-----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, Txx/oAdVSL1lcQzHsiScXShRrEdWkG1O3gAfTSa2HOznOPusHvFhYOJl7lG+M3Xf KA2txD2cReY1uzFDqyD3QQ== 0001013240-02-000007.txt : 20020413 0001013240-02-000007.hdr.sgml : 20020413 ACCESSION NUMBER: 0001013240-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20020111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICG HOLDINGS CANADA CO /CO/ CENTRAL INDEX KEY: 0000786343 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841128866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11052 FILM NUMBER: 2507109 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 q110q2001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 __ No |X] The number of outstanding common shares of ICG Communications, Inc. as of December 31, 2001 was 52,045,443. 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, 2000 and March 31, 2001 (unaudited).......................................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 2001 (unaudited)..................... 5 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1999 and 2000 (unaudited).. Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 2001 (unaudited)....................... 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 2001 (unaudited)..................... 7 Notes to Consolidated Financial Statements (unaudited)......... 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................................18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....25 PART II ......................................................................26 ITEM 1. LEGAL PROCEEDINGS ............................................26 ITEM 2. CHANGES IN SECURITIES ........................................26 ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..............................26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ........26 ITEM 5. OTHER INFORMATION ............................................26 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K ..............................27 Exhibits .....................................................27 Reports on Form 8-K ..........................................27 2 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and March 31, 2001 (Unaudited)
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Assets - ------ Current assets: Cash and cash equivalents $ 196,980 $ 128,522 Short-term investments available for sale 17,733 13,838 Trade receivables, net of allowance of $94.3 million and $95.6 million at December 31, 2000 and March 31, 2001, respectively 132,095 151,294 Other receivables 994 420 Prepaid expenses and deposits 13,234 14,008 ------------ ------------ Total current assets 361,036 308,082 Property and equipment, net (note 5) 590,500 583,854 Restricted cash 9,278 9,357 Investments 1,650 1,650 Deferred financing costs, net of accumulated amortization of $1.2 million and $3.6 million 10,969 8,605 at December 31, 2000 and March 31, 2001, respectively Deposits 7,019 8,311 ------------ ------------ Total Assets (note 1) $ 980,452 $ 919,859 ============ ============ (continued)
See accompanying notes to consolidated financial statements. 3 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited), Continued
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Liabilities and Stockholders' Deficit - ------------------------------------- Current liabilities not subject to compromise: Accounts payable $ 8,774 $ 3,704 Accrued liabilities 57,888 74,441 Deferred revenue 14,840 12,156 Current portion of long-term debt (note 6) 796 796 ------------ ------------ Total current liabilities not subject to compromise 82,298 91,097 Liabilities subject to compromise (notes 1 and 6) 2,784,627 2,768,592 Long-term liabilities not subject to compromise: Long-term debt, net of discount, less current portion (note 6) 117,784 117,784 Other long-term liabilities 1,090 1,090 ------------ ------------ Total liabilities 2,985,799 2,978,563 Redeemable preferred stock of subsidiary (at 449,056 449,056 liquidation value) Mandatorily redeemable preferred securities of ICG Funding (at liquidation value) 132,251 132,251 8% Series A Convertible Preferred Stock (at liquidation value) 785,353 785,353 Stockholders' deficit: Common stock, $0.01 par value, 100,000,000 shares authorized; 52,045,443 shares issued and outstanding 520 520 Additional paid-in capital 882,142 882,142 Accumulated deficit (4,254,669) (4,308,026) ------------ ------------ Total stockholders' deficit (3,372,007) (3,425,364) Commitments and contingencies (note 7) ------------ ------------ Total Liabilities and Stockholders' Deficit (note 1) $ 980,452 $ 919,859 ============ ============
See accompanying notes to consolidated financial statements. 4 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three Months Ended March 31, 2000 and 2001 (Unaudited)
Three months ended March 31, ------------------------- 2000 2001 ------------ ------------ (in thousands, except per share data) Revenue $ 157,408 $ 136,397 Operating costs and expenses: Operating costs 82,902 112,562 Selling, general and administrative expenses 55,089 30,696 Depreciation and amortization 64,599 15,989 Other, net 432 71 ------------ ------------ Total operating costs and expenses 203,022 159,318 ------------ ------------ Operating loss (45,614) (22,921) Other income (expense): Interest expense (contractual interest of $60.1 million not recorded during the three months ended March 31, 2001) (62,634) (12,718) Interest income 3,277 2,628 Other income (expense), net 158 (32) ------------ ------------ Total other expense, net (59,199) (10,122) ------------ ------------ Loss before reorganization expenses, accretion and (104,813) (33,043) preferred dividends Reorganization expenses (note 4) - (20,314) Accretion and preferred dividends on preferred securities of subsidiaries (16,637) - ------------ ------------ Net loss $ (121,450) $ (53,357) ============ ============ Other comprehensive income: Unrealized gain on available for sale securities 2,329 - ------------ ------------ Comprehensive loss $ (119,121) $ (53,357) ============ ============ Net loss per share - basic and diluted $ (2.52) $ (1.03) ============ ============ Weighted average number of shares outstanding - basic and diluted 48,189 52,045 ============ ============
5 See accompanying notes to consolidated financial statements. ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Deficit Three Months Ended March 31, 2001 (Unaudited) (In Thousands)
Common Stock Additional Total ----------------- paid-in Accumulated Stockholders' Shares Amount capital deficit deficit -------- --------- ---------- ------------ ------------ Balances at January 1, 2001 52,045 $ 520 $ 882,142 $(4,254,669) $(3,372,007) Net loss - - - (53,357) (53,357) -------- --------- ---------- ------------ ------------ Balances at March 31, 2001 52,045 $ 520 $ 882,142 $(4,308,026) $(3,425,364) ======== ========= ========== ============ ============
See accompanying notes to consolidated financial statements. 6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 2001 (Unaudited)
Three months ended March 31, ------------------------- 2000 2001 ------------ ------------ (in thousands) Cash flows from operating activities: Net loss $ (121,450) $ (53,357) Adjustments to reconcile net loss to net cash used by operating activities: Recognition of deferred gain (6,239) - Accretion and preferred dividends on preferred securities of subsidiaries 16,637 - Depreciation and amortization 64,599 15,989 Provision for uncollectible accounts 3,830 4,363 Deferred compensation 432 - Net loss on disposal of long-lived assets - 71 Interest expense deferred and included in long-term debt, net of amounts capitalized on assets under construction 50,587 (400) Interest expense deferred and included in capital lease obligations 1,351 - Amortization of deferred financing costs included in interest expense 501 2,364 Contribution to 401(k) plan through issuance of common stock 1,242 - Realized gain on sale of available for sale securities (481) - Other 301 - Change in operating assets and liabilities, excluding the effects of dispositions and noncash transactions: Receivables 8,390 (22,988) Prepaid expenses and deposits 1,705 (774) Accounts payable and accrued liabilities (20,095) 8,585 Deferred revenue 21,821 (2,685) ------------ ------------ Net cash provided (used) by operating activities before reorganization items 23,131 (48,832) Reorganization items: Change in restructuring accruals - 1,423 Change in liabilities subject to compromise - (14,235) ------------ ------------ Net cash provided (used) by operating activities 23,131 (61,644) Cash flows from investing activities: Acquisition of property and equipment (142,998) (7,898) Change in accounts payable and accrued liabilities for acquisition of property and equipment (30,365) 295 Proceeds from disposition of property, equipment and other assets - 55 Proceeds from sales of short-term investments available for sale 19,399 3,895 Proceeds from sale of marketable securities 2,201 - Decrease (increase) in restricted cash 1,080 (79) Increase in long-term deposits - (1,279) Purchase of investments (1,150) - ------------ ------------ Net cash used by investing activities (151,833) (5,011) (continued)
See accompanying notes to consolidated financial statements. 7 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited), Continued
Three months ended March 31, ------------------------- 2000 2001 ------------ ------------ (in thousands) Cash flows from financing activities: Proceeds from issuance of common stock $ 11,902 $ - Proceeds from issuance of long-term debt 95,000 - Principal payments on capital lease obligations (3,061) - Payments on IRU agreement (35,198) - Principal payments on long-term debt (205) - Payments of preferred dividends (2,231) - Payments of debt issuance costs - (2) Reorganization items: Principal payments on capital lease obligations subject to compromise - (1,801) ------------ ------------ Net cash provided (used) by financing activities 66,207 (1,803) ------------ ------------ Net decrease in cash and cash equivalents (62,495) (68,458) Net cash used by discontinued operations (94) - Cash and cash equivalents, beginning of period 103,288 196,980 ------------ ------------ Cash and cash equivalents end of period $ 40,699 $ 128,522 ============ ============ Supplemental disclosure of cash flows information of continuing operations: Cash paid for interest $ 7,132 $ 4,022 ============ ============ Cash paid for income taxes $ 220 $ - ============ ============ Supplemental schedule of noncash investing activities of continuing operations: Assets acquired pursuant to IRU agreement $ 57,494 $ - Assets acquired under capital leases 14,415 - ------------ ------------ Total $ 71,909 $ - ============ ============
See accompanying notes to consolidated financial statements. 8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Organization and Nature of Business (a) Organization ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated on April 11, 1996 and is the publicly-traded U.S. parent company of ICG Funding, LLC, a special purpose Delaware limited liability company and wholly owned subsidiary of ICG ("ICG Funding"), ICG Holdings (Canada) Co., a Nova Scotia unlimited liability company ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation ("Holdings"), and ICG Services, Inc., a Delaware corporation ("ICG Services") and their subsidiaries. ICG and its subsidiaries are collectively referred to as the "Company". The Company's common stock was traded on the NASDAQ National Market ("NASDAQ") stock exchange. However, due to the bankruptcy filings described below, the NASDAQ halted trading of the Company's common stock on November 14, 2000 and delisted the stock on November 18, 2000. The Company provides voice, data and Internet communication services. Headquartered in Englewood, Colorado, the Company operates an integrated metropolitan and nationwide fiber optic infrastructure to offer: o Dial-Up Services including primary rate interface and remote access services/ managed modem services on a wholesale basis to national and regional Internet service providers ("ISP"s). o Point-to-Point Broadband Service providing traditional special access service to long-distance and long-haul carriers and medium to large sized corporate customers as well as switched access and SS7 services. o Corporate Services, primarily retail voice and data services to businesses. (b) Bankruptcy Proceedings On November 14, 2000 (the "Petition Date"), ICG and most of its subsidiaries, except certain non-operating entities, 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 debt, trade liabilities and other obligations. ICG and its bankruptcy filing subsidiaries are collectively referred to as the "Debtors". 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 Court"). The bankruptcy petitions were filed in order to preserve cash and to give the Debtors the opportunity to restructure their obligations. On December 19, 2001 the Debtors filed a proposed Plan of Reorganization (the "Plan") and a Disclosure Statement with the Bankruptcy Court. The Plan is premised on the substantive consolidation of all of the Debtors for purposes of Plan voting, confirmation and distribution of claim proceeds. The Plan contemplates the conversion of the Debtors' existing unsecured debt into common equity in the post-bankruptcy, reorganized company. The Plan also contemplates the issuance of new secured notes to the Debtors' existing secured lenders. The Plan calls for the cancellation of all equity securities previously issued by the Debtors, including all common stock, preferred stock, options and warrants. It is anticipated that a hearing on the adequacy of the Disclosure Statement will be held in the Bankruptcy Court on February 1, 2002. Consummation of the Plan is contingent upon receiving Bankruptcy Court approval, as well as the approval of certain classes of creditors. The Plan and Disclosure Statement were filed with the Securities and Exchange Commission on Form 8-K on December 19, 2001. The Company, assisted by its investment banker, Dresdner Kleinwort & Wasserstein, Inc., evaluated the enterprise value of the Company in connection with the filing of its Plan and Disclosure Statement on December 19, 2001. The enterprise value of the Company on a going concern basis was estimated to be between $350 million and $500 million. This valuation of the Company results in a valuation of the new common equity to be issued under the Plan and Disclosure Statement, in the aggregate, between approximately $136 million and $287 million, which is derived by subtracting from the Company's enterprise value the projected funded debt on the pro forma balance sheet for the Company on the date of emergence from bankruptcy. The 9 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued valuation is based on numerous assumptions, including, among other things, the achievement of certain operating results, market values of publicly-traded securities of other relevant companies, and general economic and industry conditions. Under accounting guidelines commonly referred to as "Fresh Start", the fair value of all assets of the Company will be estimated as it emerges from bankruptcy in conformity with generally accepted accounting principles ("GAAP"), specifically Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". The enterprise value range in the Plan implies that a fair value adjustment of up to $200 million to reduce the value of property and equipment may be necessary. However, the Plan assumptions are likely to differ from the actual business conditions at the date of emergence from bankruptcy. Therefore, the fair values assigned to assets upon emergence from bankruptcy may also be different. The fair value adjustment to property and equipment, if any, will be recorded upon emergence from bankruptcy once the final enterprise value is determined. Because of the ongoing nature of the reorganization cases, the outcome of which is not presently determinable, the consolidated financial statements contained herein are subject to material uncertainties and may not be indicative of the results of the Company's future operations or financial position. No assurance can be given that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. As a result of the items discussed above, 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, the approval and confirmation of the Plan, 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. The consolidated financial statements do not include any adjustments to the recorded amounts or classification of assets or liabilities or reflect any amounts that may ultimately be paid to settle liabilities and contingencies which may be required in the Chapter 11 reorganization or the effect of any changes, which may be made in connection with the Company's capitalization or operations resulting from a plan of reorganization. These consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to SOP 90-7, an objective of financial statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding. For that purpose, the financial statements for periods including and subsequent to filing the Chapter 11 petition should distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses and other items not directly related to ongoing operations are reflected separately in the consolidated statement of operations as reorganization expenses (see note 4). The filing of the Chapter 11 cases by the Debtors (i) automatically stayed actions by creditors and other parties in interest to recover any claim that arose prior to the commencement of the cases, and (ii) served to accelerate, for purposes of allowance, all pre-petition liabilities of the Company, whether or not those liabilities were liquidated or contingent as of the Petition Date. The following table sets forth the liabilities of the Company subject to compromise as of December 31, 2000 and March 31, 2001: 10 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Unsecured long-term debt $ 1,968,781 $ 1,968,781 Unsecured creditors 583,749 580,994 Capital lease obligations 197,974 196,173 Priority creditors 33,385 21,894 Other secured creditors 738 750 ------------ ------------ $ 2,784,627 $ 2,768,592 ============ ============
Additionally, pre-petition debt that is subject to compromise must be recorded at the allowed claim amount, which generally results in the write-off of any deferred financing amounts associated with the debt. Interest on debt subject to compromise ceases to accrue when bankruptcy is filed. Pre-petition debt of the Debtors that is not subject to compromise, specifically the senior secured credit facility and the mortgage loans payable with balances outstanding as of March 31, 2001 of approximately $84.6 million and $34.0 million respectively, continues to accrue interest. All principal and interest payments are negotiated by the Company and the specific lenders and must be approved by the Bankruptcy Court. Under the Bankruptcy Code, the Company may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts, and other unexpired executory pre-petition contracts, subject to Bankruptcy Court approval. The Company cannot presently determine with certainty the ultimate aggregate liability which will result from the filing of claims relating to such contracts which have been or may be rejected. (2) 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, 2000, as certain information and note disclosures normally included in financial statements prepared in accordance with GAAP 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 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 three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Reclassifications Certain 2000 amounts have been reclassified to conform with the 2001 presentation. (3) Provision for Impairment of Long-Lived Tangible and Intangible Assets The Company has provided for the impairment of long-lived assets, including goodwill, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever changes in circumstances indicate that the carrying value of an asset may not be recoverable. Such events include, but are not limited to, a significant decrease in the market value of an asset, a significant adverse change in the business climate that could affect the value of an asset or a current period operating or cash flow loss combined with a history of operating or cash flow losses. An impairment loss is recognized when estimated undiscounted future cash flows, before interest, expected to be generated by the asset are less than its carrying value. Measurement of the 11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued impairment loss is based on the estimated fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows, appraisals or other pricing models. (4) Reorganization Expenses In October 2000, the Company initiated a cost reduction strategy that focused upon reducing operating expenses and returning the Company to profitability. This plan included the filing on November 14, 2000 of voluntary petitions under Chapter 11 for ICG and the majority of its subsidiaries. Under bankruptcy accounting, the Company is required to segregate and classify certain costs as reorganization costs. The following reorganization costs were incurred during the three months ended March 31, 2001 (in thousands):
Severance and employee retention costs $ 10,259 Legal and professional fees 6,318 Switch site closure costs 2,086 Line cost termination expenses 472 Other 1,179 ------------- Total $ 20,314 =============
(5) Property and Equipment Property and equipment, including assets held under capital leases, is comprised of the following:
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Land $ 8,708 $ 8,708 Buildings and improvements 36,307 36,307 Furniture, fixtures and office equipment 11,799 14,842 Machinery and equipment 9,450 9,822 Fiber optic equipment 119,146 122,608 Switch equipment 104,947 107,607 Fiber optic network 56,242 56,807 Site improvements - 839 Construction in progress 205,881 203,106 Assets held for sale 40,500 40,444 ------------ ------------ 592,980 601,090 Less accumulated depreciation (2,480) (17,236) ------------ ------------ $ 590,500 $ 583,854 ============ ============
Property and equipment includes approximately $203 million of equipment that has not been placed in service at March 31, 2001, and accordingly, is not being depreciated. The majority of this amount is related to uninstalled transport and switch equipment, software development and new network construction. (6) Long-Term Debt As a result of the Company's bankruptcy proceedings, all contractual debt payments are suspended and subject to revised payment terms during the bankruptcy process on a specific case basis. No changes have been made in the accompanying consolidated balance sheet as to amounts or terms as a result of the filing. As of March 31, 2001, the Company is in default with 12 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued respect to all of its pre-petition long-term debt, which, by its terms, would ordinarily accelerate upon the event of default. However, under bankruptcy accounting, no reclassifications are made from long-term to short-term as a result of the defaults. Additionally, debt subject to compromise should be recorded at the allowed amount of the claim. Based on this, the Company wrote-off all deferred financing costs related to the 9 7/8%, 10%, 11 5/8%, 12 1/2% and 13 1/2% Senior discount notes as of December 31, 2000. In addition, the Company ceased accreting the discounts or accruing interest on all debt amounts subject to compromise as of the Petition Date. Long-term debt, including amounts subject to compromise, is summarized as follows:
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Long-term debt not subject to compromise: Credit Agreement (a) $ - $ - Senior Facility 84,574 84,574 Mortgage loan payable, secured by Company Headquarters (b) 33,077 33,077 Mortgage loan payable, other 929 929 ------------ ------------ 118,580 118,580 Long-term debt subject to compromise: Senior discount notes, net of discount 1,968,781 1,968,781 ------------ ------------ 2,087,361 2,087,361 Less current portion (796) (796) ------------ ------------ $ 2,086,565 $ 2,086,565 ============ ============
(a) Debtor-in-Possession Financing On December 4, 2000, the Company finalized its Debtor-in-Possession Revolving Credit Agreement (the "Credit Agreement") with Chase Manhattan Bank. The Credit Agreement provided for up to $350 million in financing, subject to certain conditions. This amount was subsequently amended to $200 million. Any amounts drawn under the Credit Agreement were to be first used for repayment in full of the Senior Facility. The Company was required to pay monthly commitment fees at an annual rate of 1 1/2% on the average daily unused commitment, which were expensed monthly. This agreement contained certain covenants including capital expenditure limitations, EBITDA loss limitations, indebtedness and dividend restrictions. The Credit Agreement required repayment in full on May 14, 2002. As of September 30, 2001, no amounts had been drawn under the Credit Agreement. On November 7, 2001 the Company terminated the Credit Agreement. (b) Mortgage Payable In June 2001, the original seller ("Seller") of the Company's corporate headquarters building, land and improvements (collectively, the "Company Headquarters") exercised its right to repurchase the Company Headquarters from the Company. In connection with the repurchase, the Seller agreed to assume from the Company the mortgage loan payable and other accrued liabilities related to completing the Company Headquarters. The Company recognized a $7.6 million loss on the sale. In addition, the Company agreed to lease the Company Headquarters back from the Seller under a capital lease agreement valued at $50.4 million. (7) 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, the Company signed an agreement with a major customer, whereby the Company will provide, for $126.5 million over the initial six-year term of the agreement, exclusive service over designated portions of the Company's local fiber optic networks. The Company will recognize revenue ratably over the term of the agreement, 13 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued 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. The customer may, at its option, extend the initial term of the agreement for an additional four-year period and an additional ten-year period for incremental payment at the time the option exercises. At March 31, 2001, $175.6 million of deferred revenue related to this agreement is reflected in liabilities subject to compromise. In July 2001, as part of a settlement agreement reached with the customer (see note 10), deferred revenue was reduced by $21.5 million, with a corresponding reduction in trade receivables. The customer has not yet ordered from the Company, and the Company has not yet delivered, certain equipment and services required by this agreement. The Company is currently negotiating with this customer to resolve the issue of future services. (b) Telecommunications and Line Purchase Commitments The Company had entered into two agreements with a major interexhange carrier (the "Carrier") that required the Company to provide the Carrier 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. Under a settlement reached with the Carrier, effective September 28, 2001, the Company will no longer be liable for such underutilization charges. (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, either the Company or the vendor, upon prior written notice, may terminate the agreements. (d) Transport and Termination Charges The Company records reciprocal compensation revenue pursuant to interconnection agreements with incumbent local exchange carriers ("ILEC"s) for the transport and termination of traffic originated by ILEC customers, including Internet bound traffic. Due to changes in the regulatory environment and as a means of gaining certainty with respect to the continued collection of reciprocal compensation revenue, the Company negotiated voluntary settlement agreements with certain of its ILEC customers that provide for the payment of reciprocal compensation for terminating Internet bound traffic, but at rates lower than the Company had historically received. The Company has, as of March 31, 2001, a net receivable for the transport and termination of such traffic of approximately $32 million. The Company received cash of approximately $14 million during the three months ended March 31, 2001 from certain ILECs for terminating local and toll traffic. The Company has recognized reciprocal compensation revenue of approximately $41 million and $17 million in the three months ended March 31, 2000 and 2001, respectively. (e) Litigation During the third and fourth quarters of 2000, the Company was served with fourteen lawsuits filed by various shareholders in the Federal District Court for the District of Colorado. 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 former 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 the Court will choose a lead plaintiff's counsel. The Company has retained legal counsel and intends to vigorously defend against these lawsuits. The Company has also tendered these claims to the Company's insurers. At this time, 14 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued the claims against the Company have been stayed pursuant to the Company's filing for bankruptcy. In January 2001, certain shareholders of ICG Funding, a wholly owned subsidiary of the Company, filed an adversary proceeding with the Bankruptcy Court (Case number 00-04238 PJW Jointly Administered, Adversary Proceeding No. 01-000 PJW) against the Company and ICG Funding. The shareholders in this adversary action sought to recover approximately $2.3 million from an escrow account established to fund certain dividend payments to holders of the Funding Exchangeable Preferred Securities. Because of ICG Funding having filed for bankruptcy protection, ICG Funding did not declare the last dividend that was to have been paid with the remaining proceeds of the escrow account. In April 2001, the Company and ICG Funding finalized a settlement agreement with the shareholders that has been approved by the Bankruptcy Court. Under the terms of the settlement, the shareholders received approximately two thirds of the funds in the escrow account and the Company received the remaining one third of the escrowed funds, subject to certain contingencies and holdbacks related to shareholders that did not participate in the settlement. The Company is a party to certain other litigation that has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. (8) Summarized Financial Information of ICG Holdings, Inc. The 11 5/8% Senior Discount Notes due 2007 issued by Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount Notes due 2006 and the 13 1/2% Senior Discount Notes due 2005 issued by Holdings during 1996 and 1995, respectively, are guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be material to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. However, summarized combined financial information for Holdings and its subsidiaries is as follows: Summarized Consolidated Balance Sheet Information
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Current assets $ 325,851 $ 270,645 Property and equipment, net 143,208 149,647 Other non-current assets, net 21,754 20,913 ------------ ------------ Total assets $ 490,813 $ 441,205 ============ ============ Current liabilities $ 248,745 $ 289,851 Liabilities subject to compromise 2,508,080 2,494,139 Long-term debt, less current portion 883 883 Other long-term liabilities 1,090 1,090 Redeemable preferred stock 449,057 449,057 Stockholder's deficit (2,717,042) (2,793,815) ------------ ------------ Total liabilities and stockholders' deficit $ 490,813 $ 441,205 ============ ============
15 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued Summarized Consolidated Statement of Operations Information
Three Months Ended March 31, ------------------------- 2000 2001 ------------ ------------ (in thousands) Total revenue $ 152,877 $ 134,865 Total operating costs and expenses 206,659 190,143 ------------ ------------ Operating loss $ (53,782) $ (55,278) ============ ============ Loss from continuing operations $ (119,744) $ (76,773) ============ ============ Net loss $ (119,744) $ (76,773) ============ ============
Condensed financial information for Holdings-Canada only is as follows: Condensed Balance Sheet Information
December 31, March 31, 2000 2001 ------------ ------------ (in thousands) Current assets $ 82 $ 82 Advances to subsidiaries - - ------------ ------------ Total assets $ 82 $ 82 ============ ============ Current liabilities $ - $ - Liabilities subject to compromise (11,474) (11,474) Due to parent - - Share of losses of subsidiaries 2,717,042 2,793,815 Shareholders' deficit (2,705,486) (2,782,259) ------------ ------------ Total liabilities and shareholders' deficit $ 82 $ 82 ============ ============
Condensed Statement of Operations Information
Three Months Ended March 31, -------------------------- 2000 2001 ------------ ------------ (in thousands) Total revenue $ - $ - Total operating costs and expenses - - ------------ ------------ Operating loss - - Losses of subsidiaries (119,744) (76,773) ------------ ------------ Net loss attributable to common shareholders $ (119,744) $ (76,773) ============ ============
(9) 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 $0.5 million for the three months ended March 31, 2000, and were not significant for the three months ended March 31, 2001. ICG has no operations other than those of ICG Services, ICG Funding and Holdings-Canada and their subsidiaries. 16 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued (10) Major Customer and Event Subsequent to March 31, 2001 A significant amount of the Company's revenue is derived from long-term contracts with large customers, including one major customer (the "Customer"). For the three months ended March 31, 2001, the Customer accounted for approximately 10%, or $13.5 million, of total revenue. Revenue from the Customer represented less than 10% of total revenue for the three months ended March 31, 2000. Prior to the bankruptcy filing, the Customer and the Company developed a number of important and mutually valuable business relationships, governed by a plethora of contracts (collectively the "Pre-petition Agreements"). During the pendency of the Chapter 11 cases, both the Company and the Customer asserted various breaches of, and claims under, the Pre-petition Agreements. Following lengthy negotiations, the parties agreed to enter into a settlement resolving all of the claims and issues between the parties (the "Settlement Agreement") in order to continue a cooperative, mutually beneficial relationship and to avoid potentially costly litigation. The Settlement Agreement was approved by the Bankruptcy Court in June 2001. Under the Settlement Agreement, the Company agreed to assume certain executory contracts, as amended to mutually benefit both parties. In addition, the Settlement Agreement resolved issues related to pre-petition setoffs. The Company received significant benefits from the Settlement Agreement including (i) eliminating all pre-petition unsecured claims; (ii) receiving $10 million in cash; (iii) modifying its service contract with the Customer to eliminate the risk that current revenue levels could materially decrease; and (iv) increasing monthly revenue received by the Company from the Customer by over $1.4 million per month for 36 months and over $1 million per month for the following 24 months. Pursuant to the terms of the Settlement Agreement, the Company settled a $54.8 million net receivable from the Customer for $10.0 million, and wrote off $60.5 million in accruals and payables and $22.1 million in deferred revenue. The remaining $149.6 million of deferred revenue at September 30, 2001, related to an agreement to provide the Customer with exclusive service over designated portions of the Company's local fiber optic networks (see note 7 (a)) was not fully settled and remains reflected in liabilities subject to compromise. Based on the terms of the Settlement Agreement, the Company recorded a gain of approximately $37.8 million. The gain may be adjusted if certain transactions contemplated by the Settlement Agreement are consummated. It is not possible to determine the amount of the adjustments at this time. (11) New Accounting Standards In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement deals with the costs of closing facilities and removing assets. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation in the period it is incurred. This cost is initially capitalized and amortized over the remaining life of the underlying asset. Once the obligation is ultimately settled, any difference between the final cost and the recorded liability is recognized as a gain or loss on disposition. SFAS No. 143 is effective starting in 2003. The Company is currently evaluating the impact this pronouncement will have on future financial results. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed of" and certain provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective starting in 2002. The Company is currently evaluating the impact this pronouncement will have on future financial results. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements and information 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 formulation, approval and confirmation of a plan of reorganization; o The significant amount of indebtedness incurred by the Company and the Company's ability to successfully restructure this indebtedness; o The possibility of continued operating losses; 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 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 capital markets 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 months ended March 31, 2000 and 2001 represent the consolidated operating results of the Company. (See the unaudited consolidated financial statements of the Company for the three months ended March 31, 2001 included elsewhere herein.) 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., a Delaware corporation ("ICG"), was incorporated on April 11, 1996 and is the publicly-traded U.S. parent company of ICG Funding, LLC, a special purpose Delaware limited liability company and wholly owned subsidiary of ICG ("ICG Funding"), ICG Holdings (Canada) Co., a Nova Scotia unlimited liability company ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation ("Holdings"), and ICG Services, Inc., a Delaware corporation ("ICG Services") and their subsidiaries. ICG and its subsidiaries are collectively referred to as the "Company." The Company's common stock was traded on the NASDAQ National Market ("NASDAQ") stock exchange. However, due to the bankruptcy filings described below, the NASDAQ halted trading of the Company's common stock on November 14, 2000 and delisted the stock on November 18, 2000. The Company provides voice, data and Internet communication services. Headquartered in Englewood, Colorado, the Company operates an integrated metropolitan and nationwide fiber optic infrastructure to offer: 18 o Dial-Up Services including primary rate interface ("PRI") and remote access services ("RAS") (sometimes referred to as managed modem services) on a wholesale basis to national and regional Internet service providers ("ISP"s). o Point-to-Point Broadband Service providing traditional special access service to long distance and long-haul carriers and medium to large-sized corporate customers, as well as switched access and SS7 services. o Corporate Services, primarily retail voice and data services to businesses. Bankruptcy Proceedings During the second half of 2000, a series of financial and operational events materially impacted ICG and its subsidiaries. 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 (the "Senior Facility"). As a result of these and other events, on November 14, 2000 (the "Petition Date") ICG and most of its subsidiaries (except for certain non-operating entities), filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code in the Federal Court for the District of Delaware (the "Bankruptcy Court"). The filings were made in order to facilitate the restructuring of the Company's debt, trade liabilities and other obligations. The Company and its filing subsidiaries are currently operating as debtors-in-possession under the supervision of the Bankruptcy Court. 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, virtually all liabilities, litigation and claims against the Debtors that were in existence as of 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, the effects of such cases on the Company's business, or the effects on the interests of creditors and shareholders. Because of the bankruptcy filings, all of the Company's liabilities incurred prior to the Petition Date, including certain secured debt, are subject to compromise. 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. Consequently, 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. In September 2000, the Company initiated an internal restructuring process in order to conserve capital and address various financial issues. To lead the restructuring, the Company hired Randall Curran as its Chief Executive Officer. The Company also retained Zolfo Cooper, LLC as its restructuring advisor and Dresdner Kleinwort & Wasserstein, Inc. ("DrKW") as its financial advisor. In conjunction with the bankruptcy filing, the Company entered into a Debtor-in-Possession Revolving Credit Agreement (the "Credit Agreement") of up to $350 million, which was subsequently amended to $200 million. As of September 30, 2001, no amounts had been drawn under the Credit Agreement. On November 7, 2001 the Company terminated the Credit Agreement because it expects that the $144 million in cash and short-term investments as of September 30, 2001 will be sufficient to fund operations during the bankruptcy process. ICG is focusing on improving its overall profitability and began a restructuring process in the second half of 2000 that has resulted in a substantial reduction in operating and capital expenditures. These reductions include reducing the full-time employee count from 2,975 at the end of the second quarter of 2000 to 2,054 as of year-end 2000, and 1,389 as of September 30, 2001. The Company has met with essential vendors in an effort to ensure continued access to required equipment and services. The Company is also executing a customer retention campaign designed to enhance customer relationships throughout the restructuring process and thereafter. ICG anticipates these restructuring efforts will conserve capital, enhance profitability and assist in retaining key customers. During the pendancy of its Chapter 11 case, the Company has continued to provide on-going services to its customers while implementing a revised strategy intended to meet customer commitments and maximize short-term cash flow. Under the revised strategy, the Company's operations will focus on existing markets where the Company has capacity thereby 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 19 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 network capacity, technical capabilities and capital availability. The Company's 22-city expansion plan originally scheduled for completion at year-end 2000 has been postponed indefinitely. On December 19, 2001 the Debtors filed a proposed Plan of Reorganization (the "Plan") and a Disclosure Statement with the Bankruptcy Court. The Plan is premised on the substantive consolidation of all of the Debtors for purposes of Plan voting, confirmation and distribution of claim proceeds. The Plan contemplates the conversion of the Debtors' existing unsecured debt into common equity in the post-bankruptcy, reorganized company. The Plan also contemplates the issuance of new secured notes to the Debtors' existing secured lenders. The Plan calls for the cancellation of all equity securities issued by the Debtors, including all common stock, preferred stock, options and warrants. It is anticipated that a hearing on the adequacy of the Disclosure Statement will be held in the Bankruptcy Court on February 1, 2002. Consummation of the Plan is contingent upon receiving Bankruptcy Court approval, as well as the approval of certain classes of creditors. No assurance can be given that the Plan will be approved or that the Company will be successful in reorganizing its affairs within the Chapter 11 proceedings. The Company, assisted by its investment banker, DrKW, evaluated the enterprise value of the Company in connection with the filing of its Plan and Disclosure Statement on December 19, 2001. The enterprise value of the Company on a going concern basis was estimated to be between $350 million and $500 million. This valuation of the Company results in a valuation of the new common equity to be issued under the Plan and Disclosure Statement, in the aggregate, between approximately $136 million and $287 million, which is derived by subtracting from the Company's enterprise value the projected funded debt on the pro forma balance sheet for the Company on the date of emergence from bankruptcy. The valuation is based on numerous assumptions, including, among other things, the achievement of certain operating results, market values of publicly-traded securities of other relevant companies, and general economic and industry conditions. Under accounting guidelines commonly referred to as "Fresh Start", the fair value of all assets of the Company will be estimated as it emerges from bankruptcy in conformity with generally accepted accounting principles ("GAAP"), specifically Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The enterprise value range in the Plan implies that a fair value adjustment of up to $200 million to reduce the value of property and equipment may be necessary. However, the Plan assumptions are likely to differ from the actual business conditions at the date of emergence from bankruptcy. Therefore, the fair values assigned to assets upon emergence from bankruptcy may also be different. The fair value adjustment to property and equipment, if any, will be recorded upon emergence from bankruptcy once the final enterprise value is determined. Asset Impairment The Company has provided for the impairment of long-lived assets, including goodwill, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever changes in circumstances indicate that the carrying value of an asset may not be recoverable. Such events include, but are not limited to, a significant decrease in the market value of an asset, a significant adverse change in the business climate that could affect the value of an asset or a current period operating or cash flow loss combined with a history of operating or cash flow losses. An impairment loss is recognized when estimated undiscounted future cash flows, before interest, expected to be generated by the asset are less than its carrying value. Measurement of the impairment loss is based on the estimated fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows, appraisals or other pricing models. 20 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, and EBITDA as a percentage of the Company's total revenue.
Financial Data Three months ended March 31, --------------------------------------- 2000 2001 ------------------- ------------------- $ % $ % ---------- -------- ---------- -------- (unaudited) ($ values in thousands) Statement of Operations Data: Revenue 157,408 100 136,397 100 Operating costs 82,902 53 112,562 83 Selling, general and administrative 55,089 35 30,696 23 Depreciation and amortization 64,599 41 15,989 11 Other, net 432 - 71 - ---------- -------- --------- -------- Operating loss (45,614) (29) (22,921) (17) Other Data: EBITDA (1) 19,417 12 (6,861) (5) Net cash used by operating activities 23,131 (61,644) Net cash used by investing activities (151,833) (5,011) Net cash provided (used) by financing activities 66,207 (1,803) Capital expenditures (2) 214,907 7,898
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Statistical Data (unaudited) (3) March 31, June 30, September 30, December 31, March 31, 2000 2000 2000 2000 2001 ---------- --------- ------------- ------------ ----------- Full time employees 2,930 2,975 2,811 2,054 1,476 Access lines in service, in thousands (4) 905 1,113 1,074 950 778 Buildings connected: On-net 1,046 924 936 925 925 Hybrid (5) 7,746 8,228 8,584 8,659 8,151 ---------- --------- ------------- ------------ ----------- Total buildings connected 8,792 9,152 9,520 9,584 9,076 Operational switches: Circuit 35 43 47 47 44 ATM 24 24 24 26 26 Frame Relay 16 - - - - ---------- --------- ------------- ------------ ----------- Total operational switches 75 67 71 73 70 Regional fiber route miles (6): Operational 4,807 4,767 4,816 5,577 5,577 Under construction - 495 508 - - Regional fiber strand miles (7): Operational 177,103 184,064 192,422 166,498 166,498 Under construction - 12,254 14,891 - - Collocations with ILECs 183 188 188 160 160
(1) EBITDA consists of loss from continuing operations before interest, income taxes, reorganization expenses, depreciation and amortization, other expense, net, accretion and preferred dividends on preferred securities of subsidiaries and 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 is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities of continuing operations as determined using GAAP are also presented in Other Data. (2) Capital expenditures include assets acquired with cash, payables, under capital leases, and pursuant to IRU agreements. 21 (3) Amounts presented are for three-month periods ended, or as of the end of the period presented. (4) Access lines in service at March 31, 2001 includes lines provisioned through the Company's switch and through resale and other agreements with various local exchange carriers. Beginning in the three months ended March 31, 2001, access lines in service include only provisioned lines generating revenue. (5) Hybrid buildings connected represent buildings connected to the Company's network via another carrier's facilities. (6) Regional fiber route miles refers to the number of miles of fiber optic cable, including leased fiber. As of March 31, 2001, the Company had approximately 5,577 regional fiber route miles. Regional fiber route miles under construction represents fiber under construction. (7) Regional fiber strand miles refers to the number of regional fiber route miles, including leased fiber, along a telecommunications path multiplied by the number of fiber strands along that path. As of March 31, 2001, the Company had approximately 166,498 regional fiber strand miles, of which 46,097 regional fiber strand miles were leased under operating leases. Regional fiber strand miles under construction represents fiber under construction. THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenue
Three Months Ended March 31, --------------------------------------- 2000 2001 ------------------ ------------------- $ % $ % -------- -------- --------- ------- ($ values in thousands) Dial-Up 34,359 22 46,593 34 Point-to-Point Broadband 50,345 32 41,065 30 Corporate Services 31,686 20 31,691 23 Reciprocal Compensation 41,018 26 17,048 13 -------- -------- --------- ------- Total Revenue 157,408 100 136,397 100 ======== ======== ========= =======
Total revenue decreased $21.0 million, or 13%, for the three months ended March 31, 2001 compared with the same period in 2000. The decrease was due primarily to a $24.0 million, or 58%, decrease in Reciprocal Compensation revenue and a $9.3 million, or 18%, decrease in Point-to-Point Broadband revenue. Offsetting the decreases, Dial-Up revenue increased $12.2 million, or 36%. Dial-Up revenue is earned by providing PRI ports (one and two way) and managed modem (IRAS) services to ISPs and other communication service companies. The increase in Dial-Up revenue was primarily due to a 49% increase in customer access ports in service, offset by a 9% decrease in the average monthly revenue per port. The decrease in revenue per port was due to higher service level credits issued in the first quarter of 2001 to settle customer disputes related to network performance issues associated with the IRAS product. Dial-Up revenue's contribution to total revenue rose from 22% in the first quarter of 2000 to 34% in the first quarter of 2001. Point-to-Point Broadband revenue is generated from service provided to interexchange carriers ("IXC"s) and end-user business customers. This service provides dedicated bandwidth and offers DS1 to OC-192 capacity to connect: (i) long-haul carriers to local markets, large companies and other long-haul carrier facilities; and (ii) large companies to their long distance carrier facilities and other facilities. The decrease in Point-to-Point Broadband revenue was primarily due to $11.5 million in non-recurring revenue recognized in 2000 under the Company's fiber optic lease agreement with a major carrier. Special access, switched access and SS7 revenues also decreased primarily due to increased customer churn levels. Point-to-Point Broadband revenue's contribution to total revenue declined from 32% in the first quarter of 2000 to 30% in the first quarter of 2001. Corporate Services revenue includes local, long distance, enhanced telephony and data services to businesses over its fiber optic networks located in major metropolitan areas in California, Colorado, Ohio, Texas and the Southeast. Corporate Services revenue remained consistent at approximately $32 million for both the three months ended March 31, 2001 and 2000. The billed line count increased 9% from the first quarter of 2000 to the first quarter of 2001, while the average monthly revenue per line decreased 8%. Corporate Services revenue for the first quarter of 2001 reflects a 26% decrease in long distance revenue, due to the continued attrition of resale access lines that had high long distance service penetration rates. In addition, carrier access billing service revenue decreased 33% primarily due to revenue earned but not recognized 22 because of collection concerns. Corporate Services revenue's contribution to total revenue rose from 20% in the first quarter of 2000 to 23% in the first quarter of 2001. The Company entered into an agreement to transfer its long distance revenue stream in the fourth quarter of 2001. These customers generated $3.4 million and $2.5 million in the three months ended March 31, 2000 and 2001, respectively. The related margin was not significant. Reciprocal Compensation has historically constituted an important source of revenue for the Company. Reciprocal Compensation revenue is primarily earned pursuant to interconnection agreements with incumbent local exchange carriers ("ILEC"s) for the transport and termination of calls originated by ILEC customers, including Internet bound calls. Due to changes in the regulatory environment and as a means of gaining certainty with respect to the continued collection of Reciprocal Compensation revenue, the Company negotiated voluntary settlement agreements with certain of its ILEC customers in the first half of 2000 that provide for the payment of Reciprocal Compensation for terminating ISP traffic, but at rates lower than the Company had historically received. As a result, Reciprocal Compensation's contribution to total revenue decreased from 26% in 2000 to 13% in 2001. The decrease in Reciprocal Compensation revenue reflects an 62% decrease in the average revenue earned per minutes of use ("MOU"s), offset by an 8% increase in MOUs. The Company anticipates that due to changes in the regulatory environment, Reciprocal Compensation revenue will continue to decline in the future. A significant amount of the Company's revenue is derived from long-term contracts with large customers, including one major customer. For the three months ended March 31, 2001, this customer accounted for approximately 10%, or $13.5 million, of total revenue. Revenue from this customer represented less than 10% of total revenue for the three months ended March 31, 2000. The loss of this customer, or other significant customers, could have a material adverse effect on the Company's financial condition and results of operations. Operating costs Total operating costs increased from $83 million for the three months ended March 31, 2000 to $113 million for the same period in 2001, a 36% increase. Operating costs consist primarily of payments to ILECs, other competitive local exchange carriers ("CLEC"s), 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. The increase in operating costs is due to increased leased PRI and backbone/backhaul expenses that occurred subsequent to March 31, 2000. Through the bankruptcy proceedings, the Company has significantly reduced excess leased capacity, thereby reducing operating costs. However, much of these savings were not realized until after March 31, 2001. Operating costs increased as a percentage of revenue from 53% for 2000 to 83% for 2001, primarily due to the decrease in reciprocal compensation revenue, which generates significantly higher margins than the Company's other revenue sources. Selling, general and administrative expenses Total selling, general and administrative ("SG&A") expenses decreased from $55 million for the three months ended March 31, 2000 to $31 million for the same period in 2001, a 44% decrease. SG&A expenses decreased as a percentage of revenue from 35% for 2000 to 23% for 2001. This decrease is primarily attributable to lower staff levels in 2001 than in 2000. The number of full time employees decreased from 2,930 at March 31, 2000 to 1,476 at March 31, 2001. The decrease is also due to lower facilities costs as the Company consolidates its locations during the restructuring process, as well as lower training, travel and relocation costs associated with the lower headcount. Depreciation and amortization Depreciation and amortization decreased from $65 million for the three months ended March 31, 2000 to $16 million for the same period in 2001. The decrease is due to the reduced asset values as a result of the $1.7 billion asset impairment recorded at December 31, 2000. Interest expense Interest expense decreased from $63 million for the three months ended March 31, 2000 to $13 million for the same period in 2001. Interest on debt subject to compromise ceased to accrue as of the Petition Date. Contractual interest that was not recorded due to the bankruptcy proceedings totaled $60 million for the three months ended March 31, 2001. Included in interest expense for the three months ended March 31, 2000 and 2001 was $52 million and $2 million of noncash interest, respectively. Additionally, interest expense is net of interest capitalized related to construction in progress of $1 million and $0.4 million during the three months ended March 31, 2000 and 2001, respectively. 23 Reorganization expenses Reorganization expenses of $20 million for the three months ended March 31, 2001 consist of costs associated with the bankruptcy proceedings that are not directly attributable to the ongoing operations of the Company. Such costs include $10 million for severance and employee retention costs, $6 million in professional and legal fees, $2 million in costs related to the closing of certain switch sites and $2 million of other costs. Accretion and preferred dividends on preferred securities of subsidiaries Accretion of costs and preferred dividends on preferred securities of subsidiaries was $17 million for the three months ended March 31, 2000. The Company did not record any amounts during the three months ended March 31, 2001 as all offering costs were written off and discounts accreted as of December 31, 2000. Accretion and preferred dividends on preferred securities of subsidiaries recorded during the three months ended March 31, 2000 consisted 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 14% Preferred Stock and the 14 1/4% Preferred Stock. 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. 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. Consequently, there is substantial doubt about the Company's ability to continue as a going concern. At March 31, 2001, the Company had cash and short-term investments of approximately $142 million. On December 4, 2000, the Company finalized its Debtor-in-Possession Revolving Credit Agreement with Chase Manhattan Bank (the "Credit Agreement"). The Credit Agreement originally provided for up to $350 million in financing, which was subsequently amended to $200 million. As of September 30, 2001, the Company had cash and short-term investments of $144 million, with no amounts drawn under the Credit Agreement. On November 7, 2001 the Company terminated the Credit Agreement. Management believes that cash and short-term investments of approximately $151 million at November 30, 2001, along with protection under bankruptcy law, should enable the Company to fund operations through the bankruptcy restructuring process. However, there can be no assurance that such resources will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements, or that the Company will achieve or sustain profitability or positive EBITDA in the future. At March 31, 2001, the Company had $2,769 million of liabilities outstanding subject to compromise, including $1,969 million of indebtedness, and $1,366 million 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 or preferred stock dividend obligations that have been outstanding since November 14, 2000, except for certain interest-only payments on some of the Company's secured debt. 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. At this time, there can be no assurance as to the amount of payment, if any, that will be made to these debtors and shareholders. The Company's Plan filed with the Bankruptcy Court on December 19, 2001 does not require any additional debt or equity financing. No assurance can be given that the Plan will be approved by the Bankruptcy Court or that the Company will be successful in reorganizing its affairs within the Chapter 11 proceedings. Net Cash Provided (Used) By Operating Activities The Company's operating activities provided $23 million and used $62 million for the three months ended March 31, 2000 and 2001, respectively. Net cash provided (used) by operating activities is primarily due to losses from continuing operations, changes in working capital items and depreciation and amortization. Net cash used in operating activities for the three months ended March 31, 2000 also includes approximately $53 million of deferred interest expense, which interest was not accrued or deferred in the three months ended March 31, 2001 due to the Company's bankruptcy proceedings. 24 Net Cash Used By Investing Activities Investing activities used $152 million and $5 million in the three months ended March 31, 2000 and 2001, respectively. Net cash provided by investing activities for the three months ended March 31, 2000 includes proceeds from the sales of short-term investments available for sale and marketable securities of $22 million, offset by cash expended for the acquisition of property, equipment and other assets of $173 million. Net cash used by investing activities for the three months ended March 31, 2001 primarily includes cash expended for the acquisition of property, equipment and other assets of $8 million, partially offset by proceeds from the sale of short-term investments available for sale and marketable securities of $4 million. Net Cash Provided By Financing Activities Financing activities provided $66 million in the three months ended March 31, 2000, which includes proceeds from the issuance of long-term debt and 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 IRU agreement, long-term debt and capital leases and payments of preferred dividends on preferred securities of subsidiaries. Cash used by financing activities of $2 million for the three months ended March 31, 2001 was primarily comprised of principal payments on capital lease obligations which are subject to compromise. On August 12, 1999, ICG Equipment and NetAhead entered into a $200 million senior secured financing facility (the "Senior Facility") consisting of a $75 million term loan, a $100 million term loan and a $25 million revolving line of credit. As of March 31, 2001, $85 million was outstanding under the loans at interest rates of the prime rate plus 3.875% and 4.25% for the three months ended March 31, 2001. As of March 31, 2001, the Company had an aggregate accreted value of approximately $2 billion outstanding under the 13 1/2% Senior Discount Notes due 2005, the 12 1/2% Senior Discount Notes due 2006, the 11 5/8% Senior Discount Notes due 2007, the 10% Notes and the 9 7/8% Notes. As of March 31, 2001, an aggregate amount of $1.4 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 $245 million and $8 million for the three months ended March 31, 2000 and 2001, respectively. There is substantial uncertainty about the Company's ability to complete and place in service the Company's $203 million construction in progress balance as of March 31, 2001. Reciprocal Compensation ICG has, as of March 31, 2001, a net receivable for reciprocal compensation due under interconnection agreements with ILECs of approximately $32 million. ICG received cash of approximately $14 million during the three months ended March 31, 2001 from ILECs for terminating local traffic. The Company anticipates that due to changes in the regulatory environment, reciprocal compensation revenue will continue to decline in the future. 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. 25 PART II ITEM 1. LEGAL PROCEEDINGS During the third and fourth quarters of 2000, the Company was served with fourteen lawsuits filed by various shareholders in the Federal District Court for the District of Colorado. 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 former 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 the Court will choose a lead plaintiff's counsel. The Company has retained legal counsel and intends to vigorously defend against these lawsuits. The Company has also tendered these claims to the Company's insurers. At this time, the claims against the Company have been stayed pursuant to the Company's filing for bankruptcy. In January 2001, certain shareholders of ICG Funding, a wholly owned subsidiary of the Company, filed an adversary proceeding in the Bankruptcy Court (Case number 00-04238 PJW Jointly Administered, Adversary Proceeding No. 01-000 PJW) against the Company and ICG Funding. The shareholders in this adversary action sought to recover approximately $2.3 million from an escrow account established to fund certain dividend payments to holders of the Funding Exchangeable Preferred Securities. Because of ICG Funding having filed for bankruptcy protection, ICG Funding did not declare the last dividend that was to have been paid with the remaining proceeds of the escrow account. In April 2001, the Company and ICG Funding finalized a settlement agreement with the shareholders which has been approved by the Bankruptcy Court. Under the terms of the settlement, the shareholders received approximately two thirds of the funds in the escrow account and the Company received the remaining one third of the escrowed funds, subject to certain contingencies and holdbacks related to shareholders that did not participate in the settlement. The Company is a party to certain other litigation that has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. 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 three months ended March 31, 2001, 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 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. 26 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (A) Exhibits. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession 2.2 Joint Plan of Reorganization of ICG Communications, Inc. and Its Affiliated Debtors and Debtors in Possession [Incorporated by reference to Exhibit 2.2 to ICG Communications, Inc.'s Current Report on Form 8-K dated December 19, 2001]. 2.3 Disclosure Statement with Respect to Joint Plan of Reorganization of ICG Communications, Inc. and Its Affiliated Debtors and Debtors in Possession [Incorporated by reference to Exhibit 2.3 to ICG Communications, Inc.'s Current Report on Form 8-K dated December 19, 2001]. (10) Material Contracts. 10.84 Amended and Restated Employment Agreement, dated June 21, 2001, by and between ICG Communications, Inc., ICG Holdings, Inc., ICG Services, Inc., ICG Equipment Inc., and ICG Telecom, Inc., and Randall Curran. (B) Report on Form 8-K. The following reports on Form 8-K were filed by the registrants during the three months ended March 31, 2001: None. 27 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 January 9, 2001. ICG COMMUNICATIONS, INC. Date: January 9, 2001 By: /s/ Richard E. Fish, Jr. ------------------------------------- Richard E. Fish, Jr., Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: January 9, 2001 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 January 9, 2001. ICG HOLDINGS (CANADA) CO. Date: January 9, 2001 By: /s/ Richard E. Fish, Jr. ------------------------------------- Richard E. Fish, Jr., Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: January 9, 2001 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 January 9, 2001. ICG HOLDINGS, INC. Date: January 9, 2001 By: /s/ Richard E. Fish, Jr. ------------------------------------- Richard E. Fish, Jr., Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: January 9, 2001 By: /s/ John V. Colgan ------------------------------------- John V. Colgan, Senior Vice President and Controller (Principal Accounting Officer) EX-10 3 exhibit1084.txt EXHIBIT 10.84 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED AGREEMENT (the "Agreement") is made as of the 21st day of June, 2001, 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 (the "Executive"). RECITALS WHEREAS, the Company and Executive previously entered into an employment agreement, dated as of September 25, 2000 (the "Prior Agreement"); and WHEREAS, the Company desires to provide for the continued employment of Executive and to make certain changes in Executive's employment arrangements with the Company which the Company believes will reinforce and encourage the continued attention and dedication to the Company of Executive, in the best interest of the Company and its constituencies; and WHEREAS, Executive desires to be employed by the Company as provided herein; and WHEREAS, the Company and Executive wish to amend and restate the Prior Agreement, which agreement shall be superceded by this Agreement, NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Employment. The Company agrees to employ Executive and Executive 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, for the period and upon the terms and conditions hereinafter set forth, conditioned upon Executive permanently relocating to the Denver Metropolitan area by October 1, 2001. 2. Term. The employment of Executive by the Company as provided in Section 1 hereof shall commence on the date hereof and shall continue until terminated in accordance with the terms hereof; provided, that at the end of each calendar month, the Executive's employment shall be extended through the end of the 1 immediately following calendar month unless notice of non-renewal is given by the Company to the Executive not later than 15 days prior to the end of any such calendar month. The period during which the Executive is employed by the Company pursuant to this Agreement is referred to herein as the "Employment Term," and upon termination of Executive's employment with the Company for any reason whatsoever (including breach or alleged breach of this Agreement by the Company), the Employment Term shall be terminated. The date on which the Employment Term ends is referred to herein as the "Termination Date." 3. Position and Duties. During the Employment Term, Executive shall serve as Chief Executive Officer ("CEO") of the Company and shall have such responsibilities, duties and authority as the Company's Board of Directors (the "Board") and the Special Executive Committee of the Board (the "Special Committee") shall determine from time to time, so long as such responsibilities, duties and authority are consistent with those of Executive as of the date hereof. Executive shall devote substantially all his working time and efforts to the business and affairs of the Company and shall use his best efforts to carry out his responsibilities faithfully and efficiently in a professional manner; provided, however, that it is understood that reasonable time for personal financial matters and charitable activities shall not constitute a violation of this Agreement. 4. Place of Performance. During the Employment Term, Executive's place of performance of his services shall be Denver Metropolitan Area, except for required travel by Executive on the Company's business to an extent substantially consistent with his present business travel obligations or as may be reasonably required by the Company. 5. Compensation and Benefits. (a) Salary. During the Employment Term, the Company shall pay to Executive an annual base salary of Nine Hundred Thousand Dollars ($900,000) or Seventy Five Thousand Dollars ($75,000) per month (the "Base Salary," such salary to be paid in periodic installments in accordance with the Company's payroll practices then in effect. The Base 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. Compensation of Executive by salary payments shall not be deemed exclusive and shall not prevent Executive from participating in any other compensation or benefit plan of the Company. The Base 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 2 way limit or reduce the obligation of the Company to pay Executive's Base Salary hereunder. (b) Performance Bonus. During the Employment Period Executive shall be eligible to receive a performance bonus, based on the Company meeting certain financial targets set by the Company's Board and the Special Committee ("Performance Bonus"). With respect to the Performance Bonus relating to fiscal 2001 (the "2001 Bonus"), Executive's Performance Bonus shall be earned as follows: the Executive shall earn (i) $100,000 if the Company (on a consolidated basis with its subsidiaries) achieves $31 million EBITDA (the "2001 Bonus Threshold") and (ii) $100,000 for each $1 million in excess of the 2001 Bonus Threshold; provided, however, that, in no event shall EBITDA in excess of $39 million be taken into account in determining the 2001 Bonus, with the result that the 2001 Bonus shall not exceed $900,000. Executive may be eligible to receive a Performance Bonus during subsequent years in amounts of up to one year's Base Salary then in effect based upon performance targets to be established at the discretion of the Company's Board or the compensation committee thereof. (c) Reorganization Bonus. Executive shall be eligible to receive a reorganization bonus (the "Reorganization Bonus") equal to $900,000, payable in a lump sum ten (10) days after either (x) confirmation of a plan of reorganization for the Company in its currently pending Chapter 11 cases or (y) consummation of a sale of substantially all the assets of the Company in the Chapter 11 cases; provided, that such condition is met on or prior to December 31, 2001. If either of conditions (x) or (y) above is met following December 31, 2001, a portion of the Reorganization Bonus may become payable, provided that the amount of the Reorganization Bonus shall be reduced by $100,000 (but not below $0) for each whole one-month period immediately following December 31, 2001. For purposes of clarity of this Section 5(c), in the event that condition (x) or (y) above is met during the month of March 2002, Executive shall be entitled to a Reorganization Bonus equal to $700,000. Notwithstanding the foregoing, if conditions (x) or (y) are met after December 31, 2001, and the reason such condition was not met prior to December 31, 2001 is lack of resolution of intercreditor issues or the Official Creditors' Committee's refusal to support an Acceptable Plan (as hereinafter defined) proposed by the Company in sufficient time for it to be confirmed by December 31, 2001, the Reorganization Bonus shall be $900,000. "Acceptable Plan" means a plan of reorganization for the Company and its debtor-subsidiaries that (a) is confirmable under section 1129 of the Bankruptcy Code and (b) distributes substantially all of the economic value of the Company (subject to secured creditors claims and appropriate consideration for new money infusion, if any) 3 to unsecured creditors represented by the Committee and (c) otherwise has customary and reasonable terms. (d) Expenses. The Company will promptly reimburse Executive for all reasonable out-of-pocket expenses incurred by Executive during the Employment Term in connection with the business of the Company and the performance of his duties under this Agreement including, but not limited to, the reimbursement of Executive on a fully tax grossed-up basis for the reasonable costs of permanently relocating to the Denver Metropolitan area (including real estate brokerage fees and costs and the benefits under the Company's existing relocation program for Tier I employees), upon presentation to the Company by Executive of a reasonably itemized accounting of such expenses with reasonable supporting data. All such expenses relating to Executive's relocation shall be reviewed by the Board. (e) Other Benefits. During the Employment Term, Executive shall be entitled to continue to participate in all of the employee benefit plans and arrangements ("Benefit Plans") in effect on the date hereof in which Executive participates, or Benefit Plans providing Executive with at least equivalent benefits thereunder. Executive shall be entitled to participate in or receive benefits under any Benefit Plan made available by the Company in the future to all (but not less than all) other key employees, subject to and on a basis consistent with the terms, conditions and administration of such Benefit Plans. Any payments or benefits payable to Executive hereunder (other than any annual bonus payment) in respect of any year during which the Termination Date occurs prior to June 1 shall, unless otherwise provided in the applicable plan or arrangement, be prorated in accordance with the number of days in such year during which the Employment Term was in effect. (f) Vacations. Executive shall be entitled to vacation time, paid holidays and personal days, determined in accordance with the Company's policy then in effect but not less than 4 weeks in any calendar year. (g) Services Furnished. The Company shall furnish Executive with such office space, stenographic assistance and other office facilities and services as shall be suitable to Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof, in the Denver Metropolitan area or at the Company's headquarters. (h) During the term of this Agreement, Executive will have full use of a company vehicle at Company's expense. 4 6. Termination. (a) If this Agreement is terminated by Executive for "good reason" (as defined below), or by the Company for any reason other than Executive's death, Disability (as defined in Section 6(d) below) or for "cause" (as defined below) at any time after May 31, 2001 the Company shall pay Executive within five days of the date of the notice of termination a lump sum termination benefit in an amount equal to fifteen months' Base Salary at the rate then in effect. For purposes of this Agreement, termination for "cause" shall be limited to termination based on Executive's (i) willful and continued failure to substantially perform his duties hereunder (other than any such failure arising from his disability) provided that Executive shall first have received a notice in writing from the Board or the Special Committee specifying in reasonable detail the alleged failures and providing Executive a reasonable opportunity to cure same; (ii) acts of intentional dishonesty resulting in demonstrable harm to the Company; or (iii) conviction of felony. For purposes of this Agreement, Executive shall be entitled to terminate this Agreement for "good reason" if (i) Executive is no longer CEO of the Company or is required to report to anyone other than the Board or the Special Committee, (ii) Executive is assigned duties inconsistent with those duties customarily assigned to senior executive officers of the Company, or (iii) there is a material breach by the Company in the performance of any of the terms and conditions of this Agreement, provided Executive shall first have given written notice to the Board or the Special Committee regarding such breach and given the Company a reasonable opportunity to cure such breach. (b) If Executive dies during the Employment Term, Executive's obligations under this Agreement will terminate and the Company will pay the estate of Executive an amount equal to one year's Base Salary at the rate then in effect. (c) If, during the Employment Term, Executive is prevented from performing his duties by reason of illness or incapacity for three consecutive months in any one hundred eighty (180) day period (a "Disability"), the Company may terminate this Agreement, upon fourteen (14) days notice to Executive or his duly appointed legal representative. Executive will be entitled to all benefits provided under any disability plans of the Company. 5 (d) The Company shall be responsible for any gross-up payment required to offset any excise taxes placed on Executive if any payments made to Executive 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 Executive for temporary housing or relocation expenses result in net taxable income to Executive (net of any offsetting deductions). 7. Directors' and Officers' Insurance; Indemnification. (a) The Company represents that Executive 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, 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 Executive in good faith mutually determine to be reasonable. (b) In addition to any rights to indemnification to which Executive is entitled under the Company's Articles of Incorporation and Bylaws, the Company shall indemnify Executive at all times during and after the Employment 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 Executive's expenses in defending any civil action, suit or proceeding in advance of the final disposition of such action, suit or proceed ing to the maximum extent permitted under such applicable state laws for Executive'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 Executive's employment by the Company which obligation shall survive the termina tion of Executive's employment or the termination of the other provisions of this Agreement. 8. Confidential Information, Removal of Documents, etc. (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets, confidential information, and knowledge or data relating to the Company and the businesses and investments of the Company, which shall have been obtained by the Executive during the Executive's employment by the Company, including such information with respect to any products, improvements, formulas, designs or styles, processes, services, customers, suppliers, marketing techniques, methods, future 6 plans or operating practices ("Confidential Information"); provided, however, that Confidential Information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any specific information or type of information generally not considered confidential by persons engaged in the same business as the Company, or information disclosed by the Company or any officer thereof to a third party without restrictions on the disclosure of such information. Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such Confidential Information to anyone other than the Company and those designated by the Company. (b) Removal of Documents. All records, files, drawings, documents, models, and the like relating to the business of the Company, which the Executive prepares, uses or comes into contact with and which contain Confidential Information shall not be removed by the Executive from the premises of the Company (without the written consent of the Company) during or after the Employment Period unless such removal shall be required or appropriate in connection with his carrying out his duties under this Agreement, and, if so removed by the Executive, shall be returned to the Company immediately upon termination of the Executive's employment hereunder. (c) Remedies. Without prejudice to any other remedies that the Company may have for breach of this Agreement by the Executive, in the event of a breach or threatened breach of this Section 8, the Executive agrees that the Company shall be entitled to apply for injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. Continuing Operation. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. 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 7 respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 10. 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. 11. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. 12. Assignment. Neither this Agreement nor any rights or duties hereunder may be assigned by Executive or the Company without the prior written consent of the other, such consent not to be unreasonably withheld. 13. 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. 14. 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. 15. 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. 16. Arbitration. Any dispute, controversy or question arising under, out of, or relating to this Agreement (or the breach thereof), or, Executive's employment with the Company or termination thereof, shall be referred for arbitration in the State of Colorado to a neutral arbitrator selected by Executive and the Company and this shall be the exclusive and sole means for resolving such dispute. 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. 8 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: Bernard L. Zuroff By: /s/William J. Laggett - --------------------------------- --------------------------------- Chairman of the Special Executive Committee of the Board of Directors ICG HOLDINGS, INC. By: Bernard L. Zuroff --------------------------------- ICG SERVICES, INC. By: Bernard L. Zuroff --------------------------------- ICG EQUIPMENT, INC. By: Bernard L. Zuroff --------------------------------- ICG TELECOM, INC. By: Bernard L. Zuroff --------------------------------- 9 -----END PRIVACY-ENHANCED MESSAGE-----