UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
--------------------------------------------------------------------------------
Delaware 84-1342022
Nova Scotia Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
--------------------------------------------------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
--------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or (303)
414-5000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes |X| No __
The number of registrants' outstanding common shares as of November 17,
2000 were 52,045,443, 31,931,588 and 1,918, respectively. ICG Canadian
Acquisition, Inc., a wholly owned subsidiary of ICG Communications, Inc., owns
all of the issued and outstanding common shares of ICG Holdings (Canada) Co. ICG
Holdings (Canada) Co. owns all of the issued and outstanding shares of ICG
Holdings, Inc.
<PAGE>
TABLE OF CONTENTS
PART I ....................................................................... 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................... 3
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000 (unaudited)................................ 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 2000 (unaudited).......... 5
Consolidated Statement of Stockholders' Deficit for the Nine
Months Ended September 30, 2000 (unaudited)................... 7
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 2000 (unaudited)....................... 8
Notes to Consolidated Financial Statements(unaudited)..........10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .....................................20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....36
PART II ......................................................................37
ITEM 1. LEGAL PROCEEDINGS .............................................37
ITEM 2. CHANGES IN SECURITIES .........................................37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...............................37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS .........37
ITEM 5. OTHER INFORMATION .............................................37
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K .............................. 38
Exhibits ......................................................38
Reports on Form 8-K ...........................................38
2
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
December 31, September 30,
1999 2000
--------------- --------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 103,288 216,714
Short-term investments available for sale 22,219 17,536
Receivables:
Trade, net of allowance of $78.7 million
and $73.7 million at December 31, 1999
and September 30, 2000, respectively
(notes 4 and 9) 167,273 190,349
Other 1,458 3,291
--------------- --------------
Total net receivables 168,731 193,640
Prepaid expenses, deposits and inventory 11,388 19,839
--------------- --------------
Total current assets 305,626 447,729
--------------- --------------
Property and equipment 1,805,378 2,650,813
Less accumulated depreciation (279,698) (457,363)
--------------- --------------
Net property and equipment (note 5) 1,525,680 2,193,450
--------------- --------------
Restricted cash 12,537 7,721
Investments 28,939 15,652
Other assets, net of accumulated amortization:
Goodwill 95,187 73,099
Deferred financing costs 35,884 32,252
Other, net 16,768 20,024
--------------- --------------
147,839 125,375
--------------- --------------
Total Assets (notes 1 and 3) $2,020,621 2,789,927
=============== ==============
(continued)
3
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), Continued
December 31, September 30,
1999 2000
------------ ------------
(in thousands)
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 112,291 108,465
Payable pursuant to IRU agreement 135,322 53,826
Accrued liabilities (note 6) 85,709 206,611
Deferred revenue (note 9) 25,175 172,843
Deferred gain on sale 5,475 -
Current portion of capital lease obligations 8,090 55,761
Current portion of long-term debt (note 7) 796 796
Current liabilities of discontinued operations 529 198
------------ ------------
Total current liabilities 373,387 598,500
------------ ------------
Capital lease obligations, less current portion 63,348 139,377
Long-term debt, net of discount, less current
portion (note 7) 1,905,901 2,068,672
Other long-term liabilities 2,526 3,247
------------ ------------
Total liabilities 2,345,162 2,809,796
Redeemable preferred stock of subsidiary ($397.9
million and $441.7 million liquidation value at
December 31, 1999 and September 30, 2000,
respectively) (note 8) 390,895 435,337
Company-obligated mandatorily redeemable preferred
securities of subsidiary limited liability
company which holds solely Company preferred
stock ($133.4 million liquidation value at
December 31, 1999 and September 30, 2000,
respectively) 128,428 128,719
8% Series A Convertible Preferred Stock ($781.7
million liquidation value at September 30, 2000)
(note 8) - 658,840
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000 and
200,000,000 shares authorized at December 31,
1999 and September 30, 2000, respectively;
47,761,337 and 52,045,443 shares issued and
outstanding at December 31, 1999 and September
30, 2000, respectively 478 520
Additional paid-in capital 599,282 882,142
Accumulated deficit (1,443,624) (2,116,802)
Accumulated other comprehensive loss - (8,625)
------------ ------------
Total stockholders' deficit (843,864) (1,242,765)
------------ ------------
Commitments and contingencies (note 9)
Total Liabilities and Stockholders' Deficit
(note 1) $ 2,020,621 2,789,927
============ ============
See accompanying notes to consolidated financial statements.
4
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations Three Months and Nine
months ended September 30, 1999 and 2000 (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------
1999 2000 1999 2000
--------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $115,166 144,801 337,151 477,778
Operating costs and expenses:
Operating costs 66,284 118,711 179,391 304,202
Selling, general and administrative
expenses 94,558 84,183 180,341 188,947
Depreciation and amortization 45,079 99,023 126,137 236,514
Provision for impairment of long-lived
assets (note 3) - - 29,300 -
Net loss on disposal of long-lived assets 195 2,022 (771) 2,566
Other, net 431 431 862 1,692
--------- -------- -------- ---------
Total operating costs and expenses 206,547 304,370 515,260 733,921
--------- -------- -------- ---------
Operating loss (91,381) (159,569) (178,109) (256,143)
Other income (expense):
Interest expense (52,891) (66,014) (151,637) (195,406)
Interest income 3,772 5,898 11,669 20,437
Other expense, net (333) (352) (2,676) (349)
--------- -------- -------- ---------
(49,452) (60,468) (142,644) (175,318)
--------- -------- -------- ---------
Loss from continuing operations before
income taxes, preferred dividends
and extraordinary gain (140,833) (220,037) (320,753) (431,461)
Income tax expense - (10) - (10)
Accretion and preferred dividends on
preferred securities of subsidiaries (15,694) (17,655) (45,739) (51,428)
--------- -------- -------- ---------
Loss from continuing operations before (156,527) (237,702) (366,492) (482,899)
extraordinary gain
Income (loss) on disposal and operation of
discontinued operations 748 - (8,014) 736
--------- -------- -------- ---------
Extraordinary gain on sales of operations
of NETCOM, net of income taxes of $6.4
million - - 193,029 -
--------- -------- -------- ---------
Net loss (155,779) (237,702) (181,477) (482,163)
Accretion and dividends of 8% Series A
Convertible Preferred Stock to liquidation
value (note 8) - (17,274) - (31,736)
Charge for beneficial conversion feature of
8% Series A Convertible Preferred Stock
(note 8) - - - (159,279)
--------- -------- -------- ---------
Net loss attributable to common
stockholders $(155,779) (254,976) (181,477) (673,178)
========= ======== ======== =========
</TABLE>
5
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited), Continued
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------
1999 2000 1999 2000
---------- -------- -------- --------
(in thousands, except per share data)
Other comprehensive loss:
<S> <C> <C> <C> <C>
Unrealized loss on long-term investments - (8,625) - (8,625)
available for sale
---------- -------- -------- --------
Comprehensive loss $(155,779) (263,601) (181,477) (681,803)
========== ======== ======== ========
Net loss per share - basic and diluted:
Net loss attributable to common
stockholders, before net income
(loss) from discontinued operations
and extraordinary gain $ (3.31) (4.92) (7.81) (13.60)
Net income (loss) from discontinued
operations 0.02 - (0.17) 0.02
Extraordinary gain on sales of
operations of NETCOM - - 4.11 -
---------- -------- -------- --------
Net loss per share - basic and diluted $ (3.29) (4.92) (3.87) (13.58)
========== ======== ======== ========
Weighted average number of shares
outstanding - basic and diluted 47,320 51,782 46,948 49,564
========== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Nine Months Ended September 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional other Total
------------- paid-in Accumulated comprehensive stockholders'
Shares Amount capital deficit loss Deficit
------ ------ --------- ----------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 2000 47,761 $478 599,282 (1,443,624) - (843,864)
Shares issued for cash in
connection with the exercise
of options and warrants 936 9 14,366 - - 14,375
Shares issued for cash in
connection with the employee
stock purchase plan 174 1 2,728 - - 2,729
Shares issued as contribution
to 401(k) plan 178 2 4,296 - - 4,298
Shares issued in exchange for
long-term investment 2,996 30 21,595 - - 21,625
Warrants issued in connection
with 8% Series A Convertible
Preferred Stock - - 80,596 - - 80,596
Value ascribed to beneficial
conversion feature of 8% Series
A Convertible Preferred Stock - - 159,279 (159,279) - -
Accretion and dividends of 8%
Series A Convertible Preferred
Stock - - - (31,736) - (31,736)
Unrealized loss on long-term
investment available for sale - - - - (8,625) (8,625)
Net loss - - - (482,163) - (482,163)
------ ------ --------- ----------- ----------- ---------
Balances at September 30, 2000 52,045 $ 520 882,142 (2,116,802) (8,625) (1,242,765)
====== ====== ========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 2000 (unaudited)
Nine months ended
September 30,
--------------------
---------- ---------
1999 2000
---------- ---------
(in thousands)
Cash flows from operating activities:
Net loss $(181,477) (482,163)
Net (income) loss from discontinued operations 8,014 (736)
Extraordinary gain on sales of discontinued operations (193,029) -
Adjustments to reconcile net loss to net cash used by
operating activities:
Recognition of deferred gain (17,376) (6,239)
Accretion and preferred dividends on preferred 45,739 51,428
securities of subsidiaries
Depreciation and amortization 126,137 236,514
Provision for impairment of long-lived assets 29,300 -
Deferred compensation 862 1,294
Net loss (gain) on disposal of long-lived assets (771) 2,566
Gain on sale of securities - (634)
Provision for uncollectible accounts 56,193 31,688
Interest expense deferred and included in
long-term debt, net of amounts capitalized
on assets under construction 134,709 151,535
Interest expense deferred and included in capital 3,968 3,776
lease obligations
Amortization of deferred financing costs included in 3,541 3,933
interest expense
Contribution to 401(k) plan through issuance of 4,138 4,298
common stock
Other noncash expenses - 301
Change in operating assets and liabilities, excluding
the effects of dispositions and noncash transactions:
Receivables (87,556) (56,596)
Prepaid expenses, deposits and inventory 3,147 (3,738)
Accounts payable and accrued liabilities (12,931) 52,188
Deferred revenue 29,197 149,748
---------- ---------
Net cash provided (used) by operating activities (48,195) 139,163
---------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (368,134) (649,096)
Change in accounts payable and accrued liabilities for
purchase of long-term assets 3,288 50,682
Proceeds from sales of operations of NETCOM, net of 252,881 -
cash included in sale
Proceeds from disposition of property, equipment and
other assets 4,302 20
Proceeds from sales of short-term investments available
for sale 30,517 22,368
Proceeds from sale of marketable securities 30,000 10,634
Decrease in restricted cash 5,098 4,818
Purchase of investments (28,489) (1,400)
Purchase of minority interest in subsidiary (6,039) -
---------- ---------
Net cash used by investing activities (76,576) (561,974)
---------- ---------
(continued)
8
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited), Continued
Nine months ended
September 30,
----------------------
1999 2000
---------- ----------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of common stock:
Exercise of options and warrants $ 10,761 14,375
Employee stock purchase plan 2,688 2,729
Proceeds of 8% Series A Convertible Preferred
Stock, net of issuance costs - 720,330
Proceeds from issuance of long-term debt 80,000 95,000
Principal payments on capital lease obligations (12,720) (19,790)
Payments on IRU agreement - (179,497)
Principal payments on long-term debt (255) (90,317)
Payments of preferred dividends (6,695) (6,695)
Deferred debt issuance costs (4,777) (304)
---------- ----------
Net cash provided by financing activities $ 69,002 535,831
---------- ----------
Net increase (decrease) in cash and cash equivalents (55,769) 113,020
Net cash provided (used) by discontinued operations (5,362) 406
Cash and cash equivalents, beginning of period 210,307 103,288
---------- ----------
Cash and cash equivalents end of period $ 149,176 216,714
========== ==========
Supplemental disclosure of cash flows information of
continuing operations:
Cash paid for interest $ 9,419 30,614
========== ==========
========== ==========
Cash paid for income taxes $ 1,140 281
========== ==========
Supplemental schedule of noncash investing activities
of continuing operations:
Acquisition of corporate headquarters assets through
the issuance of long-term debt and conversion of
security deposit $ 33,077 -
========== ==========
Shares issued in exchange for long-term investment $ - 21,625
========== ==========
Assets acquired pursuant to IRU agreement $ - 96,903
Assets acquired under capital leases 6,190 135,578
---------- ----------
Total $ 6,190 232,481
========== ==========
See accompanying notes to consolidated financial statements.
9
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
(1) Bankruptcy Proceedings
During the quarter ended September 30, 2000 and subsequent to the
quarter-end, a series of financial and operational events materially
impacted ICG Communications, Inc. and its subsidiaries ("ICG" or the
"Company"). These events reduced the Company's expected revenue and cash
flow generation for the remainder of 2000 and 2001, which in turn
jeopardized the Company's ability to comply with its existing senior
secured credit facility. On November 14, 2000 (the "Petition Date"), ICG
and most of its subsidiaries filed voluntary petitions for protection under
Chapter 11 of the United States Bankruptcy Code in the Federal District of
Delaware in order to facilitate the restructuring of the Company's
long-term debt, trade liabilities and other obligations. The Company and
its bankruptcy filing subsidiaries (collectively the "Debtors") are
currently operating as debtors-in-possession under the supervision of the
United States District Court for the District of Delaware. The bankruptcy
petitions were filed in order to preserve cash and to give the Debtors the
opportunity to restructure their debt.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders are expected to be substantially altered. As a
result of these bankruptcy proceedings, substantially all liabilities,
litigation and claims against the Debtors in existence at the Petition Date
are stayed unless the stay is modified or lifted or payment has been
otherwise authorized by the Bankruptcy Court. At this time, it is not
possible to predict the outcome of the Chapter 11 cases in general or the
effects of such cases on the Company's business, or on the interest of
creditors and shareholders. As a result of the bankruptcy filing, all of
the Company's liabilities incurred prior to the Petition Date, including
certain secured debt, are subject to compromise. No assurance can be given
that the Company will be successful in reorganizing its affairs within the
Chapter 11 bankruptcy proceedings.
Further, due to the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In
addition, a plan of reorganization, or rejection thereof, could change the
amounts reported in the financial statements. As a result, there is
substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is
dependent upon, but not limited to, formulation, approval, and confirmation
of a plan of reorganization, adequate sources of capital, customer and
employee retention, the ability to provide high quality services and the
ability to sustain positive results of operations and cash flows sufficient
to continue to operate.
(2) Organization and Basis of Presentation
The Company is a facilities-based communications provider and local
exchange carrier. The Company primarily offers voice and data
communications services, including local, long distance and enhanced
telephony, to small- to medium-sized business customers and offers network
facilities and data management to ISP customers. The Company also provides
interexchange services such as special access and switched access services
to long distance carriers and other customers. The Company began marketing
competitive local dial-tone services to business customers in early 1997,
subsequent to the passage of the Telecommunications Act of 1996, which
permitted competitive interstate and intrastate telephone services. The
Company began offering network services to ISPs and other
telecommunications providers in February 1999.
(3) Significant Accounting Policies
(a) Basis of Presentation
The Company's financial statements should be read in conjunction with
ICG's Annual Report on Form 10-K for the year ended December 31, 1999,
as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the United States Securities and Exchange
Commission. The interim financial statements reflect all adjustments
10
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Significant Accounting Policies (continued)
(a) Basis of Presentation (continued)
which are, in the opinion of management, necessary for a fair
presentation of financial position, results of operations and cash
flows as of and for the interim periods presented. Such adjustments
are of a normal recurring nature. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31,
2000.
Due to the event described in note 1, the Company is considering if an
impairment of assets has occurred under Statement of Financial
Accounting Standards "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). As
the Company is currently undergoing a reorganization, there is not a
definitive business plan in place with which to determine if an
impairment has occurred or, if an impairment has occurred, the amount
of such impairment. As a result, the Company has not reduced the
carrying values of its assets in the accompanying consolidated
financial statements.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44 "Accounting for Certain Transactions
involving Stock Compensation - and interpretation of APB Opinion No.
25" ("FIN 44"). This opinion provides guidance on the accounting for
certain stock option transactions and subsequent amendments to stock
option transactions. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period from December 15, 1998 and January 12,
2000, but before July 1, 2000, the effects of applying this
Interpretation are to be recognized on a prospective basis. The
adoption of FIN 44 did not have a material effect on the Company's
financial position or results of operation.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB
101B, which delayed the implementation date of SAB 101 for the Company
until the quarter ending December 31, 2000. The Company has completed
its assessment of the impact of SAB 101 and the impact will be to
defer and amortize installation revenue over the customer term,
resulting in an increase in accumulated deficit at January, 1, 2000 of
approximately $12.7 million, an increase in revenue recognized in the
three months ended September 30, 2000 of approximately $0.1 million
and a reduction in revenue recognized in the nine months ended
September 30, 2000 of approximately $1.1 million.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments and hedging
activities. As amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB
Statement No. 133", and SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB Statement No.133" ("SFAS 138"). SFAS 133 and SFAS 138 are
effective for all quarters and fiscal years beginning after June 15,
2000. The Company will adopt SFAS 133 and SFAS 138 effective at the
beginning of its fiscal year end 2001. The Company does not believe
that the adoption of SFAS 133 and SFAS 138 will have a material effect
on the Company's financial position or results of operations.
(c) Reclassifications
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
11
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Accounts Receivable
The Company experienced network performance problems which caused the
Company's network performance to drop below certain service levels agreed
upon between the Company and certain Internet remote access services
("IRAS") customers. Based on the Company's inability to quickly resolve
these problems, the Company issued credits, in accordance with the
provisions of the customer agreements, for approximately $8 million.
During the quarter ended September 30, 2000, the Company reviewed the
adequacy of the reserve for bad debts related to its Internet service
provider ("ISP") customers as the Company had concerns about the ability of
certain of these customers to continue operating and attract future capital
given current market conditions, as well as concerns associated with
certain contract disputes. Revenue generated from the Company's ISP
customers, including related reciprocal compensation revenue, represented
approximately 50% of total revenue for the three months ended September 30,
2000. As a result, the Company recorded an additional provision of
approximately $16 million. In addition, a provision for uncollectible
accounts in the approximate amount of $4 million was provided for the
receivable from one incumbent local exchange carrier ("ILEC") for
termination of local ISP traffic deemed uncollectible because of changes in
the regulatory environment.
(5) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31, September 30,
1999 2000
------------ -------------
(in thousands)
Land $ 11,503 $ 15,436
Buildings and improvements 38,502 38,727
Furniture, fixtures and office equipment 108,024 125,105
Internal-use software costs 14,797 71,688
Machinery and equipment 32,884 44,588
Fiber optic equipment 401,676 510,076
Switch equipment 319,398 501,752
Fiber optic network 428,195 325,582
Site improvements 37,814 55,944
Service installation costs 52,649 92,751
Construction in progress 359,936 869,164
------------ ------------
1,805,378 2,650,813
Less accumulated depreciation (279,698) (457,363)
------------ ------------
$ 1,525,680 $ 2,193,450
============ ============
Property and equipment includes approximately $869 million of equipment
which has not been placed in service at September 30, 2000, and
accordingly, is not being depreciated. Due to the bankruptcy proceedings
discussed in note 1, there is substantial uncertainty about the Company's
ability to complete and place in service these assets.
(6) Accrued Liabilities
The Company accrues for property and equipment that has been received, but
which has not been invoiced. Such balances are reflected in property and
equipment and accrued liabilities in the accompanying consolidated balance
sheet. As of September 30, 2000, accrued liabilities includes $156 million
of such liabilities.
12
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Long-term Debt
Long-term debt is summarized as follows:
December 31, September 30,
1999 2000
------------- -------------
(in thousands)
Senior Facility due on scheduled maturity
dates, secured by substantially all of the
assets of ICG Equipment and NetAhead with
weighted average interest rates ranging from
9.26% to 10.06% for the nine months ended
September 30, 2000 (a) $ 79,625 84,362
9 7/8% Senior discount notes of ICG Services,
net of discount 293,925 315,931
10% Senior discount notes of ICG Services,
net of discount 361,290 388,724
11 5/8% Senior discount notes of Holdings,
net of discount 137,185 149,279
12 1/2% Senior discount notes of Holdings,
net of discount 468,344 512,848
13 1/2% Senior discount notes of Holdings,
net of discount 532,252 584,301
Mortgage loan payable with interest at 8 1/2%,
due monthly into 2009, secured by building 999 946
Mortgage loan payable with variable rate of
interest (15.21% at September 30, 2000) due
monthly into 2013, secured by corporate
headquarters 33,077 33,077
----------- ----------
1,906,697 2,069,468
Less current portion (796) (796)
----------- ----------
$1,905,901 2,068,672
=========== ==========
As a result of filing for bankruptcy, all due dates on the various debt
issuances have been accelerated in accordance with the terms of the debt.
However, due to the nature of the bankruptcy proceedings and the
uncertainty surrounding any potential debt settlements under the
bankruptcy proceedings, the Company has not at this time reclassified any
amounts to current.
On September 18, 2000, the Company announced that lower expected
financial results would put the Company in breach of its $200
million Senior Facility, absent obtaining appropriate covenant
waivers. On September 29, 2000, the Company announced that it had
reached agreement with its senior lenders to receive waivers on
potential defaults under the Senior Facility. The Company's
lenders allowed a sixty day waiver, and as part of this
agreement, required payment of 50%, or $89.7 million, of the
outstanding balance of the Senior Facility as of September 30,
2000.
On November 14, 2000, the Company announced that it had obtained
a commitment letter which will provide the Company
debtor-in-possession ("DIP") financing for a minimum of $200
million and the potential for an additional $150 million if
certain criteria are met. This DIP financing is subject to
customary pre-closing conditions and is contingent upon
Bankruptcy Court approval. The DIP financing terms require that
the Senior Facility be paid off at the time of the first draw
under the DIP financing.
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Redeemable Preferred Stock of Subsidiary and Mandatorily Redeemable 8%
Series A Convertible Preferred Stock
Redeemable preferred stock of subsidiary is summarized as follows:
December 31, September 30,
1999 2000
-------------- -------------
(in thousands)
14% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2008 $ 144,144 160,411
14 1/4% Exchangeable preferred stock of
Holdings, mandatorily redeemable in 2007 246,751 274,926
-------------- -------------
$ 390,895 435,337
============== =============
Mandatorily Redeemable 8% Series A Convertible Preferred Stock
On April 10, 2000, the Company sold 75,000 shares of mandatorily
redeemable 8% Series A-1, A-2 and A-3 Convertible Preferred Stock of ICG
(the "8% Series A Convertible Preferred Stock") and 10,000,000 warrants to
purchase ICG Common Stock to affiliates of Liberty Media Corporation
("Liberty Media"), Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse")
and Gleacher Capital Partners ("Gleacher Capital") (collectively, "the
Investors"). The sale of the 8% Series A Convertible Preferred Stock
resulted in net proceeds to the Company of $720.3 million. Each share of
8% Series A Convertible Preferred Stock has an initial liquidation
preference of $10,000 per share and bears a cumulative dividend rate of 8%
per annum, compounded daily. Dividends accrete to the liquidation
preference on a daily basis for five years and are thereafter payable in
cash or additional liquidation preference.
The 8% Series A Convertible Preferred Stock is immediately convertible
into shares of ICG Common Stock at a conversion rate of $28.00 per share,
subject to adjustment, and will have voting rights with the common
stockholders on an as-converted basis. The holders of the Series A-1 and
A-2 8% Series A Convertible Preferred Stock collectively are entitled to
elect up to three directors to the Company's Board of Directors. The
Company may redeem the 8% Series A Convertible Preferred Stock at any time
after five years from the date of issuance through their mandatory
redemption on June 15, 2015. The warrants to purchase ICG Common Stock are
immediately convertible into shares of ICG Common Stock at a conversion
rate of $34.00 per share and expire in five years from the date of
issuance. The affiliates of Liberty Media, Hicks Muse and Gleacher Capital
purchased $500.0 million, $230.0 million and $20.0 million, respectively,
in 8% Series A Convertible Preferred Stock and received a ratable portion
of the total 10,000,000 warrants. The value allocated to the warrants was
$80.6 million at the time of the transaction.
In accordance with Emerging Issues Task Force ("EITF") 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", the Company allocated $159.3
million of the proceeds from the issuance of the 8% Series A Convertible
Preferred Stock to the intrinsic value of the embedded beneficial
conversion feature of the convertible preferred securities to additional
paid-in capital. As the 8% Series A Convertible Preferred Stock is
immediately convertible into shares of ICG common stock, the beneficial
conversion feature was recognized as a return to the preferred
shareholders and included as an element of net loss attributable to common
shareholders during the nine months ended September 30, 2000 in the
accompanying consolidated statement of operations.
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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Commitments and Contingencies
As a result of the Company's filing for bankruptcy protection, all
commitments and contingencies could be substantially modified during the
Company's bankruptcy restructuring process.
(a) Network Capacity and Construction
In January 2000, Qwest Communications Corporation ("Qwest") and the
Company signed an agreement, whereby the Company will provide, for
$126.5 million over the initial six-year term of the agreement, an
indefeasible right of use ("IRU") for designated portions of the
Company's local fiber optic network. The Company will recognize
revenue ratably over the term of the agreement, as the network
capacity is available for use. The agreement was amended in March 2000
to include additional capacity for proceeds of $53.8 million, of which
$21.5 million has not been paid as of September 2000. Qwest may, at
its option, extend the initial term of the agreement for an additional
four-year period and an additional 10-year period for incremental
payment at the time the option exercises. In the event that the
Company fails to deliver any of the network capacity by March 31,
2001, Qwest is entitled to cancel any undelivered network capacity
segments and receive immediate refund of any amounts already paid to
the Company for such segments. The Company recognized approximately
$1.0 million and $2.0 million of revenue related to this agreement in
the three and nine months ended September 30, 2000, respectively.
Given limitations on future capital expenditures of the Company,
$156.8 million of deferred revenue related to the future delivery of
services pursuant to this agreement is reflected as a current
liability in the accompanying balance sheet.
(b) Telecommunications and Line Purchase Commitments
Effective September 1998, the Company entered into two service
agreements with three-year terms with WorldCom Network Services, Inc.
("WorldCom"). Under the Telecom Services Agreement, WorldCom provides,
at designated rates, switched telecommunications services and other
related services to the Company, including termination services,
toll-free origination, switched access, dedicated access and travel
card services. Under the Carrier Digital Services Agreement, WorldCom
provides the Company, at designated rates, with the installation and
operation of dedicated digital telecommunications interexchange
services, local access and other related services, which the Company
believes expedites service availability to its customers. Both
agreements require that the Company provide WorldCom with certain
minimum monthly revenue, which if not met, would require payment by
the Company for the difference between the minimum commitment and the
actual monthly revenue. Additionally, both agreements limit the
Company's ability to utilize vendors other than WorldCom for certain
telecommunications services specified in the agreements. The Company
met all minimum revenue commitments to WorldCom under these agreements
through September 30, 2000.
(c) Other Commitments
The Company has entered into various equipment and line purchase
agreements with certain of its vendors. Under these agreements, if the
Company does not meet a minimum purchase level in any given year, the
vendor may discontinue certain discounts, allowances and incentives
otherwise provided to the Company. In addition, the agreements may be
terminated by either the Company or the vendor upon prior written
notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $94 million at September 30, 2000.
Due to the current economic uncertainty of the Company's construction
in progress assets, the Company may decide not to continue with these
projects and incur additional termination costs.
(d) Transport and Termination Charges
ICG records revenue earned under interconnection agreements with ILECs
as an element of its local services revenue. Many of the ILECs have
not paid all of the amounts that the Company has recorded as revenue
and have disputed these charges based on the belief that dial-up calls
15
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Commitments and Contingencies (continued)
(d) Transport and Termination Charges (continued)
to ISPs are not local traffic as defined by the various agreements and
not subject to payment of transport and termination charges under
state and federal law and public policies. In addition, some ILECs,
while paying a portion of local reciprocal compensation due to ICG,
have disputed other portions of the charges related to local
reciprocal compensation.
ICG has, as of September 30, 2000, a net receivable for terminating
local traffic in the approximate amount of $66 million, approximately
$29 million of which is due and payable, pursuant to the terms of
executed agreements with several ILECs, when regulatory approval of
the amendments to the parties' interconnection agreements is obtained.
ICG has received cash of approximately $11 million and $94 million,
during the three months and nine months ended September 30, 2000,
respectively, from certain ILECs for terminating local traffic.
The following table represents the amount of revenue ICG has
recognized for terminating local traffic during the respective periods
($ in millions):
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
------------ ------------ ----------- ------------
$ 25 $ 26 $ 95 $ 100
Revenue for the nine months ended September 30, 1999 includes
approximately $22 million for the tandem switching and common
transport rate elements. ICG ceased, effective July 1, 1999,
recognition of these rate elements as revenue until cash receipts are
either received or the uncertainty of receipt has been removed (such
as the execution of a binding agreement). ICG has continued to bill
and vigorously pursue collection of all amounts due under the
agreements.
Revenue for the nine months ended September 30, 2000 includes
approximately $13 million derived from the resolution of previously
disputed issues not related to the period and approximately $4 million
of revenue from rates earned pursuant to the previous interconnection
agreement, neither of which will recur in subsequent periods.
The Company determined in the three months ended September 30, 2000
that approximately $4 million of the revenue previously recognized for
terminating ISP traffic for one ILEC may not be collectible due to a
changing regulatory environment and has therefore provided a provision
for uncollectible accounts.
During the quarter, the Colorado Public Utility Commission ("PUC")
issued a ruling in an ICG arbitration decision that, subject to the
outcome of judicial appellate proceedings, denies ICG the ability to
collect reciprocal compensation for ISP-bound traffic initiated on the
incumbent network and connected on ICG's network in Colorado when a
new interconnection agreement between ICG and Qwest Communications
(formerly US West) becomes effective. ICG believes that the new
interconnection agreement will become effective during the fourth
quarter, after the parties execute and receive PUC approval of a new
interconnection agreement that complies with the PUC's final
arbitration decision. Once effective, the terms in the new agreement
concerning compensation for terminating ISP traffic will then be
applied retroactively beginning 45 days prior to the effective date of
the new agreement. In prior periods, the impacted traffic represented
approximately 15% of the Company's applicable terminating traffic.
16
<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Commitments and Contingencies (continued)
(e) Litigation
During the third quarter 2000, the Company was served with seven
lawsuits filed by various shareholders in the Federal District Court
for the District of Colorado (Case numbers: 00-S-1864, 00-S-1910,
00-S-1908, 00-S-1945, 00-S-1963, 00-S-1957, and 00-S-1919). All of the
suits name as defendants the Company, the Company's former CEO, J.
Shelby Bryan and the Company's former President, John Kane.
Additionally, one of the complaints names the Company's current
President, William S. Beans, Jr., as a defendant.
All of the complaints seek unspecified damages for alleged violations
of Rules 10(b) and 20(a) of the Securities Exchange Act of 1934. The
complaints seek class action certification for similarly situated
shareholders. It is anticipated that the lawsuits will be consolidated
and that a lead plaintiff's counsel will be chosen by the Court. The
Company has retained the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP to vigorously defend it against these lawsuits. The Company
has also tendered these claims to the Company's insurers. At this
time, it is anticipated that the claims against the Company will be
stayed pursuant to the Company's filing for bankruptcy. It is
uncertain at this time whether these lawsuits will materially
adversely effect the Company's financial or operational stability.
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Case No. 97-17777) against
the Company, Zycom and certain of their subsidiaries. In this action,
the plaintiffs alleged that the Company and certain of its
subsidiaries breached certain fiduciary duties owed to the plaintiffs.
The Company denied all such allegations. The Company has recently
finalized a settlement agreement with these shareholders.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(10) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued by
Holdings during 1997 are guaranteed by ICG. The 12 1/2% Senior Discount
Notes due 2006 (the "12 1/2% Notes") and the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2% Notes") issued by Holdings during 1996 and 1995,
respectively, are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material
to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2%
Notes.
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<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Summarized Financial Information of ICG Holdings, Inc. (continued)
However, summarized combined financial information for Holdings and its
subsidiaries is as follows:
Summarized Consolidated Balance Sheet Information
December 31, September 30,
1999 2000
------------- -------------
(in thousands)
------------------------------
Current assets $ 263,870 408,348
Property and equipment, net 675,613 903,171
Other non-current assets, net 128,489 107,311
------------- -------------
Total assets $ 1,067,972 1,418,830
============= =============
Current liabilities $ 148,042 381,355
Long-term debt, less current portion 1,138,734 1,247,328
Capital lease obligations, less
current portion 57,564 50,953
Other long-term liabilities 1,233 659
Due to ICG Communications, Inc. 190,320 945,078
Due to parent 14,001 14,001
Due to (from) ICG Services 128,893 (197,358)
Redeemable preferred stock 390,895 435,337
Stockholder's deficit (1,001,710) (1,458,523)
------------- -------------
Total liabilities and stockholders' deficit $ 1,067,972 1,418,830
============= =============
Summarized Consolidated Statement of Operations Information
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------
1999 2000 1999 2000
---------- ----------- --------- ----------
(in thousands)
Total revenue 112,190 140,310 336,949 452,210
Total operating costs and
expenses 156,556 294,182 476,170 771,102
---------- ----------- ---------- ----------
Operating loss (44,366) (153,872) (139,221) (318,892)
========== =========== ========== ==========
Loss from continuing
operations (125,816) (213,593) (294,567) (411,635)
========== =========== ========== ==========
Net loss (97,619) (213,212) (302,581) (456,813)
========== =========== ========== ==========
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<PAGE>
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31, September 30,
1999 2000
------------- -------------
(in thousands)
Current assets $ 82 82
Advances to subsidiaries 14,001 14,001
-------------- -------------
Total assets $ 14,083 14,083
============== =============
Current liabilities $ 73 73
Due to parent 2,442 2,454
Share of losses of subsidiaries 1,001,710 1,458,523
Shareholders' deficit (990,142) (1,446,967)
-------------- -------------
Total liabilities and
shareholders' deficit $ 14,083 14,083
============== =============
Condensed Statement of Operations Information
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 2000 1999 2000
---------- ---------- --------- ---------
(in thousands)
Total revenue - - - -
Total operating costs and 604 - 1,810 12
expenses
---------- --------- --------- ---------
---------- --------- --------- ---------
Operating loss (604) - (1,810) (12)
Losses of subsidiaries (97,619) (214,704) (302,581) (456,813)
---------- --------- --------- ---------
Net loss attributable to
common shareholders (98,223) (214,704) (304,391) (456,825)
========== ========= ========= =========
(12) Condensed Financial Information of ICG Communications, Inc. (Parent
Company)
The primary assets of ICG are its investments in ICG Services, ICG Tevis,
ICG Funding and Holdings-Canada, including advances to those subsidiaries.
Certain corporate expenses of the parent company are included in ICG's
statement of operations and were approximately $1.4 million and $2.3
million for the three months and nine months ended September 30, 1999,
respectively, and $0.5 million and $1.5 million for the three months and
nine months ended September 30, 2000, respectively. ICG has no operations
other than those of ICG Services, ICG Funding and Holdings-Canada and their
subsidiaries.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements and
information that is based on the beliefs of management as well as assumptions
made by management based on information currently available to the Company. When
used in this document, the words "anticipate", "believe", "estimate" and
"expect" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. These
forward-looking statements are intended to qualify as safe harbors from
liability as established by the Private Securities Litigation Reform Act of
1995. Such statements reflect the current views of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this document. These forward-looking statements are affected
by important factors, including, but not limited to, the following:
o The uncertainty of the Company's future as a result of filing for
protection under bankruptcy law;
o The significant amount of indebtedness incurred by the Company and the
Company's ability to successfully restructure this indebtedness;
o The expectation of continued operating losses for the foreseeable
future;
o The Company's ability to successfully maintain commercial relationships
with its critical vendors and suppliers;
o The Company's ability to retain its major customers on profitable terms;
o The availability and terms of the significant additional capital
required to fund the Company's continued operations;
o The extensive competition the Company will face; o The Company's ability
to attract and retain qualified management and employees;
o The Company's ability to access markets and obtain any required
governmental authorizations, franchises and permits, in a timely
manner, at reasonable costs and on satisfactory terms and conditions;
and
o Changes in, or the Company's inability to comply with, existing
government regulations.
These forward-looking statements speak only as of the date of this
Quarterly Report. The Company does not undertake any obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although the Company believes that its
plans, intentions and expectations reflected in or suggested by the
forward-looking statements made in this Quarterly Report are reasonable, there
is no assurance that such plans, intentions or expectations will be achieved.
The results of operations for the three and nine months ended September
30, 1999 and 2000 represent the consolidated operating results of the Company.
(See the unaudited consolidated financial statements of the Company for the
three and nine months ended September 30, 2000 included elsewhere herein.) The
Company's consolidated financial statements reflect the operations of Network
Services, Satellite Services, Zycom and NETCOM as discontinued for all periods
presented. The terms "fiscal" and "fiscal year" refer to the Company's fiscal
year ending December 31. All dollar amounts are in U.S. dollars.
COMPANY OVERVIEW
General
ICG Communications Inc. ("ICG" or the "Company") is a facilities-based
communications provider. The Company primarily offers voice and data
communication services directly to small- to medium-sized business customers,
and data access, transport and management to ISP customers. In addition, the
Company offers special access and switched access services to long-distance
companies and other customers.
ICG's business has been transformed over the past few years from a
regional competitive access provider primarily providing access services to
interexchange carriers and medium- to large-sized business customers, to a
competitive local exchange carrier with a nationwide backbone providing voice
and data services to small- to medium-sized business customers, as well as
network facilities and data management to ISP customers. The Company's business
20
<PAGE>
transformation was initially driven by the deregulation of the local telephony
markets in 1996 and subsequently by changing technology and growth of the
Internet.
Bankruptcy Proceedings
During the quarter ended September 30, 2000 and subsequent to the
quarter-end, a series of financial and operational events materially impacted
ICG Communications, Inc. and its subsidiaries ("ICG" or the "Company").
Specifically, these events reduced the Company's expected revenue and cash flow
generation for the remainder of 2000 and 2001, which in turn jeopardized the
Company's ability to comply with its existing senior secured credit facility. On
November 14, 2000 (the "Petition Date"), ICG and most of its subsidiaries filed
voluntary petitions for protection under Chapter 11 of the United States
Bankruptcy Code in the Federal District of Delaware in order to facilitate the
restructuring of the Company's long-term debt, trade liabilities and other
obligations. The Company and its bankruptcy filing subsidiaries (collectively
the "Debtors") are currently operating as debtors-in-possession under the
supervision of the United States District Court for the District of Delaware.
The bankruptcy petitions were filed in order to preserve cash and to give the
Debtors the opportunity to restructure their debt.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders are expected to be substantially altered. As a result
of these bankruptcy proceedings, substantially all liabilities, litigation and
claims against the Debtors in existence at the Petition Date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
Bankruptcy Court. At this time, it is not possible to predict the outcome of the
Chapter 11 cases in general or the effects of such cases on the Company's
business, or on the interest of creditors and shareholders. As a result of the
bankruptcy filing, all of the Company's liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise. No
assurance can be given that the Company will be successful in reorganizing its
affairs within the Chapter 11 bankruptcy proceedings.
Further, due to the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
a plan of reorganization, or rejection thereof, could change the amounts
reported in the financial statements. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon, but not limited to,
formulation, approval, and confirmation of a plan of reorganization, adequate
sources of capital, customer and employee retention, the ability to provide high
quality services and the ability to sustain positive results of operations and
cash flows sufficient to continue to operate.
Summary of Third Quarter and Subsequent Events
Chronology of Events
During the third quarter, the Company significantly lowered expected
revenue and cash flow derived from terminating local ISP traffic based on
several significant regulatory and operational developments. Specifically, the
Company announced long-term agreements with several ILECs that guaranteed future
revenue, albeit at a lower rate. Second, a decision from the Colorado Public
Utility Commission ("PUC") made in August 2000 denied compensation for
Internet-bound traffic. Finally, as the Company increased the number of resold
lines, reciprocal compensation was reduced, as these resold lines do not
generate reciprocal compensation.
In August 2000, ICG received letters from two, large Internet remote
access service ("IRAS") customers indicating that ICG's service and network
performance did not meet standards contractually agreed upon. Absent quick
resolution of these issues, the customers stated they either were considering or
intended to terminate contractual arrangements.
On August 22, 2000, ICG's Chairman and Chief Executive Officer, J. Shelby
Bryan resigned each of these positions and the Board of Directors elected Carl
E. Vogel to the position of Chairman and Chief Executive Officer. Mr. Vogel, of
Liberty Media Group, invested $500 million in ICG through the purchase of Series
A Convertible Preferred Stock in April 2000. Mr. Vogel is also Senior Vice
President of Liberty Media Corp and Chief Executive Officer of Liberty Satellite
and Technology.
The combination of lower reciprocal compensation and the reduction in
revenue earned from IRAS customers for the third and fourth quarters
substantially reduced expected revenue and EBITDA for the second-half 2000.
Further, reduced line commitments for the installation of IRAS products lowered
expected IRAS revenue and EBITDA for 2001. Therefore, on September 18, 2000, the
21
<PAGE>
Company announced that lower than expected financial results based on these
events would, absent obtaining appropriate covenant waivers, put the Company in
breach of its $200 million senior secured credit facility. Also at this time,
the Company announced that it had a revised business plan, required additional
funding and was exploring all strategic options involving the Company.
On the evening of September 18, 2000, Carl Vogel, Chairman and Chief
Executive Officer resigned from his position as CEO and from the Board of
Directors. In addition, Mr. Gary Howard representing Liberty Media and Mr.
Thomas Hicks representing Hicks Muse resigned as directors.
On September 19, 2000, the Board of Directors ratified the formation of a
Special Executive Committee to address the current events affecting the Company.
The Special Executive Committee is comprised of Mr. William Laggett, Mr. John
Moorhead, Mr. Leontis Teryazos and Mr. Walter Threadgill.
On September 26, 2000 the ICG Board of Directors appointed Randall Curran
as Chief Executive Officer. In addition, the Company hired Wasserstein Perella &
Co., independent financial advisors, Zolfo Cooper, LLC, advisors that specialize
in company turnarounds and restructuring, and Gleacher & Co., financial
advisors.
On September 29, 2000, the Company announced that it had reached agreement
with its senior lenders to receive waivers on potential defaults under its
senior secured credit facility. The Company's lenders allowed a 60-day waiver,
and as part of this agreement, required payment of 50%, or $89.7 million, of the
outstanding balance of the facility as of September 30, 2000.
During the third quarter and subsequent thereto, the Company attempted to
obtain additional funding while at the same time cutting capital expenditures
and minimizing operating expenditures in order to maximize cash flow. However,
consistent with the capital markets reluctance to provide funding to the
telecommunications industry, the capital markets previously open to the Company
withdrew interest. Primarily as a result of these events and in response to
announcements made by the Company, the value of ICG's equity and public debt
dramatically deteriorated in price during the third quarter. In combination,
sources of available capital quickly diminished.
On November 14, 2000, the Company filed for Chapter 11 protection. Also on
this day, the Company announced that it had obtained a commitment letter which
will provide the Company debtor-in-possession financing for a minimum of $200
million and the potential for an additional $150 million if certain criteria are
met. This debtor-in-possession financing is subject to customary pre-closing
conditions and is contingent upon Bankruptcy Court approval. As of mid-November
2000, ICG is continuing operations and developing a formal plan of
reorganization.
Details Relating to Compensation for Terminating Local ISP Traffic
As noted above, expectations for revenue derived from terminating local ISP
traffic were lowered during the third quarter. This reduction in forecast
revenue was a result of three events. First, the Company signed multi-year
contacts with major ILECs during the six months ended June 30, bringing
certainty of future revenue that historically and collectively represented
approximately 75% of applicable terminating traffic, albeit at a lower rate.
Second, the Colorado PUC voted to deny compensation for terminating traffic in
the state of Colorado, a market that accounted for approximately 15% of the
Company's generated minutes of use. In addition, as the Company pursued its
strategy of rapid national expansion, demand was met in new markets through
temporarily reselling ILEC lines until the Company's owned facilities were in
place. These resale lines made up an increasing percentage of total lines of
service, and these lines do not generate reciprocal compensation revenue. These
events were estimated to reduce revenue for the remainder of 2000 and in 2001.
Details Relating to Network Performance
In late 1999 and early 2000, the Company experienced significant demand for
its IRAS product, well in excess of expectations. As such, aggressive build-out
targets were set to meet this demand. The Company, however, experienced delays
and unexpected difficulties associated with new technologies and scaling its
network and operating systems. These factors, among others, contributed to the
Company's network performance dropping below the agreed upon service levels
between the Company and certain IRAS customers. These issues do not pertain to
the fiber or dial-tone networks, or impact the Company's PRI, RAS or commercial
telephone products.
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<PAGE>
In August 2000, the Company received letters from two large IRAS customers
indicating that the Company's IRAS service and network performance did not meet
standards contractually agreed upon. Based on the Company's inability to resolve
these issues, the Company issued certain billing credits to these customers.
Additionally, these customers have subsequently advised the Company that they do
not intend to accept their full future commitments for additional lines, as
previously agreed.
IRAS billing credits issued to customers during the third quarter amounted
to approximately $8 million. In addition, revenue expected to be earned from ISP
customers in August and September was approximately $9 million below
expectations and the total commitment for IRAS line installations was reduced.
The lower expected line additions further reduced expected revenue derived from
terminating local ISP traffic, as fewer minutes of use were generated over ICG's
network. Moreover, as IRAS services are considered a higher margin product, a
lower percentage of IRAS lines reduced the Company's revenue, and adversely
impacts the expected gross margin and EBITDA.
In September, one of the IRAS customers who had previously been issued
credits, terminated its contract with the Company. This customer had a
commitment for 200,000 IRAS ports of which 104,000 were provisioned. A new
customer, however, agreed to accept 150,000 of lines primarily to be used for
RAS services, which is a lower margin product.
Since early August, the Company has been diligently addressing its network
performance issues and has made cut-backs in its aggressive growth strategy. At
this time, the Company does not intend to expand its IRAS business until it is
confident that it can capably scale to customer demand while maintaining
quality. As of mid-November 2000, the network performance, as measured by call
rejection rates, had substantially improved over the levels measured in August,
and the Company is focused on achieving high quality performance consistently
for all customers.
Status of Operations and Reorganization Plan
During the pendancy of its Chapter 11 case, the Company expects to
continue to provide on-going service to its customers while implementing a
revised strategy intended to meet customer commitments and maximize short-term
cash flow. Operations are expected to focus on existing markets where the
Company has capacity, allowing the Company to add customers for nominal
incremental cost and earn a better return on existing assets. In addition, the
Company intends to focus on product sales that utilize existing infrastructure
to reduce capital required in the short-term. In general, the Company will scale
its geographic expansion and delivery of new products to better match its
technical capabilities and capital availability. The Company's 22-city expansion
plan originally scheduled for completion at year-end 2000 will be postponed.
Due to the event described above, the Company is considering if an
impairment of assets has occurred under SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". As
the Company is currently undergoing a reorganization, there is not a definitive
business plan in place with which to determine if an impairment has occurred or,
if an impairment has occurred, the amount of such impairment. As a result, the
Company has not reduced the carrying values of its assets in the accompanying
consolidated financial statements.
Network and Service Offerings
ICG is a facilities-based telecommunications provider with network assets
and facilities in and connecting to 30 metropolitan areas in the United States.
The Company primarily offers data access, transport and management to Internet
service provider (ISP) customers, voice and data services to small and medium
sized businesses, and wholesale services to long-distance and other carriers.
The Company connects its customers through its nationwide Internet backbone and
voice network located in five major regions in the United States including
California, Colorado, Ohio, Texas and the Southeast.
23
<PAGE>
At September 30, 2000 the Company's network and facilities included
approximately:
* 47 voice and data switches
* 24 ATM switches
* 276 data POPs
* 4,816 regional fiber route miles that represent 192,422 fiber strand
miles
* 18,000 route miles of long-haul capacity leased under IRU agreements
* Connection to 9,520 buildings, and
* 188 collocations with ILECs and 40 ICG-owned collocation sites.
As of the end of the third quarter 2000, ICG's current product offerings to
the ISP market include dial-up products as well as broadband access services
including T-1 and T-3 connections and DSL. Dial-up products include primary rate
interface (PRI), remote access service (RAS) and Internet remote access service
(IRAS). PRI is a traditional product that allows an ISP to connect to its
end-user customers using the Company's local access network. RAS utilizes
ICG-owned switches and modems to connect and send data to the ISP, eliminating
the need for individual ISPs to deploy modem banks in each POP. IRAS connects,
sends and routes data for the ISP customer. With IRAS, the Company offers
network management, routing calls intended for the Internet directly to the
Internet rather than through the ISP. For business customers, the Company offers
local telephone service, enhanced telephone features such as voice mail,
long-distance service, dial-up and T-1 data connections as well as a bundled
service offering named iConverge. The Company's wholesale business provides
major carriers with connectivity to each other, to incumbent telephone companies
and to large customers. ICG's wholesale products include special access, private
line/long-haul, switched access and signaling system 7. The Company has
transport facilities in major markets located in Colorado, California, Ohio,
Texas and the Southeast.
24
<PAGE>
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for the Company for the periods
indicated. The table also shows certain revenue, expenses, operating loss,
EBITDA and EBITDA (before nonrecurring and noncash charges) as a percentage of
the Company's total revenue.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------
$ % $ % $ % $ %
-------- -------- --------- ------ -------- ------ --------- -----
(unaudited)
(in thousands)
Statement of Operations Data:
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service (1) 70,593 61 102,228 71 214,762 64 332,324 70
Special access (2) 29,415 26 30,139 21 75,415 22 103,896 22
Switched access (3) 10,618 9 7,884 6 32,210 10 28,351 6
Long distance & other (4) 4,540 4 4,550 2 14,764 4 13,207 2
-------- ------ ----------- ---- ---------- ----- --------- ------
Total revenue 115,156 100 144,801 100 337,151 100 477,778 100
Operating costs 66,284 58 118,711 82 179,391 53 304,202 64
Selling, general and 94,558 82 84,183 58 180,341 54 188,947 40
administrative
Depreciation and amortization 45,079 39 99,023 69 126,137 37 236,514 50
Provision for impairment
of long-lived assets - - - - 29,300 9 - -
Net loss on disposal of
long-lived assets 195 - 2,022 1 (771) - 2,566 -
Other, net 431 - 431 - 862 - 1,692 -
-------- ------ ----------- ---- ---------- ----- --------- -----
Operating loss (91,381) (79) (159,569)(110) (178,109) (53) (256,143) (54)
Other Data:
Net cash provided (used)
by operating activities (37,604) 36,084 (48,195) 139,163
Net cash used by
investing activities (116,065) (186,516) (76,576) (561,974)
Net cash provided (used)
by financing activities 73,848 (129,412) 69,002 535,831
EBITDA (5) (46,302) (40) (60,546) (42) (51,972) (15) (19,629) (4)
EBITDA (before nonrecurring
and noncash charges) (5) (45,676) (40) (58,093) (40) (22,581) (7) (15,371) (3)
Capital expenditures of
continuing operations (6) 138,387 324,701 374,324 881,577
Capital expenditures of
discontinued operations (6) 4,970 - 11,129 -
</TABLE>
(Continued)
25
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30, September 30,
1999 1999 2000 2000 2000
------------- ------------ ---------- ---------- -------------
(unaudited)
Statistical Data (7):
<S> <C> <C> <C> <C> <C>
Full time employees 3,054 2,853 2,930 2,975 3,160
Access lines in service (8) 584,827 730,975 904,629 1,112,964 1,074,469
Buildings connected:
On-net (9) 939 963 1,046 924 936
Hybrid (10) 6,476 7,115 7,746 8,228 8,584
------------- ------------ ---------- ---------- -------------
Total buildings connected 7,415 8,078 8,792 9,152 9,520
Operational switches:
Circuit 29 31 35 43 47
ATM - 24 24 24 24
Frame Relay (11) 16 16 16 - -
------------- ------------ ---------- ---------- -------------
Total operational switches 45 71 75 67 71
Regional fiber route miles (12):
Operational 4,449 4,596 4,807 4,767 4,816
Under construction - - - 495 508
Regional fiber strand miles (13):
Operational 167,067 174,644 177,103 184,064 192,422
Under construction - - - 12,254 14,891
Long-haul broadband route miles - 18,000 18,000 18,000 18,000
Collocations with ILECs 139 147 183 188 188
</TABLE>
(1) Local service revenue includes revenue earned from providing competitive
voice and data services to business customers and network facilities and
data management services to ISP customers. Local service revenue also
includes revenue earned from terminating local traffic under agreements with
ILECs.
(2) Special access revenue includes revenue earned from providing direct
intra-state and intra-city private line broadband connections to long
distance carriers, ISP and end user business customers.
(3) Switched access revenue includes revenue earned from both switched
terminating access and SS7 gateway services.
Switched terminating access: Switched terminating access services provide
long distance customers connectivity to the ILEC's local switched network.
SS7 gateway services: SS7 gateway services allow for rapid call setup via
high-speed circuit switched connections. ICG services include nationwide
signaling with access to SS7 networks in every LATA.
(4) Long distance revenue includes revenue earned from providing voice services
outside the customers local calling area.
(5) EBITDA consists of earnings (loss) from continuing operations before
interest expense, income taxes, depreciation and amortization, other
expense, net and accretion and preferred dividends on preferred securities
of subsidiaries, or otherwise defined as operating loss plus depreciation
and amortization. EBITDA (before nonrecurring and noncash charges)
represents EBITDA before certain nonrecurring charges such as the net loss
(gain) on disposal of long-lived assets and other, net operating costs and
expenses, including deferred compensation. EBITDA and EBITDA (before
nonrecurring and noncash charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring and noncash charges) are presented to enhance an understanding
of the Company's operating results and are not intended to represent cash
flows or results of operations in accordance with generally accepted
accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA
(before nonrecurring and noncash charges) are not measurements under GAAP
and are not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing activities
of continuing operations as determined using GAAP are also presented in
Other Data.
(6) Capital expenditures include assets acquired with cash, under capital
leases, and pursuant to IRU agreement. Capital expenditures of discontinued
operations includes the capital expenditures of Network Services, Satellite
Services, Zycom and NETCOM combined for all periods presented.
(7) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(8) Access lines in service at September 30, 2000 includes lines provisioned
through the Company's switch and through resale and other agreements with
various local exchange carriers. Resale lines typically generate lower
margins and are used primarily to obtain customers. Although the Company
plans to migrate most lines from resale to higher margin on-switch lines,
there is no assurance that it will be successful in executing this
strategy.
(9) Beginning in the three months ended June 30, 2000, on-net buildings will be
defined to exclude facilities used exclusively for ICG network operations.
(10)Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(11)Frame relay switches are no longer included in switch count as
functionality is now handled by ATM switches.
(12) Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. As of September 30, 2000, the Company had
approximately 4,816 regional fiber route miles. Regional fiber route miles
under construction represents fiber under construction, which is expected
to be operational within six months.
(13) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of September 30, 2000,
the Company had approximately 192,422 regional fiber strand miles. Regional
fiber strand miles under construction represents fiber under construction,
which is expected to be operational within six months.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Three Months Ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- --------- -------
($ values in thousands)
Local service 70,593 61 102,228 71
Special access 29,415 26 30,139 21
Switched access 10,618 9 7,884 6
Long distance & other 4,540 4 4,550 2
-------- -------- --------- -------
Total Revenue 115,166 100 144,801 100
======== ======== ========= =======
Operating costs 66,284 58 118,711 82
======== ======== ========= =======
Selling, general and
administrative 94,558 82 84,183 58
======== ======== ========= =======
Depreciation and amortization 45,079 39 99,023 68
======== ======== ========= =======
Revenue
Most of ICG's revenue is earned from small- to medium-sized business
customers who purchase voice and data communications services, or by providing
network facilities and data management services to ISPs. However, the Company
has a few large ISP customers which account for a significant portion of its ISP
revenue. The Company also offers special access and switched access services to
long-distance companies and other customers. Total revenue increased $29.6
million or 26% from the three months ended September 30, 1999 to 2000.
Local service revenue increased from $70.6 million for the three months
ended September 30, 1999 to $102.2 million for the same period in 2000, a 45%
annual increase primarily due to an increase in the average local access lines
offset by a reduction in revenue earned from IRAS customers. This reduction in
revenue per line is, in large part, driven by a higher percentage of ISP lines
in 2000, which typically earn lower revenue per line, a reduction in the percent
of total lines on-switch which do not earn reciprocal compensation and billing
credits issued to certain IRAS customers. IRAS billing credits issued to
customers during the third quarter amounted to approximately $8 million.
Including the billing credits, total revenue expected to be earned from ISP
customers in August and September was approximately $17 million below
expectations. Local service revenue includes approximately $25 million (or 22%
of revenue) and $26 million (or 18% of revenue) for the three months ended
September 30, 1999 and 2000, respectively, for terminating local ISP traffic.
For further discussion on nonrecurring reciprocal compensation revenue earned,
see "Liquidity and Capital Resources - Transport and Termination Charges".
Special access revenue increased from $29.4 million for the three months
ended September 30, 1999 to $30.1 million for the same period in 2000, an
increase of 2%. The increase in special access revenue is primarily due to
increased unit sales.
Switched access revenue decreased from $10.6 million for the three months
ended September 30, 1999 to $7.9 million for the same period in 2000, a 26%
decrease. The decrease is due to the expected attrition of switch customers.
<PAGE>
Revenue from long distance services remained consistent at $4.5 million
for both the three months ended September 30, 1999 and 2000. ICG expects long
distance revenue to decrease due to planned attrition of resale access lines,
which had high long distance service penetration rates as well as a reduction in
revenue per minute.
Operating costs
Total operating costs increased from $66.3 million for the three months
ended September 30, 1999 to $118.7 million for the same period in 2000, a 79%
increase. Operating costs increased as a percentage of revenue from 58% for 1999
to 82% for 2000. Operating costs consist primarily of payments to ILECs, other
CLECs, and long distance carriers for the use of network facilities to support
local, special, switched access services, and long distance services as well as
internal network operating costs, right of way fees and other operating costs.
Internal network operating costs include the cost of engineering and operations
personnel dedicated to the operations and maintenance of the network. Operating
costs have increased as a percentage of revenue partially due to the reduction
in revenue earned from IRAS customers, as noted above. During periods of rapid
market expansion such as ICG has experienced in 2000, backhaul and intracity
facilities have been leased on an interim basis until such time as owned
facilities are in service, resulting in an increase of operating expenses as
percent of revenue. During the three months ended September 30, 2000, ICG
incurred incremental costs associated with the advanced deployment of leased
lines in expansion cities to accommodate customer requirements. The lines were
provisioned using either ILEC or other CLEC capacity to meet customer demand. It
was ICG's intent to complete installation of these owned facilities. However,
due to the Company's bankruptcy proceedings and capital limitations, there can
be no assurance of when or if these owned facilities will be completed and
produce revenue. In addition, due to the Company's curtailed capital deployment
plan and the reallocation of resources normally assigned to capital deployment
activities, approximately $12 million in operating costs that would have been
capitalized under the Company's capitalization policies were expensed.
Selling, general and administrative expenses
Total selling, general and administrative ("SG&A") expenses decreased from
$94.6 million for the three months ended September 30, 1999 to $84.2 million for
the same period in 2000, an 11% decrease. SG&A expenses decreased as a
percentage of revenue from 82% for 1999 to 58% for 2000. The decrease in
absolute dollars and as a percentage of revenue is principally due to a
provision of $45.2 million recorded during the three months ended September 30,
1999 for accounts receivable related to certain elements of transport and
termination services provided to ILECs, which the Company believed was
uncollectible. This decrease was partially offset by an increase in average
staff levels and increased salary and benefits per employee attributable to the
new compensation plan implemented in 2000 to remain competitive in the
marketplace. The number of full time employees increased from 3,054 at September
30, 1999 to 3,160 at September 30, 2000. The Company also incurred increases in
facilities costs for new office space as well as increased sales and property
taxes, legal and professional fees. During the quarter ended September 30, 2000,
the Company reviewed the adequacy of the reserve for bad debts related to its
ISP customers as the Company had concerns about the ability of certain of these
customers to continue operating and attract future capital given current market
conditions, as well as concerns associated with certain contract disputes. As a
result, the Company recorded an additional provision of approximately $16.0
million. In addition, a provision for uncollectible accounts in the approximate
amount of $4 million was provided for the receivable from one ILEC for
termination of local ISP traffic deemed uncollectible because of changes in the
regulatory environment.
Depreciation and amortization
Depreciation and amortization increased from $45.1 million for the three
months ended September 30, 1999 to $99.0 million for the same period in 2000.
The increase is primarily due to increased investment in depreciable assets
resulting from the expansion of the Company's networks and services, as well as
a reduction in the overall weighted-average useful life of depreciable assets in
service as ICG invests a larger portion of its capital in assets with shorter
lives such as routers and computers.
Net loss on disposal of long-lived assets
Net loss on disposal of long-lived assets of $2.0 million for the three
months ended September 30, 2000 relates to the write-off of certain frame relay
switches no longer in operation.
<PAGE>
Interest expense
Interest expense increased from $52.9 million for the three months ended
September 30, 1999 to $66.0 million for the same period in 2000. Included in
interest expense for the three months ended September 30, 1999 and 2000 was
$49.5 million and $54.5 million of noncash interest, respectively. Interest
expense also increased due to the increase in debt issued under the senior
secured financing facility. Additionally, interest expense is net of interest
capitalized related to construction in progress of $2.3 million and $3.0 million
during the three months ended September 30, 1999 and 2000, respectively.
Interest income
Interest income increased from $3.8 million for the three months ended
September 30, 1999 to $5.9 million for the same period in 2000. The increase is
attributable to the increase in cash, cash equivalents and short-term
investments resulting from the cash proceeds to the Company of the 8% Series A
Convertible Preferred Stock.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion of costs and preferred dividends on preferred securities of
subsidiaries increased from $15.7 million for the three months ended September
30, 1999 to $17.7 million for the same period in 2000. The increase is due
primarily to the periodic payment of dividends on the 14% Exchangeable Preferred
Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred
Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred
Stock. Accretion and preferred dividends on preferred securities of subsidiaries
recorded during the three months ended September 30, 2000 consists of the
accretion of issuance costs and the accrual of the preferred securities
dividends associated with the 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred
Securities"), the 14% Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations
Loss from continuing operations increased from $156.5 million for the
three months ended September 30, 1999 to $237.7 million for same period in 2000
due to the increases in operating costs, SG&A expenses and depreciation and
amortization, partially offset by an increase in revenue, as noted above.
Income(loss) on disposal and operation of discontinued operations
Income (loss)from discontinued operations was $0.7 million income for the
three months ended September 30, 1999 and consists of net income of Network
Services
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value is comprised of the dividends and the accretion to liquidation
value of the 8% Series A Convertible Preferred Stock of $17.3 million during the
three months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Nine Months Ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- --------- -------
($ values in thousands)
Local service 214,762 64 332,324 70
Special access 75,415 22 103,896 22
Switched access 32,210 10 28,351 6
Long distance & other 14,764 4 13,207 2
-------- -------- --------- -------
Total Revenue 337,151 100 477,778 100
======== ======== ========= =======
Operating costs 179,391 53 304,202 63
======== ======== ========= =======
Selling, general and
administrative 180,341 54 188,947 40
======== ======== ========= =======
Depreciation and amortization 126,137 37 236,514 50
======== ======== ========= =======
<PAGE>
Revenue
Most of ICG's revenue is earned from small- to medium-sized business
customers who purchase voice and data communications services, or by providing
network facilities and data management services to ISPs. However, the Company
has a few large ISP customers which account for a significant portion of its ISP
revenue. The Company also offers special access and switched access services to
long-distance companies and other customers. Total revenue increased $140.6
million or 42% from the nine months ended September 30, 1999 to 2000.
Local service revenue increased from $214.8 million for the nine months
ended September 30, 1999 to $332.3 million for the same period in 2000, a 55%
annual increase primarily due to an increase in the average local access lines
offset by a reduction in the average revenue per line. This reduction in revenue
per line is, in large part, driven by a higher percentage of ISP lines in 2000,
which typically earn lower revenue per line, a reduction in the percent of total
lines on-switch which do not earn reciprocal compensation and billing credits
issued to certain IRAS customers. IRAS billing credits issued to customers
during the third quarter amounted to approximately $8 million. Including the
billing credits, total revenue expected to be earned from ISP customers in
August and September was approximately $17 million below expectations. Local
service revenue includes approximately $95 million (or 28% of revenue) and $100
million (or 21% of revenue) for the nine months ended September 30, 1999 and
2000, respectively, for terminating local ISP traffic. Revenue for terminating
local ISP traffic for the nine months ended September 30, 2000, includes
approximately $13 million derived from the resolution of previously disputed
issues not related to the respective period and approximately $4 million of
revenues from rates earned pursuant to the previous interconnection agreement,
neither of which will recur in subsequent periods. Additionally, approximately
$3 million recognized in the nine months ended September 30, 2000 relates to
nonrecurring elements of terminating other traffic, which is also for services
not provided within the period. For further discussion on nonrecurring
reciprocal compensation revenue earned, see "Liquidity and Capital Resources -
Transport and Termination Charges" below.
Special access revenue increased from $75.4 million for the nine months
ended September 30, 1999 to $103.9 million for the same period in 2000, an
increase of 38%. The increase in special access revenue is due to increased unit
sales as well as $12.5 million of revenue recognized during the nine months
ended September 30, 2000 under ICG's fiber optic sales- type lease agreement
with a major interexchange carrier.
Switched access revenue decreased from $32.2 million for the nine months
ended September 30, 1999 to $28.4 million for the same period in 2000, a 12%
decrease. The decrease is due to the expected attrition of switch customers.
Revenue from long distance services decreased from $14.8 million for the
nine months ended September 30, 1999 to $13.2 million for the same period in
2000, an 11% decline. ICG's long distance revenue for the nine months ended
September 30, 2000 was impacted by planned attrition of resale access lines,
which had high long distance service penetration rates as well as a reduction in
revenue per minute.
Operating costs
Total operating costs increased from $179.4 million for the nine months
ended September 30, 1999 to $304.2 million for the same period in 2000, a 70%
increase. Operating costs increased as a percentage of revenue from 53% for 1999
to 63% for 2000. Operating costs have increased as a percentage of revenue
partially due to the reduction in revenue earned from IRAS customers, as noted
above. During periods of rapid market expansion, such as ICG has experienced in
2000, backhaul and intracity facilities are leased on an interim basis until
such time as owned facilities are in service, resulting in an increase of
operating expenses as a percent of revenue. It was ICG's intent to complete
installation of these owned facilities. However, due to the Company's bankruptcy
proceedings and capital limitations, there can be no assurance of when or if
these owned facilities will be completed and produce revenue. In addition, due
to the Company's curtailed capital deployment plan and the reallocation of
resources normally assigned to capital deployment activities, approximately $12
million in operating costs that would have been typically capitalized under the
Company's capitalization policies were expensed.
Selling, general and administrative expenses
Total selling, general and administrative ("SG&A") expenses increased from
$180.3 million for the nine months ended September 30, 1999 to $188.9 million
<PAGE>
for the same period in 2000. SG&A expenses decreased as a percentage of revenue
from 54% for 1999 to 40% for 2000. The increase in absolute dollars is
principally due to an increase in average staff levels and increased salary and
benefits per employee attributable to the new compensation plan implemented in
2000 to remain competitive in the marketplace. The number of full time employees
increased from 3,054 at September 30, 1999 to 3,160 at September 30, 2000.
Certain of the SG&A increase can also be attributed to increases in facilities
costs for new office and switch space as well as increased sales and property
taxes and legal and professional fees offset by a net recovery of previously
reserved uncollectible amounts. The increase is also offset by a provision of
$45.2 million recorded during the nine months ended September 30, 1999 for
accounts receivable related to certain elements of transport and termination
services provided to ILECs, which the Company believed was uncollectible. During
the quarter ended September 30, 2000, the Company reviewed the adequacy of the
reserve for bad debts related to its ISP customers as the Company had concerns
about the ability of certain of these customers to continue operating and
attract future capital given current market conditions, as well as concerns
associated with certain contract disputes. As a result, the Company recorded an
additional provision of approximately $16.0 million. In addition, a provision
for uncollectible accounts in the approximate amount of $4 million was provided
for the receivable from one ILEC for termination of local ISP traffic deemed
uncollectible because of changes in the regulatory environment.
Depreciation and amortization
Depreciation and amortization increased from $126.1 million for the nine
months ended September 30, 1999 to $236.5 million for the same period in 2000.
The increase is primarily due to increased investment in depreciable assets
resulting from the expansion of the Company's networks and services as well as a
reduction in the overall weighted-average useful life of depreciable assets in
service as ICG invests a larger portion of its capital in assets with shorter
lives such as routers and computers.
Provision for impairment of long-lived assets
During the nine months ended September 30, 1999, the Company recorded a
provision for impairment of long-lived assets of $29.3 million. This provision
related to the impairment of software and other capitalized costs associated
with the Company's billing and provisioning system development projects under
development. The provision related to management's decision to abandon the
billing and provisioning solutions under development.
Net loss on disposal of long-lived assets
Net loss on disposal of long-lived assets of $2.6 million for the nine
months ended September 30, 2000 primarily relates to the write-off of certain
frame relay switches no longer in operation.
Interest expense
Interest expense increased from $151.6 million for the nine months ended
September 30, 1999 to $195.4 million for the same period in 2000. Included in
interest expense for the nine months ended September 30, 1999 and 2000 was
$142.2 million and $165.8 million of noncash interest, respectively. Interest
expense also increased due to the increase in debt issued under the senior
secured financing facility. Additionally, interest expense is net of interest
capitalized related to construction in progress of $9.0 million and $6.6 million
during the nine months ended September 30, 1999 and 2000, respectively.
Interest income
Interest income increased from $11.7 million for the nine months ended
September 30, 1999 to $20.4 million for the same period in 2000. The increase is
attributable to the increase in cash, cash equivalents and short-term
investments resulting from the cash proceeds to the Company of the 8% Series A
Convertible Preferred Stock.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion of costs and preferred dividends on preferred securities of
subsidiaries increased from $45.7 million for the nine months ended September
30, 1999 to $51.4 million for the same period in 2000. The increase is due
primarily to the periodic payment of dividends on the 14% Exchangeable Preferred
Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the "14 1/4% Preferred
<PAGE>
Stock") in additional shares of 14% Preferred Stock and 14 1/4% of Preferred
Stock. Accretion and preferred dividends on preferred securities of subsidiaries
recorded during the nine months ended September 30, 2000 consists of the
accretion of issuance costs and the accrual of the preferred securities
dividends associated with the 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred
Securities"), the 14% Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations
Loss from continuing operations increased from $366.5 million for the nine
months ended September 30, 1999 to $482.9 million for same period in 2000 due to
the increases in operating costs, SG&A expenses, depreciation and amortization,
offset by an increase in revenue and a decrease in the provision for impairment
of long-lived assets, as noted above.
Income(loss) on disposal and operation of discontinued operations
Income (loss)from discontinued operations was a loss of $8.0 million for
the nine months ended September 30, 1999 and income of $0.7 million for the same
period in 2000. The loss from discontinued operations for the nine months ended
September 30, 1999 consists of the combined net losses of Network Services and
Satellite Services including an estimated loss on the disposal of Network
Services of $8.0 million. Income from discontinued operations in 2000 is from
the Zycom legal expenses reimbursed as part of the settlement outstanding with
the minority shareholders. (See "Sale of Assets and Discontinued Operations"
above for further discussion.)
Extraordinary gain on sales of operations of NETCOM
The Company reported an extraordinary gain on the sales of the operations
of NETCOM during the nine months ended September 30, 1999 of $193.0 million, net
of income taxes of $6.4 million. Offsetting the gain on the sales is
approximately $16.6 million of net losses of operations of NETCOM from November
3, 1998 through the dates of the sales and approximately $35.5 million of the
proceeds was deferred and recognized over the one year term of the MindSpring
Capacity Agreement.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value is comprised of the dividends and the accretion to liquidation
value of the 8% Series A Convertible Preferred Stock of $31.7 million.
Charge for beneficial conversion feature of 8% Series A Convertible Preferred
Stock
Charge for beneficial conversion of 8% Series A Convertible Preferred
Stock during the nine months ended September 30, 2000 relates to the charge of
$159.3 million of the proceeds of the 8% Series A Convertible Preferred Stock
which was allocated to the intrinsic value of the beneficial conversion feature
of the convertible preferred securities to additional paid-in capital. As the 8%
Series A Convertible Preferred Stock is immediately convertible into shares of
ICG common stock, the beneficial conversion feature was recognized immediately
as a return to the preferred shareholders during the three months ended
September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a result
of the development and operation of its networks. The Company expects that its
operating losses will continue as it operates as a debtor-in-possession as a
result of its Chapter 11 bankruptcy filing described in the "Company Overview".
The Company does not expect that cash provided by operations will be sufficient
to fund the continuation of daily operations of the business during bankruptcy.
At September 30, 2000, the Company had cash and short term investments of
approximately $234.3 million. On November 14, 2000, the Company announced that
it had obtained a commitment letter which will provide the Company
debtor-in-possession financing for a minimum of $200 million and the potential
for an additional $150 million if certain criteria are met. This
debtor-in-possession financing is subject to customary pre-closing conditions
and is contingent upon Bankruptcy Court approval. The debtor-in-possession
financing terms require that the Company's Senior Facility be paid off at the
time of the first borrowing. Management believes that current cash, short term
investments and the debtor-in-possession financing, along with protection under
bankruptcy law, should enable the Company to fund operations through the
bankruptcy restructuring process.
<PAGE>
At September 30, 2000, the Company had approximately $2.3 billion of
indebtedness outstanding and $1.2 billion of mandatorily redeemable preferred
shares. As a result of filing for protection under bankruptcy law, the Company
is not currently paying any of the debt service obligations that are outstanding
as of November 14, 2000. In addition, future payment of principal and interest
on all of the outstanding indebtedness and dividends on the preferred shares is
subject to court approval and may be discharged in whole or in part in
bankruptcy with proceeds from the court approved plan of reorganization or
liquidation of the Company. There can be no assurance that any amounts owed to
creditors will be paid or be paid in full.
As a result of the Company's liquidity problems, the Company's directors
did not declare a dividend on the 6 3/4% Preferred Securities that was otherwise
payable on November 15, 2000. In addition, the Company has not declared
dividends on the 14% and 14 1/4% Preferred Stock.
In the event that plans or assumptions change, or prove to be inaccurate,
significant unexpected expenses are incurred, or cash resources, together with
borrowings under the debtor-in-possession financing arrangement, prove to be
insufficient to fund operations, the Company may be required to seek additional
sources of capital (or seek additional capital sooner than currently
anticipated). There can be no guarantee, however, that additional capital will
be available on reasonable terms, or at all.
Net Cash Provided (Used) By Operating Activities
The Company's operating activities used $48.2 million and provided $139.2
million for the nine months ended September 30, 1999 and 2000, respectively. Net
cash used by operating activities for the nine months ended September 30, 1999
includes the extraordinary gain on the sale of Netcom of $193.0 million,
partially offset by non-cash transactions such as depreciation and amortization
and deferred interest expense. Net cash provided by operating activities for the
nine months ended September 30, 2000 is primarily due to the advance payments
received pursuant to the IRU agreements.
Net Cash Used By Investing Activities
Investing activities used $76.6 million and $562.0 million in the nine
months ended September 30, 1999 and 2000, respectively. Net cash provided by
investing activities for the nine months ended September 30, 1999 includes
proceeds from the sales of the operations of NETCOM of $252.9 million and
proceeds from the sales of short-term investments available for sale and
marketable securities of $60.5 million, offset by cash expended for the
acquisition of property, equipment and other assets of $368.1 million and the
change in accounts payable and accrued liabilities for the purchase of long-term
assets of $3.3 million. Net cash used by investing activities for the nine
months ended September 30, 2000 primarily includes cash expended for the
acquisition of property, equipment and other assets of $649.1 million and the
change in accounts payable and accrued liabilities for the purchase of long-term
assets of $50.7 million, partially offset by proceeds from the sale of
short-term investments available for sale and marketable securities of $33.0
million. The Company acquired assets under capital leases and pursuant to IRU
agreements of $232.5 million during the nine months ended September 30, 2000.
Net Cash Provided By Financing Activities
Financing activities provided $69.0 million and $535.8 million in the nine
months ended September 30, 1999 and 2000, respectively. Net cash provided by
financing activities for the nine months ended September 30, 1999 and 2000
include proceeds from the issuance of common stock in conjunction with the
exercise of options and warrants and the Company's employee stock purchase plan,
offset by principal payments on long-term debt and capital leases and payments
of preferred dividends on preferred securities of subsidiaries. Net cash
provided by financing activities for the nine months ended September 30, 2000
also includes $95.0 million in proceeds from the issuance of long-term debt and
$720.3 million in proceeds from the issuance of the 8% Series A Convertible
Preferred Stock partially offset by $179.5 million of payments made on the IRU
agreement.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility (the "Senior Facility") consisting of
a $75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. As of September 30, 2000, $84.4 million was
outstanding under the loans at weighted average interest rates ranging from
9.26% to 10.06% for the nine months ended September 30, 2000.
<PAGE>
As of September 30, 2000, the Company had an aggregate accreted value of
approximately $2.0 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the "13 1/2 % Notes"), the 12 1/2% Senior Discount Notes due 2006 (the
"12 1/2 % Notes"), the 11 5/8% Senior Discount Notes due 2007 (the "11 5/8 %
Notes"), the 10% Notes and the 9 7/8% Notes.
As of September 30, 2000, an aggregate amount of $1.2 billion was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock, the
14 1/4% Preferred Stock and the 8% Series A Convertible Preferred Stock.
Capital Expenditures
The Company's capital expenditures including assets acquired with cash,
under capital leases and pursuant to IRU agreements were $374.3 million and
$881.6 million for the nine months ended September 30, 1999 and 2000,
respectively. The Company is in the process of evaluating its future capital
expenditure requirements in light of the bankruptcy proceedings and as part of
the Company's restructuring plan.
To facilitate the expansion of its services and networks, the Company has
entered into equipment purchase agreements with various vendors under which the
Company has committed to purchase a substantial amount of equipment and other
assets, including a full range of switching systems, fiber optic cable, network
electronics, software and services. If the Company fails to meet the minimum
purchase level in any given year, the vendor may discontinue certain discounts,
allowances and incentives otherwise provided to the Company.
Under the debtor-in-possession financing commitment, the Company's capital
expenditures will be significantly restricted. Given this, there is substantial
uncertainty about the Company's ability to complete and place in service the
Company's $869 million construction in progress balance as of September 30,
2000.
Transport and Termination Charges
Terminating Local Traffic
ICG records revenue earned under interconnection agreements with incumbent
local exchange carriers ("ILECs") as an element of its local services revenue.
Many of the ILECs have not paid all of the amounts that the Company has recorded
as revenue and have disputed these charges based on the belief that dial-up
calls to ISPs are not local traffic as defined by the various agreements and not
subject to payment of transport and termination charges under state and federal
laws and public policies. In addition, some ILECs, while paying a portion of
reciprocal compensation due to ICG, have disputed other portions of the charges.
ICG has, as of September 30, 2000, a net receivable for terminating local
traffic in the approximate amount of $66 million, approximately $29 million of
which is due and payable, pursuant to the terms of executed agreements with
several ILECs, when regulatory approval of the amendments to the parties'
interconnection agreements is obtained. ICG has received cash of approximately
$11 million and $94 million during the three months and nine months ended
September 30, 2000, respectively, from the ILECs for terminating local traffic.
The following table represents the amount of revenue ICG has recognized
for terminating local traffic of the ILECs during the respective periods ($ in
millions):
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
------------- ------------ ----------- ------------
$25 $26 $95 $100
Revenue for the nine months ended September 30, 1999 includes
approximately $22 million for the tandem switching and common transport rate
elements, the collection of which was determined to be uncertain in the quarter
commencing July 1, 1999. ICG recorded a provision of approximately $45 million
against the accounts receivable balances recorded prior to July 1, 1999 in the
event the tandem switching and common transport rate element amounts were not
ultimately collected. Effective July 1, 1999, ICG ceased recognition of these
rate elements as revenue until cash is received but continued to bill and
vigorously pursue collection of all amounts due under its interconnection
agreements.
<PAGE>
The Company determined in the three months ended September 30, 2000 that
approximately $4 million of the revenue previously recognized for terminating
ISP traffic for one ILEC may not be collectible due to a changing regulatory
environment and has therefore provided a provision for uncollectible accounts.
During the nine months ended September 30, 2000, ICG entered into
agreements to resolve certain disputes with several ILECs that collectively
represent approximately 75% of ICG's applicable terminating traffic. One of the
agreements has an effective date of December 31, 1999 and the other June 1,
2000. The agreements separately resolve the payment of certain past amounts. The
revenue for the nine months ended September 30, 2000 includes approximately $13
million derived from the resolution of previously disputed issues not related to
that period and approximately $4.0 million from rates earned pursuant to the
previous interconnection agreement, neither of which will recur in subsequent
periods.
The resolution of ICG's disputes with the remaining ILECs will continue to
be based on rulings by state public utility commissions and/or by the Federal
Communications Commission ("FCC"), or through negotiations between the parties.
ICG continues to pursue collection of the remaining amounts owed by these ILECs
under ICG's existing interconnection agreements, and certain disputes remain
outstanding.
During the quarter, the Colorado PUC issued a ruling in an ICG arbitration
decision that, subject to the outcome of judicial appellate proceedings, denies
ICG the ability to collect reciprocal compensation for ISP-bound traffic
initiated on the incumbent network and connected on ICG's network in Colorado
when a new interconnection agreement between ICG and Qwest Communications
(formerly US West) becomes effective. ICG believes that the new interconnection
agreement will become effective during the fourth quarter, after the parties
execute and receive PUC approval of a new interconnection agreement that
complies with the PUC's final arbitration decision. Once effective, the terms in
the new agreement concerning compensation for terminating ISP traffic will then
be applied retroactively beginning 45 days prior to the effective date of the
new agreement. In prior periods, the impacted traffic represented approximately
15% of the Company's applicable terminating traffic.
Other Transport and Terminating Traffic
ICG has also recognized revenue for other transport and terminating
traffic of the ILECs. The amount of revenue recognized, pursuant to ICG's
interconnection agreements, during the respective periods ($ in millions):
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
------------- ------------ ----------- ------------
$ 4 $ 4 $ 12 $ 14
The revenue for the nine months ended September 30, 2000 includes
approximately $3 million derived from the resolution of previously disputed
issues not related to the respective periods.
ICG has, as of September 30, 2000, a net receivable for other terminating
traffic in the approximate amount of $26 million, approximately $16 million of
which is due from several ILECs and payment in this amount will be received as
it is part of a binding agreement, subject only to regulatory approval of
amendments to the parties' interconnection agreements. ICG has received cash of
approximately $2 million and $8 million, during the three months and nine months
ended September 30, 2000, respectively.
Future Reciprocal Compensation Revenue
ICG has reached interconnection agreements with certain ILECs that provide
for the payment of compensation for terminating ISP traffic. These agreements
expire at dates ranging from October 2000 through May 2003. Upon expiration of
its interconnection agreements, the Company expects to continue to negotiate
and/or arbitrate reasonable compensation and collection terms for transport and
termination services, although there is no assurance that such compensation will
remain consistent with current levels. Additionally, in those states in which
ICG has not reached a negotiated resolution with the ILEC with respect to the
reciprocal compensation rate to be applied on a going-forward basis, and/or for
subsequent time periods, ongoing state and federal regulatory proceedings
addressing intercarrier compensation for Internet traffic also may impact future
rates of compensation.
<PAGE>
While ICG intends to pursue the collection of all receivables related to
transport and termination charges and believes that future revenue from
transport and termination charges recognized under ICG's interconnection
agreements will be realized, there can be no assurance that future regulatory
and judicial rulings will be favorable to ICG, or that different reciprocal
compensation rates and rate structures will not be adopted when ICG's agreements
are renegotiated or arbitrated, or as a result of FCC or state commission
proceedings on future compensation methods. ICG believes that different pricing
plans will continue to be considered and adopted, and expects that revenue from
transport and termination charges likely will decrease as a percentage of total
local services revenue from local services in subsequent periods.
During the six months ended June 30, 2000, ICG successfully negotiated
agreements, which assured the recognition and receipt of compensation for
terminating ISP traffic and resolved disputed issues with several ILECs as
discussed above. The future rates negotiated are generally lower than ICG has
been historically receiving and were negotiated for a three-year period
subsequent to the date of the agreements. Payment of compensation for
terminating ISP traffic at the rates negotiated in these agreements will apply
for the term of the agreement, irrespective of any state or federal regulatory
or judicial rulings that may be issued over the three-year period of the
agreements concerning the applicability of compensation obligations for ISP
traffic.
The revenue from reciprocal compensation is driven by three factors. The
number of lines on switch, the minutes of use per line, and the rate under the
interconnection agreement. These factors are in a large measure beyond the
control of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety
of risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's proposed debtor-in-possession financing
which, subject to changes, will incur interest at the LIBOR rate plus 4%.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On November 14, 2000 the Company filed voluntary petitions for
protection under Chapter 11 of the United States Bankruptcy Code in
the Federal District of Delaware. The Company is currently operating
as debtors-in-possession under the supervision of the Bankruptcy
Court. The bankruptcy petition was filed in order to preserve cash and
give the Company the opportunity to restructure its debt.
During the third quarter 2000 the Company was served with seven
lawsuits filed by various shareholders in the Federal District Court
for the District of Colorado (Case numbers: 00-S-1864, 00-S-1910,
00-S-1908, 00-S-1945, 00-S-1963, 00-S-1957, and 00-S-1919). All of the
suits name as defendants the Company, the Company's former CEO, J.
Shelby Bryan and the Company's former President, John Kane.
Additionally, one of the complaints names the Company's current
President, William S. Beans, Jr., as a defendant.
All of the complaints seek unspecified damages for alleged violations of
Rules 10(b) and 20(a) of the Securities Exchange Act of 1934. The
complaints seek class action certification for similarly situated
shareholders. It is anticipated that the lawsuits will be consolidated
and that a lead plaintiff's counsel will be chosen by the Court. The
Company has retained the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP to vigorously defend it against these lawsuits. The Company has
also tendered these claims to the Company's insurers. At this time, it
is anticipated that the claims against the Company will be stayed
pursuant to the Company's filing for bankruptcy. It is uncertain at this
time whether these lawsuits will materially adversely effect the
Company's financial or operational stability.
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Case No. 97-17777) against
the Company, Zycom and certain of their subsidiaries. In this action,
the plaintiffs alleged that the Company and certain of its subsidiaries
breached certain fiduciary duties owed to the plaintiffs. The Company
denied all such allegations. The Company has recently finalized an
agreement to settle all claims asserted in this litigation.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Due to the bankruptcy proceedings discussed in note 1 to the Company's
unaudited consolidated financial statements for the nine months ended
September 30, 2000, the Company is currently in default under the 13 1/2
% Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes, 9 7/8% Notes and the
Senior Secured Facility. In addition, the Company is in default under
the 14 1/4% Preferred Stock, 14% Preferred Stock, 6 3/4% Preferred
Securities and 8% Series A Convertible Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits.
(10) Material Contracts.
10.1 Amendment to Employment Agreement, dated as of July
12, 2000 by and between ICG Communications, Inc. and
Michael D. Kallet.
10.2 Employment Agreement, dated as of August 7, 2000 by and
between ICG Communications, Inc. and John Colgan.
10.3 Employment Agreement, dated as of September 24, 2000 by
and between ICG Communications, Inc. and Randall
Curran.
10.4 Amendment and Waiver No. 4 to the Loan Documents,
dated as of September 29, 2000, among ICG Equipment,
Inc., ICG NetAhead, Inc., ICG Services, Inc., as
Parent, certain Initial Lender Parties party thereto,
Morgan Stanley Senior Funding, Inc., as Sole
Book-Runner and Lead Arranger, Royal Bank of Canada,
as Collateral Agent and as Administrative Agent for
such Lender Parties, Bank of America, N.A., as
Documentation Agent and Barclays Bank Plc, as
Co-Documentation Agent
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Communications, Inc.
for the nine months ended September 30, 2000.
(B) Report on Form 8-K. The following reports on Form 8-K was filed by
the registrants during the three months ended September 30, 2000:
(i) Current Report on Form 8-K dated August 11, 2000, regarding
the announcement of earnings information and results of
operations for the quarter ended June 30, 2000 of ICG
Communications, Inc.
(ii) Current Report on Form 8-K dated August 25, 2000, announcing
the resignation of J. Shelby Bryan as Chairman and Chief
Executive Officer on September 22, 2000.
(iii) Current Report on Form 8-K dated September 18, 2000, regarding
the announcement of a revised business plan.
(iv) Current Report on Form 8-K dated September 19, 2000,
announcing the resignation of James Washington as Executive
Vice President of Network Services effective September 13,
2000.
(v) Current Report on Form 8-K dated September 19, 2000,
announcing the resignation of Carl E. Vogel as Chairman of the
Board of Directors and Chief Executive Officer on September
18, 2000.
(vi) Current Report on Form 8-K dated November 14, 2000, announcing
that the Company and most of its subsidiaries filed for
voluntary bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code.
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
INDEX TO EXHIBITS
10.1 Amendment to Employment Agreement, dated as of July 12, 2000 by and
between ICG Communications, Inc. and Michael D. Kallet.
10.2 Employment Agreement, dated as of August 7, 2000 by and between ICG
Communications, Inc. and John Colgan.
10.3 Employment Agreement, dated as of September 24, 2000 by and between ICG
Communications, Inc. and Randall Curran.
10.4 Amendment and Waiver No. 4 to the Loan Documents, dated as of September
29, 2000, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services,
Inc., as Parent, certain Initial Lender Parties party thereto, Morgan
Stanley Senior Funding, Inc., as Sole Book-Runner and Lead Arranger,
Royal Bank of Canada, as Collateral Agent and as Administrative Agent
for such Lender Parties, Bank of America, N.A., as Documentation Agent
and Barclays Bank Plc, as Co-Documentation Agent
27.1 Financial Data Schedule of ICG Communications, Inc. for the nine months
ended September 30, 2000.
<PAGE>
EXHIBIT 10.1
Amendment to Employment Agreement, dated as of July 12, 2000, by and between
ICG Communications, Inc. and Michael D. Kallet.
<PAGE>
EXHIBIT 10.2
Employment Agreement, dated as of August 7, 2000, by and between ICG
Communications, Inc. and John V. Colgan.
<PAGE>
EXHIBIT 10.3
Employment Agreement, dated as of September 25, 2000, by and between ICG
Communications, Inc. and Randall Curran.
<PAGE>
EXHIBIT 10.4
Amendment and Waiver No. 4 to the Loan Documents, dated as of September 29,
2000, among ICG Equipment, Inc., ICG NetAhead, Inc., ICG Services, Inc., as
Parent, certain Initial Lender Parties party thereto, Morgan Stanley Senior
Funding, Inc., as Sole Book-Runner and Lead Arranger, Royal Bank of Canada, as
Collateral Agent and as Administrative Agent for such Lender Parties, Bank of
America, N.A., as Documentation Agent and Barclays Bank Plc, as Co-Documentation
Agent.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 20, 2000.
ICG COMMUNICATIONS, INC.
Date: November 20, 2000 By: /s/ Harry R. Herbst
--------------------------------------
Harry R. Herbst, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Date: November 20, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Senior Vice President
and Controller (Principal Accounting
Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 20, 2000.
ICG HOLDINGS (CANADA) CO.
Date: November 20, 2000 By: /s/ Harry R. Herbst
------------------------------------
Harry R. Herbst, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Date: November 20, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Senior Vice President
and Controller (Principal Accounting
Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 20, 2000.
ICG HOLDINGS, INC.
Date: November 20, 2000 By: /s/ Harry R. Herbst
------------------------------------
Harry R. Herbst, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Date: November 20, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Senior Vice President
and Controller (Principal Accounting
Officer)
