-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THww1ZsIT7BQ25oHhYnbFwKyeg6CcMEGcQtLU1NaDvNgj6srBR/hHuIQTDlvYTml KeCH0RRZ6PSwS/qo+NNwWA== /in/edgar/work/0000786343-00-000009/0000786343-00-000009.txt : 20001122 0000786343-00-000009.hdr.sgml : 20001122 ACCESSION NUMBER: 0000786343-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICG HOLDINGS CANADA CO /CO/ CENTRAL INDEX KEY: 0000786343 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 841128866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11052 FILM NUMBER: 774046 BUSINESS ADDRESS: STREET 1: 161 INVERNESS DRIVE WEST STREET 2: P O BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3034145431 MAIL ADDRESS: STREET 1: 161 INVERNESS DRIVE WEST STREET 2: PO BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: ICG HOLDINGS CANADA INC DATE OF NAME CHANGE: 19970225 FORMER COMPANY: FORMER CONFORMED NAME: INTERTEL COMMUNICATIONS INC DATE OF NAME CHANGE: 19930107 10-Q 1 0001.txt FOR PERIOD ENDING 9/30/00 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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) - -------------------------------------------------------------------------------- Delaware 84-1342022 Nova Scotia Not Applicable Colorado 84-1158866 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) - -------------------------------------------------------------------------------- 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 Englewood, Colorado 80112 161 Inverness Drive West Not applicable Englewood, Colorado 80112 (Address of principal executive offices) (Address of U.S. agent for service) - -------------------------------------------------------------------------------- Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes |X| No __ The number of registrants' outstanding common shares as of November 17, 2000 were 52,045,443, 31,931,588 and 1,918, respectively. 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 ICG Holdings, Inc. TABLE OF CONTENTS PART I ....................................................................... 3 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................... 3 Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (unaudited)................................ 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 2000 (unaudited).......... 5 Consolidated Statement of Stockholders' Deficit for the Nine Months Ended September 30, 2000 (unaudited)................... 7 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 2000 (unaudited)....................... 8 Notes to Consolidated Financial Statements(unaudited)..........10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................................20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....36 PART II ......................................................................37 ITEM 1. LEGAL PROCEEDINGS .............................................37 ITEM 2. CHANGES IN SECURITIES .........................................37 ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...............................37 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS .........37 ITEM 5. OTHER INFORMATION .............................................37 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K .............................. 38 Exhibits ......................................................38 Reports on Form 8-K ...........................................38 2 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) December 31, September 30, 1999 2000 --------------- -------------- (in thousands) Assets Current assets: Cash and cash equivalents $ 103,288 216,714 Short-term investments available for sale 22,219 17,536 Receivables: Trade, net of allowance of $78.7 million and $73.7 million at December 31, 1999 and September 30, 2000, respectively (notes 4 and 9) 167,273 190,349 Other 1,458 3,291 --------------- -------------- Total net receivables 168,731 193,640 Prepaid expenses, deposits and inventory 11,388 19,839 --------------- -------------- Total current assets 305,626 447,729 --------------- -------------- Property and equipment 1,805,378 2,650,813 Less accumulated depreciation (279,698) (457,363) --------------- -------------- Net property and equipment (note 5) 1,525,680 2,193,450 --------------- -------------- Restricted cash 12,537 7,721 Investments 28,939 15,652 Other assets, net of accumulated amortization: Goodwill 95,187 73,099 Deferred financing costs 35,884 32,252 Other, net 16,768 20,024 --------------- -------------- 147,839 125,375 --------------- -------------- Total Assets (notes 1 and 3) $2,020,621 2,789,927 =============== ============== (continued) 3 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited), Continued December 31, September 30, 1999 2000 ------------ ------------ (in thousands) Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 112,291 108,465 Payable pursuant to IRU agreement 135,322 53,826 Accrued liabilities (note 6) 85,709 206,611 Deferred revenue (note 9) 25,175 172,843 Deferred gain on sale 5,475 - Current portion of capital lease obligations 8,090 55,761 Current portion of long-term debt (note 7) 796 796 Current liabilities of discontinued operations 529 198 ------------ ------------ Total current liabilities 373,387 598,500 ------------ ------------ Capital lease obligations, less current portion 63,348 139,377 Long-term debt, net of discount, less current portion (note 7) 1,905,901 2,068,672 Other long-term liabilities 2,526 3,247 ------------ ------------ Total liabilities 2,345,162 2,809,796 Redeemable preferred stock of subsidiary ($397.9 million and $441.7 million liquidation value at December 31, 1999 and September 30, 2000, respectively) (note 8) 390,895 435,337 Company-obligated mandatorily redeemable preferred securities of subsidiary limited liability company which holds solely Company preferred stock ($133.4 million liquidation value at December 31, 1999 and September 30, 2000, respectively) 128,428 128,719 8% Series A Convertible Preferred Stock ($781.7 million liquidation value at September 30, 2000) (note 8) - 658,840 Stockholders' deficit: Common stock, $0.01 par value, 100,000,000 and 200,000,000 shares authorized at December 31, 1999 and September 30, 2000, respectively; 47,761,337 and 52,045,443 shares issued and outstanding at December 31, 1999 and September 30, 2000, respectively 478 520 Additional paid-in capital 599,282 882,142 Accumulated deficit (1,443,624) (2,116,802) Accumulated other comprehensive loss - (8,625) ------------ ------------ Total stockholders' deficit (843,864) (1,242,765) ------------ ------------ Commitments and contingencies (note 9) Total Liabilities and Stockholders' Deficit (note 1) $ 2,020,621 2,789,927 ============ ============ See accompanying notes to consolidated financial statements. 4 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three Months and Nine months ended September 30, 1999 and 2000 (unaudited)
Three months ended Nine months ended September 30, September 30, ---------------------------------------- 1999 2000 1999 2000 --------- -------- -------- --------- (in thousands, except per share data) Revenue $115,166 144,801 337,151 477,778 Operating costs and expenses: Operating costs 66,284 118,711 179,391 304,202 Selling, general and administrative expenses 94,558 84,183 180,341 188,947 Depreciation and amortization 45,079 99,023 126,137 236,514 Provision for impairment of long-lived assets (note 3) - - 29,300 - Net loss on disposal of long-lived assets 195 2,022 (771) 2,566 Other, net 431 431 862 1,692 --------- -------- -------- --------- Total operating costs and expenses 206,547 304,370 515,260 733,921 --------- -------- -------- --------- Operating loss (91,381) (159,569) (178,109) (256,143) Other income (expense): Interest expense (52,891) (66,014) (151,637) (195,406) Interest income 3,772 5,898 11,669 20,437 Other expense, net (333) (352) (2,676) (349) --------- -------- -------- --------- (49,452) (60,468) (142,644) (175,318) --------- -------- -------- --------- Loss from continuing operations before income taxes, preferred dividends and extraordinary gain (140,833) (220,037) (320,753) (431,461) Income tax expense - (10) - (10) Accretion and preferred dividends on preferred securities of subsidiaries (15,694) (17,655) (45,739) (51,428) --------- -------- -------- --------- Loss from continuing operations before (156,527) (237,702) (366,492) (482,899) extraordinary gain Income (loss) on disposal and operation of discontinued operations 748 - (8,014) 736 --------- -------- -------- --------- Extraordinary gain on sales of operations of NETCOM, net of income taxes of $6.4 million - - 193,029 - --------- -------- -------- --------- Net loss (155,779) (237,702) (181,477) (482,163) Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value (note 8) - (17,274) - (31,736) Charge for beneficial conversion feature of 8% Series A Convertible Preferred Stock (note 8) - - - (159,279) --------- -------- -------- --------- Net loss attributable to common stockholders $(155,779) (254,976) (181,477) (673,178) ========= ======== ======== =========
5 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited), Continued
Three months ended Nine months ended September 30, September 30, ---------------------------------------- 1999 2000 1999 2000 ---------- -------- -------- -------- (in thousands, except per share data) Other comprehensive loss: Unrealized loss on long-term investments - (8,625) - (8,625) available for sale ---------- -------- -------- -------- Comprehensive loss $(155,779) (263,601) (181,477) (681,803) ========== ======== ======== ======== Net loss per share - basic and diluted: Net loss attributable to common stockholders, before net income (loss) from discontinued operations and extraordinary gain $ (3.31) (4.92) (7.81) (13.60) Net income (loss) from discontinued operations 0.02 - (0.17) 0.02 Extraordinary gain on sales of operations of NETCOM - - 4.11 - ---------- -------- -------- -------- Net loss per share - basic and diluted $ (3.29) (4.92) (3.87) (13.58) ========== ======== ======== ======== Weighted average number of shares outstanding - basic and diluted 47,320 51,782 46,948 49,564 ========== ======== ======== ========
See accompanying notes to consolidated financial statements. 6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Deficit Nine Months Ended September 30, 2000 (unaudited)
Accumulated Common Stock Additional other Total ------------- paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit loss Deficit ------ ------ --------- ----------- ------------- ------------- (in thousands) Balances at January 1, 2000 47,761 $478 599,282 (1,443,624) - (843,864) Shares issued for cash in connection with the exercise of options and warrants 936 9 14,366 - - 14,375 Shares issued for cash in connection with the employee stock purchase plan 174 1 2,728 - - 2,729 Shares issued as contribution to 401(k) plan 178 2 4,296 - - 4,298 Shares issued in exchange for long-term investment 2,996 30 21,595 - - 21,625 Warrants issued in connection with 8% Series A Convertible Preferred Stock - - 80,596 - - 80,596 Value ascribed to beneficial conversion feature of 8% Series A Convertible Preferred Stock - - 159,279 (159,279) - - Accretion and dividends of 8% Series A Convertible Preferred Stock - - - (31,736) - (31,736) Unrealized loss on long-term investment available for sale - - - - (8,625) (8,625) Net loss - - - (482,163) - (482,163) ------ ------ --------- ----------- ----------- --------- Balances at September 30, 2000 52,045 $ 520 882,142 (2,116,802) (8,625) (1,242,765) ====== ====== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements. 7 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 2000 (unaudited) Nine months ended September 30, -------------------- ---------- --------- 1999 2000 ---------- --------- (in thousands) Cash flows from operating activities: Net loss $(181,477) (482,163) Net (income) loss from discontinued operations 8,014 (736) Extraordinary gain on sales of discontinued operations (193,029) - Adjustments to reconcile net loss to net cash used by operating activities: Recognition of deferred gain (17,376) (6,239) Accretion and preferred dividends on preferred 45,739 51,428 securities of subsidiaries Depreciation and amortization 126,137 236,514 Provision for impairment of long-lived assets 29,300 - Deferred compensation 862 1,294 Net loss (gain) on disposal of long-lived assets (771) 2,566 Gain on sale of securities - (634) Provision for uncollectible accounts 56,193 31,688 Interest expense deferred and included in long-term debt, net of amounts capitalized on assets under construction 134,709 151,535 Interest expense deferred and included in capital 3,968 3,776 lease obligations Amortization of deferred financing costs included in 3,541 3,933 interest expense Contribution to 401(k) plan through issuance of 4,138 4,298 common stock Other noncash expenses - 301 Change in operating assets and liabilities, excluding the effects of dispositions and noncash transactions: Receivables (87,556) (56,596) Prepaid expenses, deposits and inventory 3,147 (3,738) Accounts payable and accrued liabilities (12,931) 52,188 Deferred revenue 29,197 149,748 ---------- --------- Net cash provided (used) by operating activities (48,195) 139,163 ---------- --------- Cash flows from investing activities: Acquisition of property and equipment (368,134) (649,096) Change in accounts payable and accrued liabilities for purchase of long-term assets 3,288 50,682 Proceeds from sales of operations of NETCOM, net of 252,881 - cash included in sale Proceeds from disposition of property, equipment and other assets 4,302 20 Proceeds from sales of short-term investments available for sale 30,517 22,368 Proceeds from sale of marketable securities 30,000 10,634 Decrease in restricted cash 5,098 4,818 Purchase of investments (28,489) (1,400) Purchase of minority interest in subsidiary (6,039) - ---------- --------- Net cash used by investing activities (76,576) (561,974) ---------- --------- (continued) 8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited), Continued Nine months ended September 30, ---------------------- 1999 2000 ---------- ---------- (in thousands) Cash flows from financing activities: Proceeds from issuance of common stock: Exercise of options and warrants $ 10,761 14,375 Employee stock purchase plan 2,688 2,729 Proceeds of 8% Series A Convertible Preferred Stock, net of issuance costs - 720,330 Proceeds from issuance of long-term debt 80,000 95,000 Principal payments on capital lease obligations (12,720) (19,790) Payments on IRU agreement - (179,497) Principal payments on long-term debt (255) (90,317) Payments of preferred dividends (6,695) (6,695) Deferred debt issuance costs (4,777) (304) ---------- ---------- Net cash provided by financing activities $ 69,002 535,831 ---------- ---------- Net increase (decrease) in cash and cash equivalents (55,769) 113,020 Net cash provided (used) by discontinued operations (5,362) 406 Cash and cash equivalents, beginning of period 210,307 103,288 ---------- ---------- Cash and cash equivalents end of period $ 149,176 216,714 ========== ========== Supplemental disclosure of cash flows information of continuing operations: Cash paid for interest $ 9,419 30,614 ========== ========== ========== ========== Cash paid for income taxes $ 1,140 281 ========== ========== Supplemental schedule of noncash investing activities of continuing operations: Acquisition of corporate headquarters assets through the issuance of long-term debt and conversion of security deposit $ 33,077 - ========== ========== Shares issued in exchange for long-term investment $ - 21,625 ========== ========== Assets acquired pursuant to IRU agreement $ - 96,903 Assets acquired under capital leases 6,190 135,578 ---------- ---------- Total $ 6,190 232,481 ========== ========== See accompanying notes to consolidated financial statements. 9 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 and June 30, 2000 (unaudited) (1) Bankruptcy Proceedings During the quarter ended September 30, 2000 and subsequent to the quarter-end, a series of financial and operational events materially impacted ICG Communications, Inc. and its subsidiaries ("ICG" or the "Company"). These events reduced the Company's expected revenue and cash flow generation for the remainder of 2000 and 2001, which in turn jeopardized the Company's ability to comply with its existing senior secured credit facility. On November 14, 2000 (the "Petition Date"), ICG and most of its subsidiaries filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code in the Federal District of Delaware in order to facilitate the restructuring of the Company's long-term debt, trade liabilities and other obligations. The Company and its bankruptcy filing subsidiaries (collectively the "Debtors") are currently operating as debtors-in-possession under the supervision of the United States District Court for the District of Delaware. The bankruptcy petitions were filed in order to preserve cash and to give the Debtors the opportunity to restructure their debt. Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and shareholders are expected to be substantially altered. As a result of these bankruptcy proceedings, substantially all liabilities, litigation and claims against the Debtors in existence at the Petition Date are stayed unless the stay is modified or lifted or payment has been otherwise authorized by the Bankruptcy Court. At this time, it is not possible to predict the outcome of the Chapter 11 cases in general or the effects of such cases on the Company's business, or on the interest of creditors and shareholders. As a result of the bankruptcy filing, all of the Company's liabilities incurred prior to the Petition Date, including certain secured debt, are subject to compromise. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. Further, due to the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the financial statements. As a result, there is substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization, adequate sources of capital, customer and employee retention, the ability to provide high quality services and the ability to sustain positive results of operations and cash flows sufficient to continue to operate. (2) Organization and Basis of Presentation The Company is a facilities-based communications provider and local exchange carrier. The Company primarily offers voice and data communications services, including local, long distance and enhanced telephony, to small- to medium-sized business customers and offers network facilities and data management to ISP customers. The Company also provides interexchange services such as special access and switched access services to long distance carriers and other customers. The Company began marketing competitive local dial-tone services to business customers in early 1997, subsequent to the passage of the Telecommunications Act of 1996, which permitted competitive interstate and intrastate telephone services. The Company began offering network services to ISPs and other telecommunications providers in February 1999. (3) Significant Accounting Policies (a) Basis of Presentation The Company's financial statements should be read in conjunction with ICG's Annual Report on Form 10-K for the year ended December 31, 1999, as certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission. The interim financial statements reflect all adjustments 10 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Significant Accounting Policies (continued) (a) Basis of Presentation (continued) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows as of and for the interim periods presented. Such adjustments are of a normal recurring nature. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2000. Due to the event described in note 1, the Company is considering if an impairment of assets has occurred under Statement of Financial Accounting Standards "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). As the Company is currently undergoing a reorganization, there is not a definitive business plan in place with which to determine if an impairment has occurred or, if an impairment has occurred, the amount of such impairment. As a result, the Company has not reduced the carrying values of its assets in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Recent Accounting Pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - and interpretation of APB Opinion No. 25" ("FIN 44"). This opinion provides guidance on the accounting for certain stock option transactions and subsequent amendments to stock option transactions. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent that FIN 44 covers events occurring during the period from December 15, 1998 and January 12, 2000, but before July 1, 2000, the effects of applying this Interpretation are to be recognized on a prospective basis. The adoption of FIN 44 did not have a material effect on the Company's financial position or results of operation. In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Subsequently, the SEC released SAB 101B, which delayed the implementation date of SAB 101 for the Company until the quarter ending December 31, 2000. The Company has completed its assessment of the impact of SAB 101 and the impact will be to defer and amortize installation revenue over the customer term, resulting in an increase in accumulated deficit at January, 1, 2000 of approximately $12.7 million, an increase in revenue recognized in the three months ended September 30, 2000 of approximately $0.1 million and a reduction in revenue recognized in the nine months ended September 30, 2000 of approximately $1.1 million. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133", and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.133" ("SFAS 138"). SFAS 133 and SFAS 138 are effective for all quarters and fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and SFAS 138 effective at the beginning of its fiscal year end 2001. The Company does not believe that the adoption of SFAS 133 and SFAS 138 will have a material effect on the Company's financial position or results of operations. (c) Reclassifications Certain 1999 amounts have been reclassified to conform with the 2000 presentation. 11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Accounts Receivable The Company experienced network performance problems which caused the Company's network performance to drop below certain service levels agreed upon between the Company and certain Internet remote access services ("IRAS") customers. Based on the Company's inability to quickly resolve these problems, the Company issued credits, in accordance with the provisions of the customer agreements, for approximately $8 million. During the quarter ended September 30, 2000, the Company reviewed the adequacy of the reserve for bad debts related to its Internet service provider ("ISP") customers as the Company had concerns about the ability of certain of these customers to continue operating and attract future capital given current market conditions, as well as concerns associated with certain contract disputes. Revenue generated from the Company's ISP customers, including related reciprocal compensation revenue, represented approximately 50% of total revenue for the three months ended September 30, 2000. As a result, the Company recorded an additional provision of approximately $16 million. In addition, a provision for uncollectible accounts in the approximate amount of $4 million was provided for the receivable from one incumbent local exchange carrier ("ILEC") for termination of local ISP traffic deemed uncollectible because of changes in the regulatory environment. (5) Property and Equipment Property and equipment, including assets held under capital leases, is comprised of the following: December 31, September 30, 1999 2000 ------------ ------------- (in thousands) Land $ 11,503 $ 15,436 Buildings and improvements 38,502 38,727 Furniture, fixtures and office equipment 108,024 125,105 Internal-use software costs 14,797 71,688 Machinery and equipment 32,884 44,588 Fiber optic equipment 401,676 510,076 Switch equipment 319,398 501,752 Fiber optic network 428,195 325,582 Site improvements 37,814 55,944 Service installation costs 52,649 92,751 Construction in progress 359,936 869,164 ------------ ------------ 1,805,378 2,650,813 Less accumulated depreciation (279,698) (457,363) ------------ ------------ $ 1,525,680 $ 2,193,450 ============ ============ Property and equipment includes approximately $869 million of equipment which has not been placed in service at September 30, 2000, and accordingly, is not being depreciated. Due to the bankruptcy proceedings discussed in note 1, there is substantial uncertainty about the Company's ability to complete and place in service these assets. (6) Accrued Liabilities The Company accrues for property and equipment that has been received, but which has not been invoiced. Such balances are reflected in property and equipment and accrued liabilities in the accompanying consolidated balance sheet. As of September 30, 2000, accrued liabilities includes $156 million of such liabilities. 12 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) Long-term Debt Long-term debt is summarized as follows: December 31, September 30, 1999 2000 ------------- ------------- (in thousands) Senior Facility due on scheduled maturity dates, secured by substantially all of the assets of ICG Equipment and NetAhead with weighted average interest rates ranging from 9.26% to 10.06% for the nine months ended September 30, 2000 (a) $ 79,625 84,362 9 7/8% Senior discount notes of ICG Services, net of discount 293,925 315,931 10% Senior discount notes of ICG Services, net of discount 361,290 388,724 11 5/8% Senior discount notes of Holdings, net of discount 137,185 149,279 12 1/2% Senior discount notes of Holdings, net of discount 468,344 512,848 13 1/2% Senior discount notes of Holdings, net of discount 532,252 584,301 Mortgage loan payable with interest at 8 1/2%, due monthly into 2009, secured by building 999 946 Mortgage loan payable with variable rate of interest (15.21% at September 30, 2000) due monthly into 2013, secured by corporate headquarters 33,077 33,077 ----------- ---------- 1,906,697 2,069,468 Less current portion (796) (796) ----------- ---------- $1,905,901 2,068,672 =========== ========== As a result of filing for bankruptcy, all due dates on the various debt issuances have been accelerated in accordance with the terms of the debt. However, due to the nature of the bankruptcy proceedings and the uncertainty surrounding any potential debt settlements under the bankruptcy proceedings, the Company has not at this time reclassified any amounts to current. On September 18, 2000, the Company announced that lower expected financial results would put the Company in breach of its $200 million Senior Facility, absent obtaining appropriate covenant waivers. On September 29, 2000, the Company announced that it had reached agreement with its senior lenders to receive waivers on potential defaults under the Senior Facility. The Company's lenders allowed a sixty day waiver, and as part of this agreement, required payment of 50%, or $89.7 million, of the outstanding balance of the Senior Facility as of September 30, 2000. On November 14, 2000, the Company announced that it had obtained a commitment letter which will provide the Company debtor-in-possession ("DIP") financing for a minimum of $200 million and the potential for an additional $150 million if certain criteria are met. This DIP financing is subject to customary pre-closing conditions and is contingent upon Bankruptcy Court approval. The DIP financing terms require that the Senior Facility be paid off at the time of the first draw under the DIP financing. 13 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Redeemable Preferred Stock of Subsidiary and Mandatorily Redeemable 8% Series A Convertible Preferred Stock Redeemable preferred stock of subsidiary is summarized as follows: December 31, September 30, 1999 2000 -------------- ------------- (in thousands) 14% Exchangeable preferred stock of Holdings, mandatorily redeemable in 2008 $ 144,144 160,411 14 1/4% Exchangeable preferred stock of Holdings, mandatorily redeemable in 2007 246,751 274,926 -------------- ------------- $ 390,895 435,337 ============== ============= Mandatorily Redeemable 8% Series A Convertible Preferred Stock On April 10, 2000, the Company sold 75,000 shares of mandatorily redeemable 8% Series A-1, A-2 and A-3 Convertible Preferred Stock of ICG (the "8% Series A Convertible Preferred Stock") and 10,000,000 warrants to purchase ICG Common Stock to affiliates of Liberty Media Corporation ("Liberty Media"), Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") and Gleacher Capital Partners ("Gleacher Capital") (collectively, "the Investors"). The sale of the 8% Series A Convertible Preferred Stock resulted in net proceeds to the Company of $720.3 million. Each share of 8% Series A Convertible Preferred Stock has an initial liquidation preference of $10,000 per share and bears a cumulative dividend rate of 8% per annum, compounded daily. Dividends accrete to the liquidation preference on a daily basis for five years and are thereafter payable in cash or additional liquidation preference. The 8% Series A Convertible Preferred Stock is immediately convertible into shares of ICG Common Stock at a conversion rate of $28.00 per share, subject to adjustment, and will have voting rights with the common stockholders on an as-converted basis. The holders of the Series A-1 and A-2 8% Series A Convertible Preferred Stock collectively are entitled to elect up to three directors to the Company's Board of Directors. The Company may redeem the 8% Series A Convertible Preferred Stock at any time after five years from the date of issuance through their mandatory redemption on June 15, 2015. The warrants to purchase ICG Common Stock are immediately convertible into shares of ICG Common Stock at a conversion rate of $34.00 per share and expire in five years from the date of issuance. The affiliates of Liberty Media, Hicks Muse and Gleacher Capital purchased $500.0 million, $230.0 million and $20.0 million, respectively, in 8% Series A Convertible Preferred Stock and received a ratable portion of the total 10,000,000 warrants. The value allocated to the warrants was $80.6 million at the time of the transaction. In accordance with Emerging Issues Task Force ("EITF") 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", the Company allocated $159.3 million of the proceeds from the issuance of the 8% Series A Convertible Preferred Stock to the intrinsic value of the embedded beneficial conversion feature of the convertible preferred securities to additional paid-in capital. As the 8% Series A Convertible Preferred Stock is immediately convertible into shares of ICG common stock, the beneficial conversion feature was recognized as a return to the preferred shareholders and included as an element of net loss attributable to common shareholders during the nine months ended September 30, 2000 in the accompanying consolidated statement of operations. 14 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Commitments and Contingencies As a result of the Company's filing for bankruptcy protection, all commitments and contingencies could be substantially modified during the Company's bankruptcy restructuring process. (a) Network Capacity and Construction In January 2000, Qwest Communications Corporation ("Qwest") and the Company signed an agreement, whereby the Company will provide, for $126.5 million over the initial six-year term of the agreement, an indefeasible right of use ("IRU") for designated portions of the Company's local fiber optic network. The Company will recognize revenue ratably over the term of the agreement, as the network capacity is available for use. The agreement was amended in March 2000 to include additional capacity for proceeds of $53.8 million, of which $21.5 million has not been paid as of September 2000. Qwest may, at its option, extend the initial term of the agreement for an additional four-year period and an additional 10-year period for incremental payment at the time the option exercises. In the event that the Company fails to deliver any of the network capacity by March 31, 2001, Qwest is entitled to cancel any undelivered network capacity segments and receive immediate refund of any amounts already paid to the Company for such segments. The Company recognized approximately $1.0 million and $2.0 million of revenue related to this agreement in the three and nine months ended September 30, 2000, respectively. Given limitations on future capital expenditures of the Company, $156.8 million of deferred revenue related to the future delivery of services pursuant to this agreement is reflected as a current liability in the accompanying balance sheet. (b) Telecommunications and Line Purchase Commitments Effective September 1998, the Company entered into two service agreements with three-year terms with WorldCom Network Services, Inc. ("WorldCom"). Under the Telecom Services Agreement, WorldCom provides, at designated rates, switched telecommunications services and other related services to the Company, including termination services, toll-free origination, switched access, dedicated access and travel card services. Under the Carrier Digital Services Agreement, WorldCom provides the Company, at designated rates, with the installation and operation of dedicated digital telecommunications interexchange services, local access and other related services, which the Company believes expedites service availability to its customers. Both agreements require that the Company provide WorldCom with certain minimum monthly revenue, which if not met, would require payment by the Company for the difference between the minimum commitment and the actual monthly revenue. Additionally, both agreements limit the Company's ability to utilize vendors other than WorldCom for certain telecommunications services specified in the agreements. The Company met all minimum revenue commitments to WorldCom under these agreements through September 30, 2000. (c) Other Commitments The Company has entered into various equipment and line purchase agreements with certain of its vendors. Under these agreements, if the Company does not meet a minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. In addition, the agreements may be terminated by either the Company or the vendor upon prior written notice. Additionally, the Company has entered into certain commitments to purchase capital assets with an aggregate purchase price of approximately $94 million at September 30, 2000. Due to the current economic uncertainty of the Company's construction in progress assets, the Company may decide not to continue with these projects and incur additional termination costs. (d) Transport and Termination Charges ICG records revenue earned under interconnection agreements with ILECs as an element of its local services revenue. Many of the ILECs have not paid all of the amounts that the Company has recorded as revenue and have disputed these charges based on the belief that dial-up calls 15 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Commitments and Contingencies (continued) (d) Transport and Termination Charges (continued) to ISPs are not local traffic as defined by the various agreements and not subject to payment of transport and termination charges under state and federal law and public policies. In addition, some ILECs, while paying a portion of local reciprocal compensation due to ICG, have disputed other portions of the charges related to local reciprocal compensation. ICG has, as of September 30, 2000, a net receivable for terminating local traffic in the approximate amount of $66 million, approximately $29 million of which is due and payable, pursuant to the terms of executed agreements with several ILECs, when regulatory approval of the amendments to the parties' interconnection agreements is obtained. ICG has received cash of approximately $11 million and $94 million, during the three months and nine months ended September 30, 2000, respectively, from certain ILECs for terminating local traffic. The following table represents the amount of revenue ICG has recognized for terminating local traffic during the respective periods ($ in millions): Three months ended Nine months ended September 30, September 30, 1999 2000 1999 2000 ------------ ------------ ----------- ------------ $ 25 $ 26 $ 95 $ 100 Revenue for the nine months ended September 30, 1999 includes approximately $22 million for the tandem switching and common transport rate elements. ICG ceased, effective July 1, 1999, recognition of these rate elements as revenue until cash receipts are either received or the uncertainty of receipt has been removed (such as the execution of a binding agreement). ICG has continued to bill and vigorously pursue collection of all amounts due under the agreements. Revenue for the nine months ended September 30, 2000 includes approximately $13 million derived from the resolution of previously disputed issues not related to the period and approximately $4 million of revenue from rates earned pursuant to the previous interconnection agreement, neither of which will recur in subsequent periods. The Company determined in the three months ended September 30, 2000 that approximately $4 million of the revenue previously recognized for terminating ISP traffic for one ILEC may not be collectible due to a changing regulatory environment and has therefore provided a provision for uncollectible accounts. During the quarter, the Colorado Public Utility Commission ("PUC") issued a ruling in an ICG arbitration decision that, subject to the outcome of judicial appellate proceedings, denies ICG the ability to collect reciprocal compensation for ISP-bound traffic initiated on the incumbent network and connected on ICG's network in Colorado when a new interconnection agreement between ICG and Qwest Communications (formerly US West) becomes effective. ICG believes that the new interconnection agreement will become effective during the fourth quarter, after the parties execute and receive PUC approval of a new interconnection agreement that complies with the PUC's final arbitration decision. Once effective, the terms in the new agreement concerning compensation for terminating ISP traffic will then be applied retroactively beginning 45 days prior to the effective date of the new agreement. In prior periods, the impacted traffic represented approximately 15% of the Company's applicable terminating traffic. 16 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Commitments and Contingencies (continued) (e) Litigation During the third quarter 2000, the Company was served with seven lawsuits filed by various shareholders in the Federal District Court for the District of Colorado (Case numbers: 00-S-1864, 00-S-1910, 00-S-1908, 00-S-1945, 00-S-1963, 00-S-1957, and 00-S-1919). All of the suits name as defendants the Company, the Company's former CEO, J. Shelby Bryan and the Company's former President, John Kane. Additionally, one of the complaints names the Company's current President, William S. Beans, Jr., as a defendant. All of the complaints seek unspecified damages for alleged violations of Rules 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints seek class action certification for similarly situated shareholders. It is anticipated that the lawsuits will be consolidated and that a lead plaintiff's counsel will be chosen by the Court. The Company has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP to vigorously defend it against these lawsuits. The Company has also tendered these claims to the Company's insurers. At this time, it is anticipated that the claims against the Company will be stayed pursuant to the Company's filing for bankruptcy. It is uncertain at this time whether these lawsuits will materially adversely effect the Company's financial or operational stability. On April 4, 1997, certain shareholders of Zycom filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Case No. 97-17777) against the Company, Zycom and certain of their subsidiaries. In this action, the plaintiffs alleged that the Company and certain of its subsidiaries breached certain fiduciary duties owed to the plaintiffs. The Company denied all such allegations. The Company has recently finalized a settlement agreement with these shareholders. The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. (10) Summarized Financial Information of ICG Holdings, Inc. The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995, respectively, are guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be material to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. 17 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Summarized Financial Information of ICG Holdings, Inc. (continued) However, summarized combined financial information for Holdings and its subsidiaries is as follows: Summarized Consolidated Balance Sheet Information December 31, September 30, 1999 2000 ------------- ------------- (in thousands) ------------------------------ Current assets $ 263,870 408,348 Property and equipment, net 675,613 903,171 Other non-current assets, net 128,489 107,311 ------------- ------------- Total assets $ 1,067,972 1,418,830 ============= ============= Current liabilities $ 148,042 381,355 Long-term debt, less current portion 1,138,734 1,247,328 Capital lease obligations, less current portion 57,564 50,953 Other long-term liabilities 1,233 659 Due to ICG Communications, Inc. 190,320 945,078 Due to parent 14,001 14,001 Due to (from) ICG Services 128,893 (197,358) Redeemable preferred stock 390,895 435,337 Stockholder's deficit (1,001,710) (1,458,523) ------------- ------------- Total liabilities and stockholders' deficit $ 1,067,972 1,418,830 ============= ============= Summarized Consolidated Statement of Operations Information Three months ended Nine months ended September 30, September 30, ------------------------ -------------------- 1999 2000 1999 2000 ---------- ----------- --------- ---------- (in thousands) Total revenue 112,190 140,310 336,949 452,210 Total operating costs and expenses 156,556 294,182 476,170 771,102 ---------- ----------- ---------- ---------- Operating loss (44,366) (153,872) (139,221) (318,892) ========== =========== ========== ========== Loss from continuing operations (125,816) (213,593) (294,567) (411,635) ========== =========== ========== ========== Net loss (97,619) (213,212) (302,581) (456,813) ========== =========== ========== ========== 18 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Condensed Financial Information of ICG Holdings (Canada) Co. Condensed financial information for Holdings-Canada only is as follows: Condensed Balance Sheet Information December 31, September 30, 1999 2000 ------------- ------------- (in thousands) Current assets $ 82 82 Advances to subsidiaries 14,001 14,001 -------------- ------------- Total assets $ 14,083 14,083 ============== ============= Current liabilities $ 73 73 Due to parent 2,442 2,454 Share of losses of subsidiaries 1,001,710 1,458,523 Shareholders' deficit (990,142) (1,446,967) -------------- ------------- Total liabilities and shareholders' deficit $ 14,083 14,083 ============== ============= Condensed Statement of Operations Information Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 1999 2000 1999 2000 ---------- ---------- --------- --------- (in thousands) Total revenue - - - - Total operating costs and 604 - 1,810 12 expenses ---------- --------- --------- --------- ---------- --------- --------- --------- Operating loss (604) - (1,810) (12) Losses of subsidiaries (97,619) (214,704) (302,581) (456,813) ---------- --------- --------- --------- Net loss attributable to common shareholders (98,223) (214,704) (304,391) (456,825) ========== ========= ========= ========= (12) Condensed Financial Information of ICG Communications, Inc. (Parent Company) The primary assets of ICG are its investments in ICG Services, ICG Tevis, ICG Funding and Holdings-Canada, including advances to those subsidiaries. Certain corporate expenses of the parent company are included in ICG's statement of operations and were approximately $1.4 million and $2.3 million for the three months and nine months ended September 30, 1999, respectively, and $0.5 million and $1.5 million for the three months and nine months ended September 30, 2000, respectively. ICG has no operations other than those of ICG Services, ICG Funding and Holdings-Canada and their subsidiaries. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements and information that is based on the beliefs of management as well as assumptions made by management based on information currently available to the Company. When used in this document, the words "anticipate", "believe", "estimate" and "expect" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. These forward-looking statements are intended to qualify as safe harbors from liability as established by the Private Securities Litigation Reform Act of 1995. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this document. These forward-looking statements are affected by important factors, including, but not limited to, the following: o The uncertainty of the Company's future as a result of filing for protection under bankruptcy law; o The significant amount of indebtedness incurred by the Company and the Company's ability to successfully restructure this indebtedness; o The expectation of continued operating losses for the foreseeable future; o The Company's ability to successfully maintain commercial relationships with its critical vendors and suppliers; o The Company's ability to retain its major customers on profitable terms; o The availability and terms of the significant additional capital required to fund the Company's continued operations; o The extensive competition the Company will face; o The Company's ability to attract and retain qualified management and employees; o The Company's ability to access markets and obtain any required governmental authorizations, franchises and permits, in a timely manner, at reasonable costs and on satisfactory terms and conditions; and o Changes in, or the Company's inability to comply with, existing government regulations. These forward-looking statements speak only as of the date of this Quarterly Report. The Company does not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although the Company believes that its plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Quarterly Report are reasonable, there is no assurance that such plans, intentions or expectations will be achieved. The results of operations for the three and nine months ended September 30, 1999 and 2000 represent the consolidated operating results of the Company. (See the unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2000 included elsewhere herein.) The Company's consolidated financial statements reflect the operations of Network Services, Satellite Services, Zycom and NETCOM as discontinued for all periods presented. The terms "fiscal" and "fiscal year" refer to the Company's fiscal year ending December 31. All dollar amounts are in U.S. dollars. COMPANY OVERVIEW General ICG Communications Inc. ("ICG" or the "Company") is a facilities-based communications provider. The Company primarily offers voice and data communication services directly to small- to medium-sized business customers, and data access, transport and management to ISP customers. In addition, the Company offers special access and switched access services to long-distance companies and other customers. ICG's business has been transformed over the past few years from a regional competitive access provider primarily providing access services to interexchange carriers and medium- to large-sized business customers, to a competitive local exchange carrier with a nationwide backbone providing voice and data services to small- to medium-sized business customers, as well as network facilities and data management to ISP customers. The Company's business 20 transformation was initially driven by the deregulation of the local telephony markets in 1996 and subsequently by changing technology and growth of the Internet. Bankruptcy Proceedings During the quarter ended September 30, 2000 and subsequent to the quarter-end, a series of financial and operational events materially impacted ICG Communications, Inc. and its subsidiaries ("ICG" or the "Company"). Specifically, these events reduced the Company's expected revenue and cash flow generation for the remainder of 2000 and 2001, which in turn jeopardized the Company's ability to comply with its existing senior secured credit facility. On November 14, 2000 (the "Petition Date"), ICG and most of its subsidiaries filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code in the Federal District of Delaware in order to facilitate the restructuring of the Company's long-term debt, trade liabilities and other obligations. The Company and its bankruptcy filing subsidiaries (collectively the "Debtors") are currently operating as debtors-in-possession under the supervision of the United States District Court for the District of Delaware. The bankruptcy petitions were filed in order to preserve cash and to give the Debtors the opportunity to restructure their debt. Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and shareholders are expected to be substantially altered. As a result of these bankruptcy proceedings, substantially all liabilities, litigation and claims against the Debtors in existence at the Petition Date are stayed unless the stay is modified or lifted or payment has been otherwise authorized by the Bankruptcy Court. At this time, it is not possible to predict the outcome of the Chapter 11 cases in general or the effects of such cases on the Company's business, or on the interest of creditors and shareholders. As a result of the bankruptcy filing, all of the Company's liabilities incurred prior to the Petition Date, including certain secured debt, are subject to compromise. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. Further, due to the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the financial statements. As a result, there is substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization, adequate sources of capital, customer and employee retention, the ability to provide high quality services and the ability to sustain positive results of operations and cash flows sufficient to continue to operate. Summary of Third Quarter and Subsequent Events Chronology of Events During the third quarter, the Company significantly lowered expected revenue and cash flow derived from terminating local ISP traffic based on several significant regulatory and operational developments. Specifically, the Company announced long-term agreements with several ILECs that guaranteed future revenue, albeit at a lower rate. Second, a decision from the Colorado Public Utility Commission ("PUC") made in August 2000 denied compensation for Internet-bound traffic. Finally, as the Company increased the number of resold lines, reciprocal compensation was reduced, as these resold lines do not generate reciprocal compensation. In August 2000, ICG received letters from two, large Internet remote access service ("IRAS") customers indicating that ICG's service and network performance did not meet standards contractually agreed upon. Absent quick resolution of these issues, the customers stated they either were considering or intended to terminate contractual arrangements. On August 22, 2000, ICG's Chairman and Chief Executive Officer, J. Shelby Bryan resigned each of these positions and the Board of Directors elected Carl E. Vogel to the position of Chairman and Chief Executive Officer. Mr. Vogel, of Liberty Media Group, invested $500 million in ICG through the purchase of Series A Convertible Preferred Stock in April 2000. Mr. Vogel is also Senior Vice President of Liberty Media Corp and Chief Executive Officer of Liberty Satellite and Technology. The combination of lower reciprocal compensation and the reduction in revenue earned from IRAS customers for the third and fourth quarters substantially reduced expected revenue and EBITDA for the second-half 2000. Further, reduced line commitments for the installation of IRAS products lowered expected IRAS revenue and EBITDA for 2001. Therefore, on September 18, 2000, the 21 Company announced that lower than expected financial results based on these events would, absent obtaining appropriate covenant waivers, put the Company in breach of its $200 million senior secured credit facility. Also at this time, the Company announced that it had a revised business plan, required additional funding and was exploring all strategic options involving the Company. On the evening of September 18, 2000, Carl Vogel, Chairman and Chief Executive Officer resigned from his position as CEO and from the Board of Directors. In addition, Mr. Gary Howard representing Liberty Media and Mr. Thomas Hicks representing Hicks Muse resigned as directors. On September 19, 2000, the Board of Directors ratified the formation of a Special Executive Committee to address the current events affecting the Company. The Special Executive Committee is comprised of Mr. William Laggett, Mr. John Moorhead, Mr. Leontis Teryazos and Mr. Walter Threadgill. On September 26, 2000 the ICG Board of Directors appointed Randall Curran as Chief Executive Officer. In addition, the Company hired Wasserstein Perella & Co., independent financial advisors, Zolfo Cooper, LLC, advisors that specialize in company turnarounds and restructuring, and Gleacher & Co., financial advisors. On September 29, 2000, the Company announced that it had reached agreement with its senior lenders to receive waivers on potential defaults under its senior secured credit facility. The Company's lenders allowed a 60-day waiver, and as part of this agreement, required payment of 50%, or $89.7 million, of the outstanding balance of the facility as of September 30, 2000. During the third quarter and subsequent thereto, the Company attempted to obtain additional funding while at the same time cutting capital expenditures and minimizing operating expenditures in order to maximize cash flow. However, consistent with the capital markets reluctance to provide funding to the telecommunications industry, the capital markets previously open to the Company withdrew interest. Primarily as a result of these events and in response to announcements made by the Company, the value of ICG's equity and public debt dramatically deteriorated in price during the third quarter. In combination, sources of available capital quickly diminished. On November 14, 2000, the Company filed for Chapter 11 protection. Also on this day, the Company announced that it had obtained a commitment letter which will provide the Company debtor-in-possession financing for a minimum of $200 million and the potential for an additional $150 million if certain criteria are met. This debtor-in-possession financing is subject to customary pre-closing conditions and is contingent upon Bankruptcy Court approval. As of mid-November 2000, ICG is continuing operations and developing a formal plan of reorganization. Details Relating to Compensation for Terminating Local ISP Traffic As noted above, expectations for revenue derived from terminating local ISP traffic were lowered during the third quarter. This reduction in forecast revenue was a result of three events. First, the Company signed multi-year contacts with major ILECs during the six months ended June 30, bringing certainty of future revenue that historically and collectively represented approximately 75% of applicable terminating traffic, albeit at a lower rate. Second, the Colorado PUC voted to deny compensation for terminating traffic in the state of Colorado, a market that accounted for approximately 15% of the Company's generated minutes of use. In addition, as the Company pursued its strategy of rapid national expansion, demand was met in new markets through temporarily reselling ILEC lines until the Company's owned facilities were in place. These resale lines made up an increasing percentage of total lines of service, and these lines do not generate reciprocal compensation revenue. These events were estimated to reduce revenue for the remainder of 2000 and in 2001. Details Relating to Network Performance In late 1999 and early 2000, the Company experienced significant demand for its IRAS product, well in excess of expectations. As such, aggressive build-out targets were set to meet this demand. The Company, however, experienced delays and unexpected difficulties associated with new technologies and scaling its network and operating systems. These factors, among others, contributed to the Company's network performance dropping below the agreed upon service levels between the Company and certain IRAS customers. These issues do not pertain to the fiber or dial-tone networks, or impact the Company's PRI, RAS or commercial telephone products. 22 In August 2000, the Company received letters from two large IRAS customers indicating that the Company's IRAS service and network performance did not meet standards contractually agreed upon. Based on the Company's inability to resolve these issues, the Company issued certain billing credits to these customers. Additionally, these customers have subsequently advised the Company that they do not intend to accept their full future commitments for additional lines, as previously agreed. IRAS billing credits issued to customers during the third quarter amounted to approximately $8 million. In addition, revenue expected to be earned from ISP customers in August and September was approximately $9 million below expectations and the total commitment for IRAS line installations was reduced. The lower expected line additions further reduced expected revenue derived from terminating local ISP traffic, as fewer minutes of use were generated over ICG's network. Moreover, as IRAS services are considered a higher margin product, a lower percentage of IRAS lines reduced the Company's revenue, and adversely impacts the expected gross margin and EBITDA. In September, one of the IRAS customers who had previously been issued credits, terminated its contract with the Company. This customer had a commitment for 200,000 IRAS ports of which 104,000 were provisioned. A new customer, however, agreed to accept 150,000 of lines primarily to be used for RAS services, which is a lower margin product. Since early August, the Company has been diligently addressing its network performance issues and has made cut-backs in its aggressive growth strategy. At this time, the Company does not intend to expand its IRAS business until it is confident that it can capably scale to customer demand while maintaining quality. As of mid-November 2000, the network performance, as measured by call rejection rates, had substantially improved over the levels measured in August, and the Company is focused on achieving high quality performance consistently for all customers. Status of Operations and Reorganization Plan During the pendancy of its Chapter 11 case, the Company expects to continue to provide on-going service to its customers while implementing a revised strategy intended to meet customer commitments and maximize short-term cash flow. Operations are expected to focus on existing markets where the Company has capacity, allowing the Company to add customers for nominal incremental cost and earn a better return on existing assets. In addition, the Company intends to focus on product sales that utilize existing infrastructure to reduce capital required in the short-term. In general, the Company will scale its geographic expansion and delivery of new products to better match its technical capabilities and capital availability. The Company's 22-city expansion plan originally scheduled for completion at year-end 2000 will be postponed. Due to the event described above, the Company is considering if an impairment of assets has occurred under SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". As the Company is currently undergoing a reorganization, there is not a definitive business plan in place with which to determine if an impairment has occurred or, if an impairment has occurred, the amount of such impairment. As a result, the Company has not reduced the carrying values of its assets in the accompanying consolidated financial statements. Network and Service Offerings ICG is a facilities-based telecommunications provider with network assets and facilities in and connecting to 30 metropolitan areas in the United States. The Company primarily offers data access, transport and management to Internet service provider (ISP) customers, voice and data services to small and medium sized businesses, and wholesale services to long-distance and other carriers. The Company connects its customers through its nationwide Internet backbone and voice network located in five major regions in the United States including California, Colorado, Ohio, Texas and the Southeast. 23 At September 30, 2000 the Company's network and facilities included approximately: * 47 voice and data switches * 24 ATM switches * 276 data POPs * 4,816 regional fiber route miles that represent 192,422 fiber strand miles * 18,000 route miles of long-haul capacity leased under IRU agreements * Connection to 9,520 buildings, and * 188 collocations with ILECs and 40 ICG-owned collocation sites. As of the end of the third quarter 2000, ICG's current product offerings to the ISP market include dial-up products as well as broadband access services including T-1 and T-3 connections and DSL. Dial-up products include primary rate interface (PRI), remote access service (RAS) and Internet remote access service (IRAS). PRI is a traditional product that allows an ISP to connect to its end-user customers using the Company's local access network. RAS utilizes ICG-owned switches and modems to connect and send data to the ISP, eliminating the need for individual ISPs to deploy modem banks in each POP. IRAS connects, sends and routes data for the ISP customer. With IRAS, the Company offers network management, routing calls intended for the Internet directly to the Internet rather than through the ISP. For business customers, the Company offers local telephone service, enhanced telephone features such as voice mail, long-distance service, dial-up and T-1 data connections as well as a bundled service offering named iConverge. The Company's wholesale business provides major carriers with connectivity to each other, to incumbent telephone companies and to large customers. ICG's wholesale products include special access, private line/long-haul, switched access and signaling system 7. The Company has transport facilities in major markets located in Colorado, California, Ohio, Texas and the Southeast. 24 RESULTS OF OPERATIONS The following table provides a breakdown of revenue, operating costs and selling, general and administrative expenses for the Company for the periods indicated. The table also shows certain revenue, expenses, operating loss, EBITDA and EBITDA (before nonrecurring and noncash charges) as a percentage of the Company's total revenue.
Three months ended Nine months ended September 30, September 30, ------------------------------------------------------------------ 1999 2000 1999 2000 ------------------------------------------------------------------ $ % $ % $ % $ % -------- -------- --------- ------ -------- ------ --------- ----- (unaudited) (in thousands) Statement of Operations Data: Revenue: Local service (1) 70,593 61 102,228 71 214,762 64 332,324 70 Special access (2) 29,415 26 30,139 21 75,415 22 103,896 22 Switched access (3) 10,618 9 7,884 6 32,210 10 28,351 6 Long distance & other (4) 4,540 4 4,550 2 14,764 4 13,207 2 -------- ------ ----------- ---- ---------- ----- --------- ------ Total revenue 115,156 100 144,801 100 337,151 100 477,778 100 Operating costs 66,284 58 118,711 82 179,391 53 304,202 64 Selling, general and 94,558 82 84,183 58 180,341 54 188,947 40 administrative Depreciation and amortization 45,079 39 99,023 69 126,137 37 236,514 50 Provision for impairment of long-lived assets - - - - 29,300 9 - - Net loss on disposal of long-lived assets 195 - 2,022 1 (771) - 2,566 - Other, net 431 - 431 - 862 - 1,692 - -------- ------ ----------- ---- ---------- ----- --------- ----- Operating loss (91,381) (79) (159,569)(110) (178,109) (53) (256,143) (54) Other Data: Net cash provided (used) by operating activities (37,604) 36,084 (48,195) 139,163 Net cash used by investing activities (116,065) (186,516) (76,576) (561,974) Net cash provided (used) by financing activities 73,848 (129,412) 69,002 535,831 EBITDA (5) (46,302) (40) (60,546) (42) (51,972) (15) (19,629) (4) EBITDA (before nonrecurring and noncash charges) (5) (45,676) (40) (58,093) (40) (22,581) (7) (15,371) (3) Capital expenditures of continuing operations (6) 138,387 324,701 374,324 881,577 Capital expenditures of discontinued operations (6) 4,970 - 11,129 -
(Continued) 25
September 30, December 31, March 31, June 30, September 30, 1999 1999 2000 2000 2000 ------------- ------------ ---------- ---------- ------------- (unaudited) Statistical Data (7): Full time employees 3,054 2,853 2,930 2,975 3,160 Access lines in service (8) 584,827 730,975 904,629 1,112,964 1,074,469 Buildings connected: On-net (9) 939 963 1,046 924 936 Hybrid (10) 6,476 7,115 7,746 8,228 8,584 ------------- ------------ ---------- ---------- ------------- Total buildings connected 7,415 8,078 8,792 9,152 9,520 Operational switches: Circuit 29 31 35 43 47 ATM - 24 24 24 24 Frame Relay (11) 16 16 16 - - ------------- ------------ ---------- ---------- ------------- Total operational switches 45 71 75 67 71 Regional fiber route miles (12): Operational 4,449 4,596 4,807 4,767 4,816 Under construction - - - 495 508 Regional fiber strand miles (13): Operational 167,067 174,644 177,103 184,064 192,422 Under construction - - - 12,254 14,891 Long-haul broadband route miles - 18,000 18,000 18,000 18,000 Collocations with ILECs 139 147 183 188 188
(1) Local service revenue includes revenue earned from providing competitive voice and data services to business customers and network facilities and data management services to ISP customers. Local service revenue also includes revenue earned from terminating local traffic under agreements with ILECs. (2) Special access revenue includes revenue earned from providing direct intra-state and intra-city private line broadband connections to long distance carriers, ISP and end user business customers. (3) Switched access revenue includes revenue earned from both switched terminating access and SS7 gateway services. Switched terminating access: Switched terminating access services provide long distance customers connectivity to the ILEC's local switched network. SS7 gateway services: SS7 gateway services allow for rapid call setup via high-speed circuit switched connections. ICG services include nationwide signaling with access to SS7 networks in every LATA. (4) Long distance revenue includes revenue earned from providing voice services outside the customers local calling area. (5) EBITDA consists of earnings (loss) from continuing operations before interest expense, income taxes, depreciation and amortization, other expense, net and accretion and preferred dividends on preferred securities of subsidiaries, or otherwise defined as operating loss plus depreciation and amortization. EBITDA (before nonrecurring and noncash charges) represents EBITDA before certain nonrecurring charges such as the net loss (gain) on disposal of long-lived assets and other, net operating costs and expenses, including deferred compensation. EBITDA and EBITDA (before nonrecurring and noncash charges) are provided because they are measures commonly used in the telecommunications industry. EBITDA and EBITDA (before nonrecurring and noncash charges) are presented to enhance an understanding of the Company's operating results and are not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA (before nonrecurring and noncash charges) are not measurements under GAAP and are not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities of continuing operations as determined using GAAP are also presented in Other Data. (6) Capital expenditures include assets acquired with cash, under capital leases, and pursuant to IRU agreement. Capital expenditures of discontinued operations includes the capital expenditures of Network Services, Satellite Services, Zycom and NETCOM combined for all periods presented. (7) Amounts presented are for three-month periods ended, or as of the end of the period presented. (8) Access lines in service at September 30, 2000 includes lines provisioned through the Company's switch and through resale and other agreements with various local exchange carriers. Resale lines typically generate lower margins and are used primarily to obtain customers. Although the Company plans to migrate most lines from resale to higher margin on-switch lines, there is no assurance that it will be successful in executing this strategy. (9) Beginning in the three months ended June 30, 2000, on-net buildings will be defined to exclude facilities used exclusively for ICG network operations. (10)Hybrid buildings connected represent buildings connected to the Company's network via another carrier's facilities. (11)Frame relay switches are no longer included in switch count as functionality is now handled by ATM switches. (12) Regional fiber route miles refers to the number of miles of fiber optic cable, including leased fiber. As of September 30, 2000, the Company had approximately 4,816 regional fiber route miles. Regional fiber route miles under construction represents fiber under construction, which is expected to be operational within six months. (13) Regional fiber strand miles refers to the number of regional fiber route miles, including leased fiber, along a telecommunications path multiplied by the number of fiber strands along that path. As of September 30, 2000, the Company had approximately 192,422 regional fiber strand miles. Regional fiber strand miles under construction represents fiber under construction, which is expected to be operational within six months. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 Three Months Ended September 30, --------------------------------------- 1999 2000 ------------------ ------------------- $ % $ % -------- -------- --------- ------- ($ values in thousands) Local service 70,593 61 102,228 71 Special access 29,415 26 30,139 21 Switched access 10,618 9 7,884 6 Long distance & other 4,540 4 4,550 2 -------- -------- --------- ------- Total Revenue 115,166 100 144,801 100 ======== ======== ========= ======= Operating costs 66,284 58 118,711 82 ======== ======== ========= ======= Selling, general and administrative 94,558 82 84,183 58 ======== ======== ========= ======= Depreciation and amortization 45,079 39 99,023 68 ======== ======== ========= ======= Revenue Most of ICG's revenue is earned from small- to medium-sized business customers who purchase voice and data communications services, or by providing network facilities and data management services to ISPs. However, the Company has a few large ISP customers which account for a significant portion of its ISP revenue. The Company also offers special access and switched access services to long-distance companies and other customers. Total revenue increased $29.6 million or 26% from the three months ended September 30, 1999 to 2000. Local service revenue increased from $70.6 million for the three months ended September 30, 1999 to $102.2 million for the same period in 2000, a 45% annual increase primarily due to an increase in the average local access lines offset by a reduction in revenue earned from IRAS customers. This reduction in revenue per line is, in large part, driven by a higher percentage of ISP lines in 2000, which typically earn lower revenue per line, a reduction in the percent of total lines on-switch which do not earn reciprocal compensation and billing credits issued to certain IRAS customers. IRAS billing credits issued to customers during the third quarter amounted to approximately $8 million. Including the billing credits, total revenue expected to be earned from ISP customers in August and September was approximately $17 million below expectations. Local service revenue includes approximately $25 million (or 22% of revenue) and $26 million (or 18% of revenue) for the three months ended September 30, 1999 and 2000, respectively, for terminating local ISP traffic. For further discussion on nonrecurring reciprocal compensation revenue earned, see "Liquidity and Capital Resources - Transport and Termination Charges". Special access revenue increased from $29.4 million for the three months ended September 30, 1999 to $30.1 million for the same period in 2000, an increase of 2%. The increase in special access revenue is primarily due to increased unit sales. Switched access revenue decreased from $10.6 million for the three months ended September 30, 1999 to $7.9 million for the same period in 2000, a 26% decrease. The decrease is due to the expected attrition of switch customers. Revenue from long distance services remained consistent at $4.5 million for both the three months ended September 30, 1999 and 2000. ICG expects long distance revenue to decrease due to planned attrition of resale access lines, which had high long distance service penetration rates as well as a reduction in revenue per minute. Operating costs Total operating costs increased from $66.3 million for the three months ended September 30, 1999 to $118.7 million for the same period in 2000, a 79% increase. Operating costs increased as a percentage of revenue from 58% for 1999 to 82% for 2000. Operating costs consist primarily of payments to ILECs, other CLECs, and long distance carriers for the use of network facilities to support local, special, switched access services, and long distance services as well as internal network operating costs, right of way fees and other operating costs. Internal network operating costs include the cost of engineering and operations personnel dedicated to the operations and maintenance of the network. Operating costs have increased as a percentage of revenue partially due to the reduction in revenue earned from IRAS customers, as noted above. During periods of rapid market expansion such as ICG has experienced in 2000, backhaul and intracity facilities have been leased on an interim basis until such time as owned facilities are in service, resulting in an increase of operating expenses as percent of revenue. During the three months ended September 30, 2000, ICG incurred incremental costs associated with the advanced deployment of leased lines in expansion cities to accommodate customer requirements. The lines were provisioned using either ILEC or other CLEC capacity to meet customer demand. It was ICG's intent to complete installation of these owned facilities. However, due to the Company's bankruptcy proceedings and capital limitations, there can be no assurance of when or if these owned facilities will be completed and produce revenue. In addition, due to the Company's curtailed capital deployment plan and the reallocation of resources normally assigned to capital deployment activities, approximately $12 million in operating costs that would have been capitalized under the Company's capitalization policies were expensed. Selling, general and administrative expenses Total selling, general and administrative ("SG&A") expenses decreased from $94.6 million for the three months ended September 30, 1999 to $84.2 million for the same period in 2000, an 11% decrease. SG&A expenses decreased as a percentage of revenue from 82% for 1999 to 58% for 2000. The decrease in absolute dollars and as a percentage of revenue is principally due to a provision of $45.2 million recorded during the three months ended September 30, 1999 for accounts receivable related to certain elements of transport and termination services provided to ILECs, which the Company believed was uncollectible. This decrease was partially offset by an increase in average staff levels and increased salary and benefits per employee attributable to the new compensation plan implemented in 2000 to remain competitive in the marketplace. The number of full time employees increased from 3,054 at September 30, 1999 to 3,160 at September 30, 2000. The Company also incurred increases in facilities costs for new office space as well as increased sales and property taxes, legal and professional fees. During the quarter ended September 30, 2000, the Company reviewed the adequacy of the reserve for bad debts related to its ISP customers as the Company had concerns about the ability of certain of these customers to continue operating and attract future capital given current market conditions, as well as concerns associated with certain contract disputes. As a result, the Company recorded an additional provision of approximately $16.0 million. In addition, a provision for uncollectible accounts in the approximate amount of $4 million was provided for the receivable from one ILEC for termination of local ISP traffic deemed uncollectible because of changes in the regulatory environment. Depreciation and amortization Depreciation and amortization increased from $45.1 million for the three months ended September 30, 1999 to $99.0 million for the same period in 2000. The increase is primarily due to increased investment in depreciable assets resulting from the expansion of the Company's networks and services, as well as a reduction in the overall weighted-average useful life of depreciable assets in service as ICG invests a larger portion of its capital in assets with shorter lives such as routers and computers. Net loss on disposal of long-lived assets Net loss on disposal of long-lived assets of $2.0 million for the three months ended September 30, 2000 relates to the write-off of certain frame relay switches no longer in operation. Interest expense Interest expense increased from $52.9 million for the three months ended September 30, 1999 to $66.0 million for the same period in 2000. Included in interest expense for the three months ended September 30, 1999 and 2000 was $49.5 million and $54.5 million of noncash interest, respectively. Interest expense also increased due to the increase in debt issued under the senior secured financing facility. Additionally, interest expense is net of interest capitalized related to construction in progress of $2.3 million and $3.0 million during the three months ended September 30, 1999 and 2000, respectively. Interest income Interest income increased from $3.8 million for the three months ended September 30, 1999 to $5.9 million for the same period in 2000. The increase is attributable to the increase in cash, cash equivalents and short-term investments resulting from the cash proceeds to the Company of the 8% Series A Convertible Preferred Stock. Accretion and preferred dividends on preferred securities of subsidiaries Accretion of costs and preferred dividends on preferred securities of subsidiaries increased from $15.7 million for the three months ended September 30, 1999 to $17.7 million for the same period in 2000. The increase is due primarily to the periodic payment of dividends on the 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred Stock. Accretion and preferred dividends on preferred securities of subsidiaries recorded during the three months ended September 30, 2000 consists of the accretion of issuance costs and the accrual of the preferred securities dividends associated with the 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"), the 14% Preferred Stock and the 14 1/4% Preferred Stock. Loss from continuing operations Loss from continuing operations increased from $156.5 million for the three months ended September 30, 1999 to $237.7 million for same period in 2000 due to the increases in operating costs, SG&A expenses and depreciation and amortization, partially offset by an increase in revenue, as noted above. Income(loss) on disposal and operation of discontinued operations Income (loss)from discontinued operations was $0.7 million income for the three months ended September 30, 1999 and consists of net income of Network Services Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value is comprised of the dividends and the accretion to liquidation value of the 8% Series A Convertible Preferred Stock of $17.3 million during the three months ended September 30, 2000. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Nine Months Ended September 30, --------------------------------------- 1999 2000 ------------------ ------------------- $ % $ % -------- -------- --------- ------- ($ values in thousands) Local service 214,762 64 332,324 70 Special access 75,415 22 103,896 22 Switched access 32,210 10 28,351 6 Long distance & other 14,764 4 13,207 2 -------- -------- --------- ------- Total Revenue 337,151 100 477,778 100 ======== ======== ========= ======= Operating costs 179,391 53 304,202 63 ======== ======== ========= ======= Selling, general and administrative 180,341 54 188,947 40 ======== ======== ========= ======= Depreciation and amortization 126,137 37 236,514 50 ======== ======== ========= ======= Revenue Most of ICG's revenue is earned from small- to medium-sized business customers who purchase voice and data communications services, or by providing network facilities and data management services to ISPs. However, the Company has a few large ISP customers which account for a significant portion of its ISP revenue. The Company also offers special access and switched access services to long-distance companies and other customers. Total revenue increased $140.6 million or 42% from the nine months ended September 30, 1999 to 2000. Local service revenue increased from $214.8 million for the nine months ended September 30, 1999 to $332.3 million for the same period in 2000, a 55% annual increase primarily due to an increase in the average local access lines offset by a reduction in the average revenue per line. This reduction in revenue per line is, in large part, driven by a higher percentage of ISP lines in 2000, which typically earn lower revenue per line, a reduction in the percent of total lines on-switch which do not earn reciprocal compensation and billing credits issued to certain IRAS customers. IRAS billing credits issued to customers during the third quarter amounted to approximately $8 million. Including the billing credits, total revenue expected to be earned from ISP customers in August and September was approximately $17 million below expectations. Local service revenue includes approximately $95 million (or 28% of revenue) and $100 million (or 21% of revenue) for the nine months ended September 30, 1999 and 2000, respectively, for terminating local ISP traffic. Revenue for terminating local ISP traffic for the nine months ended September 30, 2000, includes approximately $13 million derived from the resolution of previously disputed issues not related to the respective period and approximately $4 million of revenues from rates earned pursuant to the previous interconnection agreement, neither of which will recur in subsequent periods. Additionally, approximately $3 million recognized in the nine months ended September 30, 2000 relates to nonrecurring elements of terminating other traffic, which is also for services not provided within the period. For further discussion on nonrecurring reciprocal compensation revenue earned, see "Liquidity and Capital Resources - Transport and Termination Charges" below. Special access revenue increased from $75.4 million for the nine months ended September 30, 1999 to $103.9 million for the same period in 2000, an increase of 38%. The increase in special access revenue is due to increased unit sales as well as $12.5 million of revenue recognized during the nine months ended September 30, 2000 under ICG's fiber optic sales- type lease agreement with a major interexchange carrier. Switched access revenue decreased from $32.2 million for the nine months ended September 30, 1999 to $28.4 million for the same period in 2000, a 12% decrease. The decrease is due to the expected attrition of switch customers. Revenue from long distance services decreased from $14.8 million for the nine months ended September 30, 1999 to $13.2 million for the same period in 2000, an 11% decline. ICG's long distance revenue for the nine months ended September 30, 2000 was impacted by planned attrition of resale access lines, which had high long distance service penetration rates as well as a reduction in revenue per minute. Operating costs Total operating costs increased from $179.4 million for the nine months ended September 30, 1999 to $304.2 million for the same period in 2000, a 70% increase. Operating costs increased as a percentage of revenue from 53% for 1999 to 63% for 2000. Operating costs have increased as a percentage of revenue partially due to the reduction in revenue earned from IRAS customers, as noted above. During periods of rapid market expansion, such as ICG has experienced in 2000, backhaul and intracity facilities are leased on an interim basis until such time as owned facilities are in service, resulting in an increase of operating expenses as a percent of revenue. It was ICG's intent to complete installation of these owned facilities. However, due to the Company's bankruptcy proceedings and capital limitations, there can be no assurance of when or if these owned facilities will be completed and produce revenue. In addition, due to the Company's curtailed capital deployment plan and the reallocation of resources normally assigned to capital deployment activities, approximately $12 million in operating costs that would have been typically capitalized under the Company's capitalization policies were expensed. Selling, general and administrative expenses Total selling, general and administrative ("SG&A") expenses increased from $180.3 million for the nine months ended September 30, 1999 to $188.9 million for the same period in 2000. SG&A expenses decreased as a percentage of revenue from 54% for 1999 to 40% for 2000. The increase in absolute dollars is principally due to an increase in average staff levels and increased salary and benefits per employee attributable to the new compensation plan implemented in 2000 to remain competitive in the marketplace. The number of full time employees increased from 3,054 at September 30, 1999 to 3,160 at September 30, 2000. Certain of the SG&A increase can also be attributed to increases in facilities costs for new office and switch space as well as increased sales and property taxes and legal and professional fees offset by a net recovery of previously reserved uncollectible amounts. The increase is also offset by a provision of $45.2 million recorded during the nine months ended September 30, 1999 for accounts receivable related to certain elements of transport and termination services provided to ILECs, which the Company believed was uncollectible. During the quarter ended September 30, 2000, the Company reviewed the adequacy of the reserve for bad debts related to its ISP customers as the Company had concerns about the ability of certain of these customers to continue operating and attract future capital given current market conditions, as well as concerns associated with certain contract disputes. As a result, the Company recorded an additional provision of approximately $16.0 million. In addition, a provision for uncollectible accounts in the approximate amount of $4 million was provided for the receivable from one ILEC for termination of local ISP traffic deemed uncollectible because of changes in the regulatory environment. Depreciation and amortization Depreciation and amortization increased from $126.1 million for the nine months ended September 30, 1999 to $236.5 million for the same period in 2000. The increase is primarily due to increased investment in depreciable assets resulting from the expansion of the Company's networks and services as well as a reduction in the overall weighted-average useful life of depreciable assets in service as ICG invests a larger portion of its capital in assets with shorter lives such as routers and computers. Provision for impairment of long-lived assets During the nine months ended September 30, 1999, the Company recorded a provision for impairment of long-lived assets of $29.3 million. This provision related to the impairment of software and other capitalized costs associated with the Company's billing and provisioning system development projects under development. The provision related to management's decision to abandon the billing and provisioning solutions under development. Net loss on disposal of long-lived assets Net loss on disposal of long-lived assets of $2.6 million for the nine months ended September 30, 2000 primarily relates to the write-off of certain frame relay switches no longer in operation. Interest expense Interest expense increased from $151.6 million for the nine months ended September 30, 1999 to $195.4 million for the same period in 2000. Included in interest expense for the nine months ended September 30, 1999 and 2000 was $142.2 million and $165.8 million of noncash interest, respectively. Interest expense also increased due to the increase in debt issued under the senior secured financing facility. Additionally, interest expense is net of interest capitalized related to construction in progress of $9.0 million and $6.6 million during the nine months ended September 30, 1999 and 2000, respectively. Interest income Interest income increased from $11.7 million for the nine months ended September 30, 1999 to $20.4 million for the same period in 2000. The increase is attributable to the increase in cash, cash equivalents and short-term investments resulting from the cash proceeds to the Company of the 8% Series A Convertible Preferred Stock. Accretion and preferred dividends on preferred securities of subsidiaries Accretion of costs and preferred dividends on preferred securities of subsidiaries increased from $45.7 million for the nine months ended September 30, 1999 to $51.4 million for the same period in 2000. The increase is due primarily to the periodic payment of dividends on the 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred Stock. Accretion and preferred dividends on preferred securities of subsidiaries recorded during the nine months ended September 30, 2000 consists of the accretion of issuance costs and the accrual of the preferred securities dividends associated with the 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"), the 14% Preferred Stock and the 14 1/4% Preferred Stock. Loss from continuing operations Loss from continuing operations increased from $366.5 million for the nine months ended September 30, 1999 to $482.9 million for same period in 2000 due to the increases in operating costs, SG&A expenses, depreciation and amortization, offset by an increase in revenue and a decrease in the provision for impairment of long-lived assets, as noted above. Income(loss) on disposal and operation of discontinued operations Income (loss)from discontinued operations was a loss of $8.0 million for the nine months ended September 30, 1999 and income of $0.7 million for the same period in 2000. The loss from discontinued operations for the nine months ended September 30, 1999 consists of the combined net losses of Network Services and Satellite Services including an estimated loss on the disposal of Network Services of $8.0 million. Income from discontinued operations in 2000 is from the Zycom legal expenses reimbursed as part of the settlement outstanding with the minority shareholders. (See "Sale of Assets and Discontinued Operations" above for further discussion.) Extraordinary gain on sales of operations of NETCOM The Company reported an extraordinary gain on the sales of the operations of NETCOM during the nine months ended September 30, 1999 of $193.0 million, net of income taxes of $6.4 million. Offsetting the gain on the sales is approximately $16.6 million of net losses of operations of NETCOM from November 3, 1998 through the dates of the sales and approximately $35.5 million of the proceeds was deferred and recognized over the one year term of the MindSpring Capacity Agreement. Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value is comprised of the dividends and the accretion to liquidation value of the 8% Series A Convertible Preferred Stock of $31.7 million. Charge for beneficial conversion feature of 8% Series A Convertible Preferred Stock Charge for beneficial conversion of 8% Series A Convertible Preferred Stock during the nine months ended September 30, 2000 relates to the charge of $159.3 million of the proceeds of the 8% Series A Convertible Preferred Stock which was allocated to the intrinsic value of the beneficial conversion feature of the convertible preferred securities to additional paid-in capital. As the 8% Series A Convertible Preferred Stock is immediately convertible into shares of ICG common stock, the beneficial conversion feature was recognized immediately as a return to the preferred shareholders during the three months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred significant operating and net losses as a result of the development and operation of its networks. The Company expects that its operating losses will continue as it operates as a debtor-in-possession as a result of its Chapter 11 bankruptcy filing described in the "Company Overview". The Company does not expect that cash provided by operations will be sufficient to fund the continuation of daily operations of the business during bankruptcy. At September 30, 2000, the Company had cash and short term investments of approximately $234.3 million. On November 14, 2000, the Company announced that it had obtained a commitment letter which will provide the Company debtor-in-possession financing for a minimum of $200 million and the potential for an additional $150 million if certain criteria are met. This debtor-in-possession financing is subject to customary pre-closing conditions and is contingent upon Bankruptcy Court approval. The debtor-in-possession financing terms require that the Company's Senior Facility be paid off at the time of the first borrowing. Management believes that current cash, short term investments and the debtor-in-possession financing, along with protection under bankruptcy law, should enable the Company to fund operations through the bankruptcy restructuring process. At September 30, 2000, the Company had approximately $2.3 billion of indebtedness outstanding and $1.2 billion of mandatorily redeemable preferred shares. As a result of filing for protection under bankruptcy law, the Company is not currently paying any of the debt service obligations that are outstanding as of November 14, 2000. In addition, future payment of principal and interest on all of the outstanding indebtedness and dividends on the preferred shares is subject to court approval and may be discharged in whole or in part in bankruptcy with proceeds from the court approved plan of reorganization or liquidation of the Company. There can be no assurance that any amounts owed to creditors will be paid or be paid in full. As a result of the Company's liquidity problems, the Company's directors did not declare a dividend on the 6 3/4% Preferred Securities that was otherwise payable on November 15, 2000. In addition, the Company has not declared dividends on the 14% and 14 1/4% Preferred Stock. In the event that plans or assumptions change, or prove to be inaccurate, significant unexpected expenses are incurred, or cash resources, together with borrowings under the debtor-in-possession financing arrangement, prove to be insufficient to fund operations, the Company may be required to seek additional sources of capital (or seek additional capital sooner than currently anticipated). There can be no guarantee, however, that additional capital will be available on reasonable terms, or at all. Net Cash Provided (Used) By Operating Activities The Company's operating activities used $48.2 million and provided $139.2 million for the nine months ended September 30, 1999 and 2000, respectively. Net cash used by operating activities for the nine months ended September 30, 1999 includes the extraordinary gain on the sale of Netcom of $193.0 million, partially offset by non-cash transactions such as depreciation and amortization and deferred interest expense. Net cash provided by operating activities for the nine months ended September 30, 2000 is primarily due to the advance payments received pursuant to the IRU agreements. Net Cash Used By Investing Activities Investing activities used $76.6 million and $562.0 million in the nine months ended September 30, 1999 and 2000, respectively. Net cash provided by investing activities for the nine months ended September 30, 1999 includes proceeds from the sales of the operations of NETCOM of $252.9 million and proceeds from the sales of short-term investments available for sale and marketable securities of $60.5 million, offset by cash expended for the acquisition of property, equipment and other assets of $368.1 million and the change in accounts payable and accrued liabilities for the purchase of long-term assets of $3.3 million. Net cash used by investing activities for the nine months ended September 30, 2000 primarily includes cash expended for the acquisition of property, equipment and other assets of $649.1 million and the change in accounts payable and accrued liabilities for the purchase of long-term assets of $50.7 million, partially offset by proceeds from the sale of short-term investments available for sale and marketable securities of $33.0 million. The Company acquired assets under capital leases and pursuant to IRU agreements of $232.5 million during the nine months ended September 30, 2000. Net Cash Provided By Financing Activities Financing activities provided $69.0 million and $535.8 million in the nine months ended September 30, 1999 and 2000, respectively. Net cash provided by financing activities for the nine months ended September 30, 1999 and 2000 include proceeds from the issuance of common stock in conjunction with the exercise of options and warrants and the Company's employee stock purchase plan, offset by principal payments on long-term debt and capital leases and payments of preferred dividends on preferred securities of subsidiaries. Net cash provided by financing activities for the nine months ended September 30, 2000 also includes $95.0 million in proceeds from the issuance of long-term debt and $720.3 million in proceeds from the issuance of the 8% Series A Convertible Preferred Stock partially offset by $179.5 million of payments made on the IRU agreement. On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0 million senior secured financing facility (the "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. As of September 30, 2000, $84.4 million was outstanding under the loans at weighted average interest rates ranging from 9.26% to 10.06% for the nine months ended September 30, 2000. As of September 30, 2000, the Company had an aggregate accreted value of approximately $2.0 billion outstanding under the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2 % Notes"), the 12 1/2% Senior Discount Notes due 2006 (the "12 1/2 % Notes"), the 11 5/8% Senior Discount Notes due 2007 (the "11 5/8 % Notes"), the 10% Notes and the 9 7/8% Notes. As of September 30, 2000, an aggregate amount of $1.2 billion was outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the 8% Series A Convertible Preferred Stock. Capital Expenditures The Company's capital expenditures including assets acquired with cash, under capital leases and pursuant to IRU agreements were $374.3 million and $881.6 million for the nine months ended September 30, 1999 and 2000, respectively. The Company is in the process of evaluating its future capital expenditure requirements in light of the bankruptcy proceedings and as part of the Company's restructuring plan. To facilitate the expansion of its services and networks, the Company has entered into equipment purchase agreements with various vendors under which the Company has committed to purchase a substantial amount of equipment and other assets, including a full range of switching systems, fiber optic cable, network electronics, software and services. If the Company fails to meet the minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. Under the debtor-in-possession financing commitment, the Company's capital expenditures will be significantly restricted. Given this, there is substantial uncertainty about the Company's ability to complete and place in service the Company's $869 million construction in progress balance as of September 30, 2000. Transport and Termination Charges Terminating Local Traffic ICG records revenue earned under interconnection agreements with incumbent local exchange carriers ("ILECs") as an element of its local services revenue. Many of the ILECs have not paid all of the amounts that the Company has recorded as revenue and have disputed these charges based on the belief that dial-up calls to ISPs are not local traffic as defined by the various agreements and not subject to payment of transport and termination charges under state and federal laws and public policies. In addition, some ILECs, while paying a portion of reciprocal compensation due to ICG, have disputed other portions of the charges. ICG has, as of September 30, 2000, a net receivable for terminating local traffic in the approximate amount of $66 million, approximately $29 million of which is due and payable, pursuant to the terms of executed agreements with several ILECs, when regulatory approval of the amendments to the parties' interconnection agreements is obtained. ICG has received cash of approximately $11 million and $94 million during the three months and nine months ended September 30, 2000, respectively, from the ILECs for terminating local traffic. The following table represents the amount of revenue ICG has recognized for terminating local traffic of the ILECs during the respective periods ($ in millions): Three months ended Nine months ended September 30, September 30, 1999 2000 1999 2000 ------------- ------------ ----------- ------------ $25 $26 $95 $100 Revenue for the nine months ended September 30, 1999 includes approximately $22 million for the tandem switching and common transport rate elements, the collection of which was determined to be uncertain in the quarter commencing July 1, 1999. ICG recorded a provision of approximately $45 million against the accounts receivable balances recorded prior to July 1, 1999 in the event the tandem switching and common transport rate element amounts were not ultimately collected. Effective July 1, 1999, ICG ceased recognition of these rate elements as revenue until cash is received but continued to bill and vigorously pursue collection of all amounts due under its interconnection agreements. The Company determined in the three months ended September 30, 2000 that approximately $4 million of the revenue previously recognized for terminating ISP traffic for one ILEC may not be collectible due to a changing regulatory environment and has therefore provided a provision for uncollectible accounts. During the nine months ended September 30, 2000, ICG entered into agreements to resolve certain disputes with several ILECs that collectively represent approximately 75% of ICG's applicable terminating traffic. One of the agreements has an effective date of December 31, 1999 and the other June 1, 2000. The agreements separately resolve the payment of certain past amounts. The revenue for the nine months ended September 30, 2000 includes approximately $13 million derived from the resolution of previously disputed issues not related to that period and approximately $4.0 million from rates earned pursuant to the previous interconnection agreement, neither of which will recur in subsequent periods. The resolution of ICG's disputes with the remaining ILECs will continue to be based on rulings by state public utility commissions and/or by the Federal Communications Commission ("FCC"), or through negotiations between the parties. ICG continues to pursue collection of the remaining amounts owed by these ILECs under ICG's existing interconnection agreements, and certain disputes remain outstanding. During the quarter, the Colorado PUC issued a ruling in an ICG arbitration decision that, subject to the outcome of judicial appellate proceedings, denies ICG the ability to collect reciprocal compensation for ISP-bound traffic initiated on the incumbent network and connected on ICG's network in Colorado when a new interconnection agreement between ICG and Qwest Communications (formerly US West) becomes effective. ICG believes that the new interconnection agreement will become effective during the fourth quarter, after the parties execute and receive PUC approval of a new interconnection agreement that complies with the PUC's final arbitration decision. Once effective, the terms in the new agreement concerning compensation for terminating ISP traffic will then be applied retroactively beginning 45 days prior to the effective date of the new agreement. In prior periods, the impacted traffic represented approximately 15% of the Company's applicable terminating traffic. Other Transport and Terminating Traffic ICG has also recognized revenue for other transport and terminating traffic of the ILECs. The amount of revenue recognized, pursuant to ICG's interconnection agreements, during the respective periods ($ in millions): Three months ended Nine months ended September 30, September 30, 1999 2000 1999 2000 ------------- ------------ ----------- ------------ $ 4 $ 4 $ 12 $ 14 The revenue for the nine months ended September 30, 2000 includes approximately $3 million derived from the resolution of previously disputed issues not related to the respective periods. ICG has, as of September 30, 2000, a net receivable for other terminating traffic in the approximate amount of $26 million, approximately $16 million of which is due from several ILECs and payment in this amount will be received as it is part of a binding agreement, subject only to regulatory approval of amendments to the parties' interconnection agreements. ICG has received cash of approximately $2 million and $8 million, during the three months and nine months ended September 30, 2000, respectively. Future Reciprocal Compensation Revenue ICG has reached interconnection agreements with certain ILECs that provide for the payment of compensation for terminating ISP traffic. These agreements expire at dates ranging from October 2000 through May 2003. Upon expiration of its interconnection agreements, the Company expects to continue to negotiate and/or arbitrate reasonable compensation and collection terms for transport and termination services, although there is no assurance that such compensation will remain consistent with current levels. Additionally, in those states in which ICG has not reached a negotiated resolution with the ILEC with respect to the reciprocal compensation rate to be applied on a going-forward basis, and/or for subsequent time periods, ongoing state and federal regulatory proceedings addressing intercarrier compensation for Internet traffic also may impact future rates of compensation. While ICG intends to pursue the collection of all receivables related to transport and termination charges and believes that future revenue from transport and termination charges recognized under ICG's interconnection agreements will be realized, there can be no assurance that future regulatory and judicial rulings will be favorable to ICG, or that different reciprocal compensation rates and rate structures will not be adopted when ICG's agreements are renegotiated or arbitrated, or as a result of FCC or state commission proceedings on future compensation methods. ICG believes that different pricing plans will continue to be considered and adopted, and expects that revenue from transport and termination charges likely will decrease as a percentage of total local services revenue from local services in subsequent periods. During the six months ended June 30, 2000, ICG successfully negotiated agreements, which assured the recognition and receipt of compensation for terminating ISP traffic and resolved disputed issues with several ILECs as discussed above. The future rates negotiated are generally lower than ICG has been historically receiving and were negotiated for a three-year period subsequent to the date of the agreements. Payment of compensation for terminating ISP traffic at the rates negotiated in these agreements will apply for the term of the agreement, irrespective of any state or federal regulatory or judicial rulings that may be issued over the three-year period of the agreements concerning the applicability of compensation obligations for ISP traffic. The revenue from reciprocal compensation is driven by three factors. The number of lines on switch, the minutes of use per line, and the rate under the interconnection agreement. These factors are in a large measure beyond the control of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial position and cash flows are subject to a variety of risks in the normal course of business, which include market risks associated with movements in interest rates and equity prices. The Company routinely assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. The Company does not, in the normal course of business, use derivative financial instruments for trading or speculative purposes. Interest Rate Risk The Company's exposure to market risk associated with changes in interest rates relates primarily to the Company's proposed debtor-in-possession financing which, subject to changes, will incur interest at the LIBOR rate plus 4%. PART II ITEM 1. LEGAL PROCEEDINGS On November 14, 2000 the Company filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code in the Federal District of Delaware. The Company is currently operating as debtors-in-possession under the supervision of the Bankruptcy Court. The bankruptcy petition was filed in order to preserve cash and give the Company the opportunity to restructure its debt. During the third quarter 2000 the Company was served with seven lawsuits filed by various shareholders in the Federal District Court for the District of Colorado (Case numbers: 00-S-1864, 00-S-1910, 00-S-1908, 00-S-1945, 00-S-1963, 00-S-1957, and 00-S-1919). All of the suits name as defendants the Company, the Company's former CEO, J. Shelby Bryan and the Company's former President, John Kane. Additionally, one of the complaints names the Company's current President, William S. Beans, Jr., as a defendant. All of the complaints seek unspecified damages for alleged violations of Rules 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints seek class action certification for similarly situated shareholders. It is anticipated that the lawsuits will be consolidated and that a lead plaintiff's counsel will be chosen by the Court. The Company has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP to vigorously defend it against these lawsuits. The Company has also tendered these claims to the Company's insurers. At this time, it is anticipated that the claims against the Company will be stayed pursuant to the Company's filing for bankruptcy. It is uncertain at this time whether these lawsuits will materially adversely effect the Company's financial or operational stability. On April 4, 1997, certain shareholders of Zycom filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Case No. 97-17777) against the Company, Zycom and certain of their subsidiaries. In this action, the plaintiffs alleged that the Company and certain of its subsidiaries breached certain fiduciary duties owed to the plaintiffs. The Company denied all such allegations. The Company has recently finalized an agreement to settle all claims asserted in this litigation. The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Due to the bankruptcy proceedings discussed in note 1 to the Company's unaudited consolidated financial statements for the nine months ended September 30, 2000, the Company is currently in default under the 13 1/2 % Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes, 9 7/8% Notes and the Senior Secured Facility. In addition, the Company is in default under the 14 1/4% Preferred Stock, 14% Preferred Stock, 6 3/4% Preferred Securities and 8% Series A Convertible Preferred Stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (A) Exhibits. (10) Material Contracts. 10.1 Amendment to Employment Agreement, dated as of July 12, 2000 by and between ICG Communications, Inc. and Michael D. Kallet. 10.2 Employment Agreement, dated as of August 7, 2000 by and between ICG Communications, Inc. and John Colgan. 10.3 Employment Agreement, dated as of September 24, 2000 by and between ICG Communications, Inc. and Randall Curran. 10.4 Amendment and Waiver No. 4 to the Loan Documents, dated as of September 29, 2000, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services, Inc., as Parent, certain Initial Lender Parties party thereto, Morgan Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal Bank of Canada, as Collateral Agent and as Administrative Agent for such Lender Parties, Bank of America, N.A., as Documentation Agent and Barclays Bank Plc, as Co-Documentation Agent (27) Financial Data Schedule. 27.1: Financial Data Schedule of ICG Communications, Inc. for the nine months ended September 30, 2000. (B) Report on Form 8-K. The following reports on Form 8-K was filed by the registrants during the three months ended September 30, 2000: (i) Current Report on Form 8-K dated August 11, 2000, regarding the announcement of earnings information and results of operations for the quarter ended June 30, 2000 of ICG Communications, Inc. (ii) Current Report on Form 8-K dated August 25, 2000, announcing the resignation of J. Shelby Bryan as Chairman and Chief Executive Officer on September 22, 2000. (iii) Current Report on Form 8-K dated September 18, 2000, regarding the announcement of a revised business plan. (iv) Current Report on Form 8-K dated September 19, 2000, announcing the resignation of James Washington as Executive Vice President of Network Services effective September 13, 2000. (v) Current Report on Form 8-K dated September 19, 2000, announcing the resignation of Carl E. Vogel as Chairman of the Board of Directors and Chief Executive Officer on September 18, 2000. (vi) Current Report on Form 8-K dated November 14, 2000, announcing that the Company and most of its subsidiaries filed for voluntary bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 INDEX TO EXHIBITS 10.1 Amendment to Employment Agreement, dated as of July 12, 2000 by and between ICG Communications, Inc. and Michael D. Kallet. 10.2 Employment Agreement, dated as of August 7, 2000 by and between ICG Communications, Inc. and John Colgan. 10.3 Employment Agreement, dated as of September 24, 2000 by and between ICG Communications, Inc. and Randall Curran. 10.4 Amendment and Waiver No. 4 to the Loan Documents, dated as of September 29, 2000, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services, Inc., as Parent, certain Initial Lender Parties party thereto, Morgan Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal Bank of Canada, as Collateral Agent and as Administrative Agent for such Lender Parties, Bank of America, N.A., as Documentation Agent and Barclays Bank Plc, as Co-Documentation Agent 27.1 Financial Data Schedule of ICG Communications, Inc. for the nine months ended September 30, 2000. EXHIBIT 10.1 Amendment to Employment Agreement, dated as of July 12, 2000, by and between ICG Communications, Inc. and Michael D. Kallet. EXHIBIT 10.2 Employment Agreement, dated as of August 7, 2000, by and between ICG Communications, Inc. and John V. Colgan. EXHIBIT 10.3 Employment Agreement, dated as of September 25, 2000, by and between ICG Communications, Inc. and Randall Curran. EXHIBIT 10.4 Amendment and Waiver No. 4 to the Loan Documents, dated as of September 29, 2000, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services, Inc., as Parent, certain Initial Lender Parties party thereto, Morgan Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal Bank of Canada, as Collateral Agent and as Administrative Agent for such Lender Parties, Bank of America, N.A., as Documentation Agent and Barclays Bank Plc, as Co-Documentation Agent. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 20, 2000. ICG COMMUNICATIONS, INC. Date: November 20, 2000 By: /s/ Harry R. Herbst -------------------------------------- Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 20, 2000 By: /s/ John V. Colgan ------------------------------------ John V. Colgan, Senior Vice President and Controller (Principal Accounting Officer) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 20, 2000. ICG HOLDINGS (CANADA) CO. Date: November 20, 2000 By: /s/ Harry R. Herbst ------------------------------------ Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 20, 2000 By: /s/ John V. Colgan ------------------------------------ John V. Colgan, Senior Vice President and Controller (Principal Accounting Officer) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 20, 2000. ICG HOLDINGS, INC. Date: November 20, 2000 By: /s/ Harry R. Herbst ------------------------------------ Harry R. Herbst, Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 20, 2000 By: /s/ John V. Colgan ------------------------------------ John V. Colgan, Senior Vice President and Controller (Principal Accounting Officer) EX-10 2 0002.txt EXHIBIT 10.1 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT ("Agreement") is made as of the 12th day of July, 2000 by and between ICG Communications, Inc. ("Employer" or the "Company") and Michael D. Kallet ("Employee"). RECITALS WHEREAS, the Company and Employee previously entered into that certain Employment Agreement dated as of July 1, 1999 ("Employment Agreement"); WHEREAS, the parties desire to amend certain of the terms of the Employment Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Section 3.1. Section 3.1 shall be amended to delete Section 3.1 in its entirety and insert the following in its place: The Company shall pay Employee during the Term of this Agreement an annual base salary, payable bi-weekly. The annual base salary will initially be Three Hundred Thousand and no/100 Dollars ($300,000.00). 2. Section 3.2. The last sentence of Section 3.2 shall be amended to read as follows: "Employee's annual bonus is established at 60% of annual base salary if all objectives and goals are met." 3. Section 3.3. Section 3.3 shall be amended to delete the last sentence. 4. Section 4. The first two sentences of Section 4 shall be amended to read as follows: "The initial term of this Agreement will be for two (2) years commencing as of the date hereof ("Term"). From the date hereof, this Agreement will automatically renew from month-to-month such that there will always be two (2) years remaining in the Term, unless and until either party shall give at least sixty (60) days notice to the other of her or its desire to terminate the Agreement (in such case, the Term shall end upon the date indicated in such notice)." 5. Section 5.6. Section 5.6 shall be amended to delete Section 5.6 in its entirety and insert the following in its place: If this Agreement is terminated by the Company under Section 4 or Section 5.3 or by Employee under Section 5.4, the Company shall pay Employee a termination fee in an amount equal to two (2) times the aggregate amount of his annual base salary plus his targeted annual bonus plus the annual value of his benefits and perquisites. Such termination fee will be paid in a lump sum within fifteen (15) days 1 from the date of termination. In addition, if the Company terminates this Agreement under Section 4 or Section 5.3 or Employee terminates this Agreement under Section 5.3 or Section 5.4, all options to purchase shares of the Company and/or stock awards that have been granted to Employee, but not yet vested, will immediately vest on the date of termination and Employee will be entitled to exercise all options held by the Employee for a period of twelve (12) months after the date of termination in accordance with the plans and agreements relating to such options. 6. Other Terms and Conditions. All other terms and conditions of the Employment Agreement shall remain in full force and effect, as if fully stated herein. 7. Capitalized Terms. Capitalized and defined terms shall have the same meaning as that accorded them in the Employment Agreement, unless the context requires otherwise. 8. Conflict. If there are any conflicting terms or conditions between the terms and conditions of this Amendment and the terms and conditions of the Employment Agreement, the terms and conditions of the Amendment shall control. IN WITNESS WHEREOF, each of the parties hereto has duly executed this Amendment as of the date first written above. ICG COMMUNICATIONS, INC. /s/ Bill Beans -------------------------- Name: William S. Beans, Jr. ---------------------- Title: President & COO --------------------- /s/ Michael D. Kallet --------------------------- Michael D. Kallet 2 EX-10 3 0003.txt EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 7th day of August, 2000 by and between ICG Communications, Inc. ("Employer" or the "Company") and John Colgan ("Employee"). R E C I T A L S WHEREAS, the Company desires to employ Employee as provided herein; and WHEREAS, Employee desires to be employed by Employer as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Employment. The Company agrees to employ Employee and Employee hereby agrees to be employed on a full-time basis by the Company or by such of its subsidiary or affiliate corporations as determined by the Company in such position as is designated by the Company, for the period and upon the terms and conditions hereinafter set forth. 2. Duties. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position and shall serve the Employer faithfully and to the best of his ability. Employee shall devote 100% of his working time to carrying out his obligations hereunder. 3. Compensation and Benefits. 3.1 The Company shall pay Employee during the Term of this Agreement an annual base salary, payable bi-weekly. The annual base salary will initially be One Hundred Eighty-Five Thousand and 00/100 Dollars ($185,000.00). 3.2 In addition to the base salary, Employee will be eligible for an annual performance bonus in an exact amount to be determined by the Board of Directors of the Company or the Compensation Committee of the Board. The annual bonus will be determined in accordance with the bonus plan of the Company and will be based on objectives and goals set for the Company and the Employee. Employee's annual bonus is initially established at 45% of annual base salary if all objectives and goals are met. 3.3 In addition to salary and bonus payments as provided above, the Company will provide Employee, during the Term of this Agreement, with the benefits of such insurance plans, hospitalization plans and other benefits as shall be generally provided to employees of the Company at his level and for which Employee may be eligible under the terms and conditions thereof. 3.4 Throughout the Term of this Agreement, the Company will reimburse Employee for all reasonable out-of-pocket expenses incurred by Employee in connection with the business of the Company and the performance of his duties under this Agreement, upon presentation to the Company by Employee of an itemized accounting of such expenses with reasonable supporting data. 1 3.5 The Company may from time to time provide to Employee stock options pursuant to and subject to the terms and conditions of the Company's Stock Option Plans. 4. Term. The initial term of this Agreement will be for one (1) year commencing as of the date hereof ("Term"). From the date hereof, this Agreement will automatically renew from month-to-month such that there will always be one (1) year remaining in the Term, unless and until either party shall give at least sixty (60) days notice to the other of his or its desire to terminate this Agreement (in such case, the Term shall end upon the date indicated in such notice). The applicable provisions of Sections 6, 7, and 8 shall remain in full force and effect for the time periods specified in such Sections notwithstanding the termination of this Agreement. 5. Termination. 5.1 If Employee dies during the Term of this Agreement, this Agreement will terminate. The Company will pay the estate of Employee an amount equal to three months salary. In addition, the estate of Employee will be entitled to exercise all options theretofore vested under the Company's Stock Option Plans for a period of one (1) year after the date of death of Employee in accordance with the plans and agreements relating to such options. 5.2 If, during the Term of this Agreement, Employee is prevented from performing his duties by reason of illness or incapacity for one hundred forty (140) days in any one hundred eighty (180) day period, the Company may terminate this Agreement, upon thirty (30) days notice to Employee or his duly appointed legal representative. Employee will be entitled to all benefits provided under any disability plans of the Company. In addition, Employee or his duly appointed legal representative will be entitled to exercise all options theretofore vested under the Company's Stock Option Plans for a period of one (1) year after the date of termination in accordance with the plans and agreements relating to such options. 5.3 For the purposes of this Agreement, a "Change in Control" of the Company shall mean and be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 as amended (Exchange Act)) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (b) at any time a majority of the directors of the Company are persons who were not nominated for election by the Board; (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (d) the Company shall sell or otherwise dispose of, in one transaction or a series of related transactions, assets aggregating more than 50% of the assets of the Company and its subsidiaries consolidated; or (e) the stockholders of the Company approve a plan of complete liquidation of the Company or any agreement for the sale or disposition by the Company of all or substantially all the Company's assets. At the time of the occurrence of a Change in Control all options to purchase shares of the Company that have been granted to Employee pursuant to the Company's Stock Option Plans, but not yet vested, will immediately vest and Employee shall be entitled to exercise such options in accordance with the plans and agreements relating to such options. In addition, the Company or Employee may terminate this Agreement upon at least thirty (30) days notice at any time within one (1) year after the occurrence of a Change in Control of the Company. 2 5.4 Employee may terminate this Agreement upon at least thirty (30) days notice upon the occurrence of a constructive dismissal of Employee. For the purposes of this Agreement, "constructive dismissal" shall mean, unless consented to by Employee in writing, any of the following actions by the Company: (i) any reduction in the annual salary of Employee; (ii) prior to the occurrence of a Change in Control of the Company, any requirement to relocate to another state or country, provided, however, that this provision shall not be applicable if the principal executive offices of the Company are being relocated to such state or country; and (iii) any material reduction in the value of Employee's benefits plans and programs. 5.5 The Company may terminate this Agreement immediately for gross negligence, intentional misconduct or the commission of a felony by the Employee, in which case all rights under this Agreement shall end as of the date of such termination. 5.6 If this Agreement is terminated by the Company under Section 4, the Company shall pay Employee a termination fee in an amount equal to the aggregate amount of his annual base salary that would have been paid during the remaining Term of the Agreement. If this Agreement is terminated by the Company under Section 5.3, the Company shall pay Employee a termination fee in an amount equal to the aggregate amount of his annual base salary plus his targeted annual bonus. Such termination fee will be paid in a lump sum within fifteen (15) days from the date of termination. If this Agreement is terminated by Employee under Section 5.4, the Company will pay Employee a termination fee equal to the aggregate amount of his annual base salary plus his targeted annual bonus. Such termination fee will be paid in a lump sum within fifteen (15) days from the date of termination. In addition, if Employee terminates this Agreement under Section 5.3 or Section 5.4, all options to purchase shares of the Company that have been granted to Employee pursuant to the Company's Stock Option Plans, but not yet vested, will immediately vest on the date of termination. Employee will be entitled to exercise all options held by the Employee for a period of six (6) months after the date of termination in accordance with the plans and agreements relating to such options. 6. Non-Compete and Non-Interference. 6.1 During the Term of this Agreement, if Employee's employment with the Company is terminated under Section 4 or Section 5.3, for a period of twelve (12) months after such termination, Employee shall not, directly or indirectly, own, manage, operate, control, be employed by, or participate in the ownership, management, operation or control, of a business that is engaged in the same business as the Company within any area constituting, during the term of Employee's employment or at the time the Employee's employment is terminated, a Relevant Area. A "Relevant Area" shall be defined for the purposes of this Agreement as any area located within, or within fifth (50) miles of, the legal boundaries or limits of any city within which the Company is engaged in business or in which the Company has publicly announced or privately disclosed to employee that it plans to engage in business. 6.2 During the Term of this Agreement and for a period of twelve (12) months after termination of this Agreement, Employee shall not (i) directly or indirectly cause or attempt to cause any employee of the Company or any of its affiliates to leave the employ of the Company or any affiliate, (ii) in any way interfere with the relationship between the Company and any employee or between an affiliate and any employee of the affiliate, or (iii) interfere or attempt to interfere with any transaction in which the Company or any of its affiliates was involved during the Term of this Agreement. 3 6.3 Employee agrees that, because of the nature and sensitivity of the information to which he will be privy and because of the nature and scope of the Company's business, the restrictions contained in this Section 6 are fair and reasonable. 7. Confidential Information. 7.1 The relationship between the Company and Employee is one of confidence and trust. This relationship and the rights granted and duties imposed by this Section shall continue until a date ten (10) years from the date Employee's employment is terminated. 7.2 As used in this Agreement (i) "Confidential Information" means information disclosed to or acquired by Employee about the Company's plans, products, processes and services, including information relating to research, development, inventions, manufacturing, purchasing, accounting, engineering, marketing, merchandising, selling, pricing, tariffed or contractual terms, customer lists and prospect lists and other market information, with respect to any of the Company's business activities; and (ii) "Inventions" means any inventions, discoveries, concepts and ideas, whether patentable or not, including, without limitation, processes, methods, formulas, and techniques (as well as related improvements and knowledge) that are based on or related to Confidential Information, that pertain in any manner to the Company's technology, expertise or business and that are made or conceived by Employee, either solely or jointly with others, and while employed by the Company or within six (6) months thereafter, whether or not made or conceived during working hours or with the use of the Company's facilities, materials or personnel. 7.3 Employee agrees that he shall at no time during the Term of this Agreement or at any time thereafter disclose any Confidential Information to any person, firm or corporation to any extent or for any reason or purpose or use any Confidential Information for any purpose other than the conduct of the Company's business. 7.4 Any Confidential Information that is directly or indirectly originated, developed or perfected to any degree by Employee during the term of his employment by the Company shall be and remain the sole property of the Company and shall be deemed trade secrets of the Company. 7.5 Upon termination of Employee's employment pursuant to any of the provisions herein, Employee or his legal representative shall deliver to the Company all originals and all duplicates and/or copies of all documents, records, notebooks, and similar repositories of or containing Confidential Information then in his possession, whether prepared by him or not. 7.6 Employee agrees that the covenants and agreements contained in this Section 7 are fair and reasonable and that no waiver or modification of this Section or any covenant or condition set forth herein shall be valid unless set forth in writing and duly executed by the parties hereto. 4 8. Injunctive Relief. Upon a material breach or threatened material breach by Employee of any of the provisions of Sections 6 or 7 of this Agreement, the Company shall be entitled to an injunction restraining Employee from such breach. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach, including recovery of damages from Employee. 9. No Waiver. A waiver by the Company of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent or other breach by Employee. 10. Severability. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 11. Notices. All communications, requests, consents and other notices provided for in this Agreement shall be in writing and shall be deemed given if delivered by hand or mailed by first class mail, postage prepaid, to the last known address of the recipient. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Colorado. 13. Assignment. Neither this Agreement nor any rights or duties hereunder may be assigned by Employee or the Company without the prior written consent of the other, such consent not to be unreasonably withheld. 14. Amendments. No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing, signed by each party to this Agreement. 15. Binding Effect. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 16. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral, which relate in any way to the subject matter hereof. 5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ John V. Colgan ------------------------------------ JOHN COLGAN ICG COMMUNICATIONS, INC. By: /s/ Carla J. Wolin -------------------------------- Name: Carla J. Wolin ------------------------------ Title: Executive Vice President ----------------------------- 6 EX-10 4 0004.txt EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 25th day of September, 2000 by and between ICG Communications, Inc., ICG Holdings, Inc., ICG Services, Inc., ICG Equipment, Inc., and ICG Telecom, Inc. (collectively, "Employer" or the "Company") and Randall Curran ("Employee"). RECITALS WHEREAS, the Company desires to employ Employee as provided herein; and WHEREAS, Employee desires to be employed by Employer as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Employment. The Company agrees to employ Employee and Employee hereby agrees to be employed on a full-time basis by the Company or by such of its subsidiary or affiliate corporations as determined by the Company in such position as is designated by the Company, for the period and upon the terms and conditions hereinafter set forth. 2. Duties. Employee shall serve as Chief Executive Officer ("CEO") of ICG Communications, Inc. and shall report to the Board of Directors (the "Board") and the Special Executive Committee of the Board (the "Special Committee") thereof. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position and shall serve his Employer faithfully and to the best of his ability. During the Term (as defined below) of the Agreement, and excluding any periods of vacation, holiday, personal leave and sick leave to which Employee is entitled, Employee shall devote Employee's full business time, attention and ability to the business and affairs of the Company and shall use Employee's best efforts to carry out Employee's responsibilities faithfully and efficiently in a professional manner. 1 3. Compensation and Benefits. (a) The Company shall pay Employee during the Term of this Agreement a monthly base salary, payable bi-weekly. The monthly base salary as CEO will be Seventy Five Thousand Dollars ($75,000), which shall be effective as of September 25, 2000. This salary may be increased from time to time in accordance with normal business practices of the Company and, if so increased, shall not thereafter be reduced unless (i) any such reduction occurs on a proportionate across-the-board basis among all executive employees of the Company ("Key Employees"), and (ii) in no event shall Employee's salary be reduced to a rate below his rate as in effect on the date hereof. Compensation of Employee by salary payments shall not be deemed exclusive and shall not prevent Employee from participating in any other compensation, bonus or benefit plan of the Company. The salary payments hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay Employee's salary hereunder. (b) In addition to salary as provided above, the Company will provide Employee, during the Term of this Agreement, with the benefits of such insurance plans, benefit plans, hospitalization plans and other perquisites as shall be generally provided to senior executives of the Company and for which Employee may be eligible under the terms and conditions thereof. (c) If at any time during the Term of employment the Company seeks protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") the Company will use its reasonable best efforts to assume this Agreement. Failure of the Company to assume this Agreement within a reasonable time after seeking such protection shall entitle Employee to terminate his employment at any time thereafter and receive the same twelve month severance benefit described below as if the Company had terminated his employment other than for cause or as a result of Employee's death or disability. (d) Throughout the Term of this Agreement, the Company will promptly reimburse Employee for all reasonable out-of-pocket expenses incurred by Employee in connection with the business of the Company and the performance of his duties under this Agreement including, but not limited to, the costs of temporary housing convenient to the Company's headquarters and travel costs between headquarters and his home in St. Louis, Missouri, through June 2001, 2 upon presentation to the Company by Employee of a reasonably itemized accounting of such expenses with reasonable supporting data. (e) Provided that Employee and the Special Committee mutually agree that Employee's employment hereunder is reasonably expected to continue for a significant time beyond June, 2001, the Company will pay or reimburse Employee on a fully tax grossed-up basis for the reasonable costs and expenses of relocating to the Denver Metropolitan area, including but not limited to brokerage or similar costs incurred by Employee in obtaining a permanent residence in the Denver area. (f) During the term of this Agreement, Employee will have full use of a company vehicle at Company's expense. 4. Term. Subject to Section 5, the Term of this Agreement will be from month to month commencing on September 25, 2000. 5. Termination. (a) If this Agreement is terminated by the Company for any reason other than Employee's death, disability or for "cause" (as defined below) or by Employee for "good reason" (as defined below) at any time after the earliest to occur of (i) November 24, 2000, (ii) the date of a "change in control" (as defined below), (iii) the date on which the Board of Directors or the Special Committee resolves to file a petition for relief pursuant to Chapter 11 of the Bankruptcy Code on behalf of the Company and (iv) the date on which an involuntary petition under Chapter 7 of the Bankruptcy Code is filed against the Company, the Company shall pay Employee within five days of the date of the notice of termination a lump sum termination benefit in an amount equal to twelve month's salary at the rate then in effect. (b) For purposes of this Agreement, termination for "cause" shall be limited to termination based on Employee's (i) willful and continued failure to substantially perform his duties hereunder (other than any such failure arising from his disability) provided that Employee shall first have received a notice in writing from the Special Committee specifying in reasonable detail the alleged failures and providing Employee a reasonable opportunity to cure same; or (ii) acts of intentional dishonesty resulting in demonstrable harm to the Company. (c) For purposes of this Agreement, a "change in control" of the Company shall mean and be deemed to have occurred if (a) any "person" (as such term is 3 used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding voting securities; (b) at any time a majority of the directors of the Company are persons who were not nominated for election by the Board; (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (d) the Company shall sell or otherwise dispose of, in one transaction or a series of related transactions, assets aggregating more than fifty percent (50%) of the assets of the Company and its subsidiaries consolidated; or (e) the stockholders or creditors of the Company approve a plan of complete liquidation of the Company or any agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (d) For purposes of this Agreement, Employee shall be entitled to terminate this Agreement for "good reason" if (i) Employee is no longer CEO of the Company or is required to report to anyone other than the Board or the Special Committee, (ii) Employee is assigned duties inconsistent with those duties customarily assigned to senior executive officers of the Company, or (iii) there is a mutual breach by the Company in the performance of any of the terms and conditions of this Agreement, provided Employee shall first have given written notice to the Special Committee regarding such breach and given the Company a reasonable opportunity to cure such breach. (e) If Employee dies during the Term of this Agreement, Employee's obligations under this Agreement will terminate and the Company will pay the estate of Employee an amount equal to six (6) months base salary. (f) If, during the Term of this Agreement, Employee is prevented from performing his duties by reason of illness or incapacity for thirty (30) days in any one hundred eighty (180) day period, the Company may terminate this Agreement, upon fourteen (14) days notice to Employee or his duly appointed legal representative. Employee will be entitled to all benefits provided under any disability plans of the Company. 4 (g) The Company shall be responsible for any gross-up payment required to offset any excise taxes placed on Employee if any payments made to Employee under Section 5(a) are considered "parachute payments" (within the meaning of Section 280g of the Internal Revenue Code) or any payments or reimbursements to Employee for temporary housing or relocation expenses result in net taxable income to Employee (net of any offsetting deductions). 6. Directors' and Officers' Insurance; Indemnification. (a) The Company represents that the Employee is covered by the Directors' and Officers' liability insurance policy currently in effect which provides $60,000,000 of coverage for all directors and officers through November 1, 2000 and for a discovery period of one year thereafter, and that the Company will use its commercially reasonable efforts to obtain such a policy providing coverage for acts by officers and directors after such date in an amount which the Special Committee and Employee in good faith mutually determine to be reasonable. (b) In addition to any rights to indemnification to which Employee is entitled under the Company's Articles of Incorporation and Bylaws, the Company shall indemnify Employee at all times during and after the Term of this Agreement to the maximum extent permitted under the Delaware Business Corporation Act or any successor provision thereof, and any and all applicable state law, and shall pay Employee's expenses in defending any civil action, suit or proceeding in advance of the final disposition of such action, suit or proceeding to the maximum extent permitted under such applicable state laws for Employee's action or inaction on behalf of the Company under the terms of this Agreement including but not limited to any acts or alleged acts arising out of events prior to Employee's employment by the Company which obligation shall survive the termination of Employee's employment or the termination of the other provisions of this Agreement. 7. Severability. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 5 8. Notices. All communications, requests, consents and other notices provided for in this Agreement shall be in writing and shall be deemed give if delivered by hand or mailed by first class mail, postage prepaid, to the last known address of the recipient. 9. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. 10. Assignment. Neither this Agreement nor any rights or duties hereunder may be assigned by Employee or the Company without the prior written consent of the other, such consent not to be unreasonably withheld. 11. Amendments. No provisions of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing, signed by each party to this Agreement. 12. Binding Effect. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 13. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constituted one and the same instrument. 14. Arbitration. Any dispute, controversy or question arising under, out of, or relating to this Agreement (or the breach thereof), or, Employee's employment with the Company or termination thereof, shall be referred for arbitration in the State of Colorado to a neutral arbitrator selected by Employee and the Company and this shall be the exclusive and sole means for resolving such dispute. 15. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral, which relate in any way to the subject matter hereof. 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. By: /s/ Randall Curran ------------------------------ Randall Curran ICG COMMUNICATIONS, INC. By: /s/ William J. Laggett ------------------------------ Chairman of the Special Executive Committee of the Board of Directors ICG HOLDINGS, INC. By: /s/ Bernard L. Zuroff ------------------------------ General Counsel ICG SERVICES, INC. By: /s/ Bernard L. Zuroff ------------------------------- General Counsel ICG EQUIPMENT, INC. By: /s/ Bernard L. Zuroff ------------------------------- General Counsel ICG TELECOM, INC. By: /s/ Bernard L. Zuroff ------------------------------- General Counsel 7 EX-10 5 0005.txt EXHIBIT 10.4 EXECUTION COPY AMENDMENT AND WAIVER NO. 4 TO THE LOAN DOCUMENTS Dated as of September 29, 2000 AMENDMENT AND WAIVER NO. 4 (this "Amendment and Waiver") TO THE CREDIT AGREEMENT dated as of August 12, 1999, as amended by Amendment No. 1 thereto dated as of September 30, 1999, Amendment and Waiver No. 2 thereto dated as of December 29, 1999 and Amendment No. 3 thereto dated as of February 11, 2000 (such Credit Agreement as so amended, the "Credit Agreement") among ICG Equipment, Inc., a Colorado corporation ("ICG Equipment"), ICG NetAhead, Inc., a Delaware corporation ("ICG NetAhead" and, together with ICG Equipment, the "Borrowers"), ICG Services, Inc., a Delaware corporation, as Parent, certain Initial Lender Parties party thereto, Morgan Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal Bank of Canada, as Collateral Agent and as Administrative Agent for such Lender Parties, Bank of America, N.A., as Documentation Agent and Barclays Bank Plc, as Co-Documentation Agent. Capitalized terms not otherwise defined in this Amendment and Waiver have the same meanings as specified therefor in the Credit Agreement. PRELIMINARY STATEMENTS: The Borrowers and the Parent have requested that the Lenders amend and waive certain provisions of the Credit Agreement and the Lenders have agreed to amend and waive the Credit Agreement on the terms and subject to the conditions set forth herein. The Borrowers and the Parent hereby acknowledge that except for the granting of the waiver of certain provisions of the Credit Agreement as set forth herein, the Defaults and Events of Default being waived herein would occur and be in existence as of September 30, 2000. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, upon the Effective Date (as hereinafter defined), hereby amended as follows: (a) Section 1.01 of the Credit Agreement is amended to add the following new definition: " "Amendment and Waiver No. 4" means the Amendment and Waiver No. 4 to this Agreement dated as of September 29, 2000." (b) Section 1.01 of the Credit Agreement is further amended by amending and restating the following definition in its entirety to read as follows: " "Applicable Margin" means, at any time, from and after the Effective Date, (i) with respect to Base Rate Advances, 3.875% per annum with respect to Tranche A Term Advances and 4.250% per annum with respect to Tranche B Term Advances and, (ii) with respect to Eurodollar Rate Advances, 4.250% per annum with respect to Tranche A Term Advances. For the avoidance of doubt, the amendment to the definition of "Applicable Margin", is effective as of the Effective Date including, without limitation, with respect to all existing Advances. In addition, notwithstanding anything to the contrary contained in the Credit Agreement, from and after the Effective Date, (i) all Eurodollar Rate Advances shall on the last day of an Interest Period convert into Base Rate Advances and (ii) Base Rate Advances may not be converted in Eurodollar Rate Advances. (c) Section 1.01 of the Credit Agreement is further amended as follows: (i) The definition of "Material Adverse Change" shall be amended by adding after the words "material adverse change" the words "occurring on or after September 30, 2000". (ii) The definition of "Material Adverse Effect" shall be amended by (i) adding after the words "material adverse effect" the words "occurring on or after September 30, 2000" and (ii) adding at the end the following: "or (d) any of the Collateral" and replacing the word "or" with a comma. (d) Section 2.06(c) of the Credit Agreement is hereby amended by adding at the end of the third sentence after the words "Prepayment Date" the following: "provided that, with respect to any notice of optional prepayment in the amount of $89,700,000 delivered on or before September 29, 2000, any Tranche B Term Lender shall be required to make such election in writing to the Administrative Agent by September 29, 2000 at 3:00 p.m. (E.S.T.)." (e) Section 5.01 of the Credit Agreement is hereby amended by adding an additional subclause (q) thereto as follows: "(q) Additional Information. Promptly provide such information to the Administrative Agent as it or its agents (including, without limitation, PricewaterhouseCoopers LLP) shall reasonably request from time to time." (f) Section 5.03(a)(ii) of the Credit Agreement is hereby amended by adding at the end thereof the following: "(except as otherwise permitted under Section 2.06(c) hereof)". (g) Section 6.01 of the Credit Agreement is hereby amended by adding an additional subclause (s) thereto as follows: "(s) Any breach or violation of any term of Amendment and Waiver No. 4 if such breach or violation remains unremedied for 3 Business Days after the date on which written notice thereof shall have been given to the Borrowers by any Agent or any Lender Party." SECTION 2. Waiver to Credit Agreement. (a) For the purposes of this Section, "Waiver Termination Date" means 5:00 p.m. (E.S.T.) on November 30, 2000. (b) Subject to the occurrence of the Effective Date: (i) each Lender agrees to waive any and all of the Defaults or Events of Default that have occurred and are continuing on or prior to September 30, 2000 under Section 6.01(b) of the Credit Agreement through and until the Waiver Termination Date, to the extent that any representation or warranty contained in any Transaction Document proves to have been incorrect in any material respect at the time made or confirmed as a result of the occurrence of any facts, circumstances, events or conditions described in this Amendment and Waiver or on Schedule I attached hereto; (ii) each Lender agrees to waive any and all of the Defaults or Events of Default that have occurred and are continuing on or prior to September 30, 2000 under Section 6.01(c) of the Credit Agreement through and until the Waiver Termination Date, as a result of the failure of any Loan Party to comply with the requirements of any of the following Sections of the Credit Agreement: (A) Section 5.01(o) of the Credit Agreement, solely in connection with the failure by any Loan Party to perform and observe any provision of the Material Contracts with Microsoft or Netzero or to enforce any such Material Contract in accordance with its terms; (B) Section 5.02(a) of the Credit Agreement, solely to the extent that materialmans', mechanics', landlords', or similar liens exist as of September 28, 2000 as the result of the deferral of payments of accounts payable. To the knowledge of the Loan Parties, Schedule II attached hereto contains a schedule of such materialmans', mechanics', or landlords' liens which the Loan Parties are aware exist as of September 28, 2000; (C) Section 5.03(a)(i) of the Credit Agreement for the period ended September 30, 2000, solely to the extent resulting from the failure of the Borrowers to notify the Administrative Agent of any or all Defaults, Events of Default or any other events, developments or occurrences which are reasonably likely to have a Material Adverse Effect, in each case, resulting from the facts, circumstances, events or conditions described in this Amendment and Waiver or in any Schedule attached hereto; and (D) Sections 5.04(a), (b), (c), (d), (e) and (f) of the Credit Agreement solely for the fiscal quarter ended September 30, 2000; (iii) Each Lender agrees to waive any and all Defaults and Events of Default that occur and are continuing on or after September 30, 2000 under Section 6.01(c) of the Credit Agreement through and until the Waiver Termination Date, as a result of the failure of any Loan Party to comply with the requirements of the following sections of the Credit Agreement: (A) Section 5.01(o) of the Credit Agreement, solely in connection with the failure by any Loan Party to perform and observe any provision of the Material Contracts or to enforce any such Material Contract in accordance with its terms; and (B) Section 5.02(a) of the Credit Agreement, solely to extent that materialmans', mechanics', landlords' or similar involuntary liens arise as the result of the deferral of payments of accounts payable; provided, that if any such event described in (A) or (B) above shall be determined by the Administrative Agent, in its sole discretion, to have a Material Adverse Effect or to result in a Material Adverse Change, then such event shall constitute a Default or Event of Default, as the case may be. (iv) Each Lender agrees to waive any and all Defaults and Events of Default that occur and are continuing on or after September 30, 2000 under Section 6.01(d) of the Credit Agreement through and until the Waiver Termination Date, as a result of the failure of any Loan Party to comply with the requirements of the following sections of the Credit Agreement: (A) Section 5.01(b) of the Credit Agreement; and (B) Section 5.01(m) of the Credit Agreement, solely to the extent relating to the failure of any Loan Party or any of its Subsidiaries to make all payments and otherwise perform all obligations in respect of all leases of real property to which such Loan Party or any of its Subsidiaries is a party; provided, that if any such event described in (A) or (B) above shall be determined by the Administrative Agent, in its sole discretion, to have a Material Adverse Effect or to result in a Material Adverse Change, then such event shall constitute a Default or Event of Default, as the case may be. (v) each Lender agrees to waive any and all of the Defaults or Events of Default that have occurred or are continuing on or prior to September 30, 2000 under Section 6.01(d) through and until the Waiver Termination Date, as a result of any Loan Party's failure to comply with any term, covenant or agreement contained in any of the following Sections of the Credit Agreement: (A) Section 5.01(m) of the Credit Agreement, solely to the extent resulting from the failure to make payments in respect of leases of real property; and (B) Section 5.03(h) of the Credit Agreement solely to the extent relating to the failure of the Loan Parties to promptly deliver notices received under its Material Contracts with Microsoft and Netzero on or before September 30, 2000; (vi) each Lender agrees to waive any and all of the Defaults or Events of Default that have occurred or are continuing on or prior to September 30, 2000 under Section 6.01(e) through and until the Waiver Termination Date, as a result of the failure of any Loan Party to make payments due in respect of Capitalized Leases or the failure of ICG Services, Inc. or ICG 161, L.P. to make payments due under the Loan Agreement between ICG 161, L.P. and Trinet Realty Capital, Inc. or the related guarantee; (vii) each Lender agrees to waive any Events of Default that may occur and be continuing on or after September 30, 2000 under Section 6.01(e) through and until the Waiver Termination Date, as a result of the failure of any Loan Party to make payments due in respect of Capitalized Leases or the failure of ICG Services, Inc. or ICG 161, L.P. to make payments due under the Loan Agreement between ICG 161, L.P. and Trinet Realty Capital, Inc. or the related guarantee, provided, that to the extent that any such failure shall be determined by the Administrative Agent, in its sole discretion, to have a Material Adverse Effect or to result in a Material Adverse Change, then such failure shall constitute an Event of Default. (viii) each Lender agrees to waive any Event of Default that may occur and be continuing on or after September 30, 2000, solely under the clause in Section 6.01(f) that states "any Loan Party or any of its Subsidiaries shall generally not pay its debts as such debts become due," through and until the Waiver Termination Date; provided, that to the extent that any such event shall be determined by the Administrative Agent, in its sole discretion, to have a Material Adverse Effect or to result in a Material Adverse Change, then such failure shall constitute an Event of Default. (ix) each Lender agrees to waive the Default or Event of Default that has occurred or is continuing under Section 6.01(p) solely for the fiscal quarter ending September 30, 2000 through and until the Waiver Termination Date, as a result of the failure of ICG to comply with the financial covenants set forth therein; (c) On the Waiver Termination Date, such waivers of the Defaults and Events of Default in paragraph (b) above shall expire and without any further action by the Administrative Agent and the Lenders, such Defaults and Events of Default shall be in existence and shall have the same force and effect as if this Amendment and Waiver had not been entered into by the parties hereto, and the Administrative Agent and the Lenders shall have all of the rights and remedies afforded to them under the Transaction Documents with respect to such Defaults and Event of Default as though no waiver had been granted by them hereunder. SECTION 3. Optional Termination of the Commitments. Pursuant to, and in accordance with, Section 2.05(a) of the Credit Agreement, the Borrowers hereby irrevocably terminate in whole the Unused Working Capital Commitments and the Lenders hereby waive in connection therewith the notice requirement of five Business Days for such termination set forth in Section 2.05(a) of the Credit Agreement. SECTION 4. Investment Accounts. Subject to the occurrence of the Effective Date (and after ICG Equipment shall have irrevocably directed Morgan Stanley Dean Witter Investment Management, Inc. ("MSDWIM") with respect to account no. 30-81631-1 (the "MSDWIM Account") in writing, with the consent of the Collateral Agent, that not less than $89,700,000 (eighty-nine million seven hundred thousand dollars) shall have been delivered to the Administrative Agent pursuant to Section 5(a) hereof and after giving effect to the delivery of such funds to the Administrative Agent), the Lenders hereby agree that the Collateral Agent will withdraw the notices each dated September 21, 2000 delivered to each of MSDWIM with respect to the MSDWIM Account and Janus Funds Money Market ("Janus") with respect to account no. 881234926 (the "Janus Account") and state that such notices shall no longer be in effect; provided, that nothing contained herein shall constitute a release of the security interest and Lien in favor of the Collateral Agent with respect to such accounts and all property maintained therein. The Collateral Agent hereby further agrees that until the earlier of (a) the occurrence of an Event of Default under Sections 6.01(a), 6.01(f) (other than an Event of Default waived in Section 2(b)(viii) hereof) or 6.01(s) of the Credit Agreement and (b) the Waiver Termination Date, the Collateral Agent shall not deliver to either MSDWIM or Janus any notice directing either MSDWIM or Janus (i) to act only on the directions of the Collateral Agent with respect to the MSDWIM Account or the Janus Account respectively or (ii) not to deliver, permit the use of or release the property in either the MSDWIM Account or the Janus Account, and the Blocked Account Letters each dated September 21, 2000 from RBC Dominion Securities to each of MSDWIM and Janus shall be deemed amended hereby to such extent. SECTION 5. Conditions of Effectiveness. This Amendment and Waiver shall become effective as of the date first above written on the Business Day when, and only when, the following conditions shall have been satisfied (such date being for the purposes hereof, the "Effective Date"): (a) (i) Pursuant to, and in accordance with, Sections 2.06(a) and 2.06(c) of the Credit Agreement, the Borrowers shall have, joint and severally, optionally prepaid $89,700,000 (eighty-nine million seven hundred thousand dollars) of the outstanding aggregate principal amount of the Term Advances, together with accrued interest to the date of such prepayment on such aggregate principal prepaid, such prepayment to be applied ratably to the Term Facilities and to the installments thereof pro rata, and (ii) pursuant to, and in accordance with, Section 2.05(b), the Term Facility is automatically and permanently reduced on the date the prepayment referred to in this Section 3(a)(i) in an amount equal to $89,700,000 and the Administrative Agent shall have acknowledged in writing to the Borrowers its receipt of freely available funds in such amount. (b) The Administrative Agent shall have received the following: (i) counterparts of this Amendment and Waiver executed by the Borrowers, the Parent, and the Required Lenders or, as to any of the Lender Parties, advice satisfactory to the Administrative Agent that such Lender Party has executed this Amendment and Waiver; and (ii) a favorable opinion of counsel for the Borrowers and the Parent, in form and substance satisfactory to the Administrative Agent. (c) All principal and interest payments maturing on or before September 30, 2000 shall have been paid in full. (d) All of the accrued and unpaid fees and expenses of the Agents and the Lender Parties (including, without limitation, the accrued fees and expenses of counsel to the Administrative Agent, the fees, expenses and retainers referred in Sections 10 and 11 of this Amendment and Waiver and all other fees payable in connection with this Amendment and Waiver) shall have been paid in full. SECTION 6. Representations and Warranties of the Parent and the Borrowers. The Parent and each Borrower represent and warrant as follows: (a) Each Loan Party and each of its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) is duly qualified and in good standing as a foreign corporation in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed could not be reasonably likely to have a Material Adverse Effect and (iii) has all requisite corporate power and authority (including, without limitation, all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) The execution, delivery and performance by each Loan Party of this Amendment and Waiver and the Transaction Documents as amended hereby, to which it is or is to be a party, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's charter or bylaws, (ii) violate any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default or require any payment to be made under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties in such a manner as would be reasonably likely to have a Material Adverse Effect or (iv) except for the Liens created under the Transaction Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. No Loan Party or any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which could be reasonably likely to have a Material Adverse Effect. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery or performance by any Loan Party of this Amendment and Waiver or any of the Transaction Documents, as amended hereby, to which it is or is to be a party. (d) This Amendment and Waiver has been duly executed and delivered by the Parent and the Borrowers. This Amendment and Waiver and each of the other Transaction Documents, as amended hereby, to which any Loan Party is a party are legal, valid and binding obligations of each Loan Party thereto, enforceable against such Loan Party in accordance with their respective terms. (e) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) except as set forth in Schedule I, could be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of this Amendment and Waiver or any of the other Transaction Documents as amended hereby. (f) All filings and other actions necessary or desirable to perfect and protect the security interest in the Collateral created under the Collateral Documents have been duly made or taken and are in full force and effect, and the Collateral Documents create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and, together with such filings and other actions, perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. The Loan Parties are the legal and beneficial owners of the Collateral free and clear of any Lien, except for the liens and security interests created or permitted under the Loan Documents (except as disclosed in Schedule II hereto). (g) Except with respect to the representations and warranties in respect of which there shall be a breach which is waived in this Amendment and Waiver, the representations and warranties set forth in each of the Transaction Documents are correct in all material respects on and as of this date, before and after giving effect to this Amendment and Waiver, as though made on and as of such date. (h) Except with respect to the Defaults and Events of Default that are expressly waived in this Amendment and Waiver, no event has occurred and is continuing that constitutes a Default. SECTION 7. Waiver and Release. The Borrowers and the Parent hereby waive and agree not to assert any claims or causes of action against the Administrative Agent, the Collateral Agent, the Administration Agent, the Co-Documentation Agent, any Lender Party or any of their Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, whether known or unknown, matured or contingent, including, without limitation, for special, indirect, consequential or punitive damages, arising out of or otherwise relating to, or in connection with, this Amendment and Waiver, the Facilities, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Transaction Documents or any of the transactions entered into in connection therewith. SECTION 8. Reference to and Effect on the Credit Agreement, the Security Agreement, the Notes and the Transaction Documents. (a) On and after the Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the, Notes and each of the other Transaction Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment and Waiver. (b) On and after the effectiveness of this Amendment and Waiver, each reference in the Security Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Security Agreement, and each reference in the Credit Agreement, Notes and each of the other Transaction Documents to "the Security Agreement", "thereunder", "thereof" or words of like import referring to the Security Agreement, shall mean and be a reference to the Security Agreement, as amended by this Amendment and Waiver. (c) The Credit Agreement, the Security Agreement, the Notes and each of the other Transaction Documents, as specifically amended by this Amendment and Waiver, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all Obligations of the Loan Parties under the Transaction Documents, in each case as amended by this Amendment and Waiver . (d) The execution, delivery and effectiveness of this Amendment and Waiver shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Agents under any of the Transaction Documents, nor constitute a waiver of any provision of any of the Transaction Documents. Except as expressly provided in Sections 2(b)(iii), 2(b)(iv), 2(b)(vii) and 2(b)(viii), nothing contained in this Amendment and Waiver shall waive any Default or Event of Default that would exist or be continuing based upon the occurrence of any fact, circumstances event or condition arising or existing after September 30, 2000. SECTION 9. Consent of the Parent. The Parent, as guarantor under the Parent Guaranty, hereby consents to this Amendment and Waiver and hereby confirms and agrees that notwithstanding the effectiveness of this Amendment and Waiver, the Parent Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed on the Effective Date in all respects, except that, on and after the Effective Date, (i) each reference in the Parent Guaranty to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended by this Amendment and Waiver, and (ii) each reference in the Parent Guaranty to the "Security Agreement", "thereunder", thereof or words of like import shall mean and be a reference to the Security Agreement as amended by this Amendment and Waiver. SECTION 10. Costs and Expenses. The Borrowers agree to pay, jointly and severally, on written demand all reasonable costs and expenses of the Administrative Agent and the Lenders in connection with the preparation, execution, delivery and administration, modification and amendment of this Amendment and Waiver and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and expenses of, and a retainer of $100,000 to, each of counsel and financial advisors for the Administrative Agent) in accordance with the terms of Section 9.04 of the Credit Agreement and hereby further agree and covenant, without limiting any other rights of the Administrative Agent, Collateral Agent or the Lenders under the Transaction Documents, to pay, jointly and severally, on written demand all fees and expenses incurred or to be incurred thereby in connection with matters relating to any due diligence performed in connection with this Amendment and Waiver (whether performed prior to or after the Effective Date), the monitoring of the financial condition and prospects of the Loan Parties, the review of any documentation relating to the Loan Parties and any other actions which the Administrative Agent determines, in its judgment, to be necessary in connection with matters relating to the Loan Parties. SECTION 11. Amendment and Waiver Fee. The Borrowers agree to pay, jointly and severally, to the Lenders on or before the Effective Date, an amendment and waiver fee equal to 0.25% of the sum of (a) the aggregate Tranche A Term Commitments after giving effect to the prepayment referred to in Section 5(a)(i) above and (b) the aggregate Tranche B Term Commitments after giving effect to the prepayment referred to in Section 5(a)(i) above, payable to the Administrative Agent for the account of the Lenders, ratably in accordance with their respective interests in such Tranche A Term Commitments and Tranche B Term Commitments. SECTION 12. Execution in Counterparts. This Amendment and Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment and Waiver by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment and Waiver. SECTION 13. Governing Law. This Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York. In the event of any conflict or inconsistency between the terms of this Amendment and Waiver and the Credit Agreement, the terms and provisions of this Amendment and Waiver shall govern. SECTION 14. Waiver of Jury Trial. Each of the Borrowers, the Parent, the Administrative Agent and the Lender Parties irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Amendment and Waiver or the actions of the Administrative Agent or any Lender Party in the negotiation, administration, performance or enforcement thereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be executed by their respective officers thereunto duly authorized, as of the date first above written. ICG EQUIPMENT, INC., as Borrower By /s/ Don Teague -------------------------------------------------- Title: Executive Vice President ICG NETAHEAD, INC., as Borrower By /s/ Don Teague -------------------------------------------------- Title: Executive Vice President ICG SERVICES, INC., as Parent Guarantor By /s/ Don Teague -------------------------------------------------- Title: Executive Vice President Signature pages of lenders omitted. Schedule I Material Events The facts, circumstances, events and conditions described in any Form 8K filed by any Loan Party with the SEC subsequent to August 1, 2000. The following lawsuits have been filed against ICG and its subsidiaries: On September 22, 2000, ICG received notice of a lawsuit filed by certain shareholders against ICG. Subsequent to that time, ICG has received notice of six additional lawsuits filed by shareholders. Microsoft and Netzero have alleged defaults under Material Contracts. The Loan Parties have not made all payments due with respect to its leases of real property. Schedule II Mechanic Liens
General Contractor Lien Claimant Market/Site Lien Claimant Lease Cure Counsel/Contact Counsel/Contact Landlord Contact Status/Notes Information Exp. Date Information Information Information ================================================================================================================================= Orlando Pennington & 09/28/2000 M. A. Mortenson Allen Frank, VP Castle & Cooke T/c with R. Toppe Associates Company 9/28/00. Advised that (Subcontractor) ICG curent on payment of invoices to Mortenson. Orange County, Claim of Lien Filed Attn: Andrew Shetter Pennington & Attn: Richard S. Final invoice being FL 9/18/00 Associates, Inc. Toppe, VP processed for $146,000+ 6956 Stapoint Ct., SubK's are filing liens Amount: $63,283.00 700 Meadow Lane North 4601 Six Forks for retainage (& Ste. J Rd., Ste. 503 possibly work completed that's in queue for Minneapolis, MN Winter Park, FL Raleigh, NC 27609 payment). LL wanted to 55422 32792 know if lie (919) 782-9151 - Phone (919) 787-7529 - Fax - --------------------------------------------------------------------------------------------------------------------------------- Orlando Quality Fabrication & 10/02/00 M. A. Mortenson Quality Fabrication Castle & Cooke Supply Company & Supply Orange County, Claim of Lien Filed Attn: Andrew Shetter Attn: P. E. Attn: Richard S. FL 9/20/00 Streetman Toppe, VP Amount: $4,747.43 700 Meadow Lane North380 South Cr 427 4601 Six Forks Rd., Ste. 503 Minneapolis, MN Longwood, FL 32750 Raleigh, NC 27609 55422 (919) 782-9151 - Phone Orlando Fire (919) 787-7529 - Protection Fax 280 Lake Shore Dr. Lake Mary, FL 33746 - --------------------------------------------------------------------------------------------------------------------------------- Oakland J. Gibbs Sons, Inc. Robert G. Witser Alameda Claim of Lien Filed Law Offices of County, CA 6/16/00 Robt. G. Witser Amount: $738,249.00 P. O. Box 13221 Oakland, CA 94661-0221 - --------------------------------------------------------------------------------------------------------------------------------- (510) 339-1599 - Phone (510) 339-1070 - Fax Denver Fentress Bradburn N/A Bovis Lend Lease, David P. Hutchinson N/A Architects Ltd. Inc. Arapahoe Notice of Intent to Otten, Johnson, County, CO File Statement of Robinson, Neff & Lien dtd 9/25/00 Ragonetti, P.C. Amount: $37,257.49 950 - 17th St., Ste. 1600 Denver, CO 80202 - --------------------------------------------------------------------------------------------------------------------------------- Denver Bovis Lend Lease, Inc. N/A Same as Claimant Mark A. Rosen N/A Arapahoe Notice of Intent to McElroy, Deutsch & County, CO File Statement of Mulvaney Lien dtd 9/22/00 Amount: $2,142,184.00 1300 Mount Kemble Ave. Morristown, NJ 07962 - --------------------------------------------------------------------------------------------------------------------------------- Fresno Howe Electric, Inc. Michael A. Peters Fresno County, Complaint Filed Case & Baker, LLP CA 8/28/00 Amount: $111,356.03 575 Anton Blvd., (Rec'd check for Ste.1000 $61,277.94 will revise Costa Mesa, CA 92626 complaint to $50,357.82) - --------------------------------------------------------------------------------------------------------------------------------- Denver City and County of N/A Dept. of Revenue, N/A Denver Treasury Div. City/County of Notice of City Use Annex III Denver, CO Tax Lien dtd 9/20/00 Amount: $542,340.76 144 W. Colfax Ave. Denver, CO 80202 - --------------------------------------------------------------------------------------------------------------------------------- Seattle Parrott Mechanical, 09/20/00 M. A. Mortenson Thomas A. DeBoer Voice Mail 9/26/00 - T (Tukwila, WA) Inc. Company DeBoer advised check rec'd 9/25/00. Will wait a couple days for check to clear. Anticipate lien releas filed with County yet this week (week of 9/25/00). Called back and left message requesting that releas be faxed to ICG Legal Spokane Claim of Lien Filed Paine, Hamblen, Sabey Corporation County, WA 7/11/00 Coffin, Brooke & Miller LLP Amount: $74,623.00 717 West Sprague Attn: James Ave., Ste 1200 Harmon, CFO Spokane, WA 12201 Tukwila 99201-3505 Int'l Blvd., 4th Floor (509) 455-6000 Seattle, WA 98168-5121 (206) 281-8700 - Phone (206) 282-9951 - Fax - --------------------------------------------------------------------------------------------------------------------------------- Buffalo Grimm Construction Teng Construction Corp. File Date: Amount: $282,706.00 - --------------------------------------------------------------------------------------------------------------------------------- Denver Fentress Bradburn N/A Bovis Lend Lease David P. Hutchison N/A Architects Ltd. City/Co of Notice of Intent to Otten, Johnson, Denver, CO File Lien Stmt Dtd Robinson, Neff & 9/25/00 Ragonetti, P.C. Amount: $249,366.14 950 - 17th St., (re. South Lot) Ste. 1600 Denver, CO 80202 Denver MacGregor Wathen N/A Bovis Lend Lease Lawrence M. Construction Company Kersting, Pres. City/Co of Statement of Lien MacGregor Wathen Denver, CO dated 9/22/00 Amount: $1,180,892.16 - --------------------------------------------------------------------------------------------------------------------------------- Phoenix Sterling Network 09/28/2 N/A Cushman & Wakefield Sterling Network Exchange, LLC of Arizona Exchange, LLC Maricopa Cty, Default notice under 1850 N. Central c/o Cushman & AZ lease dtd 9/19/00 Ave., Ste. 300 Wakefield of AZ Amount: $1,523.94 Phoenix, AZ 1850 N. Central (Operating Exp) 85004-4590 Ave., Ste. 300 Attn: Lisa Phoenix, AZ Harryman, PM 85004 (602) 253-7900 - Phone (602) 253-0528 - Fax - --------------------------------------------------------------------------------------------------------------------------------- Phoenix Sterling Network N/A (Mortensen) Cushman & Wakefield Sterling Network Exchange, LLC of AZ Exchange, LLC Maricopa Cty, Invoice for LL 1850 N. Central c/o Cushman & AZ performed work > LL Ave., Ste. 300 Wakefield of AZ Work dtd 9/22/00 Amount: $137,565.67 Phoenix, AZ 1850 N. Central 85004-4590 Ave., Ste. 300 Attn: Lisa Phoenix, AZ Harryman, PM 85004 (602) 253-7900 - Phone (602) 253-0528 - Fax
EX-27.1 6 0006.txt FDS SUMMARY FINANCIAL INFORMATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 216,714 17,536 251,504 57,864 19,839 447,729 2,650,813 (457,363) 2,789,927 598,500 4,129,699 1,222,896 0 520 (1,243,285) 2,789,927 0 477,778 0 304,202 429,719 31,688 195,406 (431,461) 10 (482,899) 0 0 0 (673,178) (13.58) 0
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