrease) increase in cash and cash equivalents (220,542) 81,980 (98,870)
Net cash (used) provided by discontinued operations (19,204) 7,753 (8,149)
Cash and cash equivalents, beginning of year 360,320 120,574 210,307
------------- ----------------- ------------------
Cash and cash equivalents, end of year $ 120,574 210,307 103,288
============== ================= ==================
(Continued)
F-10
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------------------
1997 1998 1999
--------------- ----------------- --------------
(in thousands)
Supplemental disclosure of cash flows information of
continuing operations:
Cash paid for interest $ 5,715 7,299 15,216
=============== ================= ================
Cash paid for income taxes $ - 90 2,848
=============== ================= ================
Supplemental schedule of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations (note 4) $ - 15,532 -
=============== ================= ================
Acquisition of corporate headquarters assets through
the issuance of long-term debt and conversion of
security deposit (note 10) $ - - 33,077
=============== ================= ================
Assets acquired pursuant to IRU agreement - - 135,322
Assets acquired under capital leases - 775 8,393
----------------- ----------------- ----------------
Total (notes 9 and 14) $ - 775 143,715
================= ================= ================
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation (ICG), was incorporated on
April 11, 1996 and is the publicly-traded U.S. parent company of ICG
Funding, LLC, a special purpose Delaware limited liability company and
wholly owned subsidiary of ICG (ICG Funding), ICG Holdings (Canada) Co., a
Nova Scotia unlimited liability company (Holdings-Canada), ICG Holdings,
Inc., a Colorado corporation (Holdings), and ICG Services, Inc., a Delaware
corporation (ICG Services) and their subsidiaries. ICG and its
subsidiaries are collectively referred to as the "Company."
The Company's principal business activity is telecommunications services
(Telecom Services). Telecom Services consists primarily of the Company's
competitive local exchange carrier operations which provide local, long
distance, data and enhanced telephony services to business end-users and
Internet service providers (ISPs). Additionally, beginning in February
1999, the Company began providing wholesale network services over its
nationwide data network to ISPs and other telecommunications providers.
Through October 22, 1999, the Company provided Network Services which
consisted of information technology services and selected networking
products, focusing on network design, installation, maintenance and support
for a variety of end-users, including Fortune 1000 firms and other large
businesses and telecommunications companies. Through November 30, 1999,
the Company also provided Satellite Services which consisted of satellite
voice, data and video services provided to major cruise ship lines, the
U.S. Navy, the offshore oil and gas industry and integrated communications
providers. The Company's consolidated financial statements reflect the
operations and net assets of Network Services and Satellite Services as
discontinued for all periods presented.
On January 21, 1998, ICG completed a merger with NETCOM On-Line
Communication Services, Inc. (NETCOM). The Company issued approximately
10.2 million shares of ICG Common Stock in connection with the merger,
valued at approximately $284.9 million on the date of the merger. The
business combination was accounted for as a pooling of interests.
Effective November 3, 1998, the Company's board of directors adopted the
formal plan to dispose of the operations of NETCOM and, accordingly, the
Company's consolidated financial statements reflect the operations and net
assets of NETCOM as discontinued for all periods presented.
In conjunction with the sales, the legal name of the NETCOM subsidiary was
changed to ICG NetAhead, Inc. (NetAhead) (see note 3).
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and give
retroactive effect to the merger of ICG and NETCOM on January 21,
1998, which was accounted for as a pooling of interests, and include
the accounts of NETCOM and its subsidiaries as of the end of and for
the periods presented. Additionally, the accompanying consolidated
financial statements reflect the operations of NETCOM, Network
Services, Satellite Services and Zycom Corporation (Zycom) as
discontinued for all periods presented.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Inventory
Inventory, consisting of equipment to be utilized in the installation
of telecommunications systems, services and networks for customers, is
recorded at the lower of cost or market.
(d) Investments
The Company's short-term investment objectives are safety, liquidity
and yield, in that order. The Company invests primarily in high-
grade, short-term investments which consist of money market
instruments, commercial paper, certificates of deposit, government
obligations and corporate bonds, all of which are considered to be
available for sale. Realized gains and losses and declines in value
judged to be other than temporary are included in the statement of
operations.
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(2) Summary of Significant Accounting Policies (continued)
Investments in partnership interests and in common or preferred stock
for which there is no public trading market and which represent less
than a 20% equity interest in the investee company are accounted for
using the cost method, unless the Company exercises significant
influence and/or control over the operations of the investee company,
in which case the equity method of accounting is used.
(e) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment
are as follows:
Furniture, fixtures and office equipment 3 to 7 years
Machinery and equipment 3 to 8 years
Fiber optic equipment 8 years
Switch equipment 10 years
Fiber optic network 20 years
Buildings and improvements 31.5 years
(f) Capitalized Labor Costs
Also included in property and equipment are capitalized labor and
other costs associated with network development, service installation
and internal-use software development.
The Company capitalizes costs of direct labor and other employee
benefits associated with the development, installation and expansion
of the Company's networks. Depreciation begins in the period the
network is substantially complete and available for use and is
recorded on a straight-line basis over the estimated useful life of
the equipment or network, ranging from eight to 20 years.
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(2) Summary of Significant Accounting Policies (continued)
The Company capitalizes costs of direct labor and other employee
benefits associated with installing and provisioning local access
lines for new customers and providing new services to existing
customers, since these costs are directly associated with multi-
period, contractual, revenue-producing activities. Direct labor costs
are capitalized only when directly related to the provisioning of
customer services with multi-period contracts. Capitalization begins
upon the acceptance of the customer order and continues until the
installation is complete and the service is operational. Capitalized
service installation costs are depreciated on a straight-line basis
over two years, the estimated average customer contract term.
The Company capitalizes costs of direct labor and other employee
benefits associated with the development of internal-use computer
software in accordance with Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.
Internal-use software costs are depreciated over the estimated useful
life of the software, typically two to five years, beginning in the
period when the software is substantially complete and ready for use.
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the straight-
line method. Goodwill resulting from the application of the purchase
method of accounting for business combinations is amortized over a
maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from two to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is ten
years, and is included in interest expense.
(h) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets,
including goodwill, pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(2) Summary of Significant Accounting Policies (continued)
(SFAS 121), which requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. An impairment
loss is recognized when estimated undiscounted future cash flows
expected to be generated by the asset are less than its carrying
value. Measurement of the impairment loss is based on the estimated
fair value of the asset, which is generally determined using valuation
techniques such as the discounted present value of expected future
cash flows.
(i) Foreign Currency Translation Adjustments
The functional currency for all operations of NETCOM, which were sold
during the year ended December 31, 1999, was the local currency. As
such, all assets and liabilities denominated in foreign currencies
were translated through March 16, 1999 at the exchange rate on the
balance sheet date. Revenue and costs and expenses were translated at
weighted average rates of exchange prevailing during the period.
Translation adjustments are included in other comprehensive loss,
which is a separate component of stockholders' equity (deficit).
Gains and losses resulting from foreign currency translations are
included in discontinued operations and are not significant for the
periods presented.
(j) Revenue Recognition
The Company recognizes revenue from services provided to its business
end-user and ISP customers as such services are provided and charges
direct selling expenses to operations as incurred. Maintenance
revenue is recognized as services are provided. Uncollectible trade
receivables are accounted for using the allowance method.
Generally, the Company recognizes revenue earned under indefeasible
rights of usw (IRUs), of constructed dark fiber, in exchange for cash,
ratably over the term of the agreement. In the event that the IRU
meets the definition of a sales-type lease pursuant to Statement of
Financial Accounting Standards No. 13, Accounting for Leases (SFAS No.
13), and the Company transfers ownership of the underlying assets to
the customer, the Company will apply sales-type lease accounting and
recognize revenue and related costs at the inception of the agreement.
Prior to June 30, 1999, the Company applied sales-type lease
accounting to IRUs that met the
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(2) Summary of Significant Accounting Policies (continued)
criteria included in SFAS No. 13, whether or not the agreement
provided for the transfer of ownership of the underlying assets.
Under either application, revenue recognition begins in the period
that facilities are available for use by the customer. Revenue earned
on the portion of IRUs attributable to the provision of maintenance
services is recognized as services are provided, or ratably over the
term of the agreement.
Deferred revenue includes advance billings to customers for services
provided by the Company's operations which have been billed in advance
to the customer in compliance with contract terms.
(k) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109). Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) Net Loss Per Share
Net loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average
number of shares outstanding represents combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the years ended
December 31, 1997 and 1998, and ICG Common Stock only for the year
ended December 31, 1999.
Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share (SFAS
128). Under SFAS 128, basic loss per share is computed on the basis
of weighted average common shares outstanding. Diluted loss per share
considers potential common stock instruments in the calculation of
weighted average common shares outstanding. Potential common
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(2) Summary of Significant Accounting Policies (continued)
stock instruments, which include options, warrants and convertible
subordinated notes and preferred securities, are not included in the
Company's net loss per share calculation, as their effect is anti-
dilutive.
(m) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations (APB 25).
The Company has provided pro forma disclosures of net loss and net
loss per share as if the fair value based method of accounting for
these plans, as prescribed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123),
had been applied. Pro forma disclosures include the effects of
employee and non-employee director stock options granted during the
periods presented.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
_______________________________________________________________________________
(3) Discontinued Operations and Divestitures
Loss from discontinued operations consists of the following:
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
NETCOM (a) $(33,092) (61,090) -
Network Services (b) (3,494) (8,583) (1,349)
Satellite Services (c) (7,461) (3,056) 313
Zycom (d) (6,391) (4,848) -
-------- ------- ------
Loss from discontinued operations $(50,438) (77,577) (1,036)
======== ======= ======
(a) NETCOM
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an ISP
located in Atlanta, Georgia and predecessor to EarthLink, Inc.
(MindSpring). Total proceeds from the sale were $245.0 million,
consisting of $215.0 million in cash and 376,116 shares of common
stock of MindSpring, valued at approximately $79.76 per share at the
time of the transaction. Assets and liabilities sold to MindSpring
included those directly related to the domestic operations of NETCOM's
Internet dial-up, dedicated access and Web site hosting services. In
conjunction with the sale to MindSpring, the Company entered into an
agreement to lease to MindSpring for a one-year period the capacity of
certain network operating assets formerly owned by NETCOM and retained
by the Company. MindSpring utilized the Company's network capacity
under this agreement to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company
received for a one-year period 50% of the gross revenue earned by
MindSpring from the dedicated access customers formerly owned by
NETCOM. The carrying value of the assets retained by the Company was
approximately $21.7 million, including approximately $17.5 million of
network equipment, on February 17, 1999. The Company also retained
approximately $11.3 million of accrued liabilities and capital lease
obligations.
On March 16, 1999, the Company sold all of the capital stock of
NETCOM's international operations for total proceeds of approximately
$41.1 million. MetroNET Communications Corp., a Canadian entity, and
Providence Equity Partners, located in Providence, Rhode Island
(Providence), together purchased the
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(3) Discontinued Operations and Divestitures (continued)
80% interest in NETCOM Canada Inc. owned by NETCOM for approximately
$28.9 million in cash. Additionally, Providence purchased all of the
capital stock of NETCOM Internet Access Services Limited, NETCOM's
operations in the United Kingdom, for approximately $12.2 million in
cash.
During the year ended December 31, 1999, the Company recorded a
combined gain on the sales of the operations of NETCOM of
approximately $195.5 million, net of income taxes of approximately
$2.0 million. Offsetting the gain on the sales is approximately $16.6
million of net losses from operations of NETCOM from November 3, 1998
(the date on which the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM) through the dates of the
sales. Additionally, since the Company expected to generate operating
costs in excess of revenue under its network capacity agreement with
MindSpring and the terms of the sale agreement were dependent upon and
negotiated in conjunction with the terms of the network capacity
agreement, the Company deferred approximately $34.7 million of the
proceeds from the sale agreement to be applied on a periodic basis to
the network capacity agreement. The deferred proceeds were recognized
in the Company's statement of operations as the Company incurred cash
operating losses under the network capacity agreement. Accordingly,
the Company did not recognize any revenue, operating costs or selling,
general and administrative expenses from services provided to
MindSpring for the term of the agreement. Any incremental revenue or
costs generated by other customers were recognized in the Company's
consolidated statement of operations as incurred. During the year
ended December 31, 1999, the Company applied $29.3 million of deferred
proceeds from the sale of the operating assets and liabilities of
NETCOM to the network capacity agreement with MindSpring, which
entirely offset the costs of the Company's operations under the
agreement. The Company, through NetAhead, is currently utilizing the
retained network operating assets to provide wholesale capacity and
other enhanced network services on an ongoing basis to MindSpring
under a new agreement as well as to other ISPs and telecommunications
providers. Operating results from such services will be included in
the Company's statement of operations as incurred. Since the
operations sold were acquired by the Company in a transaction
accounted for as a pooling of interests, the gain on the sales of the
operations of NETCOM is classified as an extraordinary item in the
Company's consolidated statement of operations.
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(3) Discontinued Operations and Divestitures (continued)
(b) Network Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in its wholly-owned
subsidiaries, ICG Fiber Optic Technologies, Inc. and Fiber Optic
Technologies of the Northwest, Inc. (collectively, Network Services).
Accordingly, the Company's consolidated financial statements reflect
the operations of Network Services as discontinued for all periods
presented. During the three months ended June 30, 1999, the Company
accrued approximately $8.0 million for estimated losses on the
disposal of Network Services, including approximately $0.3 million for
estimated operating losses of Network Services during the phase out
period. On October 22, 1999, the Company completed the sale of all of
the capital stock of Network Services to ACS Communications, Inc. for
total proceeds of $23.9 million in cash. For the year ended December
31, 1999, the Company recorded a loss on the disposal of Network
Services of $10.9 million. The Company has included in its loss on
disposal of Network Services income from operations of $0.8 million of
Network Services from July 15, 1999 through the date of sale.
(c) Satellite Services
On July 15, 1999, the Company's board of directors adopted a formal
plan to dispose of the Company's investments in ICG Satellite
Services, Inc. and Maritime Telecommunications Network, Inc.
(collectively, Satellite Services). Accordingly, the Company's
consolidated financial statements reflect the operations of Satellite
Services as discontinued for all periods presented. On November 30,
1999, the Company completed the sale of all of the capital stock of
Satellite Services to ATC Teleports, Inc. for total proceeds of $98.1
million in cash. For the year ended December 31, 1999, the Company
recorded a gain on the disposal of Satellite Services of $48.7 million
net of income taxes of approximately $4.7 million. Offsetting the
gain on the sale is $0.7 million in net losses from operations of
Satellite Services from July 15, 1999 through the date of sale.
On July 17, 1998, the Company entered into separate definitive
agreements to sell the capital stock of MCN and Nova-Net
Communications, Inc. (Nova-Net), two wholly owned subsidiaries within
the Company's Satellite Services operations. The sale of MCN was
completed on August 12, 1998. The Company recorded a gain on the sale
of MCN of approximately $0.9 million during the year ended December
31,
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(3) Discontinued Operations and Divestitures (continued)
1998. The sale of Nova-Net was completed on November 18, 1998. The
Company recorded a loss on the sale of Nova-Net of approximately $0.2
million during the year ended December 31, 1998.
(d) Zycom
The Company owns a 70% interest in Zycom Corporation (Zycom) which,
through its wholly owned subsidiary, Zycom Network Services, Inc.
(ZNSI), operated an 800/888/900 number services bureau and a switch
platform in the United States and supplied information providers and
commercial accounts with audiotext and customer support services. In
June 1998, Zycom was notified by its largest customer of the
customer's intent to transfer its call traffic to another service
bureau. In order to minimize the obligation that this loss in call
traffic would generate under Zycom's volume discount agreements with
AT&T Corp. (AT&T), its call transport provider, ZNSI entered into an
agreement on July 1, 1998 with an unaffiliated entity, ICN Limited
(ICN), whereby ZNSI assigned the traffic of its largest audiotext
customer and its other 900-number customers to ICN, effective October
1, 1998. As part of this agreement, ICN assumed all minimum call
traffic volume obligations to AT&T.
The call traffic assigned to ICN represented approximately 86% of
Zycom's revenue for the year ended December 31, 1998. The loss of
this significant portion of Zycom's business, despite management's
best efforts to secure other sources of revenue, raised substantial
doubt as to Zycom's ability to operate in a manner which would benefit
Zycom's or the Company's shareholders. Accordingly, on August 25,
1998, Zycom's board of directors approved a plan to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom
completed the transfer of all customer traffic to other providers. On
January 4, 1999, the Company completed the sale of the remainder of
Zycom's long-lived operating assets to an unrelated third party for
total proceeds of $0.2 million. As Zycom's assets were recorded at
estimated fair market value at December 31, 1998, no gain or loss was
recorded on the sale during the year ended December 31, 1999.
The Company's consolidated financial statements reflect the operations
of Zycom as discontinued for all periods presented. Zycom reported
net losses from operations of approximately $1.2 million for the
period from August 25, 1998 to December 31, 1998 and reported no
income or losses from operations for the year ended December 31, 1999.
The Company has accrued for all expected future net losses of Zycom.
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(3) Discontinued Operations and Divestitures (continued)
Included in net current liabilities and net non-current assets of
discontinued operations in the Company's consolidated balance sheets
are the following accounts of Zycom:
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Cash and cash equivalents $ 47 -
Receivables, net 90 -
Prepaid expenses and deposits 11 -
Accounts payable and accrued liabilities (1,092) (529)
------- ----
Net current liabilities of Zycom $ (944) (529)
======= ====
Net non-current assets of Zycom - property
and equipment, net $ 220 -
======= ====
(4) Purchase Acquisitions
The acquisitions described below have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
operations of the acquired businesses are included in the Company's
consolidated financial statements from the respective dates of acquisition.
Revenue, net loss and net loss per share on a pro forma basis, assuming the
acquisitions were completed at the beginning of the periods presented, are
not significantly different from the Company's historical results for the
periods presented herein.
On July 27, 1998, the Company acquired DataChoice Network Services, L.L.C.
(DataChoice) for total consideration of $5.9 million, consisting of 145,997
shares of ICG Common Stock and approximately $1.1 million in cash. The
excess of the purchase price over the fair value of the net identifiable
assets acquired of $5.8 million has been recorded as goodwill and is being
amortized on a straight-line basis over five years. DataChoice, a Colorado
limited liability company, provides point-to-point data transmission resale
services through its long-term agreements with multiple regional carriers
and nationwide providers.
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(4) Purchase Acquisitions (continued)
The Company completed a series of transactions on July 30, 1998 to acquire
NikoNet, Inc., CompuFAX Acquisition Corp. and Enhanced Messaging Services,
Inc. (collectively, NikoNet). The Company paid approximately $13.8 million
in cash, which included dividends payable by NikoNet to its former owners
and amounts to satisfy NikoNet's former line of credit, assumed
approximately $0.7 million in liabilities and issued 356,318 shares of ICG
Common Stock with a fair market value of approximately $10.7 million on the
date of the acquisition, for all the capital stock of NikoNet. The excess
of the purchase price over the fair value of the net identifiable assets
acquired of $22.6 million has been recorded as goodwill and is being
amortized on a straight-line basis over five years. Located in Atlanta,
Georgia, NikoNet provides broadcast facsimile services and enhanced
messaging services to financial institutions, corporate investor and public
relations departments and other customers. The Company believes the
acquisition of NikoNet enables the Company to offer expanded services to
its Telecom Services customers.
On August 27, 1998, the Company purchased, for $9.0 million in cash, the
remaining 20% equity interest in ICG Ohio LINX, Inc. (ICG Ohio LINX) which
it did not already own. ICG Ohio LINX is a facilities-based competitive
local exchange carrier which operates a fiber optic telecommunications
network in Cleveland and Dayton, Ohio. The Company's additional investment
in ICG Ohio LINX, including incremental costs of obtaining that investment
of $0.1 million, is included in goodwill in the accompanying consolidated
balance sheets.
In January 1997, the Company announced a strategic alliance with Central
and South West Corporation (CSW) formed for the purpose of developing and
marketing telecommunications services in certain cities in Texas. Based in
Austin, Texas, the venture entity was a limited partnership named CSW/ICG
ChoiceCom, L.P. (ChoiceCom). On December 31, 1998, the Company purchased
100% of the partnership interests in ChoiceCom from CSW for approximately
$55.7 million in cash and the assumption of certain liabilities of
approximately $9.1 million. In addition, the Company converted
approximately $31.6 million of receivables from prior advances made to
ChoiceCom by the Company to its investment in ChoiceCom. The excess of the
purchase price over the fair value of the net identifiable assets acquired
of $29.4 million has been recorded as goodwill and is being amortized on a
straight-line basis over 10 years. The acquired company currently provides
local exchange and long distance services in Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas.
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(4) Purchase Acquisitions (continued)
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 ICG Common Stock for approximately $16.0 million to
certain shareholders of CBG. On March 24, 1998, the Company purchased the
remaining approximate 9% interest in CBG for approximately $2.9 million in
cash. The excess of the purchase price over the fair value of the net
identifiable assets acquired in the combined transactions of $48.9 million
has been recorded as goodwill and was initially being amortized on a
straight-line basis over six years. Due to unanticipated turnover in CBG's
customer base existing at the time of the acquisition, the Company
shortened the estimated useful life of goodwill associated with the
acquisition of CBG to four years during the year ended December 31, 1999.
(5) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
--------------------------
1998 1999
---------- -----------
(in thousands)
Certificates of deposit $31,000 10,442
Commercial paper 16,000 11,777
U.S. Treasury securities 5,000 -
-------- ------
$52,000 22,219
======== ======
At December 31, 1998 and 1999, the estimated fair value of the Company's
certificates of deposit, commercial paper and U.S. Treasury securities
approximated cost. All certificates of deposit, commercial paper and U.S.
Treasury securities included in short-term investments available for sale
mature within one year.
F-25
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,
-------------------------
1998 1999
---------- ----------
(in thousands)
Land $ 709 11,503
Buildings and improvements 2,296 38,502
Furniture, fixtures and office equipment 54,859 108,024
Internal-use software costs 13,655 14,797
Machinery and equipment 20,155 32,884
Fiber optic equipment 278,596 401,676
Switch equipment 180,022 319,398
Fiber optic network 231,615 428,195
Site improvements 25,004 37,814
Service installation costs 20,679 52,649
Construction in progress 236,522 359,936
---------- ---------
1,064,112 1,805,378
Less accumulated depreciation (156,054) (279,698)
---------- ---------
$ 908,058 1,525,680
========== =========
Property and equipment includes approximately $359.9 million of equipment
which has not been placed in service at December 31, 1999, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment, software development and new
network construction.
For the years ended December 31, 1997, 1998 and 1999, the Company
capitalized interest costs on assets under construction of $3.2 million,
$10.4 million and $9.0 million, respectively. Such costs are included in
property and equipment as incurred. The Company recognized interest
expense of $117.5 million, $170.0 million and $212.4 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
Also included in property and equipment at December 31, 1998 and 1999 are
remaining unamortized costs associated with the development of internal-use
computer software of $11.7 million and $17.9 million, respectively. The
Company capitalized $2.4 million, $10.0
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(6) Property and Equipment (continued)
million and $31.6 million of such costs during the years ended December 31,
1997, 1998 and 1999, respectively.
Certain of the assets described above have been pledged as security for
long-term debt, specifically, substantially all of the assets of ICG
Services were pledged as of December 31, 1999.
The following is a summary of property and equipment held under capital
leases or acquired pursuant to an IRU agreement as of December 31, 1999:
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Machinery and equipment $ 6,419 5,270
Fiber optic equipment 798 581
Switch equipment 12,957 14,819
Fiber optic network 77,523 203,556
------- -------
97,697 224,226
Less accumulated depreciation (7,816) (19,575)
------- -------
$89,881 204,651
======= =======
Amortization of capital leases is included in depreciation and amortization
in the Company's consolidated statements of operations for all periods
presented.
(7) Investments
On March 30, 1999, the Company purchased, for approximately $10.0 million
in cash, 454,545 shares of restricted Series D-1 Preferred Stock of
NorthPoint Communications Holdings, Inc., a Delaware corporation and
competitive local exchange carrier (CLEC) based in San Francisco,
California (NorthPoint) which was converted into 555,555 shares of Class B
common stock of NorthPoint (the NorthPoint Class B Shares) on May 5, 1999.
The NorthPoint Class B Shares are convertible on or after March 31, 2000 on
a one-for-one basis into a voting class of common stock of NorthPoint. The
Company is accounting for its investment in NorthPoint under the cost
method of accounting until the NorthPoint Class B Shares are converted into
voting and tradable common stock of NorthPoint.
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(7) Investments (continued)
On August 11, 1999, the Company purchased 1,250,000 shares of Series C
Preferred Stock (the ThinkLink Preferred Stock) of International ThinkLink
Corporation (ThinkLink), for $1.0 million in cash. The ThinkLink Preferred
Stock will automatically convert tocommon stock upon the completion of the
initial public offering of the common stock of ThinkLink or upon election
to convert by the holders of a majority of the ThinkLink Preferred Stock.
The conversion rate from the ThinkLink Preferred Stock to common stock of
ThinkLink is initially one-for-one; however, such conversion rate is
subject to adjustment. The Company has accounted for its investment in
ThinkLink under the cost method of accounting. Dividends on the ThinkLink
Preferred Stock will be included in income when paid. ThinkLink is an
Internet and enhanced services provider.
On November 15, 1999, the Company entered into an agreement to purchase a
limited partnership interest in Centennial Strategic Partners VI, L.P.
(Centennial). The primary purpose of the partnership is to invest in
venture capital investments, principally by investing in equity or equity-
oriented securities of privately held companies in the electronic
communications industry. The Company has capital contribution commitments
to Centennial of $1.0 million to be funded in installments through January
15, 2002. Through December 31, 1999, the Company had contributed
approximately $0.3 million to the partnership. The Company has accounted
for its investment in Centennial under the cost method of accounting.
Investments in debt securities available for sale, partnership interests
and restricted and exchangeable common and preferred stock at December 31,
1999 includes approximately $17.7 million of available for sale investments
in U.S. Treasury securities, which mature in periods in excess of one year.
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -----------------------------------------------------------------------------
(8) Other Assets
Other assets are comprised of the following:
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Deposits $14,896 3,448
Collocation costs 5,472 12,771
Right of entry costs 2,684 2,654
Non-compete agreements 800 -
Other 206 830
------- ------
24,058 19,703
Less accumulated amortization (1,734) (2,935)
------- ------
$22,324 16,768
======= ======
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for property and equipment. Required payments due each year on or before
December 31 under the Company's capital lease obligations are as follows
(in thousands):
2000 $ 17,454
2001 17,569
2002 12,200
2003 12,056
2004 12,040
Thereafter 85,716
--------
Total minimum lease payments 157,035
Less amounts representing interest (85,597)
--------
Present value of net minimum lease payments 71,438
Less current portion (8,090)
--------
$ 63,348
========
In December 1999, the Company entered into a maximum 20-year agreement with
a major interexchange carrier to lease approximately 18,000 miles of long-
haul capacity in various regions of the United States for $140.1 million,
payable in installments through June 2000. The discounted value of the
Company's remaining payments on the lease of $135.3 million is included in
payable pursuant to IRU agreement in the accompanying consolidated balance
sheet at December 31, 1999.
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(10) Long-term Debt
Long-term debt is summarized as follows:
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Senior Facility with adjustable rate of interest due on scheduled
maturity dates, secured by assets of ICG Equipment and
NetAhead (a) $ - 79,625
9 7/8% Senior discount notes of ICG Services, net of discount (b) 266,918 293,925
10% Senior discount notes of ICG Services, net of discount (c) 327,699 361,290
11 5/8% Senior discount notes of Holdings, net of discount (d) 122,528 137,185
12 1/2% Senior discount notes of Holdings, net of discount (e) 414,864 468,344
13 1/2% Senior discount notes of Holdings, net of discount (f) 465,886 532,252
Mortgage payable with interest at 8 1/2%, due monthly through
2009, secured by building 1,084 999
Mortgage loan payable with adjustable rate of interest (14.77%
at December 31, 1999) due in full on January 31, 2013,
secured by corporate headquarters (g) - 33,077
Other 65 -
---------- ---------
1,599,044 1,906,697
Less current portion (46) (796)
---------- ---------
$1,598,998 1,905,901
========== =========
(a) Senior Facility
On August 12, 1999 and amended on December 29, 1999, ICG Equipment and
NetAhead entered into a $200.0 million senior secured financing
facility (Senior Facility) consisting of a $75.0 million term loan, a
$100.0 million term loan and a $25.0 million revolving line of credit.
The Senior Facility is guaranteed by ICG Services and is secured by
the assets of ICG Equipment and NetAhead.
As required under the terms of the loan, the Company borrowed on
August 12, 1999 the available $75.0 million on the $75.0 million term
loan. The loan bears interest at an annual interest rate of LIBOR
plus 3.5% or the base rate, as defined in the credit agreement, plus
2.5%, at the Company's option. At December 31, 1999, the $75.0
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(10) Long-term Debt (continued)
million term loan bears annual interest at LIBOR plus 3.5%, or 9.67%.
Quarterly repayments commenced September 30, 1999 and require
quarterly loan balance reductions of 0.25% through June 30, 2005 with
the remaining outstanding balance to be repaid during the final three
quarters of the loan term. The $75.0 million term loan matures on
March 31, 2006. At December 31, 1999, the Company has $74.6 million
outstanding under the $75.0 million term loan.
On August 12, 1999, the Company borrowed $5.0 million on the $100.0
million term loan. The $100.0 million term loan is available for
borrowing through August 10, 2000 at an initial annual interest rate
of LIBOR plus 3.125% or the base rate, as defined in the credit
agreement, plus 2.125%, at the Company's option. At December 31,
1999, the $5.0 million outstanding under the $100.0 million term loan
bears annual interest at LIBOR plus 3.125%, or 9.35%. Quarterly
repayments commence September 30, 2002 and require aggregate loan
balance reductions of 25% through June 30, 2003, 35% through June 30,
2004 and 40% through June 30, 2005. The $100.0 million term loan
matures on June 30, 2005.
The $25.0 million revolving line of credit is available through the
maturity date of June 30, 2005 at an initial annual interest rate of
LIBOR plus 3.125% or the base rate, as defined in the credit
agreement, plus 2.125%, at the Company's option.
The Company is required to pay commitment fees ranging from 0.625% to
1.375% for the unused portion of available borrowings under the Senior
Facility.
The terms of the Senior Facility provide certain limitations on the
use of proceeds, additional indebtedness, dividends, prepayment of the
Senior Facility and other indebtedness and certain other transactions.
Additionally, the Company is subject to certain financial covenants
based on its results of operations. During the year ended December 31,
1999, certain defined terms in the credit agreement for the Senior
Facility were amended to ensure that the Company would remain in
compliance with the financial covenants of the Senior Facility.
(b) 9 7/8% Notes
On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the 9 7/8% Notes) for gross
proceeds of approximately
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(10) Long-term Debt (continued)
$250.0 million. Net proceeds from the offering, after underwriting
and other offering costs of approximately $7.9 million, were
approximately $242.1 million.
The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and
is payable each May 1 and November 1, commencing November 1, 2003.
The indenture for the 9 7/8% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes is being accreted through
May 1, 2003, the date on which the 9 7/8% Notes may first be redeemed.
The accretion of the discount and the amortization of the debt
issuance costs are included in interest expense in the accompanying
consolidated statements of operations.
(c) 10% Notes
On February 12, 1998, ICG Services completed a private placement of
10% Senior Discount Notes due 2008 (the 10% Notes) for gross proceeds
of approximately $300.6 million. Net proceeds from the offering,
after underwriting and other offering costs of approximately $9.7
million, were approximately $290.9 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants
which provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
The 10% Notes were originally recorded at approximately $300.6
million. The discount on the 10% Notes is being accreted through
February 15, 2003, the date on which the 10% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(10) Long-term Debt (continued)
(d) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the 1997
Private Offering) of 11 5/8% Senior Discount Notes due 2007 (the 11
5/8% Notes) and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the 14% Preferred Stock) for gross proceeds of $99.9
million and $100.0 million, respectively. Net proceeds from the 1997
Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the 11 5/8%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes is being accreted through
March 15, 2002, the date on which the 11 5/8% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(e) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the 1996
Private Offering) of 12 1/2% Senior Discount Notes due 2006 (the 12
1/2% Notes) and of 14 1/4% Exchangeable Preferred Stock Mandatorily
Redeemable 2007 (the 14 1/4% Preferred Stock) for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from
the 1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12
1/2% Notes contains certain covenants which provide for
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(10) Long-term Debt (continued)
limitations on indebtedness, dividends, asset sales and certain other
transactions and effectively prohibit the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes is being accreted through
May 1, 2001, the date on which the 12 1/2% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(f) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the 1995
Private Offering) through the issuance of 58,430 units (the Units),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the 13 1/2% Notes) and warrants to purchase 33 common shares of
Holdings-Canada (the Unit Warrants). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue
at the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certaincovenants
which provide for limitations on indebtedness, dividends, asset sales
and certain other transactions and effectively prohibit the payment of
cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes is being accreted over five years until September 15, 2000, the
date on which the 13 1/2% Notes may first be redeemed. The value
assigned to the Unit Warrants, representing additional debt discount,
is also being accreted over the five-year period. The accretion of
the total discount and the amortization of the debt issuance costs are
included in interest expense in the accompanying consolidated
statements of operations. Holdings may redeem the 13 1/2% Notes on or
after September 15, 2000, in whole or in part, at the redemption
prices set forth in the agreement, plus unpaid interest, if any, at
the date of redemption.
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
____________________________________________________________________________
(10) Long-term Debt (continued)
The Unit Warrants entitled the holder to purchase one common share of
Holdings-Canada, which was exchangeable into one share of ICG Common
Stock, through August 8, 2005 at the exercise price of $12.51 per
share. In connection with the Reorganization of Holdings-Canada, all
Unit Warrants outstanding are exchangeable only for shares of ICG
Common Stock on a one-for-one basis and are no longer exchangeable for
shares of Holdings-Canada.
(g) Mortgage Loan Payable
Effective January 1, 1999, the Company purchased its corporate
headquarters, land and improvements (collectively, the Corporate
Headquarters) for approximately $43.4 million. The Company, through a
newly formed subsidiary, financed the purchase primarily through a
loan secured by a mortgage on the Corporate Headquarters, guaranteed
by ICG Services, Inc. The amended loan agreement, dated May 1, 1999,
requires monthly interest payments at an initial interest rate of
14.77% per annum, which rate increases annually by 0.003% with the
mortgage balance due January 31, 2013. The seller of the Corporate
Headquarters has retained an option to repurchase the Corporate
Headquarters at the original sales price, which option is exercisable
from January 1, 2004 through January 31, 2012.
Scheduled principal maturities of long-term debt as of December 31, 1999
are as follows (in thousands):
Year:
2000 $ 796
2001 800
2002 800
2003 800
2004 800
Thereafter 2,315,556
----------
2,319,552
Less unaccreted discount (412,855)
Less current portion (796)
----------
$1,905,901
==========
F-35
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,
-------------------------
1998 1999
---------- ----------
(in thousands)
14% Exchangeable preferred stock of Holdings,
mandatorily redeemable in 2008 (a) $124,867 144,144
14 1/4% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2007 (b) 213,443 246,751
-------- -------
$338,310 390,895
======== =======
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15 and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. All dividends paid through December 31, 1999 have
been paid through the issuance of additional shares of 14% Preferred
Stock. Holdings may exchange the 14% Preferred Stock into 14% Senior
Subordinated Exchange Debentures at any time after the exchange is
permitted by certain indenture restrictions. The 14% Preferred Stock
is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly
in arrears each February 1, May 1, August 1 and November 1, and
commenced August 1, 1996. Through May 1, 2001, the dividend is
payable, at the option of Holdings, in cash or additional shares of 14
1/4% Preferred Stock. Holdings may exchange the 14 1/4% Preferred
Stock into 14 1/4% Senior Subordinated Exchange Debentures at any time
after the exchange is permitted by certain indenture restrictions.
The 14 1/4% Preferred Stock is subject to mandatory redemption on May
1, 2007.
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(11) Redeemable Preferred Securities of Subsidiaries (continued)
(c) 6 3/4% Preferred Securities
On September 24, 1997 and October 3, 1997, ICG Funding completed a
private placement of 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the 6 3/4% Preferred
Securities) for gross proceeds of $132.25 million. Net proceeds from
the private placement, after offering costs of approximately $4.7
million, were approximately $127.6 million. Included in restricted
cash at December 31, 1999 is $8.7 million which consists of the
proceeds from the private placement which are designated for the
payment of cash dividends on the 6 3/4% Preferred Securities through
November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of 2.0812 shares of ICG Common Stock per preferred security, or
$24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after
November 18, 2000. Prior to that time, ICG Funding may redeem the 6
3/4% Preferred Securities if the current market value of ICG Common
Stock equals or exceeds the exchange price by 150%, for at least 20
days of any 30-day trading period, through November 15, 2000. The 6
3/4% Preferred Securities are subject to mandatory redemption on
November 15, 2009.
On February 13, 1998, ICG made a capital contribution of 126,750
shares of ICG Common Stock to ICG Funding. Immediately thereafter,
ICG Funding sold the contributed shares to unrelated third parties for
proceeds of approximately $3.4 million. ICG Funding recorded the
contribution of the ICG Common Stock as additional paid-in capital at
the then fair market value and, consequently, no gain or loss was
recorded by ICG Funding on the subsequent sale of those shares.
Also, on February 13, 1998, ICG Funding used the remaining proceeds
from the private placement of the 6 3/4% Preferred Securities, which
were not restricted for the payment of cash dividends, along with the
proceeds from the sale of the
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(11) Redeemable Preferred Securities of Subsidiaries (continued)
contributed ICG Common Stock to purchase approximately $112.4 million
of ICG Communications, Inc. Preferred Stock (ICG Preferred Stock)
which pays dividends each February 15, May 15, August 15 and November
15 in additional shares of ICG Preferred Stock through November 15,
2000. Subsequent to November 15, 2000, dividends on the ICG Preferred
Stock are payable in cash or shares of ICG Common Stock, at the option
of ICG. The ICG Preferred Stock is exchangeable, at the option of ICG
Funding, at any time prior to November 15, 2009 into shares of ICG
Common Stock at an exchange rate based on the exchange rate of the 6
3/4% Preferred Securities and is subject to mandatory redemption on
November 15, 2009. The ICG Preferred Stock has been eliminated in
consolidation of the Company's consolidated financial statements.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which solely holds Company
preferred stock in the accompanying consolidated balance sheets.
Included in accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses is approximately
$39.8 million, $55.2 million and $61.9 million for the years ended December
31, 1997, 1998 and 1999, respectively, associated with the accretion of
issuance costs, discount and preferred security dividend accruals for the 6
3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4%
Preferred Stock and the Redeemable Preferred Stock. These costs are
partially offset by the minority interest share in losses of subsidiaries
of approximately $1.7 million for the year ended December 31, 1997. There
was no reported minority interest share in losses of subsidiaries for the
years ended December 31, 1998 or 1999.
(12) Stockholders' Deficit
(a) Stock Options and Employee Stock Purchase Plan
During the fiscal years ended September 30, 1991, 1992 and 1993, the
Company's board of directors approved incentive stock option plans and
replenishments to those plans which provide for the granting of
options to directors, officers, employees and consultants of the
Company to purchase 285,000, 724,400 and 1,692,700 shares,
respectively, of the Company's Common Stock, with exercise prices
between 80% and 100% of the fair value of the shares at the date of
grant. A total of 1,849,600
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
options, net of cancellations, have been granted under these plans
through December 31, 1999 with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.
The NETCOM 1993 Stock Option Plan was assumed by ICG at the time of
the merger, and approved by ICG's board of directors as an incentive
and non-qualified stock option plan which provides for the granting of
options to certain directors, officers and employees to purchase
2,720,901 shares of ICG Common Stock. A total of 2,073,277 options,
net of cancellations, have been granted under this plan through
December 31, 1999 at exercise prices ranging from $0.56 to $79.50,
none of which were less than 100% of the fair market value of the
shares underlying options on the date of grant, and accordingly, no
compensation expense was recorded for these options under APB 25. The
options granted under this plan are subject to various vesting
requirements, generally three and five years, and expire within ten
years from the date of grant.
From the fiscal year ended September 30, 1994 through the year ended
December 31, 1998, the Company's board of directors approved incentive
and non-qualified stock option plans and replenishments to those plans
which provide for the granting of options to certain directors,
officers and employees to purchase 2,536,000 shares of the Company's
Common Stock under the 1994 plan, an aggregate of 2,700,000 shares of
the Company's Common Stock under the 1995 and 1996 plans and 3,400,000
shares of ICG Common Stock under the 1998 plan. A total of 7,808,496
options, net of cancellations, have been granted under these plans
through December 31, 1999 at original exercise prices ranging from
$7.94 to $35.75, none of which were less than 100% of the fair market
value of the shares underlying options on the date of grant, and
accordingly, no compensation expense was recorded for these options
under APB 25. The options granted under these plans are subject to
various vesting requirements and expire in five and ten years from the
date of grant.
Additionally, during the year ended December 31, 1999, the Company's
board of directors granted 696,836 non-qualified stock options, net of
cancellations through December 31, 1999, to certain officers and
employees at exercise prices ranging from $14.44 to $23.19, none of
which were less than 100% of the fair market value of the shares
underlying options on the date of grant, and accordingly, no
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
compensation expense was recorded for these options under APB 25. The
non-qualified options granted during the year ended December 31, 1999
are subject to various vesting requirements and expire in ten years
from the date of grant.
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's board of directors and
regranted with an exercise price of $10.375, the closing price of ICG
Common Stock on the Nasdaq National Market on April 16, 1997.
Approximately 598,000 options, with original exercise prices ranging
from $15.875 to $26.25, were canceled and regranted on April 16, 1997.
For the same business purpose, all employee stock options outstanding
on September 18, 1998 with exercise prices at or in excess of $22.00
were canceled by the Stock Option Committee of the Company's board of
directors and regranted with an exercise price of $16.875, the closing
price of ICG Common Stock on the Nasdaq National Market on September
18, 1998. A total of 2,413,260 options, with original exercise prices
ranging from $22.00 to $35.75 were canceled and regranted on September
18, 1998. There was no effect on the Company's consolidated financial
statements as a result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary to be used to purchase shares of ICG Common Stock, up to
a limit of $25,000 in ICG Common Stock each year, at a 15% discount to
fair market value. Stock purchases occur four times a year on
February 1, May 1, August 1 and November 1, with the price per share
equaling the lower of 85% of the market price at the beginning or end
of the offering period. The Company is authorized to issue a total of
1,000,000 shares of ICG Common Stock to participants in the plan.
During the years ended December 13, 1997, 1998 and 1999, the Company
sold 109,213, 111,390 and 205,568 shares of ICG Common Stock,
respectively, to employees under this plan.
The Company has recorded no compensation expense in connection with
its stock-based employee and non-employee director compensation plans
pursuant to the intrinsic value based method of APB 25 for the periods
presented. Had compensation expense for the Company's plans been
determined based on the fair market value of the options at the grant
dates for awards under those plans consistent with the provisions of
SFAS 123, the Company's pro forma net loss and loss per share would
have been as presented below. Pro forma disclosures include the
F-40
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
effects of employee and non-employee director stock options granted
during the periods presented.
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands, except per share amounts)
Net loss:
As reported $(360,735) (418,045) (234,162)
Pro forma (369,677) (439,362) (259,362)
Net loss per share -- basic
and diluted:
As reported $ (8.49) (9.25) (4.97)
Pro forma (8.70) (9.72) (5.50)
The fair value of each option grant to employees and non-employee
directors other than NETCOM employees and non-employee directors was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: an expected
option life of three years for directors, officers and other
executives, and two years for other employees, for all periods;
expected volatility of 50% for the year ended December 31, 1997, 70%
for the years ended December 31, 1998 and 1999; and risk-free interest
rates ranging 5.61% to 6.74% for the year ended December 31, 1997,
4.09% to 5.77% for the year ended December 31, 1998 and 4.59% to 6.28%
for the year ended December 31, 1999. Risk-free interest rates, as
were currently available on the grant date, were assigned to each
granted option based on the zero-coupon rate of U.S. Treasury bills to
be held for the same period as the assumed option life. Since the
Company does not anticipate issuing any dividends on the ICG Common
Stock, the dividend yield for all options granted was assumed to be
zero. The weighted average fair market value of combined ICG and
NETCOM options granted during the years ended December 31, 1997, 1998
and 1999 was approximately $10.31, $13.23 and $10.53 per option,
respectively.
As options outstanding at December 31, 1999 will continue to vest in
subsequent periods and additional options are expected to be awarded
under existing and new plans, the above pro forma results are not
necessarily indicative of the impact on net loss and net loss per
share in future periods.
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
The following table summarizes the status of the Company's stock-based
compensation plans:
Shares Weighted average Options
options exercise price exercisable
-------------- ---------------- --------------
(in thousands) (in thousands)
Outstanding at January 1, 1997 6,084 $15.68 3,476
Granted 3,377 14.94
Exercised (709) 8.13
Canceled (2,604) 25.32
------
Outstanding at December 31, 1997 6,148 11.97 3,532
Granted 5,968 23.34
Exercised (1,395) 12.08
Canceled (3,941) 25.62
------
Outstanding at December 31, 1998 6,780 13.95 3,299
Granted 3,374 18.50
Exercised (817) 13.55
Canceled (1,942) 17.70
------
Outstanding at December 31, 1999 7,395 15.06 3,142
======
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding
at December 31, 1999:
Options outstanding Options exercisable
------------------------------------------------ ----------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- -------- -------------- ------------ --------- --------------- ---------
(in thousands) (in years) (in thousands)
$ 2.69 - 10.00 2,027 5.51 $ 8.30 1,937 $ 8.30
10.38 - 16.88 2,371 7.85 15.44 966 15.36
16.94 - 19.13 1,836 9.24 18.07 151 18.07
19.19 - 30.00 1,161 8.95 21.41 88 21.41
----- -----
7,395 3,142
===== =====
(b) Warrants
Between the fiscal years ended September 30, 1993 and 1995, the
Company issued a series of warrants at varying prices to purchase
common shares of Holdings-Canada which, after August 5, 1996, were
exchangeable on a one-for-one basis for Class A common shares of
Holdings-Canada or ICG Common Stock. The following table summarizes
warrant activity for the three years ended December 31, 1999:
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(12) Stockholders' Deficit (continued)
Outstanding Exercise
warrants price range
-------------- ---------------
(in thousands)
Outstanding, January 1, 1997 2,623 $ 7.38 - 21.51
Exercised (599) 7.38 - 21.51
Canceled (50) 14.50
-----
Outstanding, December 31, 1997 1,974 12.51 - 21.51
Exercised (113) 12.51 - 21.51
Canceled (9) 20.01 - 21.51
-----
Outstanding, December 31, 1998 1,852 12.51
Exercised (119) 12.51
-----
Outstanding, December 31, 1999 1,733 12.51
=====
All warrants outstanding at December 31, 1999 have an expiration date
of August 6, 2005 and, in connection with the reorganization of
Holdings-Canada which occurred during the year ended December 31,
1998, are exchangeable only for shares of ICG Common Stock on a one-
for-one basis.
(c) Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
and 50,000 shares of ICG Preferred Stock. At December 31, 1999, the
Company had no shares of preferred stock outstanding. All of the
issued and outstanding shares of ICG Preferred Stock at December 31,
1999 are held by ICG Funding.
(13) Related Party Transactions
During the fiscal year ended September 30, 1996, Holdings-Canada and
International Communications Consulting, Inc. (ICC) entered into a
consulting agreement whereby ICC provided various consulting services to
the Company through December 1999.
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(13) Related Party Transactions (continued)
During the years ended December 31, 1997, 1998 and 1999, the Company paid
approximately $1.1 million, $1.0 million and $0.5 million, respectively,
related to this consulting agreement. William W. Becker, a stockholder and
former director of the Company, is President and Chief Executive Officer of
ICC.
(14) Commitments and Contingencies
(a) Network Capacity and Construction
In January 2000, Qwest Communications Corporation (Qwest) and the
Company signed an agreement, whereby the Company will provide to
Qwest, for $126.5 million over the initial 6-year term of the
agreement, an indefeasible right of use (IRU) for designated portions
of the Company's local fiber optic network. The Company will recognize
revenue ratably over the term of the agreement, as the network
capacity is available for use and receive payments in installments
through June 18, 2000. Qwest may, at its option, extend the initial
term of the agreement for an additional four-year period and an
additional 10-year period for incremental payment at the time of the
option exercises. In the event that the Company fails to deliver any
of the network capacity by March 31, 2001, Qwest is entitled to cancel
any undelivered network capacity segments and receive immediate refund
of any amounts already paid to the Company for such segments.
In June 1999, the Company signed a minimum 10-year agreement to lease
certain portions of its fiber optic network to Qwest for $32.0
million, which was received in full by the Company in June 1999. The
Company has accounted for the agreement as a sales-type lease and is
recognizing revenue and operating costs in its consolidated financial
statements on a percentage of completion basis as the network build-
out is completed and is available for use. For the year ended December
31, 1999, the Company included $18.1 million and $3.2 million in
revenue and operating costs, respectively, in its consolidated
financial statements
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
related to the agreement, including revenue attributed to maintenance
services, which is recognized ratably over the term of the agreement.
The Company expects the network facilities included in the agreement
to be completed during the first half of 2000. Approximately $13.9
million of the total proceeds received remain in deferred revenue in
the Company's consolidated balance sheet at December 31, 1999.
In March 1996, the Company and Southern California Edison Company
(SCE) entered into a 25-year agreement under which the Company will
license 1,258 miles of fiber optic cable in Southern California, and
can install up to 500 additional miles of fiber optic cable. This
network, which will be maintained and operated primarily by the
Company, stretches from Los Angeles to southern Orange County. Under
the terms ofthis agreement, SCE is entitled to receive an annual fee
for ten years, certain fixed quarterly payments, a quarterly payment
equal to a percentage of certain network revenue, and certain other
installation and fiber connection fees. The aggregate fixed payments
remaining under the agreement totaled approximately $125.4 million at
December 31, 1999. The agreement has been accounted for as a capital
lease in the accompanying consolidated balance sheets.
(b) Telecommunications Services and Line Purchase Commitments
Effective September 1998, the Company entered into two service
agreements with three-year terms with WorldCom Network Services, Inc.
(WorldCom). Under the Telecom Services Agreement, WorldCom provides,
at designated rates, switched telecommunications services and other
related services to the Company, including termination services, toll-
free origination, switched access, dedicated access and travel card
services. Under the Carrier Digital Services Agreement, WorldCom
provides the Company, at designated rates, with the installation and
operation of dedicated digital telecommunications interexchange
services, local access and other related services, which the Company
believes expedites service availability to its
F-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
customers. Both agreements require that the Company provide WorldCom
with certain minimum monthly revenue, which if not met, would require
payment by the Company for the difference between the minimum
commitment and the actual monthly revenue. Additionally, both
agreements limit the Company's ability to utilize vendors other than
WorldCom for certain telecommunications services specified in the
agreements. The Company's policy is to accrue and include in
operating costs the effect of any shortfall in minimum revenue
commitments under these agreements in the period in which the
shortfall occurred. The Company has successfully achieved all minimum
revenue commitments to WorldCom under these agreements through
December 31, 1999.
In March 1999, the Company entered into an agreement with NorthPoint,
which designates NorthPoint as the Company's preferred digital
subscriber line (DSL) provider through June 1, 2001. Under the
agreement, the Company agreed to purchase digital subscriber lines
before designated intervals. The Company and NorthPoint are currently
renegotiating the terms of the agreement with respect to pricing and
minimum purchase levels. The Company's policy is to accrue and
include in operating costs the effect of any shortfall in DSL
installations under its agreement with NorthPoint in the period in
which the shortfall occurred, although the Company has suspended this
practice until such time that negotiations with NorthPoint are
complete. Additionally, the Company sold its existing DSL equipment
to NorthPoint for total proceeds of approximately $2.7 million.
In November 1999, the Company entered into a one-year agreement with
Covad Communications Company, a California-based DSL provider (Covad),
to purchase DSL services from Covad. Under the agreement, the Company
is required to purchase a minimum number of digital subscriber lines
before designated intervals over the one-year period. In return, the
Company will receive certain DSL service price discounts.
Additionally, the Company will receive quarterly rebates from Covad
for each line installed which meets or exceeds the designated
milestone schedule. In the event that the Company fails to purchase
the minimum number of digital subscriber lines at the designated
intervals, Covad and the Company will renegotiate the terms of the
agreement, which renegotiations may include revision of the minimum
purchase levels and the elimination of DSL service price discounts.
To date, the Company has met all required minimum commitments under
its agreement with Covad.
F-47
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
(c) Capital Purchase Commitments
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise
provided to the Company. In addition, the agreements may be
terminated by either the Company or the vendor upon prior written
notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $159.5 million at December 31, 1999.
(d) Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $11.8 million,
$27.0 million and $21.3 million for the years ended December 31, 1997,
1998 and 1999, respectively.
Minimum lease payments due each year on or before December 31 under
the Company's operating leases are as follows (in thousands):
2000 $ 23,324
2001 21,597
2002 18,526
2003 16,111
2004 12,943
Thereafter 57,478
--------
$149,979
========
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
(e) Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million, $58.3
million and $124.1 million for the years ended December 31, 1997, 1998
and 1999, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of
ILECs pursuant to various interconnection agreements. During this
period, some of the ILECs have not paid all of the bills they have
received from the Company and have disputed these charges based on the
belief that such calls are not local traffic as defined by the various
agreements and not subject to payment of transport and termination
charges under state and federal laws and public policies. However,
the Company has resolved certain of these disputes with some of the
ILECs.
The resolution of these disputes have been, and will continue to be,
based on rulings by state public utility commissions and/or by the
Federal Communications Commission (FCC), or through negotiations
between the parties. To date, there have been favorable final rulings
from 31 state public utility commissions that ISP traffic is subject
to the payment of reciprocal compensation under current
interconnection agreements. Many of these state commission decisions
have been appealed by the ILECs. To date, five federal court
decisions, including two federal circuit court of appeals decisions
have been issued upholding state commission decisions ordering the
payment of reciprocal compensation for ISP traffic. On February 25,
1999, the FCC issued a decision that ISP-bound traffic is largely
jurisdictionally interstate traffic. The decision relies on the long-
standing federal policy that ISP traffic, although jurisdictionally
interstate, is treated as though it is local traffic for pricing
purposes. The decision also emphasizes that because there currently
are no federal rules governing intercarrier compensation for ISP
traffic, the determination as to whether such traffic is subject to
reciprocal compensation under the terms of interconnection agreements
is properly made by the state commissions and that carriers are bound
by their interconnection agreements and state commission decisions
regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
rulemaking, the FCC expresses its preference that compensation rates
for this traffic continue to be set by negotiations between carriers,
with disputes resolved by arbitrations conducted by state commissions,
pursuant to the Telecommunications Act. Since the issuance of the
FCC's decision on February 25, 1999, 19 state utility commissions,
have either ruled or reaffirmed that ISP traffic is subject to
reciprocal compensation under current interconnection agreements, and
two state commissions have declined to apply reciprocal compensation
for ISP traffic under current interconnection agreements.
Additionally, 11 state commissions have awarded reciprocal
compensation for ISP traffic in arbitration proceedings involving new
agreements. One state has declined to order reciprocal compensation
in an arbitration proceeding, and two states have declined to decide
the issue in the arbitration until after the FCC and/or the state
commission reaches a decision in pending proceedings on prospective
compensation.
On March 24, 2000, the United States Court of Appeals for the District
of Columbia Circuit vacated and remanded the FCC's February 25, 1999
decision. The Company does not believe that the Circuit Court's
decision will adversely affect the state decisions noted above with
respect to reciprocal compensation. The decision does, however, create
some uncertainty and there can be no assurance that future FCC or
state rulings will be favorable to the Company.
The Company has aggressively participated in a number of regulatory
proceedings that address the obligation of the ILECs to pay the
Company reciprocal compensation for ISP-bound traffic under the
Company's interconnection agreements. These proceedings include
complaint proceedings brought by the Company against individual ILECs
for failure to pay reciprocal compensation under the terms of a
current interconnection agreement; generic state commission
proceedings concerning the obligations of ILECs to pay reciprocal
compensation to CLECs, and arbitration proceedings before state
commissions addressing the payment of reciprocal compensation on a
prospective basis under new interconnection agreements.
In 1999, the state utility commission in Colorado issued a final
decision granting a complaint filed by the Company against US West
Communications, Inc. (US West) and ruled that the Company is entitled
to be paid reciprocal compensation for ISP-bound traffic under the
terms of the Company's interconnection agreement in effect at the time
of the complaint proceeding. Additionally, in June 1999, the Alabama
Public Service Commission ruled that the Company is entitled to be
treated the same as other CLECs for which the Alabama commission had
previously ordered the payment of reciprocal compensation for ISP
traffic by BellSouth Corporation (BellSouth). The ILECs filed for
judicial review in federal district court of each of these favorable
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
commission rulings; the appeals are pending. Also in 1999, the
California PUC issued a decision affirming a previously issued
decision that held that reciprocal compensation must be paid by
Pacific Bell and GTE-California for the termination of ISP traffic by
CLECs under existing interconnection agreements. The ILECs also have
appealed the California PUC decision, and the appeal is pending.
Subsequent to the issuance of the favorable rulings by the Colorado,
Alabama and California state commissions, the Company has received
payments from US West, Pacific Bell and GTE-California for amounts
owed for reciprocal compensation. Pursuant to an earlier decision by
the Ohio commission, Ameritech has been paying ICG reciprocal
compensation for ISP traffic under its original interconnection
agreement which expired on February 15, 2000. Through December 31,
1999, the Company has received $65.8 million from Ameritech, $7.7
million from Pacific Bell and $11.7 million from GTE-California in
reciprocal compensation payments. Additionally, in January and
February 2000 the Company received additional payments from Pacific
Bell of $16.8 million, a portion of which represents amounts
previously placed in an escrow account by Pacific Bell calculated as
being owed to the Company for reciprocal compensation for ISP-bound
traffic. Also in January 2000, US West released to the Company $10.1
million in reciprocal compensation payments that had been in an escrow
account.
Additionally, through December 31, 1999, Southwestern Bell Telephone
Company (SWBT) has remitted payment to the Company of $3.9 million for
reciprocal compensation owed to the Company for traffic from SWBT
customers in Texas to ISPs served by the Company. On December 29,
1999, SWBT initiated commercial arbitration to determine of whether
the terms of the Company's current interconnection agreement with SWBT
require that the rates that the Company has been billing SWBT for
reciprocal compensation be reduced to rates established by the Texas
PUC in a 1998 consolidated arbitration with SWBT involving AT&T
Corporation, MCI Communications Corporation and other parties. Due to
subsequent procedural developments, this issue will be decided by the
Texas PUC, rather than in commercial arbitration, after the parties
have completed dispute resolution in accordance with the terms of the
interconnection agreement.
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
On September 16, 1999, the CPUC rendered a decision against
MFS/Worldcom, a CLEC (MFS), in an arbitration between Pacific Bell and
MFS. The California PUC ruled that MFS should not be permitted to
charge reciprocal compensation rates for the tandem switching and
common transport rate elements. Although the California PUC's ruling
did not involve the Company, the Company made a decision effective for
the three months beginning on September 30, 1999 and thereafter to
suspend the revenue recognition for the tandem switching and common
transport rate elements for services provided in California and in all
other states where the Company operates and such rate elements are
included in the Company's interconnection agreement with the ILEC.
Additionally, the Company recorded a provision of $45.2 million during
the three months September 30, 1999 for accounts receivable related to
these elements recognized in periods through June 30, 1999, which the
Company believes may be uncollectible. The Company continues to bill
Pacific Bell, SWBT and GTE for the tandem switching and common
transport rate elements, and will pursue collection of its accounts
receivable, despite any such provision. On February 4, 2000, the
California PUC initiated a new proceeding to examine, on a prospective
basis, compensation for ISP-bound traffic, including the tandem and
transport rate elements issue.
The Company has also recorded revenue of approximately $19.1 million
and $18.4 million for the years ended December 31, 1998 and 1999,
respectively, related to other transport and termination charges to
the ILECs, pursuant to the Company's interconnection agreements with
these ILECs. Included in the Company's trade receivables at December
31, 1998 and 1999 are $72.8 million and $76.3 million, respectively,
for all receivables related to reciprocal compensation and other
transport and termination charges. The receivables balance at
December 31, 1998 and 1999 is net of an allowance of $5.6 million and
$58.2 million, respectively, for disputed amounts and tandem switching
and common transport rate elements.
As the Company's interconnection agreements expire or are extended,
rates for transport and termination charges are being and will
continue to be renegotiated and/or arbitrated. Rates for transport and
termination also may be impacted by ongoing state and federal
regulatory proceedings addressing intercarrier compensation for
Internet traffic on a prospective basis. In addition to the FCC's
pending rulemaking proceeding and the District of Columbia Court of
Appeals recent remand, of the states in which ICG currently operates,
the Ohio, Texas and California commissions currently are conducting
proceedings on prospective compensation.
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
The Company has negotiated and/or arbitrated new or extended
interconnection agreements with BellSouth, Ameritech, GTE-California
and Pacific Bell. The Company has completed arbitration proceedings
with Bell South before the state commissions in Alabama, North
Carolina, Georgia, Kentucky, Florida and Tennessee and with Ameritech
before the Ohio commission. Final decisions issued by the Alabama,
North Carolina, Kentucky and Georgia commissions awarded the Company
reciprocal compensation for ISP traffic in new agreements to be
executed by the parties, including the tandem and transport rate
element. The arbitration decisions of the Florida and Ohio commissions
declined to rule on the merits of whether the Company should be paid
reciprocal compensation for ISP traffic. The Florida decision ruled
that the compensation provisions of the parties' current
interconnection agreement would continue to apply, subject to true up,
until the completion of the FCC's rulemaking on future compensation.
The Ohio commission deferred ruling on the merits until completion of
the Ohio commission's generic proceeding on prospective compensation,
and ordered that in the interim period until completion of the generic
proceeding, bill and keep procedures should be followed, subject to
true up once the commission proceeding is concluded. Arbitration
proceedings with US West before the Colorado commission and with SWBT
before the Texas commission are pending. The Company has negotiated an
extension of its current agreement with GTE-California until August
2000 that provides that reciprocal compensation will be paid for ISP
traffic, at rates that are lower than the rates that previously
applied under the agreement, and the Company has adopted the MFS
WorldCom/Pacific Bell interconnection agreement, effective as of March
12, 2000, which agreement also provides for the payment of the end
office rate element of reciprocal compensation for ISP traffic, with
the tandem and transport rate elements issue subject to further
litigation.
Subsequent to completion of the arbitration proceedings with
BellSouth, the Company signed a three-year agreement with BellSouth
that, among other issues, addresses the payment of reciprocal
compensation for Internet traffic. BellSouth agreed to pay past
monies due to the Company for reciprocal compensation for the period
beginning when ISP traffic was first recorded by the Company from
BellSouth and ending December 31, 1999, and the parties also agreed to
the payment of reciprocal compensation for Internet and voice traffic
for the period from January 1, 2000 through December 31, 2002 at per-
minute rates that gradually reduce over the three year period. The
agreement is applicable to all nine states in the BellSouth operating
territory.
F-53
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(14) Commitments and Contingencies (continued)
While the Company intends to pursue the collection of all receivables
related to transport and termination charges as of December 31, 1999
and believes that future revenue from transport and termination
charges recognized under the Company's interconnection agreements will
be realized, there can be no assurance that future regulatory and
judicial rulings will be favorable to the Company, or that different
pricing plans for transport and termination charges between carriers
will not be adopted when the Company's interconnection agreements
continue to be renegotiated or arbitrated, or as a result of FCC or
state commission proceedings on future compensation methods. In fact,
the Company believes that different pricing plans will continue to be
considered and adopted, and although the Company expects that revenue
from transport and termination charges likely will decrease as a
percentage of total revenue from local services in subsequent periods,
the Company's local termination services still will be required by the
ILECs and must be provided under the Telecommunications Act, and
likely will result in increasing volume in minutes due to the growth
of the Internet and related services markets. The Company expects to
negotiate and/or arbitrate reasonable compensation and collection
terms for local termination services, although there is no assurance
that such compensation will remain consistent with current levels.
(f) Litigation
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Case No. 97-17777) against
the Company, Zycom and certain of their subsidiaries. This complaint
alleges that the Company and certain of its subsidiaries breached
certain duties owed to the plaintiffs. The plaintiffs were denied
class certification by the trial court and the Court of Appeals
affirmed the trial court's decision. Trial has been tentatively
scheduled for May 2000. The Company is vigorously defending the
claims. While it is not possible to predict the outcome of this
litigation, management believes these proceedings will not have a
material adverse effect on the Company's financial condition, results
of operations or cash flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
F-54
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(15) Business Units
The Company conducts transactions with external customers through the
operations of its Telecom Services business unit. Shared administrative
services are provided to Telecom Services by Corporate Services. Corporate
Services consists of the operating activities of ICG Communications, Inc.,
ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada)
Co., ICG Holdings, Inc., ICG Services, Inc., ICG Corporate Headquarters,
L.L.C., ICG 161, L.P. and ICG Mountain View, Inc., which primarily hold
securities and real estate properties and provide certain legal, accounting
and finance, personnel and other administrative support services to Telecom
Services.
Direct and certain indirect costs incurred by Corporate Services on behalf
of Telecom Services are allocated to Telecom Services based on the nature
of the underlying costs. Transactions between Telecom Services and
Corporate Services for services performed in the normal course of business
are recorded at amounts which are intended to approximate fair value.
Set forth below are revenue, EBITDA (before non-recurring and non-cash
charges), which represents the measure of operating performance used by
management to evaluate operatingresults, depreciation and amortization,
interest expense, capital expenditures of continuing operations and total
assets for Telecom Services and Corporate Services. As described in note
3, the operating results of the Company reflect the operations of NETCOM,
Network Services, Satellite Services and Zycom as discontinued for all
periods presented.
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
Revenue:
Telecom Services $ 149,358 303,317 479,226
Corporate Services - - -
--------- ------- -------
Total revenue $ 149,358 303,317 479,226
========= ======= =======
EBITDA (before non-recurring and non-cash
charges) (a):
Telecom Services $ (92,053) (21,681) 28,941
Corporate Services (27,811) (20,415) (28,398)
--------- ------- -------
Total EBITDA (before non-recurring
and non-cash charges) $(119,864) (42,096) 543
========= ======= =======
(Continued)
F-55
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
Depreciation and amortization (b):
Telecom Services $ 46,092 87,641 170,607
Corporate Services 3,744 4,286 3,632
-------- ------- -------
Total depreciation and amortization $ 49,836 91,927 174,239
======== ======= =======
Provision for impairment of long-lived assets:
Telecom Services $ 5,169 - 31,815
Corporate Services - - -
Total provision for impairment of long-lived -------- ------- -------
assets $ 5,169 - 31,815
======== ======= =======
Interest expense (b):
Telecom Services $ 11,996 2,692 7,848
Corporate Services 105,525 167,323 204,572
-------- ------- -------
Total interest expense $117,521 170,015 212,420
======== ======= =======
Income tax expense:
Telecom Services $ - 90 25
Corporate Services - - -
-------- ------- -------
Total income tax expense $ - 90 25
======== ======= =======
Extraordinary gain on sales of operations of
NETCOM:
Telecom Services $ - - 195,511
Corporate Services - - -
-------- ------- -------
Total interest expense $ - - 195,511
======== ======= =======
Capital expenditures of continuing operations (c):
Telecom Services $250,934 355,076 735,220
Corporate Services 10,384 960 13
-------- ------- -------
Total capital expenditures of continuing
operations $261,318 356,036 735,233
======== ======= =======
F-56
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(15) Business Units (continued)
December 31,
------------------------
1998 1999
---------- ---------
(in thousands)
Total assets:
Telecom Services (d) $1,135,937 1,845,171
Corporate Services (d) 371,157 261,085
Eliminations (20,287) (85,635)
Net assets of discontinued operations 102,840 -
---------- ---------
Total assets $1,589,647 2,020,621
========== =========
(a) EBITDA (before non-recurring and non-cash charges) consists of loss
from continuing operations before interest, income taxes, depreciation
and amortization, provision for impairment of long-lived assets,
restructuring costs and other, net operating costs and expenses,
including deferred compensation and net loss (gain) on disposal of
long-lived assets, other expense, net and accretion and preferred
dividends on preferred securities of subsidiaries, or simply, revenue
less operating costs and selling, general and administrative expenses.
EBITDA (before non-recurring and non-cash charges) is presented as the
Company's measure of operating performance because it is a measure
commonly used in the telecommunications industry. EBITDA (before non-
recurring and non-cash charges) is presented to enhance an
understanding of the Company's operating results and is not intended
to represent cash flows from operating activities or results of
operations in accordance with generally accepted accounting principles
for the periods indicated. EBITDA (before non-recurring and non-cash
charges) is not a measurement under generally accepted accounting
principles and is not necessarily comparable with similarly titled
measures of other companies.
(b) Although not included in EBITDA (before non-recurring and non-cash
charges), which represents the measure of operating performance used
by management to evaluate operating results, the Company has
supplementally provided depreciation and amortization and interest
expense for Telecom Services and Corporate Services. Interest expense
excludes amounts charged for interest on outstanding cash advances and
expense allocations between Telecom Services and Corporate Services.
(c) Capital expenditures include assets acquired under capital leases and
exclude payments for construction of the Company's corporate
headquarters and corporate headquarters assets acquired through the
issuance of long-term debt.
F-57
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(15) Business Units (continued)
(d) Total assets of Telecom Services and Corporate Services excludes
investments in consolidated subsidiaries which eliminate in
consolidation.
(16) Provision for Impairment of Long-Lived Assets
During the year ended December 31, 1999, the Company recorded a provision
for impairment of long-lived assets of $31.8 million, which relates to the
impairment of software and other capitalized costs associated with Telecom
Services' billing and provisioning system projects under development. The
provision for impairment of long-lived assets was based on management's
decision to abandon the billing and provisioning systems under development
and to select new vendors for each of these systems, which vendors are
expected to provide the Company with billing and provisioning solutions
with improved functionality and earlier delivery dates at significantly
lower costs. The Company's billing and provisioning systems under
development were either not operational or were serving minimal customers
at the time management determined the carrying value of the underlying
assets was not recoverable.
For the year ended December 31, 1997, provision for impairment of long-
lived assets includes the impairment of the Company's Corporate Services
investments in StarCom International Optics Corporation, Inc. (StarCom) of
approximately $5.2 million. The Company recorded its impairment in the
investment in StarCom upon notification by a senior secured creditor of
StarCom that it intended to foreclose on its collateral in StarCom, which
subsequently caused the bankruptcy of StarCom.
(17) Restructuring Costs
During the year ended December 31, 1998, the Company recorded approximately
$1.5 million of restructuring costs associated with a combined
restructuring plan for Telecom Services and Corporate Services, which was
designed to support the Company's increased strategic focus on its ISP
customer base, as well as to improve the efficiency of operations and
general and administrative support functions. Restructuring costs under
this plan include severance and other employee benefit costs. The Company
has $0.1 million remaining in accrued liabilities at December 31, 1999
related to this restructuring plan.
Following the Company's acquisition of NikoNet in July 1998, the Company
closed a regional facility of a newly acquired subsidiary of NikoNet.
Restructuring costs, consisting
F-58
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(17) Restructuring Costs
primarily of severance costs, of approximately $0.3 million were recorded
as a result of the facility closure during the year ended December 31,
1998. The Company has $0.1 million remaining in accrued liabilities at
December 31, 1999 related to the facility closure.
(18) Income Taxes
Current income tax expense for the years ended December 31, 1998 and 1999
represents state and federal income tax relating to operations of a
subsidiary company during periods when this entity's taxable income could
not be offset by the Company's current period losses or net operating loss
carryforwards.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1999 are as follows:
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Deferred income tax liabilities:
Deferred gain on intercompany transactions - 6,598
Property and equipment, due to excess purchase price of
tangible assets and differences in depreciation for book
and tax purposes 10,173 15,427
--------- --------
Net deferred income tax liabilities $ 10,173 22,025
--------- --------
Deferred income tax assets:
Net operating loss carryforwards (247,126) (265,076)
Accrued interest on high yield debt obligations deductible
when paid (108,895) (154,601)
Accrued expenses not currently deductible for tax purposes (3,286) (18,150)
Allowance for doubtful accounts, not currently deductible
for tax purposes (5,989) (32,141)
Less valuation allowance 355,123 447,943
--------- --------
Net deferred income tax assets (10,173) (22,025)
--------- --------
Net deferred income tax liability $ - -
========= ========
F-59
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(18) Income Taxes (continued)
As of December 31, 1999, the Company has federal net operating loss
carryforwards (NOLs) of approximately $662.7 million, which expire in
varying amounts through December 31, 2019. However, due to the provisions
of Section 382 and certain other provisions of the Internal Revenue Code
and Treasury Regulations (the Code), the utilization of these NOLs may be
limited. The Company is also subject to certain state income tax laws,
which may also limit the utilization of NOLs.
A valuation allowance has been provided for the Company's deferred tax
asset as management is not presently able to determine when the Company
will generate future taxable income.
(19) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plans after
meeting minimum service and age requirements. Under the plan available to
NETCOM employees from January 1, 1997 through July 1, 1998, the Company
made a matching contribution of 100% of each NETCOM employee's contribution
up to a maximum of 3% of the employee's eligible earnings. Prior to 1997,
NETCOM's matching contribution was limited to 50% of each NETCOM employee's
contribution up to a maximum of 6% of the employee's eligible earnings.
Under the plan available to all ICG employees, including NETCOM employees
subsequent to July 1, 1998, the Company makes a matching contribution of
ICG Common Stock up to a maximum of 6% of the employee's eligible earnings.
Aggregate matching contributions under the Company's employee benefit plans
were approximately $3.6 million, $4.0 million and $5.5 million during the
years ended December 31, 1997, 1998 and 1999, respectively. The portion of
this expense which relates directly to employees of NETCOM is included in
loss from discontinued operations for all periods presented.
(20) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes issued by
Holdings during 1996 and 1995, respectively, are guaranteed by ICG and
Holdings-Canada.
F-60
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(20) Summarized Financial Information of ICG Holdings, Inc. (continued)
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized consolidated financial information for Holdings and its
subsidiaries is as follows:
Summarized Consolidated Balance Sheet Information
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Current assets $ 241,667 263,870
Net current assets of discontinued operations 22,392 -
Property and equipment, net 610,671 675,613
Other non-current assets, net 147,283 128,489
Net non-current assets of discontinued operations 48,751 -
Current liabilities 69,204 148,042
Long-term debt, less current portion 1,004,316 1,138,734
Capital lease obligations, less current portion 62,946 57,564
Other long-term liabilities - 1,233
Due to parent 191,889 256,348
Due to ICG Services 137,762 128,893
Redeemable preferred stock 338,311 390,895
Stockholder's deficit (733,664) (1,053,737)
Summarized Consolidated Statement of Operations Information
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
Total revenue $ 149,358 305,612 478,850
Total operating costs and expenses 323,149 444,310 635,390
Operating loss (173,791) (138,698) (156,540)
Loss from continuing operations (313,303) (260,618) (376,725)
Net loss (328,193) (325,211) (320,073)
F-61
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(21) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
-------------------------
1998 1999
---------- ----------
(in thousands)
Current assets $ 162 82
Advances to subsidiaries 191,889 266,056
Non-current assets, net 2,414 -
Current liabilities 73 73
Long-term debt, less current portion 65 -
Due to parent 182,101 256,317
Share of losses of subsidiary 733,664 1,053,737
Shareholders' deficit (721,438) (1,043,989)
Condensed Statement of Operations Information
Years ended December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(in thousands)
Total revenue $ - - -
Total operating costs and expenses 195 192 2,478
Operating loss (195) (192) (2,478)
Losses of subsidiaries (328,193) (325,211) (320,073)
Net loss attributable to common
shareholders (328,388) (325,403) (322,551)
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary assets of ICG are its investments in ICG Services, ICG Funding
and Holdings-Canada, including advances to those subsidiaries. Certain
corporate expenses of the parent company are included in ICG's statement of
operations and were approximately $1.2 million, $2.2 million and $1.4
million for the years ended December 31, 1997, 1998 and 1999, respectively.
ICG has no operations other than those of ICG Services, ICG
F-62
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company) (continued)
Funding, ICG Acquisition, Inc. and their subsidiaries.
(23) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents and short-term investments available for sale:
The carrying amount approximates fair value because of the short maturities
of such instruments.
Long-term investments:
The fair values of long-term investments for which it is practicable are
estimated based on the quoted market prices for those or similar
investments. The long-term investments for which it is not practicable to
estimate the fair value relate to cost investments in unrelated entities
for which there is no market.
Long-term debt:
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues for the Senior Discount
Notes which are publicly traded. The fair value of both the Senior
Facility and the mortgage loan are estimated to be the carrying amount of
the debt as the debt instruments are not publicly traded and have stated
fixed or LIBOR plus a fixed percent interest rates.
Redeemable preferred stock:
The fair value of the preferred stock, which was issued in a private
placement, is included in the following table at carrying value as such
stock is not traded in the open market and a market price is not readily
available.
F-63
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(23) Fair Value of Financial Instruments (continued)
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
---------------------------------------------------------
1998 1999
------------------------ ---------------------------
(in thousands)
Carrying Carrying
Amount Fair Value Amount Fair Value
---------------------------------------------------------
Cash and cash equivalents
and short-term investments
available for sale $ 262,307 $ 262,307 $ 125,507 $ 125,507
Restricted Cash 16,912 16,912 12,537 12,537
Long-term investments:
Practicable - - 27,696 31,019
Not practicable - - 1,243 -
Long-term debt:
Senior facility - - (79,625) (79,625)
Senior discount notes (1,597,895) (1,471,633) (1,792,996) (1,504,089)
Mortgage loan payable - - (33,077) (33,077)
Redeemable preferred stock (466,352) (466,352) (519,323) (519,323)
(24) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
In February 2000, the Company announced that it had arranged to sell
approximately $750.0 (before estimated expenses and fees of $45.0 million)
million of convertible preferred stock in the Company to three investors:
affiliates of Liberty Media Corporation (Liberty), Hicks, Muse, Tate &
Furst Incorporated (Hicks Muse) and Gleacher Capital Partners (Gleacher).
Under the terms of the transaction, Liberty will invest $500.0 million,
Hicks Muse will invest $230.0 million and Gleacher will invest $20.0
million in exchange for a total of 750,000 shares of Series A convertible
preferred stock at $1,000 per share. The preferred stock will be
convertible into the Company's common stock at a conversion rate of $28.00
per common share. The Company will also issue 10 million common stock
warrants which will be exercisable at $34.00 per share. The proceeds from
this new equity investment will be used principally by the Company to fund
network expansion. It is expected that this equity financing will close
during the second quarter of 2000.
On February 22, 2000, the Company purchased 61,845 shares of restricted
Series D Preferred Stock (Cyras Preferred Stock) of Cyras Systems, Inc.,
for approximately $1.0 million. Cyras is a manufacturer of
telecommunications equipment (Cyras). Dividends on the Cyras Preferred
Stock are 8% per annum, non-cumulative and payable in cash or any Cyras
assets legally available and as declared by the board of directors of
Cyras. The Cyras Preferred Stock is automatically convertible into shares
of common stock of Cyras, upon the initial public offering of the common
stock of Cyras or upon the election to convert by more than 66% of all of
the preferred stockholders of Cyras.
During the first quarter of 2000, the Company signed letters of intent with
its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.
for financing of future capital expenditures. The Company believes that
these proposed financing agreements will better enable the Company to fund
its scheduled network expansion through the purchase of
F-64
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(24) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
(continued)
Lucent and Cisco equipment. It is anticipated that the Lucent credit
agreement will provide the Company with up to $250.0 million of long-term
debt financing which can be drawn down during the year following the
closing to purchase network equipment. Under the terms of the Lucent letter
of intent, the Company will commit to purchase a minimum of $175.0 million
of equipment with principal amounts outstanding required to be repaid in
quarterly installments over a five-year period beginning 2001. The proposed
Cisco credit facility will provide the Company with up to $180.0 million of
capital lease financing with a three-year repayment term. During the first
quarter of 2000, $50.0 million of the capital lease financing with Cisco
was finalized, however, no amounts have been drawn down under this
facility.
In February 2000, the Company announced that it had arranged to sell
approximately $750.0 (before estimated expenses and fees of $45.0 million)
million of convertible preferred stock in the Company to three investors:
affiliates of Liberty Media Corporation (Liberty), Hicks, Muse, Tate &
Furst Incorporated (Hicks Muse) and Gleacher Capital Partners (Gleacher).
Under the terms of the transaction, Liberty will invest $500.0 million,
Hicks Muse will invest $230.0 million and Gleacher will invest $20.0
million in exchange for a total of 750,000 shares of Series A convertible
preferred stock at $1,000 per share. The preferred stock will be
convertible into the Company's common stock at a conversion rate of $28.00
per common share. The Company will also issue 10 million common stock
warrants which will be exercisable at $34.00 per share. The proceeds from
this new equity investment will be used principally by the Company to fund
network expansion. It is expected that this equity financing will close
during the second quarter of 2000.
F-65
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(24) Events Subsequent to Date of Independent Auditors' Report (Unaudited)
(continued)
Separately, pursuant to an agreement dated February 28, 2000, a subsidiary
of the Company will purchase 1,000,000 shares of common stock of Teligent,
Inc., a fixed wireless broadband communications provider (Teligent), from a
subsidiary of Teligent in exchange for 2,996,076 shares of ICG Common
Stock. The Company and Teligent believe that they have complementary
systems and infrastructure that can be leveraged to expand each company's
network and service capabilities.
F-66
FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report....................................... S-1
Schedule II: Valuation and Qualifying Accounts.................... S-2
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of February 16, 2000, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1999 as contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement Schedule II: Valuation and Qualifying Accounts.
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. We did not audit the consolidated
financial statements and related financial statement schedule of NETCOM On-Line
Communication Services, Inc. (NETCOM), a discontinued wholly owned subsidiary of
the Company, as of the year ended December 31, 1997, whose loss from operations
constitutes 83.8 percent in 1997 of the consolidated loss from discontinued
operations. Those consolidated financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included in the financial statement schedule for NETCOM,
is based solely on the report of the other auditors.
In our opinion, based on our audits and the report of the other auditors, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Denver, Colorado
February 16, 2000
S-1
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
________________________________________________________________________________
Additions
--------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- --------- ---------- ----------- ---------- ----------
(in thousands)
Allowance for uncollectible trade receivables:
Year ended December 31, 1997 $ 809 3,573 - (589) 3,793
------- ------ ----- ------ ------
Year ended December 31, 1998 $ 3,793 11,238 - (680) 14,351
------- ------ ----- ------ ------
Year ended December 31, 1999 $14,351 60,019 4,312 - 78,682
------- ------ ----- ------ ------
Allowance for uncollectible note receivable:
Year ended December 31, 1997 $ 7,275 - - (3,975) 3,300
------- ------ ----- ------ ------
Year ended December 31, 1998 $ 3,300 - - (2,000) 1,300
------- ------ ----- ------ ------
Year ended December 31, 1999 $ 1,300 - - (1,300) -
------- ------ ----- ------ ------
Allowance for impairment of long-lived
assets:
Year ended December 31, 1997 $ 2,000 5,170 - (2,000) 5,170
------- ------ ----- ------ ------
Year ended December 31, 1998 $ 5,170 - - - 5,170
------- ------ ----- ------ ------
Year ended December 31, 1999 $ 5,170 31,815 - (5,170) 31,815
------- ------ ----- ------ ------
See accompanying independent auditors' report.
S-2
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.
ICG Communications, Inc.
By: /s/ J. Shelby Bryan
-----------------------------------
J. Shelby Bryan
Chairman of the Board of Directors
and Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
Chairman of the Board of Directors and
Chief Executive Officer (Principal
/s/J. Shelby Bryan Executive Officer) March 29, 2000
- ----------------------------------
J. Shelby Bryan
Executive Vice President, Chief Financial
Officer and Director (Principal Financial
/s/Harry R. Herbst Officer) March 29, 2000
- ----------------------------------
Harry R. Herbst
Senior Vice President of Finance and
/s/John V. Colgan Controller (Principal Accounting Officer) March 29, 2000
- ----------------------------------
John V. Colgan
/s/William J. Laggett Vice Chairman of the Board of Directors March 29, 2000
- ----------------------------------
William J. Laggett
/s/John U. Moorhead Director March 29, 2000
- ----------------------------------
John U. Moorhead
/s/Leontis Teryazos Director March 29, 2000
- ----------------------------------
Leontis Teryazos
/s/Walter Threadgill Director March 29, 2000
- ----------------------------------
Walter Threadgill
ICG Communications, Inc.
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
4.19: Amendment and Waiver No. 2 to the Loan Documents, dated as of December
29, 1999, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services,
Inc., as Parent, certain Initial Lender Parties party thereto, Morgan
Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger,
Royal Bank of Canada, as Collateral Agent and as Administrative Agent
for such Lender Parties, Bank of America, N.A., as Documentation Agent
and Barclays Bank Plc, as Co-Documentation Agent.
4.20: Amendment No. 3 to the Loan Documents, dated as of February 11, 2000,
among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services, Inc., as
Parent, certain Initial Lender Parties party thereto, Morgan Stanley
Senior Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal
Bank of Canada, as Collateral Agent and as Administrative Agent for
such Lender Parties, Bank of America, N.A., as Documentation Agent and
Barclays Bank Plc, as Co-Documentation Agent.
10.50: Promissory Note, dated December 10, 1999, between ICG Telecom Group,
Inc. and John Kane.
10.51: General Release, Covenant Not to Sue and Agreement, dated as of
January 1, 2000, between ICG Communications, Inc. and John Kane.
10.52: Letter of Understanding, dated December 15, 1999, from ICG
Communications, Inc. regarding Section 4 of the Employment Agreement
between ICG Communications, Inc. and Douglas I. Falk.
10.53: Employment Agreement, dated as of July 1, 1999, by and between ICG
Communications, Inc. and Carla J. Wolin.
10.54: Amendment to Employment Agreement, dated as of August 22, 1999, by and
between ICG Communications, Inc. and Carla J. Wolin.
10.55: Employment Agreement, dated as of January 7, 2000, by and between ICG
Communications, Inc. and James Washington.
10.56: General Release, Covenant Not to Sue and Agreement, dated as of
January 17, 2000, between ICG Communications, Inc. and Douglas I.
Falk.
10.57: Employment Agreement, dated as of February 1, 2000, by and between ICG
Communications, Inc. and Cindy Z. Schonhaut.
10.58: Employment Agreement, dated as of March 8, 2000, by and between ICG
Communications, Inc. and Pamela S. Jacobson.
21.1: Subsidiaries of the Registrant.
23.1: Consent of KPMG LLP.
23.2: Consent of Ernst & Young LLP.
27.1: Financial Data Schedule of ICG Communications, Inc. for the Year Ended
December 31, 1999.