-----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, APfDXgGt+6lo+EYU+cvXeDuWKfiiLDP57IMnXIhWrkI8Y0KhskIONi8safDtSLkC gUpFXCj+hnlM0t4MLxoQ7A== 0001013240-02-000019.txt : 20020413 0001013240-02-000019.hdr.sgml : 20020413 ACCESSION NUMBER: 0001013240-02-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 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: 2507119 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 q310q2001.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 September 30, 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 incorporation or organization) Identification No.) - -------------------------------------------------------------------------------- 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 (Address of U.S. agent for offices) 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 September 30, 2001 (unaudited)........................... 3 Consolidated Statements of Operations for the Nine Months Ended September 30, 2000 and 2001 (unaudited)................ 5 Consolidated Statement of Stockholders' Deficit for the Nine Months Ended September 30, 2001 (unaudited)............. 7 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 2001 (unaudited)................ 8 Notes to Consolidated Financial Statements (unaudited).........10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....30 PART II ......................................................................31 ITEM 1. LEGAL PROCEEDINGS..............................................31 ITEM 2. CHANGES IN SECURITIES..........................................31 ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................31 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........31 ITEM 5. OTHER INFORMATION..............................................31 ITEM 6. EXHIBITS AND REPORT ON FORM 8-K................................32 Exhibits.......................................................32 Reports on Form 8-K............................................32 2 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2000 and September 30, 2001 (Unaudited)
December 31, September 30, 2000 2001 ------------ ------------- (in thousands) Assets - ------ Current assets: Cash and cash equivalents $ 196,980 $ 139,447 Short-term investments available for sale 17,733 4,085 Trade receivables, net of allowance of $94.3 million and $51.6 million at December 31, 2000 and September 30, 2001, respectively 132,095 59,266 Other receivables 994 427 Prepaid expenses and deposits 13,234 15,053 ------------ ------------- Total current assets 361,036 218,278 Property and equipment, net (note 5) 590,500 569,234 Restricted cash 9,278 7,247 Investments 1,650 650 Deferred financing costs, net of accumulated amortization of $1.2 million and $7.6 million at December 31, 2000 and September 30, 2001, respectively 10,969 6,310 Deposits 7,019 9,807 ------------ ------------- Total Assets (note 1) $ 980,452 $ 811,526 ============ =============
(continued) See accompanying notes to consolidated financial statements. 3 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited), Continued
December 31, September 30, 2000 2001 ------------ ------------- (in thousands) Liabilities and Stockholders' Deficit - ------------------------------------- Current liabilities not subject to compromise: Accounts payable $ 8,774 5,979 Accrued liabilities 57,888 68,740 Deferred revenue 14,840 8,550 Current portion of long-term debt (note 6) 796 796 ------------ ------------- Total current liabilities not subject to compromise 82,298 84,065 Liabilities subject to compromise (notes 1 and 2, 6) 784,627 2,657,396 Long-term liabilities not subject to compromise: Long-term debt, net of discount, less current portion (note 6) 117,784 84,707 Capital lease obligations, less current portion - 50,529 Other long-term liabilities 1,090 1,090 ------------ ------------- Total liabilities 2,985,799 2,877,787 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 785,353 785,353 liquidation value) 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) (4,315,583) ------------ ------------- Total stockholders' deficit (3,372,007) (3,432,921) Commitments and contingencies (note 7) ------------ ------------- Total Liabilities and Stockholders' Deficit (note 1) $ 980,452 $ 811,526 ============ =============
See accompanying notes to consolidated financial statements. 4 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three and Nine Months Ended September 30, 2000 and 2001 (Unaudited)
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2000 2001 2000 2001 ---------- --------- ---------- --------- (in thousands, except per share data) Revenue $ 145,257 $124,071 $ 477,369 $381,720 Operating costs and expenses: Operating costs 118,711 84,954 304,202 282,329 Selling, general and administrative expenses 84,182 23,469 188,947 80,635 Depreciation and amortization 99,023 18,301 236,514 50,484 Loss on disposal of assets 2,021 1,908 2,566 9,541 Other, net 433 - 1,692 - ---------- --------- ---------- --------- Total operating costs and expenses 304,370 128,632 733,921 422,989 ---------- --------- ---------- --------- Operating loss (159,113) (4,561) (256,552) (41,269) Other income (expense): Interest expense (contractual interest of $60 million and $180 million not recorded during the three and nine months ended September 30, 2001, respectively) (66,013) (277) (195,406) (24,076) Interest income 5,898 1,503 20,437 5,709 Other income (expense), net (352) (95) (349) 1,239 ---------- --------- ---------- --------- Total other income (expense), net 60,467) 1,131 (175,318) (17,128) ---------- --------- ---------- --------- Loss from continuing operations before reorganization income (expense), net and accretion and preferred dividends (219,580) (3,430) (431,870) (58,397) Reorganization income (expense), net (note 4) - 29,194 - (2,517) Accretion and preferred dividends on preferred securities of subsidiaries (17,656) - (51,428) - Income tax expense (10) - (10) - ---------- --------- ---------- --------- Income (loss) from continuing operations (237,246) 25,764 (483,308) (60,914) Net income from discontinued operations - - 736 - ---------- --------- ---------- --------- Net income (loss) (237,246) 25,764 (482,572) (60,914) Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value (17,274) - (31,736) - Charge for beneficial conversion feature of 8% Series A Convertible Preferred Stock - - (159,279) - ---------- --------- ---------- --------- Net income (loss) attributable to common stockholders $(254,520) $ 25,764 $(673,587) $(60,914) ========== ========= ========== =========
(continued) See accompanying notes to consolidated financial statements. 5 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three and Nine Months Ended September 30, 2000 and 2001 (Unaudited), Continued
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2000 2001 2000 2001 ---------- --------- ---------- --------- (in thousands, except per share data) Other comprehensive loss: Unrealized loss on long-term investments available for sale (8,625) - (8,625) - ---------- --------- ---------- --------- Comprehensive income (loss) $(263,145) $ 25,764 $(682,212) $(60,914) ========== ========= ========== ========= Net loss per share - basic and diluted: Net loss attributable to common stockholders, before net income from discontinued operations $ (4.92) $ 0.50 $ (13.60) $ (1.17) Net income from discontinued operations - - 0.02 - ---------- --------- ---------- --------- Net loss per share - basic and diluted $ (4.92) $ 0.50 $ (13.58) $ (1.17) ========== ========= ========== ========= Weighted average number of shares outstanding - basic and diluted 51,782 52,045 49,564 52,045 ========== ========= ========== =========
See accompanying notes to consolidated financial statements. 6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit Nine Months Ended September 30, 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 - - - (60,914) (60,914) ------- ------- ---------- ------------- ------------- Balances at September 30, 2001 52,045 $ 520 $ 882,142 $(4,315,583) $ (3,432,921) ======= ======= ========== ============= =============
See accompanying notes to consolidated financial statements. 7 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 2001 (Unaudited)
Nine months ended September 30, ------------------------------- 2000 2001 --------------- -------------- (in thousands) Cash flows from operating activities: Net loss $ (482,572) $ (60,914) Net income from discontinued operations (736) - Adjustments to reconcile net loss to net cash provided (used) by operating activities: Recognition of deferred gain (6,239) - Accretion and preferred dividends on preferred securities of subsidiaries 51,428 - Depreciation and amortization 236,514 50,484 Deferred compensation 1,294 - Net loss on disposal of long-lived assets 2,566 9,541 Gain on sale of securities (634) - Provision for uncollectible accounts 31,688 8,403 Interest expense deferred and included in long-term debt, net of amounts capitalized on assets under construction 151,535 (1,049) Interest expense deferred and included in capital lease obligations 3,776 5,748 Amortization of deferred financing costs included in interest expense 3,933 6,657 Contribution to 401(k) plan through issuance of common stock 4,298 - Realized gain on sale of available for sale securities - (1,542) Other 301 - Change in operating assets and liabilities, excluding the effects of dispositions and noncash transactions: Receivables (56,596) 20,114 Prepaid expenses and deposits (3,738) (1,819) Accounts payable and accrued liabilities 52,188 5,498 Deferred revenue 150,157 (6,289) --------------- -------------- Net cash provided by operating activities before reorganization items 139,163 34,832 Reorganization items: Gain on settlement with major customer - (36,271) Change in liabilities subject to compromise - (29,490) Change in restructuring accruals - (1,412) Other - (1,073) --------------- -------------- Net cash provided (used) by operating activities 139,163 (33,414) Cash flows from investing activities: Acquisition of property and equipment (649,096) (23,471) Change in accounts payable and accrued liabilities for acquisition of property and equipment 50,682 438 Proceeds from disposition of property, equipment and other assets 20 3,052 Proceeds from sales of short-term investments available for sale 22,368 13,648 Proceeds from sale of marketable securities 10,634 2,542 Decrease (increase) in restricted cash 4,818 (65) Increase in long-term deposits - (2,754) Purchase of investments (1,400) - Reorganization items: Decrease in restricted cash due to settlement of liabilities subject to compromise - 2,096 --------------- -------------- Net cash used by investing activities (561,974) (4,514)
(continued) See accompanying notes to consolidated financial statements. 8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 2001 (Unaudited), Continued
Nine months ended September 30, ------------------------------- 2000 2001 --------------- -------------- (in thousands) Cash flows from financing activities: Proceeds from issuance of common stock $ 17,104 $ - Proceeds of 8% Series A Convertible Preferred Stock, net of issuance costs 720,330 - Proceeds from issuance of long-term debt 95,000 - Principal payments on capital lease obligations (19,790) - Payments on IRU agreement (179,497) - Principal payments on long-term debt (90,317) - Payments of preferred dividends (6,695) - Payments of deferred debt issuance costs (304) (2,000) Reorganization items: Principal payments on capital lease obligations subject to compromise - (16,293) Payments of preferred dividends - (1,312) --------------- -------------- Net cash provided (used) by financing activities 535,831 (19,605) --------------- -------------- Net increase (decrease) in cash and cash equivalents 113,020 (57,533) Net cash provided by discontinued operations 406 - Cash and cash equivalents, beginning of period 103,288 196,980 --------------- -------------- Cash and cash equivalents end of period $ 216,714 $ 139,447 =============== ============== Supplemental disclosure of cash flows information of continuing operations: Cash paid for interest $ 30,614 $ 17,089 =============== ============== Cash paid for income taxes $ 281 $ - =============== ============== Supplemental schedule of noncash investing activities of continuing operations: Assets acquired pursuant to IRU agreement $ 96,903 $ - Assets acquired under capital leases 135,578 50,547 --------------- -------------- Total $ 232,481 $ 50,547 =============== ============== Shares issued in exchange for long-term investment $ 21,625 $ - =============== ==============
See accompanying notes to consolidated financial statements. 9 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 all 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 $286 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 10 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 September 30, 2001: 11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued
December 31, September 30, 2000 2001 ------------ ------------- (in thousands) Unsecured long-term debt $ 1,968,781 $ 1,968,781 Unsecured creditors 583,749 481,293 Capital lease obligations 197,974 187,101 Priority creditors 33,385 19,668 Other secured creditors 738 553 ------------ ------------- $ 2,784,627 $ 2,657,396 ============ =============
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 payable with balances outstanding as of September 30, 2001 of approximately $84.6 million and $0.9 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 nine months ended September 30, 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 12 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 items were incurred during the three and nine months ended September 30, 2001 (in thousands):
Three months Nine months ------------ ------------- Gain on settlement with major customer $ 36,271 $ 36,271 Legal and professional fees (401) (13,091) Severance and employee retention costs (673) (12,492) Switch site closure costs (1,173) (4,355) Line cost termination expenses (2,273) (4,992) Other expenses, net (2,557) (3,858) ------------ ------------- Total $ 29,194 $ (2,517) ============ =============
(5) Property and Equipment Property and equipment, including assets held under capital leases, is comprised of the following:
December 31, September 30, 2000 2001 ------------ ------------- (in thousands) Land $ 8,708 $ 1,214 Buildings and improvements 36,307 50,358 Furniture, fixtures and office equipment 11,799 16,813 Machinery and equipment 9,450 10,575 Fiber optic equipment 119,146 123,062 Switch equipment 104,947 108,053 Fiber optic network 56,242 82,630 Site improvements - 3,269 Construction in progress 205,881 180,988 Assets held for sale 40,500 37,504 ------------ ------------- 592,980 614,466 Less accumulated depreciation (2,480) (45,232) ------------ ------------- $ 590,500 $ 569,234 ============ =============
Property and equipment includes approximately $181 million of equipment that has not been placed in service at September 30, 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. 13 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued (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 September 30, 2001, the Company is in default with 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, September 30, 2000 2001 ------------ ------------- (in thousands) Long-term debt not subject to compromise: Credit Agreement (a) $ - $ - Senior secured financing facility ("Senior Facility") 84,574 84,574 Mortgage loan payable, secured by Company Headquarters (b) 33,077 - Mortgage loan payable, other 929 929 ------------ ------------- 118,580 85,503 Long-term debt subject to compromise: Senior discount notes, net of discount 1,968,781 1,968,781 ------------ ------------- 2,087,361 2,054,284 Less current portion (796) (796) ------------ ------------- $ 2,086,565 $ 2,053,488 ============ =============
(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 and Capital Lease Obligation 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 initially valued at $50.4 million ($50.5 million at September 30, 2001). Contractual payments due as of September 30, 2001 under the lease, which expires January 31, 2023, are as follows: 14 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued
2001 $ 1,295 2002 5,338 2003 5,498 2004 5,663 2005 5,833 Thereafter 130,741 ------------- Total minimum lease payments 154,368 Less amounts representing interest 103,839 ------------- Present value of net minimum lease payments 50,529 Less current portion - ------------- $ 50,529 =============
(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, 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. 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. At September 30, 2001, $149.6 million of deferred revenue related to this agreement is reflected in liabilities subject to compromise. 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 15 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued 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 September 30, 2001, a net receivable for the transport and termination of such traffic of approximately $8.7 million. The Company received cash of approximately $52.2 million, during the nine months ended September 30, 2001, from certain ILECs for terminating local and toll traffic. The Company has recognized reciprocal compensation revenue of approximately $30.1 million and $18.6 million in the three months ended September 30, 2000 and 2001, respectively, and $120.6 million and $51.4 million in the nine months ended September 30, 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, 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: 16 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued Summarized Consolidated Balance Sheet Information
December 31, September 30, 2000 2001 ------------ ------------- (in thousands) Current assets $ 325,851 $ 160,040 Property and equipment, net 143,208 184,258 Other non-current assets, net 21,754 20,261 ------------ ------------- Total assets $ 490,813 $ 364,559 ============ ============= Current liabilities $ 248,745 $ 317,864 Liabilities subject to compromise 2,508,080 2,431,540 Long-term debt, less current portion 883 883 Capital lease obligations, less current portion - 50,529 Other long-term liabilities 1,090 1,090 Redeemable preferred stock 449,057 449,057 Stockholder's deficit (2,717,042) (2,886,404) ------------ ------------- Total liabilities and stockholders' deficit $ 490,813 $ 364,559 ============ =============
Summarized Consolidated Statement of Operations Information
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2000 2001 2000 2001 ---------- ---------- ---------- ---------- (in thousands) Total revenue $ 131,905 $ 123,106 $ 452,210 $ 378,264 Total operating costs and expenses 331,615 156,529 771,102 504,809 ---------- ---------- ---------- ---------- Operating loss $(199,710) $ (33,423) $(318,892) $(126,545) ========== ========== ========== ========== Loss from continuing operations $(171,310) $ (42,393) $(411,635) $(169,362) ========== ========== ========== ========== Net loss $(215,371) $ (42,393) $(455,341) $(169,362) ========== ========== ========== ==========
Condensed financial information for Holdings-Canada only is as follows: Condensed Balance Sheet Information
December 31, September 30, 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 2,886,404 Shareholders' deficit (2,705,486) (2,874,848) ------------ ------------- Total liabilities and shareholders' deficit $ 82 $ 82 ============ =============
17 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued Condensed Statement of Operations Information
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2000 2001 2000 2001 ---------- ---------- ---------- ---------- (in thousands) Total revenue $ - $ - $ - $ - Total operating costs and expenses - - 12 - ---------- ---------- ---------- ---------- Operating loss - - (12) - Losses of subsidiaries (215,371) (42,393) (455,341) (169,362) ---------- ---------- ---------- ---------- Net loss attributable to common shareholders $(215,371) $ (42,393) $(455,353) $(169,362) ========== ========== ========== ==========
(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 and $1.5 million for the three and nine months ended September 30, 2000, respectively. Such expenses were $0.1 million for the nine months ended September 30, 2001, and were not significant for the three months ended September 30, 2001. ICG has no operations other than those of ICG Services, ICG Funding and Holdings-Canada and their subsidiaries. (10) Major customer 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 September 30, 2001, the Customer accounted for approximately 21%, or $25.7 million, of total revenue. For the nine months ended September 30, 2001, the Customer accounted for approximately 15%, or $56.4 million, of total revenue. Revenue from the Customer represented less than 10% of total revenue for the three and nine months ended September 30, 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 has recorded a gain of approximately $37.8 million, $36.3 million of which is reflected in reorganization items and $1.5 million in interest expense in the accompanying consolidated statement of operations. 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. 18 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued (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. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements and information 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 nine months ended September 30, 2000 and 2001 represent the consolidated operating results of the Company. (See the unaudited consolidated financial statements of the Company for the nine months ended September 30, 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: 20 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 2,811 at the end of the third 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 21 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 $286 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. 22 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 September 30, Six months ended September 30, --------------------------------------- --------------------------------------- 2000 2001 2000 2001 ------------------- ------------------- ------------------- ------------------- $ % $ % $ % $ % ---------- -------- ---------- -------- ---------- -------- ---------- -------- (unaudited) ($ values in thousands) Statement of Operations Data: Revenue 145,257 100 124,071 100 477,369 100 381,720 100 Operating costs 118,711 82 84,954 68 304,202 64 282,329 74 Selling, general and administrative 84,182 58 23,469 19 188,947 40 80,635 21 Depreciation and amortization 99,023 68 18,301 15 236,514 50 50,484 13 Loss on disposal of asset 2,021 1 1,908 2 2,566 - 9,541 3 Other, net 433 - - - 1,692 - - - ---------- -------- ---------- -------- ---------- -------- ---------- -------- Operating loss (159,113) (109) (4,561) (4) (256,552) (54) (41,269) (11) Other Data: EBITDA (1) (57,636) (40) 15,648 13 (15,780) (3) 18,756 5 Net cash provided (used) by operating activities 36,084 3,940 139,163 (33,414) Net cash used by investing activities (186,516) 2,033 (561,974) (4,514) Net cash provided (used) by financing activities (129,412) (1,822) 535,831 (19,605) financing Capital expenditures (2) 319,209 6,744 881,577 74,018
________________________________________________________________________________
Statistical Data (unaudited) (3) September 30, December 31, March 31, June 30, September 30, 2000 2000 2001 2001 2001 ------------- ------------ ---------- ---------- ------------- Full time employees 2,811 2,054 1,476 1,422 1,389 Access lines in service, in thousands (4) 1,074 950 778 719 789 Buildings connected: On-net 936 925 925 881 902 Hybrid (5) 8,584 8,659 8,151 7,264 6,315 ------------- ------------ ---------- ---------- ------------- Total buildings connected 9,520 9,584 9,076 8,145 7,217 Operational switches: Circuit 47 47 44 44 43 ATM 24 26 26 27 26 ------------- ------------ ---------- ---------- ------------- Total operational switches 71 73 70 71 69 Regional fiber route miles (6): Operational 4,816 5,577 5,577 5,577 5,542 Under construction 508 - - - - Regional fiber strand miles (7): Operational 192,422 166,498 166,498 166,498 165,847 Under construction 14,891 - - - - Collocations with ILECs 188 160 160 160 148
(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 23 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. (3) Amounts presented are for three-month periods ended, or as of the end of the period presented. (4) Access lines in service at September 30, 2001 includes lines provisioned through the Company's switch and through resale and other agreements with various local exchange carriers. Beginning in the nine months ended September 30, 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 September 30, 2001, the Company had approximately 5,542 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 September 30, 2001, the Company had approximately 165,847 regional fiber strand miles, of which 45,445 regional fiber strand miles were leased under operating leases. Regional fiber strand miles under construction represents fiber under construction. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenue
Three Months Ended September 30, ---------------------------------------- 2000 2001 -------------------- ------------------- $ % $ % --------- --------- --------- --------- ($ values in thousands) Dial-Up 37,840 26 45,380 37 Point-to-Point Broadband 40,423 28 36,069 29 Corporate Services 36,911 25 24,030 19 Reciprocal Compensation 30,083 21 18,592 15 --------- --------- --------- --------- Total Revenue 145,257 100 124,071 100 ========= ========= ========= =========
Total revenue decreased $21.2 million, or 15%, for the three months ended September 30, 2001 compared with the same period in 2000. The decrease was due to decreases in Point-to-Point, Corporate Services and Reciprocal Compensation revenues, offset by an increase in Dial-Up revenue. 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. Dial-Up revenue increased $7.5 million, or 20%, from $37.8 million in 2000 to $45.3 million in 2001. The increase in Dial-Up revenue was primarily due a 36% increase in average monthly revenue per port, offset by a 12% decrease in billed line count. The increase in average monthly revenue per port was due to significant service level credits issued in the third quarter of 2000 due to network performance issues associated with the IRAS product. Dial-Up revenue's contribution to total revenue rose from 26% in the third quarter of 2000 to 37% in the third 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. Point-to-Point Broadband revenue decreased $4.4 million, or 11%, from $40.4 million in 2000 to $36.1 million in 2001, primarily due to lower special access, switched access and SS7 revenues, which decreased due to increased customer churn levels. Point-to-Point Broadband revenue's contribution to total revenue rose from 28% in the third quarter of 2000 to 29% in the third 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 24 Southeast. Corporate Services revenue decreased $12.9 million, or 35%, from $36.9 million in 2000 to $24.0 million in 2001. The billed line count decreased 28% from the third quarter of 2000 to the third quarter of 2001, due to transitioning customers in non-focus areas to other carriers, while the average monthly revenue per line decreased 10%. Corporate Services revenue for the third quarter of 2001 reflects a 56% decrease in long distance revenue, due to the continued attrition of resale access lines which had high long distance service penetration rates. In addition, carrier access billing service revenue decreased 48% primarily due to revenue earned but not recognized because of collection concerns. The Company entered into an agreement to transfer its long distance revenue stream in the fourth quarter of 2001. These customers generated $2.8 million and $1.2 million in the three months ended September 30, 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 ("ILECs") 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 21% in 2000 to 15% in 2001. The decrease in Reciprocal Compensation revenue reflects a 14% decrease in minutes of use ("MOU"s) and a 29% decrease in the average revenue earned per MOU. 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 September 30, 2001, this customer accounted for approximately 21%, or $25.7 million, of total revenues. Revenue from this customer represented less than 10% of total revenue for the three months ended September 30, 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 decreased from $119 million for the three months ended September 30, 2000 to $85 million for the same period in 2001, a 28% decrease. 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. In the second quarter of 2000, the Company significantly increased the number of leased PRI and related backbone/backhaul expenses. Through the bankruptcy proceedings, the Company has significantly reduced excess leased capacity, thereby reducing operating costs. Operating costs decreased as a percentage of revenue from 82% for 2000 to 68% for 2001 due to the aforementioned cost savings and despite 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 $84 million for the three months ended September 30, 2000 to $23 million for the same period in 2001, a 72% decrease. SG&A expenses decreased as a percentage of revenue from 58% for 2000 to 19% for 2001. This decrease is primarily attributable to higher staff levels in 2000 than in 2001. The number of full time employees decreased from 2,811 at September 30, 2000 to 1,389 at September 30, 2001, while the average number of employees decreased 52% from the third quarter of 2000 to the third quarter of 2001. In addition, bad debt expense decreased $28 million from 2000 to 2001, primarily due to additional reserves recorded in 2000 to account for contract disputes with certain ISP customers, as well as to address collection concerns associated with the business and regulatory environment changes that occurred in 2000. The decrease in SG&A expenses is also due to lower facilities costs as the Company consolidates its locations during the restructuring process. Depreciation and amortization Depreciation and amortization decreased from $99 million for the three months ended September 30, 2000 to $18 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. 25 Loss on disposal of asset Loss on disposal of asset of approximately $2 million for the three months ended September 30, 2001 represents retirements of property and equipment. Interest expense Interest expense decreased from $66 million for the three months ended September 30, 2000 to $0.3 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 September 30, 2001. Included in interest expense for the three months ended September 30, 2000 and 2001 was $51 million and $8 million of noncash interest, respectively. Additionally, interest expense is net of interest capitalized related to construction in progress of $3 million for the three months ended September 30, 2000, and is not significant for the three months ended September 30, 2001. Interest income Interest income decreased from $6 million for the three months ended September 30, 2000 to $2 million for the same period in 2001. The decrease is attributable to the decrease in cash, cash equivalents and short-term investments balances. Reorganization income (expense), net Net reorganization income of $29 million for the three months ended September 30, 2001 consists of items associated with the bankruptcy proceedings that are not directly attributable to the ongoing operations of the Company. Reorganization income represents a $36 million gain on the settlement with a major customer, offset by $1 million in severance and retention costs, $1 million in costs related to the closing of certain switch sites, $2 million in line cost cancellation fees and $3 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 $18 million for the three months ended September 30, 2000. The Company did not record any amounts during the three months ended September 30, 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 September 30, 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. Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value in 2000 is comprised of the dividends and the accretion to liquidation value of the 8% Series A Convertible Preferred Stock of $14 million. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenue
Three Months Ended September 30, ---------------------------------------- 2000 2001 -------------------- ------------------- $ % $ % --------- --------- --------- --------- ($ values in thousands) Dial-Up 123,434 26 132,631 35 Point-to-Point Broadband 134,646 28 117,443 31 Corporate Services 98,729 21 80,270 21 Reciprocal Compensation 120,560 25 51,376 13 --------- --------- --------- --------- Total Revenue 477,369 100 381,720 100 ========= ========= ========= =========
26 Total revenue decreased $95.6 million, or 20%, for the nine months ended September 30, 2001 compared with the same period in 2000. The decrease was due primarily to decreases in Point-to-Point Broadband, Corporate Services and Reciprocal Compensation revenue, offset by an increase in Dial-Up revenue. Dial-Up revenue increased $9.2 million, or 7%, from $123.4 million in 2000 to $132.6 million in 2001. The increase in Dial-Up revenue was primarily due a 5% increase in average monthly revenue per port and a 3% increase in billed line count. The increase in average monthly revenue per port was due primarily to significant service level credits issued in the third quarter of 2000. Dial-Up revenue's contribution to total revenue rose from 26% in the first nine months of 2000 to 35 % in the first nine months of 2001. Point-to-Point Broadband revenue decreased $17.2 million, or 13%, from $134.6 million in 2000 to $117.4 million in 2001. The decrease in Point-to-Point Broadband revenue was primarily due to $11.5 million in non-recurring revenue recognized in the first quarter of 2000 under the Company's fiber optic lease agreement with a major carrier. In addition, special access, switched access and SS7 revenues decreased primarily due to higher customer churn levels. Point-to-Point Broadband revenue's contribution to total revenue rose from 28% in the first nine months of 2000 to 31% in the first nine months of 2001. Corporate Services revenue decreased $18.5 million, or 19%, from $98.7 million in 2000 to $80.3 million in 2001. Corporate Services revenue decreased due to a 15% decrease in the billed line count, due to transitioning customers in non-focus areas to other carriers, and an 4% decrease in the average monthly revenue per line. Corporate Services revenue for the first nine months of 2001 reflects a 47% decrease in long distance revenue, due to the continued attrition of resale access lines which had high long distance service penetration rates. In addition, carrier access billing service revenue decreased 37% primarily due to revenue earned but not recognized because of collection concerns. The Company entered into an agreement to transfer its long distance revenue stream in the fourth quarter of 2001. These customers generated $9.5 million and $5.0 million in the nine months ended September 30, 2000 and 2001, respectively. The related margin was not significant. Reciprocal Compensation revenue decreased $69.2 million, or 57%, from $120.6 million in 2000 to $51.4 million in 2001. Reciprocal Compensation's contribution to total revenue decreased from 25% in 2000 to 13% in 2001. The decrease in Reciprocal Compensation revenue reflects a 5% decrease in MOUs and a 56% decrease in the average revenue earned per MOU. 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 nine months ended September 30, 2001, this customer accounted for approximately 15%, or $56.4 million, of total revenue. Revenue from this customer represented less than 10% of total revenue for the nine months ended September 30, 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 decreased from $304 million for the nine months ended September 30, 2000 to $282 million for the same period in 2001, a 7% decrease. In the second quarter of 2000, the Company significantly increased the number of leased PRI and related backbone/backhaul expenses. 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 64% for 2000 to 74% 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 expenses decreased from $189 million for the nine months ended September 30, 2000 to $81 million for the same period in 2001, a 57% decrease. SG&A expenses decreased as a percentage of revenue from 40% for 2000 to 21% for 2001. This decrease is primarily attributable to higher staff levels in 2000 than in 2001. The number of full time employees decreased from 2,811 at September 30, 2000 to 1,389 at September 30, 2001, while the average number of employees decreased 48% from the first nine months of 2000 to the first nine months of 2001. In addition, bad debt expense decreased $23 million from 2000 to 2001 primarily due to additional reserves recorded in 2000 to account for contract disputes with certain ISP customers, as well as to address collection concerns associated with the 27 business and regulatory environment changes that occurred in 2000. The decrease is also due to lower facilities costs as the Company consolidates its locations during the restructuring process. Depreciation and amortization Depreciation and amortization decreased from $237 million for the nine months ended September 30, 2000 to $50 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. Loss on disposal of asset Loss on disposal of asset of approximately $10 million for the nine months ended September 30, 2001 relates primarily to the loss on the sale and leaseback of the Company's headquarters. Interest expense Interest expense decreased from $195 million for the nine months ended September 30, 2000 to $24 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 $180 million for the nine months ended September 30, 2001. Included in interest expense for the nine months ended September 30, 2000 and 2001 was $159 million and $11 million of noncash interest, respectively. Additionally, interest expense is net of interest capitalized related to construction in progress of $7 million and $1 million during the nine months ended September 30, 2000 and 2001, respectively. Interest income Interest income decreased from $20 million for the nine months ended September 30, 2000 to $6 million for the same period in 2001. The decrease is attributable to the decrease in cash, cash equivalents and short-term investments balances. Net reorganization income (expense), net Net reorganization expense of $3 million for the nine months ended September 30, 2001 consists of items associated with the bankruptcy proceedings that are not directly attributable to the ongoing operations of the Company. Reorganization expense represents a $36 million gain on the settlement with a major customer, offset by $13 million in legal and professional fees, $13 million in severance and retention costs, $4 million in costs related to the closing of certain switch sites, $5 million in line cost cancellation fees and $4 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 $51 million for the nine months ended September 30, 2000. The Company did not record any amounts during the nine months ended September 30, 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 nine months ended September 30, 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. Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value Accretion and dividends of 8% Series A Convertible Preferred Stock to liquidation value in 2000 is comprised of the dividends and the accretion to liquidation value of the 8% Series A Convertible Preferred Stock of $14 million. Charge for beneficial conversion feature of 8% Series A Convertible Preferred Stock Charge for beneficial conversion of 8% Series A Convertible Preferred Stock during the nine months ended September 30, 2000 relates to the charge of $159 million of the proceeds of the 8% Series A Convertible Preferred Stock which was allocated to the intrinsic value of the beneficial conversion feature of the convertible preferred securities to additional paid-in capital. As the 8% Series A Convertible Preferred Stock is immediately convertible into shares of ICG common stock, the beneficial conversion feature was recognized immediately as a return to the preferred shareholders during the nine months ended September 30, 2000. 28 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. 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. At September 30, 2001, the Company had cash and short-term investments of approximately $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 September 30, 2001, the Company had $2,657 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 $139 million and used $33 million of net cash in the nine months ended September 30, 2000 and 2001, respectively. In 2001, net cash provided by operating activities before reorganization items contributed approximately $35 million of net cash, comprised of cash generated by operating results and working capital of approximately $45 million, other sources of approximately $1 million, offset by interest paid net of interest income of approximately $11 million. Reorganization items include approximately $36 million of income from a non-cash settlement with a major customer, $33 million of cash expenses and a reduction in the liabilities subject to compromise primarily due to the adjustment of pre-petition accruals. Net cash used in operating activities for the nine months ended September 30, 2000 includes approximately $162 million of deferred interest expense, which interest was not accrued or deferred in the nine months ended September 30, 2001 due to the Company's bankruptcy proceedings. Net Cash Used By Investing Activities Investing activities used $562 million and $5 million in the nine months ended September 30, 2000 and 2001, respectively. Net cash used by investing activities for the nine months ended September 30, 2000 includes proceeds from the sales of short-term investments available for sale and marketable securities of $33 million, offset by cash expended for the acquisition of property, equipment and other assets of $598 million. Net cash used by investing activities for the nine months ended September 30, 2001 primarily includes cash expended for the acquisition of property, equipment and other assets of $23 million, partially offset by proceeds from the sale of short-term investments available for sale and marketable securities of $16 million. The Company acquired assets under capital leases of $51 million during the nine months ended September 30, 2001. Net Cash Provided (Used) By Financing Activities Financing activities provided $536 million in the nine months ended September 30, 2000, which includes proceeds from the issuance of the 8% Series A Convertible Preferred Stock, long-term debt and from the issuance of common 29 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 for the nine months ended September 30, 2001 of $20 million consists primarily of principal payments on capital lease obligations subject to compromise. On August 12, 1999, ICG Equipment and NetAhead entered into a $200 million Senior Facility consisting of a $75 million term loan, a $100 million term loan and a $25 million revolving line of credit. As of September 30, 2001, $85 million was outstanding under the loans at interest rates of the prime rate plus 3.875% and 4.25% for the nine months ended September 30, 2001. As of September 30, 2001, the Company had an aggregate accreted value of approximately $2.0 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 September 30, 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 $831 million and $74 million for the nine months ended September 30, 2000 and 2001, respectively. There is substantial uncertainty about the Company's ability to complete and place in service the Company's $181 million construction in progress balance as of September 30, 2001. Reciprocal Compensation ICG has, as of September 30, 2001, a net receivable for reciprocal compensation due under interconnection agreements with ILECs of approximately $9 million. ICG received cash of approximately $53 million during the nine months ended September 30, 2001, from ILECs for terminating local and toll 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. 30 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 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 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 nine months ended September 30, 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. 31 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 [Incorporated by reference to Exhibit 10.84 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001]. (B) Report on Form 8-K. The following reports on Form 8-K were filed by the registrants during the three months ended September 30, 2001: None. 32 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, 2002. ICG COMMUNICATIONS, INC. Date: January 9, 2002 By: /s/ Richard E. Fish, Jr. --------------------------------- Richard E. Fish, Jr., Executive Vice President andChief Financial Officer (Principal Financial Officer) Date: January 9, 2002 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, 2002. ICG HOLDINGS (CANADA) CO. Date: January 9, 2002 By: /s/ Richard E. Fish, Jr. --------------------------------- Richard E. Fish, Jr., Executive Vice President andChief Financial Officer (Principal Financial Officer) Date: January 9, 2002 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, 2002. ICG HOLDINGS, INC. Date: January 9, 2002 By: /s/ Richard E. Fish, Jr. --------------------------------- Richard E. Fish, Jr., Executive Vice President andChief Financial Officer (Principal Financial Officer) Date: January 9, 2002 By: /s/ John V. Colgan --------------------------------- John V. Colgan, Senior Vice President and Controller (Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----