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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
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Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
Not applicable
Not applicable
Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
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Name of each exchange on which
Title of each class registered
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Common Stock, $.01 par value Nasdaq National Market
(48,582,035 shares outstanding on March 27, 2000)
Not applicable Not applicable
Not applicable Not applicable
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Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 27, 2000 the aggregate market value of ICG Communications,
Inc. Common Stock held by non-affiliates (using the closing price of $39.00 on
March 27, 2000) was approximately $1,894,699,365.
ICG Canadian Acquisition, Inc., a wholly owned subsidiary of ICG
Communications, Inc., owns all of the issued and outstanding common shares of
ICG Holdings (Canada) Co.
ICG Holdings (Canada) Co. owns all of the issued and outstanding shares of
common stock of ICG Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
of ICG Communications, Inc. to be filed with the Securities and Exchange
Commission not later than April 29, 2000 has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 of ICG Communications,
Inc.
TABLE OF CONTENTS
PART I.................................................................. 1
ITEM 1. BUSINESS............................................... 1
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Overview............................................... 1
Industry............................................... 3
Market Opportunities and Strategy...................... 4
Products Descriptions and Major Contracts.............. 6
Network and Facilities................................. 10
Customers and Marketing................................ 12
Competition............................................ 12
Regulatory Activity.................................... 14
Financing Activities................................... 17
Sale of Assets and Discontinuance of Certain Businesses 18
Employees.............................................. 20
Trademarks and Trade Names............................. 20
ITEM 2. PROPERTIES............................................. 21
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ITEM 3. LEGAL PROCEEDINGS...................................... 22
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
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HOLDERS................................................ 22
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PART II................................................................. 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
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RELATED STOCKHOLDER MATTERS............................ 23
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ITEM 6. SELECTED FINANCIAL DATA................................ 25
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 29
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
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MARKET RISK............................................ 50
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 51
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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ON ACCOUNTING AND FINANCIAL DISCLOSURES................ 52
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PART III................................................................ 53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS........ 53
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ITEM 11. EXECUTIVE COMPENSATION................................. 53
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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AND MANAGEMENT......................................... 53
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 53
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PART IV................................................................. 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT
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ON FORM 8-K............................................ 54
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Financial Statements................................... 54
Report on Form 8-K..................................... 64
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Exhibits............................................... 64
Financial Statement Schedule........................... 64
FINANCIAL STATEMENTS.................................................... F-1
FINANCIAL STATEMENT SCHEDULE............................................ S-1
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PART I
Unless the context otherwise requires, the term "Company" or "ICG" means
the combined business operations of ICG Communications, Inc. and its
subsidiaries, including ICG Holdings (Canada) Co. (Holdings-Canada), ICG
Holdings, Inc. (Holdings) and ICG Services, Inc. (ICG Services). All dollar
amounts are in U.S. dollars. The Business section and other parts of this
Report contain "forward-looking statements" intended to qualify as safe harbors
from liability as established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as such
because the context of the statement includes words such as "intends,"
"anticipates," "expects," "estimates," "plans" and "believes," and other similar
words. Similarly, statements that describe the Company's future plans,
objectives or goals also are forward-looking statements. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results or outcomes to differ materially from those currently
anticipated. Factors that could affect actual results include, but are not
limited to, the Company's ability to obtain financing necessary to fund its
planned expansion, its dependence on increased traffic on the Company's
facilities, the successful implementation of the Company's strategy of offering
an integrated telecommunications package of local, long distance, enhanced
telephony, wholesale and retail data services, the successful implementation of
the Company's strategy to offer Internet access via emerging technologies,
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities.
ITEM 1. BUSINESS
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OVERVIEW
The Company is a facilities-based communications provider and, based on
revenue and customer lines in service, one of the largest non-incumbent
competitive communications companies in the United States. The Company primarily
offers voice and data services directly to business customers and offers network
facilities and data management to Internet service provider (ISPs) customers.
The Company's extensive network assets provide nationwide data services to an
estimated 700 cities with 227 data points of presence (POPs). At year-end 1999,
the Company had in service 730,975 customer lines and data access ports
(referred to throughout this report as "lines"). Also, at year-end 1999, the
Company had over 10,000 business customers and approximately 550 ISP customers.
The Company believes that through its ISP customers it serves approximately 10%
of the Internet users in the United States. The Company recognized $479.2
million of revenue in 1999, an increase of $175.9 million over 1998.
As of December 31, 1999, approximately two-thirds of lines in service were
for ISP customers. The Company provides data access and transport services to
ISPs that in many cases rely on the Company to provide network ownership and
management. During 1999, the Company began to implement its "Gateway Strategy,"
which includes meeting demand for multiple access methods to the Internet (such
as dial-up, wireless and digital subscriber lines, or DSL) and to provide
advanced network management and applications. The Company's current product
offerings to the ISP market include dial-up products such as primary rate
interface (PRI), remote access service (RAS) and Internet remote access
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service (IRAS) as well as broadband access services including T-1 and T-3
connections and DSL.
The Company also provides high quality voice and data communications
services to business customers, including local, long distance and enhanced
telephony services, through its Internet protocol, circuit switch and regional
fiber optic networks. In regional markets, ICG is a cost-efficient alternative
to the area's incumbent local telephone company (ILEC) for business customers.
The Company also provides interexchange services to long-distance carriers
(IXCs) and other customers. These "special access" services connect end-users
to long-distance carriers' facilities, connect a long-distance carrier's
facilities to the local telephone company central office and connect facilities
of the same or different long-distance carrier.
A focus of the Company's long-term strategy is to expand its national
network and facilities, based upon existing demand under contract. The Company
intends that this expansion will open major markets in which the Company can
then extend its local business service. Network expansion is undertaken through
a combination of constructing owned facilities and entering into long-term fiber
and capacity agreements with other telecom carriers. Network build-out is
designed to support increased future capacity demands.
During 1999, ICG made significant investments in network expansion and new
facilities. By year-end, the Company had:
. 18,000 miles of long-haul broadband capacity under long-term leases;
. 4,596 miles of local fiber capacity with an additional 531 miles under
construction;
. 71 voice and data switches, including 24 ATM switches (that deliver
advanced voice, data and video services) 16 frame relay switches and
31 voice switches;
. 147 collocation sites with incumbent telephone companies;
. 145 ISP customer collocation sites;
. connection of 8,078 buildings to its network;
. VoIP network capability from most POP sites; and
. 181 OC-48 and 3 OC-192 SONET transmission equipment systems.
During 1999, in connection with its high level of growth, ICG took steps to
streamline its business and focus on core operations. The Company sold non-core
assets for net cash proceeds in excess of $400 million. Sales included the
Company's retail ISP customer business and its Network Services and Satellite
Services divisions. See "Sale of Assets and Discontinuance of Certain
Businesses." The Company also centralized its provisioning process to maximize
economies of scale and opened two new provisioning centers that replaced 30
regional centers. Additionally, the Company is deploying a comprehensive
operating support system (OSS) from Telcordia Technologies, Inc. for quick and
simplified provisioning service and initiating use of a new billing system from
Saville, PLC, which the Company anticipates will be capable of managing a larger
customer base and consolidating customer billing.
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The Company's business continues to grow principally as a result of
increased Internet access demand, new technologies and increased market share
for customers traditionally served by incumbent telephone companies. The
Company's business plan calls for accelerated network expansion in 2000 into 22
new major metropolitan cities by year-end. The Company will continue to invest
in developing and delivering new products and services to complete its portfolio
of offerings to each market segment.
INDUSTRY
The markets for the Company's products and services are growing at a
substantial rate, driven in large part by new technologies and passage of the
Federal Telecommunications Act of 1996 (Telecommunications Act).
The U.S. Internet access market is expected to increase from approximately
$18 billion in 1999 to over $48 billion in 2002, reflecting expanded market size
as well as enhanced service offerings. Internet subscribers have grown
dramatically in the past two years and will continue rapid growth as forecast
for the coming three years. Growth in Internet use will come in the form of
dial-up modem access in the near-term and transition to higher growth from
emerging broadband access methods. Dial-up Internet access was estimated to
increase from approximately 37 million at year-end 1998 to approximately 43
million by year-end 1999. At the same time, residential
broadband subscribers were expected to grow from 1.5 million to 3.1 million.
Over the next three years, at year-end 2002, dial-up Internet accounts
are forecast to increase another 15% to nearly 50 million while
broadband subscribers are forecast to grow over 500% to 20 million. In
addition, the number of users per household and the time connected to the
Internet is expected to increase. (See Forrester Research, Inc. Reports from
1998 and 1999) More users and more time on the Internet are expected
to create continued, rapid increase in the demand for ISP access ports
nationwide.
Local telephone and data service is estimated to generate over $100
billion in annual revenues growing at approximately 3-5% per year. The local
incumbent telephone companies are estimated to have a 95% share of this revenue.
Competitive local exchange companies such as ICG are forecast to gain an
increasing share of this large market.
The Company is competing in the local, long distance, enhanced voice
telephony and data communications markets to provide service to its business,
ISP and interexchange customers. The Company believes it can maximize revenue
and profit opportunities by leveraging its extensive network facilities to
provide multiple communications services to its customers. The local voice
telephony sector of the telecommunications industry has long been dominated by
the ILECs. The Company's ability to compete in this industry has, however, been
enhanced due to the passage of the Telecommunications Act and various
competitive state regulatory initiatives. Due to these regulatory changes, non-
ILEC providers such as the Company are now legally able to offer many
communications services, including local dial tone and all interstate and
intrastate switched services. Notwithstanding these regulatory changes, the
ILECs have been slow to open their markets to competition, and the Company
continues to face significant barriers in gaining access to the local telephony
markets. See "Regulatory Activities."
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MARKET OPPORTUNITY AND STRATEGY
Geographical Expansion
In order to meet its customers' needs and maximize traffic across its
network, ICG is expanding its footprint nationwide to deliver basic and enhanced
voice and data services on Company-owned facilities. ICG's objective is to
supply communications infrastructure for its business and ISP customers while
adding new systems to serve application service providers (ASPs), a quickly
emerging group of companies that deliver advanced communication services over
the Internet.
The Company anticipates expanding into 22 new markets during 2000. As the
Company enters new markets, it is following a "smart build" network strategy.
Consistent with this strategy, the Company plans to build-out its network to
meet existing demand, yet the infrastructure and facilities are designed to
support significantly greater capacity demands. The Company's expansion into
new markets is supported by existing three- to five- year term contracts signed
in the second-half of 1999 for over 700,000 new Internet access ports. The
Company recently has begun offering Internet access services in six of these new
markets and expects that it will be capable of delivering service in all 22
markets utilizing its own switch facilities by year-end 2000. It is intended
that this expansion will enable the Company to deliver both voice and data
products to its ISP and business customers.
The Company's growth in the near term will be primarily driven from the ISP
segment. However, its expanded geographical footprint and new OSS systems are
intended to position the Company to accelerate growth in its business segment in
2001 and beyond.
Gateway Strategy
The Company is building its network to deliver a broad range of Internet
access methods and to support enhanced voice and data services to its customers
both directly and by partnering with other companies. Geographical expansion is
intended to be complemented with expanded product and service offerings as the
Company seeks to provide a portfolio capable of supplying the telecommunications
needs of its customers. The Company is developing bundled products,
applications and services to deliver to its ISP and business customers which
increases customer convenience and satisfaction. In turn, as customers demand
multiple products and services, the Company intends to maximize customer
retention and revenue per line while more efficiently employing facilities to
deliver profitable growth.
The Company's Gateway Strategy includes offering multiple access methods
and more advanced network management features to ISP and ASP markets. As
customers in these markets seek to grow their businesses, they frequently
require broad geographical coverage, more sophisticated facilities and network
management capabilities, as well as the capability to connect their end-use
customers to the Internet via dial-up or broadband methods.
In order to capture market share in the fast-growing Internet market, the
Company seeks to reach the end-user customer by partnering with third party
providers as well as through direct marketing channels. Today, the Company
delivers Internet access for dial-up customers through its ISP customers and has
partnered with Northpoint Communciations, Inc. (Northpoint) and
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Covad Communications Group, Inc. (Covad) to deliver DSL services during 2000,
and it plans to add additional partners to deliver DSL Internet access
nationwide. The Company plans to introduce additional Internet access
technologies as demand for new methods dictates.
The Company provides direct broadband connections to its ISP and business
customers through T-1 lines delivering 1.5 megabits of data per second (Mbps)
and T-3 lines at 44.7 Mbps. Of the 8,078 buildings connected to the Company's
switching facilities at year-end 1999, 963 were connected utilizing ICG
broadband fiber connections.
By adding new broadband customers or migrating existing dial-up customers
to broadband services, the Company can deliver additional value-added services
and applications that increase customer satisfaction, increase the value of each
customer and increase the customer's reliance on ICG.
Advanced Services
New products and technologies under the Gateway Strategy include advanced
network services such as managing content, providing applications and managing
Internet traffic. Advanced applications are intended to be offered both
directly through ICG and through partnerships with other application providers.
The Company is adding computing power within its network to support these new
services. By the end of the third quarter 2000, the Company intends to have
over 1000 central processing units, or servers, throughout its network including
traffic, application and content servers.
For example, traffic servers will enable the Company to provide caching
services for its customers, which can increase the download speed of data by as
much as 30% and improve network efficiency. The Company has already established
a relationship with a provider to deliver Unified Messaging on its network.
Other services that the Company plans to introduce in the year 2000 include
virus protection within ICG's network, reducing individual protection
requirements for customers, and Virtual Private Networks (VPNs) and Virtual
Private Dial-up Networks (VPDNs). These services combine the functionality of
private networks and employ the far reach and cost effectiveness of the
Internet.
With deployment of application and content servers on its network, the
Company anticipates offering its customers network infrastructure to support
services such as web and e-mail hosting, video and voice streaming applications
and other media applications. The Company plans to introduce these and other
advanced services in 2001 and beyond. With its extensive network, the Company
expects that it will be able to deliver these products nationwide, as they are
developed, providing revenue opportunities for ICG and its ISP and ASP partners.
During 2000, the Company intends to build a new on-line, web-based customer
management center. This center will allow ISPs to retain control over service
levels to their retail customers while at the same time outsourcing their
network requirements to ICG. Service level alerts and on-line reporting and
provisioning are expected to be a part of this initiative.
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Although several new applications are being added to ICG's network in 2000
and 2001, significant new revenue from these applications is not expected to
contribute meaningfully until 2002 and beyond. Additionally, the Company will
rely on certain third party vendors to provide technical support and equipment
to support these new applications and there can be no assurance that these
vendors will perform in a timely or adequate manner.
PRODUCTS DESCRIPTIONS AND MAJOR CONTRACTS
Product Offerings
Products and services offered by ICG as of year-end 1999 were the
following:
. Local telephone service . Remote access services (PRI/RAS /IRAS)
. Long distance telephone service . Dedicated Internet access
. Caller ID . DSL
. Voice messaging . Voice over IP
. Call waiting . Enhanced IP services (content management)
. Speed dialing . Integrated access services
. Toll free service . SS7 services
. Remote access . Special access
. Conferencing . Switched access service
. Calling cards
. Fax services
. Enhanced messaging
. Integrated Access Service
Products and Services to ISP Customers
In 1999, the Company complemented its PRI product with additional network
services to ISPs including RAS and IRAS. PRI has been the traditional product
that allows an ISP to connect to its customer by utilizing the Company's local
access network. The dial-up customer calls the ISP and the call is routed to
the Company through the public telephone service network. Using the Company's
switch network, the Internet call is routed via a signal to the ISP remote
access service modem bank, which is generally located at a collocation site
provided by the Company. The ISP can either route the call to the Internet or
to its network to terminate the call.
To further support the ISP in its network needs, the Company introduced the
RAS product. RAS utilizes the Company's switches and owned modem banks. This
service provides modem access at the Company's own switch location, eliminating
the need for ISPs to deploy modems physically at each of its POPs. RAS is a
"connect-and-send" approach, which enables the Company to act as an aggregator
for ISP traffic while limiting the ISP's capital deployment. RAS service
reduces the ISP's capital expenditures by eliminating the need for ISPs to
purchase separate modems, and transfers a portion of its network management
responsibilities to the
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Company. In 1999, the Company contracted for the provision of approximately
200,000 RAS lines.
The Company also provides Internet RAS, or IRAS, which combines access,
transport and routing services to deliver all Internet Protocol (IP) data
packets either directly to the ISP or directly to the Internet bypassing the
ISP. The IRAS product utilizes ICG's switch and data networks. The Company
estimates that more than 65% of all of ICG's ISP traffic is routed directly to
the Internet. IRAS enables regional or local ISPs to expand their geographical
footprint outside their current physical locations without significant capital
expenditures by carrying the ISP's out-of-region traffic on ICG's nationwide
data network. During the third and fourth quarters of 1999, the Company signed
long-term contracts to deliver approximately 500,000 IRAS lines.
Significant Contracts
During 1999, ICG entered into several significant contracts for the
provision of approximately 700,000 lines under its new ISP service offerings.
These contracts include new RAS and IRAS lines and the upgrade of PRI lines to
RAS. Primary contracts were:
. In June 1999, the Company entered into a five-year agreement with a
national integrated telecommunications provider, under which the
customer has agreed to purchase 100,000 RAS lines from the Company.
. In August 1999, the Company signed a long-term contract with a large
national ISP to provide a minimum of 100,000 RAS lines to the ISP for a
minimum five-year term.
. In September 1999, the Company signed a three-year agreement with a
leading provider of Internet access to provide IRAS. Throughout the term
of the agreement, the Company will install up to 100,000 IRAS lines for
the customer.
. In October 1999, the Company entered into a three-year IRAS contract
with a large e-commerce company. The customer is committed to purchase a
minimum of 200,000 IRAS lines.
. In November 1999, the Company signed an agreement with another national
ISP to provide IRAS for a three-year period. Under this agreement, the
ISP will purchase the use of a minimum of 150,000 RAS ports.
Of a total of approximately 700,000 RAS and IRAS lines contracted in the
second half of 1999, approximately 500,000 remained to be provisioned during
2000.
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Commercial Services
The services provided to the Company's commercial customers, to date
principally small and medium-sized businesses, include competitive local dial
tone, long distance, enhanced telephony features, data and dedicated or special
access services. Competitive local dial tone services consist of basic local
exchange lines and trunks for business, related line features (such as voice
mail, direct inward dialing and custom calling features), calling card and long
distance services (intraLATA or local toll calling, interLATA, intrastate and
interstate). The Company believes that having a full complement of
communications services will strengthen its overall market position and help the
Company to better penetrate the local exchange marketplace.
Although the Company carries some of its long distance traffic on its own
switches, it also relies on obtaining long distance transmission capacity from
third party carriers to provide its services. To fulfill its capacity needs,
the Company has entered into transmission agreements that typically provide for
transmission on a per minute basis with other long distance carriers. To reduce
the cost of services, the Company leases point-to-point circuits on a monthly or
longer term fixed cost basis where it anticipates high traffic volume. Private
line services are generally used to connect the separate locations of a single
business outside of the local calling area or LATA.
Through a subsidiary, NikoNet, Inc., the Company also provides broadcast
facsimile services and enhanced messaging services to financial institutions,
corporate investor and public relations departments and other customers.
NikoNet also provides facsimile to e-mail and e-mail to facsimile translation
services. The NikoNet services leverage the Company's network and creates high
margin minutes of use.
On a limited basis, the Company is currently offering Integrated Access
Service (IAS) and, based on current plans, intends to expand this offering by
the second quarter of 2000. IAS is an enhanced service that can bundle local,
long-distance and data services to be carried over a dedicated T-1 connection.
Through equipment installed by the Company at the customers' premises and the
Company's central offices, IAS provides expanded bandwidth for small to medium-
sized business customers as an alternative to purchasing additional circuits.
Data traffic, including Internet traffic, from IAS service offerings is carried
over the Company's nationwide network.
The Company is preparing to provide high-speed data transmission services
through DSL technology primarily to business end-users. The Company currently
sells this product on a wholesale basis to ISPs. DSL technology utilizes the
existing ILEC twisted copper pair connection to the customer, which gives the
customer significantly greater bandwidth and speed when connecting to the
Internet. The Company has agreements to provide DSL services through third
party vendors, including NorthPoint and Covad. These third-party vendors will
provide DSL services to the Company and the Company's end-users in certain
markets within the Company's footprint. The Company's DSL traffic in the
specified markets will be routed by the third party DSL providers to the
Company's ATM switches and transported by the Company either to the ISP, via a
point-to-point connection or via IP technology, or directly to the Internet.
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To provide its voice telephony services, the Company operates local
exchange networks in approximately 30 metropolitan markets located within the
following regions: California (Sacramento, San Diego and portions of the Los
Angeles, San Francisco and Oakland metropolitan areas); Colorado (Denver
metropolitan area, Colorado Springs and Boulder); Ohio (Akron, Cincinnati,
Cleveland, Columbus, and Dayton); the Southeast (Atlanta, Georgia; Birmingham,
Alabama; Charlotte, North Carolina; Louisville, Kentucky; and Nashville,
Tennessee); and Texas (Austin, Corpus Christi, Dallas, Houston and San Antonio).
Interexchange Services
Special access
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Special access or dedicated services are generally used to connect end-user
customers to a long distance telephone carrier's facilities, to connect long
distance carrier's facilities to the local telephone company's central offices,
and to connect different facilities of the same long distance carrier or
facilities of different long distance carriers all within the same LATA. As
part of its "carrier's carrier" strategy, the Company targeted the transport
between long distance company facilities and the local telephone company central
offices, and, for high volume customers, between the long distance company and
the end-user customer's office. In order to leverage its significant network
investment, the Company also markets these services directly to ISPs and end-
user business customers.
Switched access
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Switched access services include interstate and intrastate transport and
switching of calls between the long distance carrier's facilities and either the
local telephone company's central offices or end-users. By performing the
switching services, the Company can reduce the long distance carriers' local
access costs, which constitute their major operating expense. The Company's
Signaling System 7 (SS7) services provide signaling connections between long
distance and local exchange carriers, and between long distance carriers'
networks. SS7, sometimes referred to as "look-ahead routing," is used by local
exchange companies, long distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up that results in
more efficient use of network resources. SS7 is the standard method for
telecommunications signaling worldwide. The Company has deployed signal
transfer points (STPs) throughout its networks to efficiently route SS7 data
across the United States. SS7 is also the enabling technology for advanced
intelligence network platforms, a set of services and signaling options that
carriers can use to create new services or customer options. Carriers purchase
connections into the Company's SS7 network and purchase connections to other
local and long distance carriers on a monthly recurring basis. The Company has
also developed a nationwide SS7 service with Southern New England
Telecommunications Corporation (SNET), a subsidiary of SBC Communications, Inc.
The Company believes that, together with SNET, it is one of the largest
independent suppliers of SS7 services.
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NETWORK AND FACILITIES
Overview
The Company originally operated only local networks to service its business
and interexchange customers. The Company acquired an extensive data network as
part of its acquisition of NETCOM On-Line Communication Services, Inc. in 1998.
During 1999, the Company began providing Internet access services to ISPs and
other customers over its data network. The Company is currently expanding all
of its existing networks, including its data network, and evaluating development
of additional networks both inside and outside its existing footprint.
National Data Network
To service its ISP customers, the Company owns and operates a Tier I
nationwide data network which at December 31, 1999 included public and private
peering locations, 227 POPs, 16 frame relay switches and high-performance
routers connecting a backbone of 24 ATM switches and 18,000 miles of leased
long-haul fiber lines in the United States. The data network connects to major
public peering connections at MFS MAE East NAP (Washington, D.C.), MFS MAE West
NAP (Santa Clara, California), PacBell NAP (San Jose, California), Sprint NAP
(Newark, New Jersey) and Ameritech NAP (Chicago, Illinois). In addition, the
Company has several private peering relationships with major ISPs. The network
carries and will carry all IP data traffic associated with the Company's ISP
business. The design and architecture of the physical network permits the
Company to offer flexible, high-speed services to its customers.
Local Networks
Currently, the Company's local network supports traditional competitive
telephone and data services in five regions covering approximately 30
metropolitan areas in California, Colorado, Ohio, Texas and the Southeast.
Regional network infrastructure consists of fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. At year-end 1999, the voice network contained 31 5E Lucent switches.
The Company typically designs a ring architecture to make the voice network
accessible to the largest concentration of business end-users in a given market.
The Company's network is generally configured in redundant synchronous optical
network (SONET) rings that offer the advantage of uninterrupted service in the
event of a fiber cut or equipment failure, resulting in limited outages and
increased network reliability in a cost efficient manner.
Switched telephony services involve the transmission of voice, video or
data to long distance carrier-specified or end-user-specified termination sites.
The switch is required in order for the Company to provide the full range of
local telephone services. By contrast, the special access services provided by
the Company and other competitive local access providers to IXCs (discussed
above under "Interexchange Services") involve a dedicated communications link or
"pipe," usually between an end-user and a specific long distance carrier's POP.
With a switch and interconnection to various carriers' networks, it is possible
for the Company to direct a long distance carrier's traffic to any end-user
regardless of whether the end-user is physically connected to the Company's
owned or leased network.
-10-
Planned Capacity Upgrades
In order to meet the requirements of its growing customer base, the Company
intends to continue increasing the capacity of its national data network.
During 2000, ICG plans to increase its data network capacity to OC-48, capable
of carrying 2,488 megabits of data per second, 16 times the OC-3 capacity the
Company had at year-end 1999. If required, the Company has an option to further
increase capacity on its network by a factor of four, to OC-192, prior to year-
end 2000. The Company also plans to install up to 36 new gigabit routers during
2000 to further increase the capacity and efficiency of its network.
ICG also intends to increase the number of voice and data switches on its
network. The Company plans to add up to 35 new voice and data switches to its
network during 2000. The Company will add a new switch in each of its 22
expansion markets and plans to add additional switches in its existing markets.
In each of its expansion markets the Company will install equipment that will
deliver Internet access and network management capabilities for its ISP
customers, that is also expected to be capable of delivering basic and enhanced
voice services for its ISP and business customers.
These new services will support ISP and business customers. Examples
include:
. Integrated Access Service;
. Voice Over DSL (VoDSL), that bundles voice and data services over an
existing copper line (the Company has signed a letter of intent with a
DSL provider to jointly develop a VoDSL product);
. Unified messaging, a service that integrates voice mail, e-mail and
"follow-me" services that also utilizes the Company's nationwide VoIP
network.
The Company plans to install Lucent 5ESS switches in many of its new
markets, capable of delivering both voice and data services. The Company is
also testing technology that can potentially deliver these services on a more
cost-effective basis using new "soft switch" technology. Assuming successful
completion of this testing, the Company could install up to eight soft switches
as part of its 35-switch expansion in 2000.
The Company's data and voice networks are constructed to access long
distance carriers as well as areas of significant end-user telecommunications
traffic in a cost efficient manner. The construction period of a new network
varies depending upon the scope of the activities, such as the number of
backbone route miles to be installed, the initial number of buildings targeted
for connection to the network backbone and the general deployment of the network
infrastructure. Construction is planned to allow revenue-generating operations
to commence prior to the completion of the entire network backbone. After
installing the initial network backbone, extensions to additional buildings and
expansions to other regions of a metropolitan area are evaluated, based on
detailed assessments of market potential.
-11-
CUSTOMERS AND MARKETING
The Company's major customers include national and regional ISPs, ASPs,
other telecommunications providers, businesses and long distance carriers.
The Company's primary marketing strategies to these customers are to offer
a broad range of local, long distance, data, enhanced telephony and
infrastructure provider services at cost-effective rates. The Company markets
its service offerings through direct sales to end-users and wholesale accounts,
through sales agents and, to a limited extent, by direct mail. The Company has
developed three distinct internal sales channels, including a staff that sells
and markets ISP services, one that targets telephony services to business
customers and a third sales organization that is directed toward wholesale sales
to IXC customers. The Company is focused on improving its customer service and
provisioning process, which is essential for attracting and retaining customers.
In addition to its customer care center and trained sales teams, the Company
recently initiated CustomerConnections.net. This program assigns a Company vice
president to each major account. These vice presidents work directly with the
customer and the customers' existing account team to assist and develop the
customer relationship with the Company. It is anticipated that through this
contact, the Company will be able to better understand and respond to the needs
of its customers.
Further efforts are being made to increase customer satisfaction by
improving the provisioning, billing and back office processes. With respect to
provisioning, over the last year, the Company has increased its provisioning
capacity with the addition of more than 200 new employees in network operations
and the centralization of the process in a new national provisioning center.
During 1999, the Company also began implementing a new billing technology from
Saville, PLC which the Company anticipates will enhance its collection
capabilities and improve customer service by providing customers with reliable,
easy to understand invoices.
Customer service and monitoring of the Company's network facilities and
infrastructure are provided 24 hours per day, seven days per week. The Company
has two network monitoring centers. The center in Englewood, Colorado monitors
and manages the Company's regional fiber networks and provides high-level
monitoring of the Company's local exchange switches and is also a back-up
monitoring site for the Company's data network. The center located in San Jose,
California specifically monitors and manages the Company's data network
facilities.
COMPETITION
The Company competes in several sectors of the telecommunications service
industry, all of which are highly competitive. With respect to its ISP
services, the Company expects that competition will continue to intensify as
customers seek additional capacity to satisfy the continued growth of the
Internet. In addition, numerous competitors, including major telecommunications
carriers, are rapidly expanding their network capabilities in order to service
the ISP industry. The Company believes that the primary competitive factors for
the provision of network services are quality of service, network coverage,
reliability, price and product innovation.
-12-
The Company's competitors in the Internet access market possess (or will
possess) significant network infrastructure enabling them to provide ISPs with
capacity and access to the Internet. The Company's primary competitors in this
segment include Level 3, UUNet, Verio, Concentric, PSINet and Splitrock. While
the Company believes that its network and products will enable it to compete in
this industry sector, some of the Company's competitors have significantly
greater market presence, brand recognition and financial, technical and
personnel resources than the Company. In addition, the Company believes that
new competitors with significant resources will enter this market and construct
networks similar to the Company's networks. There can be no assurance that the
Company will be able to compete effectively with these companies.
In the commercial sector, the Company competes in an environment dominated
by the ILECs and GTE, which are among the Company's current competitors. The
ILECs have long-standing relationships with their customers and provide those
customers with various transmission and switching services. The ILECs also have
the potential to subsidize access and switched services with revenue from a
variety of businesses and historically have benefited from certain state and
federal regulations that have provided the ILECs with advantages over the
Company. Also included among the Company's current competitors in this sector
are other CLECs, network systems integration service providers, microwave and
satellite service providers, teleport operators and private networks built by
large end-users. In addition to the ILECs, competitors in this industry sector
include AT&T, MCI WorldCom and Qwest. Further, potential competitors have arisen
using different technologies, including cable television companies, utilities,
ISPs, ILECs outside their current local service areas, and the local access
operations of long distance carriers. Many of the Company's actual and potential
competitors have greater financial, technical and marketing resources than the
Company.
The Company is aware that consolidation of telecommunications companies,
including mergers between certain of the ILECs, between long distance companies
and cable television companies and between long distance companies and CLECs,
and the formation of strategic alliances within the telecommunications industry,
as well as the development of new technologies, will give rise to increased
competition. One of the primary purposes of the Telecommunications Act is to
promote competition, particularly in the local telephone market. Since
enactment, several telecommunications companies have indicated their intention
to aggressively expand their ability to address many segments of the
telecommunications industry, including segments in which the Company
participates and expects to participate. This may result in more participants
than can ultimately be successful in a given market.
While strong competition currently exists in all sectors of the industry,
the Company believes that the demand for enhanced voice and data services by
business customers provides expanded opportunity for new providers such as the
Company. There can be no assurance, however, that sufficient demand will exist
for the Company's network services in its selected markets, that market prices
will not dramatically decline or the Company will be successful in executing its
strategy in time to meet new competitors, or at all.
-13-
REGULATORY ACTIVITY
The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act of 1996.
The Telecommunications Act opened the local and long distance markets to
additional competition and changed the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state (intrastate) and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state (interstate). State and federal
regulators now share responsibility to some extent for implementing and
enforcing the pro-competitive policies and the provisions for the
Telecommunications Act.
The Telecommunications Act generally requires ILECs to negotiate agreements
to provide interconnection and nondiscriminatory access to their networks on
more favorable terms than were previously available in the past. However, such
new agreements are subject to negotiations with each ILEC that may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately,
the terms of an arbitrated agreement are subject to review by the federal
courts.
The Company executed interconnection agreements with many ILECs soon after
passage of the Telecommunications Act of 1996. The initial terms of those
agreements have expired or are soon expiring, and therefore the Company is in
the process of renegotiating and extending the terms of the interconnection
agreements. In certain instances, the Company has elected to arbitrate certain
disputed issues, or has elected to adopt a new interconnection agreement
based on an agreement previously executed between an ILEC and another CLEC. The
Company has completed arbitration proceedings with BellSouth before the state
commissions of Alabama, Florida, Georgia, Kentucky, North Carolina and Tennessee
and with Ameritech before the Ohio state commission. The Company recently filed
an arbitration petition with the Colorado state commission with respect to a
successor interconnection agreement with US West and also is in arbitration with
Southwestern Bell Telephone Company over certain disputed issues. Although the
arbitration decisions issued to date have been largely favorable to the Company
there can be no assurance that the Company will be able to continue to negotiate
and/or arbitrate acceptable new interconnection agreements.
On August 8, 1996, in two separate decisions, the Federal Communications
Commission (FCC) adopted rules and policies implementing the local competition
provisions of the Telecommunications Act. The FCC, among other things, adopted
national guidelines with respect to the unbundling of ILECs' network elements,
resale of ILEC services, the pricing of interconnection services and unbundled
elements, and other local competition issues. Numerous parties appealed both of
the FCC's orders to the U.S. Court of Appeals for the Eighth Circuit (Eighth
Circuit Court), and in 1997, the Eighth Circuit Court issued a decision which
upheld certain of the FCC's rules but reversed many of the FCC's rules on other
issues, including the pricing rules.
-14-
On January 25, 1999, the United States Supreme Court (Supreme Court)
largely reversed the Eighth Circuit Court's decision and reestablished the
validity of many of the FCC's interconnection rules, including the FCC's
jurisdiction to adopt pricing guidelines under the Telecommunications Act. The
Supreme Court also upheld the FCC's "pick-and-choose" rules, which allow CLECs
to adopt individual rates, terms and conditions from agreements that an ILEC has
with other carriers. The Supreme Court did not, however, evaluate the specific
pricing methodologies adopted by the FCC, and the appellate court will further
consider those methodologies. Additionally, the Supreme Court vacated the FCC
rules defining what network elements must be unbundled and made available to the
CLECs by the ILECs. The Supreme Court held that the FCC must provide a stronger
rationale to support the degree of unbundling ordered. As a result, the FCC
conducted a new rulemaking proceeding that adopted new rules on unbundled
network elements. On November 5, 1999, the FCC issued a decision in this
rulemaking proceeding, which established a new list of unbundled network
elements that must be provided by the ILECs.
The Company believes that it is entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet traffic originated from
ILEC customers as local traffic pursuant to various interconnection agreements.
Certain of the ILECs have not paid most of the bills they have received from the
Company and have disputed substantially all of these charges based on the
argument that ISP traffic is not local traffic as defined by the various
interconnection agreements and under state and federal laws and public policies.
The resolution of these disputes has been and will continue to be based on
rulings by state public utility commissions and/or by the FCC, and/or by
negotiations between the Company and the ILECs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations, Liquidity -
Transport and Termination Charges."
Federal Regulation
The Company generally operates as a regulated carrier with fewer regulatory
obligations than the ILECs. The Company must comply with the requirements of
the Telecommunications Act, such as offering service on a non-discriminatory
basis at just and reasonable rates. The FCC treats the Company as a non-
dominant carrier. The FCC has established different levels of regulation for
dominant and non-dominant carriers. Of domestic common carriers, only the ILECs
are classified as dominant carriers for the provision of access services, and
all other providers of domestic common carrier services are classified as non-
dominant. Under the FCC's streamlined regulation of non-dominant carriers, the
Company currently must file tariffs with the FCC for domestic and international
long distance services on an ongoing basis. The Company's provision of
international long distance services requires prior authorization by the FCC
pursuant to Section 214 of the Telecommunications Act, which the Company has
obtained. The FCC recently eliminated the requirement that non-dominant
interstate access carriers file tariffs. The Company is not subject to price
cap or rate-of-return regulation, nor is it currently required to obtain FCC
authorization for the installation or operation of its fiber optic network
facilities used for services in the United States.
-15-
State Regulation
In general, state public utility commissions have regulatory jurisdiction
over the Company when Company facilities and services are used to provide local
and other intrastate telecommunications services. Under the Telecommunications
Act, state commissions continue to set regulatory requirements for providers of
local and intrastate long distance services, including quality of services
criteria. State regulators can set prices for interconnection by CLECs with the
ILEC networks and also have the authority to set prices for the provision of
unbundled network elements by the ILECs. In certain states, the state
commission has the authority to scrutinize the rates charged by CLECs for
intrastate long distance and local services. The Company's provision of local
dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state regulation. To provide intrastate
service (particularly local dial tone service), the Company generally must
obtain a Certificate of Public Convenience and Necessity (CPCN) from the state
regulatory agency prior to offering service. In most states, the Company also
is required to file tariffs setting forth the terms, conditions and prices for
services that are classified as regulated intrastate services, and to update or
amend its tariffs as rates change or new products are added. The Company may
also be subject to various reporting and record-keeping requirements.
The Company currently holds CPCNs (or their equivalents) to provide
competitive local services in the following states: Alabama, California,
Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky,
Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
Washington, D.C., West Virginia, and Wisconsin. Additionally, the Company holds
CPCNs (or their equivalents) to provide intrastate long distance services in the
following states: Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
Applications currently are pending for CLEC authority in Arizona, Connecticut,
Louisiana, Maryland, Michigan and New Mexico.
Local Government Authorizations
Under the Telecommunications Act, local authorities retain jurisdiction
under applicable state law to control the Company's access to municipally owned
or controlled rights of way and to require the Company to obtain street opening
and construction permits to install and expand its fiber-optic network. In
addition, many municipalities require the Company to obtain licenses or
franchises (which generally have terms of 10 to 20 years) and to pay license or
franchise fees, often based on a percentage of gross revenue, in order to
provide telecommunications services, although in certain states including
California and Colorado, current state law prescribes the amount of such fees.
There is no assurance that certain cities that do not impose fees will not seek
to impose fees, nor is there any assurance that, following the expiration of
existing franchises, fees will remain at their current levels. In many markets,
the ILECs have been
-16-
excused from paying such franchise fees or pay fees that are materially lower
than those required to be paid by the Company for access to public rights of
way. However, under the Telecommunications Act, while municipalities may still
regulate use of their streets and rights of way, municipalities may not prohibit
or effectively prohibit any entity from providing any telecommunications
services. In addition, the Telecommunications Act requires that local
governmental authorities treat telecommunications carriers in a non-
discriminatory and competitively neutral manner. If any of the Company's
existing franchise or license agreements are terminated prior to their
expiration dates or not renewed, and the Company is forced to remove its fiber
from the streets or abandon its network in place, such termination could have a
material adverse effect on the Company.
The Company also engages in a variety of unregulated activities. Among the
unregulated activities is the provision of managed modem services.
Financing Activities
1999 Activities
On August 12, 1999, two of the Company's subsidiaries, ICG Equipment Inc.
(ICG Equipment) and NetAhead, entered into a $200.0 million senior secured
financing facility (Senior Facility) consisting of a $75.0 million term loan, a
$100.0 million term loan and a $25.0 million revolving line of credit. During
the year ended December 31, 1999, these subsidiaries borrowed $80.0 million
under the loans at interest rates ranging from LIBOR plus 3.125% to 3.5% or
9.35% to 9.67%. Quarterly repayments on the debt commence at various dates
beginning September 30, 1999 with remaining outstanding balances maturing on
June 30, 2005 for the $100.0 million term loan and the $25.0 million line of
credit and March 31, 2006 for the $75.0 million term loan. The terms of the
Senior Facility provide customary limitations on the use of proceeds, additional
indebtedness, investments, asset sales, dividends, prepayment of the Senior
Facility and other indebtedness and certain other transactions. Additionally,
ICG Services, ICG Equipment and NetAhead are subject to certain financial
covenants based on their results of operations. During 1999 and January 2000,
the credit agreement for the Senior Facility was amended to ensure that ICG
Services and its subsidiaries would remain in compliance with the financial
covenants of the Senior Facility.
Subsequent Activities
During the first quarter of 2000, ICG Services signed letters of intent
with its two biggest vendors, Lucent Technologies, Inc. and Cisco Systems, Inc.,
to obtain financing on future equipment purchases. The Company believes that
these financing agreements, if consummated, will better enable the Company to
fund its scheduled network expansion through the purchase of Lucent and Cisco
equipment. The Lucent credit agreement will provide ICG Services with up to
$250.0 million of capital which can be drawn down during the year following the
closing to purchase network equipment. Under the terms of the agreement, ICG
Services will commit to purchase a minimum of $175.0 million of equipment and
the remaining $75.0 million will be available to purchase equipment if and when
the Company obtains equity financing. The Lucent financing will provide for a
five-year repayment schedule and will require quarterly principal repayments
beginning in
-17-
June 2001. The Cisco credit facility will provide ICG Services with up to $180
million of capital lease financing with a three-year repayment term.
In February 2000, the Company announced that it had arranged to sell
approximately $750.0 (before estimated expenses and fees of $45.0 million)
million of convertible preferred stock in the Company to three investors:
affiliates of Liberty Media Corporation (Liberty), Hicks, Muse, Tate & Furst
Incorporated (Hicks Muse) and Gleacher Capital Partners (Gleacher). Under the
terms of the transaction, Liberty will invest $500.0 million, Hicks Muse will
invest $230.0 million and Gleacher will invest $20.0 million in exchange for a
total of 750,000 shares of Series A convertible preferred stock at $1,000 per
share. The preferred stock will be convertible into the Company's common stock
at a conversion rate of $28.00 per common share. The Company will also issue 10
million common stock warrants which will be exercisable at $34.00 per share. The
proceeds from this new equity investment will be used principally by the Company
to fund network expansion. It is expected that this equity financing will close
during the second quarter of 2000.
Also in February 2000, the Company and Teligent, Inc. (Teligent) agreed to
a common stock share exchange whereby the Company will purchase one million
shares of Teligent and Teligent will acquire 2,996,076 of the Company's shares.
The Company anticipates that this share exchange may create business
opportunities and improve operating efficiencies for both companies. The
pricing for each company's shares was based on the average closing price of the
shares of the respective company for the ten day period immediately prior to the
announcement of the transaction.
While the Company anticipates that the Lucent and Cisco debt financing
transactions, the preferred stock investment and the Teligent share exchange
will be consummated during the second quarter of 2000, there is no assurance
that the Company will be able to close these transactions on acceptable terms
and conditions. In the event the Company is not able to finalize one or more of
these transactions, its ability to undertake its network expansion and execute
its business plan could be materially adversely affected. See Part II,
"Liquidity and Capital Resources."
SALE OF ASSETS AND DISCONTINUANCE OF CERTAIN BUSINESSES
To better focus its efforts on its core operations, the Company has
disposed of certain assets which management believes did not complement its
overall business strategy. The Company will from time to time evaluate all of
its assets as to its core needs and, based on such analysis, may sell or
otherwise dispose of assets which management does not believe complement its
overall business strategy.
Sale of Operations of NETCOM
On January 21, 1998, the Company acquired NETCOM On-Line Communications
Services, Inc. (NETCOM), a provider of Internet connectivity and Web site
hosting services and other value-added services located in San Jose, California.
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc. (MindSpring), an ISP
located in Atlanta, Georgia. Total proceeds from the sale were $245.0 million,
consisting of $215.0 million in cash and 376,116 shares of unregistered common
stock of MindSpring, valued at approximately $79.76 per share at the time of the
transaction. Assets and liabilities sold to MindSpring included those directly
related to the domestic operations of NETCOM's Internet
-18-
dial-up, dedicated access and Web site hosting services. On March 16, 1999, the
Company sold all of the capital stock of NETCOM's international operations for
total proceeds of approximately $41.1 million. Specifically, MetroNET
Communications Corp. (MetroNET), a Canadian entity, and Providence Equity
Partners (Providence), located in Providence, Rhode Island, together purchased
the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9
million in cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Limited, NETCOM's subsidiary in the United Kingdom, for
approximately $12.2 million in cash. The Company realized a combined gain on the
NETCOM transactions of approximately $195.5 million, net of income taxes of
approximately $2.0 million. The Company's consolidated financial statements
reflect the operations of NETCOM as discontinued for all periods presented.
In conjunction with the sale to MindSpring, the legal name of the Company's
NETCOM subsidiary was changed to ICG NetAhead, Inc. (NetAhead). NetAhead
retained the domestic Internet backbone assets formerly owned by NETCOM which as
of December 31, 1999 included 227 POPs serving approximately 700 cities
nationwide. Commencing in the first quarter of 1999, NetAhead began to utilize
these retained network operating assets to provide wholesale Internet access and
enhanced network services to MindSpring. On February 17, 1999, the Company
entered into an agreement to provide IRAS, dedicated internet access and toll
free service to MindSpring for a one-year period. Under the Agreement, the
Company provides MindSpring with IRAS ports at a fixed fee in exchange for a
minimum of $27.0 million. MindSpring utilizes the capacity under the RAS ports
to provide Internet access to MindSpring's dial-up services customers. In
addition, under this agreement the Company receives for a one-year period 50% of
the gross revenue earned by MindSpring from the dedicated access customers
formerly owned by NETCOM. The MindSpring contract is currently operating under
a 90-day extension that ends in May 2000, and discussions are on going between
the Company and MindSpring to extend the business relationship beyond May 2000.
Discontinuance of Network Services and Satellite Services Businesses.
On July 15, 1999, the Company's board of directors adopted a formal plan to
dispose of the Company's wholly-owned subsidiaries, ICG Fiber Optic
Technologies, Inc. and Fiber Optic Technologies of the Northwest, Inc.
(collectively, Network Services) and ICG Satellite Services, Inc. and Maritime
Telecommunications Network, Inc. (collectively, Satellite Services), through the
sales of such businesses for cash proceeds. On October 22, 1999, the Company
completed the sale of all the capital stock of Network Services to an unrelated
third party for total proceeds of $23.9 million. On November 30, 1999, the
Company also completed the sale of all of the capital stock of Satellite
Services to an unrelated third party for cash proceeds of $98.1 million. The
Company recorded a loss on the disposal of Network Services of $10.9 million.
The Company recorded a gain on the disposal of Satellite Services of $48.7
million. For the years ended December 31, 1997, 1998 and 1999, Network Services
and Satellite Services combined reported revenue of $99.3 million, $94.3 million
and $104.2 million, respectively, and EBITDA losses (before non-recurring and
non-cash charges) of $1.3 million for the year ended December 31, 1997 and
EBITDA earnings (before non-recurring and non-cash charges) of $1.3 million and
$13.5 million for the years ended December 31, 1998 and 1999, respectively. The
-19-
Company's consolidated financial statements reflect the operations of Network
Services and Satellite Services as discontinued for all periods presented.
Discontinuance of Operations of Zycom.
Due primarily to the loss of a major customer, which generated a
significant obligation under a volume discount agreement with its call transport
provider, the board of directors of Zycom Corporation (Zycom), a 70%-owned
subsidiary of the Company, approved a plan on August 25, 1998 to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom completed
the transfer of all customer traffic to other providers and on January 4, 1999,
the Company completed the sale of the remainder of Zycom's long-lived operating
assets to an unrelated third party for total proceeds of $0.2 million. As
Zycom's assets were recorded at estimated fair market value at December 31,
1998, no gain or loss was recorded on the sale during the year ended December
31, 1999. For the years ended December 31, 1997 and 1998, Zycom reported
revenue of $28.3 million and $17.0 million, respectively, and EBITDA losses
(before non-recurring and non-cash charges) of $2.4 million and $2.9 million,
respectively. The Company reported no income or loss from operations for the
year ended December 31, 1999. The Company's consolidated financial statements
reflect the operations of Zycom as discontinued for all periods presented.
EMPLOYEES
As of December 31, 1999, the Company employed a total of approximately
2,853 individuals on a full-time basis. None of the Company's employees is
represented by a union. The Company has not experienced any strikes or work
stoppages and believes that relations with its employees are satisfactory.
The Company believes that its ability to successfully implement its
business strategy will depend on its continued ability to attract and retain
qualified employees, which in the current competitive environment is becoming
increasingly difficult. The Company expects to continue to add employees to the
organization, particularly in the areas of operations and sales. The Company
expects to employ an additional 300-400 employees during the next year. In
order to attract and retain highly qualified employees, the Company believes
that it is imperative to maintain a competitive compensation program. Included
in the Company's compensation program are non-cash benefit programs, including a
401(k) program, stock option grants and a bonus package which is based on both
individual and Company performance. The Company believes that it generally
offers compensation packages which are comparable with those of its competitors
who are similar in size and capital structure. Due to the existing labor
market, qualified personnel are difficult to recruit and retain and the Company
cannot guarantee that it will be able to attract and retain the personnel
necessary to implement its business strategy.
TRADEMARKS AND TRADE NAMES
The Company filed United States federal trademark applications for the
marks "ICG", "ICG Communications", "ICG Communications, Inc.", "ICG Telecom
Group, Inc.", "NetAhead", "ICG NetAhead" and "ICG NetAhead, Inc.". The Company
also filed a separate United States federal trademark application for the
diamond logo used in conjunction with ICG
-20-
on March 20, 1997. The trademark "ICG Communications, Inc." was registered on
December 7, 1999. The other applications are pending and the Company has no
assurance that they will be granted. In addition, the company filed United
States service mark applications for "Let's Talk About Your Business" on March
24, 1998 and "Hello, ICG" on March 4, 1999. These applications are pending and
the Company has no assurance that they will be granted. The domain name
icgcommunications.com was registered March 14, 1998.
ITEM 2. PROPERTIES
----------
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites and POPs. Additional
space may be purchased or leased by the Company as networks are expanded. The
Company owns a 30,000 square-foot building located in Englewood, Colorado that
houses a portion of the Company's Telecommunications Services business.
As of December 31, 1999, the Company leased approximately 230,419 square
feet of office and operations space in the Denver metropolitan area and
approximately 1,531,498 square feet in other areas of the United States outside
of Denver. Further, NetAhead leased an additional 227,472 square feet for its
POP sites at over 270 locations across the country.
Effective January 1, 1999, ICG Services purchased the Company's corporate
headquarters building, land and improvements (collectively, the Corporate
Headquarters) for approximately $43.4 million. The Corporate Headquarters is
approximately 239,749 square feet. ICG Services financed the purchase primarily
through a mortgage granted in favor of an affiliate of the seller, which
encumbers the Corporate Headquarters. Effective May 1, 1999, the Corporate
Headquarters was transferred to ICG 161, L.P., a special purpose limited
partnership owned 99% by a subsidiary of ICG Services and 1% by an affiliate of
the mortgagee and seller, and ICG 161, L.P. assumed the loan secured by the
mortgage. The partnership agreement for ICG 161, L.P. grants to the one-percent
partner an option to acquire all of ICG Service's subsidiary's interest in the
partnership for a purchase price of $43.1 million, which option is exercisable
from January 1, 2004 through January 31, 2012.
Effective December 10, 1999, a subsidiary of ICG Services acquired an 8.36
acre parcel of vacant ground located adjacent to the Corporate Headquarters for
approximately $3.3 million. The Company plans to use this parcel in connection
with the expansion of its Corporate Headquarters.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On April 4, 1997, certain shareholders of Zycom, a discontinued subsidiary
of the Company, filed a shareholder derivative suit and class action complaint
for unspecified damages, purportedly on behalf of all of the minority
shareholders of Zycom, in the District Court of Harris County, Texas against the
Company, Zycom and certain of their subsidiaries. The complaint, which has been
amended numerous times, alleges that the Company and certain of its subsidiaries
breached certain fiduciary duties owed to the plaintiffs. The plaintiffs were
denied
-21-
class certification by the trial court and this decision has been upheld
on appeal. A trial date has been set for May 2000. The Company is vigorously
preparing to defend against the plaintiffs' claims at trial. While it is not
possible to predict the outcome of litigation, management believes this
proceeding will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
In August 1999, the Company commenced litigation against International
Business Machines (IBM) in the United States District Court for District of
Colorado to recover approximately $19.0 million it paid for customization of
IBM's Integrated Customer Management System (ICMS). The Company has asserted
claims against IBM for breach of contract, unjust enrichment and breach of
warranty. IBM has asserted a counterclaim in the amount of $2.6 million for
non-payment of invoices for work it performed on the ICMS project. While it is
not possible to predict the outcome of this litigation, management believes that
it will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
The Company is a party to certain other litigation that has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows. The Company
is not involved in any administrative or judicial proceedings relative to an
environmental matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-22-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market (Nasdaq) since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange (AMEX), from August 5, 1996 to
March 24, 1997 under the symbol "ICG." Prior to August 5, 1996, Holdings-
Canada's common shares had been listed on the AMEX under the symbol "ITR" from
January 14, 1993 through February 28, 1996, and under the symbol "ICG"
thereafter through August 2, 1996. Holdings-Canada Class A Common Shares (the
Class A Shares) ceased trading on the AMEX at the close of trading on August 2,
1996. The Class A Shares, which were listed on the Vancouver Stock Exchange
(VSE) under the symbol "IHC.A," ceased trading on the VSE at the close of
trading on March 12, 1997. During 1998, all of the remaining Class A Shares
outstanding held by third parties were exchanged into shares of ICG Common
Stock.
The following table sets forth the high and low sales prices of ICG Common
Stock as reported on Nasdaq for the quarterly periods indicated:
Nasdaq National Market
---------------------------------------
High Low
----------------- -----------------
1998:
First Quarter $44.25 $24.38
Second Quarter 38.88 28.50
Third Quarter 36.63 15.50
Fourth Quarter 26.56 11.13
1999:
First Quarter $24.13 $15.25
Second Quarter 28.56 16.81
Third Quarter 28.13 15.00
Fourth Quarter 21.94 13.94
2000:
Through March 27, 2000 $39.25 $16.31
See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of ICG Common Stock. On March 27, 2000, there were
257 holders of record.
The Company has never declared or paid dividends on ICG Common Stock and
does not intend to pay cash dividends on ICG Common Stock in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on ICG Common Stock is effectively
-23-
prohibited by the restrictions contained in the Company's indentures relating to
its senior indebtedness and in the Second Amended and Restated Articles of
Incorporation of Holdings, which prohibit Holdings from making any material
payment to the Company. Certain of the Company's debt facilities also contain
covenants that restrict the Company's ability to pay cash dividends.
In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Senior Discount Notes
due 2008 (the 9 7/8% Notes). Morgan Stanley & Co. Incorporated acted as
placement agent for the offering and received placement fees of approximately
$7.5 million. In February 1998, ICG Services sold $490.0 million principal
amount at maturity ($300.6 million original issue price) of 10% Senior Discount
Notes due 2008 (the 10% Notes). Morgan Stanley & Co. Incorporated acted as
placement agent for the offering and received placement fees of approximately
$9.0 million.
In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company (ICG Funding),
completed a private placement of $132.3 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the 6 3/4%
Preferred Securities). The 6 3/4% Preferred Securities are mandatorily
redeemable November 15, 2009 at the liquidation preference of $50.00 per
security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred
Securities are cumulative at the rate of 6 3/4% per annum and are payable in
cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into ICG Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of ICG Common Stock equals or exceeds the
exchange price by 150%, for at least 20 days of any consecutive 30-day trading
period, through November 15, 2000. Morgan Stanley & Co. Incorporated and
Deutsche Morgan Grenfell Inc. acted as placement agents for the offering and
received aggregate placement fees of approximately $4.0 million.
In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007
(the 11 5/8% Notes) and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the 14% Preferred Stock), having a liquidation preference of
$1,000 per share. These securities are guaranteed by the Company on a full and
unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $7.5 million.
Each of the foregoing offerings was exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. The securities sold in each of the
foregoing offerings were subsequently registered under the Securities Act.
In October 1997, the Company issued 687,221 shares of ICG Common Stock (the
CBG Shares) to certain shareholders of Communications Buying Group, Inc. (CBG),
an Ohio based local exchange and Centrex reseller, in connection with the
acquisition of CBG for a purchase price of approximately $16.0 million. The
sale of the CBG Shares was exempt from registration
-24-
under Section 4(2) of the Securities Act because the offers and sales were made
to a limited number of investors in a private transaction. Resale of the CBG
Shares was subsequently registered on a Form S-3 registration statement which
was declared effective on October 31, 1997.
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice Network Services, L.L.C.
(DataChoice), valued at approximately $32.88 per share on the date of the sale
(the DataChoice Shares). The sale of the DataChoice Shares was exempt from
registration under Section 4(2) of the Securities Act because the offers and
sales were made to a limited number of investors in a private transaction.
Resale of the DataChoice Shares was subsequently registered on a Form S-3
registration statement which was declared effective on April 2, 1999.
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNet Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, NikoNet), valued at
approximately $30.03 per share on the date of the sale (the NikoNet Shares).
The sale of the NikoNet Shares was exempt from registration under Section 4(2)
of the Securities Act because the offer and sales were made to a limited number
of investors in a private transaction.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected financial data for the fiscal years ended September 30, 1995
and 1996, the three months ended December 31, 1996 and the years ended December
31, 1997, 1998 and 1999 has been derived from the audited consolidated financial
statements of the Company. The information set forth below should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto included elsewhere in this Annual Report. The Company's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another. The Company's consolidated financial statements reflect the operations
of Zycom, NETCOM, Network Services and Satellite Services as discontinued for
all periods presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-25-
Three
Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
-------------------------------------------------------------------------------------------------------
1995 1996 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Statement of Operations
Data:
Revenue (1) $ 30,906 72,731 27,307 149,358 303,317 479,226
Operating costs and expenses:
Operating costs 20,924 65,436 27,018 147,338 187,260 238,927
Selling, general and
administrative expenses 32,671 45,150 16,895 121,884 158,153 239,756
Depreciation and amortization 10,399 24,041 8,266 49,836 91,927 174,239
Provision for impairment of
long-lived assets 2,000 9,800 - 5,169 - 31,815
Restructuring costs - - - - 1,786 -
Other, net 241 1,030 (805) 292 4,877 387
-------- ------- -------- ------- ------ -------
Total operating costs
and expenses 66,235 145,457 51,374 324,519 444,003 685,124
Operating loss (35,329) (72,726) (24,067) (175,161) (140,686) (205,898)
Interest expense (23,190) (85,299) (24,441) (117,521) (170,015) (212,420)
Other income, net 3,398 14,182 5,885 21,404 27,283 13,778
-------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes, preferred
dividends, share of losses,
extraordinary gain and
cumulative effect of change in
accounting (55,121) (143,843) (42,623) (271,278) (283,418) (404,540)
Income tax benefit (expense) - 5,305 (1) - (90) (25)
Accretion and preferred dividends
on preferred securities of
subsidiaries net of minority
interest in share of losses (1,764) (27,598) (5,529) (39,019) (55,183) (61,897)
Share of losses of joint venture (741) (1,814) - - - -
--------------------------------------------------------------------------------------------------
Loss from continuing operations
before extraordinary gain and
cumulative effect of change in
accounting (57,626) (167,950) (48,153) (310,297) (338,691) (466,462)
Net (loss) income from
discontinued operations (33,086) (56,969) (13,161) (50,438) (79,354) 36,789
Extraordinary gain on sales of
operations of NETCOM - - - - - 195,511
Cumulative effect of change in
accounting (1) - (3,453) - - - -
-------- ------- -------- ------- ------ -------
Net loss $ (90,712) (228,372) (61,314) (360,735) (418,045) (234,162)
==================================================================================================
Loss per share from continuing
operations - basic and diluted $(1.87) (4.55) (1.15) (7.30) (7.49) (9.90)
===================================================================================================
Net loss per share - basic and
diluted $(2.94) (6.19) (1.47) (8.49) (9.25) (4.97)
===================================================================================================
Weighted average number of
shares outstanding - basic
and diluted (2) 30,808 36,875 41,760 42,508 45,194 47,116
===================================================================================================
(Continued)
-26-
Three
Months
Fiscal Years Ended Ended
September 30, December 31, Years Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1996 1996 1997 1998 1999
----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Other Data:
Net cash (used) provided by
operating activities $ (41,947) (29,375) 200 (106,761) (100,060) 21,083
Net cash used by investing
activities (65,772) (137,148) (79,621) (422,585) (343,561) (186,971)
Net cash provided (used) by
financing activities 377,772 365,272 (1,741) 308,804 525,601 67,018
EBITDA (3) (24,930) (48,685) (15,801) (125,325) (48,759) (31,659)
EBITDA (before non-recurring and
non-cash charges) (3) (22,689) (37,855) (16,606) (119,864) (42,096) 543
Capital expenditures of
continuing operations (4) 82,623 162,510 67,515 261,318 356,036 735,233
Capital expenditures of
discontinued operations (4) 49,714 68,789 11,336 25,533 38,891 12,264
Balance Sheet Data:
Cash, cash equivalents and
short-term investments
available for sale $ 268,688 458,640 392,921 232,855 262,307 125,507
Net current assets (liabilities) of
discontinued operations (5) 135,419 62,173 68,950 58,586 66 (529)
Working capital (deficit) 381,006 499,810 415,247 263,674 294,934 (67,761)
Property and equipment, net 169,907 308,615 374,924 603,988 908,058 1,525,680
Net non-current assets of
discontinued operations (5) 108,604 149,378 154,481 128,206 102,774 -
Total assets 737,099 1,066,224 1,071,699 1,205,331 1,589,647 2,020,621
Current portion oflong-term debt and
capital lease obligations 17,509 7,661 24,877 7,096 4,892 8,886
Long-term debt and capital lease
obligations, less current
portion 397,168 739,308 761,135 957,508 1,661,944 1,969,249
Redeemable preferred
securities of subsidiaries 24,336 153,318 159,120 420,171 466,352 519,323
Common stock and additional paid
-in capital 420,516 504,851 508,182 534,290 577,940 599,760
Accumulated deficit (152,487) (380,859) (430,682) (791,417) (1,209,462) (1,443,624)
Stockholders' equity (deficit) 268,001 125,203 78,711 (256,983) (631,177) (843,864)
(1) During the fiscal year ended September 30, 1996, the Company changed its
method of accounting for long-term telecom services contracts to recognize
revenue as services are provided. Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) Weighted average number of shares outstanding for the fiscal year ended
September 30, 1995 represents Holdings-Canada common shares outstanding.
Weighted average number of shares outstanding for the fiscal year ended
September 30, 1996, the three months ended December 31, 1996, and the years
ended December 31, 1997 and 1998 represents Holdings-Canada common shares
outstanding for the period from October 1, 1995 through August 2, 1996, and
represents ICG Common Stock and HoldingsCanada Class A Shares (not owned by
the Company) outstanding for the periods from August 5, 1996 through
December 31, 1998. During the year ended December 31, 1998, all of the
remaining Class A Shares outstanding held by third parties were exchanged
into shares of ICG Common Stock and, accordingly, weighted average number
of shares outstanding for the year ended December 31, 1999 represents ICG
Common Stock only.
(3) EBITDA consists of loss from continuing operations before interest, income
taxes, depreciation and amortization, other expense, net and accretion and
preferred dividends on preferred securities of subsidiaries, net of
minority interest in share of losses, or, operating loss plus depreciation
and amortization. EBITDA (before non-recurring and non-cash charges)
represents EBITDA before certain nonrecurring charges such as the provision
for impairment of long-lived assets, restructuring costs and other, net
operating costs and expenses, including deferred compensation and net loss
(gain) on
-27-
disposal of long-lived assets. EBITDA and EBITDA (before non-recurring
and non-cash charges) are provided because they are measures commonly used
in the telecommunications industry. EBITDA and EBITDA (before non-recurring
and non-cash charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with generally accepted accounting
principles (GAAP) for the periods indicated. EBITDA and EBITDA (before non-
recurring and non-cash charges) are not measurements under GAAP and are not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities as
determined using GAAP are also presented in Other Data.
(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes payments for
construction of the Company's corporate headquarters and corporate
headquarters assets acquired through the issuance of long-term debt.
Capital expenditures of discontinued operations include the capital
expenditures of Zycom, NETCOM, Network Services and Satellite Services
combined for all periods presented.
(5) Net non-current assets of discontinued operations and net current assets
(liabilities) of discontinued operations represents the assets and
liabilities of Zycom, NETCOM, Network Services and Satellite Services
combined for periods presented prior to the respective dates of each sale.
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, the ability of
the Company to obtain adequate financing to fund expansion, the dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and enhanced telephony and network services, the
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the years ended
December 31, 1997, 1998 and 1999 have been derived from the Company's audited
consolidated financial statements included elsewhere herein. The Company's
consolidated financial statements reflect the operations of Zycom, NETCOM,
Network Services and Satellite Services as discontinued for all periods
presented. All dollar amounts are in U.S. dollars.
Company Overview
ICG Communications, Inc. (ICG or the Company) is a facilities-based
communications provider and, based on revenue and customer lines in service, one
of the largest competitive communications companies in the United States. The
Company primarily offers voice and data services directly to small- to medium-
sized business customers and offers network facilities and data management to
ISP customers. In addition, the Company offers special access and switched
access services to long-distance companies and other customers.
The Company began marketing and selling local dial-tone services in major
metropolitan areas in early 1997 subsequent to passage of the Telecommunications
Act, which permitted competitive interstate and intrastate telephone services
including local dial tone. In 1999, the Company offered competitive telephone
services in five regions within the United States. In early 1998, the Company
acquired NETCOM On-Line Communication Services, Inc. (NETCOM), which provided
the Company with a Tier 1 national data network that enabled the Company to
launch its business of providing network infrastructure to ISPs. By year-end
1999, the company had 730,975 customer lines and data access ports in service,
over 12,000 business customers and approximately 500 ISP customers.
As of December 31, 1999, the Company had 496,530 data access ports in
service for its ISP customers. The Company provides data access and transport
services to ISPs that in many cases rely on the Company to provide network
ownership and management. The Company's current product offerings to the ISP
market include dial-up products such as primary rate interface (PRI), remote
access service (RAS) and Internet remote access service (IRAS), as well as
broadband access services including T-1 and T-3 connections and DSL.
As of December 31, 1999, the Company had 234,445 business customer lines in
service. Voice and data communication services offered to business customers
include local, long distance and enhanced telephony services through its
Internet protocol, circuit switch and
-29-
regional fiber optic networks. In regional markets, the Company is a cost-
efficient alternative to the area's incumbent local telephone company for
businesses.
The Company provides interexchange services to long-distance carriers and
other customers including "special access" services that connect end-users to
long-distance carrier's facilities, connect a long-distance carrier's facilities
to the local telephone company central office and connect facilities of the same
or different long-distance carrier.
In 1999, the Company realized significant growth as demonstrated by a 58
percent increase in revenue over 1998 and a more than doubling of the number of
lines in service compared to December 31, 1998. In connection with its high
level of growth, the Company took steps to streamline its business and focus on
its core operations.
To better focus its efforts on its core business operations, the Company
disposed of certain assets which management believes do not complement its
overall business strategy. During the year ended December 31, 1999, the Company
sold non-core assets and related securities for net cash proceeds of
approximately $405 million, including the sale of the Company's retail ISP
customer business and its Network Services and Satellite Services divisions (see
Part IV, "Discontinued Operations and Divestitures," note 3). The Company also
centralized its provisioning process with two new provisioning centers that
replaced 30 regional centers and added new, comprehensive operating support
systems (OSS) from Telcordia for provisioning service and from Saville for
improved customer billing.
The Company owns and operates a Tier 1 nationwide data network, which at
December 31, 1999, included public and private peering locations, 227 POPs, 31
voice switches, 16 frame relay switches and high-performance routers
connecting a backbone of 24 ATM switches and 18,000 miles of leased long-haul
fiber lines. In addition, at year-end the Company had 4,596 miles of local fiber
and connections to 8,078 buildings.
The Company's business continues to grow as a result of increased Internet
demand, new technologies and increased market share for customers traditionally
served by incumbent telephone companies. The Company's business plan calls for
accelerated network expansion in 2000 into 22 new major metropolitan areas by
year-end. The Company will also invest in developing and delivering new
products and services to complete its portfolio of offerings to each market
segment.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on equipment, sales,
marketing, customer service, engineering and support personnel prior to the
generation of corresponding revenue. EBITDA losses, EBITDA (before non-recurring
and non-cash charges) losses and operating and net losses have generally
increased immediately preceding and during periods of relatively rapid network
expansion and development of new services. Since the quarter ended June 30,
1996, EBITDA losses (before non-recurring and non-cash charges) have improved
for each consecutive quarter, through and including the quarter ended June 30,
1999 for which the Company reported positive EBITDA (before non-recurring and
non-cash charges) of $15.2 million. Due to the Company's decision to suspend the
revenue recognition for certain elements of transport and termination services
provided to ILECs and a nonrecurring provision for certain of the Company's
accounts
-30-
receivable (see "Liquidity and Capital Resources - Transport and Termination
Charges"), the Company's EBITDA (before non-recurring and non-cash charges) for
the quarter ended September 30, 1999 was a loss of $45.7 million. For the
quarter ended December 31, 1999, the Company's EBITDA (before non-recurring and
non-cash charges) improved to $23.1 million. Operating costs and operating loss
in the fourth quarter were lower and therefore EBITDA and EBITDA (before non-
recurring and non-cash charges) were higher due to an in-depth management review
of network costs that was conducted during the fourth quarter of 1999 following
the centralization of network functions. The analysis identified $9.5 million in
costs from the first nine months of 1999 related to capital activities under the
existing Company capitalization policy.
Results of Operations
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating loss,
EBITDA and EBITDA (before non-recurring and non-cash charges) as a percentage of
the Company's revenue.
Years Ended December 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------------------------------------------------------------
$ % $ % $ %
------- ---------- ----------- ---------- ------- -------
(Dollars in thousands)
Statement of Operations Data:
Revenue 149,358 100 303,317 100 479,226 100
Operating costs 147,338 99 187,260 62 238,927 50
Selling, general and administrative 121,884 82 158,153 52 239,756 50
Depreciation and amortization 49,836 33 91,927 30 174,239 36
Provision for impairment of long-lived assets 5,169 3 - - 31,815 7
Restructuring costs - - 1,786 - - -
Other, net 292 - 4,877 2 387 -
------- ---------- ----------- ---------- ------- -------
Operating loss (175,161) (117) (140,686) (46) (205,898) (43)
Other Data:
Net cash (used) provided by operating activities (106,761) (100,060) 21,083
Net cash used by investing activities (422,585) (343,561) (186,971)
Net cash provided by financing activities 308,804 525,601 67,018
EBITDA (1) (125,325) (84) (48,759) (16) (31,659) (7)
EBITDA (before non-recurring and non-cash
charges) (1) (119,864) (80) (42,096) (14) 543 -
Capital expenditures of continuing operations (2) 261,318 356,036 735,233
Capital expenditures of discontinued operations 25,533 38,891 12,264
(2)
(1) See note 3 under "Selected Financial Data" for the definitions of EBITDA and
EBITDA (before non-recurring and non-cash charges).
(2) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
-31-
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Revenue increased $175.9 million, or 58%, from $303.3 million for the year
ended December 31, 1998 to $479.2 million for the year ended December 31, 1999.
Local services revenue increased from $159.2 million, for the year ended
December 31, 1998 to $299.9 million, for the year ended December 31, 1999
increasing from 52% to 63% of total revenue respectively. The increase in local
services revenue is primarily due to an increase in the number of customer lines
in service from 354,482 lines at December 31, 1998 to 730,975 lines at December
31, 1999. In addition, local access revenue includes revenue of approximately
$58.3 million and $124.1 million for the years ended December 31, 1998 and 1999,
respectively, for reciprocal compensation relating to the transport and
termination of local traffic pursuant to various interconnection agreements. The
Company ceased recording revenue for tandem and transport reciprocal
compensation effective June 30, 1999. These agreements are currently under
renegotiation or are subject to renegotiation over the next several months.
While management believes that these agreements will be replaced by agreements
offering the Company some form of compensation for traffic, the renegotiated
agreements may reflect rates for reciprocal compensation, which are lower than
the rates under the current contracts. (See "Liquidity - Transport and
Termination Charges.") Special access revenue increased from $74.5 million, or
25% of revenue, for the year ended December 31, 1998 to $113.9 million, or 24%
of revenue, for the year ended December 31, 1999, due to increased sales and
$18.1 million of revenue recognized during the year ended December 31, 1999
under the Company's fiber optic lease agreement with a major interexchange
carrier. The Company expects to record a minimum of approximately $11.0 million
in additional revenue under this agreement during the first half of 2000.
Switched access (terminating long distance) revenue decreased to $46.7 million
for the year ended December 31, 1999, compared to $49.0 million for the year
ended December 31, 1998. The Company has raised prices on its wholesale switched
services product in order to improve margins. Revenue from long distance
services was $20.6 million and $18.7 million for years ended December 31, 1998
and 1999, respectively. The Company's long distance revenue for the year ended
December 31, 1999 was impacted by planned attrition of resale access lines which
had high long distance service penetration rates. Revenue from data services did
not generate a material portion of total revenue during either period.
Operating costs
Operating costs, which consist solely of operating costs from
telecommunications services, increased $51.6 million, or 28%, from $187.3
million for the year ended December 31, 1998 to $238.9 million for the year
ended December 31, 1999. Operating costs decreased as a percentage of revenue
from 62% for the year ended December 31, 1998 to 50% for the year ended December
31, 1999. Operating costs consist of payments to ILECs for the use of network
facilities to support local special and switched access services, network