-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ESMTg8bS/SON2KZ6FzHRJtek5L5FIoIZL/i4Z/6qmxl5acU78+V+3v4Pyvv0vvsy 1/ifUUd7n6knKdmUYlhqjw== 0000786343-98-000006.txt : 19981116 0000786343-98-000006.hdr.sgml : 19981116 ACCESSION NUMBER: 0000786343-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICG HOLDINGS CANADA INC CENTRAL INDEX KEY: 0000786343 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841128866 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11052 FILM NUMBER: 98747260 BUSINESS ADDRESS: STREET 1: 161 INVERNESS DRIVE WEST STREET 2: P O BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80155-6742 BUSINESS PHONE: 3034145431 MAIL ADDRESS: STREET 1: 161 INVERNESS DRIVE STREET 2: PO BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80155-6742 FORMER COMPANY: FORMER CONFORMED NAME: INTERTEL COMMUNICATIONS INC DATE OF NAME CHANGE: 19930107 10-Q 1 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Commission File Number 1-11965) ICG COMMUNICATIONS, INC. (Commission File Number 1-11052) ICG HOLDINGS (CANADA), INC. (Commission File Number 33-96540) ICG HOLDINGS, INC. (Exact names of Registrants as Specified in their Charters) - ------------------------------------------ ------------------------------------ Delaware 84-1342022 Canada Not Applicable Colorado 84-1158866 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) - ------------------------------------------ ------------------------------------ 161 Inverness Drive West Not applicable Englewood, Colorado 80112 1710-1177 West Hastings Street c/o ICG Communications, Inc. Vancouver, BC V6E 2L3 161 Inverness Drive West Canada P.O. Box 6742 Englewood, Colorado 80155-6742 161 Inverness Drive West Not applicable Englewood, Colorado 80112 (Address of principal executive offices) (Address of U.S. agent for service) - ------------------------------------------ ------------------------------------ Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No The number of registrants' outstanding common shares as of November 12, 1998 were 46,010,518, 31,831,558 and 1,918, respectively. ICG Holdings (Canada), Inc. owns all of the issued and outstanding shares of ICG Holdings, Inc. 2 TABLE OF CONTENTS PART I .............................................................. 3 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .............. 3 Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited).......................... 3 Consolidated Statements of Operations (unaudited) for the Three Months and Nine Months Ended September 30, 1997 and 1998................................................ 5 Consolidated Statement of Stockholders' Deficit (unaudited) for the Nine Months Ended September 30, 1998 ............ 7 Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 1997 and 1998 ........... 8 Notes to Consolidated Financial Statements, December 31, 1997 and September 30, 1998 (unaudited) ................. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. 20 PART II ............................................................... 35 ITEM 1. LEGAL PROCEEDINGS ......................................... 35 ITEM 2. CHANGES IN SECURITIES ..................................... 35 ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................... 35 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ..... 35 ITEM 5. OTHER INFORMATION ......................................... 35 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K ........................... 35 Exhibits .................................................. 35 Report on Form 8-K ........................................ 35 3 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and September 30, 1998 (unaudited)
December 31, September 30, 1997 1998 ------------------ ---------------- (in thousands) Assets Current assets: Cash and cash equivalents $ 182,202 429,418 Short-term investments 112,281 41,000 Receivables: Trade, net of allowance of $7,004 and $14,377 at December 31, 1997 and September 30, 1998, respectively (note 7) 61,439 102,351 Revenue earned, but unbilled 8,599 15,140 Due from affiliate 9,384 5,862 Other 1,696 1,664 ------------------ ---------------- 81,118 125,017 Inventory 3,901 3,259 Prepaid expenses and deposits 10,543 10,222 ------------------ ---------------- Total current assets 390,045 608,916 ------------------ ---------------- Property and equipment 736,700 963,649 Less accumulated depreciation (105,584) (158,993) ------------------ ---------------- Net property and equipment 631,116 804,656 ------------------ ---------------- Long-term notes receivable from affiliate and others, net 10,375 15,002 Restricted cash 24,649 18,889 Other assets, net of accumulated amortization: Goodwill 77,562 109,960 Deferred financing costs 23,196 37,374 Deferred advertising costs - 1,326 Transmission and other licenses 6,031 5,779 Deposits and other 9,404 24,001 ------------------ ---------------- 116,193 178,440 Net assets of discontinued operations (note 5) 76,092 78,254 ------------------ ---------------- Total assets $ 1,248,470 1,704,157 ================== ================ (Continued)
4 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited), Continued
December 31, September 30, 1997 1998 ------------------- ------------------- (in thousands) Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 38,457 59,122 Accrued liabilities 71,678 77,897 Deferred revenue 10,219 14,992 Current portion of capital lease obligations (note 7) 5,637 4,474 Current portion of long-term debt (note 2) 1,784 47 ------------------- ------------------- Total current liabilities 127,775 156,532 ------------------- ------------------- Capital lease obligations, less current portion (note 7) 66,939 60,429 Long-term debt, net of discount, less current portion (note 2) 890,568 1,553,097 ------------------- ------------------- Total liabilities 1,085,282 1,770,058 ------------------- ------------------- Redeemable preferred stock of subsidiary ($301.2 million and $334.4 million liquidation value at December 31, 1997 and September 30, 1998, respectively) (note 2) 292,442 326,248 Company-obligated mandatorily redeemable preferred securities of subsidiary limited liability company which holds solely Company preferred stock ($133.4 million liquidation value at December 31, 1997 and September 30, 1998) 127,729 127,944 Stockholders' deficit: Common stock (note 3) 749 596 Additional paid-in capital 533,541 570,033 Accumulated deficit (791,417) (1,090,672) Accumulated other comprehensive income (loss) 144 (50) ------------------- ------------------- Total stockholders' deficit (256,983) (520,093) ------------------- ------------------- Commitments and contingencies (notes 4, 5, 6 and 7) Total liabilities and stockholders' deficit $ 1,248,470 1,704,157 =================== ===================
See accompanying notes to consolidated financial statements. 5 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) Three Months and Nine Months Ended September 30, 1997 and 1998
Three months ended Nine months ended September 30, September 30, ------------------------------- ------------------------------- 1997 1998 1997 1998 ------------- -------------- ------------- -------------- (in thousands, except per share data) Revenue: Telecom services $ 36,543 82,567 101,637 205,269 Network services 16,432 14,550 50,059 40,740 Satellite services 7,640 9,350 22,306 29,982 ------------- -------------- ------------- -------------- Total revenue 60,615 106,467 174,002 275,991 Operating costs and expenses: Operating costs 52,602 64,680 156,893 187,964 Selling, general and administrative expenses 39,187 45,435 110,183 132,917 Depreciation and amortization 13,517 24,883 37,198 61,321 Net loss (gain) on disposal of long-lived assets (note 4) 1,354 (814) 1,035 (316) Restructuring costs - - - 553 ------------- -------------- ------------- -------------- Total operating costs and expenses 106,660 134,184 305,309 382,439 Operating loss (46,045) (27,717) (131,307) (106,448) Other income (expense): Interest expense (28,834) (45,982) (82,290) (121,974) Interest income 5,382 8,196 17,284 22,188 Other expense, net 237 (592) (36) (4,073) ------------- -------------- ------------- -------------- (23,215) (38,378) (65,042) (103,859) ------------- -------------- ------------- -------------- Loss from continuing operations before preferred dividends (69,260) (66,095) (196,349) (210,307) Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses (10,112) (13,987) (24,981) (40,774) ------------- -------------- ------------- -------------- Loss from continuing operations (79,372) (80,082) (221,330) (251,081) ------------- -------------- ------------- -------------- Discontinued operations (note 5): Loss from discontinued operations (7,502) (15,381) (28,285) (46,973) Loss on disposal of discontinued operations, including provision of $0.2 million for operating losses during phase out period - (1,201) - (1,201) ------------- -------------- ------------- -------------- (7,502) (16,582) (28,285) (48,174) ------------- -------------- ------------- -------------- Net loss $ (86,874) (96,664) (249,615) (299,255) ============= ============== ============= ============== Other comprehensive loss: Foreign currency translation adjustment (266) (118) (500) (194) Unrealized loss on short-term investments available for sale (235) - (540) - ------------- -------------- ------------- -------------- Other comprehensive loss (501) (118) (1,040) (194) ------------- -------------- ------------- -------------- Comprehensive loss $ (87,375) (96,782) (250,655) (299,449) ============= ============== ============= ============== (Continued)
6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited), Continued
Three months ended Nine months ended September 30, September 30, ------------------------------- ------------------------------- 1997 1998 1997 1998 ------------- -------------- ------------- -------------- (in thousands, except per share data) Net loss per share - basic and diluted (note 3): Net loss per share from continuing operations - basic and diluted $ (1.87) (1.76) (5.25) (5.59) Net loss per share from discontinued operations - basic and diluted (0.18) (0.36) (0.67) (1.07) ------------- -------------- ------------- -------------- Net loss per share - basic and diluted $ (2.05) (2.12) (5.92) (6.66) ============= ============== ============= ============== Weighted average number of shares outstanding - basic and diluted 42,359 45,588 42,159 44,922 ============= ============== ============= ==============
See accompanying notes to consolidated financial statements. 7 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Deficit (unaudited) Nine Months Ended September 30, 1998
Accumulated Common stock Additional other Total ---------------------- paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit income (loss) deficit ----------- ----------- ------------- --------------- ------------------ -------------- (in thousands) Balances at January 1, 1998 43,974 $ 749 533,541 (791,417) 144 (256,983) Shares issued for cash by subsidiary, net of selling costs 127 1 3,384 - - 3,385 Shares issued in connection with business combinations (note 6) 502 5 15,527 - - 15,532 Shares issued for cash in connection with the exercise of options and warrants 1,018 10 12,683 - - 12,693 Shares issued for cash in connection with the employee stock purchase plan 107 1 2,135 - - 2,136 Shares issued as contribution to 401(k) plan 85 1 2,592 - - 2,593 Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (171) 171 - - - Cumulative foreign currency translation adjustment - - - - (194) (194) Net loss - - - (299,255) - (299,255) =========== =========== ============= =============== ================== ============== Balances at September 30, 1998 45,813 $ 596 570,033 (1,090,672) (50) (520,093) =========== =========== ============= =============== ================== ==============
See accompanying notes to consolidated financial statements. 8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 1997 and 1998
Nine months ended September 30, ---------------------------------- 1997 1998 --------------- --------------- (in thousands) Cash flows from operating activities: Net loss $ (249,615) (299,255) Non-cash operating activities of discontinued operations 25,915 33,551 Adjustments to reconcile net loss to net cash used by operating activities of continuing operations: Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses 24,981 40,774 Depreciation and amortization 37,198 61,321 Interest expense deferred and included in long-term debt, net of amounts capitalized on assets under construction 75,000 109,850 Amortization of deferred advertising costs included in selling, general and administrative expenses - 469 Amortization of deferred financing costs included in interest expense 1,988 3,307 Write-off of non-operating assets - 250 Contribution to 401(k) plan through issuance of common shares 2,171 2,593 Net loss (gain) on disposal of long-lived assets 1,035 (316) Change in operating assets and liabilities, excluding the effects of business combinations, dispositions and non-cash transactions: Receivables (3,386) (44,168) Inventory (2,367) 1,408 Prepaid expenses and deposits (7,140) 306 Deferred advertising - (1,795) Accounts payable and accrued liabilities 23,038 23,309 Deferred revenue 2,330 4,773 --------------- --------------- Net cash used by operating activities of continuing operations (68,852) (63,623) --------------- --------------- Cash flows from investing activities: Increase in long-term notes receivable from affiliates and others (6,329) (4,877) Proceeds from sale of subsidiary, net of cash included in sale - 824 Payments for business acquisitions, net of cash acquired - (14,307) Acquisition of property, equipment and other assets, net (187,136) (260,022) Payments for construction of new headquarters (16,675) (4,944) Proceeds from disposition of property, equipment and other assets 3,009 172 Proceeds from sale of new headquarters, net of selling and other costs - 30,283 (Purchase) sale of short-term investments available for sale (88,233) 71,281 (Increase) decrease in restricted cash (8,833) 5,760 Purchase of minority interest in subsidiaries - (9,355) --------------- --------------- Net cash used by investing activities of continuing operations (304,197) (185,185) --------------- --------------- Cash flows from financing activities: Proceeds from issuance of common stock: Sale by subsidiary - 3,385 Exercise of options and warrants 2,829 12,693 Employee stock purchase plan 2,145 2,136 Proceeds from issuance of subsidiary preferred stock, net of issuance costs 207,550 - Proceeds from issuance of long-term debt 101,486 550,574 Deferred long-term debt issuance costs (3,554) (17,496) Principal payments on capital lease obligations (23,318) (7,673) Principal payments on long-term debt (1,179) (6,850) Payments of preferred dividends - (6,695) --------------- --------------- Net cash provided by financing activities of continuing operations 285,959 530,074 --------------- --------------- Net (decrease) increase in cash and cash equivalents of continuing operations (87,090) 281,266 Net cash used by discontinued operations (12,162) (34,050) Cash and cash equivalents, beginning of period 433,342 182,202 --------------- --------------- Cash and cash equivalents, end of period 334,090 429,418 =============== =============== (Continued)
9 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited), Continued
Nine months ended September 30, --------------------------------------- 1997 1998 ------------------ ------------------ (in thousands) Supplemental disclosure of cash flows information of continuing operations: Cash paid for interest $ 5,302 8,817 =================== ================= Supplemental schedule of non-cash investing and financing activities of continuing operations: Common stock issued in connection with business combinations $ - 15,532 =================== =================
See accompanying notes to consolidated financial statements. 10 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997 and September 30, 1998 (unaudited) (1) Organization and Basis of Presentation (a) Organization and Nature of Business ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated on April 11, 1996, for the purpose of becoming the new publicly-traded U.S. parent company of ICG Holdings (Canada), Inc., a Canadian federal corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation ("Holdings"), and its subsidiaries. On January 21, 1998, the Company completed a merger with NETCOM On-Line Communication Services, Inc. ("NETCOM"). At the effective time of the merger, each outstanding share of NETCOM common stock, $.01 par value, became automatically convertible into shares of ICG common stock, $.01 par value ("ICG Common Stock"), at an exchange ratio of 0.8628 shares of ICG Common Stock per NETCOM common share. The business combination was accounted for as a pooling of interests. Effective November 3, 1998, the Company's board of directors adopted a formal plan to dispose of the operations of NETCOM (see note 5) and, accordingly, the Company's consolidated financial statements reflect the operations and net assets of NETCOM as discontinued for all periods presented. On January 23, 1998, the Company formed ICG Services, Inc., a Delaware corporation and wholly owned subsidiary of ICG ("ICG Services"). ICG Services is the parent company of NETCOM and ICG Equipment, Inc., a Colorado corporation formed on January 23, 1998 to purchase or lease telecommunications equipment, software and capacity and related services, and in turn, lease such assets to Holdings' subsidiaries. ICG and its subsidiaries, including ICG Services and its subsidiaries, are collectively referred to as the "Company." The Company's principal business activity is telecommunications services, including Telecom Services, Network Services and Satellite Services. Telecom Services consists primarily of the Company's competitive local exchange carrier operations which provide services to business end users and long distance carriers and resellers. Network Services supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Satellite Services consists of satellite voice, data and video services provided to major cruise ship lines, the U.S. Navy, the offshore oil and gas industry and integrated communications providers. (b) Reference to Annual and Transition Reports The accompanying consolidated financial statements give retroactive effect to the merger of ICG and NETCOM on January 21, 1998, which was accounted for as a pooling of interests, and include the accounts of NETCOM and its subsidiaries as of the end of and for the periods presented. Additionally, the operating results of NETCOM have been presented as discontinued for all periods presented. The Company's financial statements should be read in conjunction with ICG's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, NETCOM's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1996 and the consolidated financial statements of ICG and NETCOM combined for fiscal 1997 as filed on Form 8-K of ICG Communications, Inc., ICG Funding, LLC, ICG Holdings (Canada), Inc. and ICG Holdings, Inc., dated June 12, 1998, as certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission. The interim financial statements reflect all adjustments 11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Organization and Basis of Presentation (continued) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows as of and for the interim periods presented. Such adjustments are of a normal recurring nature. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1998. (c) Reclassifications Certain 1997 amounts have been reclassified to conform with the 1998 presentation. (2) Long-term Debt and Redeemable Preferred Securities of Subsidiaries Long-term debt is summarized as follows:
December 31, September 30, 1997 1998 --------------------- ----------------- (in thousands) 9 7/8% Senior discount notes of ICG Services, net of discount $ - 260,531 10% Senior discount notes of ICG Services, net of discount - 319,802 11 5/8% Senior discount notes of Holdings, net of discount 109,436 119,084 12 1/2% Senior discount notes of Holdings, net of discount 367,494 402,413 13 1/2% Senior discount notes of Holdings, net of discount 407,409 450,152 Note payable with interest at the 90-day commercial paper rate plus 4 3/4%, paid in full on August 19, 1998 4,932 - Note payable with interest at 11%, paid in full on June 12, 1998 1,860 - Mortgage payable with interest at 8 1/2%, due monthly through 2009, secured by building 1,131 1,096 Other 90 66 --------------------- ----------------- 892,352 1,553,144 Less current portion (1,784) (47) --------------------- ----------------- $ 890,568 1,553,097 ===================== =================
Redeemable preferred stock of subsidiary is summarized as follows:
December 31, September 30, 1997 1998 ---------------------- ------------------- (in thousands) 14% Exchangeable preferred stock of Holdings, mandatorily redeemable 2008 $ 108,022 120,440 14 1/4% Exchangeable preferred stock of Holdings, mandatorily redeemable 2007 184,420 205,808 ---------------------- ------------------- $ 292,442 326,248 ====================== ===================
12 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Stockholders' Deficit (a) Common Stock Common stock outstanding at September 30, 1998 represents the issued and outstanding common stock of ICG and Class A common shares of Holdings-Canada (not owned by ICG) which are exchangeable at any time, on a one-for-one basis, for ICG Common Stock. The following table sets forth the number of shares outstanding for ICG and Holdings-Canada on a separate company basis as of September 30, 1998:
Shares Shares owned owned by third by ICG parties ----------------- ----------------- ICG Common Stock, $.01 par value, 100,000,000 shares authorized; 45,810,896 shares issued and outstanding at September 30, 1998 - 45,810,896 Holdings-Canada Class A common shares, no par value, 100,000,000 shares authorized; 31,831,558 shares issued and outstanding at September 30, 1998: Class A common shares, exchangeable on a one-for-one basis for ICG Common Stock at any time - 2,258 Class A common shares owned by ICG 31,829,300 - ----------------- Total shares outstanding 45,813,154 =================
For various business purposes, Holdings-Canada has adopted a plan of reorganization, dated November 4, 1998, whereby the minority shareholders of Holdings-Canada will receive ICG Common Stock in exchange for their Class A common shares. Also under the plan, any warrants outstanding to purchase Class A common shares of Holdings-Canada will be exchanged for warrants to purchase ICG Common Stock on equivalent terms and conditions. The reorganization will be concluded and effective January 1, 1999 and will have no effect on the Company's reported net loss per share. (b) Net Loss Per Share Basic and diluted net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding. Weighted average number of shares outstanding represents combined ICG Common Stock and Holdings-Canada Class A common shares outstanding. Potential common stock, 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. The Company has presented net loss per share from discontinued operations in the consolidated statement of operations for all periods presented. (4) Sale of Satellite Services Operating Subsidiaries On July 17, 1998, the Company entered into separate definitive agreements to sell the capital stock of MarineSat Communications, Inc. ("MCN") and Nova-Net Communications, Inc. ("Nova-Net"), two subsidiaries within the Company's Satellite Services operations. The sale of MCN was completed on August 12, 1998 and, accordingly, the Company's consolidated financial statements include the results of operations of MCN through that date. The Company recorded a gain on the sale of MCN of approximately $0.8 million in its statement of operations during the three months ended September 30, 1998. Regulatory approvals have been received and the sale of Nova-Net is expected to close on November 18, 1998. The combined revenue, net loss or net loss per share of MCN and Nova-Net do not represent a significant portion of the Company's historical consolidated revenue, net loss or net loss per share. 13 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) Discontinued Operations Loss from discontinued operations consists of the following:
Three months ended Nine months ended September 30, September 30, ---------------------------- ------------------------------ 1997 1998 1997 1998 ------------- ----------- ------------ ------------- (in thousands) Zycom (a) $ (675) (1,449) (3,068) (4,647) NETCOM (b) (6,827) (13,932) (25,217) (42,326) ------------- ----------- ------------ ------------- Loss from discontinued operations $ (7,502) (15,381) (28,285) (46,973) ============= =========== ============ =============
(a) Zycom The Company owns a 70% interest in Zycom Corporation ("Zycom") which, through its wholly owned subsidiary, Zycom Network Services, Inc. ("ZNSI"), operated an 800/888/900 number services bureau and a switch platform in the United States and supplied information providers and commercial accounts with audiotext and customer support services. In June 1998, Zycom was notified by its largest customer of the customer's intent to transfer its call traffic to another service bureau. In order to minimize the obligation that this loss in call traffic would generate under Zycom's volume discount agreements with AT&T Corp. ("AT&T"), its call transport provider, ZNSI entered into an agreement on July 1, 1998 with an unaffiliated entity, ICN Limited ("ICN"), whereby ZNSI assigned the traffic of its largest audiotext customer and its other 900-number customers to ICN, effective October 1, 1998. As part of this agreement, ICN assumed all minimum call traffic volume obligations to AT&T. The call traffic assigned to ICN represents approximately 86% of Zycom's revenue for the year ended December 31, 1997. The loss of this significant portion of Zycom's business, despite management's best efforts to secure other sources of revenue, raised substantial doubt as to Zycom's ability to operate in a manner which would benefit Zycom's or the Company's shareholders. Accordingly, on August 25, 1998, Zycom's board of directors approved a plan to wind down and ultimately discontinue Zycom's operations. On October 22, 1998, Zycom completed the transfer of all customer traffic to other providers and Zycom anticipates it will need approximately 30 to 60 days to dispose of its remaining assets and discharge its remaining liabilities. The Company's consolidated financial statements reflect the operations of Zycom as discontinued for all periods presented. Zycom incurred net losses from operations of approximately $1.0 million for the period from August 25, 1998 to the end of the period presented. During the three months ended September 30, 1998, the Company accrued approximately $1.2 million for estimated losses on disposal of Zycom's operations, including approximately $0.2 million for operating losses of Zycom during the phase out period. Included in net assets of discontinued operations in the Company's consolidated balance sheet at September 30, 1998 is approximately $0.5 million of Zycom's net property and equipment. Other remaining assets and liabilities of Zycom included in the Company's consolidated balance sheet at September 30, 1998 are cash of approximately $0.2 million, other current assets of approximately $1.5 million and accounts payable and accrued liabilities of approximately $3.4 million. 14 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) Discontinued Operations (continued) (b) NETCOM Effective November 3, 1998, the Company's board of directors adopted a formal plan to dispose of the operations of NETCOM and, accordingly, the Company's consolidated financial statements reflect the operations of NETCOM as discontinued for all periods presented. The Company's plan of disposal consists of the sale to one or more third parties in one or more transactions of all of the operating assets of NETCOM which will not be used in future Telecom Services operations. At September 30, 1998, net assets of NETCOM included in net assets of discontinued operations in the Company's consolidated balance sheet are approximately $3.0 million of inventory and prepaid expenses and approximately $80.3 million of net property and equipment and other non-current assets, offset by approximately $5.5 million of capital lease obligations. The Company has commenced an active plan to locate one or more buyers and intends to complete the sales within one year. The Company expects to record a gain on the sale of NETCOM in the period of disposition, although the amount of such gain is not presently determinable. Other remaining assets and liabilities of NETCOM included in the Company's consolidated balance sheet at September 30, 1998 are net accounts receivable of approximately $2.5 million and accounts payable and accrued liabilities of approximately $7.5 million. (6) Business Combinations On July 27, 1998, the Company acquired DataChoice Network Services L.L.C. ("DataChoice") for total consideration of $5.9 million, consisting of 145,997 shares of ICG Common Stock and approximately $1.1 million in cash. The Company accounted for the business combination as a purchase and, accordingly, the net assets and the results of operations of DataChoice have been included in the Company's consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of the net identifiable assets acquired of $5.7 million has been recorded as goodwill and is being amortized on a straight-line basis over five years. Revenue, net loss and loss per share on a pro forma basis, assuming the acquisition of DataChoice was completed at the beginning of the periods presented, are not significantly different from the Company's historical results. DataChoice, a Colorado limited liability company, provides point-to-point data transmission resale services through its long-term agreements with multiple regional carriers and nationwide providers. Additionally, the Company completed a series of transactions on July 30, 1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced Messaging Services, Inc. (collectively, "NikoNET"). The Company paid approximately $13.8 million in cash, which included dividends payable by NikoNET to its former owners and amounts to satisfy NikoNET's former line of credit, assumed approximately $0.7 million in liabilities and exchanged 356,318 shares of ICG Common Stock with a fair market value of approximately $10.7 million, for all the capital stock of NikoNET. The Company accounted for the business combination as a purchase and, accordingly, the net assets and the results of operations of NikoNET have been included in the Company's consolidated financial statements since the acquisition date. The excess of the purchase price over the fair value of the net identifiable assets acquired of $22.6 million has been recorded as goodwill and is being amortized on a straight-line basis over five years. Revenue, net loss and loss per share on a pro forma basis, assuming the acquisition of NikoNET was completed at the beginning of the periods presented, are not significantly different from the Company's historical results. Located in Atlanta, Georgia, NikoNET provides broadcast facsimile services and value-added messaging services to financial institutions, corporate investor and public relations departments and other customers. The Company believes that the acquisition of NikoNET will enable the Company to expand the service offerings currently available to its Telecom Services customers. 15 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (6) Business Combinations (continued) On August 27, 1998, the Company purchased, for $9.0 million in cash, the remaining 20% equity interest in ICG Ohio LINX, Inc. ("ICG Ohio LINX") which it did not already own. ICG Ohio LINX is a facilities-based competitive local exchange carrier which operates a fiber optic telecommunications network in Cleveland and Dayton, Ohio. The Company's additional investment in ICG Ohio LINX is included in goodwill in the accompanying consolidated balance sheet at September 30, 1998. In January 1997, the Company announced a strategic alliance with Central and SouthWest Corporation ("CSW") which is developing and marketing telecommunications services in certain cities in Texas. The venture entity, a limited partnership named CSW/ICG ChoiceCom, L.P ("ChoiceCom"), is based in Austin, Texas. Currently, CSW holds 100% of the interest in ChoiceCom, and CSW and the Company each have two representatives on the Management Committee of the general partner of ChoiceCom. On October 7, 1998, the Company entered into a definitive agreement with CSW to purchase 100% of the partnership interests in ChoiceCom. Cash consideration for the purchase is estimated to be approximately $50.0 to $55.0 million. The transaction is subject to regulatory approvals and is expected to close in late 1998 or early 1999. The acquisition of ChoiceCom will be accounted for as a purchase. (7) Commitments and Contingencies (a) Network Construction In March 1996, the Company and Southern California Edison Company ("SCE") entered into a 25-year agreement under which the Company will license 1,258 miles of fiber optic cable in Southern California, and can install up to 500 additional miles of fiber optic cable. This network, which will be maintained and operated primarily by the Company, stretches from Los Angeles to southern Orange County. Under the terms of this agreement, SCE is entitled to receive an annual fee for ten years, certain fixed quarterly payments, a quarterly payment equal to a percentage of certain network revenue, and certain other installation and fiber connection fees. The aggregate fixed payments remaining under the agreement totaled approximately $135.9 million at September 30, 1998. The agreement has been accounted for as a capital lease in the accompanying consolidated balance sheets. In May 1997, the Company entered into a long-term agreement with the Southern Company ("Southern") that will permit the Company to construct a 100-mile fiber optic network in the Atlanta metropolitan area. The Company paid $5.5 million upon execution of the agreement and was responsible for reimbursement to Southern for costs of network design, construction, installation, maintenance and repair. Additionally, the Company is also required to pay Southern a quarterly fee based on specified percentages of the Company's revenue derived from services provided over this network. Network construction on the initial 43-mile build was completed in September of 1998 at a total cost of $9.0 million, including the cost for the initial build. In June 1997, the Company entered into an indefeasible right of use ("IRU") agreement with Qwest Communications Corporation ("Qwest") for approximately 1,800 miles of fiber optic network and additional broadband capacity in California, Colorado, Ohio and the Southeast. Network construction is ongoing and is expected to be completed by December 1998. The Company is responsible for payment on the construction as segments of the network are completed and has incurred approximately $17.7 million as of September 30, 1998, with remaining costs anticipated to be approximately $17.3 million. Additionally, the Company has committed to purchase $6.0 million in network capacity from Qwest prior to the end of 1999. 16 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) Commitments and Contingencies (continued) (b) Other Commitments The Company has entered into various equipment purchase agreements with certain of its vendors. Under these agreements, if the Company does not meet a minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. In addition, the agreements may be terminated by either the Company or the vendor upon prior written notice. Additionally, the Company has entered into certain commitments to purchase capital assets with an aggregate purchase price of approximately $82.0 million at September 30, 1998. (c) Transport and Termination Charges The Company has recorded revenue of approximately $4.9 million, $17.8 million and $32.9 million for fiscal 1997 and the three months and nine months ended September 30, 1998, respectively, for reciprocal compensation relating to the transport and termination of local traffic to Internet service providers ("ISPs") from customers of incumbent local exchange carriers ("ILECs") pursuant to various interconnection agreements. The ILECs have not paid most of the bills they have received from the Company and have disputed substantially all of these charges based on the belief that such calls are not local traffic as defined by the various agreements and under state and federal laws and public policies. The resolution of these disputes will be based on rulings by state public utility commissions and/or by the Federal Communications Commission ("FCC"). To date, there have been favorable final rulings from 23 states, favorable preliminary decisions from one additional state and no unfavorable rulings by any state public utility commission that would indicate that calls placed by end users to ISPs would not qualify as local traffic subject to the payment of reciprocal compensation. In addition to the one preliminary ruling, cases are pending before three other states. Additionally, three federal district court decisions have upheld favorable state public utility commission rulings. On October 30, 1998, the FCC issued a decision that found that certain high-speed dedicated access connections, or digital subscriber line services, between end users and ISPs are interstate communications. This decision did not consider or address the issue of whether competitive local exchange carriers are entitled to receive reciprocal compensation for the transport and termination to ISPs of circuit-switched dial-up traffic originated by the ILECs. Therefore, the recent FCC decision does not change the obligations of the ILECs under existing interconnection agreements or affect state regulatory decisions requiring the ILECs to pay reciprocal compensation for ISP traffic using dial-up services. The FCC has not yet issued a decision specifically addressing reciprocal compensation issues, although the FCC has stated publicly that it will issue such a decision in the near future. The Company has also recorded revenue of approximately $4.1 million and $9.6 million for the three months and nine months ended September 30, 1998, respectively, related to other transport and termination charges to the ILECs, pursuant to the Company's interconnection agreements with these carriers. Included in the Company's trade receivables at December 31, 1997 and September 30, 1998 is $4.4 million and $44.1 million, respectively, for all receivables related to transport and termination charges. While the Company believes that all revenue recorded through September 30, 1998 is collectible and that future revenue from transport and termination charges billed under the Company's current interconnection agreements will be realized, there can be no assurance that future regulatory rulings will be favorable to the Company, or that different pricing plans for transport and termination charges between carriers will not be considered when the Company's interconnection agreements are renegotiated, beginning in 1999. 17 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) Commitments and Contingencies (continued) (d) Litigation On April 4, 1997, certain shareholders of Zycom filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of their subsidiaries. This complaint alleges that the Company and certain of its subsidiaries breached certain duties owed to the plaintiffs. The plaintiffs were denied class certification, have appealed this decision and have amended their petition to include approximately 150 named plaintiffs. The Company is vigorously defending the claims. While it is not possible to predict the outcome of this litigation, management believes these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. (8) Summarized Financial Information of ICG Holdings, Inc. The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995, respectively, are guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be material to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. However, summarized combined financial information for Holdings and its subsidiaries is as follows: Condensed Balance Sheet Information
December 31, 1997 September 30, 1998 ------------------------ --------------------- (in thousands) Current assets $ 215,817 254,385 Property and equipment, net 632,167 682,915 Other non-current assets, net 122,768 165,505 Current liabilities 98,351 87,076 Long-term debt, less current portion 890,503 973,538 Capital lease obligations, less current portion 66,939 60,429 Due to parent 30,970 150,571 Due to ICG Services - 113,800 Preferred stock 292,442 326,248 Stockholder's deficit (408,453) (608,857)
18 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Summarized Financial Information of ICG Holdings, Inc. Summarized Consolidated and Combined Statement of Operations Information
Three months ended September 30, Nine months ended September 30, ------------------------------------ ---------------------------------- 1997 1998 1997 1998 ----------------- --------------- -------------- ---------------- (in thousands) Total revenue $ 67,736 112,676 195,552 294,852 Total operating costs and expenses 114,270 142,265 1,035 403,424 Operating loss (46,532) (29,589) (133,808) (108,572) Net loss (79,884) (40,166) (224,003) (200,404)
(9) Condensed Financial Information of ICG Holdings (Canada), Inc. Condensed financial information for Holdings-Canada only is as follows: Condensed Balance Sheet Information
December 31, 1997 September 30, 1998 ------------------------ --------------------- (in thousands) Current assets $ 162 162 Advances to subsidiaries 30,790 150,571 Non-current assets, net 3,800 2,477 Current liabilities 107 107 Long-term debt, less current portion 65 65 Due to parent 22,162 140,749 Share of losses of subsidiary 408,453 608,857 Shareholders' deficit (396,035) (596,568)
Condensed Statement of Operations Information
Three months ended September 30, Nine months ended September 30, ------------------------------------ ---------------------------------------- 1997 1998 1997 1998 --------------- ------------------- ----------------- ------------------- (in thousands) Total revenue $ - - - - Total operating costs and expenses 47 48 147 129 Operating loss (47) (48) (147) (129) Losses of subsidiaries (79,884) (40,166) (224,003) (200,404) Net loss attributable to common shareholders (79,931) (40,214) (224,150) (200,533)
19 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Condensed Financial Information of ICG Communications, Inc. (Parent company) The primary assets of ICG are its investments in ICG Services, ICG Funding, LLC ("ICG Funding"), Holdings-Canada and NikoNET, including advances to those subsidiaries. Certain corporate expenses of the parent company are included in ICG's statement of operations and were approximately zero and $0.1 million for the three months and nine months ended September 30, 1997, respectively, and $1.0 million and $2.0 million for the three months and nine months ended September 30, 1998, respectively. ICG has no operations other than those of ICG Services, ICG Funding and Holdings-Canada and their subsidiaries. 20 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements which are affected by important factors including, but not limited to, dependence on increased traffic on the Company's facilities, the successful implementation of the Company's strategy of offering an integrated telecommunications package of local, long distance, data and value added services, continued development of the Company's network infrastructure and actions of competitors and regulatory authorities that could cause actual results to differ materially from the forward-looking statements. The results of operations for the three months and nine months ended September 30, 1998 represent the consolidated operating results of the Company. See the unaudited condensed consolidated financial statements of the Company for the nine months ended September 30, 1998 included elsewhere herein. The Company has reclassified its historical consolidated financial statements to present the operations of Zycom and NETCOM as discontinued. The terms "fiscal" and "fiscal year" refer to the Company's fiscal year ending December 31. All dollar amounts are in U.S. dollars. Company Overview ICG Communications Inc., ("ICG" or the "Company") is one of the nation's leading competitive integrated communications providers ("ICPs") based on the industry's 1997 revenue. ICPs seek to provide an alternative to the incumbent local exchange carriers ("ILECs"), long distance carriers and other communication service providers for a full range of communications services in the increasingly deregulated telecommunications industry. Through its competitive local exchange carrier ("CLEC") operations, the Company operates networks in four regional clusters covering major metropolitan statistical areas in California, Colorado, Ohio and the Southeast. The Company also provides a wide range of network systems integration services, maritime and international satellite transmission services. Network Services consist of information technology services and selected networking products, focusing on network design, installation, maintenance and support. Satellite Services consist of satellite voice, data and video services provided to major cruise lines, the U.S. Navy, the offshore oil and gas industry and integrated communications providers. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from $110.2 million for fiscal 1995 to $347.0 million for the 12-month period ended September 30, 1998. The Company's rapid growth is the result of the initial installation, acquisition and subsequent expansion of its fiber optic networks and the expansion of its communications service offerings. The Federal Telecommunications Act of 1996 (the "Telecommunications Act") and pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, the Company is now permitted to offer all interstate and intrastate telephone services, including competitive local dial tone. The Company is marketing and selling local dial tone services in major metropolitan areas in the following regions: California, which began service in late January 1997, followed by Ohio in February 1997, Colorado in March 1997 and the Southeast in May 1997. During fiscal 1997 and the nine months ended September 30, 1998, the Company sold 178,470 and 144,274 local access lines, respectively, of which 290,983 were in service at September 30, 1998. In addition, the Company's operating networks have grown from 627 fiber route miles at the end of fiscal 1995 to 3,995 fiber route miles as of September 30, 1998. The Company has 21 operating high capacity digital voice switches and 15 data communications switches, and plans to install additional switches as demand warrants. As a complement to its local exchange services, the Company has begun marketing bundled service offerings which include long distance, enhanced telecommunications services and data services and plans to intensify the offerings of such services in the near term. The Company will continue to expand its network through construction, leased facilities, strategic alliances and mergers and acquisitions. For example, on October 7, 1998, the Company entered into a definitive agreement with Central and SouthWest Corporation ("CSW") to purchase 100% of the partnership interests in CSW/ICG ChoiceCom, L.P. ("ChoiceCom"). The Company formed a strategic alliance with CSW to develop and market telecommunications services in certain cities in Texas. The venture entity, ChoiceCom, is based in Austin, Texas and offers a variety of telecommunications services, including local exchange services, in San Antontio, Dallas, Austin, Houston and Corpus Christi, Texas. For the nine months ended September 30, 1998, ChoiceCom reported $1.9 million in revenue and 5,341 access lines in service sold by ChoiceCom and 4,476 access lines in service sold by ICG at the end of the period. 21 Additionally, ChoiceCom has 3 operating high capacity digital voice switches as of September 30, 1998. The Company expects to complete the transaction in late 1998 or early 1999. To better focus its efforts on its core Telecom Services operations, the Company progressed toward the disposal of certain assets which management believes do not complement its overall business strategy. On July 17, 1998, the Company entered into a definitive agreement to sell the capital stock of Nova-Net Communications, Inc. ("Nova-Net") and on August 12, 1998, the Company completed the sale of MarineSat Communications, Inc. ("MCN"), two of the operating subsidiaries within the Company's Satellite Services operations. The results of operations of MCN have been included in the Company's consolidated results of operations through the closing date of the sale. Due primarily to the loss of a major customer, which generated a significant obligation under a volume discount agreement with its call transport provider, the board of directors of Zycom Corporation ("Zycom"), a 70%-owned subsidiary of the Company which operated an 800/888/900 number services bureau and switch platform, approved a plan on August 25, 1998 to wind down and ultimately discontinue Zycom's operations. Effective October 22, 1998, Zycom completed the transfer of all customer traffic to other providers and anticipates it will need approximately 30 to 60 days to dispose of its remaining assets and discharge its remaining liabilities. Additionally, effective November 3, 1998, the Company's board of directors adopted a formal plan to dispose of the operations of NETCOM On-Line Communication Services, Inc. ("NETCOM"), a provider of Internet connectivity and Web site hosting services and other value-added services located in San Jose, California. NETCOM is a wholly owned subsidiary of the Company acquired on January 21, 1998 in a transaction accounted for as a pooling of interests. The Company's plan of disposal consists of the sale to one of more third parties in one or more transactions of all of the operating assets of NETCOM which will not be used in future Telecom Services operations. The Company has commenced an active plan to locate one or more buyers and intends to complete the sales within one year. The Company expects to record a gain on the sale of NETCOM in the period of disposition, although the amount of such gain is not presently determinable. For fiscal 1997 and the nine months ended September 30, 1998, Zycom and NETCOM combined reported revenue of $189.0 million and $138.9 million, respectively, and EBITDA losses (before nonrecurring charges) of $(12.1) million and $(12.4) million, respectively. The Company has reclassified its historical consolidated financial statements to present the operations of Zycom and NETCOM as discontinued. In conjunction with the increase in its service offerings, the Company has and will continue to need to spend significant amounts on sales, marketing, customer service, engineering and support personnel prior to the generation of corresponding revenue. EBITDA, operating and net losses have generally increased immediately preceding and during periods of relatively rapid network expansion and development of new services. Since the quarter ended June 30, 1996, EBITDA losses (before nonrecurring charges) have improved for each consecutive quarter. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other selling, general and administrative expenses supporting its operations, any or all of which may not occur, the Company anticipates that EBITDA losses will continue to improve in the near term. 22 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, operating costs and expenses, operating loss, EBITDA and EBITDA (before nonrecurring charges) as a percentage of the Company's total revenue.
Three months ended September 30, Nine months ended September 30, ------------------------------------------------- ------------------------------------------ 1997 1998 1997 1998 ----------------------- ------------------------ --------------------- -------------------- $ % $ % $ % $ % ----------- ---------- -------------- --------- ------------- ------- ----------- -------- (unaudited) (in thousands) Statement of Operations Data: Revenue: Telecom services 36,543 60 82,567 77 101,637 58 205,269 74 Network services 16,432 27 14,550 14 50,059 29 40,740 15 Satellite services 7,640 13 9,350 9 22,306 13 29,982 11 ----------- ----------- -------------- --------- ------------- ------- ------------- ----- Total revenue 60,615 100 106,467 100 174,002 100 275,991 100 Operating costs: Telecom services 35,215 48,145 104,135 137,113 Network services 13,151 12,177 40,569 35,632 Satellite services 4,236 4,358 12,189 15,219 ----------- ----------- -------------- --------- ------------- ------- ------------- ----- Total operating costs 52,602 87 64,680 61 156,893 90 187,964 68 Selling, general and administrative 39,187 65 45,435 43 110,183 63 132,917 48 Depreciation and amortization 13,517 22 24,883 23 37,198 21 61,321 22 Net loss (gain) on disposal of long- lived assets 1,354 2 (814) (1) 1,035 1 (316) - Restructuring costs - - - - - - 553 - ----------- ----------- -------------- --------- ------------- ------- ------------- ----- Operating loss (46,045) (76) (27,717) (26) (131,307) (75) (106,448) (38) Other Data: Net cash used by operating activities of continuing operations (33,088) (12,447) (68,852) (63,623) Net cash used by investing activities of continuing operations (193,446) (151,395) (304,197) (185,185) Net cash provided (used) by financing activities of continuing operations 112,270 (6,055) 285,959 530,074 EBITDA (1) (32,528) (54) (2,834) (3) (94,109) (54) (45,127) (16) EBITDA (before nonrecurring charges) (31,174) (51) (3,648) (2) (93,074) (53) (44,890) (16) (1) Capital expenditures of continuing operations (2) 64,347 107,108 187,136 260,022 Capital expenditures of discontinued operations (2) 3,259 5,021 14,333 20,228
23
September 30, December 31, March 31, June 30, September 30, 1997 1997 1998 1998 1998 --------------- -------------- ------------- ------------- -------------- (unaudited) Statistical Data (3): Full time employees 2,861 3,032 3,050 3,089 3,251 Telecom services: Access lines in service (4) 50,551 141,035 186,156 237,458 290,983 Buildings connected: (5) On-net 590 596 637 665 684 Hybrid (6) 1,726 1,725 3,294 3,733 4,217 --------------- -------------- ------------- ------------- -------------- Total buildings connected 2,316 2,321 3,931 4,398 4,901 Customer circuits in service (VGEs)(7) 1,006,916 1,111,697 1,171,801 1,250,479 1,331,510 Operational switches: Voice 18 19 20 20 21 Data 15 15 15 15 15 --------------- -------------- ------------- ------------- -------------- Total operational switches 33 34 35 35 36 Switched minutes of use (millions) 788 660 639 516 513 Fiber route miles (8): Operational 3,021 3,043 3,194 3,812 3,995 Under construction - - - - 406 Fiber strand miles (9): Operational 109,510 111,435 118,074 124,642 127,756 Under construction - - - - 13,930 Wireless miles (10) 511 511 511 511 415 Satellite services: VSATs 934 957 921 928 966 C-Band installations (11) 54 57 59 66 69 Internet services (12) : Direct access and Web site hosting services subscribers 10,630 12,275 14,976 18,638 23,308 Average monthly revenue per subscriber $ 24.24 25.01 25.12 25.87 26.52
(1) EBITDA consists of earnings (loss) from continuing operations before interest, income taxes, depreciation and amortization, other expense, net and minority interest in share of losses, or simply, operating loss plus deprecation and amortization. EBITDA (before nonrecurring charges) represents EBITDA before certain nonrecurring charges such as the net loss (gain) on disposal of long-lived assets, provision for impairment of long-lived assets and restructuring costs. EBITDA and EBITDA (before nonrecurring charges) are provided because they are measures commonly used in the telecommunications industry. EBITDA and EBITDA (before nonrecurring charges) are presented to enhance an understanding of the Company's operating results and are not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA (before nonrecurring charges) are not measurements under GAAP and are not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities of continuing operations as determined using GAAP are also presented in Other Data. (2) Capital expenditures include assets acquired under capital leases and excludes payments for construction of the Company's new headquarters, which the Company sold in January 1998 and leased back under a long-term operating lease. Capital expenditures of discontinued operations includes capital expenditures of Zycom and NETCOM. (3) Amounts presented are for three-month periods ended, or as of the end of, the period presented. (4) Access lines in service at September 30, 1998 includes 199,152 lines which are provisioned through the Company's switch and 91,831 lines which are provisioned through resale and other agreements with various local exchange carriers. Resale lines typically generate lower margins and are used primarily to obtain customers. Although the Company plans to migrate lines from resale to higher margin on-switch lines, there is no assurance that it will be successful in executing this strategy. 24 (5) Prior to the first quarter of 1998, the Company reported only special access buildings connected. Beginning March 31, 1998, buildings connected includes both dial tone and special access buildings connected. The combined special access and dial tone buildings connected at December 31, 1997 was 3,153. (6) Hybrid buildings connected represent buildings connected to the Company's network via another carrier's facilities. (7) Customer circuits in service are measured in voice grade equivalents ("VGEs"). (8) Fiber route miles refers to the number of miles of fiber optic cable, including leased fiber. As of September 30, 1998, the Company had 3,995 fiber route miles, of which 53 fiber route miles were leased under operating leases. Fiber route miles under construction represents fiber under construction and fiber which is expected to be operational within six months. (9) Fiber strand miles refers to the number of fiber route miles, including leased fiber, along a telecommunications path multiplied by the number of fiber strands along that path. As of September 30, 1998, the Company had 127,756 fiber strand miles, of which 2,028 fiber strand miles were leased under operating leases. Fiber strand miles under construction represents fiber under construction and fiber which is expected to be operational within six months. (10) Wireless miles represents the total distance of the digital microwave paths between Company transmitters which are used in the Company's networks. (11) C-Band installations service cruise ships, U.S. Navy vessels and offshore oil platform installations. (12) The Company's Internet Services are provided by NETCOM. The Company's consolidated financial statements reflect the operations of NETCOM as discontinued for all periods presented. Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Revenue. Revenue for the three months ended September 30, 1998 increased $45.9 million, or 76%, from the three months ended September 30, 1997. Telecom Services revenue increased 126% to $82.6 million due to an increase in revenue from local services (dial tone), long distance and special access services, offset in part by a decline in average unit pricing and in wholesale switched services revenue. Local services revenue increased from $3.1 million (9% of Telecom Services revenue) for the three months ended September 30, 1997 to $44.1 million (53% of Telecom Services revenue) for the three months ended September 30, 1998. Revenue from long distance services generated $6.7 million for the three months ended September 30, 1998, compared to no reported revenue for the three months ended September 30, 1997. Special access revenue increased from $14.4 million (39% of Telecom Services revenue) for the three months ended September 30, 1997 to $20.2 million (24% of Telecom Services revenue) for the three months ended September 30, 1998. Switched access (terminating long distance) revenue decreased to approximately $11.6 million for the three months ended September 30, 1998, compared to $19.1 million for the three months ended September 30, 1997. The Company anticipates that switched access revenue will continue to decline as it de-emphasizes its wholesale switched services. The Company has recently raised prices on its wholesale switched services product in order to improve margins and free up switch port capacity for its higher margin dial tone product. Revenue from data services did not generate a material portion of total revenue during either period. Network Services revenue decreased 11% to $14.6 million for the three months ended September 30, 1998 as compared to $16.4 million for the three months ended September 30, 1997. The decrease in Network Services revenue is primarily due to the decline in network integration services projects from new and existing customers between the comparative periods, offset slightly by increases in integrated cabling services revenue. In addition, two significant customers delayed construction on major facilities during the three months ended September 30, 1998. 25 Satellite Services revenue increased $1.7 million, or 22%, to $9.4 million for the three months ended September 30, 1998. This increase is primarily due to the operations of Maritime Telecommunications Network, Inc. ("MTN"), which comprised $6.9 million of total Satellite Services revenue for the three months ended September 30, 1998, an increase of $2.3 million compared to the same period in 1997. The increase in revenue of MTN was offset by a decrease in revenue of MCN of $0.8 million since the results of operations of MCN were included in the Company's consolidated financial statements only through the closing date of the sale of MCN on August 12, 1998. Operating costs. Total operating costs for the three months ended September 30, 1998 increased $12.1 million, or 23%, from the three months ended September 30, 1997. Telecom Services operating costs increased from $35.2 million, or 96% of Telecom Services revenue, for the three months ended September 30, 1997, to $48.1 million, or 58% of Telecom Services revenue, for the three months ended September 30, 1998. Telecom Services operating costs consist of payments to ILECs for the use of network facilities to support special and switched access services, network operating costs, right of way fees and other costs. The increase in operating costs in absolute dollars is attributable to the increase in volume of local and special access services and the addition of network operating costs which include engineering and operations personnel dedicated to the development and launch of local exchange services. The decrease in operating costs as a percentage of total revenue is due primarily to a greater volume of higher margin services, principally local exchange services. The Company expects the Telecom Services ratio of operating costs to revenue will further improve as the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than 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 decreased 7% to $12.2 million and increased as a percentage of Network Services revenue from 80% for the three months ended September 30, 1997 to 84% for the three months ended September 30, 1998. The decrease in operating costs in absolute dollars is due to the decrease in general business volume between the comparative periods. Network Services operating costs increased as a percentage of revenue due to the decline in higher margin network integration services projects during the three months ended September 30, 1998. Network Services operating costs include the cost of equipment sold, direct hourly labor and other indirect project costs. Satellite Services operating costs increased to $4.4 million for the three months ended September 30, 1998, from $4.2 million for the three months ended September 30, 1997. Satellite Services operating costs as a percentage of Satellite Services revenue decreased from 55% for the three months ended September 30, 1997 to 47% for the three months ended September 30, 1998 as a result of the increase in revenue of MTN which provides relatively higher margins than other maritime services. Satellite Services operating costs consist primarily of transponder lease costs and the cost of equipment sold. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 1998 increased $6.2 million, or 16%, compared to the three months ended September 30, 1997. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local and long distance telephone services. SG&A expenses as a percentage of total revenue decreased from 65% for the three months ended September 30, 1997 to 43% for the three months ended September 30, 1998, as the Company begins to benefit from the revenue generated by newly developed services requiring substantial administrative, selling and marketing expense prior to initial service offerings. The Company expects SG&A expenses as a percentage of total revenue to continue to decline over the near term. Depreciation and amortization. Depreciation and amortization increased $11.4 million, or 84%, for the three months ended September 30, 1998, compared to the three months ended September 30, 1997, primarily due to increased investment in depreciable assets resulting from the continued expansion of the Company's networks and services and increased amortization arising from goodwill recorded in conjunction with two purchase business combinations completed during the three months ended September 30, 1998. 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. 26 Net loss (gain) on disposal of long-lived assets. Net loss (gain) on disposal of long-lived assets fluctuated from a net loss of $1.4 million for the three months ended September 30, 1997 to a net gain of $0.8 million for the three months ended September 30, 1998. Net loss on disposal of long-lived assets for the three months ended September 30, 1997 represents losses recorded on the disposal of the Company's investment in its Melbourne network. For the three months ended September 30, 1998, net gain on disposal of long-lived assets relates primarily to the sale of MCN. Interest expense. Interest expense increased $17.2 million, from $28.8 million for the three months ended September 30, 1997, to $46.0 million for the three months ended September 30, 1998, which includes $43.7 million of non-cash interest. The increase is primarily attributable to an increase in long-term debt, primarily the 10% Senior Discount Notes due 2008 (the "10% Notes") issued in February 1998 and the 9 7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") issued in April 1998. In addition, the Company's interest expense increased, and will continue to increase, because the principal amount of its indebtedness increases until the Company's senior indebtedness begins to pay interest in cash. Interest income. Interest income increased $2.8 million, from $5.4 million for the three months ended September 30, 1997, to $8.2 million for the three months ended September 30, 1998. The increase is attributable to the increase in cash and invested cash balances from the proceeds from the issuance of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998. Other expense, net. Other expense, net fluctuated from $0.2 million net income for the three months ended September 30, 1997 to $0.5 million net expense for the three months ended September 30, 1998. Other expense, net recorded in the three months ended September 30, 1997 consists of miscellaneous other income. For the three months ended September 30, 1998, other expense, net primarily includes litigation settlement costs of $0.3 million and a write-off of notes receivable of $0.2 million. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses increased $3.9 million, from $10.1 million for the three months ended September 30, 1997 to $14.0 million for the three months ended September 30, 1998. The increase is due primarily to the issuance of the 6 3/4% Preferred Securities in September and October 1997. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses recorded during the three months ended September 30, 1998 consists of the accretion of issuance costs ($0.3 million) and the accrual of the preferred securities dividends ($13.7 million) associated with the 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"), the 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"). Loss from continuing operations. Loss from continuing operations increased $0.7 million, or 1%, primarily due to the increases in operating costs, SG&A expenses, depreciation and amortization, interest expense and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, offset by an increase in revenue, as noted above. Loss from discontinued operations. For the three months ended September 30, 1997 and 1998, loss from discontinued operations was $7.5 million and $16.6 million, respectively, or 9% and 17%, respectively, of the Company's net loss. Loss from discontinued operations consists of the net loss of Zycom and NETCOM for the respective periods and, for the three months ended September 30, 1998, includes $1.2 million for estimated losses on the disposal of Zycom, including $0.2 million for operating losses during the phase out period. The remaining increase in loss from discontinued operations between the comparative periods is due to increases in SG&A expenses and depreciation and amortization incurred by NETCOM. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Revenue. Revenue for the nine months ended September 30, 1998 increased $102.0 million, or 59%, from the nine months ended September 30, 1997. Telecom Services revenue increased 102% to $205.3 million due to an increase in revenue from local services (dial tone), long distance and special access services, offset in part by a decline in average unit pricing and in wholesale switched services revenue. Local services revenue increased from $4.3 million (4% of 27 Telecom Services revenue) for the nine months ended September 30, 1997 to $96.6 million (47% of Telecom Services revenue) for the nine months ended September 30, 1998. Revenue from long distance services generated $17.5 million for the nine months ended September 30, 1998, compared to no reported revenue for the nine months ended September 30, 1997. Special access revenue increased from $39.9 million (39% of Telecom Services revenue) for the nine months ended September 30, 1997 to $53.9 million (26% of Telecom Services revenue) for the nine months ended September 30, 1998. Switched access (terminating long distance) revenue decreased to approximately $37.2 million for the nine months ended September 30, 1998, compared to $57.4 million for the nine months ended September 30, 1997. Revenue from data services did not generate a material portion of total revenue during either period. Network Services revenue decreased 19% to $40.7 million for the nine months ended September 30, 1998, compared to $50.1 million for the nine months ended September 30, 1997. The decrease in Network Services revenue is primarily due to the decline in network integration services projects from new and existing customers during the nine months ended September 30, 1998, offset slightly by increases in integrated cabling services revenue. In addition, two significant customers delayed construction on major facilities during the three months ended September 30, 1998. Satellite Services revenue increased $7.7 million, or 34%, to $30.0 million for the nine months ended September 30, 1998. This increase is primarily due to the operations of MTN, which comprised $20.4 million of total Satellite Services revenue for the nine months ended September 30, 1998, an increase of $6.0 million compared to the same period in 1997. The remaining increase can be attributed to the general growth of MCN and Nova-Net during the nine months ended September 30, 1998. Operating costs. Total operating costs for the nine months ended September 30, 1998 increased $31.1 million, or 20%, from the nine months ended September 30, 1997. Telecom Services operating costs increased from $104.1 million, or 102% of Telecom Services revenue, for the nine months ended September 30, 1997, to $137.1 million, or 67% of Telecom Services revenue, for the nine months ended September 30, 1998. The increase in operating costs in absolute dollars is attributable to the increase in volume of local and special access services and the addition of engineering and operations personnel dedicated to the development of local exchange services. The decrease in operating costs as a percentage of total revenue is due primarily to a greater volume of higher margin services, principally local exchange services. Network Services operating costs decreased 12% to $35.6 million and increased as a percentage of revenue from 81% for the nine months ended September 30, 1997 to 87% for the nine months ended September 30, 1998. The decrease in operating costs in absolute dollars is due to a decrease in general business volume between the comparative periods. Network Services operating costs increased as a percentage of revenue due to cost overruns and the decline in higher margin network integration services projects during the nine months ended September 30, 1998. Satellite Services operating costs increased to $15.2 million for the nine months ended September 30, 1998, from $12.2 million for the nine months ended September 30, 1997. Satellite Services operating costs as a percentage of Satellite Services revenue decreased from 55% for the nine months ended September 30, 1997 to 51% for the nine months ended September 30, 1998, primarily as a result of the increase in revenue of MTN which provides relatively higher margins than other maritime services. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses for the nine months ended September 30, 1998 increased $22.7 million, or 21%, compared to the nine months ended September 30, 1997. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local and long distance telephone services. SG&A expenses as a percentage of total revenue decreased from 63% for the nine months ended September 30, 1997 to 48% for the nine months ended September 30, 1998, as the Company begins to benefit from the revenue generated by newly developed services requiring substantial administrative, selling and marketing expense prior to initial service offerings. Depreciation and amortization. Depreciation and amortization increased $24.1 million, or 65%, for the nine months ended September 30, 1998, compared to the nine months ended September 30, 1997, primarily due to increased investment 28 in depreciable assets resulting from the continued expansion of the Company's networks and services. Additionally, during the nine months ended September 30, 1998, the Company recorded a cumulative adjustment to depreciation and amortization expense of approximately $3.7 million, for the aggregate depreciation and amortization expense on capital and other assets of MTN which was not recorded during the period in which MTN was held for sale. On July 1, 1998, the Company terminated an existing agreement to sell the capital stock of MTN. Net loss (gain) on disposal of long-lived assets. Net loss (gain) on disposal of long-lived assets fluctuated from a net loss of $1.0 million for the nine months ended September 30, 1997 to a net gain of $0.3 million for the nine months ended September 30, 1998. Net loss on disposal of long-lived assets for the nine months ended September 30, 1997 primarily relates to losses recorded on the disposal of the Company's investment in its Melbourne network. For the nine months ended September 30, 1998, net gain on disposal of long-lived assets relates to the gain on the sale of MCN of $0.8 million, offset by the write-off of certain installation costs of disconnected special access customers of $0.5 million. Restructuring costs. For the nine months ended September 30, 1998, restructuring costs include $0.6 million in costs, primarily severance costs, related to the decentralization of the Company's Network Services subsidiary. Interest expense. Interest expense increased $39.7 million, from $82.3 million for the nine months ended September 30, 1997, to $122.0 million for the nine months ended September 30, 1998, which includes $113.2 million of non-cash interest. This increase was primarily attributable to an increase in long-term debt, primarily the 10% Notes issued in February 1998 and the 9 7/8% Notes issued in April 1998. In addition, the Company's interest expense increased, and will continue to increase, because the principal amount of its indebtedness increases until the Company's senior indebtedness begins to pay interest in cash. Interest income. Interest income increased $4.9 million, from $17.3 million for the nine months ended September 30, 1997, to $22.2 million for the nine months ended September 30, 1998. The increase is attributable to the increase in cash and invested cash balances from the proceeds from the issuance of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998. Other expense, net. Other expense, net increased from $0.1 million net expense for the nine months ended September 30, 1997 to $4.0 million net expense in the nine months ended September 30, 1998. Other expense, net recorded in the nine months ended September 30, 1997 consists primarily of litigation settlement costs. For the nine months ended September 30, 1998, other expense, net primarily includes $2.7 million in settlement costs paid to the former minority shareholders of MTN, $1.0 million in litigation settlement costs and a write-off of notes receivable of $0.3 million. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses increased $15.8 million, from $25.0 million for the nine months ended September 30, 1997 to $40.8 million for the nine months ended September 30, 1998. The increase is due primarily to the issuance of the 6 3/4% Preferred Securities in September and October 1997. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses recorded during the nine months ended September 30, 1998 consists of the accretion of issuance costs ($1.0 million) and the accrual of the preferred securities dividends ($39.8 million) associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4% Preferred Stock. Loss from continuing operations. Loss from continuing operations increased $29.8 million, or 13%, due to the increases in operating costs, SG&A expenses, depreciation and amortization, interest expense and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, offset by an increase in revenue, as noted above. Loss from discontinued operations. For the nine months ended September 30, 1997 and 1998, loss from discontinued operations was $28.3 million and $48.2 million, respectively, or 11% and 16%, respectively, of the Company's net loss. Loss from discontinued operations consists of the net loss of Zycom and NETCOM for the respective periods and, for the nine months ended September 30, 1998, includes $1.2 million for estimated losses on the disposal of Zycom, including $0.2 million for operating losses during the phase out period. The remaining increase in loss from discontinued operations between the comparative periods is 29 due to increases in SG&A expenses and depreciation and amortization incurred by NETCOM and approximately $9.4 million for merger costs incurred by NETCOM relating to NETCOM's merger with ICG in January 1998. Liquidity and Capital Resources The Company's growth has been funded through a combination of equity, debt and lease financing. As of September 30, 1998, the Company had current assets of $608.9 million, including $470.4 million of cash, cash equivalents and short-term investments, which exceeded current liabilities of $156.5 million, providing working capital of $452.4 million. The Company invests excess funds in short-term, interest-bearing investment-grade securities until such funds are used to fund the capital investments and operating needs of the Company's business. The Company's short-term investment objectives are safety, liquidity and yield, in that order. Net Cash Used By Operating Activities of Continuing Operations The Company's operating activities of continuing operations used $68.9 million and $63.6 million for the nine months ended September 30, 1997 and 1998, respectively. Net cash used by operating activities of continuing operations is primarily due to net losses from continuing operations, which are partially offset by non-cash expenses, such as depreciation and amortization expense, deferred interest expense, preferred dividends on subsidiary preferred securities and changes in working capital items. The Company does not anticipate that cash provided by operations will be sufficient to fund operating activities of continuing and discontinued operations, the future expansion of existing networks or the construction and acquisition of new networks in the near term. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other SG&A expenses supporting its operations, any or all of which may not occur, the Company anticipates that net cash used by operating activities of continuing operations will continue to improve in the near term. Net Cash Used By Investing Activities of Continuing Operations Investing activities of continuing operations used $304.2 million and $185.2 million for the nine months ended September 30, 1997 and 1998, respectively. Net cash used by investing activities of continuing operations includes cash expended for the acquisition of property, equipment and other assets, of $187.1 million and $260.0 million for the nine months ended September 30, 1997 and 1998, respectively. Additionally, net cash used by investing activities of continuing operations includes payments for construction of the Company's headquarters of $16.7 million and $4.9 million for the nine months ended September 30, 1997 and 1998, respectively. During the nine months ended September 30, 1998, the Company used $9.4 million to purchase the minority interest of two of the Company's operating subsidiaries. Offsetting the expenditures for investing activities of continuing operations for the nine months ended September 30, 1998 are the proceeds from the sale of the Company's new headquarters of $30.3 million and the sale of short-term investments of $71.3 million. The Company will continue to use cash in 1998 and subsequent periods for the construction of new networks, the expansion of existing networks and, potentially, for acquisitions. Net Cash Provided By Financing Activities of Continuing Operations Financing activities of continuing operations provided $286.0 million and $530.1 million in the nine months ended September 30, 1997 and 1998, respectively. Net cash provided by financing activities of continuing operations for these periods includes cash received in connection with the private placement of the 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") and the 14% Preferred Stock in March 1997, the 6 3/4% Preferred Securities in September and October 1997 and the 10% Notes and the 9 7/8% Notes in February and April 1998, respectively. Historically, the funds to finance the Company's business acquisitions, capital expenditures, working capital requirements and operating losses have been obtained through public and private offerings of ICG and ICG Holdings (Canada), Inc. ("Holdings-Canada") common shares, convertible subordinated notes, convertible preferred shares of Holdings-Canada, capital lease financings and various working capital sources, including credit facilities, in addition to the private placement of the securities previously mentioned and other securities offerings. 30 On February 12, 1998, ICG Services, Inc. ("ICG Services") completed a private placement of 10% Notes, with a maturity value of approximately $490.0 million, for net proceeds, after underwriting and other offering costs, of approximately $290.9 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable in cash each February 15 and August 15, commencing August 15, 2003. The 10% Notes will be redeemable at the option of ICG Services, in whole or in part, on or after February 15, 2003. On April 27, 1998, ICG Services completed a private placement of 9 7/8% Notes, with a maturity value of approximately $405.3 million, for net proceeds, after underwriting and other offering costs, of approximately $242.2 million. Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes will be redeemable at the option of ICG Services, in whole or in part, on or after May 1, 2003. As of September 30, 1998, the Company had an aggregate of approximately $64.9 million of capitalized lease obligations and an aggregate accreted value of approximately $1.6 billion was outstanding under the 13 1/2% Notes, the 12 1/2% Notes, the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require payments of interest to be made in cash commencing on March 15, 2001 and mature on September 15, 2005. 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 11 5/8% Notes require payments of interest to be made in cash commencing on September 15, 2002 and mature on March 15, 2007. The 10% Notes require payments of interest in cash commencing August 15, 2003 and mature February 15, 2008. The 9 7/8% Notes require payments of interest in cash commencing November 1, 2003 and mature May 1, 2008. The 6 3/4% Preferred Securities require payments of dividends to be made in cash through November 15, 2000. In addition, the 14% Preferred Stock and 14 1/4% Preferred Stock require payments of dividends to be made in cash commencing June 15, 2002 and August 1, 2001, respectively. As of September 30, 1998, the Company had $1.2 million of other indebtedness outstanding. The Company's cash on hand and amounts expected to be available through asset sales, cash flows from operations and vendor financing arrangements will provide sufficient funds necessary for the Company to expand its business as currently planned and to fund its operating deficits through 1999. With respect to indebtedness outstanding on September 30, 1998, the Company has cash interest payment obligations of approximately $113.3 million in 2001, $158.0 million in 2002 and $212.6 million in 2003. With respect to preferred securities currently outstanding, the Company has cash dividend obligations of approximately $2.2 million remaining in 1998 and $8.9 million in each of 1999 and 2000, for which the Company has restricted cash balances for such dividend payments, $21.5 million in 2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company may have to refinance a substantial amount of indebtedness and obtain substantial additional funds prior to March 2001. The Company's ability to do so will depend on, among other things, its financial condition at the time, restrictions in the instruments governing its indebtedness, and other factors, including market conditions, beyond the control of the Company. There can be no assurance that the Company will be able to refinance such indebtedness, including such capitalized leases, or obtain such additional funds, and if the Company is unable to effect such refinancings or obtain additional funds, the Company's ability to make principal and interest payments on its indebtedness or make payments of cash dividends on, or the mandatory redemption of, its preferred stock, would be adversely affected. Capital Expenditures The Company's capital expenditures of continuing operations (including assets acquired under capital leases and excluding payments for construction of the Company's new headquarters) were $64.3 million and $107.1 million for the three months ended September 30, 1997 and 1998, respectively, and $187.1 million and $260.0 million for the nine months ended September 30, 1997 and 1998, respectively. The Company anticipates that the expansion of existing networks, construction of new networks and further development of the Company's products and services for both continuing and discontinued operations will require capital expenditures of approximately $120.0 million during the last quarter of 1998. To facilitate the expansion of its services and networks, the Company has entered into equipment purchase agreements with various vendors under which the Company has committed to purchase a substantial amount of equipment and other assets, including a full range of switching systems, fiber optic cable, network electronics, software and services. If the Company fails to meet the minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. 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. 31 Other Cash Commitments and Capital Requirements The Company's operations have required and will continue to require significant capital expenditures for development, construction, expansion and acquisition of telecommunications assets. Significant amounts of capital are required to be invested before revenue is generated, which results in initial negative cash flows. In addition to the Company's planned capital expenditures, it has other cash commitments as described in the Company's unaudited Consolidated Financial Statements for the nine months ended September 30, 1998 included elsewhere herein. In view of the continuing development of the Company's products and services, the expansion of existing networks and the construction, leasing and licensing of new networks, the Company will require additional amounts of cash in the future from outside sources. Management believes that the Company's cash on hand and amounts expected to be available through asset sales, cash flows from operations and vendor financing arrangements will provide sufficient funds necessary for the Company to expand its business as currently planned and to fund its operating deficits through 1999. Additional sources of cash may include public and private equity and debt financings, sales of non-strategic assets, capitalized leases and other financing arrangements. In the past, the Company has been able to secure sufficient amounts of financing to meet its capital expenditure needs. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company. The failure to obtain sufficient amounts of financing could result in the delay or abandonment of some or all of the Company's development and expansion plans, which could have a material adverse effect on the Company's business. In addition, the inability to fund operating deficits with the proceeds of financings until the Company establishes a sufficient revenue-generating customer base could have a material adverse effect on the Company's liquidity. Year 2000 Compliance Importance Many computer systems, software applications and other electronics currently in use worldwide are programmed to accept only two digits in the portion of the date field which designates the year. The "Year 2000 problem" arises because these systems and products cannot properly distinguish between a year that begins with "20" and the familiar "19." If these systems and products are not modified or replaced, many will fail, create erroneous results and/or may cause interfacing systems to fail. Year 2000 compliance issues are of particular importance to the Company since its operations rely heavily upon computer systems, software applications and other electronics containing date-sensitive embedded technology. Some of these technologies were internally developed and others are standard purchased systems which may or may not have been customized for the Company's particular application. The Company also relies heavily upon various vendors and suppliers that are themselves very reliant on computer systems, software applications and other electronics containing date-sensitive embedded technology. These vendors and suppliers include: (i) ILECs and other local and long distance carriers with which the Company has interconnection or resale agreements; (ii) manufacturers of the hardware and related operating systems that the Company uses directly in its operations; (iii) providers that create custom software applications that the Company uses directly in its operations; and (iv) providers that sell standard or custom equipment or software which allow the Company to provide administrative support to its operations. Strategy The Company's approach to addressing the potential impact of Year 2000 compliance issues is focused upon ensuring, to the extent reasonably possible, the continued, normal operation of its business and supporting systems. Accordingly, the Company has developed a four-phase plan which it is applying to each functional category of the Company's computer systems and components. Each of the Company's computer systems, software applications and other electronics containing date-sensitive embedded technology is included within one of the following four functional categories: 32 o Voice and Data Network, which consists of all components whether hardware, software or embedded technology used directly in the Company's operations, including components used by the Company's voice and data switches and collocations; o IT Systems, which consists of all components used to support the Company's operations, including provisioning and billing systems; o Building and Facilities, which consists of all components with embedded technology used at the Company's headquarters building and other leased facilities, including security systems, elevators and internal use telephone systems; o Office Equipment, which consists of all office equipment with date-sensitive embedded technology. For each of the categories described above, the Company will apply the following four-phase approach to identifying and addressing the potential impact of Year 2000 compliance issues: o Phase I - Assessment During this phase, the Company's technology staff will perform an inventory of all components currently in use by the Company. Based upon this inventory, the Company's business executives and technology staff will jointly classify each component as a "high," "medium" or "low" priority item, determined primarily by the relative importance that the particular component has to the Company's normal business operations, the number of people internally and externally which would be affected by any failure of such component and the interdependence of such component with other components used by the Company that may be of higher or lower priority. Based upon such classifications, the Company's business executives and information technology staff will jointly set desired levels of Year 2000 readiness for each component inventoried, using the following criteria, as defined by the Company: - Capable, meaning that such computer system or component will be capable of managing and expressing calendar years in four digits; - Compliant, meaning that the Company will be able to use such component for the purpose for which the Company intended it by adapting to its ability to manage and express calendar years in only two digits; - Certified, meaning that the Company has received testing results to demonstrate, or the vendor or supplier is subject to contractual terms which requires, that such component requires no Year 2000 modifications to manage and express calendar years in four digits; or - Non-critical, meaning that the Company expects to be able to continue to use such component unmodified or has determined that the estimated costs of modification exceed the estimated costs associated with its failure. o Phase II - Remediation During this phase, the Company will develop and execute a remediation plan for each component based upon the priorities set in Phase I. Remediation may include component upgrade, reprogramming, replacement, receipt of vendor and supplier certification or other actions as deemed necessary or appropriate. o Phase III - Testing During this phase, the Company will perform testing sufficient to confirm that the component meets the desired state of Year 2000 readiness. This phase will consist of: (i) testing the component in isolation, or unit testing; (ii) testing the component jointly with other components, or system testing; and (iii) testing interdependent systems, or environment testing. 33 o Phase IV - Implementation During the last phase, the Company will implement each act of remediation developed and tested for each component, as well as implement adequate controls to ensure that future upgrades and changes to the Company's computer systems, for operational reasons other than Year 2000 compliance, do not alter the Company's Year 2000 state of readiness. Current State of Readiness The Company has commenced certain of the phases within its Year 2000 compliance strategy for each of its functional system categories, as shown by the table set forth below. The Company does not intend to wait until the completion of a phase for all functional category components together before commencing the next phase. Accordingly, the information set forth below represents only a general description of the phase status for each functional category.
Phase ---------------------------------------------------------------------------------------------- I II III IV System and Level of Priority Assessment Remediation Testing Implementation - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Voice and Data Network - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High In progress In progress To begin Q1 1999 To begin Q1 1999 To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium In progress To begin Q4 1998 To begin Q1 1999 To begin Q1 1999 To complete Q1 1999 To complete Q2 1999 To complete Q3 1999 To complete Q4 1999 - ------------------------------- ---------------------- ----------------------------------------------------------------------- Low To begin Q4 1998 To be determined based on the results of Phase I To complete Q2 1999 - ------------------------------- ---------------------------------------------------------------------------------------------- IT Systems - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High In progress In progress In progress In progress To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium In progress In progress To begin Q1 1999 To begin Q1 1999 To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------------------------------------------------------- Low In progress To be determined based on the results of Phase I To complete Q2 1999 - ------------------------------- ---------------------------------------------------------------------------------------------- Building and Facilities - ------------------------------- ---------------------- ----------------------- ----------------------------------------------- High In progress To begin Q4 1998 To be determined based on the results of To complete Q1 1999 To complete Q2 1999 Phase II - ------------------------------- ---------------------- ----------------------- ----------------------------------------------- Medium In progress To begin Q4 1998 To be determined based on the results of To complete Q1 1999 To complete Q2 1999 Phase II - ------------------------------- ---------------------- ----------------------------------------------------------------------- Low To begin Q1 1999 To be determined based on the results of Phase I To complete Q2 1999 - ------------------------------- ---------------------------------------------------------------------------------------------- Office Equipment - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High In progress In progress To begin Q1 1999 To begin Q1 1999 To complete Q1 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium In progress In progress To begin Q1 1999 To begin Q1 1999 To complete Q1 1999 To complete Q2 1999 To complete Q3 1999 To complete Q4 1999 - ------------------------------- ---------------------- ----------------------------------------------------------------------- Low In progress To be determined based on the results of Phase I To complete Q2 1999 - ------------------------------- ---------------------- -----------------------------------------------------------------------
Separately, the Company is in the process of reviewing the Company's material contracts with contractors and vendors/suppliers and considering the necessity of renegotiating certain existing contracts, to the extent that the contracts fail to address the allocation of potential Year 2000 liabilities between parties. Prior to entering into any new material contracts, the Company will seek to address the allocation of potential Year 2000 liabilities as part of the initial negotiation. 34 Costs The Company expenses all incremental costs to the Company associated with Year 2000 compliance issues as incurred. Through September 30, 1998, such costs incurred have been less than $0.1 million and have primarily included miscellaneous costs of reference and other Year 2000 compliance planning materials. The Company has also incurred certain internal costs, including salaries and benefits for employees dedicating various portions of their time to Year 2000 compliance issues, of which costs the Company believes has not exceeded $0.5 million through September 30, 1998. The Company expects that total future incremental costs of Year 2000 compliance efforts will be approximately $3.8 million, consisting of $2.3 million in consulting fees, $1.5 million in replacement hardware and software and other miscellaneous costs. These anticipated costs have been included in the Company's fiscal 1999 budget and represent approximately 4% of the Company's budgeted expenses for information technology through fiscal 1999. Such cost estimates are based upon presently available information and may change as the Company continues with its Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000 compliance costs, as necessary. Risk, Contingency Planning and Reasonably Likely Worst Case Scenario While the Company is heavily reliant upon its computer systems, software applications and other electronics containing date-sensitive embedded technology as part of its business operations, such components upon which the Company primarily relies were developed with current state-of-the-art technology and, accordingly, the Company has reasonably assumed that its four-phase approach will demonstrate that many of its high-priority systems do not present material Year 2000 compliance issues. For computer systems, software applications and other electronics containing date-sensitive embedded technology that have met the Company's desired level of Year 2000 readiness, the Company will use its existing contingency plans to mitigate or eliminate problems it may experience if an unanticipated system failure were to occur. For components that have not met the Company's desired level of readiness, the Company will develop a specific contingency plan to determine the actions the Company would take if such component failed. At the present time, the Company is unable to develop a most reasonably likely worst case scenario for failure to achieve adequate Year 2000 compliance. The Company will be better able to develop such a scenario once the status of Year 2000 compliance of the Company's material vendors and suppliers is complete. The Company will monitor its vendors and suppliers, particularly the other telecommunications companies upon which the Company relies, to determine whether they are performing and implementing an adequate Year 2000 compliance plan in a timely manner. The Company acknowledges the possibility that the Company may become subject to potential claims by customers if the Company's operations are interrupted for an extended period of time. However, it is not possible to predict either the probability of such potential litigation, the amount that could be in controversy or upon which party a court would place ultimate responsibility for any such interruption. The Company views Year 2000 compliance as a process that is inherently dynamic and will change in response to changing circumstances. While the Company believes that through execution and satisfactory completion of its Year 2000 compliance strategy its computer systems, software applications and electronics will be Year 2000 compliant, there can be no assurance until the Year 2000 occurs that all systems and all interfacing technology when running jointly will function adequately. Additionally, there can be no assurance that the assumptions made by the Company within its Year 2000 compliance strategy will prove to be correct, that the strategy will succeed or that the remedial actions being implemented will be able to be completed by the time necessary to avoid system or component failures. In addition, disruptions with respect to the computer systems of vendors or customers, which systems are outside the control of the Company, could impair the Company's ability to obtain necessary products or services to sell to its customers. Disruptions of the Company's computer systems, or the computer systems of the Company's vendors or customers, as well as the cost of avoiding such disruption, could have a material adverse effect on the Company's financial condition and results of operations. 35 PART II ITEM 1. LEGAL PROCEEDINGS See Note 7 (d) to the Company's unaudited condensed consolidated financial statements for the nine months ended September 30, 1998 contained elsewhere in this Quarterly Report. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (A) Exhibits. (10) Material Contracts. 10.1:Employment Agreement, dated September 23, 1998, between ICG Communications, Inc. and Douglas I. Falk. (27) Financial Data Schedules. 27.1:Restated Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1997. 27.2:Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1998. (B) Report on Form 8-K. The following report on Form 8-K was filed by the registrants during the three months ended September 30, 1998: (i) Current Report on Form 8-K dated August 6, 1998, regarding the announcement of the Company's earnings information and results of operations for the quarter ended June 30, 1998. 36 INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 INDEX TO EXHIBITS 10.1:Employment Agreement, dated September 23, 1998, between ICG Communications, Inc. and Douglas I. Falk. 27.1:Restated Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1997. 27.2:Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1998. EXHIBIT 10.1 Employment Agreement, dated September 23, 1998, between ICG Communications, Inc. and Douglas I. Falk. EXHIBIT 27.1 Restated Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1997. EXHIBIT 27.2 Financial Data Schedule of ICG Communications, Inc. for the Nine Months Ended September 30, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 1998. ICG COMMUNICATIONS, INC. Date: November 13, 1998 By: /s/ Harry R. Herbst ------------------------------------- Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 13, 1998 By: /s/ Richard Bambach ------------------------------------- Richard Bambach, Vice President and Corporate Controller (Principal Accounting Officer) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 1998. ICG HOLDINGS (CANADA), INC. Date: November 13, 1998 By: /s/ Harry R. Herbst ------------------------------------- Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 13, 1998 By: /s/ Richard Bambach ------------------------------------- Richard Bambach, Vice President and Corporate Controller (Principal Accounting Officer) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 1998. ICG HOLDINGS, INC. Date: November 13, 1998 By: /s/ Harry R. Herbst ------------------------------------- Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 13, 1998 By: /s/ Richard Bambach ------------------------------------- Richard Bambach, Vice President and Corporate Controller (Principal Accounting Officer) EX-10 2 EMPLOYEMENT AGREEMENT WITH DOUGLAS I. FALK EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 23rd day of September, 1998 by and between ICG TELECOM GROUP, INC. ("Employer" or the "Company") and DOUGLAS I. FALK ("Employee"). RECITALS WHEREAS, Employer desires to hire and employ Employee as President of Employer, or in such other position with Employer or an affiliate corporation of Employer as Employer may from time-to-time decide, as provided herein; and WHEREAS, Employee desires to be employed by Employer as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Employment. The Company agrees to employ Employee and Employee hereby agrees to be employed by the Company or by such of its affiliate corporations as determined by the Company, on a full-time basis, for the period and upon the terms and conditions hereinafter set forth. 2. Capacity and Duties. Employee will be employed as President of Employer or such other position as Employer shall decide. Employee will also be elected Executive Vice President of the Employer's parent, ICG Communications, Inc., subject to the approval of the Board of Directors of such entity. Employee will make himself available to provide to ICG Communications, Inc. such services as such entity shall request of him. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position and shall serve the Employer faithfully and to the best of his ability. Employee shall devote 100% of his working time to carrying out his obligations hereunder. 3. Compensation and Benefits. 3.1 The Company will pay Employee during the Term of this Agreement an annual base salary, payable in accordance with customary Company procedures. The annual base salary will be Two Hundred Twenty-Five Thousand and 00/100 Dollars ($225,000.00). 3.2 In addition to the base salary, Employee shall be eligible for an annual performance bonus in an exact amount to be determined by the Company. The annual bonus will be based on objectives and goals set for the Company (the annual bonus is expected to be approximately forty-five percent (45%) of annual base salary if all objectives and goals are met). 3.3 In addition to salary and bonus payments as provided above, the Company will provide Employee, during the Term of this Agreement, with the benefits of such insurance plans, hospitalization plans, stock plans, retirement plans and other employee fringe benefits as shall be generally provided to senior executive officers of the Company (including sick leave and four (4) weeks vacation time) and for which Employee may be eligible under the terms and conditions thereof. 3.4 Throughout the Term of this Agreement, the Company shall provide Employee a monthly car allowance in the amount of Seven Hundred and 00/100 Dollars ($700.00). The Company will gross up Employee's income to offset the tax impact of the car allowance. 3.5 Throughout the Term of this Agreement, the Company will reimburse Employee for all reasonable out-of-pocket expenses incurred by Employee in connection with the business of the Company and the performance of his duties under this Agreement, upon presentation to the Company by Employee of an itemized accounting of such expenses with reasonable supporting data. 3.6 The Company will provide to Employee from time to time stock options under ICG Communications, Inc.'s Incentive Stock Option Plan. Employee will receive a grant of Thirty Thousand (30,000) stock options relating to the stock of the Company's ultimate parent, ICG Communications, Inc., upon employment with an exercise price equal to the closing price of ICG Communications, Inc.'s common stock on September 23, 1998 pursuant to and subject to the terms and conditions of (including vesting schedule) the 1998 ICG Incentive Stock Option Plan. 3.7 The Company will pay Employee certain relocation expenses associated with Employee's relocation from Dallas, Texas to the Denver, Colorado metropolitan area. This reimbursement will be pursuant to the Tier One Relocation Policy of the Company and such expenses shall be grossed up one time for taxes, if applicable. 4. Term. The initial term of this Agreement shall be for one (1) year, commencing on September 23, 1998 ("Initial Term"). Upon completion of the first (12) twelve months of the Term, this Agreement will automatically renew from month to month such that there will always be twelve (12) months remaining in the Term, unless and until either party shall give at least (30) thirty days notice to the other of his or its intention to terminate this Agreement. The applicable provisions of Section 6, 7, 8, 9 and 10 shall remain in full force and effect as provided and for the time periods specified in such Sections notwithstanding the termination of this Agreement; all other obligations of either party to the other under this Agreement shall terminate at the end of the Term. 5. Termination. 5.1 If Employee dies during the Term of this Agreement, the Company shall pay his estate the compensation that would otherwise be payable to him for the remaining term of this Agreement. 5.2 If, during the Term of this Agreement, Employee is prevented from performing his duties by reason of illness or incapacity for one hundred forty (140) days in any one hundred eighty (180) day period, the Company may terminate this Agreement, upon thirty (30) days prior notice thereof to Employee or his duly appointed legal representative. 5.3 The Company may terminate this Agreement at any time during the Term upon the happening of any of the following events: 5.3.1 The sale by the Company of substantially all of its assets to a single purchaser or associated group of purchasers who are not affiliates of the Company. 5.3.2 The sale, exchange or other disposition in one or more related transactions resulting in a change of ownership of fifty percent (50%) or more of the outstanding voting stock of the Company to or with a person, firm or corporation not then an affiliate of the Company. 5.3.3 The merger or consolidation of the Company in a transaction not involving an affiliate of the Company in which the shareholders of the Company receive less than fifty percent (50%) of the outstanding voting stock of the new continuing corporation. 5.3.4 A bona fide decision by the Company to terminate its business and liquidate its assets (but only if such liquidation is not part of a plan to carry on the Company's business through its shareholders). For the purpose of this Agreement, the term "affiliate" means a person, firm or corporation that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Company. 5.4 The Company may terminate this Agreement immediately for gross negligence or intentional misconduct by the Employee. 5.5 The Company may terminate this Agreement immediately upon the commission by Employee of theft, fraud, embezzlement or any other felony or upon a material breach by Employee of any obligation or covenant created by or under this Agreement. 5.6 Employee may terminate this Agreement upon at least thirty (30) days prior notice to the Company upon the happening of any of the events described in Section 5.3 above. 5.7 If this Agreement is terminated by the Company under Section 4 or Section 5.3 or by Employee under Section 5.6 during the Term hereof, the Company will pay Employee a Termination Fee equal to Employee's then current monthly base salary multiplied by twelve (12) plus an amount equivalent to twelve (12) months of COBRA premiums. Such Termination Fee will be paid in twelve (12) equal installments with the exception of the COBRA equivalent payment which will be paid in a lump sum. 6. Covenant Not to Compete. 6.1 During the Term of this Agreement (or, if longer, during the term of Employee's employment with the Company or any of its affiliates) and for a period of twelve (12) months after termination of this Agreement (or, if later, termination of Employee's employment with the Company or any of its affiliates), Employee shall not, directly or indirectly, own, mange, operate, control, be employed by, or participate in the ownership, management, operation or control of a business that is engaged in the same business as the Company within any area or at any location constituting, during the term of Employee's employment and/or at the time Employee's employment is terminated, a Relevant Area. For the purposes of this Section 6, including all subsections of this Section 6, the business in which the Company is engaged is providing telecommunications services and all other services the Company provides during the term of Employee's employment ("Services"). The "Relevant Area" shall be defined for the purposes of this Agreement as any area located within, or within fifty (50) miles of, the legal boundaries or limits of any city within which the Company or any affiliate thereof is providing Services, or in which the Company has publicly announced or privately disclosed to Employee that it plans to provide Services. 6.2 During the Term of this Agreement (or, if longer, during the term of Employee's employment with the Company or any of its affiliates) and for a period of twelve (12) months after termination of this Agreement (or, if later, termination of Employee's employment with the Company or any of its affiliates), Employee shall not (i) directly or indirectly cause or attempt to cause any employee of the Company or any of its affiliates to leave the employ of the Company or any affiliate, (ii) in any way interfere with the relationship between the Company and any employee or between an affiliate and any employee of the affiliate, or (iii) interfere or attempt to interfere with any transaction in which the Company or any of its affiliates was involved during the Term of this Agreement or Employee's employment, whichever is longer. 6.3 Employee agrees that, because of the nature and sensitivity of the information to which he will be privy and because of the nature and scope of the Company's business, the restrictions contained in this Section 6 are fair and reasonable. 7. Confidential Information: 7.1 The relationship between the Company and the Employee is one of confidence and trust. This relationship and the rights granted and duties imposed by this Section shall continue until a date ten (10) years from the date Employee's employment is terminated. 7.2 As used in this Agreement (i) "Confidential Information" means information disclosed to or acquired by Employee about the Company's plans, products, processes and services including the Services and any Relevant Area, including information relating to research, development, inventions, manufacturing, purchasing, accounting, engineering, marketing, merchandising, selling, pricing and tariffed or contractual terms, customer lists and prospect lists or other market information, with respect to any of the Company's then current business activities; and (ii) "Inventions" means any inventions, discoveries, concepts and ideas, whether patentable or not, including, without limitation, processes, methods, formulas, and techniques (as well as related improvements and knowledge) that are based on or related to Confidential Information, that pertain in any manner to the Company's then currently used technology, expertise or business and that are made or conceived by Employee, either solely or jointly with others, and while employed by the Company or within six (6) months thereafter, whether or not made or conceived during working hours or with the use of the Company's facilities, materials or personnel. 7.3 Employee agrees that he shall at no time during the Term of his employment or at any time thereafter disclose any Confidential Information or component thereof to any person, firm or corporation to any extent or for any reason or purpose or use any Confidential Information or component thereof for any purpose other than the conduct of the Company's business. 7.4 Any Confidential Information or component thereof that is directly or indirectly originated, developed or perfected to any degree by Employee during the Term of this employment by the Company shall be and remain the sole property of the Company and shall be deemed trade secrets of the Company. 7.5 Upon termination of Employee's employment pursuant to any of the provisions herein, Employee or his legal representative shall deliver to the Company all originals and all duplicates and/or copies of all documents, records, notebooks, and similar repositories of or containing Confidential Information then in his possession, whether prepared by him or not. 7.6 Employee agrees that the covenants and agreements contained in this Section 7 are fair and reasonable and that no waiver or modification of this Section or any covenant or condition set forth herein shall be valid unless set forth in writing and duly executed by the parties hereto. Employee agrees to execute such separate and further confidentiality agreements embodying the provisions of this Section 7 as the Company may reasonably request. 8. Injunctive Relief. Upon a material breach or threatened material breach by Employee of any of the provisions of Sections 6 and 7 of this Agreement, the Company shall be entitled to an injunction restraining Employee from such breach. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach, including recovery of damages from Employee. 9. No Waiver. A waiver by the Company of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent or other breach by Employee. 10. Severability. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such Section in the particular jurisdiction in which such adjudication is made. 11. Notices. All communications, requests, consents and other notices provided for in this Agreement shall be in writing and shall be deemed given if mailed by first class mail, postage prepaid, certified or return receipt requested to the last known address of the recipient. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Colorado. 13. Assignment. The Company may assign its rights and obligations under this Agreement to any affiliate of the Company or, subject to the provisions of Section 5.3, to any acquirer of substantially all of the business of the Company, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against any such assignee. Neither this Agreement nor any rights or duties hereunder may be assigned or delegated by Employee. 14. Amendments. No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing, signed by each party to this Agreement. 15. Binding Effect. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 16. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral, which relate in any way to the subject matter hereof, including without limitation, the Employment Agreement dated August 14, 1996 between ICG Satellite Services, Inc. and Employee and the Employment Agreement dated May 15, 1998 between Netcom On-Line Communication Services, Inc. and Employee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ Douglas I. Falk - ------------------------------------ DOUGLAS I. FALK ICG TELECOM GROUP, INC. By: /s/ Marc E. Maassen -------------------------------- Name: Marc E. Maassen Title: Executive Vice President ICG COMMUNICATIONS, INC. By: /s/ Marc E. Maassen -------------------------------- Name: Marc E. Maassen Title: Executive Vice President EX-27.1 3 SUMMARY FINANCIAL INFORMATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AS RESTATED TO REFLECT THE COMBINED OPERATIONS OF ICG AND NETCOM AS THOUGH THE MERGER OCCURRED AT THE BEGINNING OF THE PERIOD PRESENTED AND REFLECTED TO PRESENT THE OPERATIONS OF NETCOM AND ZYCOM AS DISCONTINUED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 334,090 120,834 59,024 5,804 5,181 531,669 651,611 87,909 1,278,186 119,795 929,571 393,618 0 802 (165,600) 1,278,186 0 174,002 0 156,893 148,416 2,193 82,290 (196,349) 0 (221,330) (28,285) 0 0 (249,615) (5.92) 0 THIS VALUE IS NOT APPLICABLE.
EX-27.2 4 SUMMARY FINANCIAL INFORMATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 429,418 41,000 139,394 14,377 3,259 608,916 963,649 158,993 1,704,157 156,532 1,613,526 454,192 0 596 (520,689) 1,704,157 0 275,991 0 187,964 194,475 8,538 121,974 (210,307) 0 (251,081) (48,174) 0 0 (299,255) (6.66) 0 THIS VALUE IS NOT APPLICABLE.
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