UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission File Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
- --------------------------------------------------------------------------------
Delaware 84-1342022
Nova Scotia Not Applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
- --------------------------------------------------------------------------------
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
Englewood, Colorado 80112
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive (Address of U.S. agent for
offices) service)
- --------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888)424-1144 or (303)
414-5000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes No |X|
The number of outstanding common shares of ICG Communications, Inc. as of
December 31, 2001 was 52,045,443. ICG Canadian Acquisition, Inc., a wholly owned
subsidiary of ICG Communications, Inc., owns all of the issued and outstanding
common shares of ICG Holdings (Canada) Co. ICG Holdings (Canada) Co. owns all of
the issued and outstanding shares of ICG Holdings, Inc.
TABLE OF CONTENTS
PART I ....................................................................... 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... 3
Consolidated Balance Sheets as of December 31, 2000
and September 30, 2001 (unaudited)........................... 3
Consolidated Statements of Operations for the Nine Months
Ended September 30, 2000 and 2001 (unaudited)................ 5
Consolidated Statement of Stockholders' Deficit for the
Nine Months Ended September 30, 2001 (unaudited)............. 7
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 2001 (unaudited)................ 8
Notes to Consolidated Financial Statements (unaudited).........10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....30
PART II ......................................................................31
ITEM 1. LEGAL PROCEEDINGS..............................................31
ITEM 2. CHANGES IN SECURITIES..........................................31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........31
ITEM 5. OTHER INFORMATION..............................................31
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K................................32
Exhibits.......................................................32
Reports on Form 8-K............................................32
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and September 30, 2001 (Unaudited)
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Assets
- ------
Current assets:
Cash and cash equivalents $ 196,980 $ 139,447
Short-term investments available for sale 17,733 4,085
Trade receivables, net of allowance of $94.3
million and $51.6 million at December 31,
2000 and September 30, 2001, respectively 132,095 59,266
Other receivables 994 427
Prepaid expenses and deposits 13,234 15,053
------------ -------------
Total current assets 361,036 218,278
Property and equipment, net (note 5) 590,500 569,234
Restricted cash 9,278 7,247
Investments 1,650 650
Deferred financing costs, net of accumulated
amortization of $1.2 million and $7.6 million
at December 31, 2000 and September 30, 2001,
respectively 10,969 6,310
Deposits 7,019 9,807
------------ -------------
Total Assets (note 1) $ 980,452 $ 811,526
============ =============
(continued)
See accompanying notes to consolidated financial statements.
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited), Continued
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities not subject to compromise:
Accounts payable $ 8,774 5,979
Accrued liabilities 57,888 68,740
Deferred revenue 14,840 8,550
Current portion of long-term debt (note 6) 796 796
------------ -------------
Total current liabilities not subject to
compromise 82,298 84,065
Liabilities subject to compromise (notes 1 and 2, 6) 784,627 2,657,396
Long-term liabilities not subject to compromise:
Long-term debt, net of discount, less current
portion (note 6) 117,784 84,707
Capital lease obligations, less current portion - 50,529
Other long-term liabilities 1,090 1,090
------------ -------------
Total liabilities 2,985,799 2,877,787
Redeemable preferred stock of subsidiary (at 449,056 449,056
liquidation value)
Mandatorily redeemable preferred securities of
ICG Funding (at liquidation value) 132,251 132,251
8% Series A Convertible Preferred Stock (at 785,353 785,353
liquidation value)
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000
shares authorized; 52,045,443 shares issued
and outstanding 520 520
Additional paid-in capital 882,142 882,142
Accumulated deficit (4,254,669) (4,315,583)
------------ -------------
Total stockholders' deficit (3,372,007) (3,432,921)
Commitments and contingencies (note 7)
------------ -------------
Total Liabilities and Stockholders' Deficit (note 1) $ 980,452 $ 811,526
============ =============
See accompanying notes to consolidated financial statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 2001
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2000 2001 2000 2001
---------- --------- ---------- ---------
(in thousands, except per share data)
Revenue $ 145,257 $124,071 $ 477,369 $381,720
Operating costs and expenses:
Operating costs 118,711 84,954 304,202 282,329
Selling, general and administrative
expenses 84,182 23,469 188,947 80,635
Depreciation and amortization 99,023 18,301 236,514 50,484
Loss on disposal of assets 2,021 1,908 2,566 9,541
Other, net 433 - 1,692 -
---------- --------- ---------- ---------
Total operating costs and expenses 304,370 128,632 733,921 422,989
---------- --------- ---------- ---------
Operating loss (159,113) (4,561) (256,552) (41,269)
Other income (expense):
Interest expense (contractual
interest of $60 million and $180
million not recorded during the
three and nine months ended
September 30, 2001, respectively) (66,013) (277) (195,406) (24,076)
Interest income 5,898 1,503 20,437 5,709
Other income (expense), net (352) (95) (349) 1,239
---------- --------- ---------- ---------
Total other income (expense), net 60,467) 1,131 (175,318) (17,128)
---------- --------- ---------- ---------
Loss from continuing operations
before reorganization income
(expense), net and accretion and
preferred dividends (219,580) (3,430) (431,870) (58,397)
Reorganization income (expense),
net (note 4) - 29,194 - (2,517)
Accretion and preferred dividends
on preferred securities of
subsidiaries (17,656) - (51,428) -
Income tax expense (10) - (10) -
---------- --------- ---------- ---------
Income (loss) from continuing
operations (237,246) 25,764 (483,308) (60,914)
Net income from discontinued
operations - - 736 -
---------- --------- ---------- ---------
Net income (loss) (237,246) 25,764 (482,572) (60,914)
Accretion and dividends of 8% Series
A Convertible Preferred Stock to
liquidation value (17,274) - (31,736) -
Charge for beneficial conversion
feature of 8% Series A Convertible
Preferred Stock - - (159,279) -
---------- --------- ---------- ---------
Net income (loss) attributable to
common stockholders $(254,520) $ 25,764 $(673,587) $(60,914)
========== ========= ========== =========
(continued)
See accompanying notes to consolidated financial statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 2001
(Unaudited), Continued
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2000 2001 2000 2001
---------- --------- ---------- ---------
(in thousands, except per share data)
Other comprehensive loss:
Unrealized loss on long-term
investments available for sale (8,625) - (8,625) -
---------- --------- ---------- ---------
Comprehensive income (loss) $(263,145) $ 25,764 $(682,212) $(60,914)
========== ========= ========== =========
Net loss per share - basic and diluted:
Net loss attributable to common
stockholders, before net income
from discontinued operations $ (4.92) $ 0.50 $ (13.60) $ (1.17)
Net income from discontinued
operations - - 0.02 -
---------- --------- ---------- ---------
Net loss per share - basic and diluted $ (4.92) $ 0.50 $ (13.58) $ (1.17)
========== ========= ========== =========
Weighted average number of shares
outstanding - basic and diluted 51,782 52,045 49,564 52,045
========== ========= ========== =========
See accompanying notes to consolidated financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Nine Months Ended September 30, 2001 (Unaudited)
(In Thousands)
Common Stock Additional Total
---------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------- ------- ---------- ------------- -------------
Balances at January 1, 2001 52,045 $ 520 $ 882,142 $ (4,254,669) $ (3,372,007)
Net loss - - - (60,914) (60,914)
------- ------- ---------- ------------- -------------
Balances at September 30,
2001 52,045 $ 520 $ 882,142 $(4,315,583) $ (3,432,921)
======= ======= ========== ============= =============
See accompanying notes to consolidated financial statements.
7
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 2001 (Unaudited)
Nine months ended September 30,
-------------------------------
2000 2001
--------------- --------------
(in thousands)
Cash flows from operating activities:
Net loss $ (482,572) $ (60,914)
Net income from discontinued operations (736) -
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Recognition of deferred gain (6,239) -
Accretion and preferred dividends on
preferred securities of subsidiaries 51,428 -
Depreciation and amortization 236,514 50,484
Deferred compensation 1,294 -
Net loss on disposal of long-lived assets 2,566 9,541
Gain on sale of securities (634) -
Provision for uncollectible accounts 31,688 8,403
Interest expense deferred and included in
long-term debt, net of amounts
capitalized on assets under construction 151,535 (1,049)
Interest expense deferred and included in
capital lease obligations 3,776 5,748
Amortization of deferred financing costs
included in interest expense 3,933 6,657
Contribution to 401(k) plan through
issuance of common stock 4,298 -
Realized gain on sale of available for
sale securities - (1,542)
Other 301 -
Change in operating assets and
liabilities, excluding the effects of
dispositions and noncash transactions:
Receivables (56,596) 20,114
Prepaid expenses and deposits (3,738) (1,819)
Accounts payable and accrued
liabilities 52,188 5,498
Deferred revenue 150,157 (6,289)
--------------- --------------
Net cash provided by operating activities
before reorganization items 139,163 34,832
Reorganization items:
Gain on settlement with major customer - (36,271)
Change in liabilities subject to
compromise - (29,490)
Change in restructuring accruals - (1,412)
Other - (1,073)
--------------- --------------
Net cash provided (used) by operating activities 139,163 (33,414)
Cash flows from investing activities:
Acquisition of property and equipment (649,096) (23,471)
Change in accounts payable and accrued
liabilities for acquisition of property and
equipment 50,682 438
Proceeds from disposition of property,
equipment and other assets 20 3,052
Proceeds from sales of short-term
investments available for sale 22,368 13,648
Proceeds from sale of marketable securities 10,634 2,542
Decrease (increase) in restricted cash 4,818 (65)
Increase in long-term deposits - (2,754)
Purchase of investments (1,400) -
Reorganization items:
Decrease in restricted cash due to
settlement of liabilities subject to
compromise - 2,096
--------------- --------------
Net cash used by investing activities (561,974) (4,514)
(continued)
See accompanying notes to consolidated financial statements.
8
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 2001 (Unaudited), Continued
Nine months ended September 30,
-------------------------------
2000 2001
--------------- --------------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of common stock $ 17,104 $ -
Proceeds of 8% Series A Convertible
Preferred Stock, net of issuance costs 720,330 -
Proceeds from issuance of long-term debt 95,000 -
Principal payments on capital lease
obligations (19,790) -
Payments on IRU agreement (179,497) -
Principal payments on long-term debt (90,317) -
Payments of preferred dividends (6,695) -
Payments of deferred debt issuance costs (304) (2,000)
Reorganization items:
Principal payments on capital lease
obligations subject to compromise - (16,293)
Payments of preferred dividends - (1,312)
--------------- --------------
Net cash provided (used) by financing activities 535,831 (19,605)
--------------- --------------
Net increase (decrease) in cash and cash
equivalents 113,020 (57,533)
Net cash provided by discontinued operations 406 -
Cash and cash equivalents, beginning of
period 103,288 196,980
--------------- --------------
Cash and cash equivalents end of period $ 216,714 $ 139,447
=============== ==============
Supplemental disclosure of cash flows
information of continuing operations:
Cash paid for interest $ 30,614 $ 17,089
=============== ==============
Cash paid for income taxes $ 281 $ -
=============== ==============
Supplemental schedule of noncash investing
activities of continuing operations:
Assets acquired pursuant to IRU agreement $ 96,903 $ -
Assets acquired under capital leases 135,578 50,547
--------------- --------------
Total $ 232,481 $ 50,547
=============== ==============
Shares issued in exchange for long-term
investment $ 21,625 $ -
=============== ==============
See accompanying notes to consolidated financial statements.
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1) Organization and Nature of Business
(a) Organization
ICG Communications, Inc., a Delaware corporation ("ICG"), was
incorporated on April 11, 1996 and is the publicly-traded U.S. parent
company of ICG Funding, LLC, a special purpose Delaware limited
liability company and wholly owned subsidiary of ICG ("ICG Funding"),
ICG Holdings (Canada) Co., a Nova Scotia unlimited liability company
("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and ICG Services, Inc., a Delaware corporation ("ICG
Services") and their subsidiaries. ICG and its subsidiaries are
collectively referred to as the "Company." The Company's common stock
was traded on the NASDAQ National Market ("NASDAQ") stock exchange.
However, due to the bankruptcy filings described below, the NASDAQ
halted trading of the Company's common stock on November 14, 2000 and
delisted the stock on November 18, 2000.
The Company provides voice, data and Internet communication services.
Headquartered in Englewood, Colorado, the Company operates an
integrated metropolitan and nationwide fiber optic infrastructure to
offer:
o Dial-Up Services including primary rate interface and remote
access services/ managed modem services on a wholesale basis to
national and regional Internet service providers ("ISP"s).
o Point-to-Point Broadband Service providing traditional special
access service to long-distance and long-haul carriers and medium
to large sized corporate customers as well as switched access and
SS7 services.
o Corporate Services, primarily retail voice and data services to
businesses.
(b) Bankruptcy Proceedings
On November 14, 2000 (the "Petition Date"), ICG and all of its
subsidiaries, except certain non-operating entities, filed voluntary
petitions for protection under Chapter 11 of the United States
Bankruptcy Code in the Federal District of Delaware in order to
facilitate the restructuring of the Company's debt, trade liabilities
and other obligations. ICG and its bankruptcy filing subsidiaries are
collectively referred to as the "Debtors." The Debtors are currently
operating as debtors-in-possession under the supervision of the United
States District Court for the District of Delaware (the "Bankruptcy
Court"). The bankruptcy petitions were filed in order to preserve cash
and to give the Debtors the opportunity to restructure their
obligations.
On December 19, 2001 the Debtors filed a proposed Plan of
Reorganization (the "Plan") and a Disclosure Statement with the
Bankruptcy Court. The Plan is premised on the substantive
consolidation of all of the Debtors for purposes of Plan voting,
confirmation and distribution of claim proceeds. The Plan contemplates
the conversion of the Debtors' existing unsecured debt into common
equity in the post-bankruptcy, reorganized company. The Plan also
contemplates the issuance of new secured notes to the Debtors'
existing secured lenders. The Plan calls for the cancellation of all
equity securities previously issued by the Debtors, including all
common stock, preferred stock, options and warrants. It is anticipated
that a hearing on the adequacy of the Disclosure Statement will be
held in the Bankruptcy Court on February 1, 2002. Consummation of the
Plan is contingent upon receiving Bankruptcy Court approval, as well
as the approval of certain classes of creditors. The Plan and
Disclosure Statement were filed with the Securities and Exchange
Commission on Form 8-K on December 19, 2001.
The Company, assisted by its investment banker, Dresdner Kleinwort &
Wasserstein, Inc., evaluated the enterprise value of the Company in
connection with the filing of its Plan and Disclosure Statement on
December 19, 2001. The enterprise value of the Company on a going
concern basis was estimated to be between $350 million and $500
million. This valuation of the Company results in a valuation of the
new common equity to be issued under the Plan and Disclosure
Statement, in the aggregate, between approximately $136 million and
$286 million, which is derived by subtracting from the Company's
enterprise value the projected funded debt on the pro forma balance
sheet for the Company on the date of emergence from bankruptcy. The
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
valuation is based on numerous assumptions, including, among other
things, the achievement of certain operating results, market values of
publicly-traded securities of other relevant companies, and general
economic and industry conditions.
Under accounting guidelines commonly referred to as "Fresh Start", the
fair value of all assets of the Company will be estimated as it
emerges from bankruptcy in conformity with generally accepted
accounting principles ("GAAP"), specifically Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations." The
enterprise value range in the Plan implies that a fair value
adjustment of up to $200 million to reduce the value of property and
equipment may be necessary. However, the Plan assumptions are likely
to differ from the actual business conditions at the date of emergence
from bankruptcy. Therefore, the fair values assigned to assets upon
emergence from bankruptcy may also be different. The fair value
adjustment to property and equipment, if any, will be recorded upon
emergence from bankruptcy once the final enterprise value is
determined.
Because of the ongoing nature of the reorganization cases, the outcome
of which is not presently determinable, the consolidated financial
statements contained herein are subject to material uncertainties and
may not be indicative of the results of the Company's future
operations or financial position. No assurance can be given that the
Company will be successful in reorganizing its affairs within the
Chapter 11 bankruptcy proceedings.
As a result of the items discussed above, there is substantial doubt
about the Company's ability to continue as a going concern. The
ability of the Company to continue as a going concern is dependent
upon, but not limited to, the approval and confirmation of the Plan,
adequate sources of capital, customer and employee retention, the
ability to provide high quality services and the ability to sustain
positive results of operations and cash flows sufficient to continue
to operate. The consolidated financial statements do not include any
adjustments to the recorded amounts or classification of assets or
liabilities or reflect any amounts that may ultimately be paid to
settle liabilities and contingencies which may be required in the
Chapter 11 reorganization or the effect of any changes, which may be
made in connection with the Company's capitalization or operations
resulting from a plan of reorganization.
These consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
Pursuant to SOP 90-7, an objective of financial statements issued by
an entity in Chapter 11 is to reflect its financial evolution during
the proceeding. For that purpose, the financial statements for periods
including and subsequent to filing the Chapter 11 petition should
distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business.
Expenses and other items not directly related to ongoing operations
are reflected separately in the consolidated statement of operations
as reorganization expenses (see note 4).
The filing of the Chapter 11 cases by the Debtors (i) automatically
stayed actions by creditors and other parties in interest to recover
any claim that arose prior to the commencement of the cases, and (ii)
served to accelerate, for purposes of allowance, all pre-petition
liabilities of the Company, whether or not those liabilities were
liquidated or contingent as of the Petition Date. The following table
sets forth the liabilities of the Company subject to compromise as of
December 31, 2000 and September 30, 2001:
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Unsecured long-term debt $ 1,968,781 $ 1,968,781
Unsecured creditors 583,749 481,293
Capital lease obligations 197,974 187,101
Priority creditors 33,385 19,668
Other secured creditors 738 553
------------ -------------
$ 2,784,627 $ 2,657,396
============ =============
Additionally, pre-petition debt that is subject to compromise must be
recorded at the allowed claim amount, which generally results in the
write-off of any deferred financing amounts associated with the debt.
Interest on debt subject to compromise ceases to accrue when
bankruptcy is filed.
Pre-petition debt of the Debtors that is not subject to compromise,
specifically the senior secured credit facility and the mortgage
payable with balances outstanding as of September 30, 2001 of
approximately $84.6 million and $0.9 million respectively, continues
to accrue interest. All principal and interest payments are negotiated
by the Company and the specific lenders and must be approved by the
Bankruptcy Court.
Under the Bankruptcy Code, the Company may elect to assume or reject
real estate leases, employment contracts, personal property leases,
service contracts, and other unexpired executory pre-petition
contracts, subject to Bankruptcy Court approval. The Company cannot
presently determine with certainty the ultimate aggregate liability
which will result from the filing of claims relating to such contracts
which have been or may be rejected.
(2) Significant Accounting Policies
(a) Basis of Presentation
The Company's financial statements should be read in conjunction with
ICG's Annual Report on Form 10-K for the year ended December 31, 2000,
as certain information and note disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to the rules and regulations of the
United States Securities and Exchange Commission. The interim
financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of financial
position, results of operations and cash flows as of and for the
interim periods presented. Such adjustments are of a normal recurring
nature. Operating results for the nine months ended September 30, 2001
are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2001.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Reclassifications
Certain 2000 amounts have been reclassified to conform with the 2001
presentation.
(3) Provision for Impairment of Long-Lived Tangible and Intangible Assets
The Company has provided for the impairment of long-lived assets, including
goodwill, pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No.
121 requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Such events include, but are not limited to, a significant
decrease in the market value of an asset, a significant adverse change in
the business climate that could affect the value of an asset or a current
period operating or cash flow loss combined with a history of operating or
cash flow losses. An impairment loss is recognized when estimated
undiscounted future cash flows, before interest, expected to be generated
by the asset are less than its carrying value. Measurement of the
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
impairment loss is based on the estimated fair value of the asset, which is
generally determined using valuation techniques such as the discounted
present value of expected future cash flows, appraisals or other pricing
models.
(4) Reorganization Expenses
In October 2000, the Company initiated a cost reduction strategy that
focused upon reducing operating expenses and returning the Company to
profitability. This plan included the filing on November 14, 2000 of
voluntary petitions under Chapter 11 for ICG and the majority of its
subsidiaries.
Under bankruptcy accounting, the Company is required to segregate and
classify certain costs as reorganization costs. The following
reorganization items were incurred during the three and nine months ended
September 30, 2001 (in thousands):
Three months Nine months
------------ -------------
Gain on settlement with major customer $ 36,271 $ 36,271
Legal and professional fees (401) (13,091)
Severance and employee retention costs (673) (12,492)
Switch site closure costs (1,173) (4,355)
Line cost termination expenses (2,273) (4,992)
Other expenses, net (2,557) (3,858)
------------ -------------
Total $ 29,194 $ (2,517)
============ =============
(5) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Land $ 8,708 $ 1,214
Buildings and improvements 36,307 50,358
Furniture, fixtures and office equipment 11,799 16,813
Machinery and equipment 9,450 10,575
Fiber optic equipment 119,146 123,062
Switch equipment 104,947 108,053
Fiber optic network 56,242 82,630
Site improvements - 3,269
Construction in progress 205,881 180,988
Assets held for sale 40,500 37,504
------------ -------------
592,980 614,466
Less accumulated depreciation (2,480) (45,232)
------------ -------------
$ 590,500 $ 569,234
============ =============
Property and equipment includes approximately $181 million of equipment
that has not been placed in service at September 30, 2001, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment, software development and new
network construction.
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(6) Long-Term Debt
As a result of the Company's bankruptcy proceedings, all contractual debt
payments are suspended and subject to revised payment terms during the
bankruptcy process on a specific case basis. No changes have been made in
the accompanying consolidated balance sheet as to amounts or terms as a
result of the filing. As of September 30, 2001, the Company is in default
with respect to all of its pre-petition long-term debt, which, by its
terms, would ordinarily accelerate upon the event of default. However,
under bankruptcy accounting, no reclassifications are made from long-term
to short-term as a result of the defaults.
Additionally, debt subject to compromise should be recorded at the allowed
amount of the claim. Based on this, the Company wrote-off all deferred
financing costs related to the 9 7/8%, 10%, 11 5/8%, 12 1/2% and 13 1/2%
Senior discount notes as of December 31, 2000. In addition, the Company
ceased accreting the discounts or accruing interest on all debt amounts
subject to compromise as of the Petition Date.
Long-term debt, including amounts subject to compromise, is summarized as
follows:
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Long-term debt not subject to compromise:
Credit Agreement (a) $ - $ -
Senior secured financing facility
("Senior Facility") 84,574 84,574
Mortgage loan payable, secured by Company
Headquarters (b) 33,077 -
Mortgage loan payable, other 929 929
------------ -------------
118,580 85,503
Long-term debt subject to compromise:
Senior discount notes, net of discount 1,968,781 1,968,781
------------ -------------
2,087,361 2,054,284
Less current portion (796) (796)
------------ -------------
$ 2,086,565 $ 2,053,488
============ =============
(a) Debtor-in-Possession Financing
On December 4, 2000, the Company finalized its Debtor-in-Possession
Revolving Credit Agreement (the "Credit Agreement") with Chase
Manhattan Bank. The Credit Agreement provided for up to $350 million
in financing, subject to certain conditions. This amount was
subsequently amended to $200 million. Any amounts drawn under the
Credit Agreement were to be first used for repayment in full of the
Senior Facility. The Company was required to pay monthly commitment
fees at an annual rate of 1 1/2% on the average daily unused
commitment, which were expensed monthly. This agreement contained
certain covenants including capital expenditure limitations, EBITDA
loss limitations, indebtedness and dividend restrictions. The Credit
Agreement required repayment in full on May 14, 2002. As of September
30, 2001, no amounts had been drawn under the Credit Agreement. On
November 7, 2001 the Company terminated the Credit Agreement.
(b) Mortgage Payable and Capital Lease Obligation
In June 2001, the original seller ("Seller") of the Company's
corporate headquarters building, land and improvements (collectively,
the "Company Headquarters") exercised its right to repurchase the
Company Headquarters from the Company. In connection with the
repurchase, the Seller agreed to assume from the Company the mortgage
loan payable and other accrued liabilities related to completing the
Company Headquarters. The Company recognized a $7.6 million loss on
the sale. In addition, the Company agreed to lease the Company
Headquarters back from the Seller under a capital lease agreement
initially valued at $50.4 million ($50.5 million at September 30,
2001). Contractual payments due as of September 30, 2001 under the
lease, which expires January 31, 2023, are as follows:
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
2001 $ 1,295
2002 5,338
2003 5,498
2004 5,663
2005 5,833
Thereafter 130,741
-------------
Total minimum lease payments 154,368
Less amounts representing interest 103,839
-------------
Present value of net minimum lease payments 50,529
Less current portion -
-------------
$ 50,529
=============
(7) Commitments and Contingencies
As a result of the Company's filing for bankruptcy protection, all
commitments and contingencies could be substantially modified during the
Company's bankruptcy restructuring process.
(a) Network Capacity and Construction
In January 2000, the Company signed an agreement with a major
customer, whereby the Company will provide, for $126.5 million over
the initial six-year term of the agreement, exclusive service over
designated portions of the Company's local fiber optic networks. The
Company will recognize revenue ratably over the term of the agreement,
as the network capacity is available for use. The agreement was
amended in March 2000 to include additional capacity for proceeds of
$53.8 million. The customer may, at its option, extend the initial
term of the agreement for an additional four-year period and an
additional ten-year period for incremental payment at the time the
option exercises. In July 2001, as part of a settlement agreement
reached with the customer (see note 10), deferred revenue was reduced
by $21.5 million, with a corresponding reduction in trade receivables.
At September 30, 2001, $149.6 million of deferred revenue related to
this agreement is reflected in liabilities subject to compromise. The
customer has not yet ordered from the Company, and the Company has not
yet delivered, certain equipment and services required by this
agreement. The Company is currently negotiating with this customer to
resolve the issue of future services.
(b) Telecommunications and Line Purchase Commitments
The Company had entered into two agreements with a major interexhange
carrier (the "Carrier") that required the Company to provide the
Carrier with certain minimum monthly revenue, which if not met, would
require payment by the Company for the difference between the minimum
commitment and the actual monthly revenue. Under a settlement reached
with the Carrier, effective, September 28, 2001 the Company will no
longer be liable for such underutilization charges.
(c) Other Commitments
The Company has entered into various equipment and line purchase
agreements with certain of its vendors. Under these agreements, if the
Company does not meet a minimum purchase level in any given year, the
vendor may discontinue certain discounts, allowances and incentives
otherwise provided to the Company. In addition, either the Company or
the vendor, upon prior written notice, may terminate the agreements.
(d) Transport and Termination Charges
The Company records reciprocal compensation revenue pursuant to
interconnection agreements with incumbent local exchange carriers
("ILEC"s) for the transport and termination of traffic originated by
ILEC customers, including Internet bound traffic. Due to changes in
the regulatory environment and as a means of gaining certainty with
respect to the continued collection of reciprocal compensation
revenue, the Company negotiated voluntary settlement agreements with
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
certain of its ILEC customers that provide for the payment of
reciprocal compensation for terminating Internet bound traffic, but at
rates lower than the Company had historically received.
The Company has, as of September 30, 2001, a net receivable for the
transport and termination of such traffic of approximately $8.7
million. The Company received cash of approximately $52.2 million,
during the nine months ended September 30, 2001, from certain ILECs
for terminating local and toll traffic.
The Company has recognized reciprocal compensation revenue of
approximately $30.1 million and $18.6 million in the three months
ended September 30, 2000 and 2001, respectively, and $120.6 million
and $51.4 million in the nine months ended September 30, 2000 and
2001, respectively.
(e) Litigation
During the third and fourth quarters of 2000, the Company was served
with fourteen lawsuits filed by various shareholders in the Federal
District Court for the District of Colorado. All of the suits name as
defendants the Company, the Company's former CEO, J. Shelby Bryan and
the Company's former President, John Kane. Additionally, one of the
complaints names the Company's former President, William S. Beans,
Jr., as a defendant. All of the complaints seek unspecified damages
for alleged violations of Rules 10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaints seek class action certification
for similarly situated shareholders. It is anticipated that the
lawsuits will be consolidated and that the Court will choose a lead
plaintiff's counsel. The Company has retained legal counsel and
intends to vigorously defend against these lawsuits. The Company has
also tendered these claims to the Company's insurers. At this time,
the claims against the Company have been stayed pursuant to the
Company's filing for bankruptcy.
In January 2001, certain shareholders of ICG Funding, a wholly owned
subsidiary of the Company, filed an adversary proceeding with the
Bankruptcy Court (Case number 00-04238 PJW Jointly Administered,
Adversary Proceeding No. 01-000 PJW) against the Company and ICG
Funding. The shareholders in this adversary action sought to recover
approximately $2.3 million from an escrow account established to fund
certain dividend payments to holders of the Funding Exchangeable
Preferred Securities. Because of ICG Funding having filed for
bankruptcy protection, ICG Funding did not declare the last dividend
that was to have been paid with the remaining proceeds of the escrow
account. In April 2001, the Company and ICG Funding finalized a
settlement agreement with the shareholders that has been approved by
the Bankruptcy Court. Under the terms of the settlement, the
shareholders received approximately two thirds of the funds in the
escrow account and the Company received the remaining one third of the
escrowed funds, subject to certain contingencies and holdbacks related
to shareholders that did not participate in the settlement.
The Company is a party to certain other litigation that has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(8) Summarized Financial Information of ICG Holdings, Inc.
The 11 5/8% Senior Discount Notes due 2007 issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Senior Discount Notes due 2006 and the
13 1/2% Senior Discount Notes due 2005 issued by Holdings during 1996 and
1995, respectively, are guaranteed by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized combined financial information for Holdings and its
subsidiaries is as follows:
16
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
Summarized Consolidated Balance Sheet Information
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Current assets $ 325,851 $ 160,040
Property and equipment, net 143,208 184,258
Other non-current assets, net 21,754 20,261
------------ -------------
Total assets $ 490,813 $ 364,559
============ =============
Current liabilities $ 248,745 $ 317,864
Liabilities subject to compromise 2,508,080 2,431,540
Long-term debt, less current portion 883 883
Capital lease obligations, less current
portion - 50,529
Other long-term liabilities 1,090 1,090
Redeemable preferred stock 449,057 449,057
Stockholder's deficit (2,717,042) (2,886,404)
------------ -------------
Total liabilities and stockholders' deficit $ 490,813 $ 364,559
============ =============
Summarized Consolidated Statement of Operations Information
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
(in thousands)
Total revenue $ 131,905 $ 123,106 $ 452,210 $ 378,264
Total operating costs and expenses 331,615 156,529 771,102 504,809
---------- ---------- ---------- ----------
Operating loss $(199,710) $ (33,423) $(318,892) $(126,545)
========== ========== ========== ==========
Loss from continuing operations $(171,310) $ (42,393) $(411,635) $(169,362)
========== ========== ========== ==========
Net loss $(215,371) $ (42,393) $(455,341) $(169,362)
========== ========== ========== ==========
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31, September 30,
2000 2001
------------ -------------
(in thousands)
Current assets $ 82 $ 82
Advances to subsidiaries - -
------------ -------------
Total assets $ 82 $ 82
============ =============
Current liabilities - -
Liabilities subject to compromise (11,474) (11,474)
Due to parent - -
Share of losses of subsidiaries 2,717,042 2,886,404
Shareholders' deficit (2,705,486) (2,874,848)
------------ -------------
Total liabilities and shareholders' deficit $ 82 $ 82
============ =============
17
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
Condensed Statement of Operations Information
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
(in thousands)
Total revenue $ - $ - $ - $ -
Total operating costs and expenses - - 12 -
---------- ---------- ---------- ----------
Operating loss - - (12) -
Losses of subsidiaries (215,371) (42,393) (455,341) (169,362)
---------- ---------- ---------- ----------
Net loss attributable to common
shareholders $(215,371) $ (42,393) $(455,353) $(169,362)
========== ========== ========== ==========
(9) Condensed Financial Information of ICG Communications, Inc. ("Parent
Company")
The primary assets of ICG are its investments in ICG Services, ICG Tevis,
ICG Funding and Holdings-Canada, including advances to those subsidiaries.
Certain corporate expenses of the Parent Company are included in ICG's
statement of operations and were approximately $0.5 million and $1.5
million for the three and nine months ended September 30, 2000,
respectively. Such expenses were $0.1 million for the nine months ended
September 30, 2001, and were not significant for the three months ended
September 30, 2001. ICG has no operations other than those of ICG Services,
ICG Funding and Holdings-Canada and their subsidiaries.
(10) Major customer
A significant amount of the Company's revenue is derived from long-term
contracts with large customers, including one major customer (the
"Customer"). For the three months ended September 30, 2001, the Customer
accounted for approximately 21%, or $25.7 million, of total revenue. For
the nine months ended September 30, 2001, the Customer accounted for
approximately 15%, or $56.4 million, of total revenue. Revenue from the
Customer represented less than 10% of total revenue for the three and nine
months ended September 30, 2000.
Prior to the bankruptcy filing, the Customer and the Company developed a
number of important and mutually valuable business relationships, governed
by a plethora of contracts (collectively the "Pre-petition Agreements").
During the pendency of the Chapter 11 cases, both the Company and the
Customer asserted various breaches of, and claims under, the Pre-petition
Agreements. Following lengthy negotiations, the parties agreed to enter
into a settlement resolving all of the claims and issues between the
parties (the "Settlement Agreement") in order to continue a cooperative,
mutually beneficial relationship and to avoid potentially costly
litigation. The Settlement Agreement was approved by the Bankruptcy Court
in June 2001.
Under the Settlement Agreement, the Company agreed to assume certain
executory contracts, as amended to mutually benefit both parties. In
addition, the Settlement Agreement resolved issues related to pre-petition
setoffs. The Company received significant benefits from the Settlement
Agreement including (i) eliminating all pre-petition unsecured claims; (ii)
receiving $10 million in cash; (iii) modifying its service contract with
the Customer to eliminate the risk that current revenue levels could
materially decrease; and (iv) increasing monthly revenue received by the
Company from the Customer by over $1.4 million per month for 36 months and
over $1 million per month for the following 24 months.
Pursuant to the terms of the Settlement Agreement, the Company settled a
$54.8 million net receivable from the Customer for $10.0 million, and wrote
off $60.5 million in accruals and payables and $22.1 million in deferred
revenue. The remaining $149.6 million of deferred revenue at September 30,
2001, related to an agreement to provide the Customer with exclusive
service over designated portions of the Company's local fiber optic
networks (see note 7 (a)) was not fully settled and remains reflected in
liabilities subject to compromise. Based on the terms of the Settlement
Agreement, the Company has recorded a gain of approximately $37.8 million,
$36.3 million of which is reflected in reorganization items and $1.5
million in interest expense in the accompanying consolidated statement of
operations. The gain may be adjusted if certain transactions contemplated
by the Settlement Agreement are consummated. It is not possible to
determine the amount of the adjustments at this time.
18
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(11) New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record
the fair value of a legal liability for an asset retirement obligation in
the period it is incurred. This cost is initially capitalized and amortized
over the remaining life of the underlying asset. Once the obligation is
ultimately settled, any difference between the final cost and the recorded
liability is recognized as a gain or loss on disposition. SFAS No. 143 is
effective starting in 2003. The Company is currently evaluating the impact
this pronouncement will have on future financial results.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets
to be Disposed of" and certain provisions of APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, SFAS No.
144 expands the scope of discontinued operations to include all components
of an entity with operations that (i) can be distinguished from the rest of
the entity and (ii) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 is effective starting in
2002. The Company is currently evaluating the impact this pronouncement
will have on future financial results.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements and
information based on the beliefs of management as well as assumptions made by
management based on information currently available to the Company. When used in
this document, the words "anticipate", "believe", "estimate" and "expect" and
similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. These forward-looking
statements are intended to qualify as safe harbors from liability as established
by the Private Securities Litigation Reform Act of 1995. Such statements reflect
the current views of the Company with respect to future events and are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in this
document. These forward-looking statements are affected by important factors,
including, but not limited to, the following:
o The uncertainty of the Company's future as a result of filing for
protection under bankruptcy law;
o The formulation, approval and confirmation of a plan of
reorganization;
o The significant amount of indebtedness incurred by the Company and the
Company's ability to successfully restructure this indebtedness;
o The possibility of continued operating losses;
o The Company's ability to successfully maintain commercial
relationships with its critical vendors and suppliers;
o The Company's ability to retain its major customers on profitable
terms;
o The extensive competition the Company will face;
o The Company's ability to attract and retain qualified management and
employees;
o The Company's ability to access capital markets in a timely manner, at
reasonable costs and on satisfactory terms and conditions; and
o Changes in, or the Company's inability to comply with, existing
government regulations.
These forward-looking statements speak only as of the date of this
Quarterly Report. The Company does not undertake any obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although the Company believes that its
plans, intentions and expectations reflected in or suggested by the
forward-looking statements made in this Quarterly Report are reasonable, there
is no assurance that such plans, intentions or expectations will be achieved.
The results of operations for the nine months ended September 30, 2000 and
2001 represent the consolidated operating results of the Company. (See the
unaudited consolidated financial statements of the Company for the nine months
ended September 30, 2001 included elsewhere herein.) The terms "fiscal" and
"fiscal year" refer to the Company's fiscal year ending December 31. All dollar
amounts are in U.S. dollars.
COMPANY OVERVIEW
General
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996 and is the publicly-traded U.S. parent company of ICG Funding,
LLC, a special purpose Delaware limited liability company and wholly owned
subsidiary of ICG ("ICG Funding"), ICG Holdings (Canada) Co., a Nova Scotia
unlimited liability company ("Holdings-Canada"), ICG Holdings, Inc., a Colorado
corporation ("Holdings"), and ICG Services, Inc., a Delaware corporation ("ICG
Services") and their subsidiaries. ICG and its subsidiaries are collectively
referred to as the "Company." The Company's common stock was traded on the
NASDAQ National Market ("NASDAQ") stock exchange. However, due to the bankruptcy
filings described below, the NASDAQ halted trading of the Company's common stock
on November 14, 2000 and delisted the stock on November 18, 2000.
The Company provides voice, data and Internet communication services.
Headquartered in Englewood, Colorado, the Company operates an integrated
metropolitan and nationwide fiber optic infrastructure to offer:
20
o Dial-Up Services including primary rate interface ("PRI") and remote
access services ("RAS") (sometimes referred to as managed modem
services) on a wholesale basis to national and regional Internet
service providers ("ISP"s).
o Point-to-Point Broadband Service providing traditional special access
service to long distance and long-haul carriers and medium to
large-sized corporate customers, as well as switched access and SS7
services.
o Corporate Services, primarily retail voice and data services to
businesses.
Bankruptcy Proceedings
During the second half of 2000, a series of financial and operational
events materially impacted ICG and its subsidiaries. These events reduced the
Company's expected revenue and cash flow generation for the remainder of 2000
and 2001, which in turn jeopardized the Company's ability to comply with its
existing senior secured credit facility (the "Senior Facility"). As a result of
these and other events, on November 14, 2000 (the "Petition Date") ICG and most
of its subsidiaries (except for certain non-operating entities), filed voluntary
petitions for protection under Chapter 11 of the United States Bankruptcy Code
in the Federal Court for the District of Delaware (the "Bankruptcy Court"). The
filings were made in order to facilitate the restructuring of the Company's
debt, trade liabilities and other obligations. The Company and its filing
subsidiaries are currently operating as debtors-in-possession under the
supervision of the Bankruptcy Court.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders are expected to be substantially altered. As a result
of these bankruptcy proceedings, virtually all liabilities, litigation and
claims against the Debtors that were in existence as of the Petition Date are
stayed unless the stay is modified or lifted or payment has been otherwise
authorized by the Bankruptcy Court. At this time, it is not possible to predict
the outcome of the Chapter 11 cases in general, the effects of such cases on the
Company's business, or the effects on the interests of creditors and
shareholders. Because of the bankruptcy filings, all of the Company's
liabilities incurred prior to the Petition Date, including certain secured debt,
are subject to compromise.
Further, due to the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded.
Consequently, there is substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to continue as a going concern is
dependent upon, but not limited to, formulation, approval, and confirmation of a
plan of reorganization, adequate sources of capital, customer and employee
retention, the ability to provide high quality services and the ability to
sustain positive results of operations and cash flows sufficient to continue to
operate. In September 2000, the Company initiated an internal restructuring
process in order to conserve capital and address various financial issues. To
lead the restructuring, the Company hired Randall Curran as its Chief Executive
Officer. The Company also retained Zolfo Cooper, LLC as its restructuring
advisor and Dresdner Kleinwort & Wasserstein, Inc. ("DrKW") as its financial
advisor.
In conjunction with the bankruptcy filing, the Company entered into a
Debtor-in-Possession Revolving Credit Agreement (the "Credit Agreement") of up
to $350 million, which was subsequently amended to $200 million. As of September
30, 2001, no amounts had been drawn under the Credit Agreement. On November 7,
2001 the Company terminated the Credit Agreement because it expects that the
$144 million in cash and short-term investments as of September 30, 2001 will be
sufficient to fund operations during the bankruptcy process.
ICG is focusing on improving its overall profitability and began a
restructuring process in the second half of 2000 that has resulted in a
substantial reduction in operating and capital expenditures. These reductions
include reducing the full-time employee count from 2,811 at the end of the third
quarter of 2000 to 2,054 as of year-end 2000, and 1,389 as of September 30,
2001. The Company has met with essential vendors in an effort to ensure
continued access to required equipment and services. The Company is also
executing a customer retention campaign designed to enhance customer
relationships throughout the restructuring process and thereafter. ICG
anticipates these restructuring efforts will conserve capital, enhance
profitability and assist in retaining key customers.
During the pendancy of its Chapter 11 case, the Company has continued to
provide on-going services to its customers while implementing a revised strategy
intended to meet customer commitments and maximize short-term cash flow. Under
the revised strategy, the Company's operations will focus on existing markets
where the Company has capacity thereby allowing the Company to add customers for
nominal incremental cost and earn a better return on existing assets. In
addition, the Company intends to focus on product sales that utilize existing
21
infrastructure to reduce capital required in the short-term. In general, the
Company will scale its geographic expansion and delivery of new products to
better match its network capacity, technical capabilities and capital
availability. The Company's 22-city expansion plan originally scheduled for
completion at year-end 2000 has been postponed indefinitely.
On December 19, 2001 the Debtors filed a proposed Plan of Reorganization
(the "Plan") and a Disclosure Statement with the Bankruptcy Court. The Plan is
premised on the substantive consolidation of all of the Debtors for purposes of
Plan voting, confirmation and distribution of claim proceeds. The Plan
contemplates the conversion of the Debtors' existing unsecured debt into common
equity in the post-bankruptcy, reorganized company. The Plan also contemplates
the issuance of new secured notes to the Debtors' existing secured lenders. The
Plan calls for the cancellation of all equity securities issued by the Debtors,
including all common stock, preferred stock, options and warrants. It is
anticipated that a hearing on the adequacy of the Disclosure Statement will be
held in the Bankruptcy Court on February 1, 2002. Consummation of the Plan is
contingent upon receiving Bankruptcy Court approval, as well as the approval of
certain classes of creditors. No assurance can be given that the Plan will be
approved or that the Company will be successful in reorganizing its affairs
within the Chapter 11 proceedings.
The Company, assisted by its investment banker, DrKW, evaluated the
enterprise value of the Company in connection with the filing of its Plan and
Disclosure Statement on December 19, 2001. The enterprise value of the Company
on a going concern basis was estimated to be between $350 million and $500
million. This valuation of the Company results in a valuation of the new common
equity to be issued under the Plan and Disclosure Statement, in the aggregate,
between approximately $136 million and $286 million, which is derived by
subtracting from the Company's enterprise value the projected funded debt on the
pro forma balance sheet for the Company on the date of emergence from
bankruptcy. The valuation is based on numerous assumptions, including, among
other things, the achievement of certain operating results, market values of
publicly-traded securities of other relevant companies, and general economic and
industry conditions.
Under accounting guidelines commonly referred to as "Fresh Start", the fair
value of all assets of the Company will be estimated as it emerges from
bankruptcy in conformity with generally accepted accounting principles ("GAAP"),
specifically Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations." The enterprise value range in the Plan implies that a
fair value adjustment of up to $200 million to reduce the value of property and
equipment may be necessary. However, the Plan assumptions are likely to differ
from the actual business conditions at the date of emergence from bankruptcy.
Therefore, the fair values assigned to assets upon emergence from bankruptcy may
also be different. The fair value adjustment to property and equipment, if any,
will be recorded upon emergence from bankruptcy once the final enterprise value
is determined.
Asset Impairment
The Company has provided for the impairment of long-lived assets, including
goodwill, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Such events include,
but are not limited to, a significant decrease in the market value of an asset,
a significant adverse change in the business climate that could affect the value
of an asset or a current period operating or cash flow loss combined with a
history of operating or cash flow losses. An impairment loss is recognized when
estimated undiscounted future cash flows, before interest, expected to be
generated by the asset are less than its carrying value. Measurement of the
impairment loss is based on the estimated fair value of the asset, which is
generally determined using valuation techniques such as the discounted present
value of expected future cash flows, appraisals or other pricing models.
22
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for the Company for the periods
indicated. The table also shows certain revenue, expenses, operating loss, and
EBITDA as a percentage of the Company's total revenue.
Financial Data
Three months ended September 30, Six months ended September 30,
--------------------------------------- ---------------------------------------
2000 2001 2000 2001
------------------- ------------------- ------------------- -------------------
$ % $ % $ % $ %
---------- -------- ---------- -------- ---------- -------- ---------- --------
(unaudited)
($ values in thousands)
Statement of Operations Data:
Revenue 145,257 100 124,071 100 477,369 100 381,720 100
Operating costs 118,711 82 84,954 68 304,202 64 282,329 74
Selling, general and administrative 84,182 58 23,469 19 188,947 40 80,635 21
Depreciation and amortization 99,023 68 18,301 15 236,514 50 50,484 13
Loss on disposal of asset 2,021 1 1,908 2 2,566 - 9,541 3
Other, net 433 - - - 1,692 - - -
---------- -------- ---------- -------- ---------- -------- ---------- --------
Operating loss (159,113) (109) (4,561) (4) (256,552) (54) (41,269) (11)
Other Data:
EBITDA (1) (57,636) (40) 15,648 13 (15,780) (3) 18,756 5
Net cash provided (used) by
operating activities 36,084 3,940 139,163 (33,414)
Net cash used by investing
activities (186,516) 2,033 (561,974) (4,514)
Net cash provided (used) by
financing activities (129,412) (1,822) 535,831 (19,605)
financing
Capital expenditures (2) 319,209 6,744 881,577 74,018
________________________________________________________________________________
Statistical Data (unaudited) (3)
September 30, December 31, March 31, June 30, September 30,
2000 2000 2001 2001 2001
------------- ------------ ---------- ---------- -------------
Full time employees 2,811 2,054 1,476 1,422 1,389
Access lines in service, in thousands (4) 1,074 950 778 719 789
Buildings connected:
On-net 936 925 925 881 902
Hybrid (5) 8,584 8,659 8,151 7,264 6,315
------------- ------------ ---------- ---------- -------------
Total buildings connected 9,520 9,584 9,076 8,145 7,217
Operational switches:
Circuit 47 47 44 44 43
ATM 24 26 26 27 26
------------- ------------ ---------- ---------- -------------
Total operational switches 71 73 70 71 69
Regional fiber route miles (6):
Operational 4,816 5,577 5,577 5,577 5,542
Under construction 508 - - - -
Regional fiber strand miles (7):
Operational 192,422 166,498 166,498 166,498 165,847
Under construction 14,891 - - - -
Collocations with ILECs 188 160 160 160 148
(1) EBITDA consists of loss from continuing operations before interest, income
taxes, reorganization expenses, depreciation and amortization, other
expense, net, accretion and preferred dividends on preferred securities of
subsidiaries and certain nonrecurring charges such as the net loss (gain)
on disposal of long-lived assets and other, net operating costs and
expenses, including deferred compensation. EBITDA is presented to enhance
an understanding of the Company's operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP for
23
the periods indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities of
continuing operations as determined using GAAP are also presented in Other
Data.
(2) Capital expenditures include assets acquired with cash, payables, under
capital leases, and pursuant to IRU agreements.
(3) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(4) Access lines in service at September 30, 2001 includes lines provisioned
through the Company's switch and through resale and other agreements with
various local exchange carriers. Beginning in the nine months ended
September 30, 2001, access lines in service include only provisioned lines
generating revenue.
(5) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(6) Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. As of September 30, 2001, the Company had
approximately 5,542 regional fiber route miles. Regional fiber route miles
under construction represents fiber under construction.
(7) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of September 30, 2001,
the Company had approximately 165,847 regional fiber strand miles, of which
45,445 regional fiber strand miles were leased under operating leases.
Regional fiber strand miles under construction represents fiber under
construction.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenue
Three Months Ended September 30,
----------------------------------------
2000 2001
-------------------- -------------------
$ % $ %
--------- --------- --------- ---------
($ values in thousands)
Dial-Up 37,840 26 45,380 37
Point-to-Point Broadband 40,423 28 36,069 29
Corporate Services 36,911 25 24,030 19
Reciprocal Compensation 30,083 21 18,592 15
--------- --------- --------- ---------
Total Revenue 145,257 100 124,071 100
========= ========= ========= =========
Total revenue decreased $21.2 million, or 15%, for the three months ended
September 30, 2001 compared with the same period in 2000. The decrease was due
to decreases in Point-to-Point, Corporate Services and Reciprocal Compensation
revenues, offset by an increase in Dial-Up revenue.
Dial-Up revenue is earned by providing PRI ports (one and two way) and
managed modem (IRAS) services to ISPs and other communication service companies.
Dial-Up revenue increased $7.5 million, or 20%, from $37.8 million in 2000 to
$45.3 million in 2001. The increase in Dial-Up revenue was primarily due a 36%
increase in average monthly revenue per port, offset by a 12% decrease in billed
line count. The increase in average monthly revenue per port was due to
significant service level credits issued in the third quarter of 2000 due to
network performance issues associated with the IRAS product. Dial-Up revenue's
contribution to total revenue rose from 26% in the third quarter of 2000 to 37%
in the third quarter of 2001.
Point-to-Point Broadband revenue is generated from service provided to
interexchange carriers ("IXC"s) and end-user business customers. This service
provides dedicated bandwidth and offers DS1 to OC-192 capacity to connect: (i)
long-haul carriers to local markets, large companies and other long-haul carrier
facilities; and (ii) large companies to their long distance carrier facilities
and other facilities. Point-to-Point Broadband revenue decreased $4.4 million,
or 11%, from $40.4 million in 2000 to $36.1 million in 2001, primarily due to
lower special access, switched access and SS7 revenues, which decreased due to
increased customer churn levels. Point-to-Point Broadband revenue's contribution
to total revenue rose from 28% in the third quarter of 2000 to 29% in the third
quarter of 2001.
Corporate Services revenue includes local, long distance, enhanced
telephony and data services to businesses over its fiber optic networks located
in major metropolitan areas in California, Colorado, Ohio, Texas and the
24
Southeast. Corporate Services revenue decreased $12.9 million, or 35%, from
$36.9 million in 2000 to $24.0 million in 2001. The billed line count decreased
28% from the third quarter of 2000 to the third quarter of 2001, due to
transitioning customers in non-focus areas to other carriers, while the average
monthly revenue per line decreased 10%. Corporate Services revenue for the third
quarter of 2001 reflects a 56% decrease in long distance revenue, due to the
continued attrition of resale access lines which had high long distance service
penetration rates. In addition, carrier access billing service revenue decreased
48% primarily due to revenue earned but not recognized because of collection
concerns. The Company entered into an agreement to transfer its long distance
revenue stream in the fourth quarter of 2001. These customers generated $2.8
million and $1.2 million in the three months ended September 30, 2000 and 2001,
respectively. The related margin was not significant.
Reciprocal Compensation has historically constituted an important source of
revenue for the Company. Reciprocal Compensation revenue is primarily earned
pursuant to interconnection agreements with incumbent local exchange carriers
("ILECs") for the transport and termination of calls originated by ILEC
customers, including Internet bound calls. Due to changes in the regulatory
environment and as a means of gaining certainty with respect to the continued
collection of Reciprocal Compensation revenue, the Company negotiated voluntary
settlement agreements with certain of its ILEC customers in the first half of
2000 that provide for the payment of Reciprocal Compensation for terminating ISP
traffic, but at rates lower than the Company had historically received. As a
result, Reciprocal Compensation's contribution to total revenue decreased from
21% in 2000 to 15% in 2001. The decrease in Reciprocal Compensation revenue
reflects a 14% decrease in minutes of use ("MOU"s) and a 29% decrease in the
average revenue earned per MOU. The Company anticipates that due to changes in
the regulatory environment, Reciprocal Compensation revenue will continue to
decline in the future.
A significant amount of the Company's revenue is derived from long-term
contracts with large customers, including one major customer. For the three
months ended September 30, 2001, this customer accounted for approximately 21%,
or $25.7 million, of total revenues. Revenue from this customer represented less
than 10% of total revenue for the three months ended September 30, 2000. The
loss of this customer, or other significant customers, could have a material
adverse effect on the Company's financial condition and results of operations.
Operating costs
Total operating costs decreased from $119 million for the three months
ended September 30, 2000 to $85 million for the same period in 2001, a 28%
decrease. Operating costs consist primarily of payments to ILECs, other
competitive local exchange carriers ("CLEC"s), and long distance carriers for
the use of network facilities to support local, special, switched access
services, and long distance services as well as internal network operating
costs, right of way fees and other operating costs. Internal network operating
costs include the cost of engineering and operations personnel dedicated to the
operations and maintenance of the network. In the second quarter of 2000, the
Company significantly increased the number of leased PRI and related
backbone/backhaul expenses. Through the bankruptcy proceedings, the Company has
significantly reduced excess leased capacity, thereby reducing operating costs.
Operating costs decreased as a percentage of revenue from 82% for 2000 to 68%
for 2001 due to the aforementioned cost savings and despite the decrease in
reciprocal compensation revenue, which generates significantly higher margins
than the Company's other revenue sources.
Selling, general and administrative expenses
Total selling, general and administrative ("SG&A") expenses decreased from
$84 million for the three months ended September 30, 2000 to $23 million for the
same period in 2001, a 72% decrease. SG&A expenses decreased as a percentage of
revenue from 58% for 2000 to 19% for 2001. This decrease is primarily
attributable to higher staff levels in 2000 than in 2001. The number of full
time employees decreased from 2,811 at September 30, 2000 to 1,389 at September
30, 2001, while the average number of employees decreased 52% from the third
quarter of 2000 to the third quarter of 2001. In addition, bad debt expense
decreased $28 million from 2000 to 2001, primarily due to additional reserves
recorded in 2000 to account for contract disputes with certain ISP customers, as
well as to address collection concerns associated with the business and
regulatory environment changes that occurred in 2000. The decrease in SG&A
expenses is also due to lower facilities costs as the Company consolidates its
locations during the restructuring process.
Depreciation and amortization
Depreciation and amortization decreased from $99 million for the three
months ended September 30, 2000 to $18 million for the same period in 2001. The
decrease is due to the reduced asset values as a result of the $1.7 billion
asset impairment recorded at December 31, 2000.
25
Loss on disposal of asset
Loss on disposal of asset of approximately $2 million for the three months
ended September 30, 2001 represents retirements of property and equipment.
Interest expense
Interest expense decreased from $66 million for the three months ended
September 30, 2000 to $0.3 million for the same period in 2001. Interest on debt
subject to compromise ceased to accrue as of the Petition Date. Contractual
interest that was not recorded due to the bankruptcy proceedings totaled $60
million for the three months ended September 30, 2001. Included in interest
expense for the three months ended September 30, 2000 and 2001 was $51 million
and $8 million of noncash interest, respectively. Additionally, interest expense
is net of interest capitalized related to construction in progress of $3 million
for the three months ended September 30, 2000, and is not significant for the
three months ended September 30, 2001.
Interest income
Interest income decreased from $6 million for the three months ended
September 30, 2000 to $2 million for the same period in 2001. The decrease is
attributable to the decrease in cash, cash equivalents and short-term
investments balances.
Reorganization income (expense), net
Net reorganization income of $29 million for the three months ended
September 30, 2001 consists of items associated with the bankruptcy proceedings
that are not directly attributable to the ongoing operations of the Company.
Reorganization income represents a $36 million gain on the settlement with a
major customer, offset by $1 million in severance and retention costs, $1
million in costs related to the closing of certain switch sites, $2 million in
line cost cancellation fees and $3 million of other costs.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion of costs and preferred dividends on preferred securities of
subsidiaries was $18 million for the three months ended September 30, 2000. The
Company did not record any amounts during the three months ended September 30,
2001 as all offering costs were written off and discounts accreted as of
December 31, 2000. Accretion and preferred dividends on preferred securities of
subsidiaries recorded during the three months ended September 30, 2000 consisted
of the accretion of issuance costs and the accrual of the preferred securities
dividends associated with the 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009, the 14% Preferred Stock and
the 14 1/4% Preferred Stock.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value in 2000 is comprised of the dividends and the accretion to
liquidation value of the 8% Series A Convertible Preferred Stock of $14 million.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenue
Three Months Ended September 30,
----------------------------------------
2000 2001
-------------------- -------------------
$ % $ %
--------- --------- --------- ---------
($ values in thousands)
Dial-Up 123,434 26 132,631 35
Point-to-Point Broadband 134,646 28 117,443 31
Corporate Services 98,729 21 80,270 21
Reciprocal Compensation 120,560 25 51,376 13
--------- --------- --------- ---------
Total Revenue 477,369 100 381,720 100
========= ========= ========= =========
26
Total revenue decreased $95.6 million, or 20%, for the nine months ended
September 30, 2001 compared with the same period in 2000. The decrease was due
primarily to decreases in Point-to-Point Broadband, Corporate Services and
Reciprocal Compensation revenue, offset by an increase in Dial-Up revenue.
Dial-Up revenue increased $9.2 million, or 7%, from $123.4 million in 2000
to $132.6 million in 2001. The increase in Dial-Up revenue was primarily due a
5% increase in average monthly revenue per port and a 3% increase in billed line
count. The increase in average monthly revenue per port was due primarily to
significant service level credits issued in the third quarter of 2000. Dial-Up
revenue's contribution to total revenue rose from 26% in the first nine months
of 2000 to 35 % in the first nine months of 2001.
Point-to-Point Broadband revenue decreased $17.2 million, or 13%, from
$134.6 million in 2000 to $117.4 million in 2001. The decrease in Point-to-Point
Broadband revenue was primarily due to $11.5 million in non-recurring revenue
recognized in the first quarter of 2000 under the Company's fiber optic lease
agreement with a major carrier. In addition, special access, switched access and
SS7 revenues decreased primarily due to higher customer churn levels.
Point-to-Point Broadband revenue's contribution to total revenue rose from 28%
in the first nine months of 2000 to 31% in the first nine months of 2001.
Corporate Services revenue decreased $18.5 million, or 19%, from $98.7
million in 2000 to $80.3 million in 2001. Corporate Services revenue decreased
due to a 15% decrease in the billed line count, due to transitioning customers
in non-focus areas to other carriers, and an 4% decrease in the average monthly
revenue per line. Corporate Services revenue for the first nine months of 2001
reflects a 47% decrease in long distance revenue, due to the continued attrition
of resale access lines which had high long distance service penetration rates.
In addition, carrier access billing service revenue decreased 37% primarily due
to revenue earned but not recognized because of collection concerns. The Company
entered into an agreement to transfer its long distance revenue stream in the
fourth quarter of 2001. These customers generated $9.5 million and $5.0 million
in the nine months ended September 30, 2000 and 2001, respectively. The related
margin was not significant.
Reciprocal Compensation revenue decreased $69.2 million, or 57%, from
$120.6 million in 2000 to $51.4 million in 2001. Reciprocal Compensation's
contribution to total revenue decreased from 25% in 2000 to 13% in 2001. The
decrease in Reciprocal Compensation revenue reflects a 5% decrease in MOUs and a
56% decrease in the average revenue earned per MOU. The Company anticipates that
due to changes in the regulatory environment, Reciprocal Compensation revenue
will continue to decline in the future.
A significant amount of the Company's revenue is derived from long-term
contracts with large customers, including one major customer. For the nine
months ended September 30, 2001, this customer accounted for approximately 15%,
or $56.4 million, of total revenue. Revenue from this customer represented less
than 10% of total revenue for the nine months ended September 30, 2000. The loss
of this customer, or other significant customers, could have a material adverse
effect on the Company's financial condition and results of operations.
Operating costs
Total operating costs decreased from $304 million for the nine months ended
September 30, 2000 to $282 million for the same period in 2001, a 7% decrease.
In the second quarter of 2000, the Company significantly increased the number of
leased PRI and related backbone/backhaul expenses. Through the bankruptcy
proceedings, the Company has significantly reduced excess leased capacity,
thereby reducing operating costs. However, much of these savings were not
realized until after March 31, 2001. Operating costs increased as a percentage
of revenue from 64% for 2000 to 74% for 2001, primarily due to the decrease in
reciprocal compensation revenue, which generates significantly higher margins
than the Company's other revenue sources.
Selling, general and administrative expenses
Total selling, general and administrative expenses decreased from $189
million for the nine months ended September 30, 2000 to $81 million for the same
period in 2001, a 57% decrease. SG&A expenses decreased as a percentage of
revenue from 40% for 2000 to 21% for 2001. This decrease is primarily
attributable to higher staff levels in 2000 than in 2001. The number of full
time employees decreased from 2,811 at September 30, 2000 to 1,389 at September
30, 2001, while the average number of employees decreased 48% from the first
nine months of 2000 to the first nine months of 2001. In addition, bad debt
expense decreased $23 million from 2000 to 2001 primarily due to additional
reserves recorded in 2000 to account for contract disputes with certain ISP
customers, as well as to address collection concerns associated with the
27
business and regulatory environment changes that occurred in 2000. The decrease
is also due to lower facilities costs as the Company consolidates its locations
during the restructuring process.
Depreciation and amortization
Depreciation and amortization decreased from $237 million for the nine
months ended September 30, 2000 to $50 million for the same period in 2001. The
decrease is due to the reduced asset values as a result of the $1.7 billion
asset impairment recorded at December 31, 2000.
Loss on disposal of asset
Loss on disposal of asset of approximately $10 million for the nine months
ended September 30, 2001 relates primarily to the loss on the sale and leaseback
of the Company's headquarters.
Interest expense
Interest expense decreased from $195 million for the nine months ended
September 30, 2000 to $24 million for the same period in 2001. Interest on debt
subject to compromise ceased to accrue as of the Petition Date. Contractual
interest that was not recorded due to the bankruptcy proceedings totaled $180
million for the nine months ended September 30, 2001. Included in interest
expense for the nine months ended September 30, 2000 and 2001 was $159 million
and $11 million of noncash interest, respectively. Additionally, interest
expense is net of interest capitalized related to construction in progress of $7
million and $1 million during the nine months ended September 30, 2000 and 2001,
respectively.
Interest income
Interest income decreased from $20 million for the nine months ended
September 30, 2000 to $6 million for the same period in 2001. The decrease is
attributable to the decrease in cash, cash equivalents and short-term
investments balances.
Net reorganization income (expense), net
Net reorganization expense of $3 million for the nine months ended
September 30, 2001 consists of items associated with the bankruptcy proceedings
that are not directly attributable to the ongoing operations of the Company.
Reorganization expense represents a $36 million gain on the settlement with a
major customer, offset by $13 million in legal and professional fees, $13
million in severance and retention costs, $4 million in costs related to the
closing of certain switch sites, $5 million in line cost cancellation fees and
$4 million of other costs.
Accretion and preferred dividends on preferred securities of subsidiaries
Accretion of costs and preferred dividends on preferred securities of
subsidiaries was $51 million for the nine months ended September 30, 2000. The
Company did not record any amounts during the nine months ended September 30,
2001 as all offering costs were written off and discounts accreted as of
December 31, 2000. Accretion and preferred dividends on preferred securities of
subsidiaries recorded during the nine months ended September 30, 2000 consisted
of the accretion of issuance costs and the accrual of the preferred securities
dividends associated with the 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009, the 14% Preferred Stock and
the 14 1/4% Preferred Stock.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value in 2000 is comprised of the dividends and the accretion to
liquidation value of the 8% Series A Convertible Preferred Stock of $14 million.
Charge for beneficial conversion feature of 8% Series A Convertible Preferred
Stock
Charge for beneficial conversion of 8% Series A Convertible Preferred Stock
during the nine months ended September 30, 2000 relates to the charge of $159
million of the proceeds of the 8% Series A Convertible Preferred Stock which was
allocated to the intrinsic value of the beneficial conversion feature of the
convertible preferred securities to additional paid-in capital. As the 8% Series
A Convertible Preferred Stock is immediately convertible into shares of ICG
common stock, the beneficial conversion feature was recognized immediately as a
return to the preferred shareholders during the nine months ended September 30,
2000.
28
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a result
of the development and operation of its networks. The Company expects that its
operating losses will continue as it operates as a debtor-in-possession as a
result of its Chapter 11 bankruptcy filing. Further, due to the bankruptcy
filing and related events, there is no assurance that the carrying amounts of
assets will be realized or that liabilities will be liquidated or settled for
the amounts recorded. Consequently, there is substantial doubt about the
Company's ability to continue as a going concern.
On December 4, 2000, the Company finalized its Debtor-in-Possession
Revolving Credit Agreement with Chase Manhattan Bank (the "Credit Agreement").
The Credit Agreement originally provided for up to $350 million in financing,
which was subsequently amended to $200 million. At September 30, 2001, the
Company had cash and short-term investments of approximately $144 million, with
no amounts drawn under the Credit Agreement. On November 7, 2001 the Company
terminated the Credit Agreement. Management believes that cash and short-term
investments of approximately $151 million at November 30, 2001, along with
protection under bankruptcy law, should enable the Company to fund operations
through the bankruptcy restructuring process. However, there can be no assurance
that such resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements, or that the Company will achieve
or sustain profitability or positive EBITDA in the future.
At September 30, 2001, the Company had $2,657 million of liabilities
outstanding subject to compromise, including $1,969 million of indebtedness, and
$1,366 million of mandatorily redeemable preferred shares. As a result of filing
for protection under bankruptcy law, the Company is not currently paying any of
the debt service or preferred stock dividend obligations that have been
outstanding since November 14, 2000, except for certain interest-only payments
on some of the Company's secured debt. In addition, future payment of principal
and interest on all of the outstanding indebtedness and dividends on the
preferred shares is subject to court approval and may be discharged in whole or
in part in bankruptcy with proceeds from the court approved plan of
reorganization or liquidation of the Company. At this time, there can be no
assurance as to the amount of payment, if any, that will be made to these
debtors and shareholders.
The Company's Plan filed with the Bankruptcy Court on December 19, 2001
does not require any additional debt or equity financing. No assurance can be
given that the Plan will be approved by the Bankruptcy Court or that the Company
will be successful in reorganizing its affairs within the Chapter 11
proceedings.
Net Cash Provided (Used) By Operating Activities
The Company's operating activities provided $139 million and used $33
million of net cash in the nine months ended September 30, 2000 and 2001,
respectively. In 2001, net cash provided by operating activities before
reorganization items contributed approximately $35 million of net cash,
comprised of cash generated by operating results and working capital of
approximately $45 million, other sources of approximately $1 million, offset by
interest paid net of interest income of approximately $11 million.
Reorganization items include approximately $36 million of income from a non-cash
settlement with a major customer, $33 million of cash expenses and a reduction
in the liabilities subject to compromise primarily due to the adjustment of
pre-petition accruals. Net cash used in operating activities for the nine months
ended September 30, 2000 includes approximately $162 million of deferred
interest expense, which interest was not accrued or deferred in the nine months
ended September 30, 2001 due to the Company's bankruptcy proceedings.
Net Cash Used By Investing Activities
Investing activities used $562 million and $5 million in the nine months
ended September 30, 2000 and 2001, respectively. Net cash used by investing
activities for the nine months ended September 30, 2000 includes proceeds from
the sales of short-term investments available for sale and marketable securities
of $33 million, offset by cash expended for the acquisition of property,
equipment and other assets of $598 million. Net cash used by investing
activities for the nine months ended September 30, 2001 primarily includes cash
expended for the acquisition of property, equipment and other assets of $23
million, partially offset by proceeds from the sale of short-term investments
available for sale and marketable securities of $16 million. The Company
acquired assets under capital leases of $51 million during the nine months ended
September 30, 2001.
Net Cash Provided (Used) By Financing Activities
Financing activities provided $536 million in the nine months ended
September 30, 2000, which includes proceeds from the issuance of the 8% Series A
Convertible Preferred Stock, long-term debt and from the issuance of common
29
stock in conjunction with the exercise of options and warrants and the Company's
employee stock purchase plan, offset by principal payments on IRU agreement,
long-term debt and capital leases and payments of preferred dividends on
preferred securities of subsidiaries. Cash used by financing activities for the
nine months ended September 30, 2001 of $20 million consists primarily of
principal payments on capital lease obligations subject to compromise.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200 million
Senior Facility consisting of a $75 million term loan, a $100 million term loan
and a $25 million revolving line of credit. As of September 30, 2001, $85
million was outstanding under the loans at interest rates of the prime rate plus
3.875% and 4.25% for the nine months ended September 30, 2001.
As of September 30, 2001, the Company had an aggregate accreted value of
approximately $2.0 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005, the 12 1/2% Senior Discount Notes due 2006, the 11 5/8% Senior
Discount Notes due 2007, the 10% Notes and the 9 7/8% Notes.
As of September 30, 2001, an aggregate amount of $1.4 billion was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock, the
14 1/4% Preferred Stock and the 8% Series A Convertible Preferred Stock.
Capital Expenditures
The Company's capital expenditures, including assets acquired with cash,
under capital leases and pursuant to IRU agreements were $831 million and $74
million for the nine months ended September 30, 2000 and 2001, respectively.
There is substantial uncertainty about the Company's ability to complete
and place in service the Company's $181 million construction in progress balance
as of September 30, 2001.
Reciprocal Compensation
ICG has, as of September 30, 2001, a net receivable for reciprocal
compensation due under interconnection agreements with ILECs of approximately $9
million. ICG received cash of approximately $53 million during the nine months
ended September 30, 2001, from ILECs for terminating local and toll traffic. The
Company anticipates that due to changes in the regulatory environment,
reciprocal compensation revenue will continue to decline in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
30
PART II
ITEM 1. LEGAL PROCEEDINGS
During the third and fourth quarters of 2000, the Company was served
with fourteen lawsuits filed by various shareholders in the Federal
District Court for the District of Colorado. All of the suits name as
defendants the Company, the Company's former CEO, J. Shelby Bryan and
the Company's former President, John Kane. Additionally, one of the
complaints names the Company's former President, William S. Beans,
Jr., as a defendant. All of the complaints seek unspecified damages
for alleged violations of Rules 10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaints seek class action certification
for similarly situated shareholders. It is anticipated that the
lawsuits will be consolidated and that the Court will choose a lead
plaintiff's counsel. The Company has retained legal counsel and
intends to vigorously defend against these lawsuits. The Company has
also tendered these claims to the Company's insurers. At this time,
the claims against the Company have been stayed pursuant to the
Company's filing for bankruptcy.
In January 2001, certain shareholders of ICG Funding, a wholly owned
subsidiary of the Company, filed an adversary proceeding with the
Bankruptcy Court (Case number 00-04238 PJW Jointly Administered,
Adversary Proceeding No. 01-000 PJW) against the Company and ICG
Funding. The shareholders in this adversary action sought to recover
approximately $2.3 million from an escrow account established to fund
certain dividend payments to holders of the Funding Exchangeable
Preferred Securities. Because of ICG Funding having filed for
bankruptcy protection, ICG Funding did not declare the last dividend
that was to have been paid with the remaining proceeds of the escrow
account. In April 2001, the Company and ICG Funding finalized a
settlement agreement with the shareholders which has been approved by
the Bankruptcy Court. Under the terms of the settlement, the
shareholders received approximately two thirds of the funds in the
escrow account and the Company received the remaining one third of the
escrowed funds, subject to certain contingencies and holdbacks related
to shareholders that did not participate in the settlement.
The Company is a party to certain other litigation that has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Due to the bankruptcy proceedings discussed in note 1 to the Company's
unaudited consolidated financial statements for the nine months ended
September 30, 2001, the Company is currently in default under the 13
1/2 % Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes, 9 7/8% Notes and
the Senior Facility. In addition, the Company is in default under the
14 1/4% Preferred Stock, 14% Preferred Stock, 6 3/4% Preferred
Securities and 8% Series A Convertible Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
31
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
2.2 Joint Plan of Reorganization of ICG Communications,
Inc. and Its Affiliated Debtors and Debtors in
Possession [Incorporated by reference to Exhibit 2.2 to
ICG Communications, Inc.'s Current Report on Form 8-K
dated December 19, 2001].
2.3 Disclosure Statement with Respect to Joint Plan of
Reorganization of ICG Communications, Inc. and Its
Affiliated Debtors and Debtors in Possession
[Incorporated by reference to Exhibit 2.3 to ICG
Communications, Inc.'s Current Report on Form 8-K dated
December 19, 2001].
(10) Material Contracts.
10.84 Amended and Restated Employment Agreement, dated June
21, 2001, by and between ICG Communications, Inc., ICG
Holdings, Inc., ICG Services, Inc., ICG Equipment,
Inc., and ICG Telecom, Inc., and Randall Curran
[Incorporated by reference to Exhibit 10.84 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001].
(B) Report on Form 8-K.
The following reports on Form 8-K were filed by the registrants
during the three months ended September 30, 2001:
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 9, 2002.
ICG COMMUNICATIONS, INC.
Date: January 9, 2002 By: /s/ Richard E. Fish, Jr.
---------------------------------
Richard E. Fish, Jr., Executive
Vice President andChief Financial
Officer (Principal Financial
Officer)
Date: January 9, 2002 By: /s/ John V. Colgan
---------------------------------
John V. Colgan, Senior Vice
President and Controller
(Principal Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 9, 2002.
ICG HOLDINGS (CANADA) CO.
Date: January 9, 2002 By: /s/ Richard E. Fish, Jr.
---------------------------------
Richard E. Fish, Jr., Executive
Vice President andChief Financial
Officer (Principal Financial
Officer)
Date: January 9, 2002 By: /s/ John V. Colgan
---------------------------------
John V. Colgan, Senior Vice
President and Controller
(Principal Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 9, 2002.
ICG HOLDINGS, INC.
Date: January 9, 2002 By: /s/ Richard E. Fish, Jr.
---------------------------------
Richard E. Fish, Jr., Executive
Vice President andChief Financial
Officer (Principal Financial
Officer)
Date: January 9, 2002 By: /s/ John V. Colgan
---------------------------------
John V. Colgan, Senior Vice
President and Controller
(Principal Accounting Officer)