UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
(Exact names of registrant as specified in its charter)
Delaware 84-1342022
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
161 Inverness Drive West
Englewood, Colorado 80112
(Address of principal executive offices)
Registrants' telephone numbers, including area codes:
(888)424-1144 or (303)414-5000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes |X| No____
The number of outstanding common shares of ICG Communications, Inc. as of
August 6, 2002 was 55,244,915.
1
TABLE OF CONTENTS
PART I ........................................................................3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ....................3
-------------------------------------------
Consolidated Balance Sheets as of December 31, 2001 and June
30, 2002 (unaudited)..........................................3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2001 and 2002 (unaudited)...............5
Consolidated Statement of Stockholders' Deficit for the Six
Months Ended June 30, 2002 (unaudited)........................6
Consolidated Statements of Cash Flows for the Three and Six
Months Ended June 30, 2001 and 2002 (unaudited)...............7
Notes to Consolidated Financial Statements (unaudited)..........9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS .....................................17
-------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....33
----------------------------------------------------------
PART II ......................................................................34
ITEM 1. LEGAL PROCEEDINGS .............................................34
-----------------
ITEM 2. CHANGES IN SECURITIES .........................................35
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...............................35
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS .........35
-----------------------------------------------------
ITEM 5. OTHER INFORMATION .............................................35
-----------------
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K ...............................36
-------------------------------
Exhibits ......................................................36
Reports on Form 8-K ...........................................37
2
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and June 30, 2002 (Unaudited)
December 31, June 30,
2001 2002
------------ -----------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 146,587 $ 101,532
Trade receivables, net of allowance of $44 million
and $22 million at December 31, 2001 and
June 30, 2002, respectively 42,365 31,721
Other receivables 559 6,043
Prepaid expenses and deposits 13,559 14,269
------------ -----------
Total current assets 203,070 153,565
Property and equipment, net (note 4) 531,187 503,020
Restricted cash 7,299 7,261
Investments 100 100
Deferred financing costs, net of accumulated
amortization of $2 million (note 3) 3,050 2,689
Deposits and other assets 10,459 11,417
------------ -----------
Total Assets (note 1) $ 755,165 $ 678,052
============ ===========
(continued)
See accompanying notes to consolidated financial statements.
3
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited), Continued
December 31, June 30,
2001 2002
------------ -----------
(in thousands)
Liabilities and Stockholders' Deficit
Current liabilities not subject to compromise:
Accounts payable $ 8,871 $ 11,096
Accrued liabilities 73,853 50,995
Deferred revenue 9,067 8,157
------------ ------------
Total current liabilities not subject to
compromise 91,791 70,248
Liabilities subject to compromise (notes 1 and 3) 2,729,590 2,724,076
Long-term liabilities not subject to compromise:
Capital lease obligations 50,708 51,001
Other long-term liabilities 1,088 59
------------ ------------
Total liabilities 2,873,177 2,845,384
Preferred stock, at liquidation value:
Redeemable preferred stock of subsidiary 449,056 449,056
Mandatorily redeemable preferred securities of
ICG Funding 92,336 55,380
8% Series A Convertible Preferred Stock 785,353 785,353
------------ -----------
Total preferred stock 1,326,745 1,289,789
Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000 shares
authorized; 53,706,777 and 55,244,915 shares
issued and outstanding at December 31, 2001 and
June 30, 2002, respectively 537 552
Additional paid-in capital 922,040 958,980
Accumulated deficit (4,367,334) (4,416,653)
------------ -----------
Total stockholders' deficit (3,444,757) (3,457,121)
Commitments and contingencies (note 7) ------------ -----------
Total Liabilities and Stockholders' Deficit (note 1) $ 755,165 $ 678,052
============ ===========
See accompanying notes to consolidated financial statements.
4
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2001 and 2002
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
2001 2002 2001 2002
---------- ---------- ---------- ---------
(in thousands, except per share data)
Revenue $ 121,252 $ 102,780 $ 257,649 $214,951
Operating costs and expenses:
Operating costs 84,813 60,912 197,375 128,290
Selling, general and administrative
expenses 26,470 23,960 57,166 51,562
Depreciation and amortization 16,194 25,311 32,183 44,937
Loss (gain) on disposal of assets 7,562 (108) 7,633 (114)
Provision for impairment of
long-lived assets - 643 - 643
---------- ---------- ---------- ---------
Total operating costs and
expenses 135,039 110,718 294,357 225,318
---------- ---------- ---------- ---------
Operating loss (13,787) (7,938) (36,708) (10,367)
Other income (expense):
Interest expense (note 3) (11,081) (4,599) (23,799) (10,303)
Reorganization expense, net (note 2) (9,819) (5,441) (27,505) (28,732)
Other income (expense), net 1,366 (57) 1,334 83
---------- ---------- ---------- ---------
Total other expense, net (19,534) (10,097) (49,970) (38,952)
---------- ---------- ---------- ---------
Net loss $ (33,321) $ (18,035) $ (86,678) $(49,319)
========== ========== ========== =========
Net loss per share - basic and
diluted $ (0.64) $ (0.33) $ (1.66) $ (0.91)
========== ========== ========== =========
Weighted average number of shares
outstanding - basic and diluted 52,118 54,856 52,093 54,285
========== ========== ========== =========
See accompanying notes to consolidated financial statements.
5
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit (Unaudited)
For the Six Months Ended June 30, 2002
(In Thousands)
Common Stock Additional Total
------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
-------- --------- ---------- ------------- -------------
Balances at January 1, 2002 53,707 $ 537 $ 922,040 $ (4,367,334) $ (3,444,757)
Shares issued upon
conversion of mandatorily
redeemable preferred
securities of ICG Funding 1,538 15 36,940 - 36,955
Net loss - - - (49,319) (49,319)
-------- --------- ---------- ------------- -------------
Balances at June 30, 2002 55,245 $ 552 $ 958,980 $ (4,416,653) $ (3,457,121)
======== ========= ========== ============= =============
See accompanying notes to consolidated financial statements.
6
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2001 and 2002
Six months ended June 30,
-------------------------
2001 2002
------------ -----------
(in thousands)
Cash flows from operating activities:
Net loss $ (86,678) $ (49,319)
Adjustments to reconcile net loss to net cash
provided by operating activities before
reorganization items:
Reorganization expense, net 27,505 28,732
Depreciation and amortization 32,183 44,937
Net loss (gain) on disposal of long-lived assets 7,633 (114)
Provision for uncollectible accounts 7,404 3,675
Provision for impairment of long-lived assets - 643
Interest costs capitalized on assets under
construction (979) (242)
Interest expense deferred and included in
capital lease obligations - 1,835
Amortization of deferred financing costs
included in interest expense 4,236 357
Realized gain on sale of available for sale
securities (1,542) -
Change in operating assets and liabilities,
excluding the effects of dispositions and
non-cash transactions:
Receivables 18,888 1,602
Prepaid expenses and deposits (2,837) (1,400)
Accounts payable and accrued liabilities 982 (24,378)
Deferred revenue (4,990) (1,939)
------------ -----------
Net cash provided by operating activities before
reorganization items 1,805 4,389
Reorganization items:
Reorganization expense, net (27,505) (28,732)
Net gain on disposal of long-lived assets - (195)
Net gain on contract settlements - (6,854)
Increase in post-petition restructuring
accruals 3,425 2,704
Increase (decrease) in liabilities subject to
compromise (15,079) 12,822
------------ -----------
(39,159) (20,255)
------------ -----------
Net cash used by operating activities (37,354) (15,866)
Cash flows from investing activities:
Acquisition of property and equipment (16,919) (24,223)
Change in prepaid expenses, accounts payable and
accrued liabilities for acquisition of property
and equipment 243 904
Proceeds from disposition of property, equipment
and other assets 1,218 3,181
Purchase of short-term investments - (10,684)
Proceeds from sales of short-term investments 9,748 10,684
Decrease (increase) in restricted cash (7) 38
Increase in long-term deposits (2,926) (1,119)
Reorganization items:
Decrease in restricted cash due to settlement of
liabilities subject to compromise 2,096 -
------------------------
Net cash used by investing activities (6,547) (21,219)
(continued)
See accompanying notes to consolidated financial statements.
7
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited), Continued
Six months ended June 30,
-------------------------
2001 2002
------------ -----------
(in thousands)
Cash flows from financing activities:
Payments of deferred debt issuance costs $ (2,000) $ -
Reorganization items:
Principal payments on capital lease obligations
subject to compromise (14,471) (8,133)
Settlement of preferred dividends (1,312) 163
------------ -----------
Net cash used by financing activities (17,783) (7,970)
------------ -----------
Net decrease in cash and cash equivalents (61,684) (45,055)
Cash and cash equivalents, beginning of period 196,980 146,587
------------ -----------
Cash and cash equivalents, end of period $ 135,296 $ 101,532
============ ===========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 13,313 $ 8,593
============ ===========
Cash paid for income taxes $ - $ -
============ ===========
Supplemental schedule of non-cash investing
activities:
Assets acquired under capital leases $ 50,355 $ -
============ ===========
See accompanying notes to consolidated financial statements.
8
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1) Business and Summary of Significant Accounting Policies
(a) Organization and Description of Business
ICG Communications, Inc., a Delaware corporation, and its subsidiaries
are collectively referred to as "ICG" or the "Company". Prior to
November 14, 2000, the Company's common stock was traded on the NASDAQ
National Market ("NASDAQ"). However, due to the bankruptcy filings
described below, the NASDAQ halted trading of the Company's common
stock on November 14, 2000 and delisted the stock on November 18,
2000.
The Company provides voice, data and Internet communication services.
Headquartered in Englewood, Colorado, the Company operates an
integrated metropolitan and nationwide fiber optic infrastructure to
offer:
o Dial-Up Services, including primary rate interface and remote
access services, on a wholesale basis to national and regional
Internet service providers ("ISP"s).
o Point-to-Point Broadband Service, providing traditional special
access service to long-distance and long-haul carriers and medium
to large sized corporate customers, as well as switched access
and SS7 services.
o Corporate Services, primarily retail voice and data services to
businesses.
(b) Basis of Presentation
The accompanying financial statements should be read in conjunction
with ICG's Annual Report on Form 10-K for the year ended December 31,
2001, as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted pursuant
to the rules and regulations of the United States Securities and
Exchange Commission. The Company's interim financial statements are
unaudited, but in the opinion of management, reflect all necessary
adjustments. Operating results for the three and six months ended June
30, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2002. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain 2001 amounts have been reclassified to conform
to the 2002 presentation.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
These consolidated financial statements have been prepared in
accordance with AICPA Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code."
Pursuant to SOP 90-7, the financial statements 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 expense, net (see note 2). Pre-petition liabilities
that are subject to compromise are reflected separately in the
consolidated balance sheet (see note 3).
(c) Bankruptcy Proceedings
On November 14, 2000 (the "Petition Date"), ICG and its operating
subsidiaries filed voluntary petitions for protection under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code") in the
United States District Court for the District of Delaware (the
"Bankruptcy Court") in order to facilitate the restructuring of the
Company's debt, trade liabilities and other obligations. (ICG and its
operating subsidiaries are collectively referred to as the "Debtors.")
The Debtors are currently operating as debtors-in-possession under the
supervision of the Bankruptcy Court.
On December 19, 2001, the Debtors filed a proposed Plan of
Reorganization and a Disclosure Statement in the Bankruptcy Court. The
Debtors subsequently filed a First Amended Disclosure Statement on
9
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
March 1, 2002 and a Second Amended Disclosure Statement on March 26,
2002, which was amended on April 3, 2002 (the Plan of Reorganization,
the Disclosure Statement, the First Amended Disclosure Statement and
the Second Amended Disclosure Statement are collectively referred to
herein as the "Original Plan"). On April 3, 2002, the Company
submitted the Original Plan to the Company's creditors for approval.
On May 16, 2002, the Company's balloting agent filed an affidavit
indicating that the Original Plan had been accepted by all classes of
creditors entitled to vote. On May 21, 2002, the Bankruptcy Court
entered an order ("the Original Confirmation Order") confirming the
Original Plan.
The Original Plan was formulated on the basis of extensive
negotiations conducted among the Debtors and their primary
constituencies. As part of the Original Plan, the Debtors received
commitment letters for new financing totaling $65 million (the
"Original Exit Financing"). The Original Exit Financing was to be
funded predominantly by Cerberus Capital Management, L.P. ("CCM").
After the Original Confirmation Order was entered by the Bankruptcy
Court, but before completion of the final Original Exit Financing
documents, CCM requested the inclusion of certain provisions in the
Original Exit Financing documents. CCM asserted that these additional
provisions were both customary, as contemplated by the Original Plan
and CCM's commitment letters, and necessary as a result of the
Debtors' recent operating results and CCM's belief that a Material
Adverse Change and a Financial Markets Disruption had occurred (as
those terms are defined in the commitment letters for the Original
Exit Financing). The Debtors disagreed with CCM's contentions and
believed that the requested provisions were neither customary nor
consistent with the commitment letters for the Original Exit
Financing. Further, because the inclusion of these provisions would
have resulted in a significant change to the economics described in
the original disclosure statement, the Debtors believed that they
would have been in contravention of the Original Plan. The Debtors
also disputed CCM's contention that a Material Adverse Change or
Financial Markets Disruption had occurred and believed that CCM was
contractually obligated to close the Original Exit Financing
transactions. Therefore, although the Bankruptcy Court confirmed the
Original Plan, the closing of the Original Exit Financing transactions
did not occur and the Original Plan did not become effective.
After consulting with the Debtors' official committee of unsecured
creditors (the "Creditors Committee") and the Debtors' senior secured
lenders (the "Senior Secured Lenders"), the Debtors engaged in
settlement discussions with CCM. As a result of those negotiations, on
July 25, 2002 the Debtors entered into an agreement with CCM that is
supported by both the Creditors Committee and the Senior Secured
Lenders, which agreement is embodied in a proposed modification to the
Original Plan (the Original Plan as modified is referred to herein as
the "Modified Plan").
Under the Modified Plan, the Debtors will receive new financing
consisting of a $25 million senior subordinated term loan (the "Senior
Subordinated Term Loan" or the "New Exit Financing"). Proceeds from
the New Exit Financing will be used to pay down a portion of the
Company's senior secured credit facility (the "Senior Facility").
Pursuant to the settlement with CCM, as of July 25, 2002, all
principal documents necessary to consummate the Modified Plan were
fully executed and the $25 million in proceeds from the New Exit
Financing was funded by CCM into escrow.
The Debtors determined that the changes to the Original Plan as
reflected in the Modified Plan were of such a significant nature as to
require a resolicitation of votes from certain classes of creditors.
Thus, on July 26, 2002, the Debtors filed the proposed Modified Plan
and a Supplement to the Disclosure Statement in the Bankruptcy Court.
A hearing has been scheduled for August 23, 2002, at which time the
Bankruptcy Court will make a determination as to the adequacy of the
Supplement to the Disclosure Statement. If approved by the Bankruptcy
Court, the Debtors will then submit the Modified Plan to a vote by
certain classes of creditors.
Accordingly, if the Debtors' creditors again vote in favor of the
Modified Plan and it is confirmed by the Bankruptcy Court, upon
certification by the Debtors that they are in compliance with certain
covenants, representations and warranties, the escrowed proceeds from
the New Exit Financing will be released for distribution on account of
the Senior Secured Lenders in accordance with the terms of the
Modified Plan, and the Effective Date for the Modified Plan can
10
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
immediately occur. It is anticipated that the Effective Date and the
Company's emergence from Chapter 11 bankruptcy protection will occur
not later than the end of October 2002.
On the Effective Date, the Company will apply Fresh Start reporting
("Fresh Start") in accordance with GAAP and the requirements of SOP
90-7. Under Fresh Start, the Company and its financial advisors will
determine the reorganization value of the Company, which generally
represents the going concern value. On the Effective Date, a new
capital structure will be established and assets and liabilities,
other than deferred taxes, will be stated at their relative fair
values. Deferred taxes will be determined in conformity with the
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
The Company, assisted by its financial advisors, Miller Buckfire Lewis
& Co., LLC (the principals of which were formerly executives of
Dresdner Kleinwort & Wasserstein, Inc.), has reevaluated the
reorganization value of the Company in connection with the Modified
Plan. The reorganization value of the Company on a going concern basis
is now estimated to be between $250 million and $325 million. The
Modified Plan as submitted reflects a reorganization value of $287.5
million, which would result in a valuation of the new common equity
and outstanding warrants totaling $82.6 million. The range of
reorganization values in the Modified Plan indicates that the value of
property and equipment may need to be reduced by up to $270 million at
the Effective Date pursuant to Fresh Start requirements. However, the
Modified Plan assumptions may differ from the actual business
conditions on the Effective Date. Therefore, the fair values assigned
to assets and liabilities on the Effective Date may also be different.
The valuation is based on numerous assumptions, including, among other
things, the achievement of certain operating results, market values of
publicly-traded securities of other similar companies, and general
economic and industry conditions.
No assurance can be given that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy proceedings.
Notwithstanding the foregoing, based on discussions with the Company's
creditors, the Company anticipates that both the Bankruptcy Court and
the requisite number of the Company's creditors will approve the
Modified Plan. Because of the ongoing nature of the reorganization
cases, the outcome of which is not determinable until finally approved
by the creditors and the Bankruptcy Court, the consolidated financial
statements contained herein are subject to material uncertainties.
The ability of the Company to continue as a going concern is dependent
upon, but not limited to, successfully emerging from Chapter 11
bankruptcy protection, access to 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 fund operations.
11
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(2) Reorganization Expense, Net
In accordance with SOP 90-7 (see note 1), the Company has segregated and
classified certain income and expenses as reorganization items. The
following reorganization items were incurred during the three and six
months ended June 30, 2001 and 2002, respectively:
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
2001 2002 2001 2002
---------- ---------- --------- ----------
(in thousands)
Severance and employee
retention costs $ 1,560 $ 3,582 $ 11,819 $ 3,894
Legal and professional fees 6,239 3,249 12,690 6,957
Switch site closure costs 929 630 3,182 1,336
Contract termination expenses 2,407 1,754 2,719 23,308
Net loss (gain) on disposal
of long-lived assets - 2,759 - (195)
Net gain on contract
settlements - (6,854) - (6,854)
Interest income (1,578) (411) (4,206) (988)
Other 262 732 1,301 1,274
---------- ---------- --------- ----------
$ 9,819 $ 5,441 $ 27,505 $ 28,732
========== ========== ========= ==========
The Company is required to reconcile recorded pre-petition liabilities with
claims filed by its creditors with the Bankruptcy Court. Differences
resulting from that reconciliation process are recorded as adjustments to
pre-petition liabilities with an offset for significant items not relating
to ongoing operations included in reorganization expense, net. During the
six months ended June 30, 2002, the Company recorded an increase in
pre-petition liabilities of $23 million for contract termination expenses.
Of this, $19 million is related to a pre-petition contract for system
design and implementation. In the first quarter of 2002, in connection with
its ongoing reconciliation of outstanding claims, the Company determined
that this amount should be recognized as additional pre-petition liability.
(3) Liabilities Subject to Compromise
Pursuant to SOP 90-7 (see note 1), the Company has segregated and
classified certain pre-petition obligations as liabilities subject to
compromise. Liabilities subject to compromise have been recorded at the
allowed claim amount. The following table sets forth the liabilities of the
Company subject to compromise as of December 31, 2001 and June 30, 2002,
respectively:
December 31, June 30,
2001 2002
------------ ------------
(in thousands)
Unsecured long-term debt $ 1,968,781 $ 1,968,781
Unsecured creditors 476,243 481,882
Capital lease obligations, secured 166,637 156,311
Capital lease obligations, unsecured 18,881 18,251
Senior Facility 85,503 85,503
Priority creditors 13,545 13,348
------------ ------------
$ 2,729,590 $ 2,724,076
============ ============
Between December 31, 2001 and June 30, 2002, liabilities to unsecured
creditors increased primarily due to the recognition of contract
termination expenses. Capital lease obligations, secured, decreased as a
result of the Company's negotiations with vendors to reduce the amount of
equipment under lease, as well as principal payments on certain capital
leases.
As a result of the Company's bankruptcy proceedings, all pre-petition
contractual debt payments are suspended and subject to revised payment
terms during the bankruptcy process on a case-by-case basis. As of June 30,
2002, the Company is in default with respect to all of its pre-petition
debt. All deferred financing costs have been written off, except the $3
million at June 30, 2002 that relates to the Senior Facility of $85
million.
12
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
In connection with its bankruptcy filing, the Company is no longer accruing
or paying interest on the unsecured long-term debt and the rejected
pre-petition capital lease obligations. Contractual interest not recorded
amounted to $60 million and $63 million for the three months ended June 30,
2001 and 2002, respectively, and $120 million and $126 million for the six
months ended June 30, 2001 and 2002, respectively.
The Company continues to accrue and make interest payments on the Senior
Facility, as approved by the Bankruptcy Court. The Bankruptcy Court has
stayed the payment of principal due under the Senior Facility.
The Modified Plan contemplates the conversion of the Debtors' existing
unsecured debt into common equity in the post-bankruptcy, reorganized
Company. The Modified Plan also contemplates the issuance of a new $25
million Senior Subordinated Term Loan (the proceeds of which would be
utilized to pay down the Senior Facility to a balance of approximately $60
million) and the restructuring of the Senior Facility with new terms and
new notes (the "Secured Notes").
(4) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31, June 30,
2001 2002
------------ -----------
(in thousands)
Land $ 1,214 $ -
Buildings and improvements 50,358 50,355
Furniture, fixtures and office equipment 33,593 28,780
Machinery and equipment 14,548 13,914
Fiber optic equipment 150,982 144,813
Switch equipment 136,133 136,636
Fiber optic network 90,137 98,580
Site improvements 11,245 4,042
Construction in progress 95,415 124,781
Assets held for sale 8,570 4,035
------------ -----------
592,195 605,936
Less accumulated depreciation (61,008) (102,916)
------------ -----------
$ 531,187 $ 503,020
============ ===========
Property and equipment includes $125 million of equipment that has not been
placed in service and $4 million of equipment that is being held for sale
at June 30, 2002, and, accordingly, is not being depreciated.
(5) Major Customers
A significant amount of the Company's revenue is derived from long-term
contracts with certain large customers, including one major customer, Qwest
Communications Corporation (together with its affiliated entities,
"Qwest"). Revenue from Qwest accounted for 15% and 31% of total revenue in
the three months ended June 30, 2001 and 2002. Revenue from Qwest accounted
for 12% and 28% of total revenue in the six months ended June 30, 2001 and
2002, respectively. As of June 30, 2002, the Company had $1.6 million in
net trade receivables from Qwest.
Prior to the bankruptcy filing, the Company and Qwest developed a number of
important and mutually valuable business relationships, governed by a
number of contracts (collectively, the "Pre-petition Agreements"). During
the pendency of the Chapter 11 cases, both the Company and Qwest asserted
various breaches of, and claims under, the Pre-petition Agreements.
Following lengthy negotiations, the parties agreed to enter into a
settlement resolving all of the claims and issues between the parties (the
"Qwest Settlement Agreement") in order to continue a cooperative, mutually
beneficial relationship and to avoid potentially costly litigation. The
Bankruptcy Court approved the Qwest Settlement Agreement in June 2001.
13
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
The Qwest Settlement Agreement contemplates the transfer of certain of the
Company's assets with a net carrying value at June 30, 2002 of
approximately $13 million and a remaining economic life of approximately
two years. The transfer requires the approval by a major vendor whose
approval is contingent upon acceptance of the Modified Plan by the
Bankruptcy Court. Further, the transfer requires approval by the Senior
Secured Lenders. Management believes that the release of pre-existing liens
on this equipment by the Senior Secured Lenders is remote. Therefore, the
transfer of the assets has not been reflected in the financial statements
as of June 30, 2002.
At June 30, 2002, the Company had $143 million of deferred revenue related
to an agreement, which was not part of the Qwest Settlement Agreement, to
provide exclusive service to Qwest over designated portions of the
Company's local fiber optic networks (see note 7(a)).
In the first quarter and first half of 2002, the companies that
individually represented more than 5% of total revenue were Qwest, UUNet (a
division of WorldCom, Inc.) and a large national ISP. MCI, another
subsidiary of WorldCom, Inc., was also a significant customer, although it
individually represented less than 5% of total revenue. On July 21, 2002
WorldCom, Inc. and substantially all of its active U.S. subsidiaries,
including UUNet and MCI, filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code (see note 7(b)). All WorldCom, Inc.
subsidiaries combined represented 12% of total revenue in the three and six
months ended June 30, 2002, up from 11% and 9% in the three and six months
ended June 30, 2001, respectively.
(6) Settlement with SBC Communications, Inc.
In January 2002, SBC Communications, Inc., on behalf of various
subsidiaries (collectively "SBC") filed a motion in the Company's
bankruptcy case seeking permission to terminate the services it provides
the Company pursuant to its interconnection agreements. SBC contended that
the Company owed SBC in excess of $24 million related to past billing, and,
as a result, should be entitled to terminate services and pursue an
administrative claim for the alleged past due receivable. The Company filed
a response to SBC's motions contending that it did not owe a significant
portion of the alleged past due amount. Additionally, the Company's
response provided that SBC owed the Company more than the Company owed SBC.
On March 29, 2002, the Company and SBC entered into a settlement agreement
regarding wholesale services. On April 30, the Bankruptcy Court issued an
order approving the terms of the settlement. Under the terms of the
settlement, the Company recorded a net $5 million of non-recurring
reciprocal compensation revenue in the three months ended March 31, 2002.
As no expenses were directly attributable to the revenue, none were
recorded in the three months ended March 31, 2002.
On May 10, 2002, the order became final and non-appealable. Only amounts
allegedly owed for retail services have yet to be resolved. The Company
believes that the ultimate resolution of the remaining items relating to
retail services will be immaterial to the Company's operating results.
As of the date of this report, the Company has not received the full amount
of the settlement contemplated in the settlement agreement, but anticipates
that it will be received in the near future.
(7) Commitments and Contingencies
As a result of the Company's bankruptcy filing, all commitments and
contingencies could be substantially modified during the Company's
reorganization process.
(a) Network Capacity and Construction
At June 30, 2002, the Company had $143 million of deferred revenue,
which is included in liabilities subject to compromise, related to an
agreement with Qwest to provide exclusive service over designated
portions of the Company's local fiber optic networks. Qwest has not
yet fully ordered from the Company, and the Company has not yet
delivered, certain equipment and services required by this agreement.
The Company recognized $4 million and $5 million of revenue in the six
months ended June 30, 2001 and 2002, respectively, relating to certain
equipment and services which Qwest has ordered and the Company has
delivered under this agreement. The Company anticipates that the
deferred revenue balance will be revalued in connection with Fresh
Start based on the expected value of providing future services. The
Modified Plan as submitted reflects a deferred revenue balance of $49
14
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
million related to this agreement in the projected pro-forma
reorganized balance sheet. The actual value of the deferred revenue
after application of Fresh Start may differ.
(b) Impact of WorldCom, Inc. Bankruptcy
On July 21, 2002, WorldCom, Inc. and substantially all of its active
U.S. subsidiaries (collectively referred to as "WorldCom") filed
voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code. As of June 30, 2002, ICG had $2.6 million on deposit
with WorldCom, pursuant to an order issued in ICG's bankruptcy
proceedings, whereby ICG was required to post a deposit to provide
WorldCom with adequate assurance of future payment for services
rendered by WorldCom to the Company. On July 16, 2002, WorldCom
applied $1 million of this deposit to outstanding balances owed by ICG
to WorldCom. The Company believes that the remaining $1.6 million of
the deposit has been or should be held by WorldCom in trust for the
Company's benefit. As such, at this time the Company is not reserving
for the deposit. Further, as of June 30, 2002, the Company had $0.7
million in trade receivables from WorldCom, all of which has been
reserved for in the allowance for doubtful accounts.
Between June 30, 2002 and July 21, 2002, ICG provided $2.4 million of
services to WorldCom. Due to WorldCom's bankruptcy filing, the
collectibility of this amount is in question; therefore, it will not
be recorded as revenue in the third quarter of 2002. In the event
WorldCom elects to affirm one or more of its contracts with the
Company through its bankruptcy proceedings, and thus is required to
cure pre-petition defaults as provided by the Bankruptcy Code, the
Company will record the revenue accordingly.
All WorldCom subsidiaries combined, including UUNet and MCI,
represented 12% of total revenue in the three and six months ended
June 30, 2002, up from 11% and 9% in the three and six months ended
June 30, 2001, respectively.
(c) Other Commitments and Contingencies
The bankruptcy filing and the severe downturn in the
telecommunications industry have had a significant negative effect on
the Company's basic operations and its dealings with all third parties
including its customers, vendors and employees. Significant amounts of
both pre-petition and post-petition billings to customers and costs
billed to the Company by vendors are in dispute. Some of these
disputes may result in litigation. As a result, significant judgment
is needed in determining the proper presentation and valuation of
revenues and costs in the financial statements. The Company expects
that negotiations with major customers and vendors to settle disputed
amounts could involve a lengthy process. The Company cannot predict
the possible outcome of such negotiations. Accordingly, the
consolidated financial statements do not include all the adjustments
that may ultimately be required to settle such contingencies or any
other contingencies, which may be required pursuant to the Company's
Chapter 11 proceedings.
Under the Bankruptcy Code, the Company may elect to assume or reject
pre-petition real estate leases, employment contracts, personal
property leases, service contracts, and other unexpired executory
pre-petition contracts, subject to Bankruptcy Court approval.
Conversely, the Company will be required to cure all pre-petition
defaults with respect to contracts that are affirmed by the Company.
The Company cannot presently determine with certainty the ultimate
aggregate liability that will result from the filing and settlement of
claims relating to such pre-petition contracts, which may be affirmed
or rejected.
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.
15
ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(8) New Accounting Standard
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred, not at the date of an entity's commitment to an exit
plan, as was required under Issue 94-3. Examples of costs covered by the
standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation,
plant closing, or other exit or disposal activity. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This 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," "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:
o The material uncertainty of the Company's ability to continue as a
going concern due to the filing for protection under bankruptcy law;
o The approval and confirmation of a plan of reorganization;
o The significant amount of indebtedness incurred by the Company and the
Company's ability to successfully restructure this indebtedness within
the bankruptcy proceeding;
o The existence of historical operating losses and the possibility of
continued operating losses;
o The Company's ability to achieve and sustain a level of operating
profitability sufficient to fund its business;
o The Company's ability to successfully maintain commercial
relationships with its critical vendors and suppliers;
o The Company's ability to retain its major customers on profitable
terms;
o The extensive competition the Company will face;
o The Company's ability to attract and retain qualified management and
employees;
o The Company's ability to access capital markets in a timely manner, at
reasonable costs and on satisfactory terms and conditions;
o Changes in, or the Company's inability to comply with, existing
government regulations; and,
o General economic conditions and the related impact on demand for the
Company's services.
These forward-looking statements speak only as of the date of this
Quarterly Report. The Company does not undertake any obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although the Company believes that its
plans, intentions and expectations reflected in or suggested by the
forward-looking statements made in this Quarterly Report are reasonable, there
is no assurance that such plans, intentions or expectations will be achieved.
The results of operations for the three and six months ended June 30, 2001
and 2002 represent the consolidated operating results of the Company. (See the
unaudited consolidated financial statements of the Company for the three and six
months ended June 30, 2002 included elsewhere herein.) The terms "fiscal" and
"fiscal year" refer to the Company's fiscal year ending December 31. All dollar
amounts are in U.S. dollars.
17
COMPANY OVERVIEW
ICG is a facilities-based, nationwide communications provider focused on
providing data and voice services to Internet service providers ("ISP"s),
telecommunication carriers and corporate customers. ICG is a competitive local
exchange carrier ("CLEC") certified in most of the United States, having
interconnection agreements with every major local exchange carrier. ICG's
facilities support three product offerings: (i) Dial-Up Services, providing
wholesale managed modem connection to ISPs and other carriers; (ii)
Point-to-Point Broadband, or special access service, providing dedicated
broadband connections to other carriers, as well as SS7 and switched access
services; and (iii) Corporate Services, providing voice and data services to
corporate customers with an emphasis on Dedicated Internet Access ("DIA")
services.
o Dial-Up Services: The Company provides primary rate interface ("PRI") ports
(one and two way) and managed modem services ("IRAS") to many of the
largest national ISPs and other telecommunications carriers, as well as to
numerous regional ISPs and other communication service companies. Most of
these services are on-switch through the Company's owned facilities. Before
the related reciprocal compensation, revenue from these services accounted
for 44% of the Company's total second quarter 2002 revenue. Associated
reciprocal compensation revenue accounted for 13% of the Company's revenue.
o Point-to-Point Broadband Service: The Company provides dedicated bandwidth
to connect (i) long-haul carriers to local markets, large corporations and
other long-haul carrier facilities and (ii) large corporations to their
long-distance carrier sites and other corporate locations. Special access
sales are focused in areas where ICG maintains local fiber and buildings
on-net or in close proximity. Point-to-Point Broadband service also
includes switched access and SS7 services. Point-to-Point Broadband service
accounted for 26% of the Company's total second quarter 2002 revenue.
o Corporate Services: The Company offers Internet access, data and voice
service to corporate customers. ICG is well positioned to expand this
service with its metropolitan asset base, data network infrastructure, and
Internet experience. Corporate Services accounted for 17% of total second
quarter 2002 revenue.
To provide its service offerings, ICG combines its 5,542 route miles of
metropolitan and regional fiber network infrastructure, nationwide data
backbone, data points of presence, 26 asynchronous transfer mode switches,
numerous private and public Internet peering arrangements and 46 voice and data
switches. The Company's data network is supported by a nationwide fiber optic
backbone currently operating at OC-12 capacity. The design of the physical
network permits the Company to offer flexible, high-speed telecommunications
services to its customers.
The metropolitan and 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 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.
REORGANIZATION AND EMERGENCE FROM BANKRUPTCY
During the second half of 2000, a series of financial and operational
events negatively 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 its
operating subsidiaries filed voluntary petitions for protection under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States District Court for the District of Delaware (the "Bankruptcy Court") in
order to facilitate the restructuring of the Company's debt, trade liabilities
and other obligations. (ICG and its operating subsidiaries are collectively
referred to as the "Debtors.") The Debtors 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 will be substantially altered. As a result of these
bankruptcy proceedings, virtually all liabilities, litigation and claims against
the Company 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. 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. At this time, it is not possible to predict with
certainty 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.
18
On December 19, 2001, the Debtors filed a proposed Plan of Reorganization
and a Disclosure Statement in the Bankruptcy Court. The Debtors subsequently
filed a First Amended Disclosure Statement on March 1, 2002 and a Second Amended
Disclosure Statement on March 26, 2002, which was amended on April 3, 2002 (the
Plan of Reorganization, the Disclosure Statement, the First Amended Disclosure
Statement and the Second Amended Disclosure Statement are collectively referred
to herein as the "Original Plan"). On April 3, 2002, the Company submitted the
Original Plan to the Company's creditors for approval. On May 16, 2002, the
Company's balloting agent filed an affidavit indicating that the Original Plan
had been accepted by all classes of creditors entitled to vote. On May 21, 2002,
the Bankruptcy Court entered an order ("the Original Confirmation Order")
confirming the Original Plan.
The Original Plan was formulated on the basis of extensive negotiations
conducted among the Debtors and their primary constituencies. As part of the
Original Plan, the Debtors received commitment letters for new financing
totaling $65 million (the "Original Exit Financing"). The Original Exit
Financing was to be funded predominantly by Cerberus Capital Management, L.P.
("CCM"). After the Original Confirmation Order was entered by the Bankruptcy
Court, but before completion of the final Original Exit Financing documents, CCM
requested the inclusion of certain provisions in the Original Exit Financing
documents. CCM asserted that these additional provisions were both customary, as
contemplated by the Original Plan and CCM's commitment letters, and necessary as
a result of the Debtors' recent operating results and CCM's belief that a
Material Adverse Change and a Financial Markets Disruption had occurred (as
those terms are defined in the commitment letters for the Original Exit
Financing). The Debtors disagreed with CCM's contentions and believed that the
requested provisions were neither customary nor consistent with the commitment
letters for the Original Exit Financing. Further, because the inclusion of these
provisions would have resulted in a significant change to the economics
described in the original disclosure statement, the Debtors believed that they
would have been in contravention of the Original Plan. The Debtors also disputed
CCM's contention that a Material Adverse Change or Financial Markets Disruption
had occurred and believed that CCM was contractually obligated to close the
Original Exit Financing transactions. Therefore, although the Bankruptcy Court
confirmed the Original Plan, the closing of the Original Exit Financing
transactions did not occur and the Original Plan did not become effective.
After consulting with the Debtors' official committee of unsecured
creditors (the "Creditors Committee") and the Debtors' senior secured lenders
(the "Senior Secured Lenders"), the Debtors engaged in settlement discussions
with CCM. As a result of those negotiations, on July 25, 2002 the Debtors
entered into an agreement with CCM that is supported by both the Creditors
Committee and the Senior Secured Lenders, which agreement is embodied in a
proposed modification to the Original Plan (the Original Plan as modified is
referred to herein as the "Modified Plan").
Under the Modified Plan, the Debtors will receive new financing consisting
of a $25 million senior subordinated term loan (the "Senior Subordinated Term
Loan" or the "New Exit Financing"). Proceeds from the New Exit Financing will be
used to pay down a portion of the Senior Facility. Pursuant to the settlement
with CCM, as of July 25, 2002, all principal documents necessary to consummate
the Modified Plan were fully executed and the $25 million in proceeds from the
New Exit Financing was funded by CCM into escrow.
The Debtors determined that the changes to the Original Plan as reflected
in the Modified Plan were of such a significant nature as to require a
resolicitation of votes from certain classes of creditors. Thus, on July 26,
2002, the Debtors filed the proposed Modified Plan and a Supplement to the
Disclosure Statement in the Bankruptcy Court. A hearing has been scheduled for
August 23, 2002 at which time the Bankruptcy Court will make a determination as
to the adequacy of the Supplement to the Disclosure Statement. If approved by
the Bankruptcy Court, the Debtors will then submit the Modified Plan to a vote
by certain classes of creditors.
Accordingly, if the Debtors' creditors again vote in favor of the Modified
Plan and it is confirmed by the Bankruptcy Court, upon certification by the
Debtors that they are in compliance with certain covenants, representations and
warranties, the escrowed proceeds from the New Exit Financing will be released
for distribution on account of the Senior Secured Lenders in accordance with the
terms of the Modified Plan, and the Effective Date for the Modified Plan can
immediately occur. It is anticipated that the Effective Date and the Company's
emergence from Chapter 11 bankruptcy protection will occur not later than the
end of October 2002.
On July 23, 2002, the Company and the Senior Secured Lenders agreed to a
stipulated order to be issued by the Bankruptcy Court that authorizes the
Company to continue using the Senior Secured Lenders' cash collateral in
accordance with a proposed budget. Under the terms of the stipulation, the
Company has agreed to maintain a total, consolidated cash balance of
approximately $90 million. The stipulation also provides that ICG Holdings, Inc.
and its subsidiaries may use the cash collateral in an amount not to exceed $10
million at any one time. The remaining balance of cash collateral is to remain
in an account established by ICG Services, Inc. This stipulated order will
remain in place until the earlier of October 31, 2002 or the Effective Date.
19
Under the New Exit Financing, the Company will be subject to a number of
customary affirmative, negative and financial covenants. Among other
restrictions, these covenants limit the Company's ability to incur additional
debt and liens, prohibit investments by the Company and restrict mergers and
sales of the Company's assets. The Company must also comply with several
financial covenants that restrict the Company's capital spending and require the
Company to maintain certain minimum EBITDA and cash levels.
The Company's management, assisted by its financial advisors, Miller
Buckfire Lewis & Co., LLC (the principals of which were formerly executives of
Dresdner Kleinwort & Wasserstein, Inc.), has reevaluated the reorganization
value of the Company in connection with the Modified Plan. The reorganization
value of the Company on a going concern basis was estimated to be between $250
million and $325 million. The Modified Plan as submitted reflects a
reorganization value of $287.5 million, which would result in a valuation of the
new common equity and outstanding warrants totaling $82.6 million. However, the
Modified Plan assumptions may differ from the actual business conditions on the
Effective Date. Therefore, the fair values assigned to assets and liabilities on
the Effective Date may also be different. The valuation is based on numerous
assumptions, including, among other things, the achievement of certain operating
results, market values of publicly-traded securities of other similar companies,
and general economic and industry conditions.
No assurance can be given that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy proceedings.
Notwithstanding the foregoing, based on discussions with the Company's
creditors, the Company anticipates that both the Bankruptcy Court and the
requisite number of the Company's creditors will approve the Modified Plan.
The ability of the Company to continue as a going concern is dependent
upon, but not limited to, successfully emerging from Chapter 11 bankruptcy
protection, access to 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
fund operations.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenue recognition, uncollectible accounts
receivable, long-lived assets, operating costs and accruals, reorganization
costs, litigation and contingencies. Management bases its estimates and
judgments on historical experience, current economic and industry conditions and
on various other factors that are believed to be reasonable under the
circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect the more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition and Accounts Receivable
Revenue for dedicated transport, data, Internet, and the majority of
switched services, exclusive of switched access, is generally billed in advance
on a fixed rate basis and recognized over the period the services are provided.
Switched access revenue, including reciprocal compensation and carrier access,
is generally billed on a transactional basis determined by customer usage. The
transactional elements of switched access services are billed in arrears and
estimates are used to recognize revenue in the period earned. Fees billed in
connection with customer installations and other up front charges are recognized
ratably over the estimated customer life.
The Company records inter-carrier compensation in accordance with
regulatory authority approval and pursuant to interconnection agreements with
incumbent local exchange carriers ("ILEC"s) and inter-exchange carriers
("IXC"s). The Company recognizes inter-carrier revenue as it is earned, except
in those cases where the revenue is under dispute and collection is uncertain.
The Company pays reciprocal compensation expense to other local exchange
carriers ("LEC"s) for local exchange traffic it terminates on the LECs'
facilities and such costs are recognized as incurred.
20
Revenue attributable to leases of metropolitan fiber and other
infrastructure pursuant to indefeasible rights-of-use agreements ("IRU"s) that
qualify for sales-type lease accounting, and were entered into prior to June 30,
1999, were recognized at the time of delivery and acceptance of the fiber by the
customer. Certain sale and long-term IRU agreements of fiber and capacity
entered into after June 30, 1999 are required to be accounted for in the same
manner as sales of real estate with property improvements or integral equipment
which results in the deferral of revenue recognition over the term of the
agreement (currently up to 20 years).
The Company establishes valuation allowances for: i) customer billings if
realization of the billing is not assured; ii) billing and service adjustments;
and iii) uncollectible accounts receivable. Valuation allowances for billings in
dispute or at risk of realization and for billing and service credits are
established through a charge to revenue, while valuation allowances for
uncollectible accounts receivable are established through a charge to selling,
general and administrative expenses. The Company assesses the adequacy of these
reserves periodically, evaluating general factors; such as the length of time
individual receivables are past due, historical collection experience, the
economic and competitive environment, and changes in the credit worthiness of
customers. The Company also assesses the ability of specific customers to meet
their financial obligations and establishes specific valuation allowances based
on the amount the Company expects to collect from these customers, as considered
necessary. If circumstances relating to specific customers change or economic
conditions improve or worsen such that past collection experience and assessment
of the economic environment are no longer relevant, the estimate of the
recoverability of the Company's trade receivables may change.
Operating Costs and Accrued Liabilities
The Company leases certain network facilities, primarily circuits, from
LECs and CLECs to augment its owned infrastructure. The Company issued a
significant number of disconnect orders to LECs and CLECs for leased circuits
throughout 2001 as a result of the curtailment of the Company's expansions
plans, as well as the rationalization of its network. In addition, many of these
facilities-providers changed the Company's billing account numbers in an attempt
to segregate the Company's pre- and post-Chapter 11 petition billing activity.
Disconnected services are frequently not reflected on a timely basis on the
Company's invoices, resulting in inaccurate invoices and disputes. In addition,
the assignment of new billing account numbers frequently resulted in incorrect
balances being carried forward on invoices. As a result of these and other types
of billing disputes, the Company is in negotiations with certain providers. In
determining the amount of line cost expenses and related accrued liabilities to
reflect in its financial statements, the Company considers the adequacy of
documentation of disconnect notices and disputes, as well as compliance with
prevailing contractual requirements for submitting such disconnect notices and
disputes to the provider of the facilities. Significant judgment is required in
estimating the ultimate outcome of the dispute resolution process, as well as
any other amounts that may be incurred to conclude the negotiations or settle
any litigation.
Long-Lived Assets
The Company provides for the impairment of long-lived assets, including
goodwill, pursuant to Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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
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 recognized impairments of long-lived assets of approximately
$1.7 billion and $28 million during the years ended December 31, 2000 and 2001,
respectively. The Company recorded an impairment of long-lived assets of $0.6
million in the six months ended June 30, 2002. The Company performed an analysis
pursuant to the requirements of SFAS No. 144 as of June 30, 2002 to determine if
a further impairment of its long-lived assets was required. The analysis
compared the Company's estimate of future undiscounted cash flows that will be
generated by the existing long-lived assets to their net book value of $503
million. The basis for the estimate of future cash flows was the financial
projections included in the Modified Plan. The analysis indicated that no
impairment was required. The Company expects to recognize a write-down in the
value of long-lived assets of up to $270 million under Fresh Start reporting
(defined below) upon emergence from bankruptcy.
21
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
These consolidated financial statements have been prepared in accordance
with AICPA Statement of Position ("SOP") 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code." 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 consolidated
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 expense, net. Reorganization expense, net was $10 million and $5
million during the three months ended June 30, 2001 and 2002, respectively.
Reorganization expense, net was $28 million and $29 million during the six
months ended June 30, 2001 and 2002, respectively.
On the Effective Date, the Company will apply Fresh Start reporting ("Fresh
Start") in accordance with GAAP and the requirements of SOP 90-7. Under Fresh
Start, the Company and its financial advisors will determine the reorganization
value of the Company, which generally represents the going concern value. On the
Effective Date, a new capital structure will be established and assets and
liabilities, other than deferred taxes, will be stated at their relative fair
values. Deferred taxes will be determined in conformity with SFAS No. 109,
"Accounting for Income Taxes."
As of the Effective Date, it is anticipated that approximately $2.5 billion
of unsecured creditor and debt liabilities will be discharged in exchange for
new common stock and warrants to purchase additional common stock with an
estimated value of approximately $83 million. In addition, the existing
outstanding preferred and common stock, including warrants and options, will be
extinguished.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Reorganized Capital Structure
Under the terms of the Modified Plan, the Senior Facility will be
restructured and new notes (the "Secured Notes") will be issued to the Senior
Secured Lenders. In addition, the Modified Plan contemplates the issuance of a
$25 million Senior Subordinated Term Loan. Proceeds from the issuance of the
Senior Subordinated Term Loan will be utilized to pay down the Secured Notes,
concurrent with the Effective Date. Accordingly, the remaining balance due on
the Secured Notes on a projected, pro forma, reorganized basis is approximately
$60 million.
The New Exit Financing is contingent upon the Company consummating the
Modified Plan, which will include obtaining the necessary approvals from the
Bankruptcy Court and the Company's creditors. The Modified Plan contains the
endorsement of the Company's Creditors Committee and their recommendation that
the creditors vote to accept the Modified Plan; however, there is no assurance
that the Bankruptcy Court and the Company's creditors will approve the proposed
Plan. Notwithstanding the foregoing, based on discussions with the Company's
creditors, the Company anticipates that both the Bankruptcy Court and the
requisite number of the Company's creditors will approve the Modified Plan.
The following table compares the capital structure of the Company as of
June 30, 2002, as reported in the Company's interim unaudited financial
statements, with the projected pro forma reorganized capital structure of the
reorganized ICG upon confirmation of the Modified Plan. Amounts presented below
as the Projected Pro Forma elements of the reorganized ICG's capital structure
are taken from the Modified Plan that assumes an Effective Date of October 31,
2002.
22
Condensed Capital Structure
Projected
Pro Forma
Actual Reorganized
June 30, 2002 October 31, 2002
--------------- ----------------
(in thousands)
Debt:
Capital lease obligations $ 225,563 $ 95,013
Senior Facility 84,574 -
Secured Notes - 59,574
Senior Subordinated Term Loan, net of $5
million of debt discount - 19,711
Other secured debt 929 15,900
Unsecured debt 1,968,781 14,696
--------------- ----------------
Total debt 2,279,847 204,894
Preferred stock 1,289,789 -
Stockholders' equity (deficit) (3,457,121) 82,589
--------------- ----------------
Total debt and stockholders' equity $ 112,515 $ 287,483
=============== ================
Capital lease obligations at the Effective Date will primarily include
long-term leases for certain fiber facilities and the corporate headquarters
building. The effective interest rate is assumed to average 14.8% per annum for
fiber leases and 11.7% per annum for the building.
The Secured Notes will be secured by substantially all assets of the
Company and are projected to have a principal balance of approximately $60
million outstanding as of the Effective Date. Interest will accrue as a premium
over LIBOR or the bank's prime rate and is assumed at 11% per annum until loan
maturity, payable quarterly in arrears. The principal balance of the Secured
Notes is projected to begin amortizing in 2003 and will mature in 2005.
The $25 million Senior Subordinated Term Loan will be arranged by CCM. The
Senior Subordinated Term Loan will be subordinated to the Secured Notes and will
be secured by liens on substantially all assets of the Company. The loan will
accrue interest at 14% per annum, will be payable monthly in arrears, and will
mature four years from the Effective Date. In addition, two separate issuances
of warrants to purchase a total of 673,684 New Common shares of the reorganized
ICG will be issued in connection with the Senior Subordinated Term Loan.
Warrants to purchase 200,000 New Common shares will have an exercise price equal
to the reorganization value per share. Warrants to purchase 473,684 New Common
shares will have an exercise price of $0.01. Both warrant issues will expire, if
unexercised, on the fifth anniversary of the Effective Date. The warrants have
an estimated fair market value of $5 million, which has been established as a
debt discount with a corresponding increase to additional paid-in capital of
stockholders' equity in the accompanying table.
The Secured Notes and the Senior Subordinated Term Loan will require the
Company to meet certain financial covenants. The financial covenants will
include minimum EBITDA requirements and capital expenditure limitations. The
covenants will also require that the Company maintain a minimum cash balance
calculated as a ratio to the outstanding balance of the Secured Notes. Certain
of these financial covenants have been established based on the Company's
projected financial results set forth in the Modified Plan. The Modified Plan,
however, is based on the good faith assumptions and projections of management,
which are inherently uncertain. Actual results could differ materially from the
Modified Plan, which in turn could negatively impact the Company's compliance
with the financial covenants.
Based on the Company's current EBITDA projections, and assuming the Company
does not raise additional funds, or cut its projected capital spending, the
Company would need to request a modification or waiver with respect to the
minimum cash coverage ratio covenant by the first quarter of 2004. Management
anticipates that the Company's business plan provides sufficient flexibility to
reduce spending as appropriate to remain in compliance with this covenant. New
sources of capital may also be available beyond that which is currently
projected by management. There is no assurance, however, that these objectives
can be realized, or that the Company will be able to secure additional capital
or alternative financing. In such event, the Senior Secured Lenders could
declare a default and take certain actions that would require the Company to
accelerate repayment.
Other secured and unsecured debt as of the Effective Date consists
primarily of notes issued to vendors, taxing authorities and professional
services providers, and are projected to have a principal balance totaling $31
million. Associated interest expense is projected at 7% to 10% per annum,
payable monthly.
23
Other Sources of Funding
The Company had cash and cash equivalents of $102 million at June 30, 2002.
The Company is projected to have $70 million in cash on the Effective Date to
fund capital expenditures, debt principal and interest obligations, and working
capital requirements. The Company anticipates that it will need $12 million and
$57 million of new debt financing in 2004 and 2005, respectively, to meet
funding requirements and to refinance the bank debt due in 2005.
The Company expects that the demand for telecommunication services will
grow and, notwithstanding the current downturn in the general economy and
specifically the telecommunications industry, that it will be able to increase
its relatively small share of the markets it serves. The Company also believes
that as the Company's revenues grow, cash provided by operating activities will
increase. The Company anticipates that it will be able to refinance all or a
portion of the amounts due at the term of the respective debt facilities,
although such refinancing is contingent upon market conditions and the Company's
results of operations and is therefore not assured.
Capital Commitments
Contractual Cash Commitments
The following table summarizes the Company's contractual cash commitments.
The table assumes the Bankruptcy Court and the creditors will confirm the
Modified Plan and that the final provisions of the Exit Financing will exhibit
terms and conditions substantially in agreement with the executed commitments
discussed above.
Four Two Six
Months Months Months Years ended December 31,
Ended Ended Ended -------------------------------------
Oct.31, Dec. 31, Dec.31, 2006 and
2002 2002 2002 2003 2004 2005 thereafter
-------------------------------------------------------------------
Principal payments on
debt and capital
lease obligations(1):
Capital lease
obligations $ 1,768 $ 107 $ 1,875 $ 9,105 $ 9,251 $ 9,353 $ 98,424
Senior Facility (2) 25,000 - 25,000 - - - -
Secured Notes - - - 2,979 7,447 49,148 -
Senior Subordinated
Term Loan - - - - - - 25,000
Other secured debt - 925 925 5,821 5,864 3,290 -
Unsecured debt - 576 576 2,665 2,894 2,902 5,659
-------------------------------------------------------------------
26,768 1,608 28,376 20,570 25,456 64,693 129,083
Other obligations
Interest payments 7,845 1,752 9,597 19,376 20,896 24,534 97,999
Restructuring fees (3) 9,887 - 9,887 - - - -
Operating leases,
rents and other
contracts 7,202 3,379 10,581 18,438 15,809 14,013 12,947
-------------------------------------------------------------------
24,934 5,131 30,065 37,814 36,705 38,547 110,946
-------------------------------------------------------------------
Total Contractual
Cash Obligations $ 51,702 $ 6,739 $ 58,441 $ 58,384 $ 62,161 $103,240 $ 240,029
===================================================================
- ---------------------
(1) Excludes the interest component - included in "Interest payments".
(2) Will be paid using proceeds form the Senior Subordinated Term Loan.
(3) Includes the estimated settlement of Administrative (Professional fees),
Convenience and Priority Claims and cash disbursed with the affirmation of
certain executory contracts (as these terms are defined in the Modified
Plan).
24
Capital Expenditures
Capital expenditures in the Modified Plan are projected to be approximately
$73 million in 2002 and $351 million through 2005. Capital expenditures,
exclusive of amounts required to maintain the current network functionality,
will be driven by customer demand for the Company's services. If customer demand
for new services does not meet the expectation of the Modified Plan, capital
expenditures will be proportionally reduced. The Company also has available
capacity on its data backbone, intracity fiber and in its modem banks. It is the
Company's objective to use this capacity to generate future revenue streams.
Assessment of Risks and Uncertainty
Availability of Financing
The Company anticipates that it will need $12 million and $57 million of
new debt financing in 2004 and 2005, respectively, to meet funding requirements
and to refinance the Secured Notes due in 2005. There can be no assurance,
however, that refinancing will be available on acceptable terms, or at all.
Further, there is 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, which will allow it to maintain cash reserves or
attract capital with which to refinance the Secured Notes.
As stated above, under the Modified Plan, the proceeds from the New Exit
Financing will be released from escrow on the Effective Date if the Debtors'
creditors again vote in favor of the Modified Plan, it is confirmed by the
Bankruptcy Court, and the Company certifies that it is in compliance with
certain covenants, representations and warranties. In the event the Company does
not obtain such financing, the Company's ability to execute its business plan
and meet future commitments may be materially adversely impacted.
Business Environment
The general economic downturn and the severe downturn in the
telecommunications industry have resulted in increased exposure to several
risks, including customer credit risk, increased customer disconnections,
pricing pressure created by an oversupply of backbone and other services, and
possible financial difficulties that may be experienced by the Company's
suppliers.
The slowing economy has caused customers to go out of business, file for
bankruptcy protection and look for opportunities to cut costs. As a result, the
Company has experienced an acceleration of customers disconnecting services,
which has resulted in downward pressure on revenue. In addition, customers are
taking longer to make buying decisions, lengthening the sales cycle. During the
second quarter of 2002, $2 million of recurring revenue was eliminated due to
customer disconnections.
Management believes that such downward pressure on revenue will continue to
negatively impact financial performance for the remainder of 2002. Approximately
16% of the Company's June, 2002 recurring revenue was earned from customers who
had filed for Chapter 11 bankruptcy protection by July 31, 2002, including
WorldCom, Inc. and its subsidiaries. The Company cannot predict how much of this
revenue will be lost in the future to disconnections. Other customers of the
Company have been adversely affected by overall industry trends and may also be
experiencing financial difficulties. The Company anticipates further
disconnections due to customers optimizing their existing networks, continued
cost cutting efforts, and additional customer bankruptcies or other financial
difficulties. There is no assurance that the Company will be able to replace
lost revenue with new revenue from sales.
While bankruptcies and financial difficulties in the telecommunications
industry present a threat to revenue growth, the contraction in the number of
providers may benefit the Company in the following respects:
(i) As some emerging providers go out of business, their customers may seek to
purchase services from the Company; and
(ii) The failure of some emerging telecommunications providers may reduce some
of what the Company believes is artificially low pricing of services that
exists in the market for certain telecommunications services.
There is no assurance that the Company will realize any benefits from the
downturn in the telecommunications industry or that the Company will not be
adversely affected by conditions in the industry or the economy in general.
25
The immense capital investments made in the telecommunications industry
have created an oversupply of network infrastructure. This oversupply, rapid
technological advancements and intense competition have resulted in significant
pricing pressure in each of the Company's main service areas. While the Company
believes it is price competitive overall, it cannot predict the impact that the
oversupply of network infrastructure will have on future operating results.
The Company's suppliers may also become adversely affected by overall
industry trends and may experience financial difficulties. There is no assurance
that the Company will be able to replace lost vendor contracts under similar
terms.
Reciprocal compensation revenue is primarily associated with the Company's
Dial-Up revenue and represents compensation from other LECs for local exchange
traffic originated on another LEC's facilities and terminated on the Company's
facilities. Reciprocal compensation rates are established by interconnection
agreements between the parties. In most states in which the Company provides
services, regulatory bodies have established lower traffic termination rates
than the rates provided under the Company's interconnection agreements. As a
result, future rates will likely be lower than the rates under the expiring
interconnection agreements. In addition, a 2001 FCC ruling on reciprocal
compensation for ISP-bound traffic has reduced rates and will further reduce
rates in June 2003. The ruling also capped the number of minutes that can be
billed for ISP-bound traffic. Reciprocal compensation represented 13% of revenue
in the three months ended June 30, 2001 and 2002, respectively. Reciprocal
compensation, including $5 million from a settlement reached with SBC
Communications, Inc., represented 13% and 14% of revenue in the six months ended
June 30, 2001 and 2002, respectively. The Company believes that the revenue
earned from reciprocal compensation will be significantly reduced in future
years.
Loss of significant customers
The Company has substantial business relationships with a few large
customers. For the three months ended June 30, 2001, and 2002, the top ten
customers accounted for 52% and 65%, respectively, of total revenue. For the six
months ended June 30, 2001, and 2002, the top ten customers accounted for 48%
and 63%, respectively, of total revenue. The Company's largest customer
accounted for 15% and 31% of total revenue in the three months ended June 30,
2001, and 2002, respectively. The Company's largest customer accounted for 12%
and 28% of total revenue in the six months ended June 30, 2001, and 2002,
respectively. In the first quarter and first half of 2002 the companies that
individually represented more than 5% of total revenue were Qwest
Communications, Inc. UUNet (a division of WorldCom, Inc.) and a large national
ISP. MCI, also a subsidiary of WorldCom, was one of the top ten customers,
although it individually represented less than 5% of total revenue in the three
and six months ended June 30, 2002. Revenue from all WorldCom subsidiaries
represented 11% and 12% of total revenue in the three months ended June 30, 2001
and 2002, respectively, and 9% and 12% of total revenue in the six months ended
June 30, 2001 and 2002, respectively.
Off Balance Sheet Financing
The Company has no off balance sheet financing other than long term
commitments for operating leases and rents.
Historical Cash Activities
Net Cash Used By Operating Activities
The Company's operating activities used $37 million and $16 million in the
six months ended June 30, 2001 and 2002, respectively. Net cash used by
operating activities is comprised primarily of net losses, reorganization items
and fluctuations in operating assets and liabilities (working capital), offset
by non-cash items included in the net losses, such as depreciation and
amortization, provision for uncollectible accounts and deferred interest
expense.
The Company's operating activities before reorganization items provided $2
million and $4 million in 2001 and 2002, respectively. For the six months ended
June 30, 2002 working capital items used cash of $26 million, primarily due to a
$24 million decrease in accounts payable and accrued liabilities. For the six
months ended June 30, 2001, working capital items provided cash of $12 million,
primarily due to $19 million decrease in receivables.
Reorganization items included in cash flows from operating activities used
$39 million and $20 million in 2001 and 2002, respectively. Reorganization items
represent primarily reorganization expense, net, adjusted for non-cash items
recognized during the bankruptcy process, and are comprised primarily of changes
in liabilities subject to compromise, gains and losses related to contract
settlements and disposals of long-lived assets, and post-petition accruals
directly related to reorganization activities.
26
Net Cash Used By Investing Activities
Investing activities used $7 million and $21 million in the six months
ended June 30, 2001 and 2002, respectively. Net cash used by investing
activities is primarily comprised of cash purchases of property and equipment,
proceeds from disposition of property, equipment and other assets, purchases and
sales of short-term investments, and fluctuations in long-term deposit balances.
Net Cash Used By Financing Activities
Financing activities used $18 million and $8 million in the six months
ended June 30, 2001 and 2002, respectively. Cash used by financing activities in
2001 and 2002 represents primarily principal payments on capital lease
obligations that are subject to compromise.
The Company continues to make interest-only payments on the Senior Facility
balance as approved by the Bankruptcy Court. The Bankruptcy Court has stayed the
payment of principal due under the Senior Facility. The Company anticipates that
in connection with the Exit Financing proposed in its Plan (see "Reorganized
Capital Structure" under "Liquidity and Capital Resources"), the Company will
repay $25 million on or about the Effective Date, and the remaining $60 million
will be replaced with the Secured Notes.
As of June 30, 2002, the Company had an aggregate accreted value of
approximately $2 billion outstanding under the 13 1/2% Senior Discount Notes due
2005, the 12 1/2% Senior Discount Notes due 2006, the 11 5/8% Senior Discount
Notes due 2007, the 10% Notes and the 9 7/8% Notes. It is anticipated that this
debt will be discharged pursuant to the confirmation of the Modified Plan.
As of June 30, 2002, an aggregate amount of approximately $1.3 billion was
outstanding under the 6 3/4% Preferred Securities, the 14% Preferred Stock, the
14 1/4% Preferred Stock and the 8% Series A Convertible Preferred Stock. It is
anticipated that the preferred stock will be extinguished pursuant to the
confirmation of the Modified Plan.
Capital Expenditures
The Company's capital expenditures, which represent assets acquired with
cash and under capital leases, were $67 million and $24 million for the six
months ended June 30, 2001 and 2002, respectively.
27
RESULTS OF OPERATIONS
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for the Company for the periods
indicated. The table also shows certain revenue, expenses, operating loss, and
EBITDA as a percentage of the Company's total revenue.
Financial Data
Three months ended June 30, Six months ended June 30,
--------------------------------------- ---------------------------------------
2000 2001 2000 2001
------------------- ------------------- ------------------- -------------------
$ % $ % $ % $ %
---------- -------- ---------- -------- ---------- -------- ---------- --------
(unaudited)
($ values in thousands)
Statement of Operations Data:
Revenue 121,252 100 102,780 100 257,649 100 214,951 100
Operating costs 84,813 70 60,912 59 197,375 77 128,290 60
Selling, general and administrative 26,470 22 23,960 23 57,166 22 51,562 24
Depreciation and amortization 16,194 13 25,311 25 32,183 12 44,937 21
Loss on disposal of asset 7,562 6 (108) - 7,633 3 (114) -
Provision for impairment of
long-lived assets - - 643 1 - - 643 -
---------- -------- ---------- -------- ---------- -------- ---------- --------
Operating loss (13,787) (11) (7,938) (8) (36,708) (14) (10,367) (5)
Other Data:
EBITDA (1) 9,969 8 17,908 17 3,108 1 35,099 16
Net cash provided (used) by
operating activities 24,290 15,470 (37,354) (15,866)
Net cash used by investing
activities (1,536) (4,122) (6,547) (21,219)
Net cash provided (used) by
financing activities (15,980) (7,270) (17,783) (7,970)
Capital expenditures (2) 59,376 16,614 67,274 24,223
- --------------------------------------------------------------------------------------------------------------------
Statistical Data (unaudited) (3)
June 30, September 30, December 31, March 31, June 30,
2000 2000 2000 2001 2001
---------- ------------- ------------ ------------ -----------
Full time employees 1,422 1,389 1,368 1,342 1,138
Telecom services:
Access lines in service, in thousands (4) 719 789 742 807 834
Buildings connected:
On-net 881 902 901 911 912
Hybrid (5) 7,264 6,315 5,727 5,189 4,748
---------- ------------- ------------ ------------ -----------
Total buildings connected 8,145 7,217 6,628 6,100 5,660
Operational switches:
Circuit 44 43 43 47 46
ATM 27 26 27 25 26
---------- ------------- ------------ ------------ -----------
Total operational switches 71 69 70 72 72
Operational regional fiber route
miles (6): 5,577 5,542 5,542 5,542 5,542
Operational regional fiber strand
miles (7): 166,498 165,847 165,847 165,847 165,927
Collocations with ILECs 160 148 161 160 158
(1) EBITDA consists of net income (loss) from continuing operations before
interest, income taxes, reorganization expense, net, depreciation and
amortization, other expenses, net. EBITDA is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP for
the periods indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities of
continuing operations as determined using GAAP are also presented in Other
Data. The following table is a reconciliation of the net loss reported by
the Company to EBITDA:
28
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
2001 2002 2001 2002
------------ ----------- ----------- -----------
(in thousands)
Net loss $ (33,321) $ (18,035) $ (86,678) $ (49,319)
Depreciation and amortization 16,194 25,311 32,183 44,937
Interest expense 11,081 4,599 23,799 10,303
Reorganization expense, net 9,819 5,441 27,505 28,732
Loss (gain) on disposal of
assets 7,562 (108) 7,633 (114)
Provision for impairment of
long-lived assets - 643 - 643
Other expense (income), net (1,366) 57 (1,334) (83)
------------ ----------- ----------- -----------
EBITDA $ 9,969 $ 17,908 $ 3,108 $ 35,099
============ =========== =========== ===========
(2) Capital expenditures include assets acquired with cash, payables, under
capital leases, and pursuant to IRU agreements.
(3) Amounts presented are for three-month periods ended, or as of the end of
the period presented.
(4) Access lines in service include only provisioned lines generating revenue.
(5) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(6) Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. None of the regional fiber route miles at
June 30, 2002 were leased under operating leases.
(7) Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands along that path. As of June 30, 2002, the
Company had 165,927 regional fiber strand miles, 45,445 of which were
leased under operating leases.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenue
Three Months Ended June 30,
-------------------------------------------------
2001 2002
------------------------ ------------------------
$ % $ %
------------ ----------- ------------ ----------
($ values in thousands)
Dial-Up 40,658 34 45,056 44
Point-to-Point Broadband 38,981 32 27,009 26
Corporate Services 25,877 21 17,445 17
Reciprocal Compensation 15,736 13 13,270 13
------------ ----------- ------------ ----------
Total Revenue 121,252 100 102,780 100
============ =========== ============ ==========
Total revenue decreased $18 million, or 15%, between the three months ended
June 30, 2001 and 2002, respectively. The decrease was due to a $12 million
decrease in Point-to-Point Broadband revenue, an $8 million decrease in
Corporate Services revenue and a $2 million decrease in Reciprocal Compensation
revenue, offset by a $4 million increase in Dial-Up revenue.
The general economic downturn and the severe downturn in the
telecommunications industry have resulted in an oversupply of network
infrastructure. In addition, the slowing economy has resulted in the Company's
customers going out of business, filing for bankruptcy protection, and looking
for opportunities to cut costs. The effects on the Company include higher levels
of customer disconnections and increased pricing pressure on new and existing
customer contracts. In addition, customers are taking longer to make buying
decisions, lengthening the sales cycle.
Dial-Up revenue is earned by providing PRI ports (one and two way) and
managed modem (IRAS) services to ISPs and other communication service companies.
Dial-Up revenue increased 11% from $41 million in 2001 to $45 million in 2002,
due primarily to an 18% increase in the billed line count, offset by a 6%
decrease in the average monthly revenue per customer port in service. Dial-Up
revenue's contribution to total revenue rose from 34% in the second quarter of
2001 to 44% in the second quarter of 2002.
29
Point-to-Point Broadband revenue is generated from service provided to
inter-exchange 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 local markets, large companies and other long-haul carrier
facilities; and (ii) large companies to their long distance carrier facilities
and other facilities. Point-to-Point Broadband revenue decreased 31% from $39
million in 2001 to $27 million in 2002. The decrease in Point-to-Point Broadband
revenue was comprised of decreases in special access, switched access and SS7
revenues of 24%, 65% and 62%, respectively, which occurred primarily due to
customer churn. Point-to-Point Broadband revenue's contribution to total revenue
declined from 32% in the first quarter of 2001 to 26% in the first quarter of
2002.
Corporate Services revenue includes local enhanced telephony (voice) and
data (internet access) services to businesses over its fiber optic networks
located in major metropolitan areas. Corporate Services revenue decreased 33%
from $26 million in 2001 to $17 million in 2002. The billed line count decreased
42% from the second quarter of 2001 to the second quarter of 2002, while the
average monthly revenue per line increased 16%. The decrease in the billed line
count is primarily the result of customer churn in the telephony services, as
well as planned transition of customers in certain service areas. In addition,
the Company entered into an agreement to transfer its long distance revenue
stream in the fourth quarter of 2001. These customers generated $1.3 million of
revenue in the three months ended June 30, 2001. The lost revenue's impact on
EBITDA was not significant. Corporate Services revenue's contribution to total
revenue declined from 21% in the second quarter of 2001 to 17% in the second
quarter of 2002.
Reciprocal Compensation revenue is primarily earned pursuant to
interconnection agreements with ILECs for the transport and termination of calls
originated by ILEC customers, including Internet bound calls. Reciprocal
Compensation revenue decreased 16% from $16 million in 2001 to $13 million in
2002. The decrease in revenue was due to a 12% decrease in the average revenue
earned per minutes of use, as well as a 5% decrease in the minutes of use.
Reciprocal Compensation's contribution to total revenue remained consistent at
13% in 2001 and 2002. The Company anticipates that Reciprocal Compensation
revenue will decline in the future based on future negotiated rates and
expiration of agreements beginning in the first quarter of 2003.
The Company has substantial business relationships with a few large
customers. For the three months ended June 30, 2001, and 2002, the top ten
customers accounted for 52% and 65%, respectively, of total revenue. The
Company's largest customer accounted for 15% and 31% of total revenue in the
three months ended June 30, 2001, and 2002, respectively. In 2002 the companies
that individually represented more than 5% of total revenue were Qwest
Communications, Inc., UUNet (a division of WorldCom, Inc.) and a large national
ISP. MCI, also a subsidiary of WorldCom, Inc., was one of the top ten customers,
although it individually represented less than 5% of total revenue. All WorldCom
subsidiaries combined represented 11% and 12% of total revenue in the three
months ended June 30, 2001 and 2002, respectively.
Operating costs
Total operating costs decreased 28% from $85 million for the three months
ended June 30, 2001 to $61 million for the same period in 2002. As a percentage
of revenue, operating costs also decreased from 70% in the second quarter of
2001 to 59% in the second quarter of 2002. Operating costs consist primarily of
payments to ILECs, other CLECs, and long distance carriers for the use of
network facilities to support local, special, switched access services, and long
distance services as well as internal network operating costs, right of way fees
and other operating costs. Internal network operating costs include the cost of
engineering and operations personnel dedicated to the operations and maintenance
of the network. Since filing for bankruptcy, the Company has significantly
reduced excess network capacity, eliminated services in unprofitable markets,
and reconfigured its network for better performance. This has resulted in lower
operating costs for both internal and leased network facilities.
Selling, general and administrative ("SG&A") expenses
Total SG&A expenses decreased 9% from $26 million for the three months
ended June 30, 2001 to $24 million for the same period in 2002. As a percentage
of revenue, SG&A expenses increased slightly from 22% for 2001 to 23% for 2002.
The average number of full-time employees during the period decreased 14% from
1,443 in 2001 to 1,243 in 2002. The decrease in SG&A costs was due primarily to
reduced costs associated with the lower headcount, lower facilities costs as the
Company consolidates its locations during the restructuring process, lower
software maintenance costs, and lower bad debt expense. In addition, real estate
and personal property taxes decreased as a result of write downs in the value of
the Company's property and equipment.
In the second quarter of 2002 the Company announced that it would reduce
its workforce. As a result, the number of full-time employees decreased 15% from
March 31, 2002 to June 30, 2002. Because the reduction did not become effective
until June 2002, the full impact on SG&A will not be seen until the third
quarter of 2002.
30
Depreciation and amortization
Depreciation and amortization increased 56% from $16 million for the three
months ended June 30, 2001 to $25 million for the same period in 2002, primarily
due to higher levels of property and equipment placed in service and subject to
depreciation.
Interest expense
Interest expense decreased 58% from $11 million for the three months ended
June 30, 2001 to $5 million for the same period in 2002, primarily due to
interest expense eliminated as a result of the Company's rejection of certain
capital leases in connection with the bankruptcy process. In addition, interest
expense in the three months ended June 30, 2001 included $2 million of deferred
financing cost amortization relating to the Debtor-In-Possession Revolving
Credit Agreement. The Company terminated the Revolving Credit Agreement on
November 7, 2001 and wrote off the remaining unamortized deferred financing
costs to interest expense at that time.
Reorganization expense, net
Reorganization expense, net decreased 45% from $10 million for the three
months ended June 30, 2001 to $5 million for the same period in 2002.
Reorganization expense, net consists of items associated with the bankruptcy
proceedings that are not directly attributable to the ongoing operations of the
Company. The decrease is attributable primarily to the $7 million gain recorded
in the quarter ended June 30, 2002 related to contract settlements reached with
vendors.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenue
Six Months Ended June 30,
-------------------------------------------------
2001 2002
------------------------ ------------------------
$ % $ %
------------ ----------- ------------ ----------
($ values in thousands)
Dial-Up 87,251 34 89,278 42
Point-to-Point Broadband 78,517 30 56,970 26
Corporate Services 59,097 23 37,686 18
Reciprocal Compensation 32,784 13 31,017 14
------------ ----------- ------------ ----------
Total Revenue 257,649 100 214,951 100
============ =========== ============ ==========
Total revenue decreased $43 million, or 17%, between the six months ended
June 30, 2001 and 2002, respectively. The decrease was due primarily to a $22
million decrease in Point-to-Point Broadband revenue, a $21 million decrease in
Corporate Services revenue, and a $2 million decrease in Reciprocal Compensation
revenue, offset by a $2 million increase in Dial-Up revenue. 2002 Reciprocal
Compensation revenue includes $5 million from a settlement reached with SBC
Communications, Inc.
Dial-Up revenue increased 2% from $87 million in 2001 to $89 million in
2002, due primarily to a 9% increase in the billed line count, offset by an 6%
decrease in the average monthly revenue per customer port in service. Dial-Up
revenue's contribution to total revenue rose from 34% in the first half of 2001
to 42% in the first half of 2002.
The decrease in Point-to-Point Broadband revenue was comprised of decreases
in special access, switched access and SS7 revenues of 22%, 56% and 50%,
respectively, which occurred primarily due to customer churn. Point-to-Point
Broadband revenue's contribution to total revenue declined from 30% in the first
quarter of 2001 to 26% in the first quarter of 2002.
Corporate Services revenue decreased 36% from $59 million in 2001 to $38
million in 2002, primarily due to a 43% decrease in the billed line count,
offset by a 12% increase in the average monthly revenue per line from the first
half of 2001 to the first half of 2002. The decrease in the billed line count is
primarily the result of customer churn in the telephony services, as well as
planned transition of customers in certain service areas. In addition, the
Company entered into an agreement to transfer its long distance revenue stream
in the fourth quarter of 2001. These customers generated $3.8 million of revenue
in the six months ended June 30, 2001. The lost revenue's impact on EBITDA was
not significant. Corporate Services revenue's contribution to total revenue
declined from 23% in the first half of 2001 to 18% in the first half of 2002.
31
Reciprocal Compensation revenue decreased 5% from $33 million in 2001 to
$31 million in 2002. Reciprocal Compensation's contribution to total revenue
increased from 13% in 2001 to 14% in 2002. Reciprocal Compensation revenue in
2002 includes $5 million from a settlement reached with SBC Communications, Inc.
The revenue from the settlement was recorded in the first quarter of 2002. If
the revenue from the settlement were to be excluded, Reciprocal Compensation
revenue would have decreased 21% to $26 million, or 12% of total revenue.
Excluding the effect of the settlement on revenue, average revenue earned per
minutes of use decreased 15% and minutes of use decreased 8%. The Company
anticipates that Reciprocal Compensation revenue will decline in the future
based on future negotiated rates and expiration of agreements beginning in the
first quarter of 2003.
The Company has substantial business relationships with a few large
customers. For the six months ended June 30, 2001, and 2002, the top ten
customers accounted for 48% and 63%, respectively, of total revenue. The
Company's largest customer accounted for 12% and 28% of total revenue in the six
months ended June 30, 2001, and 2002, respectively. In 2002 the companies that
individually represented more than 5% of total revenue were Qwest
Communications, Inc., UUNet (a division of WorldCom, Inc.) and a large national
ISP. MCI, also a subsidiary of WorldCom, Inc., was one of the top ten customers,
although it individually represented less than 5% of total revenue. All WorldCom
subsidiaries combined represented 9% and 12% of total revenue in the six months
ended June 30, 2001 and 2002, respectively.
Operating costs
Total operating costs decreased 35% from $197 million for the six months
ended June 30, 2001 to $128 million for the same period in 2002. As a percentage
of revenue, operating costs also decreased from 77% in the first half of 2001 to
60% in the first half of 2002. Since filing for bankruptcy, the Company has
significantly reduced excess network capacity, eliminated services in
unprofitable markets, and reconfigured its network for better performance. This
has resulted in lower operating costs for both internal and leased network
facilities.
Selling, general and administrative ("SG&A") expenses
Total SG&A expenses decreased 10% from $57 million for the six months ended
June 30, 2001 to $52 million for the same period in 2002. As a percentage of
revenue, SG&A expenses increased from 22% for 2001 to 24% for 2002. The average
number of full-time employees during the period decreased 18% from 1,578 in 2001
to 1,300 in 2002. The decrease in SG&A costs was due primarily to reduced costs
associated with the lower headcount, lower facilities costs as the Company
consolidates its locations during the restructuring process, lower software
maintenance costs, and lower bad debt expense. In addition, real estate and
personal property taxes decreased as a result of write downs in the value of the
Company's property and equipment.
In the second quarter of 2002 the Company announced that it would reduce
its workforce. As a result, the number of full-time employees decreased 15% from
March 31, 2002 to June 30, 2002. Because the reduction did not become effective
until June 2002, the full impact on SG&A will not be seen until the third
quarter of 2002.
Depreciation and amortization
Depreciation and amortization increased 40% from $32 million for the six
months ended June 30, 2001 to $45 million for the same period in 2002, primarily
due to higher levels of property and equipment placed in service and subject to
depreciation.
Interest expense
Interest expense decreased 57% from $24 million for the six months ended
June 30, 2001 to $10 million for the same period in 2002, primarily due to
interest expense eliminated as a result of the Company's rejection of certain
capital leases in connection with the bankruptcy process. In addition, interest
expense in the six months ended June 30, 2001 included $4 million of deferred
financing cost amortization relating to the Debtor-In-Possession Revolving
Credit Agreement. The Company terminated the Revolving Credit Agreement on
November 7, 2001 and wrote off the remaining unamortized deferred financing
costs to interest expense at that time.
Reorganization expense, net
Reorganization expense, net increased 4% from $28 million for the six
months ended June 30, 2001 to $29 million for the same period in 2002. The
increase is primarily attributable to a $21 million increase in contract
termination expenses, offset by an $8 million decrease in severance and employee
retention costs, a $6 million decrease in legal and professional fees and a $6
million gain from contract settlements recorded in 2002. As part of its
32
restructuring activities, including reconciliation of pre-petition claims,
during the six months ended June 30, 2002 the Company recognized $23 million of
contract termination expenses, which have been accrued as unsecured liabilities
subject to compromise. Severance and employee retention costs were lower because
the Company's reductions in workforce were more significant in the first half of
2001 than in 2002. In the first half of 2002, the number of full-time employees
decreased by 230 employees, compared to a decrease of 632 employees in the first
half of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and equity prices. The Company routinely
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures. The
Company does not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes.
33
PART II
ITEM 1. 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 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 United
States District Court for the District of Colorado (the "District
Court"). The complaints sought class action certification for
similarly situated shareholders. All of the initial suits named 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 named 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.) The claims
against the Company were stayed pursuant to the Company's filing for
bankruptcy.
In October 2001, the District Court consolidated the various actions
and appointed lead plaintiffs' counsel. In February 2002, lead
plaintiffs' counsel for the various shareholders filed a consolidated
amended complaint. In addition to naming Messrs. Bryan and Beans as
defendants, the amended complaint names as a defendant the Company's
former chief financial officer, Harry R. Herbst. The consolidated
amended complaint does not name the Company's former president, John
Kane. In addition, the amended complaint does not name the Company as
a defendant. The consolidated complaint, however, indicates that, but
for the fact that claims against ICG have been stayed pursuant to the
Bankruptcy Code, the Company would be named as a defendant. The
consolidated amended complaint alleges violations of Sections 10(b)
and 20(a) of the Securities and Exchange Act of 1934 and seeks class
action certification under Rule 23 of the Federal Rules of Civil
Procedure. The complaint seeks unspecified compensatory damages.
The claims against the individual defendants are proceeding and these
defendants have retained separate legal counsel to prepare a defense.
Under Section 510(b) of the Bankruptcy Code, all pre-petition
securities claims against ICG are mandatorily subordinated and will be
discharged upon the confirmation of the Modified Plan. Holders of
pre-petition equity securities claims will not receive any recovery
from the Company under the proposed Plan.
In January 2002, SBC Communications, Inc., on behalf of various
subsidiaries (collectively "SBC") filed a motion in the Company's
Bankruptcy case seeking permission to terminate the services it
provides the Company pursuant to its interconnection agreements. SBC
contended that the Company owed SBC in excess of $24 million related
to past billing, and, as a result, was entitled to terminate services
and pursue an administrative claim for the alleged past due
receivable. The Company filed a response to SBC's motions stating that
it did not owe a significant portion of the alleged past due amount.
Additionally, the Company's response contended that SBC owed the
Company considerably more than the Company owed SBC.
On March 29, 2002 the Company and SBC entered into a settlement
agreement regarding wholesale services provided by SBC and the Company
to each other pursuant to the interconnection agreements. On April 30,
the Bankruptcy Court issued an order approving the terms of the
settlement. On May 10, 2002, the order became final and
non-appealable. Only amounts allegedly owed for the retail services,
which are not governed by the interconnection agreements, have yet to
be resolved. The Company believes that the ultimate resolution of the
remaining items relating to retail services will be immaterial to the
Company's operating results.
In January 2001, certain shareholders of ICG Funding, LLC ("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 ICG Funding. The
shareholders in this adversary action sought to recover approximately
$2.3 million from an escrow account established to fund certain
dividend payments to holders of the ICG Funding Exchangeable Preferred
Securities. Because ICG Funding filed for bankruptcy protection, ICG
Funding did not declare the last dividend that was to have been paid
34
with the remaining proceeds of the escrow account. In April 2001, the
Company and ICG Funding finalized a settlement agreement with the
shareholders that has been approved by the Bankruptcy Court. Under the
terms of the settlement, the shareholders received approximately
two-thirds of the funds in the escrow account and the Company received
the remaining one-third of the escrowed funds, subject to certain
contingencies and holdbacks related to shareholders that did not
participate in the settlement.
The Company is a party to certain other litigation that has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows. The Company is not involved in any administrative or
judicial proceedings relative to an environmental matter.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Due to the bankruptcy proceedings discussed in note 1 to the Company's
unaudited consolidated financial statements for the three months ended
June 30, 2002, the Company is currently in default under the 13 1/2 %
Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes, 9 7/8% Notes and the
Senior Facility. In addition, the Company is in default under the 14
1/4% Preferred Stock, 14% Preferred Stock, 6 3/4% Preferred Securities
and 8% Series A Convertible Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
35
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(A) Exhibits.
2.4 Findings of Fact, Conclusions of Law, and Order Confirming
Second Amended Joint Plan of Reorganization of ICG
Communications, Inc. and its Affiliated Debtors and Debtors
in Possession dated May 21, 2002. [Incorporated by reference
to Exhibit 2.1 to ICG Communications, Inc.'s Current Report
on Form 8-K dated May 21, 2002].
2.5 Second Amended Joint Plan of Reorganization of ICG
Communications, Inc. and its Affiliated Debtors and Debtors
in Possession dated April 3, 2002. [Incorporated by
reference to Exhibit 2.2 to ICG Communications, Inc.'s
Current Report on Form 8-K dated May 21, 2002].
2.6 Disclosure Statement with Respect to Second Amended Joint
Plan of Reorganization of ICG Communications, Inc. and its
Affiliated Debtors and Debtors in Possession dated April 3,
2002. [Incorporated by reference to Exhibit 2.3 to ICG
Communications, Inc.'s Current Report on Form 8-K dated May
21, 2002].
2.7 Modification to the Second Amended Joint Plan of
Reorganization of ICG Communications, Inc. and its
Affiliated Debtors and Debtors in Possession dated July 26,
2002. [Incorporated by reference to Exhibit 2.7 to ICG
Communications, Inc.'s Current Report on Form 8-K dated
August 9, 2002].
2.8 Supplemental Disclosure With Respect to Second Amended Joint
Plan of Reorganization of ICG Communications, Inc. Regarding
Modification of ICG Communications, Inc. and its Affiliated
Debtors and Debtors in Possession dated July 26, 2002.
[Incorporated by reference to Exhibit 2.8 to ICG
Communications, Inc.'s Current Report on Form 8-K dated
August 9, 2002].
2.9 Senior Financing Agreement by and among ICG Communications,
Inc. and its affiliated debtor subsidiaries identified
herein, Royal Bank of Canada, as Administrative Agent and as
collateral agent, and Wachovia Bank, National Association,
as documentation agent, dated as of July 25, 2002.
[Incorporated by reference to Exhibit 2.9 to ICG
Communications, Inc.'s Current Report on Form 8-K dated
August 9, 2002].
10.85Note and Warrant Purchase Agreement by and among ICG
Communications, Inc., Madeleine L.L.C. and Morgan Stanley &
Co., Incorporated, dated as of July 25, 2002. [Incorporated
by reference to Exhibit 10.85 to ICG Communications, Inc.'s
Current Report on Form 8-K dated August 9, 2002].
10.86Escrow Agreement by and among ICG Communications, Inc.,
Madeleine L.L.C. and Morgan Stanley & Co., Incorporated,
dated as of July 25, 2002. [Incorporated by reference to
Exhibit 10.86 to ICG Communications, Inc.'s Current Report
on Form 8-K dated August 9, 2002].
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
36
(B) Report on Form 8-K.
The following reports on Form 8-K were filed by the registrant
during the three months ended June 30, 2002:
(i) Current Report on Form 8-K dated May 21, 2002, announcing
that ICG's Second Amended Joint Plan of Reorganization and
accompanying Disclosure Statement had been accepted by all
classes of creditors entitled to vote on the Plan and
confirmed by the Bankruptcy Court.
The following reports on Form 8-K were filed by the registrant
after June 30, 2002 but before the date of this Report:
(i) Current Report on Form 8-K dated August 9, 2002, announcing
that:
a) On July 25, 2002, the Debtors entered into the Senior
Facility, the Note and Warrant Purchase Agreement and
Escrow Agreement, pursuant to which $25 million was
deposited into an escrow account. The release of the
funds is contingent on approval by the Bankruptcy Court
of the Modified Plan and satisfaction of certain
conditions as set forth in the Note and Warrant
Purchase Agreement.
b) On July 26, 2002, the Company filed a modification to
ICG's Second Amended Joint Plan of Reorganization with
the Bankruptcy Court.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on August 14, 2002.
ICG COMMUNICATIONS, INC.
Date: August 14, 2002 By: /S/ RICHARD E. FISH, JR.
-------------------------------------
Richard E. Fish, Jr., Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002 By: /S/ JOHN V. COLGAN
-------------------------------------
John V. Colgan, Senior Vice President
and Controller (Principal Accounting
Officer)
38
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ICG Communications, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Randall
Curran, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/S/ RANDALL E. CURRAN
- ---------------------------------------
Randall E. Curran
Chief Executive Officer
August 14, 2002
39
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ICG Communications, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Richard
E. Fish, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/S/ RICHARD E. FISH, JR.
- --------------------------------------
Richard E. Fish, Jr.
Executive Vice President and Chief Financial Officer
August 14, 2002
40