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 333-51037)
ICG SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1448147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
161 Inverness Drive West
Englewood, Colorado 80112
(888) 424-1144 or (303) 414-5000
(Address of principal executive offices and registrant's telephone numbers,
including area codes)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On November 17, 2000, ICG Services, Inc. had 10 shares of common stock
outstanding. ICG Communications, Inc. owns all of the issued and outstanding
shares of common stock of ICG Services, Inc.
<PAGE>
TABLE OF CONTENTS
PART I ...................................................................... 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ............................. 3
Consolidated Balance Sheets as of December 31, 1999 and 3
September 30, 2000 (unaudited)...............................
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 2000 (unaudited)......... 5
Consolidated Statement of Stockholder's Equity for the Nine
Months Ended September 30, 2000 (unaudited) ................ 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 2000 (unaudited)...................... 7
Notes to Consolidated Financial Statements (unaudited) ........ 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ......................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 26
PART II ..................................................................... 28
ITEM 1. LEGAL PROCEEDINGS ............................................. 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..................... 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS............ 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 28
ITEM 5. OTHER INFORMATION ............................................. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 28
Exhibits ...................................................... 28
Reports on Form 8-K ........................................... 28
2
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
December 31, September
30,
1999 2000
------------- ------------
Assets (in thousands)
------
Current assets:
Cash and cash equivalents $ 43,222 32,214
Short-term investments available for sale 10,442 -
Receivables (note 6):
Trade, including amounts due from ICG 74,064 124,607
Due from ICG 128,893 -
Other 500 3
------------ ------------
203,457 124,610
------------ ------------
Prepaid expenses, deposits and inventory 2,942 8,460
------------ ------------
Total current assets 260,063 165,284
------------ ------------
Property and equipment 916,953 1,437,178
Less accumulated depreciation (64,273) (144,526)
------------ ------------
Net property and equipment (note 4) 852,680 1,292,652
------------ ------------
Restricted cash 1,030 1,288
Investment in partnership interests, common
stock and restricted and exchangeable
preferred stock 11,250 2,650
Investments, accounted for under the equity
method 41,152 26,101
Deferred financing and lease administration
costs, net of accumulated amortization of
$3.9 million and $6.2 million at December
31, 1999 and September 30, 2000,
respectively 20,663 19,457
Other assets 919 853
------------ ------------
Total Assets (notes 1 and 3) $ 1,187,757 1,508,285
============ ============
(Continued)
3
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited), (Continued)
December 31, September 30,
1999 2000
------------- -------------
(in thousands)
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 113,372 109,607
Pre-payment from ICG, (note 6) - 197,358
Payable pursuant to IRU agreement 135,322 53,826
Accrued liabilities 38,718 115,714
Deferred gain on sale 5,475 -
Current portion of capital lease obligations 1,951 47,066
Current portion of long-term debt (note 5) 750 750
------------- ------------
Total current liabilities 295,588 524,321
------------- ------------
Capital lease obligations, less current portion 5,784 88,424
Long-term debt, net of discount, less current
portion (note 5) 767,167 821,344
Other long-term liabilities 2,500 2,500
------------- ------------
Total liabilities $1,071,039 1,436,589
------------- ------------
Stockholder's equity:
Common stock, $.01 par value, 1,000 shares
authorized; 10 shares issued and outstanding
at December 31, 1999 and September 30, 2000 - -
Additional paid-in capital 129,402 129,402
Accumulated deficit (12,684) (57,706)
-------------- ------------
Total stockholder's equity 116,718 71,696
-------------- ------------
Commitments and contingencies (note 7)
Total Liabilities and Stockholder's Equity
(note 1) $ 1,187,757 1,508,285
============== ============
See accompanying notes to consolidated financial statements.
4
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------
1999 2000 1999 2000
----------- ------------- ----------- ------------
(in thousands)
Revenue
From services provided to ICG
<S> <C> <C> <C> <C>
(note 6) $ 32,333 63,057 66,724 159,466
Other 511 4,490 764 17,275
----------- ------------- ----------- ------------
Total revenue 32,844 67,547 67,488 176,741
----------- ------------- ----------- ------------
Cost of services and expenses:
Cost of services 1,116 15,210 2,550 38,456
Selling, general and
administrative expenses:
Amounts allocated from ICG
(note 6) 201 1,477 687 4,620
Other 387 691 737 1,508
Depreciation 14,925 35,974 35,868 78,392
Net loss on disposal of
long-lived assets - 934 - 934
----------- ------------- ----------- ------------
Total cost of services and
expenses 16,629 54,286 39,842 123,910
----------- ------------- ----------- ------------
Operating income 16,215 13,261 27,646 52,831
Other income (expense):
Interest expense:
Amounts due to ICG (note 6) - (10,033) - (11,929)
Other (18,492) (27,368) (51,629) (79,998)
Interest income:
Amounts earned from ICG (note 6) 3,848 - 13,882 3,171
Other 1,367 3,107 6,615 5,672
Other income (expense), net 1 (3) 440 282
----------- ------------- ----------- ------------
(13,276) (34,297) (30,692) (82,802)
----------- ------------- ----------- ------------
(Loss) income from continuing
operations before share of net
earnings (losses) 2,939 (21,036) (3,046) (29,971)
Share of net losses of equity
investees (3,441) (5,398) (4,706) (15,051)
----------- ------------- ----------- ------------
Loss from continuing operations (502) (26,434) (7,752) (45,022)
----------- ------------- ----------- ------------
Extraordinary gain on sales of
operations of NETCOM, net of - - 193,029 -
income taxes of $6.4 million
----------- ------------- ----------- ------------
Net income (loss) $ (502) (26,434) 185,277 (45,022)
=========== ============= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Nine Months Ended September 30, 2000 (unaudited)
Total
Common stock Additional stock-
------------- paid-in Accumulated holder's
Shares Amount capital deficit equity
------ ------ ---------- ---------- ----------
(in thousands)
Balances at January 1, 2000 - $ 129,402 (12,684) 116,718
Net loss - - - (45,022) (45,022)
------ ------ ---------- ---------- ----------
Balances at September 30, 2000 - $ 129,402 (57,706) 71,696
====== ====== ========== ========== ==========
See accompanying notes to consolidated financial statements.
6
<PAGE>
ICG SERVICES, 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) income $ 185,277 (45,022)
Extraordinary gain on sales of discontinued
operations (193,029) -
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Recognition of deferred gain (17,376) (6,239)
Share of net losses of equity investees 4,706 15,051
Depreciation 35,868 78,392
Net loss on disposal of long-lived assets - 934
Provision for uncollectible accounts - 64
Interest expense deferred and included in
long-term debt 44,866 49,439
Amortization of deferred financing costs
included in interest expense 1,438 1,859
Amortization of deferred lease administration
costs included in selling, general and
administrative expenses 878 450
Gain on sale of securities - (634)
Other noncash expenses - 301
Change in operating assets and liabilities:
Receivables (71,473) 76,113
Prepaid expenses, deposits and inventory (679) (1,323)
Accounts payable and accrued liabilities (8,725) 74,788
----------- -----------
Net cash provided (used) by operating
activities (18,249) 244,173
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (379,713) (286,936)
Investment in equity investees (35,093) -
Investment in restricted preferred stock (11,000) -
Proceeds from sales of operations of NETCOM,
net of cash included in sale 252,881 -
Proceeds from sale of short-term investments
available for sale 21,617 10,442
Purchase of long-term investments - (1,400)
Proceeds from sale of marketable securities 30,000 10,634
Increase in restricted cash - (258)
----------- -----------
Net cash used by investing activities (121,308) (267,518)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 80,000 95,000
Net pre-payment from ICG - 197,358
Deferred financing and lease administration
costs (6,264) (1,266)
Principal payments on long-term debt (188) (90,262)
Principal payments on capital lease obligations (2,365) (8,996)
Payments on IRU agreement - (179,497)
----------- -----------
Net cash provided by financing activities 71,183 12,337
----------- -----------
Net decrease in cash and cash equivalents (68,374) (11,008)
Net cash used by discontinued operations (5,107) -
Cash and cash equivalents, beginning of period 114,380 43,222
----------- -----------
Cash and cash equivalents, end of period $ 40,899 32,214
=========== ===========
(Continued)
7
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, (Continued)
Nine months ended
September 30,
-------------------------
1999 2000
----------- ------------
(in thousands)
Supplemental disclosure of cash flows
information of continuing operations:
Cash paid for interest $ 5,325 26,527
=========== ============
Cash paid for taxes $ 1,140 246
=========== ============
Supplemental disclosure of noncash
investing and financing activities of
continuing operations:
Acquisition of corporate headquarters assets
through the issuance of long-term debt and
conversion of security deposit $ 33,077 -
=========== ============
Assets acquired pursuant to IRU agreement $ - 96,903
Assets acquired under capital leases 6,190 132,617
----------- ------------
Total $ 6,190 229,520
=========== ============
See accompanying notes to consolidated financial statements.
8
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and September 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"), and,
consequently, ICG Services, Inc. (the "Company"). These events reduced
ICG'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 (including the Company)
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 and
other obligations. ICG 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 ICG and the Company 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 our 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. The
majority of the Company's revenue is generated from intercompany
transactions with ICG and its subsidiaries. As a result of ICG's bankruptcy
filings, the Company's future revenues and intercompany obligations could
be materially adversely impacted. 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 Nature of Business
ICG Services, Inc., a Delaware corporation ("ICG Services" or "the
Company"), was incorporated on January 23, 1998 and is a wholly owned
subsidiary of ICG. On January 21, 1998, ICG completed a merger with NETCOM
On-Line Communication Services, Inc., a Delaware corporation and Internet
service provider ("ISP") located in San Jose, California ("NETCOM"),
accounted for as a pooling of interests. Upon the formation of ICG
Services on January 23, 1998, ICG contributed its investment in NETCOM to
ICG Services and NETCOM became a wholly owned subsidiary of, and
predecessor entity to, ICG Services. Accordingly, the financial statements
of the Company prior to January 23, 1998 consist solely of the accounts of
NETCOM and its subsidiaries. Effective November 3, 1998, the Company's
board of directors adopted the formal plan to dispose of the operations of
NETCOM. On February 17 and March 16, 1999, the Company completed the sales
of the operations of NETCOM and, accordingly, the Company's consolidated
financial statements prior to March 16, 1999 reflect the operations and
net assets of NETCOM as discontinued. In conjunction with the sales, the
legal name of the NETCOM subsidiary
9
<PAGE>
ICG SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, (Continued)
(2) Organization and Nature of Business (continued)
was changed to ICG NetAhead, Inc. ("NetAhead"). NetAhead has retained the
domestic Internet backbone assets formerly owned by NETCOM which it is
utilizing for the provision of newly developed wholesale network services
to ISPs and other telecommunications providers. The Company's consolidated
financial statements reflect the operations of NETCOM as discontinued for
all periods presented. On January 23, 1998, ICG Equipment, Inc., a
Colorado corporation and wholly owned subsidiary of the Company ("ICG
Equipment"), was formed for the principal purpose of providing financing
of telecommunications equipment and services to ICG Telecom Group, Inc.,
an indirect wholly owned subsidiary of ICG, and its subsidiaries ("ICG
Telecom"). Such financing is provided through ICG Equipment's purchase of
telecommunications equipment, software, network capacity and related
services from original equipment manufacturers, providers of intercity
network facilities and ICG Telecom, and subsequent lease of such assets to
ICG Telecom.
(3) Significant Accounting Policies
(a) Basis of Presentation
These financial statements should be read in conjunction with the
Company'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
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 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 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
10
<PAGE>
(3) Significant Accounting Policies (continued)
(b) Recent Accounting Pronouncements (continued)
SAB 101B, which delayed the implementation date of SAB 101 for the
Company until the quarter ended December 31, 2000. The Company does
not believe that the adoption of SAB 101 will have a material impact
on its financial position or results of operations.
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 to the 2000
presentation.
(4) Property & Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31, September 30,
1999 2000
------------ -------------
(in thousands)
Land 10,794 14,727
Buildings and improvements 36,203 36,203
Furniture, fixtures and office equipment 6,326 7,283
Internal-use software costs 536 752
Machinery and equipment 13,451 18,095
Fiber optic equipment 241,167 336,026
Switch equipment 158,252 307,380
Fiber optic network 282,468 129,726
Site improvements 810 796
Construction in progress 166,946 586,190
------------ -------------
916,953 1,437,178
Less accumulated depreciation (64,273) (144,526)
------------ -------------
852,680 1,292,652
============ =============
Property and equipment includes approximately $586.2 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.
11
<PAGE>
(5) 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 at the
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, net of
discount 293,925 315,931
10% Senior discount notes, net of
discount 361,290 388,724
Mortgage loan payable with adjustable
rate of interest (15.21% at September
30, 2000) due in full on January 31,
2013, secured by corporate headquarters 33,077 33,077
--------------- ---------------
767,917 822,094
Less current portion (750) (750)
--------------- ---------------
$ 767,167 821,344
=============== ===============
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.
(a) 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.
12
<PAGE>
(6) Related Party Transactions
The following table illustrates related party transactions of ICG Services
for the three and nine months ended September 30, 1999 and 2000 (all
transactions listed are between the Company (including its subsidiaries)
and ICG (including its subsidiaries)):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 2000 1999 2000
---------- -------- --------- ----------
(in thousands)
Related Party Shared Services Activity:
Net charges to (from) ICG, including
<S> <C> <C> <C> <C>
pre-payments from ICG (a) $ 145,454 174,526 377,216 377,100
Charges from ICG included in (201) 1,477 (687) 4,620
expenses (b)
Related Party Leasing Activity:
Equipment purchased for ICG (c) 45,498 81,872 329,498 179,837
Value of new equipment on lease to
ICG (d) 18,440 40,793 164,440 134,676
Operating lease revenue (d) 26,740 35,804 53,459 101,168
Lease service fee revenue (e) 4,372 6,812 9,708 17,335
Corporate headquarters lease
revenue (f) 1,221 1,258 3,557 3,737
Related Party Interest Income (g) 3,848 - 13,882 3,171
Related Party Interest Expense (g) - (10,033) - (11,929)
Related Party Operational Activity:
Installation & local access
expenses (h) 1,200 - 4,000 -
DataChoice Revenue (i) - 19,183 - 37,226
</TABLE>
(a) The Company and its subsidiaries have entered into certain
intercompany and shared services agreements with ICG, whereby ICG
allocates to the Company direct and certain indirect costs incurred by
ICG or its other subsidiaries (the "Restricted Subsidiaries") on
behalf of the Company. Allocated expenses generally include a portion
of salaries and related benefits of legal, accounting and finance,
information systems support and other ICG employees, certain overhead
costs and reimbursement for invoices of the Company paid by ICG.
Conversely, any cash collected by ICG on behalf of the Company or its
subsidiaries or invoices paid by the Company on behalf of ICG are in
turn reimbursed to the Company by ICG. As the Company and its
subsidiaries and ICG and its Restricted Subsidiaries jointly enter
into service offerings and other transactions, joint costs incurred
are generally allocated to each of the Company and ICG according to
the relative capital invested and efforts expended by each party. All
transactions between the Company, including its subsidiaries, and ICG,
including its subsidiaries, contain fair and reasonable terms. All
such transactions are settled in cash on a quarterly basis.
During the second quarter of fiscal year 2000, the shared services
agreement between the Company and ICG was amended to allow for
pre-payments to the Company in order to offset payments for capital
expenditures, line costs, and general expenses. The outstanding
balance of $197.4 million is included in pre-payment from ICG, in the
Company's consolidated balance sheet as of September 30, 2000.
In addition, as of September 30, 2000, the Company has a trade
receivable from ICG in the approximate amount of $117 million for
earned lese revenue and infrastructure charges.
The majority of the Company's revenue is generated from intercompany
transactions with ICG and its subsidiaries. As a result of ICG's
bankruptcy filings, the Company's future revenues and intercompany
obligations could be materially adversely impacted.
(b) Certain of the amounts allocated as discussed in (a) above are
included in the Company's consolidated statement of operations as a
component of selling, general and administrative expenses ("SG&A"
expenses).
13
<PAGE>
(6) Related Party Transactions (continued)
(c) ICG Equipment purchased certain telecommunications equipment both from
and for ICG Telecom. The purchase prices and lease payments for all
leases are subject to adjustment, based on the results of an
independent appraisal which may be requested at the option of ICG or
ICG Equipment on or before 90 days from the purchase date.
(d) ICG Equipment entered into separate agreements to lease
telecommunications equipment to ICG under operating leases, with
annual lease payments commencing one year from the date of the lease.
ICG Equipment recognizes revenue from the lease payments ratably over
the lease terms. As noted in (c) above, the purchase prices and lease
payments for all leases are subject to adjustment, based on the
results of an independent appraisal which may be requested at the
option of ICG or ICG Equipment on or before 90 days from the purchase
date.
(e) Under the master lease agreement between ICG Equipment and ICG
Telecom, ICG is required to pay ICG Equipment a monthly lease service
fee, at an annual rate of prime plus 4% (13.5% at September 30, 2000),
based on the average monthly balance of assets purchased by ICG
Equipment and intended for future lease to ICG, but not yet placed
into service. ICG Equipment places assets in service upon the
commencement of the respective lease term. The amount of assets
purchased by ICG Equipment and intended for future lease to ICG, but
not yet placed into service, was approximately $155.0 million and
$187.2 million at September 30, 1999 and 2000, respectively. The
Company begins depreciation on property and equipment at the time the
assets are placed in service.
(f) Effective January 1, 1999, the Company purchased ICG's Corporate
Headquarters and subsequently assumed the prior lessor's operating
lease of the Corporate Headquarters assets to a Restricted Subsidiary
of ICG. The Company earned leasing revenue from the Restricted
Subsidiary of ICG under the operating lease, which is included in
revenue and due from ICG in the Company's consolidated financial
statements.
(g) Net interest income (expense) accrued by the Company on outstanding
balances due from or to ICG and its Restricted Subsidiaries has been
accrued on outstanding balances of intercompany transfers and direct
and indirect costs between ICG Services and ICG and its Restricted
Subsidiaries as discussed in (a) above at 12.5% and 10.15% per annum
for 1999 and 2000, respectively, which represents the Company's
approximate weighted average cost of capital at the beginning of the
respective fiscal year.
(h) In the normal course of business, ICG Telecom provides the use of
certain of its local access lines to NETCOM (prior to the disposition
of the operations of NETCOM) and NetAhead and, accordingly, charges
NETCOM and NetAhead for costs of any installation and recurring access
to its network. Theses expenses have been included in the
extraordinary gain on the sales of the operations of NETCOM for those
charges relating to NETCOM, and in operating costs for those charges
relating to NetAhead, a portion of which were applied against the
deferred gain on the sale of certain of NETCOM's domestic operating
assets and liabilities, in the Company's consolidated financial
statements.
(i) NetAhead earned revenue from a subsidiary of ICG, DataChoice Network
Services, L.L.C. ("DataChoice"), for DataChoice's use of NetAhead's
data network assets.
(7) Commitments and Contingencies
As a result of the Company's filing for bankruptcy protection, all
commitments and contingencies could be substantially modified during the
Company's bankruptcy restructuring process.
The Company has entered into various equipment 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. These agreements may be terminated by either the Company or the
vendor upon prior written notice.
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.
The Company has entered into certain commitments to purchase capital assets
with an aggregate purchase price of approximately $94.0 million at
September 30, 2000.
NETCOM, now NetAhead, is a party to certain 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.
14
<PAGE>
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 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 retain qualified management and employees and the
ability to manage growth;
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 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 Services, Inc. ("ICG Services" or the "Company") was formed on January
23, 1998 and is a wholly owned subsidiary of ICG Communications, Inc. ("ICG").
The Company's Leasing Services and Network Services operations are currently
conducted through its two operating subsidiaries, ICG Equipment, Inc. ("ICG
Equipment") and ICG NetAhead, Inc. ("NetAhead") (formerly NETCOM On-Line
Communication Services, Inc. ("NETCOM")).
On January 21, 1998, ICG acquired NETCOM, a Delaware corporation and
provider of Internet connectivity and Web site hosting services located in San
Jose, California, in a transaction accounted for as a pooling of interests. As
consideration for the acquisition, ICG issued approximately 10.2 million shares
of common stock of ICG ("ICG Common Stock"), valued at approximately $284.9
15
<PAGE>
million on the date of the merger. Upon the formation of ICG Services, ICG
contributed its investment in NETCOM to ICG Services and NETCOM became a wholly
owned subsidiary of, and predecessor entity to, ICG Services. Accordingly, the
historical consolidated financial statements of the Company prior to January 23,
1998 consist solely of the accounts of NETCOM.
In January 1998, the Company formed ICG Equipment, a Colorado corporation,
for the principal purpose of providing financing of telecommunications equipment
and services to ICG Telecom Group, Inc., an indirect wholly owned subsidiary of
ICG and provider of competitive local exchange services, and its subsidiaries
("ICG Telecom"). Such financing is provided through ICG Equipment's purchase of
telecommunications equipment, software, network capacity and related services
from original equipment manufacturers, providers of intercity network facilities
and ICG Telecom, and subsequent lease of such assets to ICG Telecom. The
equipment and services provided to ICG Telecom are utilized to upgrade and
expand ICG's network infrastructure. Management believes that all leasing and
other arrangements between ICG Equipment and ICG Telecom contain fair and
reasonable terms and are intended to be conducted on the basis of fair market
value and on comparable terms that the Company would be able to obtain from a
comparable third party. ICG Equipment completed its first significant
transaction on September 30, 1998 and, accordingly, ICG Equipment's operations
prior to that date are not significant. During the second half of 1998 through
September 30, 2000, ICG Equipment entered into a series of agreements whereby
ICG Equipment purchased telecommunications equipment and fiber optic capacity
from and for ICG Telecom and leased back the same telecommunications equipment
and fiber optic capacity to ICG Telecom under operating leases. Additionally,
under master lease agreements between ICG Equipment and ICG Telecom, ICG Telecom
is required to pay ICG Equipment a monthly lease service fee based on the
average monthly balance of assets purchased by ICG Equipment and intended for
future lease to ICG Telecom, but not yet placed into service. At September 30,
2000, ICG Equipment had approximately $712.4 million of telecommunications
equipment, software, network capacity and related services under lease to ICG
Telecom and approximately $187.2 million of such assets intended for future
lease to ICG Telecom, but not yet placed into service.
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"), and, consequently, ICG
Services, Inc. (the "Company"). Specifically, these events reduced ICG'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 (including the Company) 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 and other obligations. ICG and its 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 ICG and the Company 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 our 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. The majority
of the Company's revenue is generated from intercompany transactions with ICG
and its subsidiaries. As a result of ICG's bankruptcy filings, the Company's
future revenues and intercompany obligations could be materially adversely
impacted. 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.
16
<PAGE>
Summary of Third Quarter and Subsequent Events
Chronology of Events
During the third quarter, ICG significantly lowered expected revenue and
cash flow derived from terminating local ISP traffic based on several
significant regulatory and operational developments. Specifically, ICG 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 ICG increased the number of resold lines, reciprocal compensation
revenue was reduced, as these resold lines do not generate reciprocal
compensation revenue.
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 is
of Liberty Media Group, which 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 of 2000.
Further, reduced line commitments for the installation of IRAS products lowered
expected IRAS revenue and EBITDA for 2001. Therefore, on September 18, 2000, ICG
announced that lower 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, ICG announced
that it had a revised business plan, required additional funding and was
exploring all strategic options involving ICG.
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, ICG attempted to obtain
additional funding while at the same time cutting all 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 ICG withdrew
interest. In addition, in response to events and announcements made during the
third quarter, 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.
17
<PAGE>
On November 14, 2000, the Company filed for Chapter 11 protection. Also on
that day, ICG announced that it had obtained a commitment letter which will
provide ICG 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.
Status of Operations and Reorganization Plan
During the pendancy of the Debtors Chapter 11 cases, ICG and the Company
expect to provide on-going service to their 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 ICG has
capacity, allowing ICG to add customers for nominal incremental cost and earn a
better return on existing assets. In addition, ICG intends to focus on product
sales that utilize existing infrastructure to reduce capital required in the
short-term. In general, ICG will scale its geographic expansion and delivery of
new products to better match its technical capabilities and capital
availability. ICG'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.
Service Offerings
On February 17, 1999, the Company sold certain of the operating assets and
liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet service
provider ("ISP") located in Atlanta, Georgia and predecessor to EarthLink, Inc.
("MindSpring"), for total proceeds of $245.0 million, and on March 16, 1999, the
Company sold all of the capital stock of NETCOM's international operations in
Canada and the United Kingdom to other unrelated third parties for total
proceeds of approximately $41.1 million. In conjunction with the sale to
MindSpring, the legal name of the NETCOM subsidiary was changed to ICG NetAhead,
Inc. ("NetAhead"). NetAhead has retained the domestic Internet backbone assets
formerly owned by NETCOM. NetAhead is utilizing the retained network operating
assets to provide wholesale Internet access and enhanced network services to
MindSpring and other ISPs, ICG Telecom and other telecommunications providers.
NetAhead provides network capacity and enhanced data services to ISPs, ICG
Telecom and other telecommunications providers. In December 1998, ICG announced
plans to offer several new network services available to its business and ISP
customers which utilize ICG's and, consequently, NetAhead's nationwide data
network and service capabilities to carry out-of-region traffic and enhanced
data services provided. Modemless remote access service ("RAS") also known as
managed modem service, allows NetAhead to provide modem access at ICG's and the
Company's switch locations, thereby eliminating the need for ISPs to deploy
modems physically at each of their POPs. RAS benefits the ISPs by reducing
capital expenditures and shifting network management responsibility from the
ISPs to NetAhead. NetAhead also provides transport services to deliver all
Internet protocol (IP) data packets either directly to the ISP, if the ISP is
not collocated at the telecommunications provider's local switch, or directly to
the Internet, bypassing the ISP. Additionally, through its network operations
center, NetAhead monitors the usage of each line and is responsible for the
administration of all network repair and maintenance.
18
<PAGE>
RESULTS OF OPERATIONS
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, cost of services and expenses, operating income and
EBITDA as a percentage of the Company's revenue.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------ ------------------------------
1999 2000 1999 2000
-------------- --------------- -------------- ---------------
$ % $ % $ % $ %
--------- ----- -------- ----- -------- ----- -------- ----
(unaudited)
(in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue 32,844 100 67,547 100 67,488 100 176,741 100
Cost of services and expenses:
Cost of services 1,116 3 15,210 23 2,550 4 38,456 22
Selling, general and
administrative expenses 588 2 2,168 3 1,424 2 6,128 4
Depreciation 14,925 46 35,974 53 35,868 53 78,392 45
Net loss on disposal of
long-lived assets - - 934 1 - - 934 -
--------- ----- -------- ----- -------- ----- -------- ----
Total cost of services and
expenses 16,629 51 54,286 80 39,842 59 123,910 71
Operating income 16,215 49 13,261 20 27,646 41 52,831 29
Other Data:
Net cash provided (used) by
operating activities (24,584) 176,315 (18,249) 244,173
Net cash used by investing
activities (104,793) (164,417) (121,308) (267,518)
Net cash provided (used) by
financing activities 73,602 (166,374) 71,183 12,337
EBITDA (1) 31,140 95 50,169 75 63,514 94 132,157 75
Capital expenditures of
continuing operations (2) 88,914 192,563 385,903 516,456
</TABLE>
(1) 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.
(2) Capital expenditures include assets acquired with cash, under capital
leases, and pursuant to indefeasible right of use ("IRU) agreement.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Three Months Ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- -------- --------
($ values in thousands)
Revenue:
From services provided to ICG 32,333 98 63,057 94
Other 511 2 4,490 6
-------- -------- -------- --------
Total Revenue 32,844 100 67,547 100
======== ======== ======== ========
Cost of services 1,116 3 15,210 23
======== ======== ======== ========
Selling, general and
administrative:
Amounts allocated from ICG 201 1 1,477 2
19
<PAGE>
Three Months Ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- -------- --------
($ values in thousands)
Other 387 1 691 1
-------- -------- -------- --------
Total SG&A 588 2 2,168 3
======== ======== ======== ========
Depreciation 14,925 46 35,974 54
======== ======== ======== ========
Revenue
A significant portion of the Company's revenue is through services
provided to ICG. Revenue earned from the services provided to ICG can be broken
out as follows:
Three Months Ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- -------- --------
($ values in thousands)
Revenue from services provided to ICG:
Operating lease revenue 26,740 83 35,804 57
Lease service fee revenue 4,372 14 6,812 11
Corporate headquarters lease
revenue 1,221 3 1,258 1
NetAhead revenue with DataChoice
(a subsidiary of ICG) - - 19,163 31
NetAhead revenue with ICG - - 20 -
-------- -------- -------- --------
Total revenue from ICG 32,333 100 63,057 100
======== ======== ======== ========
Revenue recorded on operating leases of property and equipment to ICG
increased from $26.7 million for the three months ended September 30, 1999 to
$35.8 for the same period in 2000, a 34% increase. Leasing revenue increased
over the period as additional assets were leased to ICG from September 30, 1999
through September 30, 2000.
Lease service fee revenue earned from ICG for the cost of carrying assets
not yet placed into service increased from $4.4 million for the three months
ended September 30, 1999 to $6.8 million for the same period in 2000. The lease
service fee revenue increased primarily due to the increase in the amount of
assets not yet placed into service as well as the fact that the service fee is
earned at a rate of prime plus 4% (13.5% at September 30, 2000) and the prime
rate increased from September 30, 1999 to September 30, 2000.
The Company also received rental income from ICG under the operating lease
for ICG's corporate headquarters, which the Company purchased and simultaneously
leased to ICG, effective January 1, 1999. For the three months ended September
30, 1999 and 2000, the Company recorded revenue on the operating lease for the
corporate headquarters of $1.2 million and $1.3 million, respectively.
ICG Services also earned a significant amount of revenue from a subsidiary
of ICG, DataChoice Network Services, L.L.C. ("DataChoice"), for DataChoice's use
of NetAhead's RAS assets. During the three months ended September 30, 2000, the
Company earned $19.2 million in this manner.
Additionally, the increase in revenue during the three months ended
September 30, 2000 over 1999 is also due to the recognition of approximately
$4.4 million of revenue for the three months ended September 30, 2000 which
prior to February 17, 2000 had been offset against the deferred gain on the sale
of NETCOM assets.
Cost of services
Cost of services was $1.1 million for the three months ended September 30,
1999 and $15.2 million for the same period in 2000. Costs of services includes
line costs and other direct costs of NetAhead associated with NetAhead's and ICG
Telecom's joint service offering of IP telephony services. Additionally, the
20
<PAGE>
increase in cost of services during the three months ended September 30, 2000
over 1999 is due to the recognition of approximately $15.2 million of operating
expenses for the three months ended September 30, 2000 which prior to February
17, 2000 had been offset against the deferred gain on the sale of NETCOM assets.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses were approximately
$0.6 million for the three months ended September 30, 1999 and $2.2 million for
the same period in 2000. SG&A expenses include allocations of a portion of ICG's
general and administrative expenses for certain direct and indirect costs
incurred by ICG on behalf of the Company. Such allocations were $0.2 million and
$1.5 million, representing 34% and 68% of total SG&A expenses for the three
months ended September 30, 1999 and 2000, respectively. Remaining SG&A expenses
include general corporate administrative expenses, including professional and
cash management fees. Additionally, the increase in SG&A expenses during the
three months ended September 30, 2000 over 1999 is due to the recognition of
$0.3 million of SG&A expenses which prior to February 17, 2000 had been off set
against the deferred gain on the sale of NETCOM assets.
Depreciation
Depreciation increased from $14.9 million for the three months ended
September 30, 1999 to $36.0 million for the same period in 2000. Depreciation
and amortization consists primarily of depreciation of ICG Equipment's property
and equipment purchased from and for ICG Telecom and leased to ICG Telecom under
long-term operating leases, in addition to depreciation of property and
equipment of NetAhead. The increase in depreciation is primarily due to the
continued expansion of ICG Equipment's operations as well as a reduction in the
overall weighted-average useful life of depreciable assets in service.
Interest expense
Interest expense increased from $18.5 million for the three months ended
September 30, 1999 to $37.4 million for the same period in 2000 (which includes
$10.0 million in interest expense paid to ICG). Included in interest expense for
the three months ended September 30, 1999 and 2000 was $15.9 million and $19.7
million of noncash interest, respectively. Interest expense is primarily
attributable to the 10% Senior Discount Notes due 2008 (the "10% Notes") issued
in February 1998, the 9 7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes")
issued in April 1998 and the senior secured financing facility (the "Senior
Facility") completed in August 1999.
Interest income
Interest income decreased from $5.2 million for the three months ended
September 30, 1999 to $3.1 million for the same period in 2000. During the three
months ended September 30, 1999, the Company earned interest from ICG for
invoices paid by the Company on behalf of ICG and its other operating
subsidiaries. The Company also earned interest on invested cash balances during
both the three months ended September 30, 1999 and 2000.
Share of net losses of equity investees
ICG Services purchased a 20% equity interest in ICG Ohio LINX in August
1998 and a 49% equity interest in ChoiceCom in March 1999. The Company's share
of net losses of equity investees for the three months ended September 30, 1999
consists of the Company's share of net losses of ICG Ohio LINX, Inc. ("ICG Ohio
LINX") and ICG ChoiceCom L.P. ("ChoiceCom") of $0.7 million and $2.7 million,
respectively. For the same period in 2000, the Company's share of net losses of
equity investees are comprised of the Company's share of net losses of ICG Ohio
LINX and ChoiceCom of $1.0 million and $4.4 million, respectively.
Loss before extraordinary gain
Loss before extraordinary gain increased from a loss of $0.5 million for
the three months ended September 30, 1999 to loss of $26.4 million for the same
period in 2000 due to the increase in revenue, offset by increases in cost of
services, depreciation and interest expense, as noted above.
21
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Nine months ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- -------- --------
($ values in thousands)
Revenue:
From services provided to ICG 66,724 99 159,466 91
Other 764 1 17,275 9
-------- -------- -------- --------
Total Revenue 67,488 100 176,741 100
======== ======== ======== ========
Cost of services 2,550 4 38,456 22
======== ======== ======== ========
Selling, general and
administrative:
Amounts allocated from ICG 687 1 4,620 2
Other 737 1 1,508 1
-------- -------- -------- --------
Total SG&A 1,424 2 6,128 3
======== ======== ======== ========
Depreciation 35,868 53 78,392 45
======== ======== ======== ========
Revenue
A significant portion of the Company's revenue is through services
provided to ICG. Revenue earned from the services provided to ICG can be broken
out as follows:
Nine months ended September 30,
---------------------------------------
1999 2000
------------------ -------------------
$ % $ %
-------- -------- -------- --------
($ values in thousands)
Revenue from services provided to ICG:
Operating lease revenue 53,459 80 101,168 64
Lease service fee revenue 9,708 15 17,335 10
Corporate headquarters lease
revenue 3,557 5 3,737 3
NetAhead revenue with
DataChoice (a subsidiary of ICG) - - 37,167 23
NetAhead revenue with ICG - - 59 -
-------- -------- -------- --------
Total revenue from ICG 66,724 100 159,466 100
======== ======== ======== ========
Revenue recorded on operating leases of property and equipment to ICG
increased from $53.5 million for the nine months ended September 30, 1999 to
$101.2 for the same period in 2000, an 89% increase. Leasing revenue increased
over the period as additional assets were leased to ICG Telecom from September
30, 1999 through September 30, 2000.
Lease service fee revenue earned from ICG for the cost of carrying assets
not yet placed into service increased from $9.7 million for the nine months
ended September 30, 1999 to $17.3 million for the same period in 2000. The lease
service fee revenue increased primarily due to the increase in the amount of
assets not yet placed into service as well as the fact that the service fee is
earned at a rate of prime plus 4% (13.5% at September 30, 2000) and the prime
rate increased from September 30, 1999 to September 30, 2000.
The Company also received rental income from ICG under the operating lease
for ICG's corporate headquarters, which the Company purchased and simultaneously
leased to ICG, effective January 1, 1999. For the nine months ended September
30, 1999 and 2000, the Company recorded revenue on the operating lease for the
corporate headquarters of $3.6 million and $3.7 million, respectively.
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ICG Services also earned a significant amount of revenue from a subsidiary
of ICG, DataChoice, for DataChoice's use of NetAhead RAS assets. During the nine
months ended September 30, 2000, the Company earned $37.2 million in this
manner.
Additionally, the increase in revenue during the nine months ended
September 30, 2000 over 1999 is also due to the recognition of approximately
$17.0 million of revenue for the nine months ended September 30, 2000 which
prior to February 17, 2000 had been offset against the deferred gain on the sale
of NETCOM assets.
Cost of services
Cost of services was $2.6 million for the nine months ended September 30,
1999 and $38.5 million for the same period in 2000. Cost of services includes
line costs and other direct costs of NetAhead associated with NetAhead's and ICG
Telecom's joint service offering of IP telephony services. Additionally, the
increase in cost of services during the nine months ended September 30, 2000
over 1999 is due to the recognition of approximately $38.4 million of operating
expenses for the nine months ended September 30, 2000 which prior to February
17, 2000 had been offset against the deferred gain on the sale of NETCOM assets.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses were approximately
$1.4 million for the nine months ended September 30, 1999 and $6.1 million for
the same period in 2000. SG&A expenses include allocations of a portion of ICG's
general and administrative expenses for certain direct and indirect costs
incurred by ICG on behalf of the Company. Such allocations were $0.7 million and
$4.6 million, representing 48% and 75% of total SG&A expenses for the nine
months ended September 30, 1999 and 2000, respectively. Remaining SG&A expenses
include general corporate administrative expenses, including professional and
cash management fees. Additionally, the increase in SG&A expenses during the
nine months ended September 30, 2000 over 1999 is due to the recognition of $2.0
million of SG&A expenses which prior to February 17, 2000 had been offset
against the deferred gain on the sale of NETCOM assets.
Depreciation
Depreciation increased from $35.9 million for the nine months ended
September 30, 1999 to $78.4 million for the same period in 2000. Depreciation
consists primarily of depreciation of ICG Equipment's property and equipment
purchased from and for ICG Telecom and leased to ICG Telecom under long-term
operating leases, in addition to depreciation of property and equipment of
NetAhead. The increase in depreciation is primarily due to the continued
expansion of ICG Equipment's operations as well as a reduction in the overall
weighted-average useful life of depreciable assets in service.
Interest expense
Interest expense increased from $51.6 million for the nine months ended
September 30, 1999 to $91.9 million for the same period in 2000 (which includes
$11.9 million in interest expense paid to ICG). Included in interest expense for
the nine months ended September 30, 1999 and 2000 was $46.3 million and $53.5
million of noncash interest, respectively. Interest expense is primarily
attributable to the 10% Senior Discount Notes due 2008 (the "10% Notes") issued
in February 1998, the 9 7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes")
issued in April 1998 and the senior secured financing facility (the "Senior
Facility") completed in August 1999.
Interest income
Interest income decreased from $20.5 million for the nine months ended
September 30, 1999 to $8.8 million for the same period in 2000 and represents
net interest income from ICG for invoices paid by the Company on behalf of ICG
and its other operating subsidiaries and repaid on a quarterly basis as well as
interest earned on invested cash balances.
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Share of net losses of equity investees
ICG Services purchased a 20% equity interest in ICG Ohio LINX in August
1998 and a 49% equity interest in ChoiceCom in March 1999. The Company's share
of net losses of equity investees for the nine months ended September 30, 1999
consists of the Company's share of net income of ICG Ohio LINX. of $1.6 million,
offset by the Company's share of net losses of ChoiceCom of $6.3 million. For
the same period in 2000, the Company's share of net losses of equity investees
are comprised of the Company's share of net losses of ICG Ohio LINX and
ChoiceCom of $2.8 million and $12.3 million, respectively.
Loss before extraordinary gain
Loss before extraordinary gain increased from $7.8 million for the nine
months ended September 30, 1999 to $45.0 million for the same period in 2000 due
to the increase in revenue, offset by increases in cost of services,
depreciation and interest expense, as noted above.
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and short term investments of
approximately $32.2 million. On November 14, 2000, ICG announced that it had
obtained a commitment letter which will provide ICG 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 ICG to fund operations through the bankruptcy restructuring
process.
At September 30, 2000, the Company had approximately $957.6 million of
indebtedness outstanding. 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 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 paid in full.
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 contemplated financing arrangements, 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 $18.2 million and provided $244.2
million for the nine months ended September 30, 1999 and 2000, respectively. Net
cash used by operating activities during the nine months ended September 30,
1999 is primarily due to net income, which was more than offset by changes in
working capital items and noncash expenses, such as deferred interest expense
and depreciation. Net cash provided by operating activities during the nine
months ended September 30, 2000 is primarily due to net losses, which are more
than offset noncash expenses, such as deferred interest expense and
depreciation.
24
<PAGE>
Net Cash Used By Investing Activities
The Company's investing activities used $121.3 million and $267.5 million
for the nine months ended September 30, 1999 and 2000, respectively. Net cash
used 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 the sale of short-term investments and marketable and available for sale
securities of $51.6 million, offset by the acquisition of property, equipment
and other assets of $379.7 million, the purchase of the 49% equity interest in
ChoiceCom of $35.1 million and the purchase of restricted preferred stock of
$11.0 million. Net cash used by investing activities during the nine months
ended September 30, 2000 is primarily from the acquisition of property,
equipment and other assets of $286.9 million partially offset by proceeds from
the sale of short-term investments and marketable trading securities of $21.1
million. The Company acquired assets under capital leases and pursuant to IRU
agreement of $229.5 million during the nine months ended September 30, 2000.
Net Cash Provided By Financing Activities
The Company's financing activities provided $71.2 million and $12.3 million
for the nine months ended September 30, 1999 and 2000, respectively. For the
nine months ended September 30, 1999, the Company's financing activities consist
of the net proceeds from the issuance of long-term debt, principal payments on
long-term debt and capital leases and deferred financing and lease
administration costs. Net cash provided by financing activities for the nine
months ended September 30, 2000 is primarily from the proceeds from the Senior
Facility and the pre-payment from ICG which are partially offset by principal
payments on the IRU agreement, long-term debt and capital leases.
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, the Company had $84.4
million outstanding under the loans at weighted average interest rates ranging
from 9.26% to 10.06% for the nine months ended September 30, 2000.
As of September 30, 2000, the Company had an aggregate accreted value of
approximately $704.7 million outstanding under the 10% Notes and the 9 7/8%
Notes.
Other Cash Commitments and Capital Requirements
The Company's capital expenditures of continuing operations, including
assets acquired with cash, under capital leases and pursuant to IRU agreement
were $385.9 million and $516.5 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
doubt about the Company's ability to complete and place in service the Company's
$586.2 million construction in progress balance as of September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
25
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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%.
26
<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.
See Notes 1 and 6 to the Company's unaudited consolidated financial
statements for the quarterly period ended September 30, 2000 contained
elsewhere in this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS
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 10%
Notes, 9 7/8% Notes, and the Senior Secured Facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(A) Exhibits.
(10) Material Contracts.
10:1: 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 Services, Inc. for the
nine months ended September 30, 2000.
(B) Reports on Form 8-K.
(i) Current Report on Form 8-K dated September 18, 2000, regarding
the announcement of a revised business plan.
27
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INDEX TO EXHIBIT
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
INDEX TO EXHIBITS
10.1 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 Services, Inc. for the nine months ended
September 30, 2000.
<PAGE>
EXHIBIT 10.1
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>
EXHIBIT 27.1
Financial Data Schedule of ICG Services, Inc. for the nine months ended
September 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements 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 December 11, 2000.
ICG SERVICES, INC.
Date: December 11, 2000 By: /s/ Randall C. Curran
------------------------------------
Randall C. Curran
Chief Executive Officer
Date: December 11, 2000 By: /s/ John V. Colgan
------------------------------------
John V. Colgan, Vice President of
Finance and Controller
(Principal Accounting Officer)
