UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC. (Debtor-in-Possession as of November 14, 2000)
(Commission File Number 1-11052)
ICG HOLDINGS (CANADA) CO. (Debtor-in-Possession as of November 14, 2000)
(Commission File Number 33-96540)
ICG HOLDINGS, INC. (Debtor-in-Possession as of November 14, 2000)
(Exact names of registrants as specified in their charters)
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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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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
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
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Registrants' telephone numbers, including area codes: (888) 424-1144 or (303)
414-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Not applicable
Not applicable
Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
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Name of each exchange on which
Title of each class registered
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Common Stock, $.01 par value OTC Market
(52,045,443 shares outstanding as of
June 20, 2001)
Not applicable Not applicable
Not applicable Not applicable
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Indicate by check mark whether the registrants: (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [_] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of June 20, 2001 the aggregate market value of ICG Communications,
Inc. Common Stock held by non-affiliates (using the closing price of $0.10 on
June 20, 2001) was approximately $5,204,544.
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 common stock of ICG Holdings, Inc.
Table of Contents
PART I............................................................................................................... 1
ITEM 1. BUSINESS................................................................................................ 1
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Overview................................................................................................ 1
Bankruptcy Proceedings.................................................................................. 3
Asset Impairment........................................................................................ 4
Industry................................................................................................ 5
Business and Strategy................................................................................... 6
Dial-Up Services (ISP Business)...................................................................... 6
Point-to-Point Broadband, Switched Access and SS7 Services........................................... 9
Corporate Services................................................................................... 10
Sales and Marketing..................................................................................... 11
Network and Facilities.................................................................................. 12
Competition............................................................................................. 13
Regulatory Activity..................................................................................... 14
Financing Activities.................................................................................... 16
Employees............................................................................................... 17
ITEM 2. PROPERTIES.............................................................................................. 18
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ITEM 3. LEGAL PROCEEDINGS....................................................................................... 18
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 19
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PART II.............................................................................................................. 20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................... 20
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ITEM 6. SELECTED FINANCIAL DATA................................................................................. 22
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 26
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 45
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................. 46
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 46
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PART III............................................................................................................. 47
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.......................................................... 47
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ITEM 11. EXECUTIVE COMPENSATION.................................................................................. 50
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 57
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................... 59
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PART IV.............................................................................................................. 60
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K........................................... 60
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Financial Statements.................................................................................... 60
Report on Form 8-K...................................................................................... 74
Exhibits................................................................................................ 75
Financial Statement Schedule............................................................................ 75
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FINANCIAL STATEMENTS..................................... F-1
FINANCIAL STATEMENT SCHEDULE............................. S-1
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PART I
Unless the context otherwise requires, the term "Company", "ICG" or
"Registrant" means the combined business operations of ICG Communications, Inc.
and its subsidiaries, including ICG Holdings (Canada) Co. ("Holdings-Canada"),
ICG Holdings, Inc. ("Holdings") and ICG Services, Inc. ("ICG Services"). All
dollar amounts are in U.S. dollars.
The Business section and other parts of this Report contain "forward-
looking statements" intended to qualify as safe harbors from liability as
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statements include words such as "intends," "anticipates,"
"expects," "estimates," "plans" and "believes," and other similar words.
Additionally, statements that describe the Company's future plans, objectives or
goals also are forward-looking statements. All forward-looking statements are
subject to certain risks and uncertainties that could cause actual results or
outcomes to differ materially from those currently anticipated. Factors that
could affect actual results include, but are not limited to, the following:
. The uncertainty of the Company's future as a result of filing for
protection under bankruptcy law;
. The formulation, approval and confirmation of a plan of reorganization;
. The significant amount of indebtedness incurred by the Company and the
Company's ability to successfully restructure this indebtedness;
. The possibility of continued operating losses;
. The Company's ability to successfully maintain commercial relationships
with its critical vendors and suppliers;
. The Company's ability to retain its major customers on profitable terms;
. The extensive competition the Company will face;
. The Company's ability to attract and retain qualified management and
employees;
. The Company's ability to access capital markets in a timely manner, at
reasonable costs and on satisfactory terms and conditions; and
. Changes in, or the Company's inability to comply with, existing government
regulations.
ITEM 1. BUSINESS
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OVERVIEW
ICG provides voice, data and Internet communication services.
Headquartered in Englewood, Colorado, the Company operates an integrated
metropolitan and nationwide fiber optic infrastructure offering:
. 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
("ISPs").
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. 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.
. Corporate Services, primarily retail voice and data services to businesses.
Services and Customers
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Through its Dial-Up business (referred to in previous filings as the "ISP
Business"), the Company provides nationwide Internet access services to ISP
customers by connecting its 27 major markets and approximately 175 data points
of presence ("POPs") to its nationwide data network. ICG's customers include
some of the largest national and regional ISPs. As of May 2001, the Company had
approximately 570,000 ISP customer ports in service.
ICG also provides Point-to-Point Broadband services to interexchange
carriers ("IXCs") and end-user business customers. This service provides
dedicated bandwidth and offers DS1 to OC-192 capacity to connect: (i) long-haul
carriers to a local market, to large companies and to other long-haul carrier
facilities; or (ii) large companies to their long distance carriers and other
corporate facilities. Point-to-Point Broadband services are a rapidly expanding
segment of the telecommunications market as they provide customers with
dedicated capacity.
The Company's Corporate Services business (referred to in previous
filings primarily as the "Commercial Business") offers local, long distance,
enhanced telephony and data services to businesses over its fiber optic networks
located in major metropolitan areas in California, Colorado, Ohio, Texas and the
Southeast. As of May 2001, Corporate Services' customers accounted for
approximately 195,000 access lines.
Network
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To provide its service offerings, ICG combines its metropolitan and
regional fiber network infrastructure, 43 voice and data switches (down from 47
switches as of December 31, 2000), nationwide data backbone, data POPs, 26
asynchronous transfer mode ("ATM") switches and 67 private and seven public
Internet peering arrangements. The Company's data network is supported by an OC-
48 capacity nationwide fiber optic backbone currently operating at OC-3/OC-12
capacity. The design of the physical network permits the Company to offer
flexible, high-speed telecommunications services to its customers.
The regional network infrastructure consists of fiber optic cables and
associated advanced electronics and transmission equipment. The Company's
network is generally configured in redundant synchronous optical network
("SONET") rings to make the network accessible to the largest concentration of
telecommunications intensive business customers within a given market. This
network architecture also offers the advantage of uninterrupted service in the
event of a fiber cut or equipment failure, thereby resulting in limited outages
and increased network reliability in a cost efficient manner.
-2-
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. The Company anticipates that it will present a formal
plan of reorganization to the Bankruptcy Court during 2001. No assurance can be
given, however, that the plan will be approved or that the Company will be
successful in reorganizing its affairs within the Chapter 11 proceedings.
Further, due to the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded.
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 Wasserstein Perella & Co. as its financial advisor.
In conjunction with the bankruptcy filing, the Company secured a Debtor-in-
Possession Revolving Credit Agreement (the "Credit Agreement") of up to $350
million, which was subsequently amended to $200 million. The Credit Agreement,
combined with the Company's $214.7 million cash and short-term investments as of
December 31, 2000, are expected to be sufficient to fund operations through the
end of the bankruptcy process.
-3-
ICG is focusing on improving its overall profitability and began a
restructuring process in the second half of 2000 that has resulted in a
substantial reduction in operating and capital expenditures. These reductions
include reducing the full-time employee count from 2,975 at the end of the
second quarter of 2000 to 2,054 as of year-end 2000, and 1,433 as of May 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
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.
ASSET IMPAIRMENT
As a result of adverse changes in the capital markets, downward trends in
the telecommunications segment of the economy, and the subsequent deterioration
in the value of telecommunication assets, including the Company's operating
assets, the Company undertook an extensive analysis of its business plan during
late 2000 and the first half of 2001. As a result, the Company prepared a
detailed business plan that gave appropriate consideration to the environmental
factors noted above and which has resulted in the Company recording a
substantial asset impairment.
The Company has provided for the impairment of long-lived assets, including
goodwill, pursuant to Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121). SFAS 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or 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.
The analysis performed by the Company indicated that there was a
significant shortfall of cash flows compared to the carrying value of the
Company's long-lived tangible and intangible
-4-
assets and that an impairment had occurred. For purposes of calculating the
amount of the impairment the Company has segregated its long-lived assets into
three categories: intangible assets, consisting primarily of goodwill, tangible
assets to be disposed of, and tangible assets to be utilized in ongoing
operations.
As a result of the analysis of shortfalls of cash flows to carrying values
of assets, all intangibles, consisting primarily of goodwill, have been written
off as of December 31, 2000, resulting in an impairment charge of approximately
$80 million.
Additionally, the Company has determined that certain assets will not be
utilized under the business plan and will be held for resale. The fair value of
assets held for resale is based on current appraisals or purchase offers, less
cost to sell. Assets held for resale are comprised primarily of: (i) assets
under construction in late 2000 where the incremental capital required to place
the asset in service for revenue generation was not available, and (ii) assets
in service or under construction that were not required to meet expected future
customer demand as defined in the business plan. The net book value of assets to
be disposed of prior to the impairment was $165 million. An impairment of
approximately $124 million was reflected in the financial statements as of
December 31, 2000 to reduce these assets to their fair value of approximately
$41 million. These assets have not been segregated as current assets in the
accompanying consolidated financial statements as of December 31, 2000 and are
included in property and equipment because the sales are subject to final
Bankruptcy Court approval.
Management, in consultation with its financial advisors, determined that
the fair value of tangible assets to be utilized in ongoing operations was $550
million at December 31, 2000, based primarily on the present value of discounted
cash flows; although the Company also took into consideration several other
valuation techniques, including asset appraisals and current market
capitalization. As a result, the Company has recorded an impairment charge as of
December 31, 2000 of approximately $1.5 billion related to tangible assets to be
used in the ongoing operations of the Company.
The values assigned to assets if the Company emerges from bankruptcy may be
different from the fair value assigned to the long-lived assets as of December
31, 2000. 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 APB Opinion 16, Business Combinations). The assumptions regarding
capital structure and availability, business environment and the enterprise
value determined at the date of emergence from bankruptcy may differ from those
used in the impairment analysis.
INDUSTRY
Industry revenue for the U.S. Internet access market is expected to
increase from approximately $8 billion in 1999 to over $30 billion in 2005,
reflecting expanded market size as well as enhanced service offerings. (See, JP
Morgan Securities Inc. Equity Research, Telecom Services, September 8, 2000 p.
41, citing IDC, Forrester Research, Gartner Group and JPMS estimates.) The
number of Internet subscribers have grown dramatically in the past two years and
rapid growth is expected to continue in the coming three years. Growth in
Internet use will come
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in the form of dial-up modem access in the near-term and transition to higher
growth from emerging broadband access methods. In a year 2000 report, eMarketer,
which consolidates various estimates, estimated that dial-up subscribers will
grow from approximately 34 million in 1999 to approximately 55 million in 2003.
At the same time, broadband subscribers (cable and digital subscriber lines
("DSL")) were expected to grow from approximately 2 million to 21 million. The
number of users per household and the time connected to the Internet is also
expected to increase. Based on a May 2001 study by McKinsey & Company and JP
Morgan H&Q, access ports serving an average of 8.9 Internet subscribers per port
in 2000 will be reduced to 6.4 subscribers per port by 2005, driving increased
demand for access ports to support existing dial-up subscribers. More users and
increased usage of the Internet are expected to further increase the demand for
ISP access ports as sold by the Company.
Revenue from Point-to-Point Broadband services, also referred to as special
access or private line service, is forecast to grow from an estimated industry
total of approximately $13 billion in 2000 to $34 billion in 2005; a 21%
compounded annual growth rate. (See JP Morgan Securities Inc. Equity Research,
Telecom Services, September 8, 2000, p. 50, citing the FCC, IDC, company
reports, JPMS estimates September 2000.) The Company expects to benefit from
this industry growth.
Local telephone and data service is estimated to generate over a $100
billion in annual revenues. According to May 2001 Federal Communications
Commission ("FCC") data, competitive local exchange carriers ("CLECs") nearly
doubled their market share of end-user access lines from 4.4% to 8.5% as of
December 31, 1999 and 2000, respectively. CLECs such as ICG are forecast to gain
an increasing share of this large market.
BUSINESS AND STRATEGY
As a result of the Company's financial difficulties during the second half
of 2000 and its subsequent filing for bankruptcy protection, the Company has
dramatically scaled back its expansion plans and has revised its business plan
to better leverage its existing capital and network infrastructure. More
specifically, the Company has focused its product offerings to include Dial-Up
Internet access, Point-to-Point Broadband and Corporate Services, with an
emphasis in growth from Dedicated Internet Access ("DIA") going forward. The
Company has withdrawn certain products and services and has indefinitely
postponed plans to offer certain new products and enter new markets. Moreover,
the Company is transitioning all of its DSL customers to other vendors and
terminating all contracts with customers using the voice over Internet protocol
("VoIP") product.
Dial-Up Access (ISP Business)
In early 1998, the Company acquired a nationwide data network as part of
its acquisition of NETCOM On-Line Communication Services, Inc. As a result, ICG
began providing Internet access services to ISPs and other customers over this
data network.
The data network is supported by the Company's nationwide fiber optic
backbone that connects to major public and private peering connections and
private peering sites with major ISPs and IXCs. The network, in combination
with certain leased long-haul assets, carries data
-6-
traffic associated with the Company's ISP business. The design of the physical
network permits the Company to offer flexible, high-speed services to its
customers.
The Company targets a variety of data access and transport services to ISP
and corporate customers. It is not economically feasible for many ISPs to build
and maintain their own networks and consequently they prefer to outsource
network facilities management in order to focus internal resources on their core
ISP business. To this end, ICG offers PRI, private label remote access service
("PL-RAS") and Internet remote access service ("IRAS") to ISPs to manage their
Internet access requirements from connection to facilities management
responsibilities.
Services
PRI
---
PRI uses ICG's network to route ISP end-user calls from the public switched
network to the ISP-owned modem banks. The end-user dials up the ISP and the call
is sent through the public network and routed to the ICG switch, which then
routes the call to the ISP-owned modem banks or RAS equipment. The RAS equipment
is typically collocated at an ICG central office facility. If the ISP is not
collocated, a Point-to-Point Broadband connection is required between the ISP's
POP and the ICG central office.
PRI is priced per port per month. The Company's direct costs are mainly for
leased DS3 lines that connect the public network to the ICG switch or for leased
T1 lines between the ICG switch and an ISP POP that is not collocated.
PL-RAS
------
Remote access services are value-added services for which the customer pays
network management service fees. In return, the ISP has significantly reduced
capital expenditures and can quickly expand its geographical footprint over
ICG's data network. PL-RAS eliminates the need to route ISP traffic to ISP-owned
modem banks, because ICG acts as an aggregator of ISP
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traffic. PL-RAS utilizes ICG-owned switches and modems to "connect and send"
customer data packets to the ISP's POP, which is usually collocated in an ICG
central office. From there, the ISP will either route the traffic to the
Internet or to its own network. This service limits the ISP's capital deployment
by eliminating the need to purchase separate modem banks in locations around the
country.
In 2000, the Company also offered PL-RAS service to ISPs that are not
physically located in the same city. In this case, ICG RAS equipment routes the
traffic to the nearest ICG hub and onto the network backbone. The traffic is
carried over the Company's backbone to another ICG hub connected to the ISP.
From this point, the ISP routes the traffic to the Internet or to its own
system. PL-RAS is charged per port per month, typically under multi-year
contracts. The Company maintains PL-RAS service to existing customers, but no
longer offers PL-RAS to new customers.
IRAS
----
IRAS adds an additional layer of network management as it "connects, sends
and routes" customer data traffic. This service has the capability to send data
directly over ICG's network to the Internet, allowing the ISP to outsource its
infrastructure and create a national footprint with minimal investment in fixed
assets. The Company estimates that approximately 65% of ISP traffic can bypass
the ISP.
IRAS is charged per port per month, typically under multi-year contracts.
The Company's costs to provide this service are mainly related to the connection
charges to the public network, either for a leased DS3 for on-switch traffic or
for a leased PRI for off-switch traffic. Costs also include network backbone and
backhaul costs to transfer traffic to the ICG hub closest to the ISP point of
presence.
Customers
ICG's Dial-Up customers include some of the largest national and regional
ISPs. As of May 2001, the Company had approximately 570,000 ISP customer ports
providing PRI and remote access services. At an industry average of nine end-
users per port, ICG estimates that its systems have the capacity to serve
approximately 10% of all dial-up Internet subscribers in the United States.
In late 1999 and early 2000, the Company experienced significant customer
demand for its IRAS product, well in excess of expectations. Accordingly,
aggressive build-out targets were set to meet this demand. The Company, however,
experienced delays and unexpected difficulties associated with new technologies
and scaling its network and operating systems. These factors, among others,
contributed to the Company's network performance dropping below the agreed upon
service levels between the Company and certain IRAS customers. These issues did
not impact any of the Company's other services. The Company issued service
credits to customers to whom service did not meet contractual requirements
during the third and fourth quarters of 2000. In addition, commitments for
future IRAS line installations were reduced or cancelled.
-8-
Network performance with respect to the IRAS product continues to be a top
priority for the Company. By year-end 2000, the log-on success rate for the IRAS
product had significantly improved and the Company was able to consistently meet
or exceed customer expectations. Despite the Company's recent success in
improving customer service, there is no assurance that the Company will not
experience additional network problems. Additionally, there is no guarantee that
the Company will be able to maintain existing IRAS customers or obtain new
customers. In the event the Company is not successful in maintaining its IRAS
customers or obtaining new customers, the Company's revenue expectations will be
significantly reduced.
The current economic climate has negatively impacted many business sectors
including ISPs, some of which are customers of the Company's Dial-Up services.
As a result, certain of the Company's ISP customers have scaled back services
ordered from the Company or, in some instances, have filed for bankruptcy
protection. However, the vast majority of the Company's Dial-Up access revenue
is generated by large ISPs who have greater resources and are expected to
maintain their businesses and ability to pay through the current economic
downturn.
Point-to-Point Broadband, Switched Access and SS7 Services
Services
Point-to-Point Broadband
------------------------
ICG provides Point-to-Point Broadband services to long distance companies,
long-haul providers, ISPs and large end-user business customers. Point-to-Point
Broadband involves providing a dedicated facility used: (i) to connect end-user
customers to a long distance carrier's facilities; (ii) to connect a long
distance carrier's facilities to the local telephone company's central offices;
or (iii) to connect different facilities of the same carrier or one carrier to
another within the same local calling area. Point-to-Point Broadband is offered
at DS1, DS3, OC-3, OC-12, OC-48 and OC-192 capacities (with availability
depending upon location). Point-to-Point Broadband services are high-margin and
a growing business that currently accounts for approximately 80% of this
category's revenues.
Switched Access
---------------
Switched access services include interstate and intrastate transport and
switching of calls between two carriers or a carrier and an end-user. By using
ICG to switch (terminate or originate) a call, it reduces the long distance
carrier's local access cost, which is a major operating expense.
SS7
---
SS7 services are used to connect long distance (including wireless) and
local exchange carriers' networks, and the SS7 signals between network elements
to provide faster call set-up and more efficient use of network resources. ICG
is one of the largest providers of SS7 services in the U. S.
-9-
Customers
ICG provides Point-to-Point Broadband, switched access and SS7 services to
a customer base that is comprised primarily of IXCs and large-sized businesses.
Approximately 40% of revenue from this category is generated from the Company's
top ten customers.
Corporate Services
After the passage of the Federal Telecommunications Act of 1996, ICG
positioned itself as a CLEC and targeted the small to medium-sized business
market. The Company is currently targeting the medium to large-sized business
market, which it believes represents a good growth opportunity. While the demand
for voice services by businesses has been relatively stable, the demand for data
services in commercial applications is expected to increase significantly over
the next several years as this customer segment addresses its growing need for
data connections, greater bandwidth and the need to outsource network and
information technology ("IT") infrastructure. ICG has attempted to position
itself to take advantage of these industry trends with its established CLEC
customer base and existing voice and data networks.
Services
Voice
------
Competitive local dialtone service consists of basic local exchange lines
and trunks with business-related voice line features (e.g. voicemail), local
calling, and local toll calling. Under the Company's revised business strategy,
sales of voice services will concentrate on customers with a minimum of 12 lines
in areas where the Company has switch capacity. The Company's long distance
service offering provides voice transmission outside of the local exchange. The
Company has focused on providing voice services in the following five operating
regions in the United States: California, Colorado, Ohio, Texas and parts of the
Southeast.
Dedicated Internet Access ("DIA")
---------------------------------
DIA provides dedicated bandwidth from a customer's premises directly to the
Internet at T-1 and T-3 speeds using ICG's more than 70 peering arrangements. In
order to meet corporate customer needs for Internet connectivity, the Company
introduced DIA service in late 2000. The Company plans to emphasize this product
going forward, offering full T-1 and full/fractional T-3 connections. According
to a Frost & Sullivan 2000 report, the DIA market is projected to triple between
1999 and 2005. The Company anticipates offering its DIA services in a limited
number of markets in 2001 and expanding its footprint thereafter. ICG is well
positioned to penetrate this market by leveraging its existing investment in
metropolitan fiber and nationwide backbone capacity.
Customers
During 2000, ICG's Corporate Services customers were primarily small to
medium-sized business customers in regional markets, purchasing voice, data or a
bundled package including enhanced services. Business customer lines grew from
approximately 165,000 at the beginning of 1999 to approximately 230,000 at the
end of 2000. Subsequently, customer lines declined to approximately 195,000 as
of May 2001. As part of the Company's revised 2001 business plan, the Company
reduced the types of service and regions in which it would offer voice services.
As a result, affected customers have been, or are in the process of being,
transitioned to other
-10-
providers. Growth in the Corporate Service business is anticipated to come
primarily from expansion of DIA sales and enhanced voice services to generate
incremental margin.
The Corporate Services business has a large customer base, of which no
single customer accounts for a significant portion of revenue.
SALES AND MARKETING
Sales
- -----
The Company's sales organization is split into a national account team, who
typically handle the large Dial-Up and Point-to-Point Broadband accounts, and a
regional account team, who typically handle the Company's Corporate Services'
accounts.
The national sales organization is made up of eight national account
managers in addition to approximately ten technical and service support
personnel. National account managers' responsibilities include new sales,
relationship management and contract negotiation. Until recently, the Company
had a separate sales force for the special access and Point-to-Point broadband
services, however this sales team was merged into the national team to take
advantage of the synergies inherent with a simplified sales force. The national
sales group focuses on customers that will allow ICG to expand into various
markets at attractive margins, thereby providing a platform from which to sell
additional services.
The regional sales team consists of approximately 35 managers and account
executives together with a technical consultant and order coordinator for each
account executive. This team is responsible for the account from the initial
sale through post-installation customer care. The team structure is designed to
streamline the order process and improve customer service. Teams are present in
each market where the Company offers Corporate Services. In conjunction with the
effort to better match sales with provisioning and economic objectives, the
regional sales force has been restructured so that the number of account
executives in any given market is based on existing customers, available
capacity and market opportunity. In addition, the ratio of sales managers to
account executives is set at five to one, reducing the need for a manager in
each market.
Marketing
- ---------
During 2000, the Company targeted smaller business customers having 50 to
100-voice and data users for Corporate Services, both large and regional ISPs
for Dial-Up and primarily interexchange carriers for Point-to-Point Broadband
services. Going forward, target Corporate Services customers will have 50-500
users and sales will focus on DIA with voice services targeted at the DIA
customers. Point-to-Point Broadband will be marketed to large businesses as well
as interexchange carriers. Sales and marketing of all services will concentrate
on those regions where the Company has existing capacity and network
infrastructure.
Starting in the fall of 2000, the Company discontinued most of its
advertising campaigns and focused its efforts on customer retention.
-11-
NETWORK AND FACILITIES
Regional Network Assets
- -----------------------
As of May 2001, ICG's regional network assets included 43 voice and data
switches (down from 47 as of December 31, 2000) in 27 metropolitan service areas
("MSAs") and 5,580 miles of leased or owned regional and metropolitan fiber
comprising 166,498 local fiber strand miles. In addition, the Company has two
voice and data switches in hibernation that it will place into service as
capacity is needed. The majority of the Company's local fiber networks are built
in SONET rings that encircle a metropolitan area. This ring architecture is
intended to be accessible to the largest concentration of telecommunications
intensive business customers within a given market and provides fiber redundancy
to ensure uninterrupted service. As of May 2001, ICG connected 8,735 buildings
to its network through on-net (i.e., connected to the ICG network via ICG-owned
fiber) and hybrid (i.e., connected to the ICG network via third-party fiber)
applications, of which 925 buildings are connected on-net. In addition, the
network is constructed to access long distance carriers as well as end-user
telecommunications traffic in a cost efficient manner that lends itself to
providing cost-competitive Point-to-Point Broadband and switched access
services.
ICG has considerable assets under various stages of construction, many of
which are substantially complete. The majority of these assets are uninstalled
transport and switch equipment, software development and new network
construction. The Company has some switch equipment which it may or may not
complete and the Company is currently reviewing options to sell these assets.
Nationwide Network Architecture
- -------------------------------
ICG's nationwide data backbone includes OC-3/OC-12 long-haul fiber capacity
connecting nine major metropolitan areas. The fiber backbone is connected to 26
ATM switches and approximately 175 POPs with high performance routers. The
Company has peering arrangements at seven public peering sites: MAE East
(Washington D.C.), MAE West (Santa Clara, CA), MAE West ATM, MAE Dallas ATM,
PacBell (San Jose, CA), Sprint NAP (Newark, NJ), and Ameritech (Chicago, IL).
In addition, the Company has peering arrangements with approximately 70 private
companies such as IXCs and major ISPs, some with multiple locations. The
Company also owns and leases dedicated lines throughout the United States. The
Company is currently in the process of consolidating numerous data POPs as part
of its cost reduction efforts.
The majority of the Company's long-haul capacity is obtained through 20
year indefeasible right of use ("IRU") agreements with Qwest. The Company
currently has OC-12 capacity in service connecting: San Jose; Los Angeles;
Denver; Dallas; Atlanta; Washington D.C.; Newark; and Chicago, with plans to
upgrade routes from Denver and San Jose to Seattle in the third quarter of 2001
(now using OC-3 capacity). The Company has the potential to upgrade the current
OC-12 routes to OC-48 capacity by placing its additional OC-12 capacity into
service.
-12-
Certain assets are shared by each of the business sectors in order to
provide integrated service and customer care for the Company's customers,
including an operations support system and an advanced network operations center
located in Colorado. ICG provides PRI, PL-RAS and IRAS to its ISP customers
using the same local fiber and switches as utilized by the Company's Corporate
Services business.
COMPETITION
The Company participates in several sectors of the telecommunications
service industry, all of which are highly competitive. In addition, numerous
competitors, including major telecommunications carriers, have rapidly expanded
their network capabilities in order to service the ISP industry.
The Company's competitors in the dial-up Internet access market possess (or
will possess) significant network infrastructure enabling them to provide ISPs
with capacity and access to the Internet. The Company's primary competitors in
this revenue category include Level 3, MCI WorldCom, Genuity and the incumbent
local exchange carriers ("ILECs"). While the Company believes that its network
and products will enable it to compete in this industry sector, some of the
Company's competitors have significantly greater market presence, brand
recognition, financial, technical and personnel resources than the Company.
There can be no assurance that the Company will be able to compete effectively
with these companies.
In the Corporate Services and Point-to-Point Broadband sectors, the Company
competes in an environment dominated by the ILECs. The ILECs have long-standing
relationships with their customers and provide those customers with various
transmission and switching services. The ILECs also have the potential to
subsidize access and switched services with revenue from a variety of businesses
and historically have benefited from certain state and federal regulations that
have provided the ILECs with advantages over the Company. Also included among
the Company's current competitors in this sector are other CLECs, wireless
service providers and private networks built by large end-users. In addition,
competitors in this industry sector include IXCs such as AT&T and MCI WorldCom.
Further, potential competitors have arisen using different technologies,
including cable television companies, utilities, ISPs, ILECs outside their
current local service areas, and the local access operations of long distance
carriers. Many of the Company's actual and potential competitors have greater
financial, technical and marketing resources than the Company.
The Company is aware that consolidation of telecommunications companies,
including mergers between certain of the ILECs, between long distance companies
and cable television companies and between long distance companies and CLECs,
and the formation of strategic alliances within the telecommunications industry,
as well as the development of new technologies, could give rise to increased
competition. One of the primary purposes of the Telecommunications Act is to
promote competition, particularly in the local telephone market. Since
enactment, several telecommunications companies have indicated their intention
to aggressively expand into many segments of the telecommunications industry,
including segments in which the Company participates or expects to participate.
This may result in more participants than can ultimately be successful in a
given market.
-13-
While strong competition currently exists in all sectors of the industry,
the Company believes that the demand for voice and data services by business
customers provides expanded opportunities for providers such as the Company.
There can be no assurance, however, that sufficient demand will exist for the
Company's network services in its selected markets, that market prices will not
dramatically decline or that the Company will be successful in executing its
revised business strategy in time to meet new competitors, or at all.
REGULATORY ACTIVITY
Each of ICG's current service categories (Dial-Up, Point-to-Point Broadband
and Corporate Services) incurs some form of regulatory oversight from state
and/or federal regulatory authorities. For example, most of the services offered
by the Dial-Up business (i.e., managed modem services) are unregulated. However,
certain regulatory provisions, including prohibitions against price
discrimination, are typically enforced by state regulatory agencies. With
respect to the Point-to-Point Broadband business, the Company's primary
regulatory compliance responsibility relates to the collection of access charges
for both originating and terminating traffic. The application and collection of
access charges are regulated by both state and federal agencies. Finally,
Corporate Services, including the provisioning of facilities used to carry voice
traffic, has traditionally incurred significant regulatory oversight.
General Operational Issues
- --------------------------
The Federal Telecommunications Act of 1996 (the "Telecommunications Act")
generally requires ILECs to negotiate agreements to provide interconnection and
nondiscriminatory access to their local telecommunications networks and other
essential facilities. However, each new agreement, as well as renewals of the
original agreement, in some cases, are subject to negotiations with each ILEC.
Where the parties cannot agree on negotiated terms and conditions of the
agreements, the Company may petition the proper state regulatory agency to
arbitrate disputed issues. The terms of an arbitrated agreement are subject to
review by the federal courts.
The Company has executed interconnection agreements with every major ILEC
and while the initial terms of some of those agreements have expired or are soon
expiring, the Company is in the process of renegotiating and extending the terms
of those agreements.
Reciprocal compensation has historically constituted an important source of
revenue for the Company. Reciprocal compensation is payment by the carrier of an
originating voice or Internet bound call to a carrier that terminates the call.
In effect, the payment constitutes reimbursement of costs associated with call
termination. Typically, reciprocal compensation is treated by the Company as
being comprised of two separate elements. The first element, local reciprocal
compensation, relates to costs incurred as a result of the termination of calls
that originate and terminate within the same local access transport area
("LATA"). The second element, intra-LATA toll reciprocal compensation, refers to
those calls that originate within the LATA, but are terminated in a different
local calling area.
The Company believes that it is entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet bound calls originated
by ILEC customers
-14-
pursuant to various interconnection agreements and as codified by a number of
state utility commissions. However, as a means of gaining certainty with respect
to the continued collection of reciprocal compensation revenue, the Company
negotiated voluntary settlement agreements with certain ILECs that provide for
the payment of compensation for terminating ISP traffic. These agreements expire
at dates ranging from May 2002 to December 2003.
In April 2001, the Federal Communications Commission ("FCC") issued an
order on reciprocal compensation which, if not overturned on appeal, will
eventually eliminate carrier-to-carrier payments for termination of ISP traffic
after a 36-month transition period. The Company believes that the FCC order will
have no effect on its existing interconnection agreements that require the
payment of reciprocal compensation or the aforementioned voluntary settlement
agreements. Thus, the FCC order will have no material affect on the ability of
the Company to collect reciprocal compensation during the terms of those
respective agreements. Notwithstanding the foregoing, the Company anticipates
that reciprocal compensation will be a decreasing source of revenue after 2003.
Federal Regulation
- ------------------
The Company generally operates as a regulated carrier with fewer regulatory
obligations than the ILECs. The Company must comply with the requirements of the
Telecommunications Act, such as offering service on a non-discriminatory basis
at just and reasonable rates. The FCC treats the Company as a non-dominant
carrier. The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic common carriers, only the ILECs are
classified as dominant carriers for the provision of access services, and all
other providers of domestic common carrier services are classified as non-
dominant. The FCC recently eliminated the requirement that non-dominant
interstate access carriers file tariffs. The Company is not subject to price cap
or rate-of-return regulation, nor is it currently required to obtain FCC
authorization for the installation or operation of its fiber optic network
facilities used for services in the United States.
State Regulation
- ----------------
In general, state public utility commissions have regulatory jurisdiction
over the Company when Company facilities and services are used to provide local
and other intrastate telecommunications services. Under the Telecommunications
Act, state commissions continue to set regulatory requirements for providers of
local and intrastate long distance services, including service quality
standards. State regulators typically set prices for interconnection between
CLEC and ILEC networks, for the provision of unbundled network elements by the
ILECs. In certain states, the utility commission has the authority to scrutinize
the rates charged by CLECs for intrastate long distance and local services. The
Company's provision of local dial tone and intrastate switched and dedicated
services are classified as intrastate and therefore subject to state regulation.
To provide intrastate service (particularly local dial tone service), the
Company generally must obtain a Certificate of Public Convenience and Necessity
("CPCN") from the state regulatory agency prior to offering service.
Additionally, most states require the Company to file tariffs, which articulate
the terms and conditions for services that are classified as
-15-
regulated intrastate services. In some states, the Company may also be subject
to various reporting and record-keeping requirements.
Local Government Authorizations
- -------------------------------
Under the Telecommunications Act, local authorities retain jurisdiction
under applicable state law to control the Company's access to municipally owned
or controlled rights of way and to require the Company to obtain street opening
and construction permits to install and expand its fiber-optic network. In
addition, many municipalities require the Company to obtain licenses or
franchises (which generally have terms of 10 to 20 years) and to pay license or
franchise fees, often based on a percentage of gross revenue, in order to
provide telecommunications services. However, in certain states, including
California and Colorado, current law limits the amount of such fees to be paid
to local jurisdictions to actual costs incurred by the municipality for
maintaining the public rights of way. There is no assurance that certain cities
that do not impose fees will not seek to impose fees, nor is there any assurance
that, following the expiration of existing franchises, fees will remain at their
current levels. The Telecommunications Act requires that local governmental
authorities treat telecommunications carriers in a non-discriminatory and
competitively neutral manner. If any of the Company's existing franchise or
license agreements are terminated prior to their expiration dates or are not
renewed, and consequently the Company is forced to remove its facilities from
the public rights of way, such termination could have a material adverse effect
on the Company.
FINANCING ACTIVITIES
2000 Activities
- ---------------
Credit Agreement
On December 4, 2000, the Company finalized its Debtor-in-Possession
Revolving Credit Agreement ("Credit Agreement") with Chase Manhattan bank. The
Credit Agreement originally provided for up to $350 million in financing,
subject to certain conditions. This amount was subsequently amended to provide
for up to $200 million. Any amounts drawn under the Credit Agreement must first
be used for repayment in full of the Company's existing Senior Facility.
Borrowings under the Credit Agreement bear interest at 3% plus the greater of
(i) the prime rate, (ii) the Base CD rate (as defined) plus 1%, or (iii) the
Federal Funds effective rate (as defined) plus 1/2%. The Company also has the
option to borrow at the adjusted LIBOR rate (as defined) plus 4%. This
agreement contains certain covenants including capital expenditure limitations,
EBITDA targets, indebtedness and dividend restrictions. The Credit Agreement, as
amended, requires repayment in full by May 14, 2002. As of June 30, 2001, no
amounts had been drawn under the Credit Agreement.
Mandatorily Redeemable 8% Series A Convertible Preferred Stock
On April 10, 2000, the Company sold 75,000 shares of mandatorily redeemable
8% Series A-1, A-2 and A-3 Convertible Preferred Stock of ICG (the "8% Series A
Convertible Preferred Stock") and 10,000,000 warrants to purchase ICG Common
Stock for net proceeds of $707.7 million.
-16-
1999 Activities
- ---------------
Senior Facility
On August 12, 1999 ICG Equipment, Inc. and ICG NetAhead, Inc. ("NetAhead")
entered into a $200.0 million senior secured financing facility ("Senior
Facility") consisting of a $75.0 million term loan, a $100.0 million term loan
and a $25.0 million revolving line of credit. The Senior Facility is guaranteed
by ICG Services and ICG Mountain View, Inc. and is secured by the assets of ICG
Equipment, Inc. and NetAhead. The Company continues to make interest-only
payments on the Senior Facility balance of $84.6 million at December 31, 2000,
as approved by the Bankruptcy Court. Interest is paid based on the prime rate
plus 4.25% on $36 million of the balance and the prime rate plus 3.875% on the
remaining $48.6 million.
On December 19, 2000, the United States Bankruptcy Court issued an order
directing ICG Services and certain of its subsidiaries to provide adequate
protection to the lenders of the Senior Facility in the form of a first priority
post petition security interest. The Company is also subject to certain
financial covenants based on results of operations under the Senior Facility.
EMPLOYEES
As of December 31, 2000, the Company employed 2,054 full-time employees.
In the first quarter of 2001, the Company reduced its workforce such that by the
end of May 2001, the Company had 1,433 full-time employees. The Company's
employees are not represented by a union.
In the fourth quarter of 2000, the Company discontinued its existing bonus
program and enacted an employee retention program through July 2001. In June
2001, the Company approved a performance-based bonus plan for employees for the
second half of 2001. The Company believes that the successful implementation of
its business strategy will depend upon its continued ability to attract and
retain qualified employees. The Company does not expect to add significant new
employees to the organization in the near future.
During 2000, the Company provided non-cash benefit programs, including a
401(k) program and an Employee Stock Purchase Plan. In October 2000, the
Employee Stock Purchase Plan was suspended. Further, beginning with the third
quarter of 2000, the 401(k) Company match was made in cash instead of ICG stock.
For the third quarter 2000, the Company matched, in cash, 100% of the first 6%
of employees' contributions. Beginning October 1, 2000, the Company matched, in
cash, 50% of the first 6% of employees' contributions.
The Company believes that it generally offers compensation packages that
are comparable with those of its competitors who are similar in size and capital
structure. Due to numerous factors, including the uncertainty facing the
Company as a result of filing for bankruptcy, qualified personnel are difficult
to recruit and retain and the Company cannot guarantee that it will be able to
attract and retain the personnel necessary to implement its revised business
strategy.
-17-
ITEM 2. PROPERTIES
----------
The Company's real estate portfolio includes numerous properties for
administrative, warehouse, equipment, collocation and POP sites.
As of December 31, 2000, the Company had approximately 188,000 square feet
of leased office, warehouse, and equipment space in the Denver metropolitan area
and approximately 1,480,000 square feet leased in other areas of the United
States.
As of May 2001, the Company had rejected approximately 50 leases through
the bankruptcy process and through terminations directly with landlords. The
Company now leases approximately 86,000 square feet of warehouse and equipment
space in the Denver metropolitan area and approximately 1,215,000 square feet of
space leased in other areas of the United States. The Company continues to
evaluate its real estate needs and it is anticipated that additional leases will
be rejected through the bankruptcy process.
Effective January 1, 1999, ICG Services purchased the Company's corporate
headquarters building, land and improvements (collectively, the "Corporate
Headquarters") for approximately $43.4 million. The Corporate Headquarters is
approximately 239,749 square feet. ICG Services financed the purchase primarily
through a mortgage granted in favor of an affiliate of the seller, which
encumbers the Corporate Headquarters. Effective May 1, 1999, the Corporate
Headquarters was transferred to ICG 161, L.P. ("ICG 161"), a special purpose
limited partnership owned 99% by a subsidiary of ICG Services and 1% by an
affiliate of the mortgagee and seller, and ICG 161 assumed the loan secured by
the mortgage. The partnership agreement for ICG 161 granted to the 1% limited
partner an option to acquire all of ICG Services subsidiary's interest in the
partnership for a purchase price of $43.1 million, which option was exercisable
from January 1, 2004 through January 31, 2012, or earlier if the Company is in
default. As a result of the Company's financial difficulties, on June 29,
2001 the Company, with the Bankruptcy Court's approval, sold its partnership
interest to the limited partner for approximately $33.1 million in a cashless
transaction. As a result of the sale, the Company remains a tenant of the
Corporate Headquarters property under a long-term capital lease.
The Company also owns a 30,000 square foot office building located in
Englewood, Colorado. The Company listed this property for sale as of May 2001,
which sale will be subject to Bankruptcy Court approval.
On December 10, 1999, a subsidiary of ICG Services acquired an 8.36 acre
parcel of vacant land located adjacent to the Corporate Headquarters for
approximately $3.3 million. The Company had planned to use this land in
connection with the expansion of its corporate headquarters. As a result of the
Company's on-going restructuring, expansion plans with respect to this site have
been abandoned and the property has been listed for sale since the fourth
quarter of 2000. Any sale, however, will be subject to Bankruptcy Court
approval.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On November 14, 2000, the Company and most of its subsidiaries filed
voluntary petitions for protection under Chapter 11 of the United States
Bankruptcy Code in the Federal District of Delaware (Joint Case Number 00-4238
(PJW)). The Company is currently operating
-18-
as a debtor-in-possession under the supervision of the Bankruptcy Court. The
bankruptcy petition was filed in order to preserve cash and give the Company the
opportunity to restructure its debt.
During the third 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 Chief Executive Officer, 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. (Both Messrs.
Bryan and Beans remain on the Company's Board of Directors.) 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 plaintiffs'
counsel. The Company has 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. The Company has retained legal counsel and
intends to vigorously defend against these lawsuits if and when the stay is
lifted. The claims against the individual defendants are proceeding and these
defendants have retained separate legal counsel to prepare a defense.
In January 2001, certain shareholders of ICG Funding, LLC ("Funding") a
wholly-owned subsidiary of the Company, filed an adversary proceeding in the
United States Bankruptcy Court for the District of Delaware (Case number 00-
04238 PJW Jointly Administered, Adversary Proceeding No. 01-000 PJW) against the
Company and 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 Funding filed for bankruptcy protection, 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 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. The Company
is not involved in any administrative or judicial proceedings relative to an
environmental matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
ICG Common Stock, $.01 par value per share, was quoted on the NASDAQ
National Market (NASDAQ) from March 25, 1997 until November 18, 2000 under the
symbol "ICGX" and was previously listed on the American Stock Exchange (AMEX),
from August 5, 1996 to March 24, 1997 under the symbol "ICG." Prior to August
5, 1996, Holdings-Canada's common shares had been listed on the AMEX under the
symbol "ITR" from January 14, 1993 through February 28, 1996, and under the
symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common
Shares (the Class A Shares) ceased trading on the AMEX at the close of trading
on August 2, 1996. The Class A Shares, which were listed on the Vancouver Stock
Exchange (VSE) under the symbol "IHC.A," ceased trading on the VSE at the close
of trading on March 12, 1997. During 1998, all of the remaining Class A Shares
outstanding held by third parties were exchanged into shares of ICG Common
Stock.
The following table sets forth the high and low sales prices of ICG Common
Stock as reported on NASDAQ for the quarterly periods indicated. The NASDAQ
halted trading of the Company's common stock on November 14, 2000 and delisted
the stock on November 18, 2000. As of June 20, 2001, the Company's common stock
continues to be traded on the over-the-counter ("OTC") market.
NASDAQ National Market
----------------------
High Low
-------- --------
1999:
First Quarter $ 24.13 $ 15.25
Second Quarter 28.56 16.81
Third Quarter 28.13 15.00
Fourth Quarter 21.94 13.94
2000:
First Quarter $ 39.25 $ 16.31
Second Quarter 36.75 17.75
Third Quarter 23.25 0.41
The Company has never declared or paid dividends on ICG Common Stock and
does not intend to pay cash dividends on ICG Common Stock in the foreseeable
future. Further, as a result of the bankruptcy filings, the Company anticipates
that currently outstanding ICG Common Stock will be substantially altered and
likely have no future value following the Company's reorganization under the
Bankruptcy Code.
On April 10, 2000, the Company sold 75,000 shares of mandatorily redeemable
8% Series A-1, A-2 and A-3 Convertible Preferred Stock of ICG (the "8% Series A
Convertible Preferred Stock") and 10,000,000 warrants to purchase ICG Common
Stock for net proceeds of $707.7 million. Each share of 8% Series A Convertible
Preferred Stock has an initial liquidation
-20-
preference of $10,000 per share and bears a cumulative dividend rate of 8% per
annum, compounded daily. As a result of the Company's financial situation, the
Company does not anticipate paying dividends on the Preferred Stock and has
ceased the recognition of dividends. The value allocated to the warrants was
$80.6 million at the time of the transaction.
In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Senior Discount Notes
due 2008 (the 9 7/8% Notes). In February 1998, ICG Services sold $490.0 million
principal amount at maturity ($300.6 million original issue price) of 10% Senior
Discount Notes due 2008 (the 10% Notes).
In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company ("Funding"),
completed a private placement of $132.25 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the 6 3/4%
Preferred Securities). Dividends on the 6 3/4% Preferred Securities were
cumulative at the rate of 6 3/4% per annum and were payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common Stock at the
option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the
option of the holder, into ICG Common Stock at an exchange price of $24.025 per
share, subject to adjustment.
In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007
(the 11 5/8% Notes) and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the 14% Preferred Stock), having a liquidation preference of
$1,000 per share.
Each of the foregoing offerings was exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. With the exception of the 8% Series A
Convertible Preferred Stock, the securities sold in each of the foregoing
offerings were subsequently registered under the Securities Act.
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice Network Services, L.L.C.
("DataChoice"), valued at approximately $32.88 per share on the date of the sale
(the "DataChoice Shares"). The sale of the DataChoice Shares was exempt from
registration under Section 4(2) of the Securities Act because the offers and
sales were made to a limited number of investors in a private transaction.
Resale of the DataChoice Shares was subsequently registered on a Form S-3
registration statement that was declared effective on April 2, 1999.
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNet Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, "NikoNet"), valued at
approximately $30.03 per share on the date of the sale (the "NikoNet Shares").
The sale of the NikoNet Shares was exempt from registration under Section 4(2)
of the Securities Act because the offer and sales were made to a limited number
of investors in a private transaction.
In October 1997, the Company issued 687,221 shares of ICG Common Stock (the
"CBG Shares") to certain shareholders of Communications Buying Group, Inc.
("CBG"), an Ohio
-21-
based local exchange and Centrex reseller, in connection with the acquisition of
CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Section 4(2) of the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement that was declared effective on October 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected financial data for the fiscal year ended September 30, 1996,
the three months ended December 31, 1996 and the years ended December 31, 1997,
1998, 1999 and 2000 has been derived from the audited consolidated financial
statements of the Company. The Company's 2000 audited consolidated financial
statements include a going concern opinion. The information set forth below
should be read in conjunction with the Company's audited consolidated financial
statements and the notes thereto included elsewhere in this Annual Report. The
Company's development and expansion activities, including acquisitions, during
the periods shown below materially affect the comparability of this data from
one period to another. See, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-22-
Fiscal Year
Ended Three Months
September Ended
30, December 31, Years Ended December 31,
----------- ------------ -----------------------------------------------------
1996 1996 1997 1998 1999 2000
----------- ------------ --------- -------- -------- ----------
(in thousands, except per share amounts)
Statement of Operations Data:
Revenue /(1)/ $ 72,731 27,307 149,358 303,317 479,226 598,283
Operating costs and expenses:
Operating costs 65,436 27,018 147,338 187,260 238,927 440,090
Selling, general and
administrative expenses 45,150 16,895 121,884 159,939 239,756 283,965
Depreciation and amortization 24,041 8,266 49,836 91,927 174,239 318,771
Provision for impairment of
long-lived assets 9,800 - 5,169 - 31,815 1,701,466
Other, net 1,030 (805) 292 4,877 387 4,108
----------- ------------ --------- -------- -------- ----------
Total operating costs and
expenses 145,457 51,374 324,519 444,003 685,124 2,748,400
Operating loss (72,726) (24,067) (175,161) (140,686) (205,898) (2,150,117)
Interest expense (85,299) (24,441) (117,521) (170,015) (212,420) (233,643)
Interest income 19,300 5,962 21,907 28,401 16,300 23,782
Other expense, net (5,118 (77) (503) (1,118) (2,522) (15,166)
----------- ------------ --------- -------- -------- ----------
Loss from continuing operations
before reorganization expenses,
income taxes, preferred
dividends, share of losses,
extraordinary gain and
cumulative effect of change in
accounting principle (143,843) (42,623) (271,278) (283,418) (404,540) (2,375,144)
Reorganization expenses - - - - - (55,309)
Income tax benefit (expense) 5,305 (1) - (90) (25) -
Accretion and preferred dividends
on preferred securities of
subsidiaries, net of minority
interest in share of losses (27,598) (5,529) (39,019) (55,183) (61,897) (60,043)
Share of losses of joint venture (1,814) - - - - -
----------- ------------ --------- -------- -------- ----------
Loss from continuing operations
before extraordinary gain and
cumulative effect of change in
accounting principle (167,950) (48,153) (310,297) (338,691) (466,462) (2,490,496)
Net (loss) income from discontinued
operations (56,969) (13,161) (50,438) (79,354) 36,789 4,342
Extraordinary gain on sales of
operations of NETCOM - - - - 195,511 -
Cumulative effect of change in
accounting principle /(1)/ (3,453) - - - - (7,363)
----------- ------------ --------- -------- -------- ----------
Net loss (228,372) (61,314) (360,735) (418,045) (234,162) (2,493,517)
Accretion of 8% Series A
Convertible Preferred Stock to
liquidation value and related
dividends - - - - - (158,249)
Charge for beneficial conversion
feature of 8% Series A
Convertible Preferred Stock - - - - - (159,279)
----------- ------------ --------- -------- -------- ----------
Net loss attributable to
common stockholders $(228,372) (61,314) (360,735) (418,045) (234,162) (2,811,045)
=========== ============ ========= ======== ======== ==========
-23-
Fiscal Year
Ended Three Months
September Ended
30, December 31, Years Ended December 31,
----------- ------------ ------------------------------------------------
1996 1996 1997 1998 1999 2000
----------- ------------ --------- ---------- ---------- ----------
(in thousands, except per share amounts)
Loss per share from continuing
operations - basic and diluted $ (4.55) (1.15) (7.30) (7.49) (9.90) (49.63)
=========== ============ ========= ========== ========== ==========
Net loss per share-basic and
diluted (6.19) (1.47) (8.49) (9.25) (4.97) (56.02)
=========== ============ ========= ========== ========== ==========
Weighted average number of shares
outstanding - basic and diluted
/(2)/ 36,875 41,760 42,508 45,194 47,116 50,184
=========== ============ ========= ========== ========== ==========
Other Data:
Net cash (used) provided by
operating activities (29,375) 200 (106,761) (100,060) (43,476) 122,483
Net cash used by investing
activities (137,148) (79,621) (422,585) (343,561) (122,412) (557,619)
Net cash provided (used) by
financing activities 365,272 (1,741) 308,804 525,601 67,018 528,444
EBITDA /(3)/
(37,855) (16,606) (119,864) (43,882) 543 (125,772)
Capital expenditures of continuing
operations /(4)/ 162,510 67,515 261,318 360,980 739,061 973,584
Capital expenditures of
discontinued operations /(4)/ 68,789 11,336 25,533 38,891 12,264 -
Balance Sheet Data:
Cash, cash equivalents and
short-term investments available
for sale 458,640 392,921 232,855 262,307 125,507 214,713
Net current assets (liabilities)
of discontinued operations /(5)/ 62,173 68,950 58,586 66 (529) -
Working capital (deficit) 499,810 415,247 263,674 294,934 (69,960) 278,738
Property and equipment, net 308,615 374,924 603,988 908,058 1,527,879 590,500
Net non-current assets of
discontinued operations /(5)/ 149,378 154,481 128,206 102,774 - -
Total assets 1,066,224 1,071,699 1,205,331 1,589,647 2,020,621 980,452
Liabilities subject to compromise - - - - - 2,784,627
Current portion of long-term debt
and capital lease obligations 7,661 24,877 7,096 4,892 8,886 796
Long-term debt and capital lease
obligations, less current portion 739,308 761,135 957,508 1,661,944 1,969,249 117,784
Redeemable preferred securities of
subsidiaries 153,318 159,120 420,171 466,352 519,323 1,366,660
Common stock and additional
paid-in capital 504,851 508,182 534,290 577,940 599,760 882,662
Accumulated deficit (380,859) (430,682) (791,417) (1,209,462) (1,443,624) (4,254,669)
Stockholders' equity (deficit) 125,203 78,711 (256,983) (631,177) (843,864) (3,372,007)
(1) During the fiscal year ended September 30, 1996, the Company changed
its method of accounting for long-term telecom services contracts to
recognize revenue as services are provided. Other than the cumulative
effect of adopting this new method of accounting, the effect of this
change in accounting for the periods presented was not significant.
During the year ended December 31, 2000, the Company adopted Staff
Accounting Bulletin No. 101 (SAB 101), which requires the recognition
of installation revenue over the average customer term. This change
resulted in a cumulative effect of a change in accounting principle of
$7.4 million and an increase in revenue for the year ended December
31, 2000 of approximately $0.9 million.
-24-
(2) Weighted average number of shares outstanding for the fiscal year
ended September 30, 1996, the three months ended December 31, 1996,
and the years ended December 31, 1997 and 1998 represents Holdings-
Canada common shares outstanding for the period from October 1, 1995
through August 2, 1996, and represents ICG Common Stock and Holdings-
Canada Class A Shares (not owned by the Company) outstanding for the
periods from August 5, 1996 through December 31, 1998. During the year
ended December 31, 1998, all of the remaining Class A Shares
outstanding held by third parties were exchanged into shares of ICG
Common Stock and, accordingly, weighted average number of shares
outstanding for the years ended December 31, 1999 and 2000 represents
ICG Common Stock only.
(3) 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, net of minority interest in share of
losses, and certain nonrecurring charges such as the provision for
impairment of long-lived assets and other, net operating costs and
expenses, including deferred compensation and net loss (gain) on
disposal of long-lived assets. EBITDA is a measure commonly used in
the telecommunications industry. 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
generally accepted accounting principles (GAAP) for the periods
indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Data.
(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes corporate
headquarters assets acquired through the issuance of long-term debt.
Capital expenditures of discontinued operations include the capital
expenditures of Zycom, NETCOM, Network Services and Satellite Services
combined for all periods presented.
(5) Net non-current assets of discontinued operations and net current
assets (liabilities) of discontinued operations represent the assets
and liabilities of Zycom, NETCOM, Network Services and Satellite
Services combined for periods presented prior to the respective dates
of each sale.
-25-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion includes certain forward-looking statements that
are affected by important factors including, but not limited to, the following:
. The uncertainty of the Company's future as a result of filing for
protection under bankruptcy law;
. The formulation, approval and confirmation of a plan of reorganization;
. The significant amount of indebtedness incurred by the Company and the
Company's ability to successfully restructure this indebtedness;
. The possibility of continued operating losses;
. The Company's ability to successfully maintain commercial relationships
with its critical vendors and suppliers;
. The Company's ability to retain its major customers on profitable terms;
. The extensive competition the Company will face;
. The Company's ability to attract and retain qualified management and
employees;
. The Company's ability to access capital markets in a timely manner, at
reasonable costs and on satisfactory terms and conditions; and
. Changes in, or the Company's inability to comply with, existing government
regulations.
The results for the years ended December 31, 1998, 1999 and 2000 have been
derived from the Company's audited consolidated financial statements included
elsewhere herein. The Company's consolidated financial statements reflect the
operations of Zycom, NETCOM, Network Services and Satellite Services as
discontinued for all periods presented. All dollar amounts are in U.S. dollars.
COMPANY OVERVIEW
ICG provides voice, data and Internet communication services. Headquartered
in Englewood, Colorado, the Company operates an integrated metropolitan and
nationwide fiber optic infrastructure offering:
. 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
("ISPs").
. 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.
. Corporate Services, primarily retail voice and data services to businesses.
-26-
Services and Customers
- ----------------------
Through its Dial-Up business (referred to in previous filings as the "ISP
Business"), the Company provides nationwide Internet access services to ISP
customers by connecting its 27 major markets and approximately 175 data points
of presence ("POPs") to its nationwide data network. ICG's customers include
some of the largest national and regional ISPs. As of May 2001, the Company had
approximately 570,000 ISP customer ports in service.
ICG also provides Point-to-Point Broadband services to interexchange
carriers ("IXCs") and end-user business customers. This service provides
dedicated bandwidth and offers DS1 to OC-192 capacity to connect: (i) long-haul
carriers to a local market, to large companies and to other long-haul carrier
facilities; or (ii) large companies to their long distance carriers and other
corporate facilities. Point-to-Point Broadband services are a rapidly expanding
segment of the telecommunications market as they provide customers with
dedicated capacity.
The Company's Corporate Services business (referred to in previous filings
primarily as the "Commercial Business") offers local, long distance, enhanced
telephony and data services to businesses over its fiber optic networks located
in major metropolitan areas in California, Colorado, Ohio, Texas and the
Southeast. As of May 2001, Corporate Services customers accounted for
approximately 195,000 access lines in service.
Network
- -------
To provide its service offerings, ICG combines its metropolitan and
regional fiber network infrastructure, 43 voice and data switches (down from 47
switches as of December 31, 2000), nationwide data backbone, data POPs, 26
asynchronous transfer mode ("ATM") switches and 67 private and seven public
Internet peering arrangements. The Company's data network is supported by an OC-
48 capacity nationwide fiber optic backbone currently operating at OC-3/OC-12
capacity. The design of the physical network permits the Company to offer
flexible, high-speed telecommunications services to its customers.
The regional network infrastructure consists of fiber optic cables and
associated advanced electronics and transmission equipment. The Company's
network is generally configured in redundant synchronous optical network
("SONET") rings to make the network accessible to the largest concentration of
telecommunications intensive business customers within a given market. This
network architecture also offers the advantage of uninterrupted service in the
event of a fiber cut or equipment failure, thereby resulting in limited outages
and increased network reliability in a cost efficient manner.
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
-27-
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. The Company anticipates that it will present a formal
plan of reorganization to the Bankruptcy Court during 2001. No assurance can be
given, however, that the plan will be approved or that the Company will be
successful in reorganizing its affairs within the Chapter 11 proceedings.
Further, due to the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded.
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 Wasserstein Perella & Co. 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. The Credit
Agreement, combined with the Company's $214.7 million cash and short-term
investments balances as of December 31, 2000, are expected to be sufficient to
fund operations through the end of the bankruptcy process.
ICG is focusing on improving its overall profitability and began a
restructuring process in the second half of 2000 that has resulted in a
substantial reduction in operating and capital expenditures. These reductions
include reducing the full-time employee count from 2,975 at the end of the
second quarter of 2000 to 2,054 as of year-end 2000, and 1,433 as of May 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.
-28-
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
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.
ASSET IMPAIRMENT
As a result of adverse changes in the capital markets, downward trends in
the telecommunication segments of the economy, and the subsequent deterioration
in the value of telecommunication assets, including the Company's operating
assets, the Company undertook an extensive analysis of its business plan during
late 2000 and the first half of 2001. As such, the Company prepared a detailed
business plan that gave appropriate consideration to the environmental factors
noted above and which has resulted in the Company recording a substantial asset
impairment.
The Company has provided for the impairment of long-lived assets, including
goodwill, pursuant to Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121). SFAS 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.
The analysis performed by the Company indicated that there was a
significant shortfall of cash flows compared to the carrying value of the
Company's long-lived tangible and intangible assets and that an impairment had
occurred. For purposes of calculating the amount of the impairment, the Company
has segregated its long-lived assets into three categories: intangible assets,
consisting primarily of goodwill, tangible assets to be disposed of, and
tangible assets to be utilized in ongoing operations.
As a result of the analysis of shortfalls of cash flows to carrying values
of assets, all intangibles, consisting primarily of goodwill, have been written
off as of December 31, 2000, resulting in an impairment charge of approximately
$80 million.
-29-
Additionally, the Company has determined that certain assets will not be
utilized under the business plan and will be held for resale. The fair value of
assets held for resale is based on current appraisals or purchase offers, less
cost to sell. Assets held for resale are comprised primarily of: (i) assets
under construction in late 2000, for which the incremental capital required to
place the asset in service for revenue generation is not available, and (ii)
assets in service are not required to meet expected future customer demand as
defined in the business plan. The net book value of assets to be disposed of
prior to the impairment was $165 million. An impairment of approximately $124
million was reflected in the financial statements as of December 31, 2000 to
reduce these assets to their fair value of approximately $41 million. These
assets have not been segregated as current assets in the accompanying
consolidated financial statements as of December 31, 2000 and are included in
property and equipment because the sales are subject to final Bankruptcy Court
approval.
Management, in consultation with its financial advisors, determined that
the fair value of tangible assets to be utilized in ongoing operations was $550
million at December 31, 2000. The determination was based primarily on the
present value of discounted cash flows, although the Company also took into
consideration several other valuation techniques, including asset appraisals and
current market capitalization. As a result, the Company has recorded an
impairment charge as of December 31, 2000 of approximately $1.5 billion related
to tangible assets to be used in the ongoing operations of the Company.
The values assigned to assets as the Company emerges from bankruptcy may be
different from the fair value assigned to the long-lived assets as of December
31, 2000. 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 APB Opinion 16, Business Combinations). The assumptions regarding
capital structure and availability, business environment and the enterprise
value determined at the date of emergence from bankruptcy may differ from those
used in the impairment analysis.
No adjustment was made to recorded depreciation during the year ended
December 31, 2000. The net book value of the impaired assets becomes the new
cost basis of the assets as of December 31, 2000. This amount is then
depreciated over the remaining estimated useful life of the assets.
During 1999, the provision for impairment of long-lived assets of $31.8
million relates to the impairment of software and other capitalized costs
associated with Telecom Services' billing and provisioning system projects under
development. The provision for impairment of long-lived assets was based on
management's decision to abandon the billing and provisioning systems under
development and to select new vendors for these systems, which vendors were
expected to provide the Company with billing and provisioning solutions with
improved functionality and earlier delivery dates at lower costs than what was
proposed by the former vendors. Provision for impairment of long-lived assets
was recorded based on management's estimate of the net realizable value of the
Company's assets at December 31, 1999.
-30-
RESULTS OF OPERATIONS
The following table provides certain statement of operations data and
certain other financial data for the Company for the periods indicated. The
table also presents revenue, operating costs and expenses, operating loss
and EBITDA as a percentage of the Company's revenue.
Years Ended December 31,
------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------- ----------
$ % $ % $ %
------------ ----------- ------------ ---------- ------------ ----------
($ values in thousands)
Statement of Operations Data:
Revenue $ 303,317 100 479,226 100 598,283 100
Operating costs 187,260 62 238,927 50 440,090 74
Selling, general and administrative 159,939 53 239,756 50 283,965 47
Depreciation and amortization 91,927 30 174,239 36 318,771 53
Provision for impairment of - - 31,815 7 1,701,466 284
long-lived assets
Other, net 4,877 1 387 - 4,108 1
---------- ----- --------- ----- ----------- -----
Operating loss (140,686) (46) (205,898) (43) (2,150,117) (359)
Other Data:
Net cash provided (used) by (100,060) (43,476) 122,483
operating activities
Net cash used by investing (343,561) (122,412) (557,619)
activities
Net cash provided by financing 525,601 67,018 528,444
activities
EBITDA /(1)/ (43,882) (14) 543 - (125,772) (21)
Capital expenditures of continuing 360,980 739,061 973,584
operations /(2)/
Capital expenditures of 38,891 12,264 -
discontinued operations /(2)/
(1) See note 3 under "Selected Financial Data" for the definition of
EBITDA.
(2) See note 4 under "Selected Financial Data" for the definitions of
capital expenditures of continuing operations and capital expenditures
of discontinued operations.
YEAR 2000 COMPARED TO YEAR 1999
Revenue
-------
Year Ended December 31,
--------------------------------
1999 2000
--------------------------------
$ % $ %
-------- -------- -------- ------
($ values in thousands)
Dial-Up $ 62,381 13 154,343 26
Point-to-Point Broadband 161,850 34 176,499 29
Corporate Services 112,490 23 128,378 22
Reciprocal Compensation 142,505 30 139,063 23
-------- --- ------- ---
Total Revenue $479,226 100 598,283 100
======== === ======= ====
Total revenue increased 25% to $598.3 million in 2000 compared with
1999. Dial-Up revenues increased significantly to account for 26% of the
revenue generated in 2000. The contribution of reciprocal compensation as a
percent of total revenue declined from 30% in 1999 to 23% in 2000 due
primarily to growth in other revenue sources. The Company currently has one
customer that accounts for approximately 10% of total revenue.
31
Dial-Up revenue increased 147% to $154.3 million in 2000 from $62.4 million
in 1999. The increase in revenue is primarily attributable to growth in customer
access ports in service of more than 100% as well as an increase in revenue
received per port of more than 10%. The increase in revenue per port is due to a
higher percentage of Internet remote access service ("IRAS") ports in 2000. The
increase in revenue was partially offset by approximately $30 million in service
credits issued to certain IRAS customers in the third and fourth quarters of
2000. The credits were issued as a result of network performance problems that
affected those customers' service. In addition, the Company did not recognize
approximately $5.5 million of Dial-Up revenue otherwise earned due to concerns
regarding the ultimate collection of billings for such service.
Point-to-Point Broadband revenue, which includes switched access and SS7
revenues, increased 9% to $176.5 million in 2000 from $161.9 million in 1999.
The increase is primarily due to a 20% increase in Point-to-Point Broadband
service revenue from growth in facilities and services provided, partially
offset by a 24% decrease in switched access and SS7 revenue. Switched access and
SS7 services generated approximately 20% of the revenues in this revenue
category in 2000. Switched access revenue decreased primarily due to the
expected attrition of switched access customers.
Corporate Services revenue increased 14% from $112.5 million in 1999 to
$128.4 million in 2000. The increase is attributable to an increase of
approximately 25% in the number of access lines offset by a decrease in revenue
per line. The decrease in revenue per line is primarily the result of a decline
in long distance revenue.
Reciprocal compensation revenue declined slightly from $142.5 in 1999
million to $139.1 million in 2000. Reciprocal compensation revenue is primarily
earned under interconnection agreements with incumbent local exchange carriers
("ILECs") for terminating local traffic but also includes revenue from transport
and termination of other traffic for the ILECs. Reciprocal compensation is
charged based on a rate per minute of use (MOU). Reciprocal compensation MOU
increased approximately 50% in 2000 from 1999 as the number of ports and access
lines increased, which was offset by a decline in the average rate per MOU of
approximately 30%. In 2000, the Company negotiated new interconnection
agreements with several ILECs. These agreements assured the recognition and
receipt of compensation for terminating ISP traffic but at rates lower than the
Company had historically received. The Company anticipates that due to changes
in the regulatory environment, reciprocal compensation revenue earned after 2003
will not be significant.
Operating costs
- ---------------
Total operating costs increased from $238.9 million in 1999 to $440.1
million in 2000, an 84% increase. Operating costs increased as a percentage of
revenue from 50% in 1999 to 74% in 2000. Operating costs consist primarily of
payments to ILECs, other competitive local exchange carriers ("CLECs"), and long
distance carriers for the use of network facilities to support Dial-Up, voice,
Point-to-Point Broadband, switched access and long distance services as well as
internal network operating costs, right of way fees and other operating costs.
Internal network operating costs include the cost of engineering and operations
personnel dedicated to the operations and maintenance of the network. Operating
costs have increased as a percentage of
-32-
revenue due to the amount of service credits issued to IRAS customers, as noted
above, and as a result of the number of lines leased in 2000. ICG incurred
incremental costs associated with the advanced deployment of leased lines in
expansion cities to accommodate customer requirements, resulting in an increase
in operating expenses as a percent of revenue. Those lines were provisioned
using either ILEC or other CLEC capacity to meet customer demand. The Company is
in the process of terminating circuits which are not generating revenue and, as
a result, has experienced a significant reduction in operating costs in 2001.
Selling, general and administrative expenses (SG&A)
- ---------------------------------------------------
Total SG&A expenses increased from $239.8 million in 1999 to $284.0 million
in 2000, an 18% increase. SG&A expenses as a percentage of revenue decreased
from 50% in 1999 to 47% in 2000. The increase in SG&A is attributable to
increases in salaries and benefits, the provision for uncollectible accounts and
other expenses incurred to support the rapid expansion the Company was
experiencing in the first three quarters of 2000. Average full-time equivalents
("FTE") did not change significantly in 2000 from 1999. The number of FTEs
reached 3,160 at the end of the third quarter of 2000 before decreasing to 2,054
as of the end of the year. The increase in salaries and benefits is primarily
attributable to the compensation plan implemented in late 1999 and early 2000.
The compensation plan was designed to allow the Company to attract high quality
talent required to support the Company's growth and to increase retention. The
increase in the provision for uncollectible accounts was attributable to a
significant increase in the aging of customer accounts due primarily to the
downturn in the business environment during the last half of 2000, as well as to
customers' reactions to ICG's reorganization. To a lesser extent, a reduction in
resources currently being expended to pursue collection of amounts due under
interconnection agreements also contributed to the increase in the provision for
uncollectible accounts. SG&A expenses have been significantly reduced in 2001.
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased from $174.2 million in 1999 to
$318.8 million in 2000. The increase is primarily due to increased investment in
depreciable assets resulting from the expansion of the Company's networks and
services in the last half of 1999 and first half of 2000, as well as a reduction
in the overall weighted-average useful life of depreciable assets in service.
ICG recently invested a larger portion of its plant and equipment in assets with
shorter lives such as routers and computers.
Other, net
- ----------
Other, net operating costs and expenses increased from $0.4 million in 1999
to $4.1 million in 2000. Other, net operating costs and expenses consists of
$1.3 million of deferred compensation from an arrangement with its former chief
executive officer in 1999 and 2000. In addition, the Company recorded a gain of
$0.9 million in 1999 and a loss of $2.8 million in 2000 for the disposal of
miscellaneous long-lived assets.
-33-
Interest expense
- ----------------
Interest expense increased from $212.4 million in 1999 to $233.6 million in
2000. The increase in interest expense is due to the increase in debt balances
under the Senior Facility and Senior discount notes through the Petition Date.
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 $30.3 million for the period from the Petition Date through December 31,
2000. Included in interest expense for 1999 and 2000 was $197.2 million and
$175.8 million of noncash interest, respectively. Additionally, interest expense
is net of interest capitalized related to construction in progress of $9.0
million and $7.0 million during 1999 and 2000, respectively.
Interest income
- ---------------
Interest income increased from $16.3 million in 1999 to $23.8 million in
2000. The increase is attributable to the increase in cash, cash equivalents and
short-term investments resulting from the cash proceeds to the Company of the 8%
Series A Convertible Preferred Stock. The amount of interest income attributable
to increased cash balances during the bankruptcy proceedings was not material.
Other expense, net, including realized gains and losses on marketable trading
- -----------------------------------------------------------------------------
securities costs
- ----------------
Other expense, net increased from $2.5 million in 1999 to $15.2 million in
2000. The 2000 amount primarily relates to the loss on the investment in
Teligent, partially offset by a gain on litigation settlement. Other expense,
net in 1999 consists of litigation settlement costs offset by a gain on the sale
of the common stock of MindSpring.
Reorganization expenses
- -----------------------
Reorganization expenses of $55.3 million in 2000 consist of costs
associated with the bankruptcy proceedings that are not directly attributable to
the on-going operations of the Company. Such costs include $36.5 million for the
write-off of deferred financing and offering costs, $9.6 million for severance
and employee retention costs, $6.3 million in professional fees, $2.3 million in
lease cancellation charges and $0.6 million of other costs.
Accretion and preferred dividends on preferred securities of subsidiaries
- -------------------------------------------------------------------------
Accretion of costs and preferred dividends on preferred securities of
subsidiaries decreased from $61.9 million in 1999 to $60.0 million in 2000. The
decrease is due primarily to the bankruptcy proceedings. The accretion of the
preferred dividends and amortization of offering costs on all preferred
securities which ceased as of the Petition Date. The Company fully accreted the
discount and fully wrote-off the offering costs associated with the preferred
stock subsequent to the Petition Date. Such amounts are included in
reorganization expenses in the accompanying consolidated statement of
operations. Accretion and preferred dividends on preferred securities of
subsidiaries recorded during 1999 and through the Petition Date for the year
ended December 31, 2000 consist of the accretion of issuance costs and the
accrual of the
-34-
preferred securities associated with the 6 3/4% Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred
Securities"), the 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008
and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2009.
Net income from discontinued operations
- ---------------------------------------
Net income from discontinued operations was $36.8 million and $4.3 million
in 1999 and 2000, respectively. Net income for 1999 consists of the net income
and gain from the sale of Satellite Services, partially offset by the net loss
from operations and loss on disposal of Network Services. Net income from
discontinued operations for 2000 primarily consists of adjustments to the gain
(loss) on disposal of Network and Satellite Services.
Extraordinary gain on the sales of operations of NETCOM
- -------------------------------------------------------
The Company reported an extraordinary gain on the sales of operations of
NETCOM during 1999 of $195.5 million, net of income taxes of $2.0 million.
Offsetting the gain on the sales is approximately $16.6 million of net losses of
operations of NETCOM from November 3, 1998 through the dates of the sales and
$34.7 million of deferred sales proceeds from the sale of certain of the
domestic operating assets and liabilities of NETCOM to MindSpring. The deferred
proceeds were recognized on a periodic basis over the term of the Company's
network capacity agreement with MindSpring.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
Cumulative effect of change in accounting principle for revenue from
installation services of $7.4 million for 2000 is due to the change in
accounting as a result of the adoption of SAB 101 on October 1, 2000 applied
retroactively from January 1, 2000.
Accretion and dividends of 8% Series A Convertible Preferred Stock to
- ---------------------------------------------------------------------
liquidation value and related dividends
- ---------------------------------------
Accretion and dividends of 8% Series A Convertible Preferred Stock to
liquidation value and related dividends is comprised of the dividends and the
accretion to liquidation value of the 8% Series A Convertible Preferred Stock of
$158.2 million during 2000.
Charge for beneficial conversion feature of 8% Series A Convertible Preferred
- -----------------------------------------------------------------------------
Stock
- -----
Charge for beneficial conversion of 8% Series A Convertible Preferred Stock
during 2000 relates to the charge to additional paid-in capital of $159.3
million of the proceeds of the 8% Series A Convertible Preferred Stock which is
the intrinsic value of the beneficial conversion feature of the convertible
preferred securities. The beneficial conversion feature was recognized
immediately as a return to the preferred shareholders during 2000 as the 8%
Series A Convertible Preferred Stock is immediately convertible into shares of
ICG common stock.
-35-
YEAR 1999 COMPARED TO YEAR 1998
Revenue
- -------
Year Ended December 31,
--------------------------------
1998 1999
--------------------------------
$ % $ %
-------- -------- ------- ------
($ values in thousands)
Dial-Up $ 20,692 7 62,381 13
Point-to-Point Broadband 120,855 40 161,850 34
Corporate Services 84,405 28 112,490 23
Reciprocal Compensation 77,365 25 142,505 30
-------- -------- ------- ------
Total Revenue $303,317 100 479,226 100
======== ======== ======= ======
Total revenue increased 58% to $479.2 million in 1999 compared with 1998.
Dial-Up revenue increased 201% from $20.7 million in 1998 to $62.4 million
in 1999. The increase in revenue is primarily attributable to growth in
customer access ports in service of more than 150% as well as an increase in
revenue received per port.
Point-to-Point Broadband revenue, which includes switched access and SS7
revenues, increased 34% from $120.9 million in 1998 to $161.9 million in 1999.
The increase is primarily due to a 60% increase in Point-to-Point service
revenue from growth in facilities and services provided, partially offset by a
5% decrease in switched access and SS7 revenue. Approximately 25% of the Point-
to-Point revenue increase is attributable to revenue recognized under
the Company's fiber optic lease agreement with a major interexchange carrier.
Switched access and SS7 generated approximately 29% of the revenues in this
category in 2000.
Corporate Services revenue increased 33% from $84.4 million in 1998 to
$112.5 million in 1999. The increase is attributable to an increase of
approximately 40% in the number of access lines offset by a decrease in the
revenue per line. The decrease in revenue per line was primarily the result of a
decline in long distance revenue.
Reciprocal compensation revenue increased 84% to $142.5 million in 1999
from $77.4 million in 1998. Reciprocal compensation revenue is primarily earned
under interconnection agreements with ILECs for terminating local traffic but
also includes revenue from transport and termination of other traffic for the
ILECs. Reciprocal compensation is charged based on a rate per MOU. Reciprocal
compensation revenue increased as the number of ports and access lines
increased. However, the average rate per MOU declined by approximately 40%
primarily as a result of the Company's decision to discontinue recording revenue
for tandem and transport elements of reciprocal compensation on July 1, 1999.
Operating costs
- ---------------
Operating costs increased $51.6 million, or 28%, from $187.3 million in
1998 to $238.9 million in 1999. Operating costs decreased as a percentage of
revenue from 62% in 1998 to 50%
-36-
in 1999. Operating costs consist of payments to ILECs for the use of network
facilities to support local and Point-to-Point Broadband services, internal
network operating costs, right of way fees and other costs. The increase in
operating costs in absolute dollars is attributable to the increase in volume of
Corporate Services and Point-to-Point Broadband services and the increase in
internal network operating costs which include engineering and operations
personnel dedicated to the provision of local exchange services.
Selling, general and administrative expenses
- --------------------------------------------
Total SG&A expenses increased $79.8 million, or 50%, from $159.9 million in
1998 to $239.8 million in 1999. Total SG&A expenses decreased as a percentage of
revenue from 53% in 1998 to 50% in 1999. The increase in absolute dollars is due
in part to a provision for uncollectible accounts receivable of approximately
$45 million recorded during the third quarter of 1999 for accounts receivable,
which the Company believed may be uncollectible due to unfavorable regulatory
rulings. The receivables related primarily to certain elements of reciprocal
compensation and transport and termination services provided to ILECs recorded
in periods prior to June 30, 1999.
Depreciation and amortization
- -----------------------------
Depreciation and amortization increased $82.3 million, or 90%, for 1999,
compared to 1998, primarily due to increased investment in depreciable assets
resulting from the continued expansion of the Company's networks and services as
well as a reduction in the overall weighted-average useful life of depreciable
assets. In addition, amortization increased due to goodwill recorded in
conjunction with the acquisition of CSW/ICG ChoiceCom, L.P. (ChoiceCom)
completed on December 31, 1998.
Provision for impairment of long-lived assets
- ---------------------------------------------
For 1999, the provision for impairment of long-lived assets of $31.8
million relates to the impairment of software and other capitalized costs
associated with billing and provisioning system projects under development. The
provision for impairment of long-lived assets was based on management's decision
to abandon the billing and provisioning systems under development at the time.
Other, net
- ----------
Other, net operating costs and expenses decreased from $4.9 million in 1998
to $0.4 million in 1999. Other, net operating costs and expenses for 1999
consists of deferred compensation expense of $1.3 million related to the
Company's deferred compensation arrangement with its former chief executive
officer, offset by a net gain on disposal of miscellaneous long-lived assets of
$0.9 million. Other, net operating costs and expenses for 1998 relates to the
write-off of certain installation costs of disconnected special access customers
of $0.5 million, the write-off of certain costs associated with an abandoned
operating support system project of $0.8 million and general disposal of
furniture, fixtures and office equipment of $3.6 million.
-37-
Interest expense
- ----------------
Interest expense increased $42.4 million, from $170.0 million for 1998 to
$212.4 million which includes $197.2 million of non-cash interest in 1999.
Interest expense increased due to the increase in long-term debt associated with
the Company's purchase of the corporate headquarters, effective January 1, 1999,
and the senior secured financing facility (Senior Facility) completed in August
1999.
Interest income
- ---------------
Interest income decreased from $28.4 million in 1999 to $16.3 million in
1999 due to the decrease in cash, cash equivalents and short-term investments.
Other expense, net, including realized gains and losses on marketable trading
- -----------------------------------------------------------------------------
securities
- ----------
Other expense, net increased from $1.1 million to $2.5 million from 1998 to
1999, respectively. The increase is due to an increase in other expenses from
$1.1 million in 1998 to $2.5 million in1999. Other expenses primarily consist of
litigation settlement costs offset by a gain on the sale of the common stock of
MindSpring in 1999. Other expenses primarily consist of litigation settlement
costs in 1999.
Accretion and preferred dividends on preferred securities of subsidiaries, net
- ------------------------------------------------------------------------------
of minority interest in share of losses
- ---------------------------------------
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses increased $6.7 million, from $55.2
million in 1998 to $61.9 million in 1999. The increase is due primarily to the
periodic payment of dividends on the 14% Exchangeable Preferred Stock
Mandatorily Redeemable 2008 (the 14% Preferred Stock) and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2009 (the 14 1/4% Preferred
Stock) in additional shares of 14% Preferred Stock and 14 1/4% Preferred Stock.
Accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses recorded during 1999 includes the
accretion of issuance costs of $1.3 million and the accrual of the preferred
securities dividends of $60.6 million associated with the 6 3/4% Exchangeable
Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the
6 3/4% Preferred Securities), the 14% Preferred Stock and the 14 1/4% Preferred
Stock.
Net income (loss) from discontinued operations
- ----------------------------------------------
Net income (loss) from discontinued operations improved from a $79.4
million net loss in 1998 to $36.8 million net income in 1999. Net loss from
discontinued operations for 1998 consists of the combined net loss of Zycom,
NETCOM, Network Services and Satellite Services. Net income from discontinued
operations for 1999 consists of the combined net losses of Network Services and
net income of Satellite Services. Zycom terminated its normal operations on
October 22, 1998 and, accordingly, the Company reported no loss from
discontinued operations of Zycom for 1999. Since the Company expected to report
a gain on the disposition of NETCOM, the Company deferred the net losses from
operations of NETCOM from
-38-
November 3, 1998 (the date on which the Company's board of directors adopted the
formal plan to dispose of the operations of NETCOM) through the dates of the
sales and, accordingly, the Company reported no loss from discontinued
operations of NETCOM prior to or subsequent to the dates of the sales for 1999.
Additionally, net income from discontinued operations for 1999 includes the gain
on the sale of Satellite Services of $48.7 million, offset by the loss on the
sale of Network Services of $10.9 million. Net loss from discontinued operations
for 1998 includes an estimated loss on the disposal of Zycom of $1.8 million.
Extraordinary gain on sales of operations of NETCOM
- ---------------------------------------------------
The Company reported an extraordinary gain on the sales of operations of
NETCOM during 1999 of $195.5 million, net of income taxes of $2.0 million.
Offsetting the gain on the sales is approximately $16.6 million of net losses of
operations of NETCOM from November 3, 1998 through the dates of the sales and
$34.7 million of deferred sales proceeds from the sale of certain of the
domestic operating assets and liabilities of NETCOM to MindSpring. The deferred
proceeds were recognized on a periodic basis over the term of the Company's
network capacity agreement with MindSpring.
QUARTERLY RESULTS
The following table presents selected unaudited operating results for
three-month quarterly periods during the years ended December 31, 1999 and 2000.
The Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Company's consolidated financial statements and related
footnotes included elsewhere in this Annual Report. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods.
Revenue for the third and fourth quarters of 2000 was lower, and operating
loss higher, due primarily to billing credits issued for network service
problems, increases in the provision for uncollectible accounts, the non-
recognition of revenue from certain ISP customers and the asset impairment.
Billing credits issued to IRAS customers totaled approximately $17 million and
$13 million in the third and fourth quarters of 2000, respectively. The Company
recorded a provision for uncollectible accounts of approximately $29 million and
$53 million in the third and fourth quarters of 2000, respectively. Of those
amounts, approximately $6 million and $13 million related to reciprocal
compensation for the third and fourth quarters of 2000, respectively. In
addition, during the fourth quarter of 2000, the Company did not recognize
approximately $5.5 million of Dial-Up revenue due to concerns regarding the
ultimate collection of billings. Finally, the Company recorded an impairment of
long-lived assets of $1.7 billion during the fourth quarter of 2000.
Operating costs and net loss in the fourth quarter of 1999 were lower, and
EBITDA was higher due to an in-depth management review of network costs that was
conducted during the fourth quarter of 1999 following the centralization of
network functions. The analysis identified approximately $9.5 million in costs
from the first nine months of 1999 that related to capital activities under the
existing Company capitalization policy. Of the $9.5 million adjustment
-39-
booked in the fourth quarter, approximately $5.0 million related to costs that
should have been capitalized in the second quarter and $4.5 million of costs
that should have been capitalized in the third quarter.
Three Months Ended Three Months Ended
------------------------------------------------ ---------------------------------------------
Mar. 31, June. 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 2000 2000 2000 2000 2000
----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------
(Dollars in thousands except per share and statistical data amounts)
Statement of Operations Data:
Revenue/(1)/ $ 104,331 117,654 115,166 142,075 157,408 174,704 145,257 120,914
Operating loss (27,568) (59,160) (91,381) (27,789) (45,614) (51,826) (159,113) (1,893,564)
Loss from continuing operations (86,206) (123,759) (156,527) (99,970) (121,450) (124,612) (237,246) (2,007,188)
Net (loss) income from
discontinued operations (111) (8,651) 748 44,803 - 736 - 3,606
Net income (loss) 106,712 (132,410) (155,779) (52,685) (121,450) (123,876) (237,246) (2,010,945)
Net income (loss) attributable to
common stockholders 106,712 (132,410) (155,779) (52,685) (121,450) (297,617) (254,520) (2,137,458)
=========== =========== =========== ========== ========== ========== ========== ==========
Loss per share from continuing
operations - basic and
diluted (1.85) (2.63) (3.31) (2.11) (2.52) (2.56) (4.58) (39.97)
=========== =========== =========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding - basic and diluted 46,538 46,988 47,320 47,618 48,189 48,723 51,782 50,184
=========== =========== =========== ========== ========== ========== ========== ==========
Other Data:
Net cash used (provided) by
operating activities (47,906) 37,315 (37,604) 4,719 (7,234) 110,313 36,084 (16,680)
Net cash provided (used) by
investing activities 133,100 (93,611) (116,065) (45,836) (121,468) (253,990) (186,516) 4,355
Net cash provided (used) by
financing activities (456) (4,390) 73,848 (1,984) 66,207 599,036 (129,412) (7,387)
EBITDA / (2)/
7,874 15,221 (45,676) 23,124 19,417 22,438 (57,637) (109,990)
Capital expenditures of continuing
operations / (3)/ 102,912 133,025 138,387 364,737 214,907 347,461 319,209 92,007
Capital expenditures of
discontinued operations /(3)/ 2,805 3,354 4,970 1,135 - - - -
Statistical Data/ (4)/:
Full time employees 2,665 2,753 3,054 2,853 2,930 2,975 3,160 2,054
Telecom services:
Access lines in service / (5)/ 418,610 494,405 584,827 730,975 904,629 1,112,964 1,074,469 950,447
Buildings connected:
On-net 789 874 939 963 1,046 924 936 925
Hybrid /(6)/ 5,337 5,915 6,476 7,115 7,746 8,228 8,584 8,659
----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------
Total buildings connected 6,126 6,789 7,415 8,078 8,792 9,152 9,520 9,584
Operational switches:
Circuit 29 29 29 31 35 43 47 47
ATM - - - 24 24 24 24 26
Frame relay 17 16 16 16 16 - - -
----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------
Total operational switches 46 45 45 71 75 67 71 73
Regional fiber route miles / (7)/:
Operational 4,351 4,406 4,449 4,596 4,807 4,767 4,816 5,577
Under construction - - - 531 - 495 508 -
Regional fiber strand miles/(8)/:
Operational 155,788 164,416 167,067 174,644 177,103 184,064 192,422 166,498
Under construction - - - 18,564 - 12,254 14,891 -
Collocations with ILECs 111 126 139 147 183 188 188 160
(1) On October 10, 2000, the Company adopted SAB 101, Revenue Recognition in
Financial Statements. As required by GAAP, the Company has reflected the
effects of the change in accounting principle as if such change had been
adopted as of January 1, 2000. This resulted in the following changes in
revenue amounts previously in the Company's 2000 quarterly reports on Forms
10-Q: an increase to revenue of approximately $0.1 million for the first
quarter, a decrease to revenue of approximately $1.0 million for the second
quarter and an increase to revenue of approximately $0.5 million for the
third quarter.
(2) See note 3 under "Selected Financial Data" for the definition of EBITDA.
-40-
(3) See note 4 under "Selected Financial Data" for the definitions of capital
expenditures of continuing operations and capital expenditures of
discontinued operations.
(4) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(5) Access lines in service includes lines provisioned through the Company's
switch and through resale and other agreements with various local exchange
carriers. Access lines provisioned include internal and other non-revenue
generating access lines. On a go-forward basis, the Company plans to report
only revenue generating access lines in service to better match line count
with reported revenue. As of December 31, 2000 the provisioned lines
generating revenue are approximately 940,000.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(7) Regional fiber route miles refers to the number of miles of regional fiber
optic cable, including leased fiber. As of December 31, 2000, the Company
had 5,577 regional fiber route miles. Regional fiber route miles under
construction represents fiber under construction that is expected to be
operational within six months.
(8) 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 December 31, 2000,
the Company had 166,498 regional fiber strand miles, of which 46,097
regional fiber strand miles were leased under operating leases. Regional
fiber strand miles under construction represents fiber under construction
that is expected to be operational within six months.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2000, the Company has federal NOL carryforwards of
approximately $1.277 billion, which expire in varying amounts through December
31, 2020. Due to the provisions of Internal Revenue Code ("Code") sections 108,
382 and certain other Code and Treasury Regulations, it is anticipated the major
portion of the NOLs will be reduced by cancellation of indebtedness and that a
change in ownership will occur as a result of a plan of reorganization ("Plan")
that is expected to be filed. If the Plan results in the issuance of new stock
and or the cancellation of existing stock, the remaining amount NOLs (if any)
will be limited on the amount that can be utilized each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a result
of the development and operation of its networks. The Company expects that its
operating losses will continue as it operates as a debtor-in-possession as a
result of its Chapter 11 bankruptcy filing. Further, due to the bankruptcy
filing and related events, there is no assurance that the carrying amounts of
assets will be realized or that liabilities will be liquidated or settled for
the amounts recorded. Consequently, there is substantial doubt about the
Company's ability to continue as a going concern.
At December 31, 2000, the Company had cash and short-term investments of
approximately $214.7 million. On December 4, 2000, the Company finalized its
Debtor-in-Possession Revolving Credit Agreement with Chase Manhattan Bank (the
"Credit Agreement"). The Credit Agreement originally provided for up to $350
million in financing, which was subsequently amended to $200 million. The Credit
Agreement financing terms require that the Company's Senior Facility be paid off
at the time of the first borrowing. Management believes that current cash,
short-term investments and the Credit Agreement, along with protection under
bankruptcy law, should enable the Company to fund operations through the
bankruptcy
-41-
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. As of May 31, 2001, the Company
had cash and short-term investments of $152.1 million, with no amounts drawn
under the Credit Agreement.
At December 31, 2000, the Company had $2,785 million of liabilities
outstanding subject to compromise, including $2,167 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 of reorganization may require additional debt and/or
equity financing. There can be no assurance that additional financing
arrangements will be available to the Company on acceptable terms, or at all. If
adequate funds are not available, or are not available on acceptable terms, the
Company may not be able to emerge from bankruptcy in the time frame it
anticipates, or at all, and it may be prohibited from otherwise responding to
competitive pressures. In such case, the Company's business, results of
operations and financial condition will be materially adversely affected. In
addition, no assurance can be given that the plan of reorganization will be
approved by the Bankruptcy Court or that the Company will be successful in
reorganizing its affairs within the Chapter 11 proceedings.
As a result of the Company's liquidity problems, the Company's directors
did not declare a dividend on the 6 3/4% Preferred Securities that was otherwise
payable on November 15, 2000. In addition, the Company has not declared
dividends on the 14%, 14 1/4% Preferred Stock and the 8% Series A Convertible
Preferred Stock.
Net Cash Provided (Used) By Operating Activities
- ------------------------------------------------
The Company's operating activities used $100.1 million and $43.5 million,
and provided $122.5 million during 1998, 1999 and 2000, respectively. Net cash
provided (used) by operating activities is primarily due to losses from
continuing operations and increases in receivables, which are partially offset
by changes in deferred revenue and other working capital items and non-cash
expenses, such as depreciation and amortization, deferred interest expense,
accretion and preferred dividends on subsidiary preferred securities. In 2000,
cash provided by operating activities included $34 million in non-cash charges
related to the Company's reorganization. Also in 2000, interest of approximately
$30.3 million was not recognized due to the bankruptcy proceedings. The
Company's operating activities provided $122.5 million in 2000; however, this is
largely attributable to the bankruptcy proceedings which have increased the
amount of the
-42-
Company's accounts payable and accrued liabilities balances. In addition,
deferred revenue increased primarily due to an agreement with an interexchange
carrier.
Net Cash Used By Investing Activities
- --------------------------------------
Investing activities used $343.6 million, $122.4 million, and $557.6
million during 1998, 1999 and 2000, respectively. Net cash used by investing
activities includes cash expended for the acquisition of property, equipment and
other assets of $360.2 million, $595.3 million, and $742.8 million for 1998,
1999 and 2000, respectively. Net cash used by investing activities also includes
$64.6 million and $146.3 million for 1999 and 2000, respectively, for the change
in accounts payable and accrued liabilities for the purchase of long-term
assets.
The Company used $67.8 million during 1998 for the acquisitions of
ChoiceCom, NikoNet and DataChoice combined and $9.1 million to purchase the
minority interest of two of the Company's subsidiaries. During 1998, the Company
received proceeds from the sale of the Company's corporate headquarters of $30.3
million and the sale of the short-term investments of $60.3 million.
During 1999, the Company used $28.9 million for the purchase of long-term
investments and $6.0 million to purchase the minority interest of two of the
Company's subsidiaries. Offsetting the expenditures of investing activities for
1999 are the net proceeds from the sales of NETCOM, Network Services and
Satellite Services combined of $404.9 million, including $30.0 million in
proceeds from the sale of common stock of MindSpring, which the Company received
as partial consideration for the sale of the domestic operations of NETCOM, and
proceeds from the sales of short-term investments available for sale of $29.8
million.
Offsetting the expenditures for investing activities for 2000 are the
proceeds from the sale of short-term investments and marketable securities of
$32.8 million. The Company acquired assets under capital leases and IRU
agreements of $0.8 million, $143.7 million and $230.8 million during 1998, 1999
and 2000 respectively.
Net Cash Provided By Financing Activities
- ------------------------------------------
Financing activities provided $525.6 million, $67.0 million and $528.4
million during 1998, 1999 and 2000, respectively. Net cash provided by financing
activities for these periods includes cash received in connection with the
private placement of the 10% Notes and the 9 7/8% Notes in February 1998 and
April 1998, respectively, the Senior Facility completed in August 1999, and the
8% Series A Convertible Preferred Stock issued in April 2000. Historically, the
funds to finance the Company's business acquisitions, capital expenditures,
working capital requirements and operating losses have been obtained through
public and private offerings of the Company and Holdings-Canada common shares,
convertible subordinated notes, convertible preferred shares of Holdings-Canada,
capital lease financings and various working capital sources, including credit
facilities, in addition to the private placement of the securities previously
mentioned and other securities offerings. Net cash provided by financing
activities for 1998, 1999 and 2000 also includes proceeds from the issuance of
common stock in conjunction with the exercise of options and warrants and the
Company's employee stock
-43-
purchase plan, offset by principal payments on long-term debt, capital leases
and IRU agreements and payments of preferred dividends on preferred securities
of subsidiaries.
On August 12, 1999, ICG Equipment and NetAhead entered into a $200.0
million senior secured financing facility ("Senior Facility") consisting of a
$75.0 million term loan, a $100.0 million term loan and a $25.0 million
revolving line of credit. During 1999 and 2000, the Company borrowed
approximately $80.0 million and $95.0 million, respectively, under the loans at
variable interest rates.
During 2000, the Company received net proceeds of $707.7 million from the
issuance of the 8% Series A Convertible Preferred Stock. These proceeds were
used to fund the Company's operating and expansion activities. Due to the
bankruptcy proceedings, the Company has fully written off the offering costs and
fully accreted the discount associated with the 8% Series A Convertible
Preferred Stock totaling $118.1 million.
As of December 31, 2000, the Company had an aggregate accreted value of
approximately $2.0 billion outstanding under the 13 1/2% Senior Discount Notes
due 2005 (the 13 1/2% Notes), the 12 1/2% Notes due 2006 (the 12 1/2% Notes),
the 11 5/8% Notes, the 10% Notes, and the 9 7/8% Notes.
Capital Expenditures
- --------------------
The Company's capital expenditures of continuing operations (including
assets acquired under capital leases) were $361.0 million, $739.1 million and
$973.6 million for 1998, 1999 and 2000, respectively.
There is substantial uncertainty about the Company's ability to obtain
capital and to complete and place in service the Company's $232 million
construction in progress balance as of December 31, 2000.
Reciprocal Compensation
- -----------------------
ICG has, as of December 31, 2000, a net receivable for reciprocal
compensation due under interconnection agreements with ILECs of approximately
$28 million. ICG received cash of approximately $175 million during the year
ended December 31, 2000, from ILECs for terminating local traffic. The Company
anticipates that due to changes in the regulatory environment, reciprocal
compensation revenue earned after 2003 will not be significant
Revenue for 1999 includes approximately $22 million for the tandem
switching and common transport rate elements. Effective July 1, 1999, ICG ceased
recognition of these rate elements as revenue until cash receipts are either
received or the uncertainty of receipt has been removed (such as the execution
of a binding agreement). ICG has continued to bill and pursue collection of all
amounts due under the agreements.
-44-
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. As
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133", and SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No.133" ("SFAS 138"). SFAS 133 and
SFAS 138 are effective for all quarters and fiscal years beginning after June
15, 2000. The adoption of SFAS 133 and SFAS 138 did not have a material effect
on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
INTEREST RATE RISK
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its Senior Facility and Credit Agreement.
The Company invests primarily in high-grade, short-term investments that
consist of money market instruments, commercial paper, certificates of deposit,
government obligations and corporate bonds, all of which are considered to be
available for sale. As of December 31, 2000, the Company had approximately
$214.7 million in cash, cash equivalents and short-term investments available
for sale, at a weighted average fixed interest rate of 7.00%. A hypothetical 10%
fluctuation in market rates of interest would not cause a material change in the
fair value of the Company's investment in marketable securities at December 31,
2000, and accordingly, would not cause a material impact on the Company's
financial position, results of operations or cash flows.
On August 12, 1999, the Company entered into the Senior Facility,
consisting of two term loans and a revolving line of credit. All components of
the Senior Facility bear variable annual rates of interest, based on the change
in the prime rate. No additional borrowings are available under the Senior
Facility. The Company is continuing to make interest only payments which are
affected by fluctuations in the prime rate. As of December 31, 2000, the Company
had $84.6 million outstanding under the Senior Facility. A hypothetical change
in annual interest rate of 1% per annum would result in a change in interest
expense of approximately $0.8 million.
-45-
The Company is also subject to interest rate risk under the Credit
Agreement, which bears variable annual rates of interest. However, as of
December 31, 2000, the Company has not borrowed any money under the Credit
Agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements of the Company appear on page F-1 of
this Annual Report. The financial statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1
of this Annual Report.
Selected quarterly financial data required under this Item is included
under Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
-46-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
DIRECTORS AND OFFICERS OF ICG COMMUNICATIONS, INC.
Set forth below are the names and certain information about the directors
of the Company as of June 1, 2001:
Name Age Position
- ---- --- ---------------------------------------
William J. Laggett/(1)(4)(5)(6)/ 71 Vice-Chairman of the Board of Directors
William S. Beans, Jr. 36 Director
J. Shelby Bryan 55 Director
John U. Moorhead II/(2)(3)(6)/ 49 Director
Leontis Teryazos/(2)(3)(4)(5)(6)/ 58 Director
Walter Threadgill/(1)(3)(4)(5)(6)/ 55 Director
_______________________________
(1) Term as Director expires in 2002.
(2) Term as Director expires in 2003.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Stock Option Committee.
(6) Member of Special Executive Committee.
William J. Laggett has been Vice-Chairman of the Board of Directors since
------------------
June 1999. Prior to such time, he was Chairman of the Board of Directors from
June 1995 and a Director from January 1995. Mr. Laggett was the President of
Centel Cellular Company from 1988 until his retirement in 1993. From 1970 to
1988, Mr. Laggett held a variety of management positions with Centel
Corporation, including Group Vice President-Products Group, President-Centel
Services, and Senior Vice President-Centel Corporation. Prior to joining
Centel, Mr. Laggett worked for New York Telephone Company.
William S. Beans, Jr. has been a Director since April 2000. Mr. Beans
---------------------
also served as President and Chief Operating Officer from January 2000 to
December 2000. Prior thereto, Mr. Beans was Executive Vice President and
President of Network Services from June 1999 to April 2000. Before joining the
Company, Mr. Beans held several positions in Teleport Communications Group,
Inc., a division of AT&T Local Services. He was National Vice President -
Operations from November 1997 until June 1999, Vice President Customer
Care/Customer Service from October 1995 to November 1997 and Vice President of
Network Development from September 1993 to October 1995.
J. Shelby Bryan has been a Director since May 1995. He also served as
---------------
President, Chief Executive Officer and Director from May 1995 through August 22,
2000 and as Chairman of the Board of Directors and Chief Executive Officer from
June 1999 through August
-47-
22, 2000. Mr. Bryan has over 20 years of experience in the telecommunications
industry, primarily in the cellular business. He co-founded Millicom
International Cellular S.A., a publicly owned corporation providing cellular
service internationally, served as its President and Chief Executive Officer
from 1985 to 1994 and served as a Director through May 1998.
John U. Moorhead II has been a Director since June 1998 and is Managing
-------------------
Director of C.E. Unterberg Towbin. From 1991 until April 2001 Mr. Moorhead was
Managing Director of VM Equity Partners, a firm he co-founded. Prior to founding
VM Equity Partners, Mr. Moorhead worked for eight years as a senior executive in
investment banking, first at EF Hutton and then at Lehman Brothers where he was
Senior Vice President and Director of the New Business Group of Lehman Brothers'
investment banking division from 1987 to 1990. Mr. Moorhead serves on the Board
of Directors of SEMX Inc., a NASDAQ National Market company that provides
specialty materials and services to the microelectronic and semiconductor
industries.
Leontis Teryazos has been a Director of ICG since June 1995. Mr.
----------------
Teryazos is President of Letmic Management Inc., a financial advisory firm that
specializes in working with early stage telecommunications and health care
companies. Mr. Teryazos also serves on the Board of Directors of Aurelium
Biopharma Inc., and QR Canada Capital Inc. (QRI/CDNX), a publicly traded
Canadian Venture Capital company. Mr. Teryazos is also President and CEO of QR
Canada Capital Inc. Mr. Teryazos is also head of Letmic Management Reg'd, a
Montreal real estate developer. Mr. Teryazos is a graduate of Cornell
University in 1965 and the Taft School, Watertown, Connecticut in 1961.
Walter Threadgill has been a Director since December 1997 and is the
-----------------
Managing General Partner of Atlantic Coastal Ventures, L.P. Mr. Threadgill also
serves on the Board of Directors of Ravisent Technologies, Inc. Previously, Mr.
Threadgill was the President and Chief Executive Officer of Multimedia Broadcast
Investment Corporation. He has held positions as Divisional Vice President of
Fiduciary Trust Company in New York and as Senior Vice President and Chief
Operating Officer of United National Bank in Washington, D.C. Mr. Threadgill
chaired the Presidential Small Business Advisory Committee and served the
National Association of Investment Companies as Director, Treasurer and
Legislative Committee Chairman. Mr. Threadgill is a member of the Federal
Communications Bar Association.
EXECUTIVE OFFICERS OF ICG COMMUNICATIONS, INC.
The current executive officers of the Company are as follows:
Name Age Position
- ----
Randall E. Curran 47 Chief Executive Officer
Richard E. Fish, Jr. 36 Executive Vice President and Chief Financial
Officer
Michael D. Kallet 47 Executive Vice President - Operations and Chief
Technology Officer
Bernard L. Zuroff 45 Executive Vice President, General Counsel and
Secretary
-48-
Randall E. Curran has been Chief Executive Officer since September 2000.
-----------------
Prior thereto, Mr. Curran was Chairman, President and Chief Executive Officer of
Thermadyne Holdings Corporation ("Thermadyne"). From 1995 to 2000, Mr. Curran
also held several other executive positions at Thermadyne including Chief
Operating Officer and Chief Financial Officer. Prior to joining Thermadyne, Mr.
Curran held various finance positions with Clarke Industries, Inc., McGraw-
Edison Co., and Arthur Anderson & Co.
Richard E. Fish, Jr. has been Executive Vice President and Chief
--------------------
Financial Officer since December 2000. Prior to this position, Mr. Fish was
Senior Vice President of Finance since September 1999. Before joining the
Company, Mr. Fish was Director-Access Management with AT&T Corp. from 1998 to
1999. AT&T Corp. acquired Teleport Communications Group, Inc. in 1998 where Mr.
Fish was Director-Operations since 1995.
Michael D. Kallet has been Executive Vice President - Operations and
-----------------
Chief Technology Officer since December 2000 and was Executive Vice President,
Products and Strategic Development since July 1999. Prior thereto, he was
Senior Vice President of Products and Services from December 1995. He has been
General Manager and Chief Operations Officer of ICG NetAhead, Inc., a subsidiary
of the Company, since February 1999. Prior to joining the Company, he held
several positions in the technology industry, including positions at IBM,
Computer Support Corporation, Walker Interactive and Software Publishing
Corporation (Harvard Graphics).
Bernard L. Zuroff has been Executive Vice President, General Counsel and
-----------------
Secretary since October 2000. Prior to this position, Mr. Zuroff was Assistant
General Counsel and Corporate Attorney since July 1996. Before joining the
Company, he had eleven years of experience as an attorney with Gorsuch Kirgis,
L.L.C., the Resolution Trust Company and Infotel, Inc.
There are no family relationships between any current director or officer
or any other current director or officer.
DIRECTORS AND OFFICERS OF ICG HOLDINGS (CANADA) CO.
The sole director of ICG Holdings-Canada is Bernard L. Zuroff. Randall E.
Curran is the Chief Executive Officer, Richard E. Fish, Jr. is the President and
Chief Financial Officer, and Bernard L. Zuroff is the Executive Vice President,
General Counsel and Secretary.
DIRECTORS AND OFFICERS OF ICG HOLDINGS, INC.
The directors for ICG Holdings are Randall E. Curran and Richard E. Fish, Jr.
Randall E. Curran is the Chief Executive Officer, Richard E. Fish, Jr. is the
President and Chief Financial Officer, and Bernard L. Zuroff is Executive Vice
President, General Counsel and Secretary.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to file with the Securities Exchange
Commission reports regarding their ownership and
-49-
changes in ownership of the Company's stock. ICG believes that during 2000,
its directors and executive officers complied with all Section 16(a) filing
requirements with the following exceptions: (1) a Form 3 with respect to stock
options granted to James Washington, former Executive Vice President-Network
Services, was not filed on or before January 17, 2000 as required, but on
February 10, 2000; (2) four Form 4s with respect to stock options granted to
Michael D. Kallet, Executive Vice President-Operations and Chief Technology
Officer, Cindy Z. Schonhaut, former Executive Vice President-External Affairs,
H. Don Teague, former Executive Vice President, General Counsel and Secretary,
and Carla J. Wolin, former Executive Vice President-People Services, were not
filed on or before February 10, 2000 as required, but on March 31, 2000; (3) two
Form 4s with respect to stock options granted to William J. Laggett, Director
and Vice Chairman, and Walter Threadgill, Director were not filed on or before
July 10, 2000 as required, but on July 18, 2000; (4) a Form 4 with respect to
stock options granted to Leontis Teryazos, Director, was not filed on or before
July 10, 2000, as required, but on July 13, 2000; and (5) due to a Chapter 11
related staffing shortage, a Form 3 reporting that Randall E. Curran, Chief
Executive Officer does not beneficially own any derivative securities was not
filed on or before October 5, 2000 as required but on October 23, 2000, a Form 3
with respect to stock options granted to Bernard L. Zuroff, Executive Vice
President, General Counsel and Secretary was not filed on or before October 25,
2000 as required, but on December 1, 2000 and an amended Form 5 was filed on
March 14, 2001 by William S. Beans, former President and Chief Operating
Officer, with respect to a stock option grant that was inadvertently not
included in the Form 5 that was timely filed on February 14, 2001.
In making these statements, ICG has relied upon a review of reports on
Forms 3, 4 and 5 furnished to the Company during, or with respect to its last
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
EXECUTIVE OFFICER COMPENSATION
The following table provides certain summary information concerning
compensation paid by the Company and its subsidiaries to the three individuals
who served as the Company's Chief Executive Officer during the fiscal year ended
December 31, 2000; together with the four executive officers and two other most
highly compensated officers or former officers (the "Named Officers") for the
fiscal years ended December 31, 2000, 1999, and 1998. Neither Holdings-Canada
nor Holdings pays any form of compensation to any of their respective Directors
or Officers.
-50-
Summary Compensation Table
Annual Compensation
Long-term
------------------------------------------- Compensation
----------------- All
Other Annual Securities Other
Name and Principal Fiscal Compensation Underlying Compensation
Position Year Salary ($) Bonus ($) ($) Options ($)
- ---------------------------------------------------------------------------------------------------------------------
Randall E. Curran 2000 225,000 - 18,786/(1)/ - -
Chief Executive Officer 1999 - - - - -
1998 - - - - -
Carl E. Vogel 2000 - - - 19,480 -
Former Chief Executive 1999 - - - - -
Officer/(2)/ 1998 - - - - -
J. Shelby Bryan 2000 1,538,011/(3)/ - 48,383/(4)/ 250,000 -
Director and former Chief 1999 1,500,000/(5)/ - 98,658/(6)/ 200,000 -
Executive Officer and
Chairman 1998 1,435,191/(5)/ - 159,554/(7)/ - -
Richard E. Fish, Jr. 2000 168,654 80,630/(8)/ 6,000/(9)/ 60,000 -
Chief Financial Officer 1999 47,115 11,514/(10)/ 1,268/(9)/ 30,000 -
1998 - - - - -
Michael D. Kallet 2000 283,924/(11)/ 207,020/(12)/ 71,197/(13)/ - 1,610/(14)/
EVP - Operations and 1999 240,154/(15)/ 136,838 3,000/(16)/ 55,000 -
Chief Technology
Officer 1998 - - - 35,000 -
Bernard L. Zuroff 2000 140,000 51,837/(17)/ 7,500/(16)/ 33,300 -
Executive Vice President - 1999 111,950/(18)/ 27,640/(19)/ - 3,300 -
General Counsel 1998 88,034 21,028/(20)/ - 2,400 -
Robert P. Athey 2000 126,346/(21)/ 22,000/(22)/ 130,449/(23)/ - -
Senior Vice President - Sales 1999 89,318/(24)/ 10,757 92,150/(25)/ 11,300 -
1998 63,805/(26)/ 5,275/(27)/ 81,776/(28)/ 1,125 -
John Kane/(29)/ 2000 60,328 1,000,000 - - 1,224,038/(30)/
Former President 1999 337,463 1,059,745 9,049 150,000 -
1998 157,236 101,916 4,200 110,000 -
Williams S. Beans, Jr. 2000 467,981/(31)/ 326,193/(32)/ 70,924/(33)/ 100,000 7,173/(14)/
Former President and 1999 134,615 46,875 164,394/(34)/ 749,982 2,625/(35)/
Chief Operating Officer 1998 - - - - -
______________________________
(1) Consists of Mr. Curran's housing, travel and car allowances as provided for
in his employment agreement.
(2) Mr. Vogel resigned from the Company effective September 18, 2000.
(3) Consists of amounts earned pursuant to the compensation formula in Mr.
Bryan's employment agreement. This amount includes payment of $1,073,556
that was earned in 1999.
(4) Consists of $48,383 for housing expenses.
(5) Consists of amounts earned pursuant to the compensation formula in Mr.
Bryan's employment agreement, as adjusted for amounts earned in 1998 and
1999.
(6) Consists of $13,997 for car allowance, $49,583 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$35,078.
(7) Consists of $24,430 for car allowance, $46,964 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$88,160.
(8) Consists of $40,630 incentive bonus and $40,000 retention bonus.
(9) Consists of amounts for car allowance.
(10) Consists of $1,514 incentive bonus and $10,000 sign-on bonus.
(11) Consists of $283,462 in annual salary and $462 of retroactive salary that
was paid in 2000.
-51-
(12) Consists of $122,020 incentive bonus and $85,000 retention bonus.
(13) Consists of $12,000 for a car allowance and $59,197 relocation payment.
(14) Consists of executive life insurance payments.
(15) Consists of $239,615 in annual salary and $539 of retroactive salary that
was paid in 1999.
(16) Consists of amounts for car allowance.
(17) Consists of $38,837 incentive bonus and $13,000 retention bonus.
(18) Consists of $111,103 in annual salary and $846 of retroactive salary that
was paid in 1999.
(19) Consists of $2,500 reward and recognition bonus and $25,140 incentive
bonus.
(20) Consists of $675 reward and recognition bonus and $20,353 incentive bonus.
(21) Consists of $125,192 in annual salary and $1,154 of retroactive salary that
was paid in 2000.
(22) Consists of retention bonus.
(23) Consists of $128,649 in sales commissions and $1,800 in car allowance
amounts.
(24) Consists of $88,741 in annual salary and $577 in retroactive salary that
was paid in 2000.
(25) Consists of $88,550 in sales commissions and $3,600 in car allowance
amounts.
(26) Consists of $62,904 in annual salary and $901 in retroactive salary that
was paid in 2000.
(27) Consists of $4,975 incentive bonus and $300 in recruiting bonus.
(28) Consists of $78,176 in sales commissions and $3,600 in car allowance
amounts.
(29) Pursuant to the terms of a General Release, Covenant Not to Sue and
Agreement entered into between John Kane and the Company, Mr. Kane's
employment agreement was terminated and he resigned from his positions with
the Company as of January 1, 2000. In addition, he received severance and
bonus payments and the Company canceled $280,000 of promissory notes
executed by Mr. Kane. Further, all of Mr. Kane's unvested options became
fully vested. On January 19, 2000, the Company filed a complaint against
Mr. Kane in Arapahoe County District Court, Colorado. Subsequently, the
Company and Mr. Kane entered into a settlement agreement which provided,
among other things, that 82,500 vested options to purchase 220,000 shares
of ICG stock were revoked by ICG and relinquished by Mr. Kane.
(30) Consists of $12,766 of COBRA premium equivalents, $931,272 in severance,
and $280,000 attributable to the Company foregoing its right to seek
reimbursement of promissory notes.
(31) Consists of $448,077 in annual salary and $19,904 in retroactive salary
which was paid in 2000.
(32) Consists of $183,793 incentive bonus and $142,400 retention bonus.
(33) Consists of $35,724 for car allowance and $35,200 for relocation expenses.
(34) Consists of $7,800 for car allowance, $156,379 for relocation expenses and
$215 for non-taxable relocation expenses.
(35) Consists of taxable interest on loan.
-52-
Option/SAR Grants in Last Fiscal Year
The Company granted no stock appreciation rights during the year ended
December 31, 2000 to the Named Officers or to other employees. The following
table provides information on option grants during the year ended December 31,
2000 to the Named Officers:
Potential realizable value at
Individual grants assumed
--------------------------------------------
Number of Percent of total Exercise annual rates of stock
Securities options granted or price appreciation
Underlying to employees in fiscal base Expiration for
Name options year price date option term
granted (#) ($/Sh)
--------------------------------
5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------
Randall E. Curran - - - - - -
Carl E. Vogel 14,480/(1)/ .27561% $ 32.875 4/10/10 - -
5,000/(1)/ .09516% $ 22.875 6/6/10 - -
J. Shelby Bryan 250,000/(1)/ 4.7584% $ 24.375 5/9/10 - -
Richard E. Fish, Jr. 60,000/(2)/ 1.14203% $ 29.75 4/27/10 - -
Michael D. Kallet 40,000/(3)/ .76135% $ 18.00 1/6/10 - -
48,905/(2)/ .93085% $ 24.375 5/9/10 - -
Bernard L. Zuroff 25,800/(2)/ .49107% $ 29.75 4/27/10 - -
7,500/(3)/ .14275% $34.3125 2/28/10 - -
John Kane - - - - - -
Robert P. Athey - - - - - -
William S. Beans, Jr. 100,000/(1)/ 1.90339% $ 24.375 5/9/10 - -
_____________________________________________
(1) Granted from 1998 Stock Option Plan (Amended and Restated as of September
10, 1999).
(2) Granted from Year 2000 Broad-Based Long-Term Incentive Plan.
(3) Granted from 1996 Stock Option Plan (Amended and Restated as of September
10, 1999).
-53-
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table provides information on options exercised during
the year ended December 31, 2000 by the Named Officers and the value of
such officers' unexercised options at December 31, 2000:
Number of securities Value of unexercised in-the-
Shares underlying unexercised money options at
acquired on Value options at fiscal year end (#) fiscal year end ($)/(1)/
------------------------------ -----------------------------
Name exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Randall E. Curran - - - - - -
Carl E. Vogel - - 9,480 10,000 - -
J. Shelby Bryan 150,000 1,584,375 2,033,334 166,666 - -
Richard E. Fish, Jr. - - 13,500 76,500 - -
Michael D. Kallet - - 126,345 138,655 - -
Bernard L. Zuroff - - 10,281 29,719 - -
John Kane 137,500 1,914,707 82,500 - -
Robert P. Athey - - 8,244 5,181 - -
William S. Beans, Jr. - - 106,945 333,055 - -
- ----------------------------------------
(1) While the Company's common stock is trading on certain over the
counter markets, the shares are believed by management to carry no
value.
DIRECTOR COMPENSATION
The Company compensates its non-employee directors for attendance
at meetings of the Board of Directors or a committee of the Board of
Directors as follows: $4,000 for attendance at a meeting in person, plus
reimbursement of expenses, and $1,500 for participation in a telephonic
meeting; provided that when meetings of the Board of Directors and/or one
or more committees are held on the same day, the non-employee directors are
entitled to be compensated only for one such meeting. In addition, the
Vice-Chairman of the Board of Directors, Mr. Laggett, receives an annual
fee of $80,000 payable in quarterly installments and Messrs. Moorhead,
Teryazos and Threadgill receive an annual fee of $60,000 payable in
quarterly installments. On December 15, 1999, all non-employee directors of
the Company were granted options for the 2000 fiscal year to purchase
20,000 shares of Common Stock under the 1998 Stock Option Plan, which
vested as to 5,000 shares on the 15th day of the last month of each fiscal
quarter of 2000 commencing March 15, 2000. On June 7, 2000, all non-
employee Directors of the Company were granted options to purchase 5,000
shares of ICG Common Stock under the Company's 1998 Stock Option Plan.
-54-
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with Randall E.
Curran, Richard E. Fish, Jr., Michael D. Kallet, Bernard L. Zuroff, Robert
Athey, Brian Cato, Darlinda Coe, John Colgan, Kimberly Gordon, David Hurtado,
Gayle Landis, and Gary Lindgren.
In July 2001, the Bankruptcy Court approved the terms of an amended
employment agreement for Mr. Curran. The amended agreement will provide for the
continued employment of Mr. Curran on a month to month term at an annual base
salary of $900,000 which may be increased from time to time in accordance with
normal business practices of the Company. Subject to the Company achieving
certain financial targets established by the Company's Board and the Special
Committee, the amended agreement also provides for a performance bonus of up to
$900,000 in 2001 and for performance bonuses in subsequent years in amounts of
up to twelve months' base salary at the rate then in effect based upon
performance targets to be established at the discretion of the Company's Board
or the compensation committee thereof. Mr. Curran will also be eligible to
receive a reorganization bonus of up to twelve months' base salary in the event
that a plan of reorganization for the Company is consummated and confirmed in
its currently pending Chapter 11 case, depending on the timing thereof, or if
there is a sale of all or substantially all of the Company's assets. In
addition, Mr. Curran is entitled to benefits as are generally provided to the
Company's senior executives including reimbursement of reasonable out-of-pocket
expenses incurred on behalf of the Company. If the amended agreement is
terminated by the Company for any reason other than Mr. Curran's death,
disability, or for cause, or is terminated by Mr. Curran for good reason, Mr.
Curran will receive a lump sum severance in an amount equal to fifteen months'
base salary at the rate then in effect. If Mr. Curran's employment is
terminated in the case of death, his estate will receive an amount equal to
twelve months' base salary.
The Company's employment agreements with Richard E. Fish, Jr., Michael D.
Kallet, Bernard L. Zuroff, Robert Athey, Brian Cato, Darlinda Coe, John Colgan,
Kimberly Gordon, David Hurtado, Gayle Landis, and Gary Lindgren provide for base
salaries and such other benefits as are generally provided to senior executives,
including reimbursement of reasonable out-of-pocket expenses incurred on behalf
of the Company. Mr. Kallet's agreement also provides for a bonus payment if Mr.
Kallet is actively employed upon either: (a) the consummation of a sale of all
or substantially all of the Company's assets; or (b) the date a reorganization
plan is confirmed. These employment agreements may be terminated by the Company
with or without cause or by the employee upon the occurrence of a constructive
dismissal. If an agreement is terminated by the Company for any reason other
than the employee's death, disability or for cause, or if there is a
constructive dismissal, the employee will receive an amount equal to twelve
months' salary at the rate then in effect. 50% will be paid in a lump sum
within 15 days of termination and the remaining 50% is payable in twelve
installments commencing 30 days after termination. If the employee obtains new
employment within such twelve month period, the severance is subject to
mitigation on a dollar for dollar basis. If the employee's employment is
terminated in the case of death, his/her estate will receive an amount equal to
three months' base salary. Messrs. Kallet, Zuroff, Athey, Cato, Ms. Coe, Mr.
Colgan, Ms. Gordon, Mr. Hurtado, Ms. Landis, and Mr. Lindgren are also subject
to a ten-year confidentiality covenant and a one-year non-interference
commitment following termination of employment.
-55-
Consulting Arrangements
- -----------------------
The Company's agreement with William S. Beans, Jr. provides for Mr. Beans'
resignation of employment as of February 4, 2001 and his resignation as an
officer of the Company and as an officer and director of any of the Company's
subsidiaries as of December 4, 2001. Mr. Beans is entitled to receive severance
pay of $528,895, as well as continued participation in the Company's welfare
benefit plans for a period of one (1) year. Mr. Beans continues as a Director
and as a consultant during the payment period. The Company also forgave a
$100,000 loan that was made to Mr. Beans in 1999.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee consists of three non-employee Directors:
William J. Laggett, Vice-Chairman of the Board of Directors, Leontis Teryazos
and Walter Threadgill.
Board Compensation Committee Report on Executive Compensation
- -------------------------------------------------------------
The Compensation Committee of the Board of Directors evaluates compensation
levels of senior management as well as the various factors that affect the
compensation of the Company's highest paid officers. The Compensation Committee
established the existing executive compensation program to encourage and reward
management's efforts to strengthen the Company's business. The Company operates
in a competitive marketplace and needs to retain well-qualified executive
talent. Executive compensation is reviewed regularly to ensure compliance
within existing guidelines and for competitiveness in the marketplace.
The Company has employment agreements with certain of its executive
officers. See "Executive Employment Agreements" for descriptions of those
agreements. All senior management are compensated with base salaries which are
intended to compensate executives for their ongoing leadership skills and
management responsibility. In addition, eligible employees, including executive
management received incentive bonuses for the first and second quarters of 2000.
The incentive bonuses were dependent upon the Company's performance as measured
against certain pre-determined goals and objectives. The incentive bonus plan
was suspended for the third and fourth quarters of the fiscal year as a result
of the Company's filing for Chapter 11 bankruptcy protection. In its place, the
Company implemented a retention bonus program that was designed to stabilize and
retain the existing workforce. See "Summary Compensation Table" for the
definition of Named Officers and the bonuses paid to them.
On April 28, 2000, the Stock Option Committee awarded stock options to
certain employees of the Company, including executive officers. These grants
were based on individual performance and responsibility and were related to the
executive officers' performance during the year ended December 31, 1999 as well
as an incentive for continued efforts and success. Subsequently, trading of the
Company's stock on the NASDAQ National Market was suspended on November 14, 2000
and delisted on November 18, 2000. See "Summary Compensation Table" for the
stock options granted to the executive officers.
The Compensation Committee has reviewed the compensation of the Company's
executive officers and has concluded that their compensation is reasonable and
appropriate.
-56-
The Compensation Committee continually evaluates the compensation of the
Company's executive officers, including an assessment of compensation
reports for comparable companies and for the telecommunications industry.
The Compensation Committee believes that maintaining suitable executive
compensation programs is necessary to support the future progress of the
Company and its successful emergence from bankruptcy.
William J. Laggett
Leontis Teryazos
Walter Threadgill
(Members of the Compensation Committee)
STOCK PERFORMANCE GRAPH
The Company has not included a performance graph as the Company's
stock has been delisted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
CERTAIN BENEFICIAL OWNERS
To the best of the Company's knowledge, based on filings with the
Securities and Exchange Commission, the following are the only persons who own
beneficially five percent or more of the Company's voting securities
outstanding, as of June 1, 2001.
Series A Percent of Series Percent of
Preferred A Preferred Common Common
Name and Address of Beneficial Owner Stock/(1)/ Stock/(2)/ Stock/(3)/ Stock/(4)/
- ------------------------------------ ---------- ------------------ ---------- ----------
IDT Investments, Inc. /(5)/ 73,000 97.4% 38,098,994 42.3%
520 Broad Street
Newark, New Jersey 07102
_________________________
(1) The Series A Preferred Stock includes the 8% Series A-1 Convertible
Preferred Stock due 2015 (the "Series A-1 Preferred Stock"), the 8%
Series A-2 Convertible Preferred Stock due 2015 (the "Series A-2
Preferred Stock") and the 8% Series A-3 Convertible Preferred Stock
due 2015 (the "Series A-3 Preferred Stock"). Except in relation to
director appointment rights, the powers, preferences and relative,
participating, optional and other special rights of the Series A-1
Preferred Stock, the Series A-2 Preferred Stock and the Series A-3
Preferred Stock are identical.
(2) Based on 75,000 shares of Series A Preferred Stock outstanding as of
June 1, 2001.
(3) Amounts include shares of Common Stock issuable upon conversion of the
Series A Preferred Stock and upon exercise of warrants. This holder
reported all amounts on a Schedule 13D on May 4, 2001.
(4) Based on 52,045,443 shares of Common Stock issued and outstanding as
of June 1, 2001, plus shares of Common Stock issuable to such
beneficial owner upon conversion or exercise of Preferred Stock and
warrants, as the case may be. All share percentages assume that each
respective beneficial owner has converted its shares of Series A
Preferred Stock, if any, into Common Stock and has exercised its
warrants to purchase shares of Common Stock, if any.
(5) On April 18, 2001 IDT issued 7,500 shares of Class B Common Stock and
30,000 shares of Class A Convertible Preferred Stock in exchange for
50,000 shares of the 8% Series A-1 Convertible Preferred Stock and
warrants to purchase an aggregate of 6,666,667 shares of ICG Common
Stock pursuant to the terms of the Stock Exchange Agreement dated
April
-57-
18, 2001 between IDTI, IDTC, IDT America, Corp, 225 Old NB Road, Inc.,
226 Old NB Road, Inc., 60 Park Place Holding Company, Inc., Liberty
Media Corporation, Microwave Holdings, L.L.C., and TP Management.
Pursuant to the terms of the Certificate of Designation, each share of
the Series A-1 Convertible Preferred Stock was automatically converted
to a share of the 8% Series A-3 Convertible Preferred Stock.
On May 2, 2001 IDT issued 8,188 shares of Series B Convertible
Preferred Stock in exchange for 23,000 shares of the 8% Series A-2
Convertible Preferred Stock and warrants to purchase an aggregate of
3,066,667 shares of ICG Common Stock pursuant to the terms of the
Stock Exchange Agreement dated May 2, 2001 between IDTI, IDTC, IDT
America, IDT Ventures, Inc., HM4 Teligent Qualified Fund, LLC, HM4
Teligent Private Fund, LLC, NM 4-SBS Teligent Coinvestors, LLC, HM PG-
IV Teligent, LLC, HM 4-EQ Teligent Coinvestors, LLC, HM4 ICG Qualified
Fund, LLC, HM4 ICG Private Fund, LLC, HM PG-IV ICG, LLC, HM 4-SBS ICG
Coinvestors, LLC, and HM 4-EQ ICG Coinvestors, LLC. Pursuant to the
terms of the Certificate of Designation, each share of Series A-2
Convertible Preferred Stock was automatically converted to a share of
the 8% Series A-3 Convertible Preferred Stock. All information is
based on a Schedule 13D filed by IDT with the SEC.
OWNERSHIP OF MANAGEMENT
The following table sets forth, as of June 1, 2001, the number of
shares of ICG voting securities owned by all executive officers, directors
and nominees of ICG individually and as a group. The persons named in the
table below have sole voting and investment power with respect to all of
the shares of ICG voting securities owned by them, unless otherwise noted.
Amount/Nature of
Name of Beneficial Owner Beneficial Ownership Percent/(1)/
- -------------------------------------------------------------------- -------------------- ------------
William J. Laggett/(2)/...................................................... 157,797 *
Vice Chairman of the Board of Directors
Randall E. Curran............................................................ - *
Chief Executive Officer
Richard D. Fish, Jr./(3)/.................................................... 13,724 *
Executive Vice President, Chief Financial Officer
Michael D. Kallet/(4)/....................................................... 129,016 *
Executive Vice President - Operations and Chief Technology Officer
Bernard L. Zuroff/(5)/....................................................... 12,622 *
Executive Vice President, General Counsel & Secretary
William S. Beans, Jr./(6)/................................................... 114,408 *
Director, former President
J. Shelby Bryan/(7)/......................................................... 2,008,763 3.9%
Chairman Director, former Chief Executive Officer and
Vice Chairman of the Board of Directors
John U. Moorhead II/(8)/..................................................... 72,500 *
Director
Leontis Teryazos/(9)/........................................................ 152,500 *
Director
-58-
Amount/Nature of
Name of Beneficial Owner Beneficial Ownership Percent/(1)/
- -------------------------------------------------------------------- -------------------- ------------
Walter Threadgill/(10)/............................................. 82,500 *
Director
All current executive officers and directors as a group
(10 persons)...................................................... 2,278,533 4.4%
_________________________________
* Less than one percent of the outstanding shares of Common Stock.
(1) Based on 52,045,443 issued and outstanding shares of Common Stock on June
1, 2001, plus shares of Common Stock that may be acquired by the person or
group indicated pursuant to any options and warrants exercisable, or
pursuant to the conversion of any outstanding shares of the Company's
Preferred Stock, or pursuant to any shares vesting under the Company's
401(k) Plan, within 60 days.
(2) Includes 157,797 shares of ICG Common Stock that may be acquired pursuant
to the exercise of outstanding stock options.
(3) Includes 224 shares of ICG Common Stock held by a 401(k) plan in Mr. Fish's
name and 13,500 shares of ICG Common Stock that may be acquired pursuant to
the exercise of outstanding stock options.
(4) Includes 1,694 shares of ICG Common Stock held by a 401(k) plan in Mr.
Kallet's name, 977 shares of ICG Common Stock held in ICG's Employee Stock
Purchase Plan and 126,345 shares of ICG Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
(5) Includes 1,252 shares of ICG Common Stock held by a 401(k) plan in Mr.
Zuroff's name, 1,089 shares of ICG Common Stock held in ICG's Employee
Stock Purchase Plan and 10,281 shares of ICG Common Stock that may be
acquired pursuant to the exercise of outstanding stock options.
(6) Includes 7,463 shares of ICG Common Stock held by a 401(k) plan in Mr.
Beans's name and 106,945 shares of ICG Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
(7) Includes 58,763 shares of ICG Common Stock held by a 401(k) plan in Mr.
Bryan's name and 1,950,000 shares of ICG Common Stock that may be acquired
pursuant to the exercise of outstanding stock options.
(8) Includes 72,500 shares of ICG Common Stock that may be acquired pursuant to
the exercise of outstanding stock options.
(9) Includes 152,500 shares of ICG Common Stock that may be acquired pursuant
to the exercise of outstanding stock options.
(10) Includes 82,500 shares of ICG Common Stock that may be acquired pursuant to
the exercise of outstanding stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
-59-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
-------------------------------------------------------------
(A) (1) FINANCIAL STATEMENTS
The following financial statements are included in Item 8 of Part II:
Page
----
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets, December 31, 1999 and 2000.............. F-4
Consolidated Statements of Operations, Years Ended December 31,
1998, 1999 and 2000................................................. F-6
Consolidated Statements of Stockholders' Deficit, Years Ended
December 31, 1998, 1999 and 2000.................................... F-8
Consolidated Statements of Cash Flows, Years Ended December 31,
1998, 1999 and 2000................................................. F-9
Notes to Consolidated Financial Statements........................... F-12
(2) FINANCIAL STATEMENT SCHEDULE
The following Financial Statement Schedule is submitted herewith:
Independent Auditors' Report......................................... S-1
Schedule II: Valuation and Qualifying Accounts....................... S-2
(3) LIST OF EXHIBITS
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
2.1 Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1
to Registration Statement on Form S-4 of ICG Communications,
Inc., File No. 333-4226].
(3) Corporate Organization
3.1 Certificate of Incorporation of ICG Communications, Inc.
dated April 11, 1996. [Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
3.2 By-laws of ICG Communications, Inc. [Incorporated by
reference to Exhibit 3.2 to Registration Statement on Form
S-4 of ICG Communications, Inc., File No. 333-4226].
3.3 Agreement and Plan of Reorganization by and among ICG
-60-
Communications, Inc., ICG Canadian Acquisition, Inc.,
ICG Holdings (Canada), Inc. and ICG Holdings (Canada)
Co., dated November 4, 1998. [Incorporated by
reference to Exhibit 3.3 to ICG Communications, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1998.]
3.4: Order of Amalgamation between ICG Holdings (Canada),
Inc. and ICG Holdings (Canada) Co., dated December 22,
1998. [Incorporated by reference to Exhibit 3.4 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1998.]
3.5: Memorandum and Articles of Association of ICG Holdings
(Canada) Co. filed with the Registrar of Joint Stock
Companies, Halifax, Nova Scotia. [Incorporated by
reference to Exhibit 3.5 to ICG Communications, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1998.]
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
4.1: Note Purchase Agreement, dated as of July 14, 1995,
among the Registrant, IntelCom Group (U.S.A.), Inc.,
Morgan Stanley Group Inc., Princes Gate Investors,
L.P., Acorn Partnership I, L.P., PGI Investments
Limited, PGI Investments Limited, PGI Sweden AB, and
Gregor von Opel and Morgan Stanley Group, Inc., as
Agent for the Purchasers [Incorporated by reference to
Exhibit 4.1 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.2: Warrant Agreement, dated as of July 14, 1995, among
the Registrant, the Committed Purchasers, and IntelCom
Group (U.S.A.), Inc., as Warrant Agent [Incorporated
by reference to Exhibit 4.2 to Form 8-K of IntelCom
Group Inc., dated July 18, 1995].
4.3: First Amended and Restated Articles of Incorporation
of ICG Holdings, Inc. [Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.), Inc., File No. 333-04569].
4.4: Indenture, dated August 8, 1995, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank
Colorado, National Association [Incorporated by
reference to Exhibit 4.6 to Registration Statement on
Form S-4 of IntelCom Group (U.S.A.) Inc., File Number
33-96540].
4.5: Indenture, dated April 30, 1996, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank
Colorado, National Association [Incorporated by
reference to Exhibit 4.14 to Registration Statement on
Form S-4 of IntelCom Group (U.S.A.) Inc., File No.
333-04569].
4.6: Indenture, dated March 11, 1997, among ICG Holdings,
Inc., ICG Communications, Inc. and Norwest Bank
Colorado, National
-61-
Association [Incorporated by reference to Exhibit 4.15
to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-24359].
4.7: Written Action of the Manager of ICG Funding, LLC,
dated as of September 24, 1997, with respect to the
terms of the 6 3/4% Exchangeable Limited Liability
Company Preferred Securities [Incorporated by
reference to Exhibit 4.8 to Registration Statement on
Form S-3 of ICG Funding, LLC, File No. 333-40495].
4.8: Amended and Restated Limited Liability Company
Agreement of ICG Funding, LLC, dated as of September
23, 1997 [Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3 of ICG Funding,
LLC, File No. 333-40495].
4.9: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of February
12, 1998 [Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-4 of ICG Services,
Inc., File No. 333-51037].
4.10: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of April 27,
1998 [Incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-4 of ICG Services,
Inc., File No. 333-60653, as amended].
4.11: Second Amended and Restated Articles of Incorporation
of ICG Holdings, Inc., dated March 10, 1997.
[Incorporated by reference to Exhibit 4.11 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1998.]
4.12: Loan Agreement, dated as of January 1, 1999, by and
among TriNet Realty Capital, Inc. and ICG Services,
Inc. [Incorporated by reference to Exhibit 10.3 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999].
4.13: Promissory Note, dated as of January 1, 1999, by and
among TriNet Realty Capital, Inc. and ICG Services,
Inc. [Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999].
4.14: Deed of Trust, Assignment of Rents and Security
Agreement, made as of January 1, 1999, granted by ICG
Services, Inc. for the benefit of TriNet Realty
Capital, Inc. [Incorporated by reference to Exhibit
10.5 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended March 31,
1999].
4.15: Amended and Restated Loan Agreement, dated as of May
1, 1999, by and among TriNet Realty Capital, Inc. and
ICG 161, L.P. [Incorporated by reference to Exhibit
10.1 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30,
1999].
4.16: Credit Agreement, dated as of August 12, 1999, among
ICG Equipment, Inc. and ICG NetAhead, Inc., as
Borrowers, ICG
-62-
Services, Inc., as Parent, the Initial Lenders and the
Initial Issuing Bank, as Initial Lenders and Initial
Issuing Bank, Royal Bank of Canada, as Administrative
Agent and Collateral Agent, Morgan Stanley Senior
Funding, Inc., as Sole Book-Runner and Lead Arranger
and Bank of America, N.A. and Barclays Bank Plc, as
Co-Documentation Agents [Incorporated by reference to
Exhibit 10.11 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1999].
4.17: Security Agreement, dated August 12, 1999, from ICG
Equipment, Inc. and ICG NetAhead, Inc., as Grantors to
Royal Bank of Canada, as Collateral Agent
[Incorporated by reference to Exhibit 10.12 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
4.18: Amendment No. 1 to Credit Agreement, dated as of
December 31, 1999, among ICG Equipment, Inc. and ICG
NetAhead, Inc., as Borrowers, ICG Services, Inc., as
Parent, certain Initial Lender Parties thereto, Morgan
Stanley Senior Funding, Inc., as Sole Book-Runner and
Lead Arranger, Royal Bank of Canada, as Collateral
Agent and as Administrative Agent for such Lender
Parties, and Bank of America, N.A. and Barclays Bank
Plc, as Co-Documentation Agents [Incorporated by
reference to Exhibit 10.8 to ICG Communications,
Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999].
4.19: Amendment and Waiver No. 2 to the Loan Documents,
dated as of December 29, 1999, among ICG Equipment,
Inc., ICG NetAhead, Inc., ICG Services, Inc., as
Parent, certain Initial Lender Parties party thereto,
Morgan Stanley Senior Funding, Inc., as Sole Book-
Runner and Lead Arranger, Royal Bank of Canada, as
Collateral Agent and as Administrative Agent for such
Lender Parties, Bank of America, N.A., as
Documentation Agent and Barclays Bank Plc, as Co-
Documentation Agent. [Incorporated by reference to
Exhibit 4.19 to ICG Communications, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1999.]
4.20: Amendment No. 3 to the Loan Documents, dated as of
February 11, 2000, among ICG Equipment, Inc., ICG
NetAhead, Inc., ICG Services, Inc., as Parent, certain
Initial Lender Parties party thereto, Morgan Stanley
Senior Funding, Inc., as Sole Book-Runner and Lead
Arranger, Royal Bank of Canada, as Collateral Agent
and as Administrative Agent for such Lender Parties,
Bank of America, N.A., as Documentation Agent and
Barclays Bank Plc, as Co-Documentation Agent.
[Incorporated by reference to Exhibit 4.20 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1999.]
4.21: Certificate of Designation of the Powers, Preferences
and Relative, Participating, Optional and Other
Special Rights of 8% Series A-1 Convertible Preferred
Stock Due 2015, 8% Series A-2 Convertible
-63-
Preferred Stock Due 2015 and 8% Series A-3 Convertible
Preferred Stock Due 2015, and Qualifications,
Limitations and Restrictions Thereof, Filed on April
7, 2000 with the Delaware Secretary of State.
[Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report of Form 10-Q
for the quarterly period ended March 31, 2000.]
4.22: Registration Rights Agreement dated as of April 7,
2000, by and between ICG Communications, Inc. and
Liberty Media Corporation, HMTF Bridge ICG, LLC, HM4
ICG Qualified Fund, LLC, HM4 ICG Private Fund, LLC, HM
PG-IV ICG, LLC, HM 4-SBS ICG Coinvestors, LLC, HM 4-EQ
ICG Coinvestors, LLC and Gleacher/ICG Investors LLC.
[Incorporated by reference to Exhibit 10.5 to ICG
Communications, Inc.'s Quarterly Report of Form 10-Q
for the quarterly period ended March 31, 2000.]
4.23: Amendment to the Preferred Stock and Warrant Purchase
Agreement dated as of April 10, 2000 between ICG
Communications, Inc. and Liberty Media Corporation,
HMTF Bridge ICG, LLC, HM4 ICG Qualified Fund, LLC, HM4
ICG Private Fund, LLC, HM PG-IV ICG, LLC, HM 4-SBS ICG
Coinvestors, LLC, HM 4-EQ ICG Coinvestors, LLC and
Gleacher/ICG Investors LLC. [Incorporated by reference
to Exhibit 10.6 to ICG Communications, Inc.'s
Quarterly Report of Form 10-Q for the quarterly period
ended March 31, 2000.]
4.24 Form of Common Stock Warrant Agreement dated April 10,
2000. [Incorporated by reference to Exhibit 10.7 to
ICG Communications, Inc.'s Quarterly Report of Form
10-Q for the quarterly period ended March 31, 2000.]
4.25 Amendment and Waiver No. 4 to the Loan Documents,
dated as of September 29, 2000, among ICG Equipment,
Inc., ICG NetAhead, Inc., ICG Services, Inc., as
Parent, certain Initial Lender Parties party thereto,
Morgan Stanley Senior Funding, Inc., as Sole Book-
Runner and Lead Arranger, Royal Bank of Canada, as
Collateral Agent and as Administrative Agent for such
Lender Parties, Bank of America, N.A., as
Documentation Agent and Barclays Bank Plc, as Co-
Documentation Agent. [Incorporated by reference to
Exhibit 10.4 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2000.]
4.26 Revolving Credit Agreement, dated as of December 4,
2000, among ICG Communications, Inc. and each of its
subsidiaries party hereto, as Borrowers, and the Chase
Manhattan Bank, as Agent.
4.27 Security and Pledge Agreement, dated as of December 4,
2000 by and among ICG Communications, Inc. and each of
its subsidiaries party hereto, as Borrowers and the
Chase Manhattan Bank, as Agent.
4.28 First Amendment to Credit Agreement, dated as of
January 31, 2001, among ICG Communications, Inc. and
each of its subsidiaries party hereto, as Borrowers,
the Chase Manhattan Bank
-64-
and each of the other commercial banks, finance
companies, insurance companies or other financial
institutions or funds from time to time party to the
Agreement, and the Chase Manhattan Bank, as Agent.
4.29 Waiver to Credit Agreement, dated as of March 30,
2001, among ICG Communications, Inc. and each of its
subsidiaries party hereto, as Borrowers, the Chase
Manhattan Bank and each of the other commercial banks,
finance companies, insurance companies or other
financial institutions or funds from time to time
party to the Agreement, and the Chase Manhattan Bank,
as Agent.
4.30 Amendment to Waiver to Credit Agreement, dated as of
March 30, 2001, among ICG Communications, Inc. and
each of its subsidiaries party hereto, as Borrowers,
the Chase Manhattan Bank and each of the other
commercial banks, finance companies, insurance
companies or other financial institutions or funds
from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.31 Second Amendment to Waiver to Credit Agreement, dated
as of March 30, 2001, among ICG Communications, Inc.
and each of its subsidiaries party hereto, as
Borrowers, the Chase Manhattan Bank and each of the
other commercial banks, finance companies, insurance
companies or other financial institutions or funds
from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.32 Second Amendment to Credit Agreement, dated as of May
2, 2001, among ICG Communications, Inc. and each of
its subsidiaries party hereto, as Borrowers, the Chase
Manhattan Bank and each of the other commercial banks,
finance companies, insurance companies or other
financial institutions or funds from time to time
party to the Agreement, and the Chase Manhattan Bank,
as Agent.
4.33 Loan Modification Agreement dated as of June 28, 2001
between Trinet Realty Capital, Inc. as lender and
Trinet Realty Investors V, Inc. as borrower.
(9) Voting Trust Agreement
None.
(10) Material Contracts
10.1: Arrangement and Support Agreement dated June 27, 1996
between ICG Communications, Inc. and IntelCom Group
Inc. [Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
10.2: Incentive Stock Option Plan #2 [Incorporated by
reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of IntelCom
-65-
Group Inc., File No. 33-86346, filed November 14,
1994].
10.3: Form of Stock Option Agreement for Incentive Stock
Option Plan #2 [Incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed
November 14, 1994].
10.4: Incentive Stock Option Plan #3 [Incorporated by
reference to Exhibit 4.3 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File
No. 33-86346, filed November 14, 1994].
10.5: Form of Stock Option Agreement for Incentive Stock
Option Plan #3 [Incorporated by reference to Exhibit
4.4 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed
November 14, 1994].
10.6: 1994 Employee Stock Option Plan [Incorporated by
reference to Exhibit 4.5 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File
No. 33-86346, filed November 14, 1994].
10.7: Form of Stock Option Agreement for 1994 Employee
Stock Option Plan [Incorporated by reference to
Exhibit 4.6 to the Registration Statement on Form S-8
of IntelCom Group Inc., File No. 33-86346, filed
November 14, 1994].
10.8: Employment Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.5 to Form 8-
K of IntelCom Group Inc., as filed on August 2,
1995].
10.9: Stock Option Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.6 to Form 8-
K of IntelCom Group Inc., as filed on August 2,
1995].
10.10: Indemnification Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.7 to Form 8-
K of IntelCom Group Inc., as filed on August 2,
1995].
10.11: Placement Agreement, dated as of August 3, 1995,
among IntelCom Group Inc., IntelCom Group (U.S.A.),
Inc., certain subsidiaries of IntelCom Group
(U.S.A.), Inc. and Morgan Stanley & Co. Incorporated
[Incorporated by reference to Exhibit 10.1 to Form 8-
K of IntelCom Group Inc., as filed on August 9,
1995].
10.12: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to
Exhibit 10.42 to ICG Communications, Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended
September 30, 1996].
10.13: ICG Communications, Inc. 1996 Employee Stock Purchase
Plan. [Incorporated by reference to the Registration
Statement on Form S-8 of ICG Communications, Inc.,
File No. 33-14127, filed on October 14, 1996].
10.14: Consulting Services Agreement, by and between
IntelCom Group Inc. and International Communications
Consulting, Inc., effective January 1, 1996
[Incorporated by reference to Exhibit 10.44 to ICG
-66-
Communications, Inc.'s Transition Report on Form 10-
K/A for the three months ended December 31, 1996].
10.15: Confidential General Release and Covenant Not to Sue,
by and between ICG Communications, Inc. and John D.
Field, dated November 5, 1996 [Incorporated by
reference to Exhibit 10.45 to ICG Communications,
Inc.'s Transition Report on Form 10-K/A for the three
months ended December 31, 1996].
10.16: Amendment, dated as of March 26, 1997, between ICG
Communications, Inc. and J. Shelby Bryan, to
Employment Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997].
10.17: 1996 Stock Option Plan [Incorporated by reference to
Exhibit 4.6 to the Registration Statement on Form S-8
of ICG Communications, Inc., File No. 333-25957,
filed on April 28, 1997].
10.18: Amendment No. 1 to the ICG Communications, Inc. 1996
Stock Option Plan. [Incorporated by reference to
Exhibit 10.46 to ICG Communications, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1997.]
10.19: Employment Agreement, dated as of April 22, 1997,
between ICG Communications, Inc. and Don Teague
[Incorporated by reference to Exhibit 10.2 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997].
10.20: Amendment No. 2 to the ICG Communications, Inc. 1996
Stock Option Plan [Incorporated by reference to
Exhibit 10.1 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997].
10.21a:Purchase Agreement between ICG Holdings, Inc. and
TriNet Corporate Realty Trust, Inc., dated December
9, 1997. [Incorporated by reference to Exhibit 10.52a
to ICG Communications, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997.]
10.21b:First Amendment to Purchase Agreement, by and between
ICG Holdings, Inc. and TriNet Essential Facilities X,
Inc., dated January 15, 1998. [Incorporated by
reference to Exhibit 10.52b to ICG Communications,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997.]
10.21c:Assignment of Purchase Agreement, by and between
TriNet Corporate Realty Trust, Inc., dated January
15, 1998. [Incorporated by reference to Exhibit
10.52c to ICG Communications, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997.]
10.21d:Commercial Lease - Net between TriNet Essential
Facilities X, Inc. and ICG Holdings, Inc., dated
January 15, 1998. [Incorporated by reference to
Exhibit 10.52d to ICG Communications, Inc.'s
-67-
Annual Report on Form 10-K for the year ended
December 31, 1997.]
10.21e:Continuing Lease Guaranty, by ICG Communications,
Inc. to TriNet Essential Facilities X, Inc., dated
January 20, 1998. [Incorporated by reference to
Exhibit 10.52e to ICG Communications, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1997.]
10.21f:Continuing Lease Guaranty, by ICG Holdings (Canada),
Inc. to TriNet Essential Facilities X, Inc., dated
January 20, 1998. [Incorporated by reference to
Exhibit 10.52f to ICG Communications, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1997.]
10.22: Agreement and Plan of Merger, dated October 12, 1997,
by and among ICG Communications, Inc., ICG
Acquisition, Inc. and NETCOM On-Line Communication
Services, Inc. [Incorporated by reference to Exhibit
2.1 to Form 8-K, dated January 21, 1998].
10.23: Amendment to Agreement and Plan of Merger, dated
December 15, 1997, by and among ICG Communications,
Inc., ICG Acquisition, Inc. and NETCOM On-Line
Communication Services, Inc. [Incorporated by
reference to Exhibit 2.2 to Form 8-K, dated January
21, 1998].
10.24: Employment Agreement, dated July 1, 1998, between ICG
Communications, Inc. and Harry R. Herbst
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998].
10.25: Employment Agreement, dated September 23, 1998,
between ICG Communications, Inc. and Douglas I. Falk
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998].
10.26: Asset Purchase Agreement by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication
Services, Inc., dated as of January 5, 1999
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Current Report on Form 8-K,
dated March 4, 1999].
10.27: ICG Communications, Inc. 1998 Stock Option Plan.
[Incorporated by reference to Attachment A to ICG
Communications, Inc.'s Proxy Statement for the year
ended December 31, 1997.]
10.28: Form of Stock Option Agreement for 1998 Stock Option
Plan. [Incorporated by reference to Exhibit 10.28 to
ICG Communications, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998.]
10.29: Amendment No. 1 to the ICG Communications, Inc. 1998
Stock Option Plan, dated December 15, 1998.
[Incorporated by reference to Exhibit 10.29 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1998.]
-68-
10.30: Form of Agreement regarding Gross-Up Payments, by and
between ICG Communications, Inc. and each of J.
Shelby Bryan, Harry R. Herbst, Douglas I. Falk and H.
Don Teague, dated December 16, 1998. [Incorporated by
reference to Exhibit 10.30 to ICG Communications,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998.]
10.31: Extension and Amendment to Employment Agreement,
dated as of March 10, 1999, by and between ICG
Communications, Inc. and J. Shelby Bryan.
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999].
10.32: Deferred Compensation Agreement, dated as of April 1,
1999, by and between ICG Communications, Inc. and J.
Shelby Bryan [Incorporated by reference to Exhibit
10.2 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended March 31,
1999].
10.33: Purchase Agreement, dated as of January 1, 1999, by
and among TriNet Essential Facilities X, Inc. and ICG
Services, Inc. [Incorporated by reference to Exhibit
10.6 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended March 31,
1999].
10.34: Assumption and Modification Agreement, dated as of
May 1, 1999, by and among ICG Services, Inc., ICG
161, L.P. and TriNet Realty Capital, Inc.
[Incorporated by reference to Exhibit 10.2 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.35: Employment Agreement, dated as of May 19, 1999,
between ICG Communications, Inc. and Harry R. Herbst
[Incorporated by reference to Exhibit 10.3 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.36: Employment Agreement, dated as of May 19, 1999,
between ICG Communications, Inc. and H. Don Teague
[Incorporated by reference to Exhibit 10.4 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.37: Employment Agreement, dated as of May 19, 1999,
between ICG Communications, Inc. and John Kane
[Incorporated by reference to Exhibit 10.5 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.38: Employment Agreement, dated as of June 1, 1999,
between ICG Communications, Inc. and Douglas I. Falk
[Incorporated by reference to Exhibit 10.6 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.39: Amendment to Employment Agreement, dated as of June
9, 1999, between ICG Communications, Inc. and John
Kane [Incorporated
-69-
by reference to Exhibit 10.7 to ICG Communications,
Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999].
10.40: Employment Agreement, dated as of June 28, 1999,
between ICG Communications, Inc. and William S.
Beans, Jr. [Incorporated by reference to Exhibit 10.8
to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30,
1999].
10.41: Share Price Appreciation Vesting Non-Qualified Stock
Option Agreement, dated as of June 28, 1999, between
ICG Communications, Inc. and William S. Beans, Jr.
[Incorporated by reference to Exhibit 10.9 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999].
10.42: Employment Agreement, dated as of July 1, 1999,
between ICG Communications, Inc. and Michael D.
Kallet [Incorporated by reference to Exhibit 10.10 to
ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999].
10.43: Amendment to the Stock Option Agreement between J.
Shelby Bryan and IntelCom Group, Inc. dated May 30,
1995, dated as of March 10, 1999, between ICG
Communications, Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999].
10.44: Amendment to the Stock Option Agreement between J.
Shelby Bryan and IntelCom Group, Inc. dated November
13, 1995, dated as of March 10, 1999, between ICG
Communications, Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.2 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999].
10.45: Promissory Note, dated as of August 6, 1999, between
ICG Telecom Group, Inc. and John Kane [Incorporated
by reference to Exhibit 10.3 to ICG Communications,
Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999].
10.46: Amendment to Employment Agreement, dated as of August
22, 1999, between ICG Communications, Inc. and John
Kane [Incorporated by reference to Exhibit 10.4 to
ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30,
1999].
10.47: Amendment to Employment Agreement, dated as of August
22, 1999, between ICG Communications, Inc. and Don
Teague [Incorporated by reference to Exhibit 10.5 to
ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30,
1999].
10.48: Amendment to Employment Agreement, dated as of August
22, 1999, between ICG Communications, Inc. and Harry
R. Herbst
-70-
[Incorporated by reference to Exhibit 10.6 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999].
10.49: Amendment to Employment Agreement, dated as of
September 14, 1999, between ICG Communications, Inc.
and J. Shelby Bryan [Incorporated by reference to
Exhibit 10.7 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1999].
10.50: Promissory Note, dated as of December 10, 1999,
between ICG Telecom Group, Inc. and John Kane.
[Incorporated by reference to Exhibit 10.50 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.]
10.51: General Release, Covenant Not to Sue and Agreement,
dated as of January 1, 2000, between ICG
Communications, Inc. and John Kane. [Incorporated by
reference to Exhibit 10.51 to ICG Communications,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.]
10.52: Letter of Understanding to Douglas I. Falk, dated
December 15, 1999, from ICG Communications, Inc.
regarding Section 4 of the Employment Agreement
between ICG Communications, Inc. and Douglas I. Falk.
[Incorporated by reference to Exhibit 10.52 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.]
10.53: Employment Agreement, dated as of July 1, 1999, by
and between ICG Communications, Inc. and Carla J.
Wolin. [Incorporated by reference to Exhibit 10.53 to
ICG Communications, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.]
10.54: Amendment to Employment Agreement, dated as of August
22, 1999, by and between ICG Communications, Inc. and
Carla J. Wolin. [Incorporated by reference to Exhibit
10.54 to ICG Communications, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31,
1999.]
10.55: Employment Agreement, dated as of January 7, 2000, by
and between ICG Communications, Inc. and James
Washington. [Incorporated by reference to Exhibit
10.55 to ICG Communications, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31,
1999.]
10.56: General Release, Covenant Not to Sue and Agreement,
dated as of January 17, 2000, between ICG
Communications, Inc. and Douglas I. Falk.
[Incorporated by reference to Exhibit 10.56 to ICG
Communications, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.]
10.57: Employment Agreement, dated as of February 1, 2000,
by and between ICG Communications, Inc. and Cindy Z.
Schonhaut. [Incorporated by reference to Exhibit
10.57 to ICG
-71-
Communications, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.]
10.58: Employment Agreement, dated as of March 8, 2000, by
and between ICG Communications, Inc. and Pamela S.
Jacobson. [Incorporated by reference to Exhibit 10.58
to ICG Communications, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999.]
10.59: Employment Agreement dated as of December 22, 1999 by
and between ICG Communications, Inc. and William S.
Beans, Jr. [Incorporated by reference to Exhibit 10.1
to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended March 31,
2000.]
10.60: Employment Agreement dated as of March 23, 2000 by
and between ICG Communications, Inc. and W. Terrell
Wingfield, Jr. [Incorporated by reference to Exhibit
10.2 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended March 31,
2000.]
10.61: Deferred Compensation Agreement dated as of March 31,
2000 by and between ICG Communications, Inc. and J.
Shelby Bryan. [Incorporated by reference to Exhibit
10.3 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended March 31,
2000.]
10.62: Amendment to Employment Agreement dated as of April
13, 2000 by and between ICG Communications, Inc. and
William S. Beans, Jr. [Incorporated by reference to
Exhibit 10.8 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 2000.]
10.63: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Carla J. Wolin. [Incorporated by reference to Exhibit
10.1 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
2000.]
10.64: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
James Washington. [Incorporated by reference to
Exhibit 10.2 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2000.]
10.65: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Cindy Z. Schonhaut. [Incorporated by reference to
Exhibit 10.3 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2000.]
10.66: Amendment to Employment Agreement, dated as of May
10, 2000, by and between ICG Communications, Inc. and
Don Teague. [Incorporated by reference to Exhibit
10.4 to ICG Communications, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
2000.]
-72-
10.67: Amendment to Employment Agreement, dated as of July
12, 2000 by and between ICG Communications, Inc. and
Michael D. Kallet. [Incorporated by reference to
Exhibit 10.1 to ICG Communications, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2000.]
10.68: Employment Agreement, dated as of August 7, 2000 by
and between ICG Communications, Inc. and John Colgan.
[Incorporated by reference to Exhibit 10.2 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000.]
10.69: Employment Agreement, dated as of September 24, 2000
by and between ICG Communications, Inc. and Randall
Curran. [Incorporated by reference to Exhibit 10.3 to
ICG Communications, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30,
2000.]
10.70: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Robert
Athey.
10.71: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Brian
Cato.
10.72: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Darlinda
Coe.
10.73: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and John
Colgan.
10.74: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Richard
E. Fish.
10.75: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Kimberly
Gordon.
10.76: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and David
Hurtado.
10.77: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Michael
D. Kallet.
10.78: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Gayle
Landis.
10.79: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Gary
Lindgren.
10.80: Employment Agreement, dated as of February 26, 2001
by and between ICG Communications, Inc. and Bernard
L. Zuroff.
10.81: Fourth Amendment to Lease, dated as of June 28, 2001
between Trinet Realty Investors V, Inc. as landlord
and ICG Holdings, Inc. as tenant.
10.82: Agreement Regarding Option and Exercise of Option
dated as of June 28, 2001 by Trinet Realty Investors
V, Inc. and ICG Corporate Headquarters, L.L.C.
10.83: Consulting Agreement, dated January 10, 2001 by and
between ICG Communications, Inc. and William S.
Beans, Jr.
(11) Statement re Computation of per Share Earnings
Not Applicable.
-73-
(12) Statement re Computation of Ratios
Not Applicable.
(13) Annual Report to Security Holders
Not Applicable.
(21) Subsidiaries of the Registrant
21.1: Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security
Holders.
Not Applicable.
(23) Consents
23.1: Consent of KPMG LLP.
(24) Power of Attorney.
Not Applicable.
(27) Financial Data Schedule.
27.1: Financial Data Schedule of ICG Communications, Inc.
for the Year Ended December 31, 2000.
(B) Report on Form 8-K
The following reports on Form 8-K were filed by the Registrants during
the quarter ended December 31, 2000:
ICG Communications, Inc. (i) Current Report on Form 8-K dated December
ICG Holdings (Canada) Co. 5,2000, announcing the resignations of Mr.
ICG Holdings, Inc.: William S. Beans, Jr., President and Chief
Operating Officer, Harry R. Herbst,
Executive Vice President and Chief
Financial Officer, Cindy Schonhaut,
Executive Vice President -Government and
External Affairs and Carla J. Wolin,
Executive Vice President - People
Services, effective as of December 4,
2000.
(ii)Current Report on Form 8-K dated December
22, 2000, announcing that effective
December 18, 2000, the NASDAQ National
Stock Market delisted the common stock of
ICG Communications, Inc., a Delaware
corporation (the "Company"), due to the
Company's filing for Chapter 11 bankruptcy
protection.
-74-
(C) Exhibits
The exhibits required by this Item are listed under Item 14(A)(3).
(D) Financial Statement Schedule
The financial statement schedule required by this Item is listed under Item
14(A)(2).
-75-
FINANCIAL STATEMENTS
Page
--------
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets, December 31, 1999 and 2000............................. F-3
Consolidated Statements of Operations, Years Ended December 31, 1998, 1999 and
2000.............................................................................. F-5
Consolidated Statements of Stockholders' Deficit, Years Ended December 31, 1998,
1999 and 2000..................................................................... F-7
Consolidated Statements of Cash Flows, Years Ended December 31, 1998, 1999 and
2000.............................................................................. F-8
Notes to Consolidated Financial Statements.......................................... F-11
F-1
Independent Auditors' Report
The Board of Directors
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries (the Company) (a debtor-in-possession as
of November 14, 2000) as of December 31, 1999 and 2000, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in note 3 to the consolidated financial statements, during 2000,
the Company determined that the carrying value of its long-lived tangible and
intangible assets had been impaired. In accordance with Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 121), the Company recorded an
impairment charge at December 31, 2000 of approximately $1.7 billion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ICG
Communications, Inc. and subsidiaries as of December 31, 1999 and 2000 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has suffered recurring losses,
has a significant net capital deficiency and, on November 14, 2000 the Company
and most of its subsidiaries filed voluntary petitions for protection under
Chapter 11 of the United States Bankruptcy Code. 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. The Company has not filed a plan of reorganization
which, when filed, is subject to acceptance by the Company's impaired creditors
and stockholders and approval by the bankruptcy court which acceptance and
approval is not assured. These factors, among others, raise substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As explained in note 2 to the consolidated financial statements, during the year
ended December 31, 2000, the Company changed its method of accounting for
installation revenue.
/s/ KPMG LLP
April 6, 2001, except for note 3,
as to which the date is
June 28, 2001
F-2
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Balance Sheets
December 31, 1999 and 2000
- ------------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------
Assets 1999 2000
- ------ ------------------- --------------------
(in thousands)
Current assets:
Cash and cash equivalents $ 103,288 196,980
Short-term investments available for sale 22,219 17,733
Receivables:
Trade, net of allowance of $78.7 million and $94.3 million at
December 31, 1999 and 2000, respectively 167,273 132,095
Other 1,458 994
-------------------- --------------------
Total net receivables 168,731 133,089
-------------------- --------------------
Prepaid expenses and deposits 9,189 13,234
-------------------- --------------------
Total current assets 303,427 361,036
-------------------- --------------------
Property and equipment 1,807,577 592,980
Less accumulated depreciation (279,698) (2,480)
-------------------- --------------------
Net property and equipment 1,527,879 590,500
-------------------- --------------------
Restricted cash 12,537 9,278
Investments 28,939 1,650
Other assets:
Goodwill, net of accumulated amortization of $31.7 million at
December 31, 1999 95,187 -
Deferred financing costs, net of accumulated amortization of
$14.4 million and $1.2 million at December 31, 1999 and
2000, respectively 35,884 10,969
Other intangible assets, net 12,490 -
Deposits 4,278 7,019
-------------------- --------------------
147,839 17,988
-------------------- --------------------
Total Assets (note 1) $ 2,020,621 980,452
==================== ====================
(Continued)
F-3
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Balance Sheets, Continued
- --------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
Liabilities and Stockholders' Deficit 1999 2000
- ------------------------------------- ---------------- ----------------
(in thousands)
Current liabilities not subject to compromise:
Accounts payable $ 112,291 8,774
Payable pursuant to IRU agreement 135,322 -
Accrued liabilities 85,709 57,888
Deferred revenue 25,175 14,840
Deferred gain on sale 5,475 -
Current portion of capital lease obligations 8,090 -
Current portion of long-term debt 796 796
Current liabilities of discontinued operations 529 -
---------------- --------------
Total current liabilities not subject to compromise 373,387 82,298
---------------- --------------
Liabilities subject to compromise - 2,784,627
Long-term liabilities not subject to compromise:
Capital lease obligations, less current portion 63,348 -
Long-term debt, net of discount, less current portion 1,905,901 117,784
Other long-term liabilities 2,526 1,090
---------------- --------------
Total liabilities 2,345,162 2,985,799
---------------- --------------
Redeemable preferred stock of subsidiary ($397.9 million and $449.1 million
liquidation value at December 31, 1999 and 2000, respectively) 390,895 449,056
Mandatorily redeemable preferred securities of ICG Funding ($133.4 million
and $132.3 million liquidation value at December 31, 1999 and 2000,
respectively) 128,428 132,251
8% Series A Convertible Preferred Stock ($785.4 million liquidation value at
December 31, 2000) - 785,353
Stockholders' deficit:
Common stock, $.01 par value, 100,000,000 shares authorized; 47,761,337
and 52,045,443 shares issued and outstanding at December 31, 1999 and
2000, respectively 478 520
Additional paid-in capital 599,282 882,142
Accumulated deficit (1,443,624) (4,254,669)
---------------- --------------
Total stockholders' deficit (843,864) (3,372,007)
---------------- --------------
Commitments and contingencies
Total Liabilities and Stockholders' Deficit (notes 1 and 14) $ 2,020,621 980,452
================ ============
See accompanying notes to consolidated financial statements.
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Operations
Years Ended December 31, 1998, 1999 and 2000
- --------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------
1998 1999 2000
------------------ ------------------ -------------------
(in thousands, except per share data)
Revenue $ 303,317 479,226 598,283
------------------ ------------------- -------------------
Operating costs and expenses:
Operating costs 187,260 238,927 440,090
Selling, general and administrative expenses 159,939 239,756 283,965
Depreciation and amortization 91,927 174,239 318,771
Provision for impairment of long-lived assets - 31,815 1,701,466
Other, net 4,877 387 4,108
------------------ ------------------- -------------------
Total operating costs and expenses 444,003 685,124 2,748,400
------------------ ------------------- -------------------
Operating loss (140,686) (205,898) (2,150,117)
Other (expense) income:
Interest expense (contractual interest of $30.3 million not
recorded during the year ended December 31, 2000) (170,015) (212,420) (233,643)
Interest income 28,401 16,300 23,782
Other expense, net, including realized gains and losses on
marketable trading securities (1,118) (2,522) (15,166)
------------------ ------------------- -------------------
(142,732) (198,642) (225,027)
------------------ ------------------- -------------------
Loss from continuing operations before reorganization expense,
income taxes, accretion and preferred dividends, extraordinary
gain, and cumulative effect of change in accounting principle (283,418) (404,540) (2,375,144)
Reorganization expenses - - (55,309)
Income tax expense (90) (25) -
Accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses (55,183) (61,897) (60,043)
------------------ ------------------- -------------------
Loss from continuing operations before extraordinary gain and
cumulative effect of change in accounting principle $ (338,691) (466,462) (2,490,496)
------------------ ------------------- -------------------
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Operations, Continued
- --------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------
1998 1999 2000
------------------ --------------- ---------------
(in thousands, except per share data)
Discounted operations:
Gain (loss) from discontinued operations $ (77,577) (1,036) 770
Gain (loss) on disposal of discontinued operations, net of income
taxes of $4.7 million in 1999 (1,777) 37,825 3,572
------------------- ---------------- ----------------
(79,354) 36,789 4,342
------------------- ---------------- ----------------
Net loss before extraordinary gain and cumulative effect of
change in accounting principle (418,045) (429,673) (2,486,154)
------------------ ---------------- ----------------
Extraordinary gain on sales of operations of NETCOM, net of income taxes
of $2.0 million - 195,511 -
Cumulative effect of change in accounting principle for revenue from
installation services - - (7,363)
------------------- ---------------- ----------------
Net loss (418,045) (234,162) (2,493,517)
Accretion of 8% Series A Convertible Preferred Stock to liquidation -
value and related dividends - (158,249)
Charge for beneficial conversion feature of 8% Series A Convertible
Preferred Stock - - (159,279)
------------------- ---------------- ----------------
Net loss attributable to common stockholders (418,045) (234,162) (2,811,045)
=================== ================ ================
Other comprehensive loss:
Foreign currency translation adjustment (263) - -
------------------- ---------------- ----------------
Other comprehensive loss (263) - -
------------------- ---------------- ----------------
Comprehensive loss $ (418,308) (234,162) (2,493,517)
=================== ================ ================
Net loss per share - basic and diluted:
Loss from continuing operations $ (7.49) (9.90) (49.63)
Income (loss) from discontinued operations (1.76) 0.78 .09
Extraordinary gain on sales of operations of NETCOM - 4.15 -
Accretion, dividends and beneficial conversion of 8% Series A
Convertible Preferred Stock - - (6.33)
Cumulative effect of change in accounting principle - - (.15)
------------------- ---------------- ----------------
Net loss per share - basic and diluted $ (9.25) (4.97) (56.02)
=================== ================ ================
Weighted average number of shares outstanding - basic and diluted 45,194 47,116 50,184
=================== ================ ================
See accompanying notes to consolidated financial statements.
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 1998, 1999 and 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Additional
Common stock paid-in Accumulated
-------------------------
Shares Amount capital deficit
------------ ----------- ------------ ------------
(in thousands)
BALANCES AT JANUARY 1, 1998 43,974 $ 749 533,541 (791,417)
Shares issued for cash by subsidiary, net of selling costs 127 1 3,384 -
Shares issued for cash in connection with the exercise of options and warrants 1,519 15 19,268 -
Shares issued in connection with business combinations 502 5 15,527 -
Shares issued for cash in connection with the employee stock purchase plan 111 1 2,249 -
Shares issued as contribution to 401(k) plan 127 2 3,662 -
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (309) 309 -
Cumulative foreign currency translation adjustment - - - -
Net loss - - - (418,045)
------------ ----------- ------------ -----------
BALANCES AT DECEMBER 31, 1998 46,360 464 577,940 (1,209,462)
Shares issued for cash in connection with the exercise of options and warrants 935 9 12,524 -
Shares issued for cash in connection with the employee stock purchase plan 206 2 3,359 -
Shares issued as contribution to 401(k) plan 260 3 5,457 -
Shares issued upon conversion of long-term debt - - 2 -
Reversal of cumulative foreign currency translation adjustment - - - -
Net loss - - - (234,162)
------------ ----------- ------------ -----------
BALANCES AT DECEMBER 31, 1999 47,761 478 599,282 (1,443,624)
Shares issued for cash in connection with the exercise of options and warrants 936 9 14,366 -
Shares issued for cash in connection with the employee stock purchase plan 174 1 2,728 -
Shares issued as contribution to 401(k) plan 178 2 4,296 -
Shares issued in exchange for long-term investment 2,996 30 21,595 -
Warrants issued in connection with 8% Series A Convertible Preferred Stock - - 80,596 -
Value ascribed to beneficial conversion feature of 8% Series A Convertible
Preferred Stock - - 159,279 (159,279)
Accretion and dividends of 8% Series A Convertible Preferred Stock - - - (158,249)
Net loss - - - (2,493,517)
------------ ----------- ------------ -----------
BALANCES AT DECEMBER 31, 2000 52,045 $ 520 882,142 (4,254,669)
============ =========== ============ ===========
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
comprehensive stockholders'
income (loss) deficit
----------------- ---------------
(in thousands)
BALANCES AT JANUARY 1, 1998 144 (256,983)
Shares issued for cash by subsidiary, net of selling costs - 3,385
Shares issued for cash in connection with the exercise of options and warrants - 19,283
Shares issued in connection with business combinations - 15,532
Shares issued for cash in connection with the employee stock purchase plan - 2,250
Shares issued as contribution to 401(k) plan - 3,664
Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - -
Cumulative foreign currency translation adjustment (263) (263)
Net loss - (418,045)
-------------- -----------------
BALANCES AT DECEMBER 31, 1998 (119) (631,177)
Shares issued for cash in connection with the exercise of options and warrants - 12,533
Shares issued for cash in connection with the employee stock purchase plan - 3,361
Shares issued as contribution to 401(k) plan - 5,460
Shares issued upon conversion of long-term debt - 2
Reversal of cumulative foreign currency translation adjustment 119 119
Net loss - (234,162)
-------------- -----------------
BALANCES AT DECEMBER 31, 1999 - (843,864)
Shares issued for cash in connection with the exercise of options and warrants - 14,375
Shares issued for cash in connection with the employee stock purchase plan - 2,729
Shares issued as contribution to 401(k) plan - 4,298
Shares issued in exchange for long-term investment - 21,625
Warrants issued in connection with 8% Series A Convertible Preferred Stock - 80,596
Value ascribed to beneficial conversion feature of 8% Series A Convertible
Preferred Stock - -
Accretion and dividends of 8% Series A Convertible Preferred Stock - (158,249)
Net loss - (2,493,517)
-------------- -----------------
BALANCES AT DECEMBER 31, 2000 - (3,372,007)
============== =================
See accompanying notes to consolidated financial statements.
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1999 and 2000
- --------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------------------
1998 1999 2000
----------------- ------------------ -------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (418,045) (234,162) (2,493,517)
Net loss (income) from discontinued operations 79,354 (36,789) (4,342)
Extraordinary gain on sales of discontinued operations - (195,511) -
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Cumulative effect of change in accounting principle - - 7,363
Recognition of deferred gain - (29,250) (6,239)
Accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses 55,183 61,897 60,043
Depreciation and amortization 91,927 174,239 318,771
Provision for impairment of long-lived assets - 31,815 1,701,466
Loss on marketable trading securities - - 21,991
Deferred compensation - 1,293 1,295
Net loss (gain) on disposal of long-lived assets 4,877 (906) 2,415
Provision for uncollectible accounts 11,238 60,019 84,457
Interest expense deferred and included in long-term debt, net
of amounts capitalized on assets under construction 152,601 186,080 168,779
Interest expense deferred and included in capital lease
obligations 5,637 5,294 4,046
Amortization of deferred advertising costs included in
selling, general and administrative expenses 1,795 - -
Amortization of deferred financing costs included in interest
expense 4,478 4,860 5,276
Contribution to 401(k) plan through issuance of common stock 3,664 5,460 4,298
Change in operating assets and liabilities, excluding the effects of
business combinations and dispositions:
Receivables (88,962) (120,857) (49,619)
Prepaid expenses, deposits and inventory (1,566) 3,474 (2,392)
Deferred advertising costs (1,795) - -
Accounts payable and accrued and other liabilities (2,288) 18,847 95,072
Deferred revenue 1,842 20,721 169,237
----------------- ------------------ -------------------
Net cash provided (used) by operating activities
before reorganization items $ (100,060) (43,476) 88,400
----------------- ------------------ -------------------
(Continued)
F-8
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------
1998 1999 2000
---------------- ---------------- -----------------
(in thousands)
Reorganization items:
Changes in restructuring accruals - - 8,094
Changes in liabilities subject to compromise - - (10,504)
Write-off of deferred financing and offering costs - - 36,493
---------------- ---------------- -----------------
Net cash provided (used) by operating activities (100,060) (43,476) 122,483
---------------- ---------------- -----------------
Cash flows from investing activities:
Proceeds from sales of discontinued operations, net of selling costs
and cash included in sales - 374,897 -
Payments for business acquisitions, net of cash acquired (67,841) - -
Acquisition of property, equipment and other assets (360,205) (595,346) (742,766)
Change in accounts payable and accrued liabilities for purchase of
long-term assets - 64,559 146,325
Proceeds from disposition of property, equipment and other assets 168 4,300 4,157
Proceeds from sale of corporate headquarters, net of selling and
other costs 30,283 - -
Proceeds from sale of short-term investments available for sale 60,281 29,781 22,172
Proceeds from sale of marketable securities, net of realized gain - 30,000 10,634
Purchase of investments - (28,939) (1,400)
Decrease in restricted cash 7,737 4,375 3,259
Increase in long-term notes receivable from affiliate and others (4,880) - -
Purchase of minority interest in subsidiaries (9,104) (6,039) -
---------------- ---------------- -----------------
Net cash used by investing activities (343,561) (122,412) (557,619)
---------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 24,918 15,894 17,104
Proceeds of 8% Series A Convertible Preferred Stock, net of issuance
costs - - 720,330
Proceeds from issuance of long-term debt 550,574 80,000 95,000
Deferred long-term debt issuance costs (17,591) (4,785) (7,150)
Principal payments on capital lease obligations (16,509) (14,662) (20,525)
Payments on IRU agreement - - (179,497)
Principal payments on long-term debt (6,864) (502) (90,122)
Payments of preferred dividends (8,927) (8,927) (6,696)
---------------- ---------------- -----------------
Net cash provided by financing activities 525,601 67,018 528,444
---------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 81,980 (98,870) 93,308
Net cash provided (used) by discontinued operations 7,753 (8,149) 384
Cash and cash equivalents, beginning of year 120,574 210,307 103,288
---------------- ---------------- -----------------
Cash and cash equivalents, end of year 210,307 103,288 196,980
================ ================ =================
(Continued)
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession as of November 14, 2000)
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------
1998 1999 2000
---------------- ---------------- -----------------
(in thousands)
Supplemental disclosure of cash flows information of continuing
operations:
Cash paid for interest $ 7,299 15,216 32,626
================ ================ =================
Cash paid for income taxes $ 90 2,848 378
================ ================ =================
Supplemental disclosure of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations $ 15,532 - -
================ ================ =================
Common stock issued in connection with long-term
investment $ - - 21,625
================ ================ =================
Acquisition of corporate headquarters assets through the
issuance of long-term debt and conversion of security
deposit $ - 33,077 -
================ ================ =================
Assets acquired pursuant to IRU agreement $ - 135,322 96,903
Assets acquired under capital leases 775 8,393 133,915
---------------- ---------------- -----------------
Total $ 775 143,715 230,818
================ ================ =================
F-10
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
(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:
. Dial-Up Internet access services including primary rate interface
and remote access services/ managed modem services on a wholesale
basis to national and regional Internet service providers (ISPs).
. 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.
. 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 and ICG 161, LP,
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 petitions were filed in order to preserve cash and to give
the Debtors the opportunity to restructure their obligations. ICG 161,
LP is a subsidiary of ICG Services whose sole purpose is the ownership
of the Company's headquarters in Englewood, Colorado.
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(1) Organization and Nature of Business, continued
(b) Bankruptcy Proceedings, continued
The consolidated financial statements contained herein have been
prepared in accordance with generally accepted accounting principles
applicable to a going concern, and do not purport to reflect or to
provide for all of the possible consequences of the ongoing Chapter 11
reorganization cases. Specifically, the consolidated financial
statements do not present the amount which will ultimately be paid to
settle liabilities and contingencies which may be required in the
Chapter 11 reorganization cases or the effect of any changes which may
be made in connection with the Debtors' capitalization or operations
resulting from a plan of reorganization. The Debtors have not filed a
plan of reorganization as of this date, but expect to file one in the
near term. The plan, when filed, is subject to acceptance by the
Company's compromised creditors and stockholders and approval by the
Bankruptcy Court.
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.
These Chapter 11 filings, together with the limitation on the
Company's financing alternatives, necessitated a comprehensive
examination of the Company's business operations. Because of the
numerous development projects that the Company had underway and the
limited opportunity that existed for completion of these projects, it
was decided by management that, without additional capital, virtually
none of the existing development projects could be successfully
completed.
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, 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. 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
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(1) Organization and Nature of Business, continued
(b) Bankruptcy Proceedings, continued
effect of any changes, which may be made in connection with the
Company's capitalization or operations resulting from a plan of
reorganization.
(c) Accounting under Bankruptcy
The December 31, 2000 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 prepetition
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 (in thousands):
Unsecured creditors $ 583,749
Priority creditors 33,385
Other secured creditors 738
Capital lease obligations 197,974
Unsecured long-term debt 1,968,781
------------
$ 2,784,627
============
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 Facility and the mortgage payable with
balances outstanding as of December 31, 2000 of approximately $84.6
million and $0.9 million respectively,
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(1) Organization and Nature of Business, continued
(c) Accounting under Bankruptcy, continued
continues to accrue interest, although payment of such interest, or
any principal payments, is agreed upon by the Company and the specific
lenders. All arrangements are subject to Bankruptcy Court approval.
The Company's creditors had until April 30, 2001 to file any
adjustments to claim amounts. The Company must reconcile any
differences between the claim amount and the amount per the Company's
records.
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 prepetition
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. The Bankruptcy Code accords
priority, subject to certain limits and conditions, to claims and
expenses in the following order: administrative expenses of the
bankruptcy, wages and salaries, contributions to employee benefit
plans, certain customer deposits, and certain tax claims.
(d) Discontinued Operations
During 1999, the Company sold the retail customer ISP business of
NETCOM On-Line Communication Services, Inc. (NETCOM), but retained the
national Tier 1 data network assets. Additionally, during 1999, the
Company sold ICG Fiber Optic Technologies, Inc. and Fiber Optic
Technologies of the Northwest, Inc., (collectively Network Services)
and ICG Satellite Services, Inc. and Maritime Telecommunications
Network, Inc. (collectively Satellite Services). Network Services
provided information technology services and selected networking
products. Satellite Services provided satellite voice, data and video
services to major cruise ship lines, the U.S. Navy, the offshore oil
and gas industry and integrated communications providers. (See note 5,
"Sale of Assets and Discontinued Operations".)
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and reflect
the operations of
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(a) Basis of Presentation, continued
NETCOM, Network Services, Satellite Services and Zycom Corporation
(Zycom) as discontinued for all periods presented.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Inventory
Inventory, consisting of equipment to be utilized in the installation
of telecommunications systems, services and networks for customers, is
recorded at the lower of cost or market in property and equipment in
the accompanying balance sheet.
(d) Investments
The Company invests primarily in high-grade, short-term investments
that consist of money market instruments, commercial paper,
certificates of deposit, government obligations and corporate bonds,
all of which are considered to be available-for-sale.
Investments in partnership interests and in common or preferred stock
for which there is no public trading market and which represent less
than a 20% equity interest in the investee company are accounted for
using the cost method, unless the Company exercises significant
influence and/or control over the operations of the investee company,
in which case the equity method of accounting is used. Realized gains
and losses and declines in value judged to be other than temporary are
included in the statement of operations.
(e) Property and Equipment
See note 3 for a discussion of the impairment of long-lived assets.
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(e) Property and Equipment, continued
Property and equipment, prior to reflection of the impairment
in note 3, have been stated at cost. Subsequent to the
impairment, the impaired net book value of the asset held as
of December 31, 2000 becomes the new cost basis of the asset
and is depreciated over the remaining estimated useful life of
the asset. Assets acquired subsequent to December 31, 2000
will be stated at cost to acquire and depreciated over their
estimated useful life.
Costs of construction have been capitalized, including
interest costs related to construction, capitalized labor and
other costs associated with network development, service
installation and internal-use software development.
The Company capitalizes costs of direct labor and other
employee benefits associated with installing and provisioning
local access lines for new customers and providing new
services to existing customers, since these costs are directly
associated with multi-period, contractual, revenue-producing
activities. Direct labor costs are capitalized only when
directly related to the provisioning of customer services with
multi-period contracts. Capitalization begins upon the
acceptance of the customer order and continues until the
installation is complete and the service is operational.
Capitalized service installation costs are depreciated on a
straight-line basis over two years, the estimated average
customer contract term.
The Company capitalizes costs of direct labor and other
employee benefits associated with the development of
internal-use computer software in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Internal-use software
costs are depreciated over the estimated useful life of the
software, typically two to five years, beginning in the period
when the software is substantially complete and ready for use.
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(e) Property and Equipment, continued
Depreciation begins in the period the network is substantially
complete and available for use and is recorded on a
straight-line basis over the estimated useful life of the
equipment or network, ranging from eight to 20 years.
Estimated useful lives of major categories of property and
equipment are as follows:
Furniture, fixtures and office equipment 3 to 7 years
Internal-use software costs 2 to 5 years
Machinery and equipment 3 to 8 years
Fiber optic equipment 8 years
Switch equipment 10 years
Fiber optic networks 20 years
Buildings and improvements 31.5 years
Site improvements 7 years
Service installation costs 2 years
Equipment held under capital leases is stated at the lower of
the fair value of the asset or the net present value of the
minimum lease payments at the inception of the lease. For
equipment held under capital leases, depreciation is provided
using the straight-line method over the estimated useful lives
of the assets owned, or the related lease term, whichever is
shorter.
(f) Other Assets
Goodwill resulting from the application of the purchase method
of accounting for business combinations is amortized over a
maximum of 20 years using the straight-line method. See note 3
for a discussion of the impairment of long-lived assets.
Amounts related to the acquisition of transmission and other
licenses are recorded at cost and amortized over 20 years
using the straight-line method. Rights of way, minutes of use,
and non-compete agreements are recorded at cost, and amortized
using the straight-line method over the terms of the
agreements, ranging from two to 12 years. See note 3 for a
discussion of the impairment of long-lived assets.
Amortization of deferred financing costs is provided over the
life of the related financing agreement, the maximum term of
which is ten years, and is included in interest expense. The
Company has written-off deferred financing costs related to
debt subject to compromise as of December 31, 2000 (see notes
4 and 11).
(g) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets,
including goodwill, pursuant to Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(g) Impairment of Long-Lived Assets, continued
be Disposed of (SFAS 121), which requires that long-lived
assets and certain identifiable intangibles held and used by
an entity be reviewed for impairment whenever events or
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 as appropriate. The Company
recorded an impairment of its' long-lived assets during 2000.
See note 3 for a discussion of the impairment.
(h) Revenue Recognition
The Company recognizes revenue from services provided to its
business end-user and ISP customers as such services are
provided and charges direct selling expenses to operations as
incurred. Maintenance revenue is recognized as services are
provided. Uncollectible receivables are accounted for using
the allowance method.
Generally, the Company recognizes revenue earned under
indefeasible rights-of-use (IRU), of constructed fiber, in
exchange for cash, ratably over the term of the agreement. In
the event that the IRU meets the definition of a sales-type
lease pursuant to Statement of Financial Accounting Standards
No. 13, Accounting for Leases (SFAS No. 13), and the Company
transfers ownership of the underlying assets to the customer,
the Company will apply sales-type lease accounting and
recognize revenue and related costs at the inception of the
agreement. Prior to June 30, 1999, the Company applied
sales-type lease accounting to IRUs that met the criteria
included in SFAS No. 13, whether or not the agreement provided
for the transfer of ownership of the underlying assets. Under
either application, revenue recognition begins in the period
that facilities are available for use by the customer. Revenue
earned on the portion of IRUs attributable to the provision of
maintenance services is recognized ratably over the term of
the agreement.
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(h) Revenue Recognition, continued
Deferred revenue includes amounts billed, in compliance with
customer contracts, before service is provided.
On October 1, 2000, the Company adopted Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. Effective
January 1, 2000, installation revenue is recognized ratably
over a two-year period. Prior to the adoption of SAB 101, the
Company recognized installation revenue as services were
performed. As required by generally accepted accounting
principles, the Company has reflected the effects of the
change in accounting principle as if such change had been
adopted as of January 1, 2000, and has included in the results
of operations for the year ended December 31, 2000, a charge
of approximately $7.4 million relating to the cumulative
effect of this change in accounting principle. In addition,
the change in accounting principle resulted in an increase in
revenue for the year ended December 31, 2000 of approximately
$0.9 million.
(i) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). Under the asset and
liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(j) Net Loss Per Share
Net loss per share is calculated by dividing the net loss by
the weighted average number of shares outstanding. Weighted
average number of shares outstanding represents combined ICG
Common Stock and Holdings-Canada Class A common shares
outstanding for the year ended December 31, 1998, and ICG
Common Stock only for the years ended December 31, 1999 and
2000.
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies, continued
(j) Net Loss Per Share, continued
Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per
Share (SFAS 128). Under SFAS 128, basic loss per share is
computed on the basis of weighted average common shares
outstanding. Diluted loss per share considers potential common
stock instruments in the calculation of weighted average
common shares outstanding. Potential common stock instruments,
which include options, warrants and convertible subordinated
notes and preferred securities, are not included in the
Company's net loss per share calculation, as their effect is
anti-dilutive.
(k) Stock-Based Compensation
The Company accounts for its stock-based employee and
non-employee director compensation plans using the intrinsic
value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employee, (APB
25) and related Interpretations. The Company has provided pro
forma disclosures of net loss and net loss per share as if the
fair value based method of accounting for these plans, as
prescribed by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), had
been applied. Pro forma disclosures include the effects of
employee and non-employee director stock options granted
during the periods presented.
(l) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from
those estimates.
(m) Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period's presentation.
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Provision for Impairment of Long-Lived Tangible and Intangible Assets
As a result of adverse changes in the capital markets, specifically as
related to the availability of capital to finance competitive local
exchange carrier's growth, downward trends in certain segments of the
economy, particularly with respect to expected growth of demand in
technology and telecommunications segments, the Company's Chapter 11
filing and the subsequent deterioration in the value of the Company's
operating assets, the Company undertook an extensive analysis of its
business plan during the fourth quarter of 2000 and the first quarter
of 2001. As a result, the Company prepared a detailed business plan
that gave appropriate consideration to the environmental factors noted
above.
SFAS 121 requires that assets to be held and used are measured for
impairment on the basis of undiscounted future cash flows before
interest determined at the lowest level for which there are
identifiable cash flows. Due to the Company's inability to allocate
significant amounts of central support costs to the various markets,
the impairment analysis was performed on a Company-wide basis. This
analysis indicated that there was a shortfall of cash flows compared to
the carrying value of the Company's long-lived tangible and intangible
assets and that an impairment had occurred. For purposes of calculating
the amount of the impairment the Company has segregated its long-lived
assets into three categories: intangible assets, consisting primarily
of goodwill, tangible assets to be disposed of, and tangible assets to
be utilized in ongoing operations.
As a result of the analysis of shortfalls of cash flows to carrying
values of assets noted above, all intangibles, consisting primarily of
goodwill, have been written off as of December 31, 2000, resulting in
an impairment charge of approximately $79.8 million.
Additionally, the Company has determined that certain assets that will
not be utilized under the business plan will be held for resale. The
fair value of assets held for resale was based on current appraisals or
purchase offers, less cost to sell. Assets held for resale are
comprised primarily of 1) assets which were under construction in late
2000 and for which the incremental capital required to place the asset
in service for revenue generation was not available, and 2) assets in
service which were not required to meet expected future customer demand
as defined in the business plan. The net book value of assets to be
disposed of prior to the impairment was $164.5 million. An impairment
of approximately $124.0 million was reflected in the financial
statements as of December 31, 2000 to reduce the assets to their fair
value of approximately $40.5 million. These assets have not been
segregated as current assets in the accompanying consolidated financial
statements as of December 31, 2000 and are included in property and
equipment because the sales are subject to final Bankruptcy Court
approval.
The fair value of tangible assets to be utilized in ongoing operations
was determined to be $550 million. This value was derived primarily
from the discounted cash flows from
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(3) Provision for Impairment of Long-Lived Tangible and Intangible Assets,
continued
future operations; however the Company also took into consideration
several other valuation techniques. The following describes the
different methods used and the resulting ranges of value under those
techniques.
. Discounted cash flows - The Company, as noted above, developed a
new business plan in late 2000 and early 2001. The Company hired
external third-party consultants to assist during the bankruptcy
process and help in the formulation of a business plan, including
the calculation of a range of reorganization values for the
Company to utilize in the development of a proposed plan of
reorganization. This business plan is expected to be the basis
for the plan of reorganization ultimately submitted to the
Bankruptcy Court. However, the reorganization plan, when filed,
is subject to acceptance by the Company's compromised creditors
and stockholders and approval by the Bankruptcy Court. At the
present time, the Company is unable to determine what the final
reorganization value will be and therefore the amounts used to
calculate the impairment reflected in the accompanying
consolidated financial statements as of December 31, 2000 are
based on estimates which could differ significantly from the
Company's reorganization value determined upon emergence from
bankruptcy, currently estimated to be late 2001 or early 2002.
The Company's business plan process noted above was a
comprehensive, zero-based assessment of the markets in which the
Company believes it can provide profitable service offerings in
the future. The Company has identified new products that leverage
the Company's expertise and existing network assets. These new
products are expected to generate a significant portion of the
Company's future revenues. The business plan also includes
substantial capital expenditures to complete the network and
generate the revenues projected within the business plan. In
order to fund the business plan through 2005, the plan
contemplates an infusion of equity and debt of approximately $200
million which the Company estimates will be available on
acceptable terms, although no commitments for such funds have
been obtained and such availability cannot be assured.
Additionally, the plan contemplates significant future
restructuring of the Company's basic operating costs including,
but not limited to, additional significant reductions in selling,
general and administrative expenses and line costs. This
valuation technique results in a range of fair values of the
Company's long-lived assets from $400 million to $900 million.
. Asset appraisal - In connection with securing the Company's
Credit Agreement (see note 11), appraisals were performed
with an effective date of December 22, 2000. These appraisals
indicated that the value of the Company's long-lived assets
ranged from $640 to $740 million. These appraisals were prepared
on the basis of an orderly liquidation, which is not part of the
Company's plan.
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) Provision for Impairment of Long-Lived Tangible and Intangible Assets,
continued
. Current market capitalization - This analysis was based on the
public market capitalization as determined by reference to recent
trading prices for the Company's debt and equity securities. For
this calculation, the preferred securities were assumed to have no
value and the senior discount notes were valued at 8-10% of the
face value based on recent trading prices. Fully secured debt
balances (such as capital leases and the Senior Facility) were
valued at 100% of their book value. This valuation technique
resulted in a range of fair values of the Company's long-lived
assets from $400 million to $600 million.
Management, in consultation with its financial advisors, determined
that the appropriate valuation technique was based on discounted cash
flows. Under this method, the Company believes the appropriate fair
value of its long-lived tangibles assets at December 31, 2000 to be
$550 million. As a result, the Company has recorded an impairment
charge as of December 31, 2000 of approximately $1.5 billion related to
tangible assets to be used in the ongoing operations of the Company. No
adjustment was made to recorded depreciation during the year ended
December 31, 2000. The net book value of the impaired assets becomes
the new cost basis of the assets as of December 31, 2000. This amount
is then depreciated over the remaining estimated useful life of the
assets.
The Company, during the year ended December 31, 1999, also recorded a
provision for impairment of long-lived assets of $31.8 million, which
relates to the impairment of software and other capitalized costs
associated with Telecom Services' billing and provisioning system
projects under development. The provision for impairment of long-lived
assets was based on management's decision to abandon the billing and
provisioning systems under development and to select new vendors for
each of these systems, which vendors were expected to provide the
Company with billing and provisioning solutions with improved
functionality and earlier delivery dates at significantly lower costs.
The Company's billing and provisioning systems under development were
either not operational or were serving minimal customers at the time
management determined the carrying value of the underlying assets was
not recoverable.
(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 the Company and the majority
of its subsidiaries.
Under bankruptcy accounting, the Company is required to segregate and
classify certain costs as reorganization costs.
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(4) Reorganization Expenses, continued
The following reorganization costs were incurred during the year ended
December 31, 2000 (in thousands):
Write-off of deferred financing and offering costs
(notes 11 and 12) $ 36,493
Severance costs 4,435
Retention bonus 5,212
Professional fees 6,260
Cancellation charges 2,337
Debtor-in-Possession commitment fees 400
Other 172
------------------
Total $ 55,309
==================
(5) Sale of Assets and Discontinued Operations
Income (loss) from discontinued operations consists of the following:
Years ended December 31,
------------------------------------------------------------
1998 1999 2000
------------------- ------------------ -----------------
(in thousands)
NETCOM (a) $ (61,090) - -
Network Services (b) (8,583) (1,349) -
Satellite Services (c) (3,056) 313 770
Zycom (d) (4,848) - -
------------------ ------------------ -----------------
Income (loss) from discontinued operations
$ (77,577) (1,036) 770
================== ================== =================
(a) NETCOM
On February 17, 1999, in accordance with a plan of disposition
adopted on November 3, 1998, the Company sold certain of the
operating assets and liabilities of NETCOM to MindSpring
Enterprises, Inc. (MindSpring), predecessor to EarthLink, Inc.
for total proceeds of $245.0 million. Assets and liabilities
sold to MindSpring included those directly related to the
domestic operations of NETCOM's Internet dial-up, dedicated
access and Web site hosting services.
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(5) Sale of Assets and Discontinued Operations, continued
(a) NETCOM, continued
Additionally, on March 16, 1999, the Company sold all of the
capital stock of NETCOM's international operations (including
NETCOM Canada and NETCOM U.K.) for total proceeds of
approximately $41.1 million.
In conjunction with the sale to MindSpring, the Company
entered into an agreement to lease to MindSpring for a
one-year period the capacity of certain network operating
assets formerly owned by NETCOM and retained by the Company
(the MindSpring Capacity Agreement). Under the agreement,
MindSpring utilized the Company's network capacity to provide
Internet access to the dial-up services customers formerly
owned by NETCOM. In addition, the Company received for a
one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.
As the Company expected to generate operating losses under the
MindSpring Capacity Agreement, and the terms of the sale
agreement were dependent upon and negotiated in conjunction
with the terms of the sale of the operating assets of NETCOM,
the Company deferred approximately $35.5 million of the
proceeds from the sale agreement to be applied on a periodic
basis to losses incurred under the MindSpring Capacity
Agreement. Accordingly, the Company did not recognize any
revenue, operating costs or selling, general and
administrative expenses from services provided to MindSpring
for the twelve-month term of the agreement which expired
February 17, 2000. Any incremental revenue or costs generated
by other customers, or by other services provided to
MindSpring was recognized in the Company's consolidated
statement of operations as incurred.
As discussed above, the terms of the MindSpring Capacity
Agreement were negotiated in conjunction with and were
dependent upon the terms of the sale of the operating assets
of NETCOM to MindSpring. As such, these transactions are
collectively referred to as "Sale of Operating Assets of
NETCOM".
(b) Network Services
On October 22, 1999, in accordance with a plan of disposition
adopted on July 15, 1999, the Company completed the sale of
all of the capital stock of Network Services for total
proceeds of $23.9 million in cash.
F-25
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(5) Sale of Assets and Discontinued Operations, continued
(c) Satellite Services
On November 30, 1999, in accordance with a plan of disposition
adopted on July 15, 1999, the Company completed the sale of
all of the capital stock of Satellite Services for total
proceeds of $98.1 million in cash.
(d) Zycom
The Company owns a 70% interest in Zycom Corporation
("Zycom"). Zycom's board of directors approved a plan to wind
down and ultimately discontinue Zycom's operations on August
25, 1998.
(6) Purchase Acquisitions
The acquisitions described below have been accounted for using the
purchase method of accounting and, accordingly, the net assets and
results of operations of the acquired businesses are included in the
Company's consolidated financial statements from the respective dates
of acquisition. Revenue, net loss and net loss per share on a pro forma
basis, assuming the acquisitions were completed at the beginning of the
periods presented, are not significantly different from the Company's
historical results for the periods presented herein.
On July 27, 1998, the Company acquired DataChoice Network Services,
L.L.C. (DataChoice) for total consideration of $5.9 million, consisting
of 145,997 shares of ICG Common Stock and approximately $1.1 million in
cash. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $5.8 million was recorded as goodwill
and, until December 31, 2000, was being amortized on a straight-line
basis over five years. See note 3 for a discussion of the impairment of
intangible assets.
The Company completed a series of transactions on July 30, 1998 to
acquire all of the capital stock of NikoNet, Inc., CompuFAX Acquisition
Corp. and Enhanced Messaging Services, Inc. (collectively, NikoNet).
The Company paid approximately $13.8 million in cash, assumed
approximately $0.7 million in liabilities and issued 356,318 shares of
ICG Common Stock with a fair market value of approximately $10.7
million on the date of the acquisition. The excess of the purchase
price over the fair value of the net identifiable assets acquired of
$22.6 million was recorded as goodwill and, until December 31, 2000,
was being amortized on a straight-line basis over five years. See note
3 for a discussion of the impairment of intangible assets.
On August 27, 1998, the Company purchased, for $9.0 million in cash,
the remaining 20% equity interest in ICG Ohio LINX, Inc. (ICG Ohio
LINX) which it did not already
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
________________________________________________________________________________
(6) Purchase Acquisitions, continued
own. The Company's additional was recorded as goodwill and, until
December 31, 2000, was being amortized on a straight-line basis over
five years. See note 3 for a discussion of the impairment of intangible
assets.
(7) Short-term Investments Available-for-Sale
Short-term investments available-for-sale are comprised of the
following:
December 31,
------------------------------------
1999 2000
---------------- ---------------
(in thousands)
Certificates of deposit $ 10,442 -
Commercial paper 11,777 -
U.S. Treasury securities - 17,733
---------------- ---------------
$ 22,219 17,733
================ ===============
At December 31, 1999 and 2000, the estimated fair value of the
Company's certificates of deposit, commercial paper and U.S. Treasury
securities approximated cost. All certificates of deposit, commercial
paper and U.S. Treasury securities included in short-term investments
available-for-sale mature within one year.
(8) Property and Equipment
See note 3 for a discussion regarding the impairment of long-lived
assets. The property and equipment balances shown as of December 31,
2000, reflect the $1.7 billion impairment charge.
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(8) Property and Equipment, continued
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31,
-----------------------------------------
1999 2000
------------------ ------------------
(in thousands)
Land $ 11,503 12,856
Buildings and improvements 38,502 38,162
Furniture, fixtures and office equipment 108,024 17,355
Internal-use software costs 14,797 -
Machinery and equipment 32,884 9,482
Fiber optic equipment 401,676 121,398
Switch equipment 319,398 104,947
Fiber optic networks 428,195 56,242
Site improvements 37,814 824
Service installation costs 52,649 -
Other 2,199 -
Construction in progress 359,936 231,714
------------- -------------
1,807,577 592,980
Less accumulated depreciation (279,698) (2,480)
------------- -------------
$1,527,879 590,500
============= =============
Property and equipment includes approximately $232 million of equipment
that has not been placed in service at December 31, 2000, and
accordingly, is not being depreciated. The majority of this amount is
related to uninstalled transport and switch equipment and new network
construction.
At December 31, 1999, the Company had approximately $205 million of
property and equipment held under capital leases on a net book value
basis. As of December 31, 2000, after the impairment charge, the
Company had approximately $158 million of property and equipment held
under capital leases. Amortization of capital leases is included in
depreciation and amortization in the Company's consolidated statements
of operations for all periods presented.
For the years ended December 31, 1998, 1999 and 2000, the Company
capitalized interest costs on assets under construction of $10.4
million, $9.0 million and $7.0 million respectively. However, in
connection with the asset impairment discussed in note 3, all
capitalized interest amounts have been written-off as of December 31,
2000. The Company recognized interest expense of $170.0 million, $212.4
million and $233.6 million for the years ended December 31, 1998, 1999
and 2000, respectively.
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(8) Property and Equipment, continued
Also included in property and equipment at December 31, 1999 are
remaining unamortized costs associated with the development of
internal-use computer software of $9.0 million. The Company capitalized
$10.0 million, $31.6 million and $52.9 million of such costs during the
years ended December 31, 1998, 1999 and 2000 respectively.
Certain of the assets described above have been pledged as security for
long-term debt, specifically, substantially all of the assets of ICG
Services were pledged as of December 31, 2000. The net book value of
ICG Services assets included in the total above, after allocation of
the impairment described in footnote 3, is approximately $430.3 million
as of December 31, 2000.
(9) Investments
On February 22, 2000, the Company purchased restricted Series D 8%
Convertible Preferred Stock (Cyras Preferred Stock) of Cyras Systems,
Inc. (Cyras), for approximately $1.0 million. The Cyras Preferred Stock
is automatically convertible into shares of common stock of Cyras, upon
the initial public offering of the common stock of Cyras or upon the
election to convert by more than 66% of all of the preferred
stockholders of Cyras.
On July 6, 2000, a subsidiary of the Company acquired 1,000,000 shares
of unregistered common stock of Teligent, Inc., a fixed wireless
broadband communications provider (Teligent), from a subsidiary of
Teligent in exchange for 2,996,076 shares of ICG Common Stock. The
Teligent shares were valued at $21.625 per share. As of December 31,
2000, the decrease in the value of the Teligent shares of $21.6
million, based on the market price at December 31, 2000, was deemed to
be other than temporary and, accordingly, the charge related to the
write-down of such shares is included in the accompanying consolidated
statement of operations.
On March 30, 1999, the Company purchased, for approximately $10.0
million in cash, 454,545 shares of restricted Series D-1 Preferred
Stock of NorthPoint Communications Holdings, Inc. (NorthPoint), a
Delaware corporation and competitive local exchange carrier based in
San Francisco, California which was converted into 555,555 shares of
Class B common stock of NorthPoint on May 5, 1999. The shares were sold
in a series of transactions during the year ended December 31, 2000,
resulting in a net gain of approximately $0.5 million.
On August 11, 1999, the Company purchased 1,250,000 shares of Series C
Preferred Stock of International ThinkLink Corporation (ThinkLink), for
$1.0 million in cash. ThinkLink has ceased operations and, accordingly,
the investment was written off.
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(9) Investments, continued
On November 15, 1999, the Company entered into an agreement to purchase
a limited partnership interest in Centennial Strategic Partners VI,
L.P. (Centennial). The primary purpose of the partnership is to invest
in venture capital investments, principally by investing in equity or
equity-oriented securities of privately held companies in the
electronic communications industry. The Company has capital
contribution commitments to Centennial of $1.0 million to be funded in
installments through January 15, 2002. Through December 31, 2000, the
Company had contributed approximately $0.7 million to the partnership.
The Company has accounted for its investment in Centennial under the
cost method of accounting.
(10) Capital Lease Obligations
As a result of the Company's bankruptcy proceedings, all capital lease
payments are suspended and subject to negotiation on a lease by lease
basis. Certain leases could be amended or rejected. However, the
following table represents contractual payments due each year on or
before December 31 under the original terms of the Company's capital
lease obligations (in thousands):
2001 $ 91,420
2002 65,319
2003 35,832
2004 12,393
2005 12,393
Thereafter 73,811
----------------
Total minimum lease payments 291,168
Less amounts representing interest (93,194)
----------------
Present value of net minimum lease payments 197,974
Less current portion (68,130)
----------------
$ 129,844
================
(11) 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 December 31, 2000, the Company
is in default with respect to substantially all of its prepetition
debt. 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 has written-off
all deferred financing costs related to the 9 7/8%, 10%, 11 5/8%, 12
1/2% and 13 1/2%
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Long-term Debt, continued
Senior discount notes as of December 31, 2000. Such amounts totaled
$26.8 million and are included in reorganization expenses in the
accompanying consolidated statement of operations (see note 4). 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,
---------------------------------
1999 2000
---------------- --------------
(in thousands)
Credit Agreement (a) $ - -
Senior Facility with adjustable rate of interest due on scheduled maturity dates, secured
by assets of ICG Equipment and NetAhead (b) 79,625 84,574
Mortgage loan payable with adjustable rate of interest (15.21% at December 31, 2000) due
in full on January 31, 2013, secured by corporate headquarters (c) 33,077 33,077
Mortgage payable with interest at 8 1/2%, due monthly through 2009, secured by building 999 929
-------------- --------------
Long-term debt not subject to compromise 113,701 118,580
-------------- --------------
9 7/8% Senior discount notes of ICG Services, net of discount (d) 293,925 319,564
10% Senior discount notes of ICG Services, net of discount (d) 361,290 393,311
11 5/8% Senior discount notes of Holdings, net of discount (d) 137,185 151,342
12 1/2% Senior discount notes of Holdings, net of discount (d) 468,344 520,264
13 1/2% Senior discount notes of Holdings, net of discount (d) 532,252 584,300
-------------- --------------
Long-term debt subject to compromise 1,792,996 1,968,781
-------------- --------------
1,906,697 2,087,361
Less current portion (796) (796)
-------------- --------------
$1,905,901 2,086,565
============== ==============
(a) Debtor-in-Possession Financing
On December 4, 2000, the Company finalized its
Debtor-in-Possession Revolving Credit Agreement (the Credit
Agreement) with Chase Manhattan Bank. The Credit Agreement
provides 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
must first be used for repayment in full of the Senior
Facility. Borrowings under the Credit Agreement bear interest
at 3% plus the greater of (i) the prime rate, (ii) the Base CD
rate (as defined) plus
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Long-term Debt, continued
(a) Debtor-in-Possession Financing, continued
1%, or (iii) the Federal Funds effective rate (as defined)
plus 1/2%. The Company also has the option to borrow at the
adjusted LIBOR rate (as defined) plus 4%. The Company must pay
monthly commitment fees at an annual rate of 1 1/2% on the
average daily unused commitment, which are expensed monthly.
This agreement contains certain covenants including capital
expenditure limitations, EBITDA loss limitations, indebtedness
and dividend restrictions. The Credit Agreement requires
repayment in full on May 14, 2002. As of December 31, 2000, no
amounts had been drawn under the Credit Agreement.
(b) Senior Facility
On August 12, 1999 and amended on December 29, 1999, ICG
Equipment and NetAhead entered into a $200.0 million senior
secured financing facility (the Senior Facility) consisting of
a $75.0 million term loan, a $100.0 million term loan and a
$25.0 million revolving line of credit. The Senior Facility is
guaranteed by ICG Services and ICG Mountain View, Inc. and is
secured by the assets of ICG Equipment and NetAhead.
In October, 2000, the Company's lenders granted a sixty-day
waiver, and as part of this agreement, the Company paid 50%,
or $89.7 million, of the outstanding balance of the Senior
Facility as of September 30, 2000.
The United States Bankruptcy Court, on December 19, 2000,
issued an order directing ICG Services and certain of its
subsidiaries to provide adequate protection to the lenders of
the Senior Facility for the unpaid balance in the form of a
valid, perfected, first priority post petition security
interest. The outstanding balance is therefore not subject to
compromise.
At December 31, 2000, the $36.0 million outstanding under the
$75.0 million term loan bears annual interest at the prime
rate plus 4.25%, or 13.75%. Contractually, quarterly
repayments commenced September 30, 1999 and require quarterly
loan balance reductions of 0.25% through June 30, 2005 with
the remaining outstanding balance to be repaid during the
final three quarters of the loan term. The loan matures on
March 31, 2006.
At December 31, 2000, the $48.6 million outstanding under the
$100.0 million term loan bears annual interest at the prime
rate plus 3.875%, or 13.375%. Contractually, quarterly
repayments commence September 30, 2002 and require aggregate
loan balance reductions of 25% through June 30, 2003, 35%
through
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Long-term Debt, continued
(b) Senior Facility, continued
June 30, 2004 and 40% through June 30, 2005. The loan matures
on June 30, 2005.
The terms of the Senior Facility provide certain limitations
on the use of proceeds, additional indebtedness, dividends,
prepayment of the Senior Facility and other indebtedness and
certain other transactions. Additionally, the Company is
subject to certain financial covenants based on its results of
operations. Due to the bankruptcy proceedings, the Company is
in default with respect to the terms of the Senior Facility.
The amortization of the debt issuance costs during 1999 and
through the Petition Date in 2000 is included in interest
expense in the accompanying consolidated statement of
operations. The unamortized debt issuance cost balance was
written-off as of year end and is included in reorganization
expenses in the accompanying consolidated statement of
operations (see note 4).
Subsequent to the Chapter 11 filing, the Company continues to
make interest only payments on the Senior Facility, as
approved in a signed order from the Bankruptcy Court, based on
the prime rate plus 4.25% and the prime rate plus 3.875% terms
noted above.
The Credit Agreement described in (a) requires that the Senior
Facility be paid off in full with proceeds from the first draw
under the Credit Agreement.
(c) Mortgage Loan Payable
Effective January 1, 1999, the Company purchased its corporate
headquarters, land and improvements (collectively, the
Corporate Headquarters) for approximately $43.4 million. The
Company, through a newly formed subsidiary, ICG 161, LP,
financed the purchase primarily through a loan secured by a
mortgage on the Corporate Headquarters, guaranteed by ICG
Services, Inc. The amended loan agreement, dated May 1, 1999,
requires monthly interest payments at an initial interest rate
of 14.77% per annum, which rate increases annually by 0.003%
with the mortgage balance due January 31, 2013. The seller of
the Corporate Headquarters has retained an option to
repurchase the Corporate Headquarters at the original sales
price, which option is exercisable from January 1, 2004
through January 31, 2012. ICG 161, LP, did not file for
protection under Chapter 11. This mortgage is therefore not
subject to compromise.
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Long-term Debt, continued
(d) Senior Discount Notes
Prior to the Petition Date, the original discount on all of
the discount notes described below was being accreted over the
period from the issue date to the date that the notes may
first be redeemed. The accretion is included in interest
expense in the accompanying consolidated statements of
operations.
The 9 7/8% Notes are unsecured senior obligations of ICG
Services that mature on May 1, 2008, at a maturity value of
$405.3 million.
The 10% Notes are unsecured senior obligations of ICG Services
that mature on February 15, 2008, at a maturity value of
$490.0 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, with a
maturity value of $176.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1,
2006, with a maturity value of $550.3 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on
September 15, 2005, with a maturity value of $584.3 million.
The sale of the notes was made in units with each unit
consisting of ten notes plus unit warrants to purchase 33
common shares of Holdings - Canada. The value attributable to
the warrants was approximately $6 million that was included as
additional debt discount.
The Unit Warrants entitled the holder to purchase one common
share of Holdings-Canada, which was exchangeable into one
share of ICG Common Stock, through August 8, 2005 at the
exercise price of $12.51 per share. In connection with the
Reorganization of Holdings-Canada, all Unit Warrants
outstanding are exchangeable only for shares of ICG Common
Stock on a one-for-one basis and are no longer exchangeable
for shares of Holdings-Canada.
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(11) Long-term Debt, continued
Contractual principal maturities of long-term debt as of December 31,
2000, which are expected to be substantially altered as a result of the
bankruptcy proceedings, are as follows (in thousands):
Year:
2001 $ 796
2002 6,874
2003 15,826
2004 19,021
2005 594,818
Thereafter 1,687,095
-----------------
2,324,430
Less unaccreted discount (237,069)
Less current portion (796)
-----------------
$ 2,086,565
=================
(12) Preferred Stock
(a) Redeemable Preferred Securities of Subsidiaries
As a result of the filing of voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy
Code, the Company is prohibited from declaring or paying any
preferred dividends. The Company has fully written off the
offering costs and fully accreted the discount associated with
the preferred stock totaling $9.7 million. Such amounts are
included in reorganization expenses in the accompanying
consolidated statement of operations (see note 4).
Included in accretion and preferred dividends on preferred
securities of subsidiaries, net of minority interest in share of
losses is approximately, $55.2 million, $61.9 million and $60.0
million for the years ended December 31, 1998, 1999 and 2000
respectively, associated with the accretion of issuance costs,
discount and preferred security dividend accruals for the 6 3/4%
Preferred Securities, the 14% Preferred Stock and the 14 1/4%
Preferred Stock and the Redeemable Preferred Stock through the
Petition Date.
F-35
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Preferred Stock, continued
(a) Redeemable Preferred Securities of Subsidiaries, continued
Redeemable preferred stock of subsidiaries is summarized as
follows:
December 31,
-------------------------------------
1999 2000
---------------- ----------------
(in thousands)
14% Exchangeable preferred stock of Holdings,
mandatorily redeemable in 2008 $ 144,144 165,831
14 1/4% Exchangeable preferred stock of Holdings, 246,751 283,225
mandatorily redeemable in 2007 ---------------- ----------------
$ 390,895 449,056
================ ================
6 3/4% Mandatorily redeemable preferred securities of ICG
Funding $ 128,428 132,251
================ ================
The 14% exchangeable preferred stock bears a cumulative dividend
payable quarterly in arrears. All dividends paid through the
Petition Date have been paid through the issuance of additional
shares of 14% Preferred Stock.
The 14 1/4% exchangeable preferred stock bears a cumulative
dividend payable quarterly in arrears. All dividends paid through
the Petition Date have been paid through the issuance of
additional shares of 14 1/4% Preferred Stock.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative
dividend at the rate of 6 3/4% per annum. The dividend is paid
quarterly in arrears each February 15, May 15, August 15 and
November 15, and commenced November 15, 1997. The dividend was
payable in cash through November 15, 2000 and, thereafter, in
cash or shares of ICG Common Stock, at the option of ICG Funding.
The 6 3/4% Preferred Securities are exchangeable, at the option
of the holder, at any time prior to November 15, 2009 into shares
of ICG Common Stock at an exchange rate of 2.0812 shares of ICG
Common Stock per preferred security, or $24.025 per share,
subject to adjustment. Due to the bankruptcy proceedings, the
Company did not declare or pay the dividend that was otherwise
payable on November 15, 2000.
On February 13, 1998, ICG made a capital contribution of 126,750
shares of ICG Common Stock to ICG Funding. Immediately
thereafter, ICG Funding sold the contributed shares to unrelated
third parties for proceeds of approximately $3.4 million. ICG
Funding recorded the contribution of the ICG Common Stock as
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Preferred Stock, continued
(a) Redeemable Preferred Securities of Subsidiaries, continued
additional paid-in capital at the then fair market value and,
consequently, ICG Funding recorded no gain or loss on the
subsequent sale of those shares.
Also, on February 13, 1998, ICG Funding purchased approximately
$112.4 million of ICG Communications, Inc. Preferred Stock (ICG
Preferred Stock) which contractually pays dividends each February
15, May 15, August 15 and November 15 in additional shares of ICG
Preferred Stock through November 15, 2000. Subsequent to November
15, 2000, dividends on the ICG Preferred Stock are payable in
cash or shares of ICG Common Stock, at the option of ICG. The ICG
Preferred Stock is exchangeable, at the option of ICG Funding, at
any time prior to November 15, 2009 into shares of ICG Common
Stock at an exchange rate based on the exchange rate of the 6
3/4% Preferred Securities and is subject to mandatory redemption
on November 15, 2009. The ICG Preferred Stock has been eliminated
in consolidation of the Company's consolidated financial
statements.
(b) Mandatorily Redeemable 8% Series A Convertible Preferred Stock
On April 10, 2000, the Company sold 75,000 shares of mandatorily
redeemable 8% Series A-1, A-2 and A-3 Convertible Preferred Stock
of ICG (the 8% Series A Convertible Preferred Stock) and
10,000,000 warrants to purchase ICG Common Stock for net proceeds
of $707.7 million. Each share of 8% Series A Convertible
Preferred Stock has an initial liquidation preference of $10,000
per share and bears a cumulative dividend rate of 8% per annum,
compounded daily. Dividends accrue to the liquidation preference
on a daily basis for five years and are thereafter payable in
cash or additional liquidation preference. The value allocated to
the warrants was $80.6 million at the time of the transaction.
The original agreement provided for a change in control and
certain conversion features.
The Company has fully written off the offering costs and fully
accreted the discount associated with the 8% Series A Convertible
Preferred Stock totaling $118.1 million. Such amounts are
included in accretion of 8% Series A Convertible Preferred Stock
and related dividends in arriving at net loss attributable to
common stockholders in the accompanying consolidated statement of
operations.
Additionally, the Company allocated $159.3 million of the
proceeds from the issuance of the 8% Series A Convertible
Preferred Stock to the intrinsic value of the embedded beneficial
conversion feature of the convertible preferred securities
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) Preferred Stock, continued
(b) Mandatorily Redeemable 8% Series A Convertible Preferred Stock,
continued
to additional paid-in capital. The accompanying consolidated
statement of operations includes approximately $40.1 million of
accretion and dividends related to the 8% Series A Convertible
Preferred Stock through the Petition Date.
(13) Stockholders' Deficit
(a) Stock Options and Employee Stock Purchase Plan
A total of 1,849,600 options, net of cancellations, have been
granted under plans established prior to 1994 through December 31,
2000 with exercise prices ranging from approximately $2.92 to
$14.03.
A total of 2,040,989 options, net of cancellations, have been
granted under the NETCOM plan through December 31, 2000 at exercise
prices ranging from $0.56 to $79.50.
A total of 10,447,296 options, net of cancellations, have been
granted under plans established after 1993 through December 31,
2000 at original exercise prices ranging from $5.00 to $37.88.
Additionally, during the years ended December 31, 1999 and 2000,
the Company's board of directors granted 1,179,511 non-qualified
stock options, net of cancellations through December 31, 2000, to
certain officers and employees at exercise prices ranging from
$14.44 to $37.88.
All of the options granted under the plans are subject to various
vesting requirements, generally three and five years and expire in
five and ten years from date of grant.
In October 1996, the Company established an Employee Stock Purchase
Plan, which the Company discontinued in the third quarter of 2000.
Under this plan, employees could elect to designate 1% to 30% of
their annual salary to be used to purchase shares of ICG Common
Stock, up to a limit of $25,000 each year, at a 15% discount to
fair market value. Stock purchases occurred four times a year on
February 1, May 1, August 1 and November 1, with the price per
share equaling the lower of 85% of the market price at the
beginning or end of the offering period. The Company was authorized
to issue a total of 1,000,000 shares of ICG Common Stock to
participants in the plan. During the years ended December 31,
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Deficit, continued
(a) Stock Options and Employee Stock Purchase Plan, continued
1998, 1999 and 2000, the Company sold 111,390, 205,568 and
173,772 shares of ICG Common Stock, respectively, to employees
under this plan.
The Company has recorded no compensation expense in connection
with its stock-based employee and non-employee director
compensation plans pursuant to the intrinsic value based
method of APB 25 for the periods presented. Had compensation
expense for the Company's plans been determined based on the
fair market value of the options at the grant dates for awards
under those plans consistent with the provisions of SFAS 123,
the Company's pro forma net loss and loss per share would have
been as presented below. Pro forma disclosures include the
effects of employee and non-employee director stock options
granted during the periods presented.
Years ended December 31,
--------------------------------------------------------
1998 1999 2000
----------------- ---------------- ---------------
(in thousands, except per share amounts)
Net loss attributable to common stockholders:
As reported $ (418,045) (234,162) (2,811,045)
Pro forma (439,362) (259,362) (2,861,258)
Net loss per share - basic and diluted:
As reported $ (9.25) (4.97) (56.02)
Pro forma (9.72) (5.50) (57.02)
The fair value of each option grant to employees and
non-employee directors other than NETCOM employees and
non-employee directors was estimated on the date of grant
using the Black-Scholes option-pricing model with the
following weighted average assumptions: an expected option
life of three years for directors, officers and other
executives, and two years for other employees, for the years
ended December 31, 1998 and 1999, and five years (the average
contractual life) for the year ended December 31, 2000;
expected volatility of 70% for the years ended December 31,
1998 and 1999 and 250% for the year ended December 31, 2000;
and risk-free interest rates ranging, 4.09% to 5.77% for the
year ended December 31, 1998, 4.59% to 6.28% for the year
ended December 31, 1999 and 6.00% to 6.50% for the year ended
December 31, 2000. Risk-free interest rates, as were currently
available on the grant date, were assigned to each granted
option
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Deficit, continued
(a) Stock Options and Employee Stock Purchase Plan, continued
based on the zero-coupon rate of U.S. Treasury bills to be
held for the same period as the assumed option life. Since the
Company does not anticipate issuing any dividends on the ICG
Common Stock, the dividend yield for all options granted was
assumed to be zero. The weighted average fair market value of
combined ICG and NETCOM options granted during the years ended
December 31, 1998, 1999 and 2000 was approximately, $13.23,
$10.53 and $27.15 per option, respectively.
The following table summarizes the status of the Company's
stock-based compensation plans:
Shares underlying Weighted average Options
options exercise price exercisable
---------------------- ---------------------- ---------------------
(in thousands) (in thousands)
Outstanding at January 1, 1998 6,148 $ 11.97
Granted 5,968 23.34
Exercised (1,395) 12.08
Canceled (3,941) 25.62
----------------------
Outstanding at December 31, 1998 6,780 13.95 3,299
Granted 3,374 18.50
Exercised (817) 13.55
Canceled (1,942) 17.70
----------------------
Outstanding at December 31, 1999 7,395 15.06 3,142
Granted 7,813 26.69
Exercised (832) 15.65
Canceled (4,724) 24.26
----------------------
Outstanding at December 31, 2000 9,652 20.02 3,276
======================
F-40
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Deficit, continued
(a) Stock Options and Employee Stock Purchase Plan, continued
The following table summarizes information about options
outstanding at December 31, 2000:
Options outstanding Options exercisable
--------------------------------------------------------- --------------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------- ------------------ ----------------- ------------------ ------------------- -----------------
(in thousands) (in years) (in thousands)
$ 2.60 - 7.94 1,591 4.52 $ 7.88 1,555 $ 7.89
8.44 - 17.80 2,631 7.16 15.21 1,190 15.12
17.94 - 29.00 2,987 8.89 22.47 311 20.24
29.75 - 37.88 2,443 9.27 30.17 220 30.01
------------------ -------------------
9,652 3,276
================== ===================
(b) Warrants
As discussed in note 12, on April 10, 2000, the Company issued
warrants to purchase 10,000,000 shares of ICG Common Stock at
an exercise price of $34.00 per share. The warrants were
valued at $80.6 million at the time of the transaction. As of
December 31, 2000, none of the warrants had been exercised.
At December 31, 1999 and 2000, 1,733,000 and 1,646,000
warrants, respectively, with an expiration date of August 6,
2005 were outstanding and are exchangeable for shares of ICG
Common Stock on a one-for-one basis.
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Deficit, continued
(b) Warrants, continued
The following table summarizes warrant activity for the three
years ended December 31, 2000:
Outstanding Exercise
warrants price range
-------------------- ----------------------
(in thousands)
Outstanding, January 1, 1998 1,974 $12.51 - 21.51
Exercised (113) 12.51 - 21.51
Canceled (9) 20.01 - 21.51
--------------------
Outstanding, December 31, 1998 1,852 12.51
Exercised (119) 12.51
--------------------
Outstanding, December 31, 1999 1,733 12.51
Granted 10,000 34.00
Exercised (87) 12.51
---------------------
Outstanding, December 31, 2000 11,646 $12.51 - 34.00
====================
(c) Preferred Stock
The Company is authorized to issue 1,000,000 shares of
preferred stock, of which no shares were outstanding as of
December 31, 2000. In addition, the Company has 50,000 shares
of ICG Preferred Stock issued and outstanding, all of which
are held by ICG Funding at December 31, 2000.
(14) 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
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies, continued
(a) Network Capacity and Construction, continued
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
10-year period for incremental payment at the time the option
exercises. The Company recognized approximately $3.0 million
of revenue related to this agreement in the year ended
December 31, 2000. The remaining $177.3 million of deferred
revenue related to this agreement is reflected in liabilities
subject to compromise. The Company has not yet delivered for
service, as required by the contract, the majority of the
fiber optic facilities and is negotiating with this customer
to resolve the issue of the future services.
(b) Telecommunications and Line Purchase Commitments
Effective September 1998, the Company entered into two service
agreements with three-year terms with a major interexchange
carrier. (the "Carrier"). Under the Telecom Services
Agreement, the Carrier provides, at designated rates, switched
telecommunications services and other related services to the
Company, including termination services, toll-free
origination, switched access, dedicated access and travel card
services. Under the Carrier Digital Services Agreement, the
Carrier provides the Company, at designated rates, with the
installation and operation of dedicated digital
telecommunications interexchange services, local access and
other related services, which the Company believes expedites
service availability to its customers. Both agreements require
that the Company provide 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. Additionally, both agreements
limit the Company's ability to utilize vendors other than the
Carrier for certain telecommunications services specified in
the agreements.
(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.
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies, continued
(c) Other Commitments, continued
Due to the current economic uncertainty of the Company's
construction in progress assets, the Company may decide not to
continue with these projects and incur additional termination
costs.
(d) Transport and Termination Charges
ICG records revenue earned under interconnection agreements
with incumbent local exchange carrier (ILECs) as an element of
its local services revenue. Some ILECs, while paying a portion
of local reciprocal compensation due to ICG, have disputed
other portions of the charges.
ICG has, as of December 31, 2000, a net receivable for
terminating local traffic of approximately $24.0 million. ICG
received cash of approximately $160.0 million, during the year
ended December 31, 2000, from certain ILECs for terminating
local traffic.
ICG has recognized revenue of approximately $58 million, $124
million, and $116 million in each of the years ended December
31, 1998, 1999 and 2000, respectively, for terminating local
traffic.
Revenue for the year ended December 31, 1999 includes
approximately $22.0 million for the tandem switching and
common transport rate elements. ICG ceased, effective July 1,
1999, recognition of these rate elements as revenue until cash
receipts are either received or the uncertainty of receipt has
been removed (such as the execution of a binding agreement).
ICG has continued to bill and pursue collection of all amounts
due under the agreements.
(e) Operating Leases
Under the Bankruptcy Code, the Company may elect to assume or
reject all leases noted below, subject to Bankruptcy Court
approval.
The Company leases office space and equipment under
non-cancelable operating leases. Lease expense was
approximately, $27.0 million, $21.3 million and $29.6 million
for the years ended December 31, 1998, 1999 and 2000,
respectively.
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies, continued
(e) Operating Leases, continued
Minimum lease payments due each year on or before December 31
under the Company's current contractual operating leases are
as follows (in thousands):
2001 $ 22,913
2002 21,433
2003 20,458
2004 18,662
2005 18,004
Thereafter 78,280
-------------------------
$ 179,750
=========================
(f) 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
in the United States Bankruptcy Court for the District of
Delaware (Case number 00-04238 PJW Jointly Administered,
Adversary Proceeding No. 01-000` PJW) against the Company and
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
Funding having filed for bankruptcy protection, 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 Funding finalized a settlement agreement with
the shareholders which has been approved by the
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(14) Commitments and Contingencies, continued
(f) Litigation, continued
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.
On April 4, 1997, certain shareholders of Zycom filed a
shareholder derivative suit and class action complaint for
unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of
Harris County, Texas (Case No. 97-17777) against the Company,
Zycom and certain of their subsidiaries. In this action, the
plaintiffs alleged that the Company and certain of its
subsidiaries breached certain fiduciary duties owed to the
plaintiffs. The Company denied all such allegations. The
Company has recently finalized a settlement agreement with
these shareholders. The settlement did not have a material
impact on the consolidated financial statements of the
Company.
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. All
prepetition claims have been stayed pursuant to the Company's
filing of bankruptcy.
(15) Income Taxes
Current income tax expense for the years ended December 31, 1998, 1999
and 2000 represents state and federal income tax relating to operations
of a subsidiary company during periods when this entity's taxable
income could not be offset by the Company's current period losses or
net operating loss carryforwards (NOLs).
Income tax benefit differs from the amounts computed by applying the
U.S. federal income tax rate to loss before income taxes primarily
because the Company has not recognized the income tax benefit of
certain of its net operating loss carryforwards and other deferred tax
assets due to the uncertainty of realization.
F-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(15) Income Taxes, continued
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 2000 are as follows:
December 31,
----------------------------
1999 2000
------------- ------------
(in thousands)
Deferred income tax liabilities:
Deferred revenue $ 6,598 -
Property and equipment 15,427 -
------------- -------------
Net deferred income tax liabilities $ 22,025 -
------------- -------------
Deferred income tax assets:
Deferred revenue - (65,000)
Net operating loss carryforwards (265,076) (510,877)
Property and equipment - (318,116)
Unrealized loss on investments - (34,904)
Accrued interest on high yield debt obligations (154,601) (194,435)
Accrued expenses (18,150) (11,745)
Allowance for doubtful accounts (32,141) (37,714)
Less valuation allowance 447,943 1,172,791
------------- -------------
Net deferred income tax assets (22,025) -
------------- -------------
Net deferred income tax liability $ - -
============= =============
As of December 31, 2000, the Company has federal NOL carryforwards of
approximately $1.277 billion, which expire in varying amounts through
December 31, 2020. Due to the provisions of Internal Revenue Code
("Code") sections 108, 382 and certain other Code and Treasury
Regulations, it is anticipated the major portion of the NOLs will be
reduced by cancellation of indebtedness and that a change in ownership
will occur as a result of a plan of reorganization ("Plan") that is
expected to be filed. If the Plan results in the issuance of new stock
and or the cancellation of existing stock, the remaining amount NOLs
(if any) will be limited on the amount that can be utilized each year.
The Company is also subject to certain state income tax laws, which may
also limit the amount and utilization of NOLs at state level.
Considering the net reversals of future taxable and deductible amounts
and that management is not presently able to determine when the Company
will generate future taxable income, the Company has established a
valuation allowance principally for the
F-47
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(15) Income Taxes, continued
portion of its deductible temporary differences, including NOLs that
may not be available due to expirations or the limitations described
above. After application of the valuation allowance, the Company's net
deferred tax assets and liabilities are zero.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under
Section 401(k) of the Code that the Company administers for
participating employees. All full-time employees are covered under the
plans after meeting minimum service and age requirements. Under the
plan available to NETCOM employees from January 1, 1997 through July 1,
1998, the Company made a matching contribution of 100% of each NETCOM
employee's contribution up to a maximum of 3% of the employee's
eligible earnings. Under the plan available to all ICG employees,
including NETCOM employees subsequent to July 1, 1998, the Company made
matching contributions of ICG Common Stock up to a maximum of 6% of the
employee's eligible earnings through the first and second quarter of
2000. During the third and fourth quarter of 2000, the Company matching
was made in cash, up to 3% of the employee's eligible earnings.
Aggregate matching contributions under the Company's employee benefit
plans were approximately, $4.0 million, $5.5 million and $6.1 million
during the years ended December 31, 1998, 1999 and 2000, respectively.
The portion of this expense, which relates directly to employees of
NETCOM, is included in loss from discontinued operations for all
periods presented.
(17) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary assets of ICG are its investments in ICG Services, 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, $2.2 million, $1.4 million and $2.1
million for the years ended December 31, 1998, 1999 and 2000,
respectively. ICG has no operations other than those of ICG Services,
ICG Funding, ICG Acquisition, Inc. and their subsidiaries.
(18) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(18) Fair Value of Financial Instruments, continued
Cash and cash equivalents and short-term investments available-for-
sale:
The carrying amount approximates fair value because of the short
maturities of such instruments.
Long-term investments:
The fair values of long-term investments for which it is practicable
are estimated based on the quoted market prices for those or similar
investments. The long-term investments for which it is not practicable
to estimate the fair value relate to cost investments in unrelated
entities for which there is no public market.
Long-term debt:
The fair value of the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues for the Senior
Discount Notes that are publicly traded. The fair value of both the
Senior Facility and the mortgage loan are estimated to be the carrying
amount of the debt as the debt instruments are not publicly traded and
have stated fixed or LIBOR or Prime plus a fixed percent interest
rates.
Redeemable preferred stock:
The fair value of the preferred stock, which was issued in a private
placement, is included in the following table at carrying value as of
December 31, 1999 as such stock is not traded in the open market and a
market price is not readily available. At December 31, 2000, the fair
value is estimated to be zero due to the bankruptcy proceedings.
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(18) Fair Value of Financial Instruments, continued
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
------------------------------------------------------------------
1999 2000
---------------------------- ---------------------------------
(in thousands)
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------------------------------------
Cash and cash equivalents and short-term
investments available- for-sale $ 125,507 $ 125,507 214,713 214,713
Restricted cash 12,537 12,537 9,278 9,278
Long-term investments:
Practicable 27,696 31,019 - -
Not practicable 1,243 - 1,650 -
Long-term debt:
Senior facility (79,625) (79,625) (84,574) (84,574)
Senior discount notes (1,792,996) (1,504,089) (1,968,781) (176,472)
Mortgage loan payable (33,077) (33,077) (33,077) (33,077)
Redeemable preferred stock (519,323) (519,323) (1,366,660) -
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(19) Summarized Financial Information for Non-Bankruptcy Filing Subsidiaries
(Unaudited)
As discussed in note 1, the majority of the Company's subsidiaries
filed voluntary petitions for protection under Chapter 11. The
following table summarizes financial information as of and for the year
ended December 31, 2000 for the Company's non-bankruptcy and bankruptcy
filing subsidiaries:
Non-Bankrupt Bankrupt
Companies Companies Eliminations Consolidated
--------------------- ------------------ ------------------ -------------------
Current assets $ 201 361,036 (201) 361,036
Property and equipment, net 44,985 545,515 - 590,500
Other non-current assets, net 9,982 28,688 (9,754) 28,916
--------------------- ------------------ ------------------ -------------------
Total Assets $ 55,168 935,239 (9,955) 980,452
===================== ================== ================== ===================
Current liabilities $ 193 81,904 201 82,298
Liabilities subject to compromise - 2,767,825 16,802 2,784,627
Long-term debt, less current portion 33,077 84,707 - 117,784
Other long-term liabilities 2,500 1,090 (2,500) 1,090
Due to Intercompany 14,703 - (14,703) -
Redeemable preferred stock - 1,366,660 - 1,366,660
Stockholder's equity (deficit) 4,695 (3,366,947) (9,755) (3,372,007)
--------------------- ------------------ ------------------ -------------------
Total Liabilities and Stockholder's
Equity (Deficit) $ 55,168 935,239 (9,955) 980,452
===================== ================== ================== ===================
Non Bankrupt Bankrupt
Companies Companies Eliminations Consolidated
--------------------- ----------------- ----------------- ------------------
Total revenue $ 4,995 598,283 (4,995) 598,283
Total operating costs and expenses 1,376 2,752,019 (4,995) 2,748,400
--------------------- ----------------- ----------------- ------------------
Operating income (loss) 3,619 (2,153,736) - (2,150,117)
===================== ================= ================= ==================
Loss from continuing operations (1,485) (2,489,011) - (2,490,496)
===================== ================= ================= ==================
Net loss $ (1,485) (2,492,032) - (2,493,517)
===================== ================= ================= ==================
(20) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 11, the 11 5/8% Notes issued by Holdings during
1997 are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes
issued by Holdings during 1996 and 1995, respectively, are guaranteed
by ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be
material to the holders of the 11 5/8%
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Holdings, Inc., continued
Notes, the 12 1/2% Notes and the 13 1/2% Notes. However, summarized
consolidated financial information for Holdings and its subsidiaries is
as follows. The Company has provided an allowance for any net
intercompany receivables owed to ICG Holdings, Inc.
Summarized Consolidated Balance Sheet Information
December 31,
--------------------------------------
1999 2000
----------------- ------------------
(in thousands)
Current assets $ 263,870 173,393
Property and equipment, net 675,613 143,208
Other non-current assets, net 128,489 21,754
----------------- ------------------
Total Assets $ 1,067,972 338,355
================= ==================
Current liabilities $ 148,042 96,287
Liabilities subject to compromise - 2,508,080
Long-term debt, less current portion 1,138,734 883
Capital lease obligations, less current portion 57,564 -
Other long-term liabilities 1,233 1,090
Due to ICG Communications, Inc. 190,320 -
Due to parent 14,001 -
Due to ICG Services 128,893 -
Redeemable preferred stock 390,895 449,057
Stockholder's deficit (1,001,710) (2,717,042)
----------------- ------------------
Total liabilities and stockholders' deficit $ 1,067,972 338,355
================= ==================
Summarized Consolidated Statement of Operations Information
Years ended December 31,
--------------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
(in thousands)
Total revenue $ 305,612 478,850 570,628
Total operating costs and expenses 444,310 635,390 2,089,170
------------------- ------------------- -------------------
Operating loss (138,698) (156,540) (1,518,542)
=================== =================== ===================
Loss from continuing operations (260,618) (376,725) (1,658,895)
=================== =================== ===================
Net loss $ (325,211) (320,073) (1,713,861)
=================== =================== ===================
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(21) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
-----------------------------------------------
1999 2000
---------------------- ----------------------
(in thousands)
Current assets $ 82 82
Advances to subsidiaries 14,001 -
---------------------- ----------------------
Total assets $ 14,083 82
====================== ======================
Current liabilities $ 73 -
Liabilities subject to compromise - (11,474)
Due to parent 2,442 -
Share of losses of subsidiary 1,001,710 2,717,042
Shareholders' deficit (990,142) (2,705,486)
---------------------- ----------------------
Total liabilities and shareholders deficit $ 14,083 82
====================== ======================
Condensed Statement of Operations Information
Years ended December 31,
---------------------------------------------------------------
1998 1999 2000
------------------ ------------------ ------------------
(in thousands)
Total revenue $ - - -
Total operating costs and expenses 192 2,478 12
------------------ ------------------ ------------------
Operating loss (192) (2,478) (12)
================== ================== ==================
Losses of subsidiaries (325,211) (320,073) (1,715,332)
================== ================== ==================
Net loss attributable to common shareholders $ (325,403) (322,551) (1,715,344)
================== ================== ==================
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary assets of ICG are its investments in ICG Services, 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, $2.2 million, $1.4 million and $2.1
million for the years ended December 31, 1998, 1999 and 2000,
respectively. ICG has no operations other than those of ICG Services,
ICG Funding, ICG Acquisition, Inc. and their subsidiaries.
F-53
FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report......................................... S-1
Schedule II: Valuation and Qualifying Accounts...................... S-2
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of June 28, 2001, we reported on the consolidated balance sheets
of ICG Communications, Inc. and subsidiaries (the Company) (a debtor-in-
possession as of November 14, 2000) as of December 31, 1999 and 2000 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 2000 as
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. In connection with our audits of the aforementioned
consolidated financial statements, we have also audited the related financial
statement Schedule II: Valuation and Qualifying Accounts. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, based on our audits, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
The consolidated financial statements and financial statement schedule have been
prepared assuming the Company will continue as a going concern. As discussed in
note 1 to the consolidated financial statements, the Company has suffered
recurring losses, has a significant net capital deficiency and, on November 14,
2000 the Company and most of its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the United States Bankruptcy Code. The
consolidated financial statements and financial statement schedule 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. The Company has not filed a plan of reorganization which, when
filed, is subject to acceptance by the Company's impaired creditors and
stockholders and approval by the bankruptcy court which acceptance and approval
is not assured. These factors, among others, raise substantial doubt about its
ability to continue as a going concern. The consolidated financial statements
and financial statement schedule do not include any adjustments that might
result from the outcome of this uncertainty.
As explained in note 2 to the consolidated financial statements, during the year
ended December 31, 2000, the Company changed its method of accounting for
installation revenue.
/s/ KPMG LLP
Denver, Colorado
June 28, 2001
S-1
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
- --------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- --------- -------- -------- --------- ------
(in thousands)
Allowance for uncollectible trade receivables:
Year ended December 31, 1998 $ 3,793 11,238 -- (680) 14,351
------- ------- ------- ------- -------
Year ended December 31, 1999 $14,351 60,019 4,312 -- 78,682
------- ------- ------- ------- -------
Year ended December 31, 2000 $78,682 84,457 -- 68,854 94,285
------- ------- ------- ------- -------
Allowance for uncollectible note receivable:
Year ended December 31, 1998 $ 3,300 -- -- (2,000) 1,300
------- ------- ------- ------- -------
Year ended December 31, 1999 $ 1,300 -- -- (1,300) --
------- ------- ------- ------- -------
Year ended December 31, 2000 $ -- -- -- -- --
------- ------- ------- ------- -------
Allowance for impairment of long-lived
assets:
Year ended December 31, 1998 $ 5,170 -- -- -- 5,170
------- ------- ------- ------- -------
Year ended December 31, 1999 $ 5,170 31,815 -- (5,170) 31,815
------- ------- ------- ------- -------
Year ended December 31, 2000 $31,815 -- -- (31,815) --
------- ------- ------- ------- -------
See accompanying independent auditors' report.
S-2
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
4.26 Revolving Credit Agreement, dated as of December 4, 2000, among ICG
Communications, Inc. and each of its subsidiaries party hereto, as
Borrowers, and the Chase Manhattan Bank, as Agent.
4.27 Security and Pledge Agreement, dated as of December 4, 2000 by and among
ICG Communications, Inc. and each of its subsidiaries party hereto, as
Borrowers and the Chase Manhattan Bank, as Agent.
4.28 First Amendment to Credit Agreement, dated as of January 31, 2001, among
ICG Communications, Inc. and each of its subsidiaries party hereto, as
Borrowers, the Chase Manhattan Bank and each of the other commercial
banks, finance companies, insurance companies or other financial
institutions or funds from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.29 Waiver to Credit Agreement, dated as of March 30, 2001, among ICG
Communications, Inc. and each of its subsidiaries party hereto, as
Borrowers, the Chase Manhattan Bank and each of the other commercial
banks, finance companies, insurance companies or other financial
institutions or funds from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.30 Amendment to Waiver to Credit Agreement, dated as of March 30, 2001,
among ICG Communications, Inc. and each of its subsidiaries party hereto,
as Borrowers, the Chase Manhattan Bank and each of the other commercial
banks, finance companies, insurance companies or other financial
institutions or funds from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.31 Second Amendment to Waiver to Credit Agreement, dated as of March 30,
2001, among ICG Communications, Inc. and each of its subsidiaries party
hereto, as Borrowers, the Chase Manhattan Bank and each of the other
commercial banks, finance companies, insurance companies or other
financial institutions or funds from time to time party to the Agreement,
and the Chase Manhattan Bank, as Agent.
4.32 Second Amendment to Credit Agreement, dated as of May 2, 2001, among ICG
Communications, Inc. and each of its subsidiaries party hereto, as
Borrowers, the Chase Manhattan Bank and each of the other commercial
banks, finance companies, insurance companies or other financial
institutions or funds from time to time party to the Agreement, and the
Chase Manhattan Bank, as Agent.
4.33 Loan Modification Agreement dated as of June 28, 2001 between Trinet
Realty Capital, Inc. as lender and Trinet Realty Investors V, Inc. as
borrower.
10.70: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Robert Athey.
10.71: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Brian Cato.
10.72: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Darlinda Coe.
10.73: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and John Colgan.
10.74: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Richard E. Fish.
10.75: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Kimberly Gordon.
10.76: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and David Hurtado.
10.77: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Michael D. Kallet.
10.78: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Gayle Landis.
10.79: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Gary Lindgren.
10.80: Employment Agreement, dated as of February 26, 2001 by and between ICG
Communications, Inc. and Bernard L. Zuroff.
10.81: Fourth Amendment to Lease, dated as of June 28, 2001 between Trinet
Realty Investors V, Inc. as landlord and ICG Holdings, Inc. as tenant.
10.82: Agreement Regarding Option and Exercise of Option dated as of June 28,
2001 by Trinet Realty Investors V, Inc. and ICG Corporate Headquarters,
L.L.C.
21.1: Subsidiaries of the Registrant.
23.1: Consent of KPMG LLP.
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.
ICG Communications, Inc.
By: /s/Randall E. Curran
-------------------------
Randall E. Curran
Chief Executive Officer
Date: July 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Randall E. Curran Chief Executive Officer July 13, 2001
- ---------------------------
Randall E. Curran
Executive Vice President, Chief
Financial Officer (Principal
/s/ Richard E. Fish, Jr. Financial Officer) July 13, 2001
- ---------------------------
Richard E. Fish, Jr.
Senior Vice President, Finance
/s/ John V. Colgan and Controller (Principal
- --------------------------- Accounting Officer) July 13, 2001
John V. Colgan
/s/ William J. Laggett Vice Chairman of the Board of
- --------------------------- Directors July 13, 2001
William J. Laggett
/s/ John U. Moorhead Director July 13, 2001
- ---------------------------
John U. Moorhead
/s/ Leontis Teryazos Director July 13, 2001
- ---------------------------
Leontis Teryazos
/s/ Walter Threadgill Director July 13, 2001
- ---------------------------
Walter Threadgill
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.
ICG Holdings (Canada) Co.
By: /s/Randall E. Curran
---------------------------------
Randall E. Curran
CEO
Date: July 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
President (Principal Executive
/s/Randall E. Curran Officer) July 13, 2001
- --------------------------
Randall E. Curran
Executive Vice President, Chief
Financial Officer (Principal
/s/Richard E. Fish, Jr. Financial Officer) July 13, 2001
- --------------------------
Richard E. Fish, Jr.
Vice President and Controller
/s/John V. Colgan (Principal Accounting Officer) July 13, 2001
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John V. Colgan
Executive Vice President, General
/s/Bernard L. Zuroff Counsel, Secretary and Director July 13, 2001
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Bernard L. Zuroff
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.
ICG Holdings, Inc.
By: /s/Randall E. Curran
-----------------------------------
Randall E. Curran
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: July 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
Chairman of the Board of
Directors, President and Chief
Executive Officer (Principal
/s/Randall E. Curran Executive Officer) July 13, 2001
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Randall E. Curran
Executive Vice President, Chief
Financial Officer and Director
/s/Richard E. Fish, Jr. (Principal Financial Officer July 13, 2001
- --------------------------
Richard E. Fish, Jr.
Vice President and Controller
/s/John V. Colgan (Principal Accounting Officer) July 13, 2001
- --------------------------
John V. Colgan
Executive Vice President,
General Counsel, Secretary
/s/Bernard L. Zuroff and Director July 13, 2001
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Bernard L. Zuroff