ITEM 1. BUSINESS
Overview
The Company is one of the largest providers of competitive local telephone services in the United States, based on estimates of the industry's 1996 revenue. Competitive local exchange carriers ("CLECs"), formerly known as CAPs (competitive access providers), seek to provide an alternative to the incumbent local exchange carriers ("ILECs") for a full range of telecommunications services in the newly opened regulatory environment. As a CLEC, the Company operates networks in three regional clusters covering major metropolitan statistical areas in California, Colorado, and the Ohio Valley, and in three markets in the Southeast. The Company is expanding its geographic focus to include Texas and Oklahoma (and may also expand to Arkansas and Louisiana) through its recently announced joint venture with Central and South West Corporation ("CSW") that will develop and market telecommunications services, including local exchange telephone service, in these markets. The Company also provides a wide range of network systems integration services and maritime and international satellite transmission services. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from $29.5 million for fiscal 1993 to $190.7 million for the 12-month period ended December 31, 1996.
In August 1996, IntelCom Group Inc. ("IntelCom"), a Canadian federal corporation, received final approval for its reincorporation into the United States, pursuant to which its shareholders exchanged approximately 98 percent of their common shares on a one-for-one basis for shares of Common Stock of ICG, a Delaware corporation. IntelCom then changed its name to ICG Holdings (Canada), Inc., and its wholly owned subsidiary, IntelCom Group (U.S.A.), Inc., a Colorado corporation, changed its name to ICG Holdings, Inc. Shareholders who elected to continue to hold common shares of Holdings-Canada ("Class A Common Shares") are entitled to exchange such shares at any time into ICG Common Stock. The reincorporation was designed to maintain the Company's results of operations, existing net operating losses and asset values of the Company without causing any material United States or Canadian federal income tax consequences to the Company.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act") and several pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, the Company is now permitted to offer all interstate and intrastate telephone services, including local dial tone, and is developing a full set of complementary services, such as long distance and data transmission services. The Company began offering competitive local dial tone services in Orange County, California in September 1996, and intends to begin offering local dial tone services in most of its markets during the first half of 1997. The Company has 14 high capacity digital telephony switches (and one additional switch located in Phoenix which will be operational through April 1997, after which it will be relocated) and 10 data communications switches in operation to support its services, and plans to install additional telephony and data switches as demand warrants. To facilitate the expansion of its services, the Company has entered into agreements with Lucent Technologies, Inc. ("Lucent") and Northern Telecom, Inc. ("Nortel"), and has reached a non-binding agreement in principle with Cascade Communications, Inc. ("Cascade"), to purchase a full range of switching systems, fiber optic cable, network electronics, software and services. See "-Telecom Services-Recent Developments."
Telecom Services
The Company operates networks in the following markets within its three regional clusters: California (Sacramento, San Diego and the Los Angeles and San Francisco metropolitan areas); Colorado (Denver, Colorado Springs and Boulder); and the Ohio Valley (Akron, Cincinnati, Cleveland, Columbus, Dayton and Louisville). The Company also operates networks in Birmingham, Charlotte and Nashville. The Company will continue to expand its network through construction, leased facilities and strategic joint ventures, such as the recently announced joint venture with CSW that will initially serve Austin and Corpus Christi, Texas and Tulsa, Oklahoma with local telephone, long distance and data transmission services. The joint venture may also develop business opportunities in other cities in Texas, Oklahoma, Arkansas and Louisiana. The Company's operating networks have grown from approximately 168 fiber route miles at the end of fiscal 1993 to approximately 2,385 fiber route miles as of December 31, 1996. Telecom Services revenue has increased from $4.8 million for fiscal 1993 to $109.0 million for the 12-month period ended December 31, 1996.
Strategy
The Company's objective is to become the dominant alternative to the ILEC in the markets it serves. In furtherance of this objective, the Company has developed strategies to leverage its extensive network footprint, its considerable expertise in the provision of switched telecommunications services, and its established customer base of long distance carriers. In addition, the Company has begun to aggressively market its broad range of telecommunications services to business end users. Key elements of this strategy are:
Expand Service Offerings. The Company's focus is to provide a wide range of local, long distance and data communications services to business and carrier customers within the Company's service areas, with an emphasis on local dial tone services. The Company believes that customers are increasingly demanding a broad, full service approach to providing
telecommunications services. By offering a wide array of services, management believes the Company will be able to capture high volume business accounts. To this end, the Company plans to complement its core competitive local exchange services with competitive local toll, long distance and data communications services tailored to the needs of its customers.
Market Services to End Users and Carriers. The Company has historically marketed its services primarily to long distance carriers and resellers and its "first to market" advantage has enabled it to establish relationships with such carriers and resellers. As competition in the provision of local telephone services increases, these carriers and resellers are attempting to expand their service offerings by developing and delivering local telephone services and new enhanced products and services, which the Company is able to provide its carrier customers for resale. In addition, the Company is expanding its sales and marketing efforts to include end user business customers. Management believes a targeted end user strategy can accelerate its penetration of the local services market and better leverage the Company's network investment. In support of this entrance into the end user market, the Company is substantially expanding its distribution channels through a significant increase in its direct sales force and marketing personnel.
Concentrate Markets in Regional Clusters. The Company believes that by focusing on regional clusters it will be able to more effectively service its customers' needs and efficiently market, operate and control its networks. As a result, the Company has concentrated its networks in regional clusters serving major metropolitan areas in California, Colorado and the Ohio Valley. The Company also operates networks in the Southeast in Birmingham, Charlotte and Nashville. The Company is currently expanding its network footprint to include Texas and Oklahoma (and may also expand to Arkansas and Louisiana) in partnership with CSW.
Expand Alliances with Utilities. The Company has established and is actively pursuing strategic alliances with utility companies to take advantage of their existing fiber optic infrastructures and customer relationships. This approach affords the Company the opportunity to license or lease fiber optic facilities on a long-term basis in a more timely, cost effective manner than by constructing facilities. In addition, utilities possess conduit and other facilities that enable the Company to more easily install additional fiber to extend existing networks in a given market. Finally, management expects these strategic alliances to combine the Company's expertise in providing high quality telecommunications services with the utility's name recognition and customer relationships in marketing telecommunications products and services to the utility's customer base.
Telecom Services Networks
The Company's networks are composed of fiber optic cables, switching facilities, advanced electronics, transmission equipment and related wiring and equipment. The Company typically designs a ring architecture with a view toward making the network accessible to the largest concentration of telecommunication intensive businesses in a given market.
The Company's networks are configured in redundant synchronous optical network ("SONET") rings that offer the advantage of uninterrupted service in the event of a fiber cut or
equipment failure, resulting in limited outages and increased network reliability. The Company generally markets its services at prices below those charged by the ILEC. Management believes these factors combine to create a more reliable and cost effective alternative to copper-based networks which are still used, to some extent, by ILECs.
The Company's networks are constructed to access long distance carriers as well as areas of significant end user telecommunications traffic in a cost efficient manner. The construction period of a new network varies depending upon the scope of the activities, such as the number of backbone route miles to be installed, the initial number of buildings targeted for connection to the network backbone and the general deployment of the network infrastructure. Construction is planned to allow revenue-generating operations to commence prior to the completion of the entire network backbone. When constructing and relying principally on its own facilities, the Company has experienced a period of 12 to 18 months from initial design of a network to revenue generation for such network. Based upon its experience of using ILEC facilities to provide initial customer service and the Company's new agreements to use utilities' existing fiber, the Company has experienced revenue generation within nine months after commencing network design. After installing the initial network backbone, extensions to additional buildings and expansions to other regions of a metropolitan area are evaluated, based on detailed assessments of market potential. The Company is currently expanding all of its existing networks to reduce its reliance on the ILECs and evaluating development of new networks both inside and outside its existing regional clusters.
The Company's network monitoring center in Denver operates and manages all of the Company's networks from one central location. Centralized electronic monitoring and control of the Company's networks allows the Company to avoid duplication of this function in each city, thereby reducing costs. The monitoring capabilities are supplemented through a contract with a Lucent switch control center in Phoenix for surveillance of substantially all of the Company's central office switches.
Switched services involve the transmission of voice or data to long distance carrier-specified or end user-specified termination sites. By contrast, the special access services provided by the Company and other CLECs involve a fixed communications link or "pipe," usually between a specific end user and a specific long distance carrier's point of presence ("POP"). With a switch and interconnection to various carriers' networks, it is possible for the Company to direct a long distance carrier's traffic to any end user regardless of whether the end user is connected to the Company's owned or leased network. In addition, a switch gives the Company the technological capability to provide the full range of local telephone services. The Company began offering local telephone services to business customers in the Orange County, California area in September 1996. The Company anticipates extending such services over the next 12 months to the remainder of its existing markets. See "-Regulation-State Regulation."
Recent Developments
CSW Agreement. In January 1997, the Company announced a joint venture with CSW which will develop and market telecommunications services in Texas and Oklahoma (and may also expand to Arkansas and Louisiana). The new company will be based in Austin, Texas and will
initially serve Austin and Corpus Christi, Texas and Tulsa, Oklahoma with local telephone, long distance and data transmission services. ChoiceCom also expects to develop business opportunities in other cities in Texas, Oklahoma, Arkansas and Louisiana.
Lucent Agreement. In September 1996, the Company entered into an equipment purchase agreement with Lucent for advanced telecommunications products and services. Lucent will provide the Company with a full range of systems, software and services which will be used by the Company to build and expand the Company's advanced communications networks, including 5ESS(R)-2000 switching systems, SONET equipment, access equipment, power plants, application software systems, Advanced Intelligence Network ("AIN") platforms, data networking products and fiber optic cable. Lucent has also agreed to provide engineering, installation, onsite technical support and other professional services. Under the agreement, if the Company does not meet a minimum purchase level in any given year, Lucent may discontinue certain discounts, allowances and incentives otherwise provided to the Company for the year in which the minimum level was not met. In addition, the agreement may be terminated by either the Company or Lucent upon sixty days prior written notice.
Cascade Agreement. The Company has reached a non-binding agreement in principle with Cascade for the purchase of data switching components that will enable the Company to provide high-speed data connectivity to its customers. The Company expects to execute the agreement shortly. The agreement also provides for purchase of high-speed frame relay and asynchronous transfer mode ("ATM") switching products. In addition, the Company will utilize turnkey services from Cascade for product planning and deployment, including program management, network design, onsite operations support and training. The Company began offering its data communications services in selected California markets in December 1996 and plans to deploy similar networks in its Colorado and Ohio markets in the first half of 1997.
Nortel Agreement. In December 1996, the Company entered into an equipment and software licensing agreement with Nortel under which Nortel will provide the Company with telecommunications equipment and software.
Network Expansion. The Company continues to expand its network footprint through several strategic initiatives with utility companies and others. These include a 30-year agreement and two indefeasible rights of use ("IRU") agreements with the Los Angeles Department of Water and Power ("LADWP") for 105 miles of fiber optic capacity in Los Angeles, including Century City, West Los Angeles, Mid-Wilshire and Sherman Oaks; a 15-year agreement with the City of Burbank, California to lease fiber optic capacity on an 11.5 mile network; and a ten-year agreement, with a five-year renewal, and three ten-year IRU agreements with the City of Alameda Bureau of Electricity ("Alameda"), each with five-year renewals, under which the Company will have access to approximately seven miles of fiber optic cable.
Interconnection Agreements. The Company has executed interconnection agreements with Pacific Bell in California, Ameritech Corp. ("Ameritech") in Ohio and SBC Communications, Inc. ("SBC") in Oklahoma and Texas, and interim agreements have been signed with GTE in California and in Alabama, Florida, Indiana, Kentucky, North Carolina, Ohio, Oklahoma, and Texas. An interconnection agreement also has been signed with BellSouth which
covers Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina and Tennessee. The Company's interconnection agreement with Ameritech allows for the agreement to be expanded without further negotiations to include Ameritech's properties in Illinois, Indiana, Michigan and Wisconsin. The Company's interconnection agreement with SBC allows for the agreement to be expanded without further negotiations to include SBC's properties in Arkansas, Kansas and Missouri. The Company also has negotiated with Cincinnati Bell Telephone Company, but has been unable to reach an agreement to date. On January 28, 1997, the Company filed arbitration petitions with the relevant public utility commissions in Indiana, Kentucky and Ohio. After participating in an arbitration hearing before the Colorado Public Utilities Commission (Colorado "PUC"), the Company executed an agreement with U S WEST Communications, Inc. ("U S WEST") on December 17, 1996, which agreement was approved by the Colorado PUC on January 15, 1997. U S WEST has filed an appeal of the PUC's approval of the arbitrated agreement with the Federal District Court in Denver, Colorado. Certain of the Company's interconnection agreements do not contain "most favored nation" pricing clauses. The Company believes it is entitled to "most favored nation" pricing provisions under federal law, but this issue is being litigated. If this litigation is finally judicially resolved adversely to the Company's position, the Company will be subject to the risk that other CLECs may obtain more favorable pricing terms from ILECs.
Services
The Company's competitive local exchange services include private line, special access, interstate and intrastate switched access services, local dial tone, long distance and data services. Private line services are generally used to connect the separate locations of a single business. Special access services are generally used to connect end user customers to a long distance telephone carrier's facilities, to connect long distance carrier's facilities to the local telephone company's central offices, and to connect different facilities of the same long distance carrier or facilities of different long distance carriers. As part of its initial "carrier's carrier" strategy, the Company targeted the transport between long distance company facilities and the local telephone company central offices, and, for high volume customers, between the long distance company and the end user customer's office. The Company has begun to market its services directly to end user business customers.
The Company's interstate and intrastate switched access services include the transport and switching of calls between the long distance carrier's facilities and either the local telephone company central offices or end users. By performing the switching services, the Company can reduce the long distance carriers' local access costs, which constitute their major operating expense. As the Company provides a greater portion of the local segment of a call over its own facilities, the Company expects to experience improved margins on what has initially been a negative or low margin revenue stream.
Competitive local dial tone services consist of basic local exchange lines and trunks for business, related line features (such as voice mail, Direct Inward Dialing (DID), hunting and custom calling features), local calling, and intraLATA, also called local toll, calling. The Company plans make these services available in second quarter of 1997. The Company believes that having a full complement of communications services, including local and long distance
services, will strengthen its overall market position and help the Company to better penetrate the local exchange marketplace. The Company is also developing long distance services, including calling and debit cards, to complement its local exchange services family of products.
The Company expects to begin offering long distance services in the first half of 1997. The target customers for such services are the Company's existing and end user customers. The Company's existing switches will facilitate its entry into this business and reduce its cost of obtaining long distance transmission capacity. However, the Company will rely on other carriers to provide transmission and termination services. Therefore, the Company expects to enter into resale agreements, which typically provide for resale on a per minute basis, with long distance carriers to fulfill such needs. To reduce its cost of services, the Company may lease point-to-point circuits on a monthly or longer term fixed cost basis where it anticipates high traffic volume.
In order to expand into providing long distance services, the Company has begun to select new equipment and software and integrate these into its networks, hire and train qualified personnel, enhance its billing, back-office and information systems to accommodate long distance services and the acceptance of potential customers. The Company expects to generate low or negative gross margins and substantial start-up expenses as it rolls out its long distance service offerings. The Company does not expect long distance services to generate a material portion of its revenues over the near term.
The Company expects to begin offering data transmission services, which include frame relay and ATM, in most of its markets in 1997, and has already been doing so in California since December 1996. The Company has initially targeted Internet Service Providers ("ISPs") with its frame relay services in the belief that these firms require increasing amounts of local frame relay to connect businesses to ISP's services. The Company also intends to offer its data transmission services to its existing and potential customers, which have substantial data communications requirements. In providing these services, the Company will be dependent upon vendors for assistance in the planning and deployment of its initial data product offerings, as well as ongoing training and support. Additionally, the Company must select new equipment and software and integrate these into its networks, hire and train qualified personnel, enhance its billing, back-office and information systems to accommodate data transmission services and customer acceptance of such services. The Company does not expect its data transmission business to generate a material portion of its revenues over the near term and as a new entrant in the business, expects to generate low or negative gross margins and substantial start-up costs.
The Company's Signaling System 7 ("SS7") services provide signaling connections between long distance and local exchange carriers, and between long distance carriers' networks. SS7, known as look-ahead routing, is used by local exchange companies, long distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up, resulting in a more efficient use of network resources. SS7 is now the standard method for telecommunications signaling worldwide. The Company has deployed signal transfer points ("STPs") throughout its networks to efficiently route SS7 data across the United States. SS7 is also the enabling technology for AIN platforms, a set of services and signaling options that carriers can use to create new services or customer options. Carriers purchase connections into the
Company's SS7 network, and also purchase connections to other carriers (local and long distance) on a monthly recurring basis.
In August 1996, the Company acquired the SS7 business of Pace Network Services, Inc., a division of Pace Alternative Communications, Inc. The Company has also developed a nationwide SS7 service with Southern New England Telephone ("SNET"), one of the nation's ten largest local exchange carriers. The Company believes that, together with SNET, it is one of the largest independent suppliers of SS7 services. The Company's STPs are integrated with two SNET "gateway" STPs in Connecticut.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom") which operates an 800/900 number service bureau and a switch platform in the United States supplying information providers and commercial accounts with audiotext and customer support services.
Industry
The Company operates primarily in the local telephone service market as a CLEC. The Company also plans to compete in the long distance market, and in the frame relay and ATM data communications markets, to provide "full service" to its end user and carrier customers. The Company believes it can maximize revenue and profit opportunities by leveraging its extensive network facilities in providing multiple communications services to its customers.
Local telephone service competition was made possible by the Telecommunications Act and by regulatory initiatives at the state level. Prior to passage of the Telecommunications Act, firms like the Company were generally confined to providing special access services. These firms, including the Company, installed fiber optic cable connecting long distance telephone carriers' POPs within a metropolitan area and, in some cases, connecting end users (primarily large businesses and government entities) with long distance carrier POPs. The greater capacity and economies of scale inherent in fiber optic cable enabled the CAPs to offer customers less expensive and higher quality special access and private line services than the ILECs.
Signals carried over digital fiber optic networks are superior in many respects to older analog signals carried over copper wire, which continue to be used in varying degrees by the ILECs. In addition to offering faster and more accurate transmission of voice and data communications, digital fiber optic networks generally require less maintenance than comparable copper wire facilities, thereby decreasing operating costs. Furthermore, the transmission capacity of digital fiber optic cable is determined by the electronic equipment used on the network. This allows network capacity to be increased with a change in electronics, not the actual fiber network, as would be the case with a copper wire architecture. Lastly, digital fiber optic cable is largely immune from electromagnetic and radio interference, resulting in enhanced transmission quality.
The Telecommunications Act, subsequent FCC decisions and many state legislative and regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, CLECs are now legally able to offer all communications services, including local dial tone and all interstate and intrastate switched services, effectively opening up the local telephone market to full competition. Because of these
changes in state and federal regulations, CLECs have expanded their services from providing competitive access services such as private line and special access to providing all local exchange services to become true competitors to the ILECs. See "-Regulation."
Network Services
Through the Company's wholly owned subsidiary, Fiber Optic Technologies, Inc. ("FOTI"), the Company supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Revenue from Network Services was $60.4 million for the 12-month period ended December 31, 1996.
The Company provides network infrastructures, systems and support services, including the design, engineering and installation of local and wide area networks ("LANs/WANs") for its customers. These networks (within end user offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial and other network technologies. The Company specializes in turnkey network installations including cabling and electronics that address specific environments. The Company also provides professional network support services. These services include network move, add and change services and on-going maintenance and support services. Network Services revenue is expected to constitute a smaller portion of the Company's future revenue as Telecom Services revenue increases.
The Company offers these network integration and support services through offices located within four regions. The regional headquarters are located in Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and data transmission services to major cruise lines, commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms. The Company also owns a teleport facility which provides international voice and data transmission services. Revenue for the Satellite Services operations (adjusted to reflect the sale of certain teleport assets) was $11.4 million for fiscal 1995 and $21.3 million for the 12-month period ended December 31, 1996.
MTN. In January 1995, the Company and an unaffiliated entity formed Maritime Telecommunications Network, Inc. ("MTN") which purchased the assets of a business providing digital wireless communications through satellites to the maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing an experimental radio frequency license and a grant of Special Temporary Authority ("STA") issued by the FCC. MTN provides private communications networks to various cruise lines allowing passengers to make calls from their cabins to anywhere in the world. MTN additionally provides its communications services to the U.S. Navy in conjunction with a major long distance provider, which serves as the long distance carrier, while MTN provides the communications equipment and network. The Company believes that the radio frequencies employed under its experimental license enable it to provide a higher quality maritime
service than is available through the radio frequencies currently allocated to other maritime service providers.
In April 1996, the FCC issued a waiver allowing MTN to apply for a permanent FCC license to utilize the same frequencies as are being used under the experimental license. The Company's application is pending. Additionally, in January 1997, the FCC granted an STA which enables MTN to conduct operations as proposed in the pending application for a permanent license, for up to an initial six-month period while the FCC's review of the permanent license applications is pending. Although the Company expects that the FCC will issue a permanent license, there can be no assurance that the Company will be granted a permanent license, that the experimental license currently being used will be renewed for a future term or that any license granted by the FCC will not require substantial payments from the Company. See "-Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in Maritime Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and satellite communications for commercial ships, private vessels and land-based mobile units. This acquisition expands the Company's business from C-band satellite services for cruise ships and naval vessels to cover land-based units and smaller ships.
Nova-Net. In May 1994, the Company acquired Nova-Net Communications, Inc. ("Nova-Net"), which provides private data networks utilizing VSATs and specializes in data collection and in monitoring and control of customer production and transmission facilities in various industries, including oil and gas, electric and water utilities and environmental monitoring industries. Nova-Net designs, builds and manages private data networks that enable a variety of companies to transmit critical sensor and flow readings to key monitoring points from multiple locations. Nova-Net manages networks 24 hours a day, seven days a week through its network control center in Englewood, Colorado.
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the Company's acquisition of MTN, is located 20 miles south of Newark and specializes in international digital voice and data communications services with full fiber interconnection to the local telephone company facilities in New York City. Teleport services are also provided to the maritime industry, including support of the Company's cruise ship, U.S. Navy and offshore oil platform telephone and data services business. In addition, the Company markets the resale of services from the four teleports it sold in the first quarter of 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to offer a broad range of local and long distance communications services, including data communications, to business customers and the Company's wholesale (primarily long distance carrier) customers, at cost-effective rates. Wholesale customers typically re-market the Company's services to the wholesaler's end user, under the wholesaler's brand name. The Company markets its services in regional clusters, which it believes is the most effective and efficient way to penetrate its markets.
The Company markets its products through direct sales to end users and wholesale accounts, and through some direct mail. The Company is launching a print advertising campaign in the first quarter of 1997 and may intensify direct mail activities. Telecom Services revenue from major long distance carriers and resellers constituted approximately 78%, 71% and 69% of the Company's Telecom Services revenue in fiscal 1995, fiscal 1996 and the three-month period ended December 31, 1996, respectively. The balance of the Company's Telecom Services revenue was derived from end users. The Company anticipates revenue from end users will increase in the future as it continues to expand its local telephone service offerings and grows its sales and marketing teams to focus on the end user segment of the market. Telecom service agreements with its customers typically provide for terms of one to five years, fixed prices and early termination penalties.
The Company has telecommunications sales offices in: Irvine, Los Angeles, Oakland, Sacramento and San Diego, California; Denver and Colorado Springs, Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama; Louisville, Kentucky; Charlotte, North Carolina; and Nashville, Tennessee. The Company anticipates opening additional sales offices in California, Ohio, and Texas in 1997. The Company's marketing staff is located in Denver, Colorado.
The Company markets its network systems integration products and services through a direct sales force located in the Rocky Mountains, Pacific Northwest, Texas and California regions. The Company also has entered into reseller agreements with manufacturers of network integration products and services.
The Company offers satellite private line transmission services from its teleport to business customers that can benefit from the Company's international and domestic transmission capabilities. The Company also markets voice and data communications to the maritime industry, including cruise ships, U.S. Navy vessels, commercial vessels, private yachts, offshore oil platforms and mobile land-based units.
Competition
The Company operates in an increasingly competitive environment dominated by the ILECs, such as the RBOCs and GTE, which are among the Company's current competitors. Also included among the Company's current competitors are independent ILECs, other CLECs, network systems integration services providers, microwave and satellite service providers, teleport operators, wireless telecommunications providers and private networks built by large end users. Potential competitors (using similar or different technologies) include cable television companies, utilities, local telephone companies outside their current local service areas, and the local access operations of long distance carriers. Consolidation of telecommunications companies, including pending mergers between certain of the RBOCs, and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to increased competition. One of the primary purposes of the Telecommunications Act is to promote competition, particularly in the local telephone market. Since enactment of the Telecommunications Act, several telecommunications companies have indicated their intention to aggressively expand their ability to address many segments of the telecommunications industry,
including segments in which the Company participates and expects to participate. For example, AT&T and MCI are entering the local markets, as competitors of the Company. This may result in more participants than can ultimately be successful in a given market.
Telecom Services. The bases of competition in competitive local telecommunications services are generally price, service, reliability, transmission speed and availability. The Company believes that its expertise in developing and operating highly reliable, advanced digital networks which offer substantial transmission capacity at competitive prices enables the Company to compete effectively against the ILECs and other CLECs.
In every market in which the Company operates telecom service networks, the ILECs (which are the historical monopoly providers of local telephone services) are the primary competitors. The ILECs have long-standing relationships with their customers and provide those customers with various transmission and switching services. The ILECs also have the potential to subsidize access and switched services with revenue from a variety of businesses and historically have benefited from certain state and federal regulations that have favored the ILECs over the Company. In certain markets where the Company operates, other CLECs also operate or have announced plans to enter the market. Some of those CLECs are affiliated with major long distance companies. Current competitors also include network systems integration services providers, wireless telecommunications providers and private networks built by large end users. Additional competition may emerge from cable television operators and electric utilities. Many of the Company's actual and potential competitors have greater financial, technical and marketing resources than the Company.
The Company's networks compete most directly with the RBOCs and GTE. In general, the provision of interstate access services by the RBOCs and GTE, including the rates charged for such services, is regulated by the FCC, and the provision of intrastate access and local services, including the rates charged for such services, is regulated by the individual state regulatory commissions. See "-Regulation." In the past, FCC policies have constrained the ability of the RBOCs and GTE to decrease their prices for interstate access services, based on their status as dominant carriers. Although FCC regulatory approval for price reductions (beyond certain parameters) still must be obtained, the FCC has allowed all recently proposed access reductions to become effective and has granted the RBOCs flexibility in pricing their interstate access services on a central office by central office basis. This pricing flexibility resulted in certain RBOCs lowering their prices in high density zones, the probable arena of competition with the Company. In addition, the FCC has granted waivers of its access charge pricing rules to the RBOCs to allow them to further reduce certain access prices. The FCC also commenced a rule making proceeding in December 1996 that proposes to undertake a comprehensive reform of its access charge pricing rules, and a separate rule making proceeding is considering a reform of the existing subsidies that promote universal service. Under the Telecommunications Act, the FCC is required to complete the universal service reform proceeding and to adopt new rules by May 8, 1997. The FCC's access charge reform proceeding is likely to eventually result in a reduction in access rates charged by the RBOCs and GTE. The lowering of access rates and increased pricing flexibility for the RBOCs and GTE may adversely affect
the Company's ability to compete for certain services. If the RBOCs and GTE continue to lower access rates, there would be downward pressure on certain special access and switched access rates charged by CLECs, which pressure may adversely affect the Company's profitability. See "-Regulation." In addition, the Telecommunications Act and its implementation by the states and the FCC allows the RBOCs and GTE to provide a broader range of services and likely will enable the RBOCs and GTE to more effectively compete against long distance carriers, which are the Company's primary customers for telecom services.
Network Services. The bases of competition in the network services market are primarily technological capability and experience, value-added services and price. In this market, the Company competes with a variety of local and regional system integrators.
Satellite Services. In the delivery of domestic and international satellite services, the Company competes with other full service teleports in the northeast region of the United States. The bases of competition are primarily reliability, price and transmission quality. Most of the Company's satellite competitors focus on the domestic video market. Competition is expected principally from a number of domestic and foreign telecommunications carriers, many of which have substantially greater financial and other resources than the Company. In the maritime telecommunications market, MTN competes primarily with COMSAT Corporation ("COMSAT") in providing similar telecommunications services. COMSAT has FCC licenses that are similar to MTN's, it owns its own satellites and it is the sole U.S. point of control for access to Intelsat satellites.
Regulation
The Company's services are subject to significant federal, state and local regulation. The Company operates in an industry that is undergoing substantial change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opens the local and long distance markets to additional competition and changes 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 for implementing and enforcing the provisions of the Telecommunications Act. In exchange for unbundling their network elements and allowing competitors to interconnect at cost-based rates and on nondiscriminatory terms and conditions, the RBOCs are now allowed to seek authority to provide long distance services.
The Telecommunications Act generally requires ILECs to provide interconnection and nondiscriminatory access to the ILEC networks on more favorable terms than have been available in the past. However, such new agreements are subject to negotiations with each ILEC which may involve considerable delays and may not necessarily be obtained on terms and conditions that are acceptable 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 FCC or the federal courts. There can be no assurance that the Company will be able to negotiate acceptable new interconnection agreements or that, if state regulatory authorities impose terms and conditions on the parties in arbitration, such terms will be acceptable to the Company.
On August 8, 1996, in two separate decisions in its FCC Docket 96-98, referred to as the "First Report and Order" and the "Second Report and Order," the FCC adopted rules and policies implementing the local competition provisions of the Telecommunications Act. The FCC, among other things, adopted national guidelines with respect to the unbundling of ILECs' network elements, resale of ILEC services, the pricing of interconnection services and unbundled elements, and other local competition issues.
Both of the Orders adopted by the FCC on August 8, 1996 have been challenged in federal courts of appeals by the RBOCs, GTE, other independent ILECs, long distance carriers, and state regulatory commissions. Petitions also have been filed with the FCC requesting that the FCC reconsider various aspects of the interconnection rules. The requests for court review of the FCC's First Report and Order have been consolidated into one proceeding that will be decided by the U.S. Court of Appeals for the Eighth Circuit in St. Louis, Missouri. Requests also were filed by certain ILECs and state commissions to stay the effective date of the FCC's rules adopted in the First Report and Order pending the issuance by the Court of a decision on the merits. On October 15, 1996, the Court issued a stay of certain of the FCC's rules adopted in the First Report and Order, including implementation of the pricing provisions of the FCC's rules, which define the methodology by which the ILECs must develop prices for their unbundled elements and provide the basis for the FCC's interim or "default" and "proxy" price ceilings and ranges. The Court also stayed the FCC's "most favored nation" rules which implement Section 252(i) of the Telecommunications Act and require ILECs to make available any interconnection, service or network element in an approved interconnection agreement to any other requesting carrier on the same terms and conditions and at the same price, thereby enabling new entrants to "pick and choose" elements of established interconnection agreements. Oral argument on the merits of the FCC's rules was heard on January 17, 1997 and the Court is not expected to render a decision until March or April 1997. The Court's stay, however, does not affect the FCC's other interconnection rules as adopted on August 8, 1996, nor does it affect the statutory requirements of the Telecommunications Act, including the statutory requirement that ILECs conduct negotiations, enter into interconnection agreements with competitive carriers, and unbundle their network elements. A separate appeal of the FCC's Second Report and Order also is pending.
Federal Regulation. The Company generally operates as a regulated carrier with fewer regulatory obligations than the ILECs. The Company must comply with the requirements of the Telecommunications Act, such as offering service on a non-discriminatory basis at just and reasonable rates. The FCC treats the Company as a non-dominant carrier. The FCC has established different levels of regulation for dominant and non-dominant carriers. Of domestic common carriers, only GTE and the RBOCs are classified as dominant carriers for the provision of access services, and all other providers of domestic common carrier services are classified as non-dominant. Under the FCC's streamlined regulation of non-dominant carriers, the Company must file tariffs with the FCC for certain interstate services on an ongoing basis. The FCC has, however, recently eliminated the requirement that non-dominant long distance carriers file tariffs. Based on this proposal and previous FCC decisions, the Company believes that the FCC also will eliminate tariff filing requirements for non-dominant local exchange carriers such as the Company. The Company is not subject to price cap or rate of return regulation, nor is it currently required to obtain FCC authorization for the installation or operation of its fiber optic network facilities used
for services in the United States. The Company may install and operate non-radio facilities for the transmission of interstate communications without prior FCC authorization. The Company's use of digital microwave radio frequencies in connection with certain of its telecommunications services is subject to FCC radio frequency licensing regulation. See "Federal Regulation of Microwave and Satellite Radio Frequencies" below.
State Regulation. In general, state regulatory agencies have regulatory jurisdiction over the Company when Company facilities and services are used to provide intrastate services. Under the Telecommunications Act, states cannot effectively prohibit any entity from providing telecommunications services, but the states continue to have general authority to set criteria for reviewing applications to provide intrastate services (including local services). State regulators will continue to set the requirements for providers of local and intrastate services, including quality of services criteria. However, state regulators can no longer allow (or require) restrictions on the resale of telecommunications services. State regulators also can regulate the rates charged by CLECs for intrastate and local services. The Company's provision of local dial tone and intrastate switched and dedicated services are classified as intrastate and therefore subject to state regulation. The Company expects that it will offer more intrastate services as its business and product lines expand. To provide intrastate service (particularly local dial tone service), the Company generally must obtain a Certificate of Public Convenience and Necessity ("CPCN") from the state regulatory agency prior to offering service. In most states, the Company also is required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate, and to update or amend its tariffs as rates change or new products are added. The Company may also be subject to various reporting and record-keeping requirements.
The Company currently holds CPCNs (or their equivalents) from the states of Alabama, California, Colorado, Florida, Kentucky, North Carolina, Ohio, Tennessee and Texas. The Company has authority to provide local and intrastate long distance services in Alabama, California, Colorado, Kentucky, Ohio, Tennessee and Texas. The Company also has authority in Florida to provide intrastate long distance services and alternative access services. The Company also holds a CPCN to provide intrastate long distance services in North Carolina and applications are pending before the applicable state commission for CPCNs to provide local telecommunications services in North Carolina and to provide local and long distance services in Indiana and Oklahoma, as well as to expand the Company's local telephone service areas in Ohio.
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, based on a percentage of gross revenue, in order to provide telecommunication services. In certain states, however, including California and Colorado, such fees cannot be imposed under state law. There is no assurance that certain cities that do not impose fees will not seek to impose fees, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. In many markets, the ILECs have been excused from paying such franchise fees or pay fees that are materially lower than those required to be paid by the Company for access to public rights of way. However, under the
Telecommunications Act, while municipalities may still regulate use of their streets and rights of way, municipalities may not prohibit or effectively prohibit any entity from providing any telecommunications services. In addition, the Telecommunications Act requires that local governmental authorities treat telecommunications carriers in a non-discriminatory and competitively neutral manner. If any of the Company's existing franchise or license agreements are terminated prior to their expiration dates or not renewed, and the Company is forced to remove its fiber from the streets or abandon its network in place, such termination could have a material adverse effect on the Company.
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC continues to regulate radio frequency use by both private and common carriers under the Telecommunications Act. Unlike common carriers, private carriers contract with select customers to provide services tailored to the customer's specific needs. The FCC does not currently regulate private carriers (other than their use of radio frequencies) and has preempted the states from regulating private carriers insofar as they provide interstate services. The Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use of radio frequencies to provide satellite and wireless services. The Company holds a number of satellite earth station licenses in connection with its operation of satellite-based private carrier networks. The Company also provides maritime communications services pursuant to an experimental license and a grant of a STA. In April 1996, the FCC issued a waiver to the Company which may allow it to obtain a permanent FCC license to provide these services using the same radio frequencies currently being used under the experimental license. The Company has filed an application for a permanent license under the terms of the FCC's waiver decision, and the application is pending. The STA was granted on January 30, 1997 and enables the Company to conduct operations pursuant to such application during the FCC's review.
The Telecommunications Act limits ownership or control of an entity holding a common carrier radio license by non-U.S. citizens, foreign corporations and foreign governments. Because of these restrictions, historically the Company and its subsidiaries have not been eligible to hold common carrier radio licenses used to provide telephone and wireless services. Therefore, third parties hold certain common carrier licenses and provide service to the Company over the licensed facilities for resale by the Company to the Company's customers. The Telecommunications Act permits the FCC to determine on a case-by-case basis that the public interest will be served by waiving the foreign ownership restrictions. The Company intends to apply to the FCC for a waiver of the foreign ownership restrictions that remain applicable to the Company. If a waiver is granted, or if currently applicable ownership restrictions are relaxed or removed, the common carrier radio licenses will be transferred to the Company upon receipt of FCC approval.
Employees
On January 31, 1997, the Company employed a total of 1,483 individuals on a full time basis. There are 112 employees of one of the Company's subsidiaries who are subject to collective bargaining agreements which expire on December 31, 1997 and May 31, 1998. The Company believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for offices, storage and equipment rooms and collocation sites. Additional space may be purchased or leased by the Company as networks are expanded. The Company owns a 30,000 square-foot building located in the Denver metropolitan area. This facility serves as the Company's corporate headquarters as well as its nationwide network monitoring and control facility for its Telecom Services business. The Company currently also leases approximately 116,000 square feet of office space for operations located in the Denver metropolitan area. As a result of its recent and anticipated future growth, the Company has acquired property for its new headquarters and has commenced construction of an office building that the Company anticipates will accommodate all of the Company's Colorado operations.
ITEM 3.
ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS
SBC has alleged before the San Antonio city council that the Company's arrangement to license cable being built by City Public Service of San Antonio ("CPS") in greater San Antonio violates state law and has sought to have the San Antonio city council repudiate the Company's contract with CPS. The assertion of SBC is that CPS would, through its license arrangement with the Company, be providing telecommunications services in contravention of Texas state law. In December 1995, the San Antonio city council imposed a moratorium on network construction which expired in March 1996. The Company believes it has a valid contract with CPS and filed suit against SBC in December 1995 in the District Court for the Western District of Texas, San Antonio Division seeking, among other things, damages for tortious interference and a declaratory judgment that the contract with CPS is legal and binding. SBC's motion to dismiss that suit was granted by the Court and ICG's appeal of that decision is pending before the U.S. Court of Appeals for the Fifth Circuit. In June 1996, ICG filed suit in State Court in San Antonio seeking a declaration that the contract is valid under state law. In addition, in May 1996, the Company filed a petition with the FCC seeking preemption of Texas state law under the Telecommunications Act. That petition currently is pending before the FCC.
ICG and its subsidiaries are not parties to any material litigation. The continuing participation by ICG and its subsidiaries in regulatory proceedings before the FCC and state regulatory agencies concerning the adoption of new regulations is unlikely to result in a material adverse effect on the financial condition and results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been listed on the American Stock Exchange ("AMEX") since August 5, 1996 under the symbol "ICG." Prior to that time, 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 Common Shares ceased trading on the AMEX at the close of trading on August 2, 1996. Holdings-Canada Class A Common Shares are listed on the Vancouver Stock Exchange ("VSE") under the new symbol "IHC.A."
The following table sets forth, for the fiscal periods indicated, the high and low sale prices of the Common Shares as reported on the AMEX through August 2, 1996, and the VSE through the date indicated below, and the high and low sales prices of the Common Stock as reported on the AMEX from August 5, 1996 through the date indicated below. The table also sets forth the average of the monetary exchange rates on the last day of each such fiscal period.
On February 18, 1997, the last reported sale price for the Common Stock on the AMEX was $14.75 per share. On February 18, 1997, there were 31,299,392 shares of Common Stock outstanding and 101 holders of record.
The Company has never declared or paid dividends on the Common Stock and does not intend to pay cash dividends on the Common Stock in the foreseeable future. ICG intends to retain future earnings, if any, to finance the development and expansion of its business. In addition, the payment of any dividends on the Common Stock is effectively prohibited by the restrictions contained in the Company's indentures and in the First Amended and Restated Articles of Incorporation of Holdings, which prohibits Holdings from making any material payment to the Company. Certain of the Company's debt facilities contain covenants which also may restrict the Company's ability to pay cash dividends.
The Company has not made any sales of unregistered securities during fiscal 1996 or the three months ended December 31, 1996.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for each fiscal year in the five-year period ended September 30, 1996 and for the three months ended December 31, 1996 has been derived from the audited Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Transition Report. Results of operations for the three months ended December 31, 1996 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which are affected by important factors including, but not limited to, dependence on increased traffic on the Company's facilities, the successful implementation of the Company's local dial tone and long distance strategies and actions of competitors and regulatory authorities that could cause actual results to differ materially from the forward-looking statements. The results for the three months ended December 31, 1995 have been derived from the Company's unaudited Consolidated Financial Statements included herein.
Company Overview
The Company provides Telecom Services, Network Services and Satellite Services. Telecom Services consist primarily of the Company's CLEC operations. The Company is one of the largest providers of competitive local telephone services in the United States, based on estimates of the industry's 1995 revenue. Network Services consist of information technology services and selected networking products, focusing on network design, installation, maintenance and support. Satellite Services consist of maritime and international satellite transmission services and provide private data networks utilizing VSATs. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenues increasing from $59.1 million for fiscal 1994 to $190.7 million for the 12-month period ended December 31, 1996. The Company's rapid growth is the result of the initial installation, acquisition and subsequent expansion of its fiber optic networks, the acquisition and growth of its network systems integration business and, prior to fiscal 1996, growth in Satellite Services.
Prior to fiscal 1996, the majority of the Company's revenue had been derived from Network Services. However, the Company's Network Services revenue (as well as Satellite Service revenue) will continue to represent a diminishing percentage of the Company's consolidated revenue as the Company continues to emphasize its Telecom Services. In March 1996, the Company completed the sale of four of its teleports which were used in the Company's Satellite Services operations.
The Company's operating networks have grown from 323 fiber route miles at the end of fiscal 1994 to 2,385 fiber route miles at December 31, 1996. Telecom Services revenue has increased from $14.9 million for fiscal 1994 to $109.0 million for the 12-month period ended December 31, 1996. The Company has experienced declining access unit prices and increasing price competition which have been more than offset by increasing network usage. The Company expects to continue to experience declining access unit prices and increasing price competition for the foreseeable future.
The Company expects to continue to experience negative operating margins from the provision of switched access services while its networks are in the development and construction phases, during which the Company relies on ILEC networks to carry a significant portion of its customers' switched traffic. The Company expects to realize improved operating margins from
switched services on a given network when (i) increased volumes of traffic are attained and build-out enables such traffic to be carried on the Company's own network instead of ILEC facilities, and (ii) higher margin enhanced services are provided to customers on the Company's network. In addition, the Company believes that the unbundling of ILEC services and the implementation of local telephone number portability, which are mandated by the Telecommunications Act, will reduce the Company's costs of providing switched services and facilitate the marketing of such services. However, the Company's switched access services strategy has not yet been profitable and may not become profitable due to, among other factors, lack of customer demand, competition from other CLECs and downward pricing pressure from the ILECs.
The Company believes that the provisions of the Telecommunications Act, including the opening of the local telephone services market to competition, the unbundling of ILEC services and the implementation of local telephone number portability, will facilitate the Company's plan to provide a full array of local, long distance and data communications services. In order to fully implement its strategy, the Company must make significant capital expenditures to provide additional switching capacity, network infrastructure and electronic components. The Company must also make significant investments and expenditures to develop, train and manage its marketing and sales personnel. The Company has limited experience providing such services and there can be no assurance that the Company will be successful.
The continued development, construction and expansion of the Company's business requires significant capital, a large portion of which is expended before any revenue is generated. The Company has experienced, and expects to continue to experience, negative cash flow and significant losses while it expands its operations to provide a wide range of telecommunications services and establishes a sufficient revenue-generating customer base. There can be no assurance that the Company will be able to establish or retain such a customer base. When constructing and relying principally on its own facilities, the Company has experienced a period of up to 18 months from initial design of a network to revenue generation for that network. However, using leased ILEC facilities to provide initial customer service and the Company's new agreements to use utilities' existing fiber, the Company has experienced initial revenue generation within nine months after commencing network design.
Results of Operations
The following table provides a breakdown of revenue and operating costs for Telecom Services, Network Services and Satellite Services and certain other financial data for the Company for the periods indicated. The table also shows certain revenue, expenses, operating loss and EBITDA as a percentage of the Company's total revenue.
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31, Revenue. Revenue for the three months ended December 31, 1996 increased $21.6 million, or 61%, from the three months ended December 31, 1995. The increase in total revenue reflects continued growth in Telecom Services, Network Services and Satellite Services, offset slightly by the loss in revenue resulting from the sale of four of the Company's teleports during the second quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million due to an increase in network usage for both special and switched access services, offset in part by a decline in average unit pricing. Switched services revenue increased from $6.0 million (44% of Telecom Services revenue) for the three months ended December 31, 1995, to $23.9 million (69% of Telecom Services revenue) for the three months ended December 31, 1996, of which $7.5 million relates to revenue from Zycom compared to $0.9 million for the three months ended December 31, 1995. Approximately $6.5 million of the increase in Zycom revenue for the three months ended December 31, 1996 as compared to the same period in 1995 relates to changes in the classification of certain operating costs as a result of the Company entering into long-term contracts with its major customers. Network usage as reflected in voice grade equivalents ("VGEs") increased 53% from 488,403 VGEs on December 31, 1995 to 748,528 on December 31, 1996. On December 31, 1996, the Company had 2,069 buildings connected to its networks compared to 1,539 buildings connected on December 31, 1995. Consistent with expectations, Network Services revenue growth has been moderate, increasing from $15.7 million to $16.0 million for the three months ended December 31, 1995 and 1996, respectively, while the Company continues to reposition its systems and operations to improve operating results. Satellite Services revenue remained relatively stable between the three-month periods ended December 31, 1995 and 1996 as a result of the offsetting effects of increased maritime minutes of use from cruise ships and no revenue in the three months ended December 31, 1996 from the four teleports sold in March 1996. On a pro forma basis to reflect the sale of the teleports, the Company's Satellite Services revenue for the three months ended December 31, 1995 and 1996 was $3.7 million and $6.2 million, respectively.
Operating costs. Total operating costs for the three months ended December 31, 1996 increased $22.8 million, or 84%, from the same period in 1995. Telecom Services operating costs increased from $11.9 million, or 88%, of Telecom Services revenue for the three months ended December 31, 1995, to $34.5 million, or 99%, of Telecom Services revenue for the three months ended December 31, 1996. Telecom Services operating costs consist of payments to ILECs for the use of network facilities to support off-net and switched access services, network operating costs, right of way fees and other costs. The increase in operating costs in absolute dollars is attributable to the increase in switched access services and the addition of engineering personnel dedicated to the development of local exchange services. The increase in operating costs as a percentage of revenue is due primarily to the increase in switched access services revenue, which generates negative margins as a result of the higher costs associated with utilizing ILEC network facilities and the investment in the development of local exchange services without the benefit of corresponding revenue in the same period. The Company expects that the Telecom Services ratio of operating costs to revenue will continue to increase until the Company provides a greater volume of higher margin services, principally local telephone 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. Network Services operating costs
increased 2% to $12.3 million for the three months ended December 31, 1996 and increased as a percentage of Network Services revenue from 76% to 77% for the three month periods ended December 31, 1995 and 1996, respectively. Network Services operating costs include the cost of equipment sold, direct hourly labor and other indirect project costs. Satellite Services operating costs decreased 2% to $3.2 million for the three months ended December 31, 1996. Satellite Services operating costs as a percentage of revenue declined to 51% of Satellite Services revenue during the three months ended December 31, 1996, from 52% during the three months ended December 31, 1995. The decrease in percentage of revenue as well as absolute dollars is attributable to the decline in revenue resulting from the sale of four of the Company's teleports in March 1996, offset by an increase in higher margin maritime services revenue at MTN. Revenue from teleport operations historically have yielded lower gross margins than maritime services revenue. Satellite Services operating costs consist primarily of satellite transponder lease costs and costs of equipment sold.
Selling, general and administrative expense. Selling, general and administrative ("SG&A") expense for the three months ended December 31, 1996 increased $5.6 million, or 30%, compared to the three months ended December 31, 1995. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local telephone services. SG&A expense as a percentage of total revenue was 43% for the three months ended December 31, 1996, compared to 53% for the same period in 1995. There is typically a period of higher administrative and marketing expense prior to the generation of appreciable revenue from new products and services or newly developed markets. SG&A expense for Network Services decreased both in absolute dollars and as a percentage of Network Services revenue due to the cost control efforts by the Company's management and due to approximately $0.7 million in non-recurring charges, primarily legal accruals, recorded during the three months ended December 31, 1995. Satellite Services SG&A expense decreased in absolute dollars and as a percentage of Satellite Services revenue due to cost control efforts by the Company's management. Other corporate expenses increased from $4.0 million, or 11% of total revenue, for the three months ended December 31, 1995 to $5.7 million, or 10% of total revenue, for the three months ended December 31, 1996. This increase is primarily attributable to the addition of employees, principally human resources and regulatory personnel, for the purpose of managing the Company's growth and its expansion into new markets as allowed under the Telecommunications Act. The Company expects SG&A expense (principally for Telecom Services) to increase in absolute dollars over the near term to facilitate the development and marketing of local services and the commencement of marketing services (including long distance and data transmission services) to business end user customers.
Depreciation and amortization expense. Depreciation and amortization expense increased $4.9 million, or 100%, for the three months ended December 31, 1996, as compared to the same period in 1995. Depreciation of fixed assets increased by approximately $2.3 million as a result of the shortening of estimated depreciable lives during fiscal 1996, as discussed in "-Accounting Changes," and an increase in depreciable fixed assets due to the continued expansion of the Company's networks. The increase in depreciation expense was offset slightly due to the decrease
in depreciable assets resulting from the sale of four of the Company's teleports in March 1996. The Company reports high levels of depreciation expense relative to revenue during the early years of operation of a new network because the full cost of a network is depreciated using the straight line method despite the low rate of capacity utilization in the early stages of network operation.
Interest expense. Interest expense increased by $9.3 million, from $15.2 million for the three months ended December 31, 1995 to $24.5 million for the three months ended December 31, 1996, which included $22.7 million of non-cash interest. This increase was attributable to an increase in long-term debt, primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in April 1996, and an increase in capitalized lease obligations to finance Telecom Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three months ended December 31, 1995 to $6.0 million for the three months ended December 31, 1996. The increase is attributable to the interest earned on the proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Exchangeable Preferred Stock ("14 1/4% Preferred Stock") in April 1996.
Share of losses in joint venture. Effective October 1, 1996, the Company sold its 50% interest in the Phoenix network joint venture. As a result, no share of losses in joint venture was recorded during the three months ended December 31, 1996, as compared to the $0.2 million recorded during the same period in 1995. Future results will include the Company's share of losses from the joint venture with CSW.
Other, net. Other, net fluctuated $1.7 million from $1.0 million net expense in the three months ended December 31, 1995 to $0.7 million net income in the three months ended December 31, 1996. Other expense recorded in the three-month period ended December 31, 1995 represents the write-off of deferred financing costs on a credit facility that was fully paid in December 1995. Other income recorded in the three-month period ended December 31, 1996 is primarily attributable to the $0.8 million gain recognized in conjunction with the sale of the Company's 50% interest in the Phoenix network joint venture.
Minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock. Minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock increased $1.8 million, from $3.2 million for the three months ended December 31, 1995 to $5.0 million for the three months ended December 31, 1996. The increase is due primarily to the issuance of the 14 1/4% Preferred Stock in April 1996. Minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock recorded during the current three-month period consists of the accretion of issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7 million) associated with the 14 1/4% Preferred Stock, offset by minority interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term telecom services contracts. The cumulative effect of change in accounting for revenue from long-term telecom services contracts recorded during the three months ended December 31, 1995 is due to the change in accounting principle as described in "-Accounting Changes." As the change in accounting was
applied retroactively as of October 1, 1995, no similar amounts were recorded during the three months ended December 31, 1996.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal 1996 compared to the pro forma results of operations for fiscal 1995, assuming the change in accounting for long-term telecom services contracts described in "-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from fiscal 1995. The increase in total revenue reflects continued growth in Telecom Services, Network Services and Satellite Services, offset slightly by the loss in revenue resulting from the sale of four of the Company's teleports. Telecom Services revenue increased 177% to $87.7 million due to an increase in network usage for both special and switched access services, offset in part by a decline in average unit prices. Switched services revenue increased from $7.2 million (22% of Telecom Services revenue) for fiscal 1995, to $51.6 million (59% of Telecom Services revenue) for fiscal 1996, of which $14.9 million relates to revenue from Zycom compared to $1.4 million in fiscal 1995. Approximately $10.6 million of the increase in Zycom revenue relates to changes in the classification of certain operating costs as a result of the Company entering into long-term contracts with its major customers. Network usage as reflected in VGEs increased 47% from 430,535 VGEs on September 30, 1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996, the Company had 2,067 buildings connected to its networks compared to 1,375 buildings connected on September 30, 1995. Consistent with expectations, Network Services revenue growth has been moderate, increasing from $58.8 million to $60.1 million, while the Company continues to reposition its systems and operations to improve operating results. Satellite Services revenue increased 4% to $21.3 million for fiscal 1996 primarily due to increased maritime minutes of use from cruise ships offset in part by the decrease resulting from the sale of four of the Company's teleports. Satellite Services revenue for fiscal 1995 and 1996, on a pro forma basis to reflect the sale of teleports, was $11.4 million and $18.9 million, respectively. Satellite Services revenue decreased $0.4 million from the third quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in revenue was primarily due to three Navy vessels being in "dry dock."
Operating costs. Total operating costs for fiscal 1996 increased $56.4 million, or 72%, from fiscal 1995. Telecom Services operating costs increased from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7 million, or 90% of Telecom Services revenue for fiscal 1996. The increase in operating costs in absolute dollars is attributable to the increase in switched access services and the expansion in off-net special access service offerings. The increase in operating costs as a percentage of total revenue is due primarily to the increase in switched access services revenue, which generates negative margins as a result of the higher costs associated with utilizing ILEC network facilities and the investment in the development of local exchange services without the benefit of corresponding revenue in the same period. The Company expects that the Telecom Services ratio of operating costs to revenue will continue to increase until the Company carries more traffic on its own facilities rather than the ILEC facilities, provides a greater volume of higher margin services, principally local telephone services, and obtains the right to use unbundled ILEC facilities on satisfactory terms, any or all of which may not occur.
Network Services operating costs increased 1% to $46.3 million and decreased as a percentage of Network Services revenue from 78% for fiscal 1995 to 77% for fiscal 1996. Satellite Services operating costs decreased to $10.3 million for fiscal 1996, from $11.1 million for fiscal 1995. Satellite Services operating costs as a percentage of revenue also declined to 48% for fiscal 1996, compared to 54% for fiscal 1995. The decrease both in absolute dollars and as a percentage of revenue is attributable to the decline in revenue resulting from the sale of four of the Company's teleports, partially offset by an increase in higher margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expense for fiscal 1996 increased $13.8 million, or 22%, compared to fiscal 1995. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, marketing and sales staff dedicated to the expansion of the Company's networks and implementation of the Company's switched services strategy and development of local telephone services. A portion of the increase was also attributable to approximately $1.8 million of legal, accounting, and SEC filing fees incurred in the incorporation of a new U.S. publicly traded holding company, ICG Communications, Inc., and approximately $1.3 million of consulting fees related to various process improvement initiatives. SG&A expense as a percentage of total revenue was 45% for fiscal 1996, compared to 57% for fiscal 1995. SG&A expense for Network Services increased due to increased engineering, marketing and sales staff to support growth in network system installations. Satellite Services SG&A expense increased primarily due to the growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased $13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of fixed assets increased by approximately $7.0 million as a result of the shortening of estimated depreciable lives discussed in "-Accounting Changes," and an increase in depreciable fixed assets due to the continued expansion of the Company's networks. The increase in depreciation expense was offset slightly due to the decrease in depreciable assets resulting from the sale of four of the Company's teleports.
Interest expense. Interest expense increased by $61.3 million, from $24.4 million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5 million of non-cash interest. This increase was attributable to an increase in long-term debt, primarily the 13 1/2% Senior Discount Notes (the "13 1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996, and an increase in capitalized lease obligations to finance the purchase of Telecom Services and Satellite Services equipment. Also included in interest expense is a charge of approximately $11.5 million for the payments made to holders of the 13 1/2% Notes with respect to consents to amendments to the indenture governing the 13 1/2% Notes in order to permit the 1996 Offering (as defined herein) in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995. The increase is attributable to the increase in cash from the proceeds of the issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4% Preferred Stock in April 1996.
Share of losses in joint venture. Share of losses in the Phoenix network joint venture, in which the Company held a 50% equity interest, increased $1.1 million, or 145%, from fiscal 1995
to $1.8 million for fiscal 1996 due to increased losses resulting from the continued expansion and implementation of switched access services. Effective October 1, 1996, the Company sold its interest in the Phoenix network joint venture.
Provision for impairment of goodwill, investment and notes receivable. Provision for impairment of goodwill, investment and notes receivable increased $2.9 million from fiscal 1995 to $9.9 million for fiscal 1996. The current year amount includes valuation allowances for the amounts receivable for advances made to the Phoenix network joint venture included in long-term notes receivable ($5.8 million), the investment in the Melbourne network ($2.7 million) and the note receivable from NovoComm, Inc. ($1.3 million). The allowances were a result of management's estimate of the realizable value of the assets as of September 30, 1996.
Other, net. Other, net increased $8.3 million for fiscal 1996 from $0.8 million for fiscal 1995 due primarily to the loss on the sale of four of the Company's teleports and certain other satellite assets ($1.1 million), the write-off of certain assets ($2.5 million), settlement costs of certain litigation ($1.2 million) and the write-off of deferred financing costs upon conversion or settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock. Minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock increased $24.2 million, from $1.1 million for fiscal 1995 to approximately $25.3 million for fiscal 1996. The increase is due to the accretion of the Unit Warrants (as defined herein) ($14.4 million) and issue costs ($1.1 million) associated with the issuance of the 12% redeemable preferred stock of Holdings (the "Redeemable Preferred Stock"), accretion of issue costs associated with the 14 1/4% Preferred Stock ($0.3 million), accrual of the preferred stock dividend on the Redeemable Preferred Stock ($2.1 million) and the 14 1/4% Preferred Stock ($9.1 million) and the excess redemption price over the stated value of the convertible Series B Preferred Stock of Holdings-Canada ("Convertible Preferred Stock of Holdings-Canada") ($1.0 million), partially offset by the minority interest in losses of subsidiaries.
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million. The income tax benefit is due to an adjustment to the deferred tax liability as a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term telecom services contracts. The increase in cumulative effect of change in accounting for revenue from long-term telecom services contracts is due to the change in accounting as described in "-Accounting Changes."
Fiscal 1995 Compared to Fiscal 1994
The following information reflects the pro forma results of operations for fiscal 1995 compared to the pro forma results of operations for fiscal 1994, assuming the change in accounting for long-term telecom services contracts described in "-Accounting Changes" had been applied retroactively.
Revenue. Revenue for fiscal 1995 increased $52.2 million, or 89%, from fiscal 1994, reflecting continued growth in Telecom Services, Network Services and Satellite Services operations. Telecom Services revenue increased 120% to $31.6 million. The increase in Telecom Services revenue reflects an increase in network usage, which was partially offset by a decline in average unit prices, and the acquisition in April 1994 of networks in the Los Angeles and San Francisco metropolitan areas, which were included for the full year in fiscal 1995. Network usage as reflected in VGEs increased 92% from 224,072 VGEs on September 30, 1994 to 430,535 VGEs on September 30, 1995. On September 30, 1995, the Company had 1,375 buildings connected to its networks compared to 226 buildings connected on September 30, 1994. Network Services revenue increased 63% to $58.8 million primarily from the acquisition of DataCom Integrated Systems Corporation ("DISC"), which was included for the full year in fiscal 1995 and which subsequently merged into Network Services, as well as from new network system installations. The increase in network system installations resulted from additional projects from existing customers and an increase in general demand for local area networks due to increased business networking requirements. Satellite Services revenue increased 152% to $20.5 million for fiscal 1995, which resulted principally from the acquisitions of Nova-Net, MTN and teleports located in the metropolitan Atlanta and New York areas which generated $3.9 million, $7.5 million and $4.4 million in revenue, respectively, for fiscal 1995. Satellite Services revenue for fiscal 1995, as adjusted to reflect the sale of four of the Company's teleports, was $11.4 million.
Operating costs. Total operating costs for fiscal 1995 increased $40.7 million, or 107%, from fiscal 1994. Telecom Services operating costs increased from $7.1 million, or 49% of Telecom Services revenue for fiscal 1994, to $21.8 million, or 69% of Telecom Services revenue for fiscal 1995. Telecom Services operating costs increased in absolute terms as well as a percentage of revenue due to an expansion in off-net service offerings, for which the Company leases network facilities from local telephone companies, and the implementation of switched access services, which generated negative margins due to the costs associated with reselling ILEC network facilities. Network Services operating costs increased 74% to $45.9 million primarily due to an increased volume of Network Services business. Network Services operating costs as a percentage of revenue increased from 73% for fiscal 1994 to 78% for fiscal 1995 due to rapid expansion and the inclusion in Network Services operating costs of project managers and operations personnel directly associated with network systems projects in fiscal 1995, which were treated as SG&A costs in 1994. Satellite Services operating costs increased to $11.1 million, or 54% of Satellite Services revenue, for fiscal 1995, from $4.7 million, or 58% of Satellite Services revenue, for fiscal 1994. This increase in absolute terms was attributable to an increased volume of Satellite Services business primarily due to the acquisition of Nova-Net and MTN, and increased usage of leased satellite transponders. The decrease in operating costs as a percentage of revenue is attributable to the higher margins associated with MTN, which represented a larger portion of Satellite Services revenue in fiscal 1995, as opposed to video and data transmission services.
Selling, general and administrative expense. SG&A expense for fiscal 1995 increased $34.9 million, or 125%, compared to fiscal 1994. This increase was principally due to the continued rapid expansion of the Company's networks, including the acquisition of networks in the Los Angeles and San Francisco metropolitan areas during the third quarter of fiscal 1994 and related significant additions to the Company's management information systems, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's switched access services strategy. SG&A expense as a percentage of total revenue was 57% for fiscal 1995 compared to 48% for fiscal 1994. There is typically a period of higher administrative and marketing expense prior to the generation of appreciable revenue from newly acquired or newly developed networks or markets. SG&A expense for Network Services increased due to increased engineering, marketing and sales staff to support increased growth in network systems installations. Satellite Services SG&A increased due to the acquisitions of teleports in metropolitan Atlanta and New York, the acquisition of the Company's VSAT operations during the third quarter of fiscal 1994, and the acquisition of MTN during the second quarter of fiscal 1995.
Depreciation and amortization. Depreciation and amortization increased $8.4 million, or 103%, for fiscal 1995 compared to fiscal 1994. This increase resulted from an increased investment in depreciable fixed assets as a result of the acquisition of new networks and the expansion of existing networks and Satellite Services facilities.
Interest expense. Interest expense increased $15.9 million, from $8.5 million for fiscal 1994 to $24.4 million for fiscal 1995, which included $15.1 million of non-cash interest. This increase was attributable to an increase in capitalized lease obligations to finance Telecom Services and Satellite Services equipment and an increase in long-term debt, primarily the 13 1/2% Notes issued in August 1995.
Interest income. Interest income increased $2.4 million, or approximately 133%, from fiscal 1994. The increase is attributable to the increase in cash from the proceeds of the issuance of the 13 1/2% Notes in August 1995.
Provision for impairment of goodwill, investment and notes receivable. The $7.0 million provision for impairment of goodwill, investment and notes receivable for fiscal 1995 is a result of a $5.0 million write-down in the goodwill associated with the acquisition of Nova-Net and a $2.0 million allowance for an investment. The write-downs and allowance were a result of management's estimate of the realizable value of the assets as of September 30, 1995.
Share of losses of joint venture. The Company had a 50% equity interest in a joint venture operating the Phoenix network. Using the equity accounting method, the Company's share of losses in the Phoenix network joint venture was approximately $0.7 million for fiscal 1995. The Company began recording losses from the joint venture in the second quarter of fiscal 1994. The loss from joint venture recorded in fiscal 1994 includes $0.4 million for losses incurred prior to fiscal 1994. Effective October 1, 1996, the Company sold its interest in the Phoenix network joint venture.
Quarterly Results
The following table presents selected unaudited operating results for three-month quarterly periods, beginning with the three-month period ended December 31, 1994 and through the three-month period ended December 31, 1996. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the Company's Consolidated Financial Statements and related notes included elsewhere in this Transition Report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. ICG's development and expansion activities, including acquisitions, during the periods shown below materially affect the comparability of this data from one period to another.
The Company's consolidated revenue has increased every quarter since the first fiscal quarter of 1992, primarily due to the installation and acquisition of new networks, the expansion of existing networks and increased services provided over existing networks. From the third quarter of fiscal 1993 until the sale of four teleports in the second quarter of fiscal 1996, Satellite Services also contributed to the quarterly revenue growth.
Operating and net losses have generally increased immediately preceding and during periods of relatively rapid network acquisition and expansion activity. The increased quarterly losses from the first quarter of fiscal 1995 through the quarter ended December 31, 1996 resulted from a combination of increases in negative margin switched access services revenue and increases in personnel and other SG&A expenses to support the acquisition and expansion of Telecom Services networks, the implementation of the Company's switched access services strategy and development of local telephone services.
Individual operating units may experience variability in quarter to quarter revenue due to (i) the timing and size of contract orders, (ii) the timing of price changes and associated impact on volume, and (iii) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1996, the Company had net operating loss carryforwards ("NOLs") of approximately $171.9 million, which expire at various times in varying amounts through 2011. However, due to the provisions of Section 382, Section 1502 and certain other provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of a portion of the NOLs will be limited. In addition, the Company is also subject to certain state income tax laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as well as other tax attributes, following significant changes in ownership of a corporation's stock, as defined in
the Code. Investors are cautioned that future events beyond the control of the Company could reduce or eliminate the Company's ability to utilize the tax benefits of its NOLs. Future ownership changes under Section 382 will require a new Section 382 computation which could further restrict the use of the NOLs. In addition, the Section 382 limitation could be reduced to zero if the Company fails to satisfy the continuity of business enterprise requirement for the two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt and lease financing. As of December 31, 1996, the Company had current assets of $449.2 million, including $392.5 million of cash, cash equivalents and short-term investments, which exceeded current liabilities of $87.6 million, providing working capital of $361.6 million. The Company invests excess funds in short-term, interest-bearing investment-grade securities until such funds are used to fund the capital investments and operating needs of the Company's business. The Company's investment objectives are safety, liquidity and yield, in that order.
Cash Used By Operating Activities
The Company's operating activities used $7.5 million, $43.0 million and $47.4 million in fiscal 1994, 1995 and 1996, respectively, and $5.6 million and $8.6 million for the three months ended December 31, 1995 and 1996, respectively. Cash used by operations is primarily due to net losses, which are partially offset by non-cash expenses, such as depreciation, deferred interest expense, preferred dividends on subsidiary preferred stock and changes in working capital items.
The Company expects to continue to generate negative cash flow from operating activities while it emphasizes the development, construction and expansion of its Telecom Services business. Consequently, it does not anticipate that cash provided by operations will be sufficient to fund future expansion of existing networks or the construction and acquisition of new networks in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $51.5 million, $71.3 million and $131.2 million (net of $21.6 million received in connection with the sale of certain satellite equipment, including four teleports) in fiscal 1994, 1995 and 1996, respectively, and $24.2 million (net of $21.1 million received in connection with the aforementioned sale) and $82.3 million for the three months ended December 31, 1995 and 1996, respectively. Cash used by investing activities includes cash expended for the acquisition of property, equipment and other assets of $43.2 million, $49.8 million and $120.1 million for fiscal 1994, 1995 and 1996, respectively, and $25.8 million and $58.8 million for the three months ended December 31, 1995 and 1996, respectively. The Company will continue to use cash in 1997 for the construction of new networks and the expansion of existing networks. The Company acquired assets under capital leases
and through the issuance of debt or warrants of $11.7 million, $38.7 million and $55.0 million in fiscal 1994, 1995 and 1996, respectively, and $0.1 million and $19.5 million for the three months ended December 31, 1995 and 1996, respectively. The majority of assets acquired under capital leases and through the issuance of debt during fiscal 1995 was for the purchase and installation of 12 of the Company's 15 high capacity digital switches (one of which is located in Phoenix and will be operational through April 1997, after which it will be relocated). Assets acquired during the year ended September 30, 1996 under capital leases primarily consisted of fiber optic networks included in the Company's agreement with Southern California Edison Company ("SCE"). The Company is required to make capital lease payments of $31.6 million, $15.6 million, $13.9 million, $14.3 million and $17.4 million during 1997, 1998, 1999, 2000 and 2001, respectively, and $107.5 million thereafter. The Company expects to make investments of approximately $24.2 million in 1997 in its joint venture with CSW and estimates making additional investments therein of approximately $25.5 million through 2002. The Company is obligated to purchase all of the shares of MTN (at fair value) that are owned by the other shareholder of MTN, if MTN has not completed a public offering by January 3, 1998.
Cash Provided (Used) By Financing Activities
Financing activities provided $49.4 million, $377.8 million and $360.2 million in fiscal 1994, 1995 and 1996, respectively, and used $8.4 million and $0.2 million in the three months ended December 31, 1995 and 1996, respectively. The funds to finance the Company's business acquisitions, capital expenditures, working capital requirements and operating losses were obtained through public and private offerings of Holdings-Canada common shares, the 12 1/2% Notes and 14 1/4% Preferred Stock, units (the "Units") consisting of the 13 1/2% Notes and warrants (the "Unit Warrants"), the Redeemable Preferred Stock, 8% Convertible Subordinated Notes and 7% Convertible Subordinated Notes (together the "Convertible Subordinated Notes") and Convertible Preferred Shares of Holdings-Canada, capital lease financings and various working capital sources, including credit facilities.
As of December 31, 1996, an aggregate of approximately $92.8 million of capitalized lease obligations was due prior to December 31, 2001 and an aggregate accreted value of approximately $685.8 million was outstanding under the 12 1/2% Notes and 13 1/2% Notes. The 12 1/2% Notes require payments of interest to be made in cash commencing on November 1, 2001 and mature on May 1, 2006. The 13 1/2% Notes require payments of interest to be made in cash commencing on March 15, 2001 and mature on September 15, 2005. In addition, the 14 1/4% Preferred Stock requires payment of dividends to be made in cash commencing August 1, 2001. As of December 31, 1996, the Company had $6.5 million of other indebtedness that matures prior to December 31, 2001. The Company may also have additional payment obligations prior to such time, the amount of which cannot presently be determined. See notes 3, 8, 10 and 14 to the Consolidated Financial Statements. The Company's cash on hand and amounts expected to be available through vendor financing arrangements will provide sufficient funds necessary for the Company to expand its Telecom Services business as currently planned and to fund its operating deficits through 1997 and early 1998. Accordingly, the Company may have to refinance a substantial amount of indebtedness and obtain substantial additional funds prior to March 2001. The Company's ability to do so will depend on, among other things, its financial condition at the time, the restrictions in the instruments governing it indebtedness, and other factors, including market conditions, beyond the control of the Company. There can be no assurance that the Company will be able to refinance such indebtedness, including such capitalized leases, or obtain such additional funds, and if the Company is unable to effect such refinancings or obtain
additional funds, the Company's ability to make principal and interest payments on its indebtedness or make payments of cash dividends on, or the mandatory redemption of, the 14 1/4% Preferred Stock, would be adversely affected.
Capital Expenditures
The Company expects to continue to generate negative cash flow from operating activities while it emphasizes development, construction and expansion of its business and until the Company establishes a sufficient revenue-generating customer base. The Company's capital expenditures (including asset acquired under capital leases and through the issuance of debt) were $54.9 million, $88.5 million and $175.1 million in fiscal 1994, 1995 and 1996, respectively, and $25.9 million and $78.2 million for the three months ended December 31, 1995 and 1996, respectively. The Company anticipates that the expansion of existing networks, construction of new networks and further development of the Company's products and services will require capital expenditures of approximately $250.0 million and $240.0 million during 1997 and 1998, respectively, and continued significant capital expenditures thereafter. To facilitate the expansion of its switched services strategy and entrance into data communications, the Company has entered into equipment purchase agreements with various vendors under which the Company must purchase a substantial amount of equipment and other assets, including a full range of switching systems, fiber optic cable, network electronics, software and services. Actual capital expenditures will depend on numerous factors, including certain factors beyond the Company's control. These factors include the nature of future expansion and acquisition opportunities, economic conditions, competition, regulatory developments and the availability of equity, debt and lease financing.
General
The Company's operations have required and will continue to require significant capital expenditures for development, construction, expansion and acquisitions. Significant amounts of capital are required to be invested before revenue is generated, which results in initial negative cash flow.
In view of the anticipated negative cash flow from operating activities, the continuing development of the Company's products and services, the expansion of existing networks and the construction, leasing and licensing of new networks, the Company will require additional amounts of cash in the future from outside sources. Management believes that the Company's cash on hand and amounts expected to be available through vendor financing arrangements will provide sufficient funds necessary for the Company to expand its Telecom Services business as currently planned and to fund its operating deficits through 1997 and early 1998. Additional sources of cash may include public and private equity and debt financings, sales of non-strategic assets, capitalized leases and other financing arrangements. The Company may require additional amounts of equity capital in the near term. In the past, the Company has been able to secure sufficient amounts of financing to meet its capital expenditure needs. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company.
The failure to obtain sufficient amounts of financing could result in the delay or
abandonment of some or all of the Company's development and expansion plans, which could have a material adverse effect of 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.
Accounting Changes
During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts. Under the new method, the Company recognizes revenue as services are provided and continues to charge direct selling expenses to operations as incurred. The Company had previously recognized revenue in an amount equal to the noncancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer, to the extent of direct installation and selling expense incurred in obtaining customers during the period in which such revenue was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract had been recognized ratably over the remaining noncancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry.
As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995. The Company's results for fiscal 1996 include a charge of $3.5 million ($0.13 per share) relating to the cumulative effect of this change in accounting as of October 1, 1995. The effect of this change in accounting was not significant for fiscal 1996. If the new revenue recognition method had been applied retroactively, Telecom Services revenue would have decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995, respectively. See the Company's Consolidated Financial Statements and the related notes thereto contained elsewhere in this Transition Report.
In addition, the Company has shortened the estimated depreciable lives for substantially all of its fixed assets. These estimates were changed to better reflect the estimated periods during which these assets will remain in service and result in useful lives which are more consistent with industry practice. The changes in estimates of depreciable lives have been made on a prospective basis, beginning January 1, 1996. This change in estimate increased depreciation expense during fiscal year 1996 by approximately $7.0 million ($0.26 per share). The change would have had an estimated annual effect of approximately $9.0 million had the change been in effect for the entire year. Deferred tax liability has been adjusted for the effect of this change in estimated depreciable lives, which resulted in an income tax benefit of $5.3 million in fiscal 1996.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page of this Transition Report. The financial statement schedule required under Regulation S-X is filed pursuant to Item 14 of this Transition Report, and appears on page S-1 of this Transition Report.
Selected quarterly financial data required under this Item is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
ICG's corporate charter provides that Directors serve staggered three-year terms. The Directors of ICG will hold office until the designated annual meeting of stockholders and until their successors have been elected and qualified or until their death, resignation or removal.
There are currently four committees of the Board of Directors of ICG: Executive Committee, Audit Committee, Compensation Committee and Stock Option Committee. The Executive Committee provides Board oversight for the operations of the Company between Board meetings. The Audit Committee reviews the services provided by the Company's independent auditors, consults with the independent auditors on audits and proposed audits of the Company, reviews certain filings with the Securities and Exchange Commission and various internal auditing procedures and the adequacy of internal controls. The Compensation Committee determines compensation for most executives and reviews transactions, if any, with affiliates. The Stock Option Committee determines stock option awards. The officers of ICG are elected by the Board of Directors and hold office until their successors are chosen and qualified or until their death, resignation or removal.
Set forth below are the names, ages and positions of Directors and executive officers of ICG.
Executive Officers of ICG
William J. Laggett has been Chairman of the Board of Directors since June 1995 and a Director since January 1995. Mr. Laggett was the President of Centel Cellular Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr. Laggett held a variety of management positions with Centel Corporation, including Group Vice President-Products Group, President-Centel Services, and Senior Vice President-Centel Corporation. Prior to joining Centel, Mr. Laggett worked for New York Telephone Company .
J. Shelby Bryan was appointed President, Chief Executive Officer and a Director in May 1995. He has 17 years of experience in the telecommunications industry, primarily in the cellular business. He co-founded Millicom International Cellular S.A. ("Millicom"), a publicly owned corporation providing international cellular service, served as it President and Chief Executive Officer from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since August 1996 and Executive Vice President - Satellite of ICG since October 1996. Prior to joining the Company, Mr. Falk held several positions in the cruise line industry, including President of Norwegian Cruise Line, Senior Vice President - Marketing and Sales with Holland America Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his work in the cruise line industry, Mr. Falk held executive positions with MTI Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning Associates and The Procter and Gamble Company.
James D. Grenfell joined the Company as Executive Vice President, Chief Financial Officer and Treasurer in November 1995. Previously, Mr. Grenfell served as Director of Financial Planning for BellSouth Corporation and Vice President and Assistant Treasurer of BellSouth Capital Funding. A Chartered Financial Analyst, Mr. Grenfell has been a telephone industry financial executive for over 15 years. He was with BellSouth from 1985 through November 1996, serving previously as Finance Manager of Mergers and Acquisitions. He handled BellSouth's financing strategies, including capital market financings as well as public debt and banking relationships. Prior to BellSouth, Mr. Grenfell spent two years as a Project Manager with Utility Financial Services and six years with GTE of the South, a subsidiary of GTE Corporation, including four years as Assistant Treasurer.
Mark S. Helwege has been Executive Vice President - Network of ICG and President of Fiber Optic Technologies, Inc. since August 1996. Prior to joining the Company, Mr. Helwege was Director of Service Marketing Support for Technology Service Solutions. From 1986 to 1995, Mr. Helwege held various senior management roles, including Vice President of Sales, and President and Chief Executive Officer with Intelogic Trace. Mr. Helwege also has held various management positions with the Computer Services Division of General Electric, General Datacomm Industries and Western Union Telegraph Company.
Marc E. Maassen has been Executive Vice President since August 1996. Prior to this position, Mr. Maassen was Executive Vice President - Network of ICG beginning in October 1995, and President of Fiber Optic Technologies, Inc. in April 1995. Mr. Maassen joined the Company in 1991 as Vice President of Sales and Marketing. Prior to joining the Company, Mr. Maassen held senior sales management positions at TelWatch, Inc., an integrated network management software company. Mr. Maassen previously worked for First Interstate as Director of Telecom and for AT&T Information Systems as an Account Executive and U S WEST as a Major Accounts Manager.
William J. Maxwell has been Executive Vice President - Telecom of ICG since October 1995, and President of ICG Telecom Group, Inc. since December 1992. Prior to joining the Company, Mr. Maxwell was the senior marketing executive of WilTel Inc., a full service telecommunications company. Mr. Maxwell, who has over 25 years of general management and financial experience, also served as President and Chief Executive Officer of MidAmerican Communications Corporation in Omaha, Nebraska from November 1987 to June 1991.
Directors of ICG
Harry R. Herbst has been a Director since October 1995 and has been Vice President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since November 1995 and Vice President and Treasurer of Gulf Canada Resources Ltd. from January to November 1995. Previously, Mr. Herbst was Vice President of Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with Coopers & Lybrand.
Stan McLelland has been a Director since October 1996 and is Executive Vice President and General Counsel of Valero Energy Corporation in San Antonio, Texas. McLelland also served on the Board of Directors of Valero Natural Gas Partners, L.P., a publicly owned limited partnership traded on the New York Stock Exchange, from 1987 to 1994. Mr. McLelland was previously associated with the law firm of Baker & Botts in Houston and in the private practice of law in Austin specializing in oil and gas litigation.
Jay E. Ricks has been a Director since March 1993. Mr. Ricks is Chairman of Douglas Communications Corp. ("DCC"), a privately held cable television company. Mr. Ricks is a director of Data Transmission Network Corporation, a publicly owned data distribution company and a director of the licensee of KBTX-TV in Bryan, Texas, and KWTX-TV in Waco, Texas. Mr. Ricks is also a director and shareholder of SkyConnect, Inc. Mr. Ricks specialized in the communications law practice with the Washington, D.C. law firm of Hogan & Hartson from 1962 until 1990.
Leontis Teryazos has been a Director since June 1995. Mr. Teryazos, a Canadian resident, has headed Letmic Management Inc., a financial consulting firm, since 1993, and Letmic Management Reg'd., a real estate development and management company, since 1985.
Directors and Executive Officers of Holdings-Canada and Holdings
The Directors and executive officers of each of Holdings-Canada and Holdings are set forth below. Biographical information regarding each individual is set forth above (except as to Mr. Gregory C.K. Smith, whose biographical information appears below).
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman) J. Shelby Bryan Harry R. Herbst Jay E. Ricks Gregory C.K. Smith Leontis Teryazos
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer Douglas I. Falk - Executive Vice President - Satellite James D. Grenfell - Executive Vice President, CFO and Treasurer Mark S. Helwege - Executive Vice President - Network Marc E. Maassen - Executive Vice President William J. Maxwell - Executive Vice President - Telecom
Gregory C.K. Smith, 38, has been a Director of Holdings-Canada since April 1994. Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver, British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon from June 1986 until he joined the partnership in April 1991.
Holdings
The Directors of Holdings are:
J. Shelby Bryan James D. Grenfell Mark S. Helwege William J. Maxwell
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer Douglas I. Falk - Executive Vice President - Satellite James D. Grenfell - Executive Vice President, CFO and Treasurer Mark S. Helwege - Executive Vice President - Network Marc E. Maassen - Executive Vice President William J. Maxwell - Executive Vice President - Telecom
Compliance With Section 16(a)of the Exchange Act
The following table lists the Directors, officers, beneficial owners of more than 10% of the outstanding Common Stock (each a "Reporting Person") that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year, the number of late reports, the number of transactions that were not reported on a timely basis, and any known failure to file a required Form by each Reporting Person.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee directors $250 for telephonic meetings and $2,500 for each directors' meeting or committee meeting attended, plus reimbursement of expenses. In addition, the Chairman of the Board receives an annual fee of $80,000 payable in quarterly installments. In fiscal 1996, all non-employee directors of ICG were granted options to purchase 20,000 shares of Common Stock under ICG's 1996 Stock Option Plan, and during the stub period from October 1, 1996 through December 31, 1996, all non-employee directors of ICG were granted options to purchase 5,000 shares of Common Stock under such Plan. On January 1, 1997, all non-employee directors of ICG were granted options to purchase 20,000 shares of Common Stock under ICG's 1996 Stock Option Plan, which will vest as to 5,000 shares at the end of each fiscal quarter. All non-employee directors are given the option to receive shares of ICG Common Stock in lieu of their cash fees.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of J. Shelby Bryan, the President and Chief Executive Officer, William J. Laggett, the Chairman of the Board of Directors, Stan McLelland, Director, and Jay E. Ricks, Director.
Executive Compensation
The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries, to or on behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer, and the four other most highly compensated executive officers for the fiscal years ended September 30, 1996, 1995 and 1994, and one additional officer for whom disclosure would have been required but for the fact that the individual was not serving as executive officer at September 30, 1996 (the "Named Officers"). The Company has not maintained any long-term incentive plans and the Company has not granted stock appreciation rights.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table provides information on options exercised during fiscal 1996 by the Named Officers and the value of such officers' unexercised options at the end of the last fiscal year:
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants during fiscal 1996 to the Named Officers:
Executive Employment Contracts
The Company has employment agreements with Messrs. J. Shelby Bryan, Douglas I. Falk, James D. Grenfell, Mark S. Helwege and William J. Maxwell.
The Company's employment agreement with Mr. Bryan provides for an initial term of two years, which commenced May 30, 1995 and which may be continued for one year at the option of Mr. Bryan. As compensation, the Company will pay Mr. Bryan a salary equal to the sum of one percent of the monthly increase in Company revenue and three percent of the monthly increase in EBITDA, offset in any month where one component is a negative amount to not less than zero. If Mr. Bryan's salary exceeds $1,500,000 in any fiscal year, the Company may elect to pay such excess in unregistered Common Stock. Mr. Bryan is entitled to benefits as are generally provided to executive officers of ICG, including options under stock option plans, a leased automobile, private club membership fees and reimbursement of reasonable out-of-pocket expenses incurred on behalf of the Company. The employment agreement may be terminated by the Company with or without cause or after a disability continuing for a six-month consecutive period, or by Mr. Bryan for cause, including breach of the agreement or reduction in status or responsibilities, or change of control. If the employment agreement is terminated for any reason other than for cause, the Company is obligated to pay Mr. Bryan a lump sum of $2.5 million and to continue benefits for a period equal to the greater of the remainder of the employment term or eighteen months. After termination of the employment agreement, Mr. Bryan is subject to a confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Falk, dated August 14, 1996, has an initial one-year term commencing August 26, 1996 and continues from month to month thereafter until either party provides 30 days notice of termination. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Falk also receives stock options under the stock option plans. If the Company terminates the employment agreement without cause or if the Company or Mr. Falk terminates the employment agreement upon the occurrence of a major transaction involving the Company, then Mr. Falk will receive his salary and insurance benefits for a period of 12 months following the date of termination. Mr. Falk is subject to a confidentiality covenant and to a one-year non-competition commitment following the termination of his employment.
The Company's employment agreement with Mr. Grenfell provides for an initial two-year term which commenced November 1, 1995. Upon completion of the first 12 months of the initial term, the agreement automatically renews from month-to-month such that 12 months remain in the term. The agreement may be terminated upon 30 days written notice from either party or by the Company if Mr. Grenfell is unable to perform his duties for 140 days in any 180-day period due to illness or incapacity. Mr. Grenfell is entitled to such other benefits as are generally provided to executive officers of the Company, including options under the Company's stock option plans, use of a company car and reimbursement or direct payment of reasonable out-of-pocket expenses incurred on behalf of the Company. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. If the employment agreement is terminated without cause by the Company or by either party upon the occurrence of a change of control involving the Company, Mr. Grenfell will receive a termination fee equal to his current monthly salary times the number of months remaining in the term. Mr. Grenfell is also subject to a ten-year confidentiality covenant and a one-year non-competition commitment.
The Company's employment agreement with Mr. Helwege, dated July 8, 1996, has an initial one-year term commencing August 1, 1996 and renews automatically thereafter until either
party provides 30 days notice of termination. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Helwege also receives stock options under the stock option plans. The Company may terminate the employment agreement for any reason upon 30 days notice. If the Company terminates the employment agreement without cause or if the Company or Mr. Helwege terminates the employment agreement upon the occurrence of a major transaction involving the Company, then Mr. Helwege will receive his salary and insurance benefits for a period of 12 months following the date of termination. Mr. Helwege is subject to a confidentiality covenant and to a one-year non-competition commitment following the termination of his employment.
The Company's employment agreement with Mr. Maxwell, dated December 1, 1992, has an initial five-year term and thereafter one-year terms until either party provides 30 days notice of termination prior to the end of a term. The agreement provides for an annual base salary and an incentive bonus determined by the Board of Directors. Mr. Maxwell also receives stock options under the stock option plans. If the Company terminates the employment agreement without cause or if the Company or Mr. Maxwell terminates the employment agreement upon the occurrence of a major transaction involving the Company, then Mr. Maxwell shall receive his salary for the lesser of one year or until the expiration of the current employment term. Mr. Maxwell is subject to a confidentiality covenant and to a one-year non-competition commitment following the termination of his employment.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 31, 1997, the number of shares of Common Stock of ICG owned by (i) each Named Officer and Director, (ii) all executive officers and Directors as a group, and (iii) each person who owned of record, or was known to own beneficially, more than 5% of the outstanding shares of Common Stock. The persons named in the table below have sole voting and investment power with respect to all of the shares of Common Stock owned by them, unless otherwise noted.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and satellite services businesses which held common carrier radio licenses subject to foreign ownership restrictions, the common carrier licenses used by the Company's teleports and the wireless competitive access networks are controlled by Teleport Transmissions Holdings Inc. ("TTH"), a corporation owned 33% each by U.S. Directors William Laggett and Jay Ricks, and a former Director. TTH's subsidiaries have given 15-year promissory notes to ICG to acquire FCC licenses. As a result of the Plan of Arrangement, the Company is reviewing the possibility of exercising its option to have the common carrier licenses transferred back to the Company. In the event that the Company meets the requirements imposed by the FCC, or receives appropriate waivers, upon completion of the transfer of the licenses the promissory notes will be canceled and TTH and its subsidiaries will be dissolved. In fiscal 1996 and the three months ended December 31, 1996, the Company paid or accrued $2.4 million and $0.6 million, respectively, to TTH's subsidiaries for common carrier services, and ICG received from TTH's subsidiaries $1.9 million and $0.4 million, respectively, as payments on the promissory notes, management services, equipment leases and technical support. In addition, $1.1 million of the note balances were canceled in fiscal 1996 due to the sale of the licenses in conjunction with the sale of four of the Company's teleports. See "Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc. ("ICC") have entered into a three-year consulting agreement whereby ICC will provide various consulting services to the Company through December 1999 in exchange for approximately $4.2 million in consulting fees to be paid during the term of the agreement. During fiscal 1996 and the three months ended December 31, 1996, the Company paid $1.3 million and $0.3 million, respectively, related to this consulting agreement. William W. Becker is President and Chief Executive Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995 between the Company and the Becker Group of Companies (the "Becker Group"), a company founded by William W. Becker, a former Director of the Company, the Company was assigned a note receivable in the amount of $200,000, which had previously been advanced to John D. Field, a former executive officer of the Company, by the Becker Group. The note receivable is evidenced by a promissory note from Mr. Field to the Company payable on demand, which bears interest at a rate of 7% per annum. Interest is payable annually.
In order to facilitate the relocation of William J. Maxwell, the Company advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory note payable on demand, which bears interest at a rate of 7% per annum.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included in Item 8 of Part II: Page ----- Independent Auditors' Report Consolidated Balance Sheets, September 30, 1995 and 1996, and December 31,1996 Consolidated Statements of Operations, Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996 Consolidated Statements of Stockholders' Equity (Deficit), Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1996 Consolidated Statements of Cash Flows, Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996 Notes to Consolidated Financial Statements, September 30, 1995 and 1996, and December 31, 1996
(2) Financial Statement Schedule. The following Financial Statement Schedule is submitted herewith:
Independent Auditors' Report S-2 Schedule II: Valuation and Qualifying Accounts S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or SuccessionPlan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business Corporations Act. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)].
(3) Corporate Organization.
3.1: Memorandum and Articles of IntelCom Group Inc., as amended, filed with the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1992].
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as amended by Special Resolution passed October 7, 1994, filed with the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 10-K for the year ended September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the Registrar of Companies, Province of British Columbia, Canada [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated October 30, 1995. [Incorporated by reference to Exhibit 3.5 to IntelCom Group Inc.'s Annual Report on Form 10-K for the year ended September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc. dated April 11, 1996. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders, Including Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of Incorporation and copies of all Amendments thereto, filed with the Registrar of Companies for the Province of British Columbia, Canada [Incorporated by reference to Exhibit (i) to IntelCom Group Inc.'s Form 20-F for the fiscal year ending September 30, 1991].
4.2: Note Purchase Agreement dated September 16, 1993 [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated by reference to IntelCom Group Inc.'s Annual Report on Form 20-F for the year ended September 30, 1993, as filed on September 30, 1994].
4.4: Form of Indenture between IntelCom Group Inc. and Bankers Trust Company for 7% Convertible Subordinated Redeemable Notes due 1998 [Incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.5: Form of Indenture between IntelCom Group Inc. and Bankers Trust Company for 7% Simple Interest Convertible Subordinated Redeemable Notes due 1998 [Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among the Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley Group Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Investments Limited, PGI Sweden AB, and Gregor von Opel and Morgan Stanley Group, Inc., as Agent for the Purchasers [Incorporated by reference to Exhibit 4.1 to Form 8-K of IntelCom Group Inc., dated July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the Registrant, the Committed Purchasers, and IntelCom Group (U.S.A.), Inc., as Warrant Agent [Incorporated by reference to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated July 18, 1995].
4.8: First Amended and Restated Articles of Incorporation of ICG Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.), Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc. [Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226].
(9) Voting Trust Agreement.
None.
(10) Material Contracts.
10.1: Joint Venture Agreement, dated September 29, 1992, between IntelCom Group Inc. and Greenstar Resources Ltd. [Incorporated by reference to Exhibit 16 to IntelCom Group Inc.'s Annual Report on Form 20-F, as amended, for the fiscal year ended September 30, 1992].
10.2: Employment Agreement between Teleport Denver, Inc. and William J. Maxwell [Incorporated by reference to Exhibit 3.38 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.3: Arrangement and Support Agreement dated June 27, 1996 between ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)].
10.4: Stock Purchase Agreement and Accord and Satisfaction Agreement dated June 24, 1993, between Joseph T. Buck III and William A.
Byrd and TDI [Incorporated by reference to Exhibit 3.28 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.5: Full Payout Net Lease dated June 7, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.34 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993.]
10.6: Full Payout Net Lease dated June 18, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.35 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.7: Full Payout Net Lease dated July 16, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.36 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.8: Full Payout Net Lease dated November 10, 1993 between Applied Telecommunications Technologies, Inc. and Teleport Denver, Inc. [Incorporated by reference to Exhibit 3.37 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated August 23, 1993, between Cliff Arellano, Nancy Arellano and TDI [Incorporated by reference to Exhibit 3.29 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.10:Asset Purchase Agreement dated November 18, 1993, between Mtel Digital Services, Inc. and IntelCom Group Inc. [Incorporated by reference to Exhibit 3.30 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.11:Stock Purchase Agreement dated November 18, 1993, between IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor Bay, Inc., Bay Area Teleport, Inc., and Upsouth Corporation [Incorporated by reference to Exhibit 3.31 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
10.12:Agreement and Plan of Merger dated May 24, 1994, by and among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and FiberCAP, Inc. [Incorporated by reference to Exhibit 10.69 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.13:Note Sale and Purchase Agreement dated August 3, 1994, by and between IntelCom Group Inc., ICG Wireless Services, Inc., Noon Investments Ltd., Melco Investments Ltd. and Polera Overseas Inc. [Incorporated by reference to Exhibit 10.70 to the Registration
Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.14:Agreement and Plan of Merger dated July 22, 1994, by and among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., DataCom Integrated Systems Corporation, Larry DiGioia and Richard Williams [Incorporated by reference to Exhibit 10.71 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568, filed August 26, 1994].
10.15:Share Exchange Agreement, dated May 31, 1994, between IntelCom Group Inc. and Worldwide Condominium Developments, Inc. [Incorporated by reference to Exhibit 10.71 to the Registration Statement on Form S-1, Amendment No. 7 of IntelCom Group Inc., File No. 33-76568, filed October 17, 1994.]
10.16: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].
10.17: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].
10.18: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].
10.19: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].
10.20:1994 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].
10.21: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].
10.22:PEDTS Acquisition Note 1994-1, dated April 29, 1994, by Pacific & Eastern Digital Transmission Services, Inc. ("PEDTS") to IntelCom Group (U.S.A.), Inc. ("ICG"), in the amount of $2,928,591 [Incorporated by reference to Exhibit 10.27 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.23:PEDTS Acquisition Note 1994-2, dated April 29, 1994, by PEDTS to ICG, in the amount of $1,230,475 [Incorporated by reference to Exhibit 10.28 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.24:PEDTS Acquisition Note 1994-3, dated April 29, 1994, by PEDTS to ICG, in the amount of $932,239 [Incorporated by reference to Exhibit
10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.25:TTC Acquisition Note, dated November 3, 1994, by Teleport Transmission Holdings, Inc. to ICG, in the amount of $125,242.33 [Incorporated by reference to Exhibit 10.30 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1994].
10.26:Agreement and Assignment, dated July 24, 1995, by Teleport Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc., William W. Becker, Michael L. Glaser, William J. Laggett, Jay E. Ricks and Gary Bryson. [Incorporated by reference to Exhibit 10.26 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1995].
10.27: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].
10.28: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].
10.29:Indemnification Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.7 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.30:Letter Agreement, dated July 12, 1995, between IntelCom Group Inc. and Larry L. Becker [Incorporated by reference to Exhibit 10.8 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.31:Agreement and General Release, made effective July 12, 1995, between IntelCom Group Inc. and Larry L. Becker [Incorporated by reference to Exhibit 10.9 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.32:Subscription and Exchange Agreement, dated as of July 14, 1995, among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, and Gregor von Opel [Incorporated by reference to Exhibit 10.4 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.33:Security Agreement, dated July 18, 1995, from IntelCom Group (U.S.A.), Inc. as issuer, and the Grantors named therein, as grantors, to MS Group, as agent [Incorporated by reference to Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.34:Pledge Agreement, dated July 18, 1995, from IntelCom Group Inc., as a pledgor, to MS Group, as agent [Incorporated by reference to Exhibit 10.2 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.35:Subsidiary Guarantee, dated July 18, 1995, from the persons set forth on the signature pages thereof, as guarantors, in favor of the purchasers to the Note Purchase Agreement referred to therein, and MS Group, as agent [Incorporated by reference to Exhibit 10.3 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995].
10.36: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.]
10.37:Form of Exchange Agent Agreement between IntelCom Group (U.S.A.), Inc. and Norwest Banks [Incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.), Inc., File No. 33-96540].
10.38:Employment Agreement between IntelCom Group Inc. and James D. Grenfell, dated November 1, 1995. [Incorporated by reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1995].
10.39:Employment Agreement between Fiber Optic Technologies, Inc. and Mark S. Helwege, dated July 8, 1996 [Incorporated by reference to Exhibit 10.39 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.]
10.40:Purchase and Sale Agreement, dated as of October 19, 1995, by and among ICG Wireless Services, Inc., IntelCom Group (U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc. [Incorporated by reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1995].
10.41:Employment Agreement between ICG Satellite Services, Inc. and Douglas I. Falk, dated August 14, 1996 [Incorporated by reference to Exhibit 10.41 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.]
10.42: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.]
10.43: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].
10.44:Consulting Services Agreement, by and between IntelCom Group Inc. and International Communications Consulting, Inc., effective January 1, 1996.
10.45:Confidential General Release and Convenant Not to Sue, by and between ICG Communications, Inc. and John D. Field, dated November 5, 1996.
(11) Statement re Computation of per Share Earnings. Not Applicable
(12) Statement re Computation of Ratios. Not Applicable
(13) Annual Report to Security Holders. Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22, 1996 from KPMG Peat Marwick LLP to the Company [Incorporated by reference to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report on Form 10-Q/A for the quarter ended December 31, 1995].
(21) Subsidiaries of Registrant.
(22) Published Report re Matters Submitted to Vote of Security Holders. Not Applicable
(23) Consent.
23.1: Consent of KPMG Peat Marwick LLP
(24) Power of Attorney. Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1:Report by the FCC on Preliminary Statistics of Communications Common Carriers (1993 Edition) (pp. 39-40) [Incorporated by reference to Exhibit 99.8 to the Registration Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc., File No.33-76568,filed August 26, 1994].
99.2:In re Expanded Interconnection with Local Telephone Company Facilities (Phases I & II) (FCC 1992) [Incorporated by reference to Exhibit 3.46 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
99.3:In re Teleport Transmission Holdings, (FCC 1993) [Incorporated by reference to Exhibit 3.49 to IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal year ended September 30, 1993].
(B) Report on Form 8-K. The following report on Form 8-K was filed by the Registrants during the three months ended December 31, 1996:
ICG Communications, Inc.: Current Report on Form 8-K dated October 25, 1996.
(C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required by this Item is listed under Item 14(A)(2).
FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets, September 30, 1995 and 1996, and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations, Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity (Deficit), Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1996 . . . . . . . . . . . . .
Consolidated Statements of Cash Flows, Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996 . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements, September 30, 1995 and 1996, and December 31, 1996 . . . . . . . . . . . . . . . . . .
Independent Auditors' Report
The Board of Directors and Stockholders ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and December 31, 1996 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 1996, and the three-month period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ICG Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and December 31, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, and the three-month period ended December 31, 1996, in conformity with generally accepted accounting principles.
As explained in note 2 to the consolidated financial statements, during the year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado February 21, 1997
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets September 30, 1995 and 1996, and December 31, 1996
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
See accompanying notes to consolidated financial statements.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
See accompanying notes to consolidated financial statements.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years Ended September 30, 1994, 1995 and 1996, and the Three Months Ended December 31, 1995 (unaudited) and 1996
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
ICG COMMUNICATIONS, INC. COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
See accompanying notes to consolidated financial statements.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements September 30, 1995 and 1996, and December 31, 1996 - ----------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc. ("ICG"), a Delaware corporation, was incorporated on April 11, 1996, for the purpose of becoming the new publicly-traded U.S. parent company of ICG Holdings (Canada), Inc. ("Holdings-Canada"), a Canadian federal corporation (formerly known as IntelCom Group Inc.), ICG Holdings, Inc. ("Holdings"), a Colorado corporation (formerly known as IntelCom Group (U.S.A.), Inc.), and its subsidiaries (collectively, the "Company"). Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged their common shares on a one-for-one basis for either (i) shares of $.01 par value common stock of ICG (the "Common Stock"), or (ii) Class A common shares of Holdings-Canada (which are exchangeable at any time on a one-for-one basis into shares of ICG Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of the total issued and outstanding common shares of Holdings-Canada were exchanged for an equal number of shares of Common Stock of ICG. In accordance with generally accepted accounting principles, the Arrangement was accounted for in a manner similar to a pooling of interests since ICG and Holdings-Canada had common shareholders, and the number of shares outstanding and the weighted average number of shares outstanding reflect the equivalent shares outstanding for the combined companies.
The Company's principal business activity is telecommunications services, including Telecom Services, Network Services and Satellite Services. Telecom Services consists of the Company's competitive local exchange carrier ("CLEC") operations. CLECs seek to provide an alternative to the incumbent local exchange telephone company for a full range of telecommunications services. The Company's Telecom Services customers are primarily long distance carriers and resellers, as well as business end users. Network Services supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Satellite Services provides satellite voice and data services to major cruise ship lines, the commercial shipping industry, yachts, the U.S. Navy and offshore oil platforms.
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 have been prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of the Company and its majority and wholly owned subsidiaries. Financial information prior to the completion of the Arrangement on August 2, 1996, represents the financial position and results of operations of Holdings-Canada and Holdings, which are considered predecessor entities to ICG.
In addition, the accompanying consolidated financial statements include the accounts of Teleport Transmission Holdings, Inc. ("TTH"), which holds certain transmission licenses acquired in connection with certain of the Company's business combinations in 1994. As of December 31, 1996, TTH is owned one-third each by two U.S. directors and one former director. TTH's financial statements have been consolidated with the financial statements of the Company due to common ownership and control.
All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Change in Fiscal Year End
The Company has elected to change its fiscal year end to December 31 from September 30, effective January 1, 1997. References to fiscal 1996 relate to the year ended September 30, 1996.
Unaudited consolidated statements of operations and cash flows for the three months ended December 31, 1995 have been included in the accompanying consolidated financial statements for comparative purposes.
(c) Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests primarily in high grade short-term investments which consist of money market instruments,
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
commercial paper, certificates of deposit, government obligations and corporate bonds, all of which are considered to be available for sale. The Company's investment objectives are safety, liquidity and yield, in that order. The Company carries all cash equivalents and short-term investments at cost, which approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to be utilized in the installation of communications systems and networks for customers, is recorded at the lower of cost or market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity method, under which the Company's share of earnings or losses of the joint ventures are reflected in operations and dividends are credited against the investment when received. Losses recognized in excess of the Company's investment due to additional investment or financing requirements, or guarantees, are recorded as a liability in the accompanying consolidated financial statements. Other investments representing an interest of 20% or more, but less than 50%, are accounted for using the equity method of accounting. Investments of less than 20% are accounted for using the cost method, unless the Company exercises significant influence and/or control over the operations of the investee company, in which case the equity method is used.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are capitalized, including interest costs related to construction. Equipment held under capital leases is stated at the lower of the fair value of the asset or the net present value of the minimum lease payments at the inception of the lease. Depreciation is provided using the straight-line method over the estimated useful lives of the assets owned and the related lease term for equipment held under capital leases.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Effective January 1, 1996, the Company shortened the estimated depreciable lives for substantially all of its fixed assets. These estimates were changed to better reflect the estimated periods during which these assets will remain in service and result in useful lives which are more consistent with industry practice. The changes in estimates of depreciable lives were made on a prospective basis, beginning January 1, 1996. The effect of this change was to increase depreciation expense and net loss for the year ended September 30, 1996 by approximately $7.0 million ($0.26 per share).
Estimated useful lives of major categories of property and equipment before and after January 1, 1996 are as follows:
Before After January 1, 1996 January 1, 1996 --------------- ----------------- Office furniture and equipment 5 to 7 years 3 to 7 years Buildings and improvements 31.5 years 31.5 years Machinery and equipment 7 to 15 years 3 to 8 years Switch equipment 15 years 10 years Fiber optic transmission system 30 years 20 years
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses are recorded at cost. Amortization is provided using the straight-line method over 20 years. Goodwill results from the application of the purchase method of accounting for business combinations. Amortization is provided using the straight-line method over a maximum of 20 years.
Rights of way, minutes of use, and non-compete agreements are recorded at cost, and amortized using the straight-line method over the terms of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of the related financing agreement, the maximum term of which is 10 years.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
(i) Revenue Recognition
During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts. Under the new method, the Company recognizes revenue as services are provided and continues to charge direct selling expenses to operations as incurred. The Company had previously recognized revenue in an amount equal to the non-cancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer to the extent of direct installation and selling expenses incurred in obtaining customers during the period in which such revenue was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract had been recognized ratably over the remaining non-cancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry.
As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995, and has presented the pro forma effects on prior periods assuming the change had been applied retroactively. The Company's results for fiscal 1996 reflect a charge of approximately $3.5 million relating to the cumulative effect of this change in accounting as of October 1, 1995. The effect of this change in accounting for fiscal 1996 was not significant.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Revenue from Satellite Services is recognized as services are rendered. Revenue from Network Services contracts for the design and installation of communication systems and networks, which are generally short-term in duration, is recognized primarily using the percentage of completion method of accounting. Maintenance revenue is recognized as services are provided.
Uncollectible trade receivables are accounted for using the allowance method.
(j) Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding. Weighted average number of shares outstanding for fiscal years 1994 and 1995 and the three months ended December 31, 1995 represents outstanding Holdings-Canada common shares. Weighted average number of shares outstanding for fiscal 1996 represents outstanding Holdings-Canada common shares for the period October 1, 1995 through August 2, 1996, and outstanding ICG Common Stock and Holdings-Canada Class A common shares (owned by third parties) for the period August 5, 1996 through September 30, 1996 and for the three-month period ended December 31, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
Common stock equivalents, which include options, warrants and convertible subordinated notes and preferred stock, are not included in the loss per share calculation as their effect is anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee director compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations ("APB 25"). The Company has provided pro forma disclosures of net loss and loss per share as if the fair value based method of accounting for these plans, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had been applied. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1996 and the three months ended December 31, 1996.
(m) Impairment of Long-Lived Assets
Effective October 1, 1996 the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121") which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to be generated by the asset is less than its carrying value. Measurement of the impairment loss is based on the fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows. The adoption of SFAS 121 had no effect on the consolidated financial statements of the Company.
(n) Reclassifications
Beginning in fiscal 1996, network operating costs, which were previously classified as selling, general and administrative expenses, have been reclassified as operating costs to conform with current industry practice. Such expenses amounted to $2.6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
million, $2.1 million, and $13.7 million in fiscal 1994, 1995 and 1996, respectively, and $2.4 million and $5.8 million for the three months ended December 31, 1995 and 1996, respectively. All prior financial information has been restated to conform with the current presentation.
Certain other prior period amounts have been reclassified to conform with the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisitions and Investments During the Year Ended September 30,
In January 1996, the Company purchased the remaining 49% minority interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned subsidiary. Consideration for the purchase was approximately $2.0 million in cash and 66,236 common shares of Holdings-Canada valued at approximately $0.8 million, for total consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel California, L.P. ("Linkatel") and its other partners, Linkatel Communications, Inc. and The Copley Press, Inc., under which the Company acquired a 60% interest in Linkatel for an aggregate purchase price of $10.0 million in cash and became the general partner of Linkatel. In April 1996, the partnership was renamed ICG Telecom of San Diego, L.P. ("ICG Telecom of San Diego").
In March 1996, the Company acquired a 90% equity interest in Maritime Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and satellite communications for commercial ships, private vessels, offshore oil platforms and land-based mobile units, for approximately $0.7 million in cash and approximately $0.1 million of assumed debt, for total consideration of approximately $0.8 million.
In August 1996, the Company acquired the Signaling System 7 ("SS7") business of Pace Network Services, Inc. ("Pace"), a division of Pace Alternative Communications, Inc. SS7 is used by local exchange companies, long-distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up resulting in a more efficient use of network resources. The
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company paid cash consideration of $1.6 million as of September 30, 1996 and an additional $1.0 million in January 1997, based on the operating results of the underlying business since the date of acquisition.
The above acquisitions have been accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations are included in the consolidated financial statements from the date of acquisition. Revenue, net loss and loss per share on a pro forma basis are not significantly different from the Company's historical results for the periods presented herein. The aggregate purchase price of the 1996 acquisitions, in which the Company obtained a controlling interest, was allocated based on fair values as follows (in thousands):
Current assets $ 6,563 Property and equipment 7,542 Other assets, including goodwill 10,647 Current liabilities (775) Long-term liabilities (6,314) Minority interest (1,422) =================== $ 16,241 ===================
(b) Acquisitions and Investments During the Year Ended September 30,
In January 1995, the Company and an unaffiliated entity formed Maritime Telecommunications Network, Inc. ("MTN") to provide wireless communications through satellites to the maritime cruise industry, U.S. Navy vessels and offshore oil platforms. The Company acquired (i) approximately 64% of MTN, (ii) approximately $4.4 million in notes receivable from MTN and (iii) consulting and non-compete agreements valued at an aggregate of approximately $0.3 million in exchange for (i) approximately $9.0 million in cash, (ii) the surrender and cancellation of a note to the Company from the other entity for $0.6 million plus interest, (iii) 408,347 Holdings-Canada common shares valued at approximately $5.1 million (of which 256,303 common shares were issued in the fourth quarter of fiscal year 1994, and (iv) the Company's commitment to provide additional convertible working capital advances to MTN as required by MTN. The other shareholder of MTN contributed the assets of a predecessor business to MTN.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
MTN also assumed approximately $2.1 million of obligations of such predecessor business. The Company paid a $0.5 million finder's fee obligation of the predecessor to a third party. The Company has also agreed that the Company will purchase the MTN shares owned by the other shareholder of MTN at fair value, as defined, if MTN has not completed a public offering of common stock by January 3, 1998.
In March 1995, the Company purchased a 56% interest and in July 1995, an additional 2% interest in Zycom Corporation ("Zycom"), an Alberta, Canada corporation whose shares are traded on the Alberta Stock Exchange. Consideration for the purchase was approximately $0.8 million in cash, the conversion of $2.0 million in notes receivable, and the assumption of approximately $0.7 million in debt for total consideration of approximately $3.5 million. In March 1996, the Company acquired an additional approximate 12% equity interest in Zycom by converting a $3.2 million receivable due from Zycom.
The above acquisitions were accounted for using the purchase method of accounting. The aggregate purchase price of the 1995 acquisitions, in which the Company obtained a controlling interest, was allocated based on fair values as follows (in thousands):
Current assets $ 1,835 Property and equipment 9,086 Other assets, including goodwill 16,986 Current liabilities (2,764) Long-term liabilities (6,779) Minority interest (4,850) ---------------------- $ 13,514 ======================
In November 1994 and January 1995, the Company purchased an aggregate of 571,428 shares of InterAmericas Communications Corporation ("InterAmCom") for total cash consideration of $2.0 million, which represented an approximate 6% interest. During fiscal 1995, the Company recorded an allowance of $2.0 million for the impairment of the investment based on management's estimate of the net realizable value of the investment.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2 million ($3.9 million in cash, $1.1 million in common shares of Holdings-Canada, and the conversion of approximately $0.2 million in notes receivable) in StarCom International Optics Corporation ("StarCom"), for which the Company received a 25% equity interest in each of Starcom's wholly owned operating subsidiaries. The total acquisition price is included in investments in the accompanying consolidated financial statements. The 25% equity interest has been pledged as collateral for StarCom financings.
(c) Acquisitions During the Year Ended September 30, 1994
In August 1994, the Company acquired DataCom Integrated Systems Corporation ("DataCom"). The Company issued 141,654 Holdings-Canada common shares (14,854 of which were issued in fiscal 1995) valued at approximately $2.0 million as consideration for the purchase. Based on the performance of that business since the acquisition date, the Company issued to the previous owners of DataCom 17,908 shares of ICG Common Stock valued at approximately $0.4 million during the three months ended December 31, 1996.
In July 1994, the Company completed the acquisition of FiberCap, Inc. Consideration for the purchase was approximately $0.2 million in cash, 57,250 common shares of Holdings-Canada valued at approximately $0.8 million and a note payable of $0.1 million, for total consideration of $1.1 million.
In April 1994, the Company acquired Mid-American Cable Inc. for an aggregate price of $1.6 million. Consideration for the purchase was $0.2 million in cash and 84,401 common shares of Holdings-Canada valued at $1.4 million.
In April 1994, the Company acquired PTI Harbor Bay, Inc./UpSouth Corporation ("Bay Area Teleport"). Total consideration paid for the purchase was approximately $0.3 million in cash and 1,183,147 common shares of Holdings-Canada valued at approximately $19.0 million, for total consideration of approximately $19.3 million.
In April 1994, the Company acquired substantially all the business assets of Mtel Digital System, Inc. ("Mtel DS"). Consideration for the purchase was approximately $0.7 million in cash and a note payable for approximately $6.9 million, bearing
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
interest at 7.5% per annum, for total consideration of approximately $7.6 million. The note was paid during 1995.
In connection with the Bay Area Teleport and Mtel DS acquisitions, the Company paid an aggregate amount of approximately $0.5 million to an unaffiliated third party as a finder's fee, which is included in the cost of the acquisitions. The fee was satisfied through the issuance of 31,513 common shares of Holdings-Canada.
In February 1994, the Company agreed to acquire Nova-Net Communications, Inc. ("Nova-Net"). The Company assumed management control of Nova-Net effective May 1, 1994 and completed the acquisition on November 2, 1994. Consideration for the purchase was $0.7 million in cash, assumption of approximately $1.4 million in outstanding debt, after payments subsequent to September 30, 1994, and approximately $6.6 million in common shares of Holdings-Canada, for an aggregate price of approximately $8.7 million. During fiscal 1995, the Company recorded a provision for impairment of the goodwill recorded in connection with the Nova-Net acquisition of $5.0 million, based on management's estimate of the net realizable value of the investment.
In October 1993, the Company purchased all the real and personal property and licenses of an earth station in Steele Valley, California, for consideration of approximately $0.9 million, which was satisfied through the issuance of 2,253 common shares of Holdings-Canada valued at approximately $0.1 million and $0.8 million in cash.
The above acquisitions were accounted for using the purchase method of accounting. The aggregate purchase price of the 1994 acquisitions was allocated based on fair values as follows (in thousands):
Current assets $ 4,848 Property and equipment 23,278 Other assets, including goodwill 19,531 Current liabilities (5,588) =================== $ 42,069 ===================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(d) Investments in Joint Venture and Affiliate
In January 1997, the Company announced a joint venture with Central and Southwest Corporation ("CSW") which will develop and market telecommunications services in Texas and Oklahoma (and may expand to Arkansas and Louisiana). Each party has a 50% equity interest and is required to make additional pro rata capital contributions as prescribed in the joint venture agreement. The Company estimates its contributions to be approximately $24.2 million in 1997, with aggregate contributions of approximately $49.7 million over the next five years. The joint venture will be accounted for using the equity method of accounting.
In September 1992, the Company entered into a joint venture agreement with Greenstar Technologies Inc. (now GST Telecommunications, Inc. ("GST")) in which each party had a 50% equity interest. The purpose of the joint venture was to design, construct and operate a competitive access network in Phoenix. In return for its 50% interest, the Company was required to provide equity or debt financing. As of September 30, 1996, the Company had provided financing of $11.7 million, including working capital advances, which is included in long-term notes receivable and had established a valuation allowance of $5.8 million due to uncertainty of collection. Working capital advances totaled $0.4 million and were included in Receivables-Joint Venture and Affiliate as of September 30, 1995. The Company began to record losses for its 50% interest in the joint venture in the second quarter of fiscal 1994, and as of September 30, 1996, had recorded a total loss of $3.7 million, including a loss of $1.5 million for the year ended September 30, 1996. The Company's equity contribution to the joint venture through September 30, 1996 totaled $1.2 million. Effective October 1, 1996, the Company sold its interest in the joint venture to GST. The Company received approximately $2.1 million in cash, representing $1.3 million of consideration for its 50% interest and $0.8 million for equipment and amounts advanced to the joint venture. In addition, the Company received equipment with a net book value of $2.4 million and assumed liabilities of $0.3 million. The Company may receive and additional $2.0 million based upon the future performance of the business. The $0.8 million gain on sale of the investment is included in other income for the three-month period ended December 31, 1996.
Also included in Receivables-Joint Venture and Affiliate at September 30, 1995, is $0.3 million due from an affiliate of the Company's Mexican subsidiary. The
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued - ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company is in the process of selling its investment in Mexico. The gain or loss on the sale is not expected to be significant.
(4) Notes Receivable
Notes receivable due within one year are comprised of the following:
September 30, --------------------- December 31, 1995 1996 1996 ---------- ---------- ------------ (in thousands) Due from Crescomm Telecommunications Services, Inc., with interest at approximately 8% $ 250 - - Due from NovoComm, Inc., with interest at 8% 1,500 200 200 Other 11 63 - --------- ----------- -------- $1,761 263 200 ========= =========== =========
The NovoComm, Inc. note receivable at September 30, 1996 and December 31, 1996 is net of a valuation allowance of $1.3 million based on management's uncertainty as to collection.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment, including assets owned under capital leases, is comprised of the following:
September 30, -------------------------- December 31, 1995 1996 1996 -------------- ----------- ------------ (in thousands) Land $ 1,519 - - Buildings and improvements 3,676 2,684 2,684 Furniture, fixtures and office equipment 13,666 25,143 29,214 Machinery and equipment 25,195 21,057 21,398 Fiber optic equipment 39,104 77,354 89,874 Satellite equipment 15,044 18,024 20,195 Switch equipment 20,302 53,413 58,571 Fiber optic transmission system 74,251 111,172 120,548 Building/site preparation - - 21 Construction in progress (see note 14) 35,852 74,588 117,972 ------------ ------------ ------------ 228,609 383,435 460,477 Less accumulated depreciation (26,605) (47,298) (56,545) ------------ ------------ ------------ $ 202,004 336,137 403,932 ============ ============ =============
Property and equipment includes approximately $118.0 million of equipment which has not been placed in service at December 31, 1996, and accordingly is not being depreciated. The majority of this amount is related to new network construction (see note 14).
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(5) Property and Equipment (continued)
Certain of the above assets have been pledged as security for long-term debt and capital lease obligations at December 31, 1996. The following is a summary of property and equipment owned under capital leases:
September 30, ------------------------------- December 31, 1995 1996 1996 ---------------- ------------- -------------- (in thousands)
Machinery and equipment $ 10,349 7,882 8,043 Fiber optic equipment 663 395 377 Switch equipment 17,529 26,509 25,733 Construction in progress 13,935 52,645 71,842 -------------- --------------- ------------- 42,476 87,431 105,995 Less accumulated depreciation (2,117) (4,362) (5,171) ============== =============== ============= $ 40,359 83,069 100,824 ============== =============== =============
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(6) Other Assets
Other assets are comprised of the following:
September 30, December 31, ---------------------------- --------------- 1995 1996 1996 ------------ -------------- --------------- (in thousands)
Deposits 811 3,514 3,579 PACE customer base - 1,580 2,581 Rights of way 1,091 1,707 1,739 Minutes of use agreement - 1,421 1,421 Non-compete agreements 602 602 902 Risk premium 2,004 - - Other 552 800 807 ----------- ------------ --------------- 5,060 9,624 11,029 Less accumulated amortization (1,785) (1,227) (1,547) =========== ============ =============== Other $ 3,275 8,397 9,482 =========== ============= ===============
(7) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC will provide various consulting services to the Company through December 1999 in exchange for approximately $4.2 million in consulting fees to be paid during the term of the agreement. During fiscal 1996 and for the three-month period ended December 31, 1996, the Company paid $1.3 million and $0.3 million, respectively, related to this consulting agreement. William W. Becker, a stockholder and former director of the Company, is President and Chief Executive Officer of ICC.
At September 30, 1995 and 1996, and December 31, 1996, receivables from officers and employees in the amount of approximately $0.6 million are primarily comprised of notes bearing interest at 7% and are included in Receivables-Other in the accompanying consolidated financial statements. The notes receivable relate to relocation expenses of officers.
Effective May 31, 1994, the Company acquired the remaining 4% minority interest in Holdings from Worldwide Condominium Developments, Inc. ("WWCDI"), a related
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(7) Related Party Transactions (continued)
entity. The 4% interest was exchanged for (i) the transfer of the Company's oil and gas properties (at an estimated value of approximately $0.9 million), (ii) the surrender and cancellation of two demand promissory notes receivable from William W. Becker, owner of WWCDI (the "Becker Interests"), in the total principal amount of approximately $4.0 million and (iii) 373,663 common shares of Holdings-Canada. The 4% minority interest in Holdings was valued at approximately $12.2 million by the non-related members of the Company's Board of Directors. The transaction was approved unanimously by Holdings-Canada's non-related directors, and ratified by Holdings-Canada's non-related shareholders. Due to the related party nature of the purchase, the investment has been recorded at the historical basis of WWCDI. As a result, consideration in excess of the historical basis has been recorded in a manner similar to a dividend.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable
Long-term debt is summarized as follows:
September 30, December 31, ------------------------ ---------------- 1995 1996 1996 ----------- ------------- -------------- (in thousands)
12 1/2% Senior discount notes, net of discount (a) $ - 315,626 325,530 13 1/2% Senior discount notes, net of discount (b) 299,934 343,772 355,955 Convertible subordinated notes (c) 74,434 491 65 Credit facility (d) 13,515 - - Note payable with interest at the 90-day commercial paper rate plus 4.75% (10.09% at December 31, 1996), due 2001, secured by certain telecommuni- cations equipment - 5,888 5,815 Note payable with interest at 11%, due monthly through fiscal 1999, secured by equipment 3,493 2,803 2,625 Mortgage payable with interest at 8.5%, due monthly through 2009, secured by building 1,242 1,194 1,177 Notes payable to sellers of FOTI and FOTDS (e) 600 - - Other 336 10 8 --------- -------------- -------------- $393,554 669,784 691,175 Less current portion (14,454) (795) (817) ---------- -------------- -------------- $379,100 668,989 690,358 ========== ============== ==============
(a) 12 1/2% Senior Discount Notes
On April 30, 1996, Holdings completed a private placement (the "1996 Private Offering") of 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock (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
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
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 12 1/2% Note indenture contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions.
The 12 1/2% Notes were originally recorded at approximately $300.0 million. The discount on the 12 1/2% Notes and the debt issuance costs are being accreted over ten years until maturity at May 1, 2006. The accretion of the discount and debt issuance costs is included in interest expense in the accompanying consolidated financial statements.
Approximately $35.3 million of the proceeds from the 1996 Private Offering were used to redeem the 12% redeemable preferred stock of Holdings (the "Redeemable Preferred Stock") issued in August 1995 ($30.0 million), pay accrued preferred dividends ($2.6 million) and to repurchase 916,666 warrants of the Company ($2.7 million) issued in connection with the Redeemable Preferred Stock. The Company recognized a charge to minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock of approximately $12.3 million for the excess of the redemption price of the Redeemable Preferred Stock over the carrying amount at April 30, 1996, and recognized a charge to interest expense of approximately $11.5 million for the payments made to noteholders with respect to consents to amendments to the indenture governing the 13 1/2% Notes to permit the 1996 Private Offering.
(b) 13 1/2% Senior Discount Notes
On August 8, 1995, Holdings completed a high yield debt offering (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 (the "13 1/2% Notes") due September 15, 2005, and warrants to purchase 33 common shares of Holdings-Canada (the "Unit Warrants"), resulting in net proceeds of approximately $286.0 million, net of approximately $14.0 million in issuance costs. The 13 1/2% Notes were sold at approximately 51% of the stated maturity of $584.3 million, and will mature on September 15, 2005. Interest accrues 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.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
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 using the interest method over five years until September 15, 2000, the date at which the 13 1/2% Notes can first be redeemed. The value assigned to the Unit Warrants, representing additional debt discount, is also being accreted to the debt over the five-year period. The accretion of the total discount is included in interest expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000, in whole or in part, at the redemption prices set forth in the agreement, plus unpaid interest, if any, at the date of redemption. The 13 1/2% Notes are guaranteed on a senior, unsecured basis by ICG and Holdings-Canada. The 13 1/2% Note indenture contains certain covenants which provide for limitations on indebtedness, dividends, asset sales, and certain other transactions.
The Unit Warrants entitle the holder to purchase one common share of Holdings-Canada at the exercise price of $12.51 per share and are exercisable at any time between August 8, 1996 and August 8, 2005 (see note 12 (c)).
In connection with the issuance of the 13 1/2% Notes, the Company obtained $6.0 million of interim financing from the placement agent and certain private investors in exchange for the issuance of an aggregate of 520,000 Series A Warrants (see note 12 (c)). The $6.0 million was repaid with a portion of the proceeds from the 1995 Private Offering. As a result of the repayment of the interim financing, the value assigned to the Series A Warrants totaling approximately $3.0 million, representing debt discount, was charged to interest expense during the year ended September 30, 1995.
(c) Convertible Subordinated Notes
Effective September 17, 1993, Holdings-Canada issued $18.0 million in convertible subordinated notes with interest at 8% ("8% Notes"). Interest was payable, at the option of the Company, in cash or through the issuance of additional 8% Notes. The 8% Notes were subordinated to all present and future senior debt.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
The 8% Notes, excluding unpaid interest, were convertible, at the option of the holder, at any time into common shares of Holdings-Canada at a conversion price of $15.60 for each common share. During fiscal 1995, approximately $1.1 million of the 8% Notes, including approximately $0.1 million of interest paid in 8% Notes, were converted to 69,230 common shares of Holdings-Canada. During fiscal 1996, the remaining $17.0 million of the 8% Notes and approximately $3.1 million of interest paid in 8% Notes were converted into 1,289,738 shares of Holdings-Canada.
The Company, in conjunction with the issuance of the 8% Notes, paid to its placement agent a private placement fee of $0.9 million. The private placement fee was included in deferred financing costs as of September 30, 1995 and was being amortized over the term of the 8% Notes. During the year ended September 30, 1996, the remaining $0.5 million of deferred financing costs were written off upon conversion of the 8% Notes.
Effective October 28, 1993, the Company issued approximately $47.8 million in convertible subordinated notes with interest at 7% ("7% Notes"). The 7% Notes were due October 30, 1998, unless earlier converted or redeemed. Interest was payable, at the option of the Company, in cash or through the issuance of additional 7% notes. The 7% Notes were subordinated to all present and future senior debt.
All or any portion of the outstanding principal amount of any note and interest are convertible, at the option of the holder, into common shares of Holdings-Canada at a conversion price of $18.00 for each common share.
During fiscal 1996, the Company notified the holders of the 7% Notes of its intent to redeem the 7% Notes, together with accrued interest. As of December 31, 1996, approximately $47.8 million of the 7% Notes and approximately $8.9 million of interest paid in 7% Notes were converted into 3,146,283 shares of Holdings-Canada. As of December 31, 1996, approximately $0.1 million of interest paid in 7% Notes remains outstanding, which are in the process of being converted.
The Company paid to the placement agent a private placement fee of approximately $2.4 million. The private placement fee, included in deferred financing costs, was being amortized over the term of the 7% Notes. During the year ended September 30,
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
1996, approximately $1.1 million of deferred financing costs were written off upon conversion of the 7% Notes.
(d) Credit Facility
Effective November 16, 1990, the Company, through Teleport Denver Ltd. ("TDL"), a subsidiary of Holdings, entered into an $18.0 million financing arrangement with Communications Credit Corp. ("CCC"), a subsidiary of Northern Telecom Finance Corporation, to provide for the acquisition, construction, installation, operation, maintenance and expansion of a fiber optic transmission system. The promissory notes accrued interest at 5.5% over the 90-day high grade commercial paper rate with a maximum rate of 14.5%.
In December 1995, the Company refinanced this credit facility as part of the short-term financing agreement with Norwest Bank Colorado, N.A. ("Norwest"), described below, which was repaid in March, 1996. During the year ended September 30, 1996, $1.1 million of deferred financing costs were written off upon payment of the credit facility.
(e) Notes Payable to Sellers of FOTI and FOTDS
In conjunction with the 1992 acquisitions of FOTI and Fiber Optic Technologies Data Systems, Inc. ("FOTDS"), the Company issued notes payable of approximately $2.0 million bearing interest at 7% per annum, payable annually in cash or common shares of Holdings-Canada at the option of the Company. The principal was payable through the issuance of 266,800 common shares of Holdings-Canada, at a deemed value of $7.50 per common share. As of September 30, 1995, 186,800 Holdings-Canada common shares had been issued. On January 3, 1996, the final payment was satisfied at a discount, with the Company issuing 76,027 common shares of Holdings-Canada pursuant to an agreement to purchase the remaining 49% of FOTI (see note 3).
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(8) Long-term Debt and Short-term Notes Payable (continued)
Scheduled principal maturities of long-term debt as of December 31, 1996 are as follows (in thousands):
Due within: One year $ 817 Two years 1,774 Three years 1,680 Four years 1,287 Five years 938 Thereafter (a) 1,137,794 ------------ 1,144,290 Less unaccreted discount on the 12 1/2% Notes and 13 1/2% Notes (453,115) ------------- $ 691,175 =============
(a) Includes $550.3 million of 12 1/2% Notes and $584.3 million of 13 1/2% Notes due at maturity.
Short-term Note Payable and Line-of-Credit
At September 30, 1995, FOTI maintained a $4.0 million line of credit bearing interest at the prime rate plus 5% that was payable on demand. In December 1995, the Company refinanced the line of credit as part of a short-term facility with Norwest described below.
In December 1995, Holdings obtained $17.5 million of short-term financing with Norwest, with interest at 2.5% above the Money Market Account yield, to refinance certain of the Company's debt. The Company paid off this debt and accrued interest in March 1996.
(9) Capital Lease Obligations
The Company is obligated under various capital lease agreements for equipment at September 30, 1995 and 1996, and December 31, 1996. Capital lease obligations increased in fiscal 1996 primarily due to the Company's agreement with Southern
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(9) Capital Lease Obligations (continued)
California Edison Company to license fiber optic cable in Southern California (see note 14(a)).
The future required payments under the Company's capital lease obligations subsequent to December 31, 1996 are as follows (in thousands):
Due within: One year $ 31,552 Two years 15,644 Three years 13,914 Four years 14,340 Five years 17,352 Thereafter 107,532 ----------- Total minimum lease payments 200,334 Less amounts representing interest (104,505) ----------- Present value of net minimum lease payments 95,829 Less current portion (24,683) ----------- $ 71,146 ===========
(10) Redeemable Preferred Stock of Subsidiary
12% Redeemable Preferred Stock
In August 1995, Holdings-Canada completed a private placement of preferred stock (the "Private Placement") in connection with the 1995 Private Offering discussed in note 8. The Private Placement consisted of 300,000 shares of Redeemable Preferred Stock and warrants to purchase 2,750,000 common shares of Holdings-Canada (see note 12(c)) for net proceeds of $28.8 million, after payment of $1.2 million in issuance costs. The Redeemable Preferred Stock accrued dividends quarterly at an annual rate of 12% per annum.
The Redeemable Preferred Stock was originally recorded at approximately $13.7 million, which represents the $28.8 million in net proceeds less the approximate $15.1 million value assigned to the warrants, which was included in additional paid-in capital of the Company. The value assigned to the warrants, representing a discount on the Redeemable
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(10) Redeemable Preferred Stock of Subsidiary (continued)
Preferred Stock, was accreted through the time the Redeemable Preferred Stock was redeemed on April 30, 1996 with a portion of the proceeds from the 1996 Private Offering.
14 1/4% Exchangeable Preferred Stock
The 14 1/4% Preferred Stock consists of 150,000 shares of 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 commencing August 1, 1996. Through May 1, 2001, the dividend is payable, at the option of the Company, in cash or additional shares of 14 1/4% Preferred Stock. The Company 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.
Included in minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock for the years ended September 30, 1995 and 1996, and the three months ended December 31, 1996, is approximately $1.3 million, $27.0 million and $5.8 million, respectively, associated with the Redeemable Preferred Stock (fiscal 1995 and fiscal 1996) and the 14 1/4% Preferred Stock (fiscal 1996 and the three months ended December 31, 1996), including the accretion of warrants issued in connection with the Redeemable Preferred Stock, accretion of issuance costs and a 12% and 14 1/4% preferred stock dividend accrual on the Redeemable Preferred Stock and the 14 1/4% Preferred Stock, respectively. These costs are partially offset by the minority interest share of losses in subsidiaries of approximately $0.6 million, $2.7 million and $0.8 million for the years ended September 30, 1995 and 1996, and the three months ended December 31, 1996, respectively.
(11) Convertible Preferred Stock of Subsidiary
Convertible Series B Preferred Stock, no par value, 2,000,000 shares authorized; 990,000 shares issued and outstanding at September 30, 1995.
In May and June 1995, Holdings-Canada sold an aggregate of 1,600,000 convertible preferred shares, having an aggregate stated value of $16.0 million. Net proceeds to the Company, after issuance costs of approximately $0.9 million, were approximately $15.1
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(11) Convertible Preferred Stock of Subsidiary (continued)
million. The convertible preferred shares were convertible at the holders' election into common shares of Holdings-Canada commencing in July 1995, at a discount from the market price at the time of conversion equal to 18.5% for $6.0 million of the convertible preferred shares ("Series A Preferred Stock") and 17.5% for $10.0 million of the convertible preferred shares ("Series B Preferred Stock").
In July 1995, 10,000 shares of the Series B Preferred Stock were repurchased for $0.1 million in cash. In August and September 1995, 200,000 shares of the Series A Preferred Stock were converted to 302,029 common shares of Holdings-Canada valued at $2.0 million, and 400,000 shares of the Series A Preferred Stock were repurchased for approximately $4.2 million in cash. The excess of the repurchase price over the stated value of the Series A and Series B Preferred Stock repurchased of approximately $0.5 million was treated as a preferred stock dividend and is included in minority interest in share of losses, net of accretion and preferred dividends on subsidiary preferred stock in the accompanying consolidated financial statements.
During fiscal 1996, the Company repurchased approximately $5.6 million of the Series B Preferred Stock, and approximately $3.8 million of the Series B Preferred Stock was converted to Holdings-Canada common shares. The excess of the repurchase and conversion price over the stated value of the Series B Preferred Stock of approximately $1.0 million has been treated as a preferred stock dividend and is included in minority interest in share of losses, net of accretion and preferred stock dividends on subsidiary preferred stock in the accompanying consolidated financial statements. No convertible preferred shares remained outstanding at September 30, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit)
Common Stock
Common stock outstanding at December 31, 1996 represents the issued and outstanding Common Stock of ICG and Class A common shares of Holdings-Canada (owned by third parties) which are exchangeable at any time, on a one-for-one basis, for ICG Common Stock. The following table sets forth the number of shares outstanding for ICG and Holdings-Canada on a separate company basis as of December 31, 1996:
Shares owned Shares owned by by ICG third parties ------------- ----------------- ICG Common Stock, $.01 par value, 100,000,000 shares authorized; 0, 29,888,376 and 31,087,825 shares issued and outstanding at September 30, 1995 and 1996, and December 31, 1996, respectively - 31,087,825 Holdings-Canada Class A common shares, no par value, 100,000,000 shares authorized; 24,990,839, 31,672,103 and 31,795,270 shares issued and outstanding at September 30, 1995 and 1996, and December 31, 1996, respectively: Class A common shares, exchangeable on a one-for-one basis for ICG Common Stock at any time - 807,054 Class A common shares owned by ICG 30,988,216 - -------------- Total shares outstanding 31,894,879 ==============
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
(a) Private Placements
In May and June 1995, the Company privately placed 595,000 common shares of Holdings-Canada for $7.50 per share. Net proceeds to the Company, after issuance costs of approximately $0.4 million, were approximately $4.0 million. Pursuant to a private placement memorandum dated June 1993, for the issue of 1,500,000 common shares for approximately $8.3 million, the Company agreed to file a registration statement with the Securities and Exchange Commission of the United States that was to become effective on or before October 11, 1993. The registration statement did not become effective on or before that date. As a result, the Company issued, for no additional consideration, an additional 197,250 shares to the investors. The issuance of these additional shares was recorded as a capital transaction during the year ended September 30, 1994.
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors approved incentive stock option plans and replenishments to those plans which provide for the granting of options to directors, officers, employees and consultants of the Company to purchase 285,000, 742,400 and 1,692,700 shares, respectively, of the Company's Common Stock, with exercise prices between 80% and 100% of the fair value of the shares at the date of grant. A total of 1,849,600 options have been granted under these plans with exercise prices ranging from approximately $2.92 to $14.03. Compensation expense has been recorded for options granted at an exercise price below the fair market value of the Company's Common Stock at the date of grant, pursuant to the provisions of APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant.
In fiscal years 1994, 1995 and 1996, and the three months ended December 31, 1996, 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 and an aggregate of 2,700,000 shares of the Company's Common Stock under the 1995 and 1996 plans. A total of 4,177,381 options have been granted under these plans at exercise prices ranging
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
from $7.94 to $26.25, none of which were less than 100% of the fair market value of the shares underlying options on the date of grant, and, accordingly, date of grant, and accordingly, no compensation expense has been recorded for these options under APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant.
In October 1996, the Company established an Employee Stock Purchase Plan whereby employees can elect to designate 1% to 30% of their annual salary, up to a limit of $25,000 per year, to be used to purchase shares of the Company's Common Stock at a 15% discount to fair market value. Stock purchases will occur four times a year on February 1, May 1, August 1 and November 1, with the price per share equaling the lower of 85% of the market price at the beginning or end of the offering period. The Company is authorized to issue a total of 1,000,000 shares of Common Stock to participants in the plan. No shares of the Company's Common Stock had been sold to employees under this plan as of December 31, 1996. On February 1, 1997, the Company sold 22,330 shares of the Company's Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its stock-based employee and non-employee director compensation plans of $0.9 million, $0.2 million, $0.1 million and $0.2 million for fiscal years 1994, 1995 and 1996, and the three months ended December 31, 1996, respectively, pursuant to the intrinsic value based method of APB 25. Had compensation expense for the Company's plans been determined based on the fair market value of the options at the grant dates for awards under those plans consistent with the provisions of SFAS 123, the Company's pro forma net loss and loss per share would have been as presented below. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1996 and the three months ended December 31, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
Year ended Three months ended September 30, 1996 December 31, 1996 ------------------------- --------------------- (in thousands, except per share amounts) Net loss: ---------- As reported $ (184,107) (49,823) Pro forma (186,831) (50,819)
Loss per share: --------------- As reported $ (6.83) (1.56) Pro forma (6.93) (1.60)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the year ended September 30, 1996 and the three months ended December 31, 1996: an expected option life of three years for directors, officers and other executives, and two years for other employees, for both periods; expected volatility of 50% for both periods; and risk-free interest rates ranging from 5.03% to 6.57% for directors, officers and other executives and 5.22% to 6.10% for other employees, for both periods. Risk-free interest rates, as were currently available on the grant date, were assigned to each granted option based on the zero-coupon rate of U.S. Treasury bills to be held for the same period as the assumed option life. Since the Company does not anticipate issuing any dividends on its Common Stock, the dividend yield was assumed to be zero. The weighted average fair market value of options granted during the year ended September 30, 1996 and the three months ended December 31, 1996 was approximately $5.28 and $9.42 per option, respectively.
As options outstanding at December 31, 1996 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 of applying a fair value based method of accounting for stock-based compensation for the year ended September 30, 1996 and the three months ended December 31, 1996 are not necessarily indicative of the effects on net loss and loss per share in future periods.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes the status of the Company's stock-based compensation plans as of and for the fiscal years ended September 30, 1994, 1995 and 1996, and as of and for the three months ended December 31, 1996:
Shares Weighted underlying average Options options exercise price exercisable ------------- ---------------- ------------ (in thousands) (in thousands)
Outstanding at October 1, 1993 865 Granted 516 $ 12.23 Exercised (62) 3.34 -------------
Outstanding at September 30, 1994 1,319 6.81 769 Granted 2,520 9.73 Exercised (264) 3.32 Canceled (201) 13.25 -------------
Outstanding at September 30, 1995 3,374 9.08 940 Granted 1,322 11.78 Exercised (248) 7.55 Canceled (243) 11.12 -------------
Outstanding at September 30, 1996 4,205 9.77 2,264 Granted 335 18.59 Exercised (31) 8.95 Canceled (56) 12.65 --------------
Outstanding at December 31, 1996 4,453 10.34 2,969 ==============
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes information about options outstanding at December 31, 1996:
(c) Warrants
During the years ended September 30, 1994, 1995 and 1996, and the three months ended December 31, 1996, the Company's warrant activity was as follows:
(i) During the year ended September 30, 1993, the Company issued to WWCDI bonus warrants to purchase 6,680 Holdings-Canada common shares at an exercise price of $7.50. At September 30, 1994, all of these warrants had been exercised for $50,100.
(ii) During the year ended September 30, 1993, the Company issued to a debt holder warrants to purchase 17,067, 3,255 and 11,039 common shares at exercise prices of $6.56, $7.38 and $7.88, respectively. During the year ended September 30, 1994, 17,067 warrants were exercised for proceeds of $111,960. In addition, during the year ended September 30, 1994, the Company issued to the same debt holder additional warrants to purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada at $21.51,
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
$20.01 and $11.80 per share, exercisable on or before November 10, 1998, March 24, 1999, and July 8, 1999, respectively. An additional 7,725 warrants were issued on July 10, 1995 at an exercise price of $14.50, which expire on July 9, 2000. Also issued on July 10, 1995 were 60,000 additional warrants to an affiliate of the debt holder at an exercise price of $14.50, which expire on July 9, 2000. During the three-month period ended December 31, 1996, 1,231 of the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the $11.80 warrants were canceled.Total warrants outstanding held by the debt holder and affiliates were 95,031 at December 31, 1996.
(iii) During the year ended September 30, 1994, the Company issued to two financial advisors warrants to purchase 75,000 and 200,000 common shares of Holdings-Canada. These warrants have an exercise price of $7.94 and $18.00 and are exercisable for two- and five- year periods, respectively. During the years ended September 30, 1995 and 1996, 74,335 and 665 of the 75,000 warrants were exercised for proceeds of $590,035 and $5,278, respectively. During the three-month period ended December 31, 1996, 100,000 of the 200,000 warrants were exercised for proceeds of $1.8 million. At December 31, 1996, 100,000 warrants remained outstanding.
(iv) Pursuant to a private placement during the year ended September 30, 1992, the Company issued to William W. Becker, a former director of the Company, warrants to purchase 600,000 common shares of Holdings-Canada at exercise prices of $5.65 and $6.51 on or before February 11, 1993 and 1994, respectively. During the year ended September 30, 1994, these warrants were exercised for proceeds of approximately $3.8 million.
(v) Pursuant to a private placement of the Redeemable Preferred Stock and the interim financing arrangement during the year ended September 30, 1995, the Company issued 1,895,000 Series A Warrants and 1,375,000 Series B Warrants to purchase an equal number of common shares of Holdings-Canada. The exercise prices are $7.94 and $8.73, respectively, and the warrants expire on July 14, 2000. None of the warrants had been exercised as of September 30, 1995. During the year ended September 30, 1996, the Company repurchased 458,333 each of the Series A and Series B Warrants for $3.21 and $2.52, respectively (see note 8). In addition, 1,853,334
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
warrants were exercised in June 1996 through a cashless exercise in which 1,271,651 Holdings-Canada common shares were issued. As of December 31, 1996, 250,000 Series A Warrants and 250,000 Series B Warrants remain outstanding.
(vi) In connection with the 1995 Private Offering, the Company issued 1,928,190 warrants to purchase an equal number of common shares of Holdings-Canada. The warrants are exercisable beginning August 8, 1996 at $12.51 per share and expire on August 6, 2005. As of December 31, 1996, all of these warrants remain outstanding.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes warrant activity for the three years ended September 30, 1996 and the three months ended December 31, 1996:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The warrants outstanding expire on the following dates as of December 31, 1996:
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as partial payment for the sale of four of its teleports and certain related assets, and entered into a management agreement with the purchaser whereby the purchaser assumed control of the teleport operations. Upon approval of the transaction by the Federal Communications Commission ("FCC"), the Company completed the sale in March 1996 and received an additional $0.4 million due to certain closing adjustments, for total proceeds of $21.5 million. The Company recognized a loss of approximately $1.1 million on the sale. Revenue associated with these operations was approximately $5.9 million, $9.1 million and $2.5 million for fiscal years ended September 30, 1994, 1995 and 1996, respectively. The Company has reported results of operations from these assets through December 31, 1995.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(14) Commitments and Contingencies
(a) Network Construction
In November 1995, the Company signed an agreement with City Public Service of San Antonio ("CPS") to license excess fiber optic facilities on a new 300-mile fiber network being built by the municipally-owned electric and gas utility to provide for its communications needs in the greater metropolitan area. Pursuant to this agreement, the Company has provided a $12.0 million irrevocable letter of credit to secure payment of the Company's portion of the construction costs. The letter of credit is secured by cash collateral of $13.3 million.
The legal ability of CPS, as a municipally-owned utility, to enter into this contract with the Company has been challenged by SBC Communications, Inc. ("SBC") before the San Antonio City Council as being in violation of a May 1995 Texas state law.
The Company has filed a petition with the FCC requesting a declaratory ruling that the federal Telecommunications Act of 1996 preempts the Texas state law to the extent that it precludes implementation of the agreement between CPS and the Company, and has also filed a declaratory ruling request with a Texas state court. Both of these actions are pending. The Company has also filed a civil suit against SBC, and the Company's appeal of a dismissal of that suit is also pending.
In February 1996, the Company entered into a 20-year agreement with WorldCom, Inc. ("WorldCom"), under which the Company will pay approximately $8.8 million for the right to use fiber along a 330-mile fiber optic network in Ohio. The network is being constructed by WorldCom in conjunction with the Company. An aggregate of approximately $2.7 million has been paid by the Company through December 31, 1996, with the balance due upon the completion of specified segments of the network.
In March 1996, the Company and Southern California Edison Company ("SCE") jointly entered into a 25-year agreement under which the Company will lease 1,258 miles of fiber optic cable in Southern California, and can install up to 500 additional miles of fiber optic cable. This network, which will be maintained and operated primarily by the Company, stretches from Los Angeles to San Diego. Under the terms of this agreement, SCE will be entitled to receive an annual fee for ten years,
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
certain fixed quarterly payments, including a quarterly payment equal to a percentage of certain network revenue, and certain other installation and fiber connection fees. The aggregate fixed payments remaining under this 25-year agreement totaled approximately $149.4 million at December 31, 1996. The agreement has been accounted for as a capital lease in the accompanying consolidated balance sheets at December 31, 1996.
In March 1996, the Company entered into a long-term agreement with a subsidiary of The Southern Company ("Southern") and Alabama Power Company ("Alabama Power") for the right to use 22 miles of existing fiber and 122 miles of additional Alabama Power rights of way and facilities to reach the three major business centers in Birmingham. Southern will, in conjunction with the Company, construct the network and provide maintenance services with respect to the fiber installed. Southern also will provide consulting services to the Company relating to the build-out of the network and potential enhancements to the Company's products and services.
Under the agreement, the Company also is required to pay Southern a quarterly fee based on specified percentages of the Company's revenue for services provided through this network. The Company's estimated costs to complete the network are approximately $4.0 million, which are expected to be incurred during 1997.
In July 1996, the Company entered into a 20-year agreement with subsidiaries of American Electric Power ("AEP") to jointly build a 45-mile network addition in metropolitan Columbus, plus a 138-mile long-haul link to Canton, Ohio. The Company's estimated costs to complete the construction are approximately $4.7 million, which are expected to be incurred during 1997.
(b) Company Headquarters
The Company has acquired property for its new headquarters and has commenced construction of an office building that the Company expects will accommodate all of the Company's Colorado operations. The total cost of the project is expected to be approximately $44.0 million, of which $9.4 million had been incurred as of December 31, 1996 and is included in construction in progress. The Company is currently negotiating financing arrangements under which the Company will lease
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
the office space under a long-term operating lease, and expects an agreement to be reached in the near future.
(c) 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 for that year certain discounts, allowances and incentives otherwise provided to the Company. In addition, the agreements may be terminated by either the Company or the vendor upon prior written notice.
In December 1996, the Company entered into an equipment and software licensing agreement with Northern Telecom, Inc. under which the Company has agreed to purchase $100.0 million of telecommunications equipment and software over the next three years.
In September 1996, the Company entered into a 30-year agreement and two indefeasible rights of use ("IRU") agreements with the Los Angeles Department of Water and Power ("LADWP") for 105 miles of fiber optic capacity throughout downtown Los Angeles, Century City, West Los Angeles, Mid-Wilshire and Sherman Oaks. The agreements were subject to acceptance testing and, in January 1997, the Company paid approximately $17.5 million upon the inception of the agreements. The amount paid was included in construction in progress and current portion of capital lease obligations in the accompanying consolidated balance sheets at December 31, 1996.
In addition to the above, the Company has entered into certain commitments to purchase assets with an aggregate purchase price of approximately $34.0 million at December 31, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(d) Leases
The Company leases office space and equipment under non-cancelable operating leases. Lease expense for the years ended September 30, 1994, 1995 and 1996, and the three months ended December 31, 1996, was approximately $1.3 million, $2.8 million, $5.1 million and $1.3 million, respectively. Estimated future minimum lease payments for the years subsequent to December 31, 1996 are (in thousands):
Due within: One year $ 5,592 Two years 4,368 Three years 3,049 Four years 2,112 Five years 1,369 Thereafter 4,721 ====================== $ 21,211 ====================== (e) Litigation
The Company is a party to certain litigation which has arisen in the ordinary course of business. In the opinion of management and legal counsel, the ultimate resolution of these matters will not have a significant effect on the financial condition of the Company.
(15) Income Taxes
Income tax expense (benefit) for the year ended September 30, 1996 is as follows (in thousands):
Year ended September 30, 1996 -------------------------- Current income tax expense $ 198 Deferred income tax benefit (5,329) -------------------------- Total $ (5,131) ==========================
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(15) Income Taxes (continued)
Current income tax expense for the year ended September 30, 1996 represents state income tax relating to operations of companies in states requiring separate entity tax returns. Accordingly, these entities' taxable income cannot be offset by the Company's net operating loss carryforwards. No income tax expense or benefit was recorded in fiscal 1994, fiscal 1995 or the three months ended December 31, 1996.
Income tax expense (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.
During the year ended September 30, 1996, the deferred tax liability was adjusted for the effects of certain changes in estimated lives of property and equipment as discussed in note 2 (f). As a result, the Company recognized an income tax benefit of $5.3 million.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1995 and 1996, and December 31, 1996 are as follows:
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(15) Income Taxes (continued)
As of December 31, 1996, the Company has net operating losses ("NOLs") of approximately $171.9 million for U.S. tax purposes which expire in varying amounts through 2011. However, due to the provisions of Section 382, Section 1502 and certain other provisions of the Internal Revenue Code (the "Code"), the utilization of these NOLs will be limited. The Company is also subject to certain state income tax laws, which will also limit the utilization of NOLs.
The net deferred tax asset related to the Company's NOL carryforwards represents the portion of the NOLs that the Company estimates will be utilized to reduce future taxable income resulting from the reversal of temporary differences. A valuation allowance has been provided for the remainder of the deferred tax asset relating to the NOLs, as management cannot determine when the Company will generate future taxable income.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section 401(k) of the Code which the Company administers for participating employees. All full-time employees are covered under the plan after meeting minimum service and age requirements. The Company contributes a matching contribution of its Common Stock (up to 6% of annual salary) which totaled approximately $0.3 million, $0.5 million, $1.2 million and $0.5 million during the years ended September 30, 1994, 1995 and 1996, and the three months ended December 31, 1996, respectively.
(17) Significant Customer
During the year ended September 30, 1995, the Company had revenue from a single customer which comprised 11% of total revenue and accounts receivable which comprised 8% of the total accounts receivable balance at September 30, 1995. There were no customers which accounted for greater than 10% of revenue or accounts receivable as of, or for the years ended September 30, 1994 and 1996, or for the three months ended December 31, 1996.
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 8(a) and (b), the 12 1/2% Notes and 13 1/2% Notes issued by Holdings during 1996 and 1995, respectively, are guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be material to the holders of the 12 1/2% Notes and 13 1/2% Notes. However, summarized combined financial information for Holdings and subsidiaries and affiliates as of September 30, 1995 and 1996, and December 31, 1996 and for the years ended September 30, 1994, 1995 and 1996, and for the three months ended December 31, 1996 is as follows:
Summarized Consolidated and Combined Statement of Operations Information (a)
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc. (continued)
(a) The 1994 amounts include FOTI and its subsidiaries which was 51% owned by Holdings-Canada. Holdings-Canada's 51% interest in FOTI was contributed to Holdings effective in February 1995 (the remaining 49% was purchased in January 1996) and, accordingly, FOTI's operations have been included in the consolidated amounts subsequent to that date.
(19) Condensed Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only as of September 30, 1995 and 1996, and December 31, 1996 and for the years ended September 30, 1994, 1995 and 1996 and for three months ended December 31, 1996 is as follows:
Condensed Balance Sheet Information
Condensed Statement of Operations Information
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued - ----------------------------------------------------------------------------
(20) Condensed Financial Information of ICG Communications, Inc. (Parent company)
The sole asset of ICG is its investment in Holdings-Canada. ICG has no operations other than those of Holdings-Canada and its subsidiaries.
FINANCIAL STATEMENT SCHEDULE
Page ICG Communications, Inc. -----
Independent Auditors' Report S-2
Schedule II: Valuation and Qualifying Accounts S-3
S-1
Independent Auditors' Report
The Board of Directors and Stockholders ICG Communications, Inc.:
Under the date of February 21, 1997, we reported on the consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of September 30, 1995 and 1996, and December 31, 1996 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended September 30, 1996, and the three-month period ended December 31, 1996 as contained in the Company's Transition Report on Form 10-K for the transition period from October 1, 1996 to December 31, 1996. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as whole, presents fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado February 21, 1997
S-2
Schedule II ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts - -------------------------------------------------------------------------------
(in thousands)
Balance at Charged to Balance at Beginning Costs and Deductions/ End of of Period Expenses Writeoffs Period ---------- ------------ ----------- ----------
Allowance for uncollectible trade receivables:
Year ended September 30, 1994 $ 111 1,791 (841) 1,061 -------- ---------- ------------ ----------
Year ended September 30, 1995 $ 1,061 2,360 (1,204) 2,217 -------- ---------- ----------- ---------
Year ended September 30, 1996 $ 2,217 1,585 (1,293) 2,509 -------- ---------- ----------- ---------
Three months ended December 31, 1996 $ 2,509 914 (908) 2,515 -------- ----------- ----------- ---------
Allowance for uncollectible note receivable:
Year ended September 30, 1994 $ - - - - -------- ------------ ----------- ----------
Year ended September 30, 1995 $ - 175 - 175 -------- ------------ ----------- ----------
Year ended September 30, 1996 $ 175 7,100 - 7,275 -------- ------------ ----------- ----------
Three months ended December 31, 1996 $ 7,275 - - 7,275 -------- ------------ ----------- ----------
Allowance for investment impairment:
Year ended September 30, 1994 $ - - - - -------- ------------- ---------- ----------
Year ended September 30, 1995 $ - 2,000 - 2,000 -------- -------------- ---------- ----------
Year ended September 30, 1996 $ 2,000 - - 2,000 -------- -------------- ---------- ----------
Three months ended December 31, 1996 $ 2,000 - - 2,000 --------- -------------- ---------- ----------
See accompanying independent auditors' report.
S-3
INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
TRANSITION REPORT ON FORM 10-K for the transition period from October 1, 1996 to December 31, 1996
Filed Pursuant to Section 13 of the Securities Exchange Act of 1934
EXHIBITS
10.44: Consulting Services Agreement, by and between IntelCom Group Inc. and International Communications Consulting, Inc., effective January 1, 1996.
10.45: Confidential General Release and Covenant Not to Sue, by and between ICG Communications, Inc. and John D. Field, dated November 5, 1996.
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
EXHIBIT 10.44
Consulting Services Agreement, by and between IntelCom Group Inc. and International Communications Consulting, Inc., effective January 1, 1996.
EXHIBIT 10.45
Confidential General Release and Covenant Not to Sue, by and between ICG Communications, Inc. and John D. Field, dated November 5, 1996.
EXHIBIT 21
Subsidiaries of the Registrant
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
EXHIBIT 27
Financial Data Schedule
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Communications, Inc.
By: /s/J. Shelby Bryan J. Shelby Bryan President, Chief Executive Officer and Director
Pusuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date Chairman of the Board of /s/William J. Laggett Directors February 19, 1997 - ------------------------ William J. Laggett President, Chief Executive Officer and Director (Principal /s/J. Shelby Bryan Executive Officer) February 19, 1997 - ------------------------- J. Shelby Bryan Executive Vice President, Chief Financial Officer and Treasurer /s/James D. Grenfell (Principal Financial Officer) February 19, 1997 - ------------------------- James D. Grenfell Vice President and Corporate Controller (Principal Accounting /s/Richard Bambach Officer) February 19, 1997 - ------------------------- Richard Bambach
/s/Harry R. Herbst Director February 19, 1997 - ------------------------- Harry R. Herbst
/s/Stan McLelland Director February 19, 1997 - ------------------------- Stan McLelland
/s/Jay E. Ricks Director February 19, 1997 - ------------------------- Jay E. Ricks
/s/Leontis Teryazos Director February 19, 1997 - -------------------------- Leontis Teryazos
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Holdings (Canada), Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of /s/William J. Laggett Directors February 19, 1997 - ----------------------- William J. Laggett President, Chief Executive Officer and Director (Principal Executive /s/J. Shelby Bryan Officer) February 19, 1997 - ------------------------ J. Shelby Bryan Executive Vice President, Chief Financial Officer and Treasurer /s/James D. Grenfell (Principal Financial Officer) February 19, 1997 - ------------------------ James D. Grenfell Vice President and Corporate Controller (Principal Accounting /s/Richard Bambach Officer) February 19, 1997 - ------------------------ Richard Bambach
/s/Harry R. Herbst Director February 19, 1997 - ------------------------ Harry R. Herbst
/s/Jay E. Ricks Director February 19, 1997 - ------------------------ Jay E. Ricks
/s/Gregory C.K. Smith Director February 19, 1997 - ------------------------ Gregory C.K. Smith
/s/Leontis Teryazos Director February 19, 1997 - ------------------------ Leontis Teryazos
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 19, 1997.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan J.Shelby Bryan Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of Directors, President and Chief /s/J. Shelby Bryan Executive Officer (Principal - ---------------------- Executive Officer) February 19, 1997 J. Shelby Bryan Executive Vice President, Chief /s/James D. Grenfell Financial Officer, Treasurer and - ----------------------- Director (Principal Financial Officer) February 19, 1997 James D. Grenfell Vice President and Corporate /s/Richard Bambach Controller (Principal Accounting - ----------------------- Officer) February 19, 1997 Richard Bambach
/s/William J. Maxwell Executive Vice President-Telecom - ----------------------- and Director February 19, 1997 William J. Maxwell
/s/Mark S. Helwege Executive Vice President-Network - ----------------------- and Director February 19, 1997 Mark S. Helwege