20020516Application(Part 1).pdf

RECEIVED @
FILED OMaryV.York,ISB No.5020
Holland &Hart,LLP 2002 MAY l 6 AM 10·57
101 South Capitol Blvd.,Suite 1400
Boise,ID 83702-7714 íU hJ PUBLICUTILITIESCOMMISSIONTelephone:[phone]
Fax:[phone]
myork@hollandhartcom
Thorvald A.Nelson,CSB No.24715
Holland &Hart,LLP
8390 E.Crescent Pkwy Suite 400
Greenwood Village,CO 80111 NEW CASETelephone:[phone]
Fax:[phone]
tnelson@hollandhartcom
Attorneysfor ICG Telecom Group
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Application of )Case No./(G yff)"(f
ICG TELECOM GROUP,Inc.)APPLICATION AND REQUEST
)FOR MODIFIED PROCEDURE OF
To Amend and Expand its Certificate )ICG TELECOM GROUP
of Public Convenience and Necessity )
to Provide Facilities-Based Local )
Exchange and Interexchange )TelecommunicationsServices )
Statewide )
I.INTRODUCTION
ICG Telecom Group,Inc.("ICG")by its undersigned counsel and pursuant to
Idaho Code Section 61-526 through -528,Idaho Administrative Procedure Act Section
31.01.01.112,and Procedural Order No.26665,hereby applies to the Idaho Public
Utilities Commission ("Commission")for an amendment to its existingCertificate of
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 1
Public Convenience and Necessity (CertificateNo.356).The Commission previously
granted ICG authority to providefacilities-based local exchange and interexchange
telecommunications services in the service territories of Qwest and Verizon By this
Application,ICG requests authorityto providefacilities-based local and interexchange
in the remainder of the State of Idaho.This Application is identical in nature to the
applicationfiled by Level 3 Communications,LLC in Case No.LEV-T-02-01.The
Commission,in Order 29009 issued on April 29,2002,approved Level 3's application.
In support of its application,ICG provides the following information:
II.CONTACT INFORMATION
Correspondence or communication pertainingto this Application should be
directed to:
Thorvald A.Nelson
Holland &Hart,LLP
8390 E.Crescent Pkwy.,Suite 400
Greenwood Village,CO 80111
Telephone:[phone]
Fax:[phone]
with a copy to:
Amy Hartzler
ICG Communications,Inc.
161 Inverness Drive West
Englewood,CO 80112
Telephone:[phone]
Fax:[phone]
Questions concerning the ongoing operations of ICG followingcertification should be
directed to:
See In the Matter of the Application ofICG Telecom Group,Inc.for a Certificate ofPublic
Convenienceand Necessity to Provide Telecommunications Services in Idaho,Case No.GNR-T-98-9,
Order No.27955 (March 5,1999).ICG now seeks to amend and expand the authority granted in its
Certificate of Public Convenience and Necessity to provide such services statewide,including,but not
limited to,the service territories of Farmers Mutual Telephone Company.
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 2
Amy Hartzler
ICG Communications,Inc.
161 Inverness Drive West
Englewood,CO 80112
Telephone:[phone]
Fax:[phone]
III.DESCRIPTION OF CONSTRUCTION OR EXPANSION
ICG is currently authorized to provide facilities-based local exchange and
interexchange telecommunications services within the service territories of Qwest and
Verizon,and hereby seeks authorization to provide the same services in the remainder
of the State.ICG seeks authorization to provideall forms of facilities-based local
exchange and interexchange telecommunications services including private line and
switched access services throughoutthe State of Idaho.ICG's services are available on
a full-time basis,twenty-four hours a day,seven days a week.
ICG is committed to expanding its services to portions of the state that have
experienced little or no competitiveentry to date.ICG's initial expansion will be into
the service area of Farmers Mutual Telephone Company ("FMTC").ICG intends to
offer its services to,among other customers,Internet service providerswho currently do
not have points of presence in many of the exchange areas covered by this Application.
ICG has established nationwide contractual arrangements with major Internet Service
Providers for the developmentof points of presence on the ICG network.Consumers
who currently have to dial long-distance for access to Internet service providers will
benefit by the establishment of points of presence within their local calling areas.
ICG intends to deploy an independent network by either building its own
facilities or leasing the facilities of other carriers.To the extent that a small LEC
possesses an exemptionor suspension under Section 251(f)of the Act,ICG does not
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 3
seek interconnection under Section 251(c)at this time,nor does ICG seek at this time to
challenge such exemptionfrom any of the other obligationsspecified in Section 251(c)
Rather,for the present time,ICG intends to lease the facilities of third party carriers,
or,where necessary,purchase the tariffed services of LECs exempt under Section
251(c)to support market entry and the exchange of all kinds of traffic between the
small LEC's customers and ICG customers.However,to preserve its right to provide
service using a small LEC's unbundled network elements at some future date,ICG
requests that the Commission grant ICG full facilities-based authority statewide with
the qualification that ICG may not provide service using unbundled network elements
of a LEC that qualifiesfor an exemptionunder Section 251(f),unless and until it
submits a bona fide request for interconnection and the Commission determines that the
request satisfies the requirements of Section 251(f)
IV.MAP
ICG is still in the process of identifying the specific areas in which it will
construct and install facilities and intends to rely initially on the leased facilities and
tariffed services of other certificated carriers.To the extent ICG determines that it will
construct facilities,when ICG completes its construction plans,it will submit a map of
suitable scale showingthe location of the construction and its relation to other public
utilities in the area that offer or providesimilar utility service.
V.FINANCIAL STATEMENT AND CONSTRUCTION TIMELINE
This Commission granted ICG a certificate of public convenience and necessity
on March 5,1999 based in part upon finding that ICG possessed the requisite financial
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 4
qualificationsto providetelecommunications services in Idaho ICG continues to meet
this requirement today.While ICG does not file annual reports or Form 10-K reports,
ICG is attaching as Exhibit A its parent corporation's(ICG Communications,Inc.)
annual report for 1999 (there is no 2000 annual report)and Form 10-K for 2001.
Further,ICG has attached as Exhibit B its most recent financial statements.
On December 19,2001,ICG Communications,Inc.,ICG Telecom Group'sparent
company,filed a Plan of Reorganization("Plan")with the U.S.Bankruptcy Court for
the District of Delaware ("BankruptcyCourt").However,ICG Communications is on
the verge of emerging from the bankruptcy.In April,ICG won preliminary court
approval of its revised Plan.Final approval from the BankruptcyCourt and the
creditors is expected on May 20,2002.If approval is granted,ICG Communications
will emerge from the bankruptcy as early as two to three weeks later.
Since the Chapter 11 filing,ICG Communications'restructuringefforts helped
positionthe company such that it expects to exceed all of its financial and operational
goals for 2001.During the Chapter 11 process,ICG Communications was able to retain
or in some cases expand service agreements with nearly all of its top 100 customers.
Importantly,as of November 30,2001,ICG Communications had in excess of $150
million in cash available for funding on a going forward basis.In addition,ICG
Communications has been cash flow positive since March 2001,reporting
approximately$34 million of EBITDA through November 2001.These results through
2 In the Matter of the Application ofICG Telecom Group,Inc.for a Certificate ofPublic ConvenienceandNecessitytoProvideTelecommunicationsServicesinIdaho,Case No.GNR-T-98-9,Order
No.27955 (March 5,1999).
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 5
November are already in excess of the full year target of $25 million in EBITDA and
appear to be on target to exceed ICG Communications'stretch goal of $38 million.
Further,while ICG's parent ICG Communications is currently in bankruptcy,the
bankruptcy has had no effect on the ICG's ability to providehigh quality service to its
customers.Notwithstandingthe bankruptcy,ICG has and will remain consistently able
to make any necessary expenditures and investments to meet its service obligations.
Indeed,recognizing this fact,a number of states including Louisiana,Maryland,
Nebraska,and Wisconsin have granted applicationsby ICG Telecom Group for
authorityto provide basic local exchange service even while ICG Communications has
been in the bankruptcy process.No state commission has denied an applicationby ICG
Telecom Group to providecompetitivelocal exchange service during this period
precisely because the nature of this bankruptcy does not inhibit ICG Telecom Group's
financial ability to providehigh quality,reliable service.
Therefore,the Commission should find that ICG remains financially qualifiedto
provide telecommunications services in the State of Idaho.As indicated above,ICG
has not finalized its construction plans and intends to rely primarily on the leased
facilities or tariffed services of other certificated carriers.To the extent ICG
determines that it will construct facilities,when ICG completes its construction plans,
the Applicant will providethe Commission with a construction timeline.
VI.TARIFFS
ICG has effective tariffs on file with the Commission.To the extent that the
tariffs require revisions to reflect the authority ICG is seeking by this application,ICG
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 6
will modify its tariffs and file the revisions with the Commission prior to offering
regulated serviced in Idaho.
VII.COMPLIANCE WITH COMMISSION RULES
Attached hereto is a sworn verification executed by Applicant stating that
Applicant agrees to comply with all Idaho laws and Commission rules and regulations.
VIII.ESCROW ACCOUNT FOR ADVANCE DEPOSITS
Should ICG decide to require advance deposits from its customers,it will enter
into an escrow agreement with a bonded escrow agent prior to requiring advanced
deposits from its telecommunications customers in Idaho.ICG will comply with all
applicable Idaho laws and Commission rules and regulationsregarding advance
customer deposits.Should ICG decide to require advance deposits,ICG will file a copy
of its escrow agreement upon the Commission's request.
IX.REQUESTFOR MODIFIED PROCEDURE
ICG believes that the public interest does not require a hearing to consider the
issues presented by this Application and,accordingly,pursuant to Idaho Public Utilities
Commission Rules of Procedure,Rule 201,requests that the Application be processed
under Modified Procedure.
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 7
X.CONCLUSION
WHEREFORE,ICG Telecom Group,Inc.respectfullyrequests that this matter
be processed under Modified Procedure and that the Commission grant it the requested
authorityto provide facilities-based local exchange and interexchange
telecommunications services throughoutthe State of Idaho.
Dated this 15th day of May,2002.
HOLLAND &HART LLP
Thorvald A.Nelson
Counsel for ICG Telecom Group
2939325 1.DOC
APPLICATION AND REQUEST FOR MODIFIED PROCEDURE OF ICG TELECOM GROUP
Page 8
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Application of )Case No.
ICG TELECOM GROUP,Inc.)APPLICATION AND REQUEST
)FOR MODIFIED PROCEDURE OF
To Amend and Expand its Certificate )ICG TELECOM GROUP
of Public Convenience and Necessity )
to Provide Facilities-Based Local )
Exchange and Interexchange )
Telecommunications Services Statewide )
AFFIDAVIT OF BERNARD L.ZUROFF
Bernard L.Zuroff,being duly sworn,deposes and says the following:
1.Applicant's full name and address is:ICG Telecom Group,Inc.which is headquartered
at 161 Inverness Drive West,Englewood CO 80112.
2.Affiant's association with applicant is that of Vice President and General Counsel.
3.Affiant has been employed by the applicant as Vice President and General Counsel since
October 2000 and has been employed by the Applicantsince July 1996.
4.The Applicant has reviewed all of the applicable Idaho laws and Commission's rules and
agrees to comply with them.
I certify that all statements made and matters set forth in the application are true and correct to
the best of my knowledge,information,and belief.
(Signature)
Bernard L.Zur
I do hereby certify that on this 1 #day of g ,2002 ersonally appeared
before me Bernard L.Zuroff,who,being by me first duly sworn,declared that he signed the
foregoing document and that the statements therein contained are true.
Notary Public
(Notary Seal)My Commission Expires:6 N (NOG
2941594 1.DOC
EXHIBIT A
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I FINANCIAL&OPERATIONAL HIGHLIGHTS
instatied 376,000 lines and ended the year with 731,000,more than double 1998
increased revenue 58%to $479 million
impmved EBITDA by $42 million
Sold non-core assets for $405 million
increased gross property,plant and equipment investment to $1.8 billion
Signeci contracts for 700,000 lines in the second half of 1999 for new productofferings
1 Restructured management team and negotiated substantial funding to deliver superior results in 2000
LINES Inl SERVICE HIGH MARGlN NETWORK TRAFFIC Lines onswitch"
97 141 97 45%
es I---II-li-I-----asa sa 7sa
731 eta
REVENUEGROWTH EBITDAPERFORMANCE
os .42
LOCAL FIBER ROUTE MIL S BU LDINGS CONNECTED
a,ooo 97 IMil-El-EME-i 3,150
4.225 sa
2
EXPERIEENEOMNAATSNH
P
A STRONG LONG-TERM
GROLVTH STRATEGY AND THE
REQUIRED CAPITAL LVILL
BRiNG VALUE TO EACH OF
QUR SHAREHOLDERS
DEAR 1CG SHAREHOLDERS,
Your company enjoyed an exceptional year of growth,benefiting from rapid expansion in the
telecommunications market and,more important,from successful execution of its 1999 busi-
ness plan.We have witnessed a more than doubling of customer lines in service.a 58 percent
increase in revenue and improved operating margins over 1998.We have set the stage for posi-
tive EBITDA growth going forward,and I wish to commend our outstanding team for
delivering these results.
Beyond operating results,we made changes to restructure our business to better focus on
core operations.We sold non-core businesses raising more than 5400 million,and we centralized
operating functions and restructured our management team with highly experienced industrv
leaders.Further.we extended our network from five regional clusters to have national reach.
ICG has become a national communications infrastructure company with a strong leadership
team aligned to deliver long-term growth.
The U.S.telecommunications industry as a whole enjoyed substantial growth in 1999,
reaching over S250 billion in revenues fueled by demand for new products and services and
rapid growth in Internet use estimated at 10 million new users during the year.The prolifera-
tion of e-commerce and identified demand for new technologies via the Internet for business
and homes,such as video conferencing,unified messaging and entertainment,will continue to
propel growth in Internet use and integrated telecommunications at a remarkable rate.
In the Network section of this report,we will cover our strategy for meeting the changing neeo,
of the telecommunications market and how we intend to capture market share.
Two and one-half years ago,we recognized the impending growth in the Internet market and
developed our business plans to capitalize on the opportunities presented by rapid growth in
data transmission.We continue to invest in network expansion and adding products and services
to meet the needs of Internet service provider (ISP)customers.While we have established ICG as
a national infrastructure provider,the technologies and opportunities continue to change.and
our vision continues to evolve.We believe that the market for broadband technologies will grow
rapidly,and we will meet this demand through direct marketing and third-parts affiliations.
ICG will continue to take a leading position in developing and adding to our product portfolio.
Last year I discussed our goals to expand ICG's position as the Internet gateway of choice
for ISPs,grow the local commercial telephone service business and rapidly deploy new serv-
ices for both ISP and business customers.It was a successful year on all accounts,
contributing to the substantial growth in customer line count and establishing ICG as a
leader in serving the ISP market.
During 1999.ICG was able to capture a significant share of the Internet market.adding
280.000 ISP lines and ending the year with more than 500 ISP customers and nearly 500.000
lines.ICG estimates that the Company now serves approximately ten percent of Internet users.
In addition,our business customer access lines grew by 50 percent over 1998 to more than
230.000 lines.Our deplovinent of new services was highlighted by initiating RAS and IRAS
services,network management services for ISPs,when the company signed long-term contracts
for 700,000 lines in the second half of the year,more than double the total number of lines at
year-end 1998.As is reflected in our 2000 business plan,we will aggressively continue our quest
to provide a complete portfolioof products and services to both business and ISP customers
while expanding our geographical presence.
In Februarv 2000,we announced that we had attracted sizable equity funding as well as ven-
doi financing for a total of nearly $1.2 billion,all within the first 60 days of 2000.With this level
of funding,we will again deliver extraordinaryline growth in 2000,accelerate network expan-
sion plans and position the company to realize substantial revenue and EBITDA growth in 2001.
In 2000.our network build-out will complete a 22-citv expansion plan.bringing ICG
services to the majoritv of top U.S.metropolitan areas by year-end.Network expansion plans
are supported by existing demand from ISPcustomers,yet will open up major markets to
expand the commercial business in 2001.Build-out employs the "smart-build"network strategs
which means that we invest according to current demand yet engineer to accommodate
substantially greater demand.
Along with geographical expansion,ICG continues to create a comprehensive portfolioof
products and services for both ISP and business customers to meet our goal of becoming a
one-stop shop for all telecommunications needs.Our long-term outlook is to establish
national presence and offer customers a full range of products and services.As customers
needs change and they transition to new technologies,ICG is positioned to capture market
share for new products from existing customers.Our goal is to simplifv the complex telecom-
munications requirements of our customers while,in turn,benefiting from greater network
efficiency as more services are delivered via the ICG network.
In order to deliver on our strategic growth plans and establish long-term customer relation-
ships,ICG is focused on two things -execution and customer service.During 1999 and early
2000.we took significant steps to ensure that we could satisfy the high growth that confronts us
and maintain the highest qualitv service.We:
acquired the necessarv funding;
scaled the network build-out to accommodate long-term growth:
completed building a top management team that,we are confident,will execute our rapid
growth plans and meet provisioning targets;and,
hired more than 300 support staff,and hired these people early,to ensure a high level of
training to meet our year-2000 goals.
Our emphasis on customer service led to our 1999 investment in two new,centralized pro-
visioning centers and acquisition of top operating support systems software to better serve the
installation and billing needs of a larger customer base.In addition,we have created customer
service teams that include a company executive to support major accounts through a newly
initiated program called CustomerConnections.net.
Also in 1999 and early 2000.we made excellent progress in regard to collecting reaproca.
compensation revenue owed to the Company and negotiating contracts that bring certamn :o
future revenue streams.During this time,we collected more than 5100 million in reciprocal
compensation revenue and signed a long-term contract that clarifies future revenue terms and
sets precedence for contracts to be renewed this year.
As we continue forward.I am verv pleased to see the combination of experienced leader-
ship,a strong long-term growth strategv and the funding in place to make the investments that
we believe will bring value to each of our shareholders.
In 2000 you can look forward to:
expansion into 22 major metropolitan areas,significantly extending our geographic footprint
and positioning the Company for sizable growth from the business segment in 2001;
again more than doubling customer lines;
again increasing revenue over 50 percent:
positive EBITDA:and
deplovment of new products and services that will reach the exploding markets for broad-
band Internet access and network management capabilities.
1999 was a record year,and 2000 will be once again.ICG is a dvnamic company within a
dynamic industry.As you read on,you will better understand the dramatic changes and growth
realized at ICG this year and learn why we are so enthusiastic about our future.
Best Regards,
J.Shelby Bryan
Chairman and Chief Executive Officer
April2000
O
Our bu sines s ISTO PROVIDE to provide the network infrastructure and
COMMUNICATIONSSERVICE AND INFRASTRUc-facilities used by most of the nations largest
0 TURE TO CUSTOMERS THAT RANGE FROM SMALL Internet service providers and to enable a
BUSINESSESTO LARGE INTERNETCOMPANIEs seamless connection from your computer to
AND MAJOR LONG DISTANCE CARRIERs.the Internet.Internet service providers (ISPs)
What does that mean?Someone in an office are companies to which individuals and busi-
picks up the telephone or an individual at nesses subscribe in order to access the
home or work accesses the Internet and he or Internet and e-mail.
she connects to the desired destination As ISPs seek to expand their geographical
quickly,simply.ICG makes this happen.presence and technical capabilities,it becomes
ICGhas a nationwide network with the capa-capital-intensive and time-consuming for the
bility to connect to the world.The network selves ISPs to manage independent network systems
more than 700 cities across the United States,and build switching facilities.Essentially,ICG
carning voice and data,and connecting the pools the infrastructure needs of its ISP cus-
end-user to his or hër destination.The network tomers using the ICG network,allowing them to
E design is flexible,able to manage and channel quickly expand into new cities and provide
large amounts of data for our Internet service faster,more reliable Internet access for their
provider customers and to connect individual customers.In turn,their customers get better
telephone calls and transmit data for businesses.service,and the ISP can focus on growing its
Millions of Internet calls cross our net-business.ICG also offers enhanced services to
work each day,and the individuals going its ISPclients in the form of advanced network
O on-line usually have no idea that they are management capabilities,which are discussed in
traveling across the ICG network.It is our job more detail in the network section of this report.
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At year-end 1999.ICG s extensive network telephone company.ICG not only provides
infrastructure served an estimated five mil-local telephone service,but also long distance
lion Internet accounts,or approximately ten and enhanced features such as voice messag-
percent of the U.S.market.through more than ing and caller ID.
-500 ISPcustomers.At year-end,the Company Our business customers also need to send
had one-half million data access lines,with and receive computer-generated data from
each line serving approximately ten individual one business location to another.They wam
end-users.Providing infrastructure to Internet high-speed access to the Internet and demand
companies is one of the fastest-growing sec-innovations such as video-conferencing.The
tors of ICG s business.In the second half of Companys extensive network infrastructure
1999.the Company signed contracts with carries both voice and data,allowing ICG to
-c major ISPs for approximately 700.000 new provide solutions for businesses as the need
lines,more than double the total number of for these converging technologies grows.By
ICG customer lines in service at year-end 1998.bundling a companys requirements for local
ICG is also a competitive local exchange telephone service,long-distance,enhanced
carrier,commonly referred to as a CLEC.This telephone features,nenvorks and data.ICG
means that ICG offers telephone services that becomes a "one-stop shop"for telecommuni-
historically would have been available only cations products and services.
through your local Bell,or incumbent.Tele-Additionally,the Company offers both
phone company.ICG s customers are special access and switched termination.
primarily small or medium-sized businesses These services provide regional local access
with ten to 100 lines that have chosen to use for long-distance companies and other
ICG as a cost efficient alternative to the local competitive local exchange companies as
Speed dialing access service (PI BAS11RAS)
ollocation
-Remote access SS7 service
Calling.cards Special &
a cost efficient alternative to the incumbent focused on identifving customer requirements
local telephone companies.and meeting commitments.After installation.
The flexibilifv of the ICG national network ICG holds regular follow-up discussions with
is reflected in its ive eerceustorerhsaseand customers tsoenacbleeerteretmderstanding
its that will enable ICG to add new products A primarvcomponent of customer ser-
and services to meet the changing needs of vice is network reliabilits.lCG has two network
our customers over the long-term.operations centers (NOCs).At each NOC.the
Among its peer group.ICG is the largest in Company uses highly sophisticated software
terms of lines connected.The Company is that monitors operations to identifv potential
making significant investments to expand its network disruptions 24 hours per day,seven
network into the majoritv of large metropolitan days per week.The Englewood.Colorado,
areas in the United States and to offer a full NOC monitors the regional fiber networks
range of high-capacitv Internet access meth-and local exchange switches,while the San
ods as well as advanced network management Jose,California,center specifically monitors
services for its ISP customers.As a result,the and manages the data-related infrastructure.
Company is well positioned to capture increas-In addition,the ICG regional fiber networks
ing market share in a fast growing erwironment.are built in SONET rings that encircle the
metropolitan area.If there is a fiber cut for
CUSTOMER SERVICE Customer service is a top any reason,traffic is redirected in the other
priority and is approached as a team effort direction within the ring in 50 milliseconds,
including an account executive,a sales engi-essentially undetectable to customers.
neer and a technical consultant who are
10
O
Our te arri IS MAKING IT ALL quiet sound of efficiency in the ICG Network
HAPPEN.Vision,hard work,talent,enthusi-Operations Centers demonstrates the experi-
asm.From sales to customer service,to ence and know-how of our people.The
network expansion to new product develop-enthusiastic trainers at ICG's new employeeCment,our people are working together to orientations show the passion our people
achieve a common set of objectives that will bring to work.
add value to ICG and our customers.Throughout the organization,the ICG
0 One look at the intricate and precise team is "getting it done."It may require inno-
wiring inside an ICG switch site reveals the vation,quick reaction or makmg smart
pride our people bring to their work.The decisions based on what is best for the
activity inside an ICG provisioning center Company.Whatever the case may be.our
confirms the determination to turn up what team is consistently meeting our objectives
are often thousands of lines per day.The with remarkable effort.
OUR PEOPLEARE WORKING TOGETHER TO ACHIEVE A COMMON SET OF OS.IECTIVES.
In 1999,the Company established an Also,in the second half of 1999 and early
internal measuring system that is available 2000,ICG restructured and expanded its
for monitoringprogress towards our corpo-management team to include highly experi-
rate objectives on a daily basis.ICG enced and accomplished individuals.Among
employees can track the performance of sev-the new management team are people who
eral key business areas such as provisioning,have pioneered new products,built net-
repair and network capacity and compare works.overseen large customer-base
daily information with the Company's over-telecommunications operations,developed
all objectives.This valuable.on-line and launched new products and executed
information enables employees to recognize aggressive line-growth plans.Our team has
where the Company is accomplishing its the know-how and the vision to gain market
goals as well as identifv where they,or their share and realize long-term profitable
department,may need to improve within a growth in an ever-changing communications
particular business function.Importantly,it market environment.
keeps all of ICG working together to meet
our growth objectives.
The network -smART-auito"The proliferation of greater banduidth and
-ICG IS BUILDING ITS NATIONAL NETWORKTo availabilitv of new technologies,such as video
MEETTODAY'S DEMAND -ENGINEERINGITTo and e-commerce over the Internet,will drive
MEETTOMORROW'S DEMAND.demand for more sophisticated network
management;
INDUSTRY GROWTH It is estimated that the CLECs currently have less than 5 percent of
whole telecommunications "pie."with annual the 5100 billion in annual revenue from local
revenue of approximately one-quarter billion telephone service,yet CLEC market share
dollars today,could nearly triple in size by continues to climb at a rapid pace;and
2008.Within this vast market.demand for Bundled services and new features are
ICG s network,products and services will increasing revenue per existing customer.
come from several different sources:As the needs of our customers grow.
An estimated 30 million new users are so will we.
expected to log on to the Internet benveen
year-end 1999 and year-end 2002,dram3ti-STRATEGY ICG seeks to compete on a national
cally expanding the market size for ISPs;basis and provide its customers with next-
High-speed Internet access is forecast to generation solutions that will simplifv their
grow by 10 times the number of estimated telecommunications and nenvork require-
1999 users over the next four years,thus driv-ments,enabling them to compete more
ing more data over the Internet,requiring
more access lines per end-user and more net-
work transport services:
IN ORDERTO CAPTURE MARKET SHARE,ICG S STRATEGY ISTO OFFER INTEGRATED VOICE AND DATA PRODUCTS AND SERV
ICES IN AN EXRANDING GEOGRAPHIC FOOTPRINTANOTO INTEGRATENEWTECHNOLOGIESASTHEY BECOME AVAILABLE
efficiently in their business.In order to achieve In order to capture market share,ICG s
this,ICG is building a national network and a strategv is to offer integrated voice and data
complete portfolio of products and services to products and services in an expanding geo-
become a single point of contact that provides graphic footprintand to integrate new
the communications services and infrastruc-technologies as they become available.As
ture required by each customer.For our ISP end-users and customers are ready to transi-
customers.ICGs strategv is to be an Internet tion to higher-capacitv Internet access
"gateway."offering multiple access methods,methods or other high-end telecommunica-Q
network management and advanced applica-tions products,ICG s infrastructure and
tions.For the emerging market of ASPs established market presence will enable the
(application service providers,companies Company to capture market share from new
that offer software applications via the and existing customers.New products and
Internet),ICG will offer immediate access to services will be marketed through direct chan-
the infrastructure and facilities required to nels as well as through strategic relationships
deliver their products in more than 700 cities.with third parties.As customers demand mul-
For our business customers.ICG strives to tiple products and services,ICG benefits from
simplifv telecommunications services by more efficient use of its network and facilities,
bundling their voice and data needs.The realizing more profitable growth.
Company is building its network with the
flexibility to deliver a broad range of Internet
access methods and to support enhanced
voice and data services.
14
O
NETWORK EXPANSION At year-end 1999,ICG grated voice and data in all of these areas.
had 731,000 lines in service,an increase of Network construction uses the "smart-build"
more than 100 percent over year-end 1998.strategv,which means that ICG is building its
The Company s nationwide data network is network based on existing demand yet engi-
considered Tier 1 and fiber-rich with public neering it to handle significantly increased
and private peering locations,227 points of capacitv needs for tomorrows products and
presence serving approximately 700 cities,16 services.At year-end,the Company had OC3
frame relay switches and high-performance capacity (155.5 million bits per second)cover-
routers connecting 24 ATM switches and ing more than 18.000 route miles.By mid-year
18.000 miles of long-haul fiber lines.In addi-2000,this capacitv will be increased to OC48.
tio6n.at vear-endca
fi
ehrnaeamdname
tions
astimeso
ti n
oeceraeaace
t a
d C9o2mpany
to mhorethan8,000 buildin sT Company on
l
dedinnceret
n n
eadiexpansion
telephone companies and provides 145 ICG-softswitch technologv,which has the flexibility
owned collocations for ISPcustomers.to support rapid growth and enables the con-
During the year 2000,ICG will complete vergence of voice and data over one network.
E its expansion program into 22 new major In addition,by the fourth quarter 2000,
inetropolitan areas,further extending its approximately 1,000 servers will be added to
national footprintto the majoritv of the the network system to handle traffic,applica-laergnestdtJmetropolitanareas.The n twork dúlrencdnptortmuntreereents,which isr
egv.
s i t
L.
16
ACCESS APPUCATION SERVICES:UTNER:
DSL Unified messaging Private label ISP
Dedicated Intemet access Virtual private networks Application bosling
ireless Vo!P -Content caching
services On-lineanlering
LEVERAGING THE NETWORK As the Company For example,as the market for data grows.
broadens its portfolio of products and ser-so do possible Internet access methods.Most
vices.it expects to increase revenue and return Internet users dial-up via a modem attached
on investment from its existing infrastructure.to their telephone lines.Going forward.the
As the portfolio grows,it opens up a larger trend toward new applications,such as video
potential customer base and delivers on our and audio capabilities,will drive demand for
strategv to be a single point of contact for broadband connections,which enable more
business customers.For our ISP customers,and faster data transmission.ICGs strategv to
it means that ICG can build and manage the be a one-stop shop means the Company
increasingly complex infrastructure require-must provide its business customers,and the
ments so they dont have to.ultimate end-users of its ISP customers,the
CUSTOMERACCESS SWITCHSITE/METHODS .HUB
0 0 'THE INTERNET
ISPcollocation
GOING FORWARD,THETRENDTOWARD NEWAPPLICATIONS,SUCH AS VIDEO AND AUDIO CAPABILITIES WILL DRIVE
DEMAND FOR BROADBAND CONNECTIONS.WHICH ENABLE MORE AND FASTER DATA TRANSMISSION
flexibilitv to access the Internet or ICG network ICG has traditionally provided the facilities
via multiple methods.ICG currently offers that connect an ISPto its customers.Since the
service to customers using telephone modems,majoritv of lSP customer traffic is destined
digital subscriber lines ("DSL"a tvpe of broad-directly for the Internet,ICG also offers
band access that works with normal copper advanced network management services.
telephone lines and is constantly connected),such as RAS and IRAS,which not only connect
Tls and T3s (dedicated business lines)and will the ISP to its customers but also route traffic
eventually offer cable,wireless and satellite on behalf of the ISE ISPcommunications
connections.ICG is developing relationships intended for the Internet are directly routed to
with third-parts providers of alternative access the ICG network and Internet,and only traffic
methods in order to provide DSL and fixed that needs to communicate with the ISP is
V
wireless products to our customers.sent to its system.This reduces the number of
During 1999.ICG's products and services hubs and the infrastructure that the ISP needs
were substantially extended,and the pace to own,reduces the traffic processed by the
continues into 2000.ISPand speeds up the service for the cus-CD
tomer.In the second half of 1999,ICG
INFRASTRUCTURE PROVIDER GROWTH Forecast signed contracts for more than 700,000 RAS
growth for Internet use and Internet service and IRAS access lines with major,national
providers coupled with the emerging market Internet service providers.
of application service providers opens
tremendous opportunity for ICG and its
established national network.
Going forward.ICG s investment in exchange lines and trunks.related line fea-
advanced servers to be installed at ICG sites tures (such as voice mail,direct imvard
across the nation will better cater to ISPdata-dialing and custom calling features).calling
management needs,serve the emerging mar-card and long-distance services,and they
kets for application and content providers,need to send and receive data.ICG now offers
and allow the Company to offer services such integrated access services (IAS)on a limited
as caching and content management.Simply basis and plans to expand this offering by
speaking,these servers will hold and manage mid-year 2000.lAS is an enhanced service
data and software applications for customers that can bundle local,long-distance and data
at ICG facilities,presenting further opportu-services to be carried over a dedicated Tl
O nirv for ICG to deliver value-added services to connection that provides expanded band-
high-growth markets.width to small and medium-sized business.
Future growth in commercial sales is
COMMERCIALBUSINESS GROWTH The com-expected to result from the Companys aggres-
mercial portion of our business refers to sive network expansion and bundling products
business customers,tvpically small to and services that will deliver one-stop conven-
medium-sized companies.ICG has enjoyed ience to customers.Specifically.the year 2000
substantial growth from this traditional side network expansion,which is based on deliver-
of its business.reflected by a 500 percent ing services under ISP contracts,will open up
increase in customer lines over two years.large,new metropolitan markets and allow
Business customers usually receive local ICG to significantly expand its number of
dial-tone services that consist of basic local business customers served in 2001.
Indeoendent auditors'reoort
Recoro·EprsiG LL
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ICG COMMUNICATIONS,INC
We have audited.in accordance with generally accepted auditing standards tne consoh-
dated balance sheets of ICG Communications,Inc.and subsidiaries (the "Compan as o:
December 31,1998 and 1999,and the related consolidated statements of operanons and
cash flows for each of the years in the three-year period ended December 31.1999.wnich
financial statements are included in the Annua1Report and Form 10-K for the year ended
December 31.1999,and are not included herein.We did not audit the consolidated financial
statements of NETCOM On-Line Communication Services,Inc.("Netcom").a discorrinued
wholly owned subsidiarv of the Company for the year ended December 31.1997,whose loss
from operations constitutes 83.8 percent of the consolidated loss from discontinued operations
in 1997.These consolidated financial statements were audited by other auditors whose
reports have been furnished to us,and our opinion,insofar as it relates to the amounts
included for Netcom in 1997,was based solely on the reports of the other auditors.Our
report dated Februarv 16,2000,which was based in part on the reports of the other auditors.
expressed an unqualified opinion on the aforementioned consolidated financial statements.
In our opinion,based on our audits and the reports of the other auditors,the information
set forth in the accompanving condensed consolidated financial statements is fairly stated,in
all material respects,in relation to the consolidated financial statements from which it has
been derived and should be read in conjunction with such consolidated financial statements.
ȾG LCP
KPMG
Denver,Colorado
February 16,2000
20 ÛOnsolidated statements of operations
($m thousands,except per share datal
Years ended December 31,
1999 1998 1997
Revenue:
Local services S 299,941 159,197 21,252
Long distance 18,733 20,591
Special access 113,852 74,489 55.435
Switched terminating access 46,700 49,040 72,671
Total revenue 479,226 303.317 149,358
Operating costs (238,927)(187,260)(147,338)
Selling,general and administrative (239,756)(158,153)(121,884)
EBITDA(before nonrecurring and noncash charges)543 (42,096)(119,864)
Depreciation and amortization (174,239)(91,927)(49,836)
Provision for impairment of long-lived assets (31,815)-(5,169)
Other,net (387)(6,663)(292)
Operating loss (205,898)(140,686)(175,161)
Interest expense (212,420)(170,015)(117.521)
Interest income 16,300 28,401 21,828
Other,net (2,522)(1,118)(424)
Loss from continuing operations before income taxes,
preferred dividends and extraordinary gain (404,540)(283.418)(271,278)
Income tax expense (25)(90)
Accretion and preferred dividends on
preferred securities of subsidiaries (61,897)(55,183)(39.019)
Loss from continuing operations before extraordinary gain (466,462)(338,691)(310,297)
Discontinued operations:
Loss from discontinued operations (1,036)(77,577)(50,438)
Gain (loss)on disposal of discontinued operations 37,825 (1,777)
income (loss)from discontinued operations 36,789 (79,354)(360,735)
Extraordinary gain on sales of operations
of NETCOM,net of income taxes 195,511 --
Net loss $(234,162)(418,045)(360,735)
Net loss per share -basic and diluted:
Loss from continuing operations $(9.90)(7.49)(7.30)
Income (loss)from discontinued operations 0.78 (1.76)(1.19)
ExtraordinarY gain 4.15
Net loss per share -basic and diluted S (4.97)(9.25)(8.49)
Weighted average number of shares outstanding
-basic and diluted 47,116 45,194 42,508
The financial statements should be read in conjunction with the Company's 2000 Proxy statement and 1999 Form
1 K,filed with the Securities and Exchange Commission,which include the Company's consolidated financial
statements,notes to consolidated financial statements and management's discussion and analysis.
Consolidated condensed balance sheets
to inousanos
December 31,
1999 1998
Assets:
Cash,cash equivalents and short-term investments S 125,507 262,307
Receivables,net 168,731 113,559
Property and equipment,net 1,525,680 908,058
Other assets,net 200,703 202,883
Net assets of discontinued operations -102,840
Total assets S 2,020 621 1,589.647
Liabilities and Stockholders'Deficit:
Accounts payable and accrued liabilities $198,000 81,989
Payable pursuant to IRU agreement 135,322
Capital leases 71,438 67,792
Debt 1,906,697 1,599,044
Other liabilities 33,705 5,647
Total liabilities 2,345.162 1,754,472
Redeemable preferred securities of subsidiaries 519,323 466,352
Stockholders'deficit:
Common stock 478 464
Additional paid-in capital 599,282 577,940
Accumulated deficit (1,443,624)(1,209,462)
Accumulated other comprehensive loss -(119)
Total stockholders'deficit (843,864)(631,177)
Total liabilities and stockholders'deficit S 2.020,621 1,589,647
Diluted shares (in thousands)50,217 56,183
22 Consolidated statements of cash flow-
(S in thousands
Years ended December 31,
1999 1998 1997
Cash flows from operating activities
Net loss S (234,162)(418.045)(360,735)
Net loss (income)from discontinued operations (36,789)79,354 50,438
Extraordinary gain on sales of discontinued operations (195,511)
Adjustments to reconcile net loss to not cash
provided (used)by operating activities:
Recognition of deferred gain (29,250)
Accretion and preferred dividends on preferred securities
of subsidiaries,net of minority interest in share of losses 61,897 55,183 37,904
Depreciation and amortization 174,239 91,927 49,836
Provision for impairment of long-lived assets 31,815 -5,169
Deferred compensation 1,293
Net loss (gain)on disposal of long-lived assets (906)4,877 292
Provision for uncollectible accounts 60,019 11,238 3,573
interest expense deferred and included in long-term debt,
not of amounts capitalized on assets under construction 186,080 152,601 102,947
interest expense deferred and included in
capital iease obligations 5,294 5,637 6,345
Amortization of deferred advertising costs included
in selling,general and administrative expenses -1,795
Amortization of deferred financing costs
included in interest expense 4,860 4,478 2,514
Writeoff of nonoperating assets --200
Contribution to 401K pian through issuance of common stock 5,460 3,664 3,010
Change in operating assets and liabilities,excluding the effects
of business combinations,dispositions and noncash transactions:
Receivables (120,857)(88,962)(24,257)
Prepaid expenses,deposits and inventory 3,474 (1,566)(5,426)
Deferred advertising costs -(1,795)-
Accounts payable and accrued and other liabilities 83,406 (2,288)20,846
Deferred revenue 20,721 1,842 583
Net cash provided (used)by operating activities 21,083 (100,060)(106,761)
Cash flows from investing activities:
Proceeds from sales of discontinued operations,
net of selling costs and cash included in sales 374,897
Payments for business acquisitions,net of cash acquired -(67,841)(45,861)
Acquisition of property,equipment and other assets (591,518)(355,261)(261,318)
Payments for construction of corporate headquarters (3,300)(4,944)(29,432)
Purchase of corporate headquarters (528)-
Proceeds from disposition of property,equipment and other assets 4,300 168 14,574
Proceeds from sale of corporate headquarters,
not of selling and other costs -30,283 -
(Purchase)sale of short-term investments available for safe 29,781 60,281 (65,580)
Conse!?dated statements of cash flows
Years ended December 31,
1999 1998 1997
Proceeds from sale of marketable securities,net of realized gain 30,000
(increase)decrease in restricted cash 4,375 7.737 (25,416)
Increase in long-term notes receivable from affiliate and others -(4.880)(9.552)
Purchase of investments (28,939)
Purchase of minority interest in subsidiaries (6,039)(9,104)
Net cash used by investing activities (186,971)(343,561)(422,585)
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sale by subsidiary -3,385
Business combination --15,960
Exercise of options and warrants 12,533 19,283 4,116
Employeestock purchase plan 3,361 2,250 1,319
Proceeds from issuance of redeemable preferred securities
of subsidiary,net of issuance costs --223,628
Proceeds from issuance of long-term debt 80,000 550,574 99,908
Deferred long-term debt issuance costs (4,785)(17,591)(3,554)
Principal payments on capital lease obligations (14,662)(16,509)(29,735)
Principal payments on long-term debt (502)(6,864)(1,598)
Payments of preferred dividends (8,927)(8,927)(1,240)
Net cash provided by financing activities 67,018 525,601 308,804
Net (decrease)increase in cash and cash equivalents (98,870)81,980 (220,542)
Net cash provided (used)by discontinued operations (8,149)7,753 (19,204)
Cash and cash equivalents,beginning of year 210,307 120,574 360,320
Cash and ecquivalents,end of year 103.288 210,307 120,574
Supplemental disclosure of cash flows information
of continuing operations:
Cash paid for interest 15,216 7,299 5,715
Cash paid for income taxes 2,848 90
Supplemental schedule of noncash investing and
financing activities of continuing operations:
Common stock issued in connection with
business combinations -15,532 -
Acquisition of corporate headquarters assets through the
issuance of tong-term debt and conversions of security deposit 33,077 --
Assets acquired pursuant to IRU agreement 135,322 --
Assets acquired under capital ieases 8,393 775 -
Total 143,715 775 -
ment Team
FROMTOPTO BOTTOM -J.SHELBY BRYAN WILLIAM íBILLI BEANS.JR.,HARRY HERBST PAM JACOBSON MICHAEL NALLET CINDI SCNO:.a
DON TEAGUE JAMES WASHINGTON TERRY WINGEIELD.JR.AND CARLA WOLIN
J.SHELBY BRYAN,Chairman and ChiefExecutive Ogcer-CINDY SCHONHAUT.Executive Vice President.Governmen:
Brvan joined ICG in May 1995 as president and chief andExternalAffairs-Schonhaut is responsible for ICG
executive officer.Under Brvans leadership,ICG has implementation of the Telecommunications Act of 1996
deployed one of the largest data networks in the United and parallel state laws and negotiation of ICG s intercon-
States.Brvan is a leader in the telecommunications indus-nection agreements with the ILECs.Schonhaut has more
trv.having co-founded Millicom International Cellular S.A..than 20 years of experience as an attornev in the field of
which is recognized as the pioneer in both U.S.and interna-federal and state telecommunications regulation and
tional cellular telephony public policv.and she has held distinguished positions at
MFSCommunications Company.Inc.and the Federal
WILLIAM (BILL)BEANS,JR.,Presidenrand ChiefOperating Communications Commission (FCC).
Officer-Beans was appointed to this position in Januarv2000,
after serving as executive vice president and president of DON TEAGUE,Executive Vice President.General Counsel and
Network Services.Prior to joining ICG.Beans was national Secretary-Teague brought more than 30 years of outstanding
vice president for AT&T Local Services,where he was legal experience to ICG when he joined the company in
responsible for all day-to-day operations.Before AT&Ts May 1997.Prior to ICG.Teague was senior rice president
acquisition of Teleport Communications Group (TCG),and general counsel for Falcon Seaboard Resources Inc.
Beans served as national vice president of Operations.Prior Prior to that,he was a partner in the law firm of Vinson and
to TCG.Beans was director of Development at Peter Elkins.Teague has a diverse legal background,which
Kiewit/Metropolitan Fiber Systems,Inc.,where he was includes experience with securities offerings,mergers and
responsible for new market development.acquisitions,banking and finance,energy regulation,and
international law.
HARRY HER BST,Executive Vice Presidentand ChiefFinancial
Oficer-Herbst was appointed to this position in June 1998.JAMES WASHINGTON,Executive VicePresident.'Verwork
Herbst has been a member of the ICG Board of Directors Services-Washington is responsible for managing day-to-day
since October 1995.He previously had served on the board network operations and engineering duties.Prior to joining
of Syncrude Canada.Herbst came to ICGwith more than 10 ICG,Washington spent one and one-half years at AT&T as
years of senior financial management expertise with Gulf vice president of Local Planning.Washington also spent six
Canada Resources Ltd..Torch Energv Advisors,Inc.and years with Teleport Communications Group as a regional
Apache Corp.vice president,where he managedall aspects of the busi-
ness,ranging from sales to operations.In addition.
PAM JACOBSON,Executive Vice President.Sales &Washington has served in executive management and gen-
Marketing-lacobson is responsible for ICGs overall mar-eral manager positions at American Mobile Systems,PacTel
keting,sales,customer care and corporate Paging and MobileComm.
communications'functions.Jacobson brought more than
20 years experience in marketing,sales,operationS,TERRY WINGFIELD,JR.,Executive VicePresident.Corporare
finance.and general management from GTE.Most Development-Wingfield is responsible for the development
recently.Jacobson served as president of General Markets of ICGs ongoing business strategv.Prior to joining ICG.
at GTE.Jacobson also held other executive posts,includ-Wingfield was senior vice president of Telephony Ventures
ing vice president-Strategic and Technology Planning for for AT&T Broadband and Internet Services and was respon-
GTEs domestic operations.sible for the creation and operation of residential telephony
ventures.Wingfield also held multiple positions at Teleport
MICHAELKALLET,Executive VicePresident.Products and Communications Group (TCG),including vice president
Technology-Kalletjoined ICG in December 1995 through and general counsel where he directed acquisitions,super-
Netcom.a former subsidiarv of ICG.as senior vice president vised the companys initial public offering and negotiated
for Products and Services.Kallet brought more than 25 the merger between TCG and AT&T.
years of product and service experience to ICG.He has
worked as general manager of technology and product-CARLA WOLlN.Executive Vice President.People Services-
related disciplines such as research and development.Wolin is responsible for all services affecting people.Wolin
product marketing,network and server operations,and IT.brought more than 30 years of experience in the people and
He has worked for IBM,Computer Support Corporation,administrative services arena to ICG.She has held executive
Walker Interactive,and Software Publishing Corporation positions in various organizations,including Executive let
(Harvard Graphics).Aviation.United Technologies Corporation.Aerospatiale
Corporation,and Time Inc.Wolin also has spent time as a
consultant to numerous companies,helping to improve and
value their people process.
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46
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington.D.C.20549
FORM 10-K
lE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31,2001
OR
O 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 November14,2000)
(Exact names of registrant as specified in its charter)
Delaware 84-1342022
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
161 Inverness Drive West Not applicable
Englewood,Colorado80112 (Address of U.S.agent for service)
(Address of prmcipal executive offices)
Registrants'telephone numbers,including area codes:[phone] or [phone]
Securities registered pursuant to Section 12(b)of the Act:
Not applicable
Securities registered pursuant to Section 12(g)of the Act:
Title of each class Name of each exchange on which registered
Common Stock,S.01 par value
(53.706,777 shares outstanding as of April 9,2002).........................OTC Market
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 U No O
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will
not be contained,to the best of registrants'knowledge,in definitiveproxy or informationstatements incorporated by reference in Part III
of this Form.10-K or any amendment to this Form 10-K.O 4
As of April 9,2002 the aggregate market value of ICG Communications,Inc.Common Stock held by non-affiliates (using the
osing price of SO on April 9,2002)was approximately $0.
Table of Contents
PART I
ITEM 1.BUSTNFSS 3
Overview 3
Bankruptcy Proceedings 4
Industry 5
Business and Strategy 6
Product Offerings 6
Dial-Up Services (ISP Business)6
Point-to-Point Broadband 8
Corporate Services 8
Sales,Customer Care,Marketing and Customer Concentration 9
Networkand Facilities 10
Competition 10
Regulatory Activity 11
Financing Activities 14
Employees 15
Certain Risk Factors 15
ITEM 2.PROPER TIFS 19
ITEM 3.LEG AT .PROCEEDTNGS 19
ITEM 4.SURMISSTON OF MATTFRSTO A VOTF OF SECURITYHOLDERS 20
PART II
ITEM 5.MARKFT FOR RFGTSTR ANT'S COMMONFQITITY AND RET.ATED STOCKHOT.DER
MATTFRS 21
ITEM6.SFT.Et ibl>FTNANCIAT.DATA 21
ITEM 7.MANAGFMFNT'S DTSCUSSTON AND ANAT.VSIS OF FTNANCIAT CONDTTIONAND
RFRUI.TS OF OPERATTONS 25
Reorganization and Emergence fromBankmptcy 25
Critical Accounting Policies 27
Company Overview 29
Liquidity and Capital Resources 30
Resulttof Operations 38
Quarterly Results ..
47
Net Operating Loss Carryforwards 49
New Accounting Standards 49
Reciprocal Compensation 50
ITEM 7A.QUANTITATIVF AND QITAT.TTATTVFDISCI.OSURFS ABOUT MARKET RTSK 50
ITEM 8.FTNANCIAT.STATFMFNTSAND SIJPPI FMENTARY DATA 51
ITEM 9.CHANGES TN AND DTRAGREFMFNTS WITFI ACCOUNTANTSON ACCOUNTTNG
AND FTNANCIALDISCT.OSURE 51
PART III
ITEM 10.DIRECTORSAND FXFCITTTVFOFFICERS OF REGISTR ANT 52
ITEM 11.FXECUTTVFCOMPFNSATION 54
ITEM 12.SFCURTTY OWNERSHIP OF CERTATN RENFFICIAL OWNERS AND MANAGFMFNT 58
ITEM 13.CERTATN RET.ATIONSHTPS AND RET,ATED TR ANSACTTONS 60
PARTIV
ITEM 14.FXHTBTTS.FINANCTAT.STATFMENT SCHEDULFAND RFPORT ON FORM 8-K 61
Financial Statements 6 I
Report on Form 8-K 71
Exhibits -
-$1
Financial Statement Schedule 71
FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTSCHEDULE S-1
2
Schedule D
ICG COMMUNICATIONS,INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Additions
Balance at Chargedto Charged to Balance at
beghaning costs and odher endof
Description of period expenses accounts Deductions period
(aldhousands)
Allowance for uncollectible trade receivables:
Yearendedl3eceniber31,1999 ~
S 14.351'S -60.019 S 4.312 S --S-78.682
Year ended December 31,2000 $78,68 $84.457 $-S (68.854),S 94.285
Year ended December 31,2001 S 94,285 $14.236 $-S (64.307)S 44.214
Allowance foruncollectible note receivable:
Yearendedl3ecenaber31,1999 S 1,300 $--$--S (1.300)S --
Year ended December 31,2000 S ---S --S --S S --
YearendedDecernber31,2001 $--S --$--S --S --
See accompanying independent auditors'report.
S-2
PART I
Unless the context otherwise requires,the term "Company","ICG"or "Registrant"means the combined
business operations of ICG Communications,Inc.and its subsidiaries,including ICG Holdings (Canada)Co.
("Holdings-Canada"),ICGHoldings,Inc.("Holdings")and1CG Services,Inc.("ICG Services").All dollar amounts are
in U.S.dollars.
The Business section and other parts ofthis Report contain "forward-lookingstatements"intended to quali as
safe harbors from liabilitv as established by the Puvate Secunties 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 futureplans,objectives or goals also are forward-lookingstatements.More specifically,as a result ofthe
Company's bankruptcyfiling (discussed below),the Company has providedcertain business projections or forecasts in this
Report.The Company does not anticipate that it will,and disclaims any obligation to,furnish updated projections or
forecasts in the future.All forward-lookingstatements are subject to certain nsks and uncertainties that could cause actual
results or outcomes to differmaterially from those currently anticipated See "Certain Risk Factors."
ITEM 1.BUSINESS
OVERVIEW
ICG provides voice,data and Internet communication services.Headquartered in Englewood,Colorado,the
Company operates an integrated metropolitan and nationwide fiber optic infrastructure offering:
Dial-Up semices including primary rate interface ('TRI")and remote access services ("RAS")
(sometimes referred to as "managed modem services")on a wholesale basis to national and regional
Internet semice providers ("ISPs").
Point-to-Point Broadband service providingtraditional special access service to long distance and long-
haul carriers and medium to large-sized corporate customers,as well as switched access and SS7
services.
Corporate Semices,primarily retail voice and data services to businesses with an emphasis on Dedicated
Intemet Access Services ("DIA")
Services and Customers
Through its Dial-Up business (referred to in previous filings as the "ISP Business"),the Company provides
nationwide Internet access services to ISP customers by connecting its 27 major markets and numerous data points of
presence ("POPs")to its nationwide data network.ICG'scustomers include some of the largest national and regional ISPs.
As of December 2001,the Company had approximately 610,000 ISP customer ports in service.
ICG also provides Point-to-Point Broadband services to interexchange carners ("IXCs")and end-user business
customers.This service provides dedicated bandwidth and offers DS1 to OC-192 capacity to connect:(i)long-haul carriers
to a local market,to large companies and to other long-haul carrier facilities;or (ii)large companies to their long distance
carriers and other corporate facilities.Point-to-Point Broadband services are an expanding segment of the
telecommunicationsmarket.
The Company's Corporate Services revenue category (referred to in previous filings primarilyas the "Commercial
Business")includes local,long distance,enhanced telephony and data services to businesses over its fiber optic networks
located in major metropolitan areas in California,Colorado,Ohio,Texas and parts of the Southeast.As of December 2001,
Corporate Services'customers accounted for approximately 131,000 access lines.Corporate Services includes DIA service,
launched in August 2001.
3
Network
To provideits service offerings,ICG combines its metropolitan and regional fiber network infrastructure,43 voice
and data switches,nationwide data backbone,data POPs,27 asynchronous transfer mode ("ATM")switches and numerous
private and public Internet peering arrangements.The Company's data network is supported by an OC-48 capacity
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 regional network infrastructure consists of fiber optic cables and associated advanced electronics and
transmission equipment.The Company's network is generally configured in redundant synchronous optical network
("SONET")rings to make the network accessible to the largest concentration of telecommunications intensive business
customers within a givenmarket.This network architecture also offers the advantage of uninterrupted service in the event
of a fiber cut or equipment failure,thereby resulting in limited outages and increased network reliability in a cost efficient
manner.
BANKRUPTCY PROCEEDINGS
During the second half of 2000,a series of financial and operational events 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 most of its
subsidiaries (except for certain non-operating entities),filed voluntarypetitions for protection under Chapter 11 of the
United States Bankruptcy Code in the United States District Court for the District of Delaware (the "Bankruptcy Court").
The filings were made in order to facilitate the restructuring of the Company's debt,trade liabilities and other obligations.
The Company and its filing subsidiaries are currently operating as debtors-in-possession under the supervision of the
Bankmptcy 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 and shareholders.
On December 19,2001,the Company and its debtor subsidiaries filed a proposed Plan of Reorganization and a
Disclosure Statement in the Bankruptcy Court.The Company 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 and the Disclosure Statement,as amended,are collectively referred to herein as the "Plan".)A
hearing on the adequacy of the Disclosure Statement was held in the Bankruptcy Court on April 3,2002,at which time the
Bankruptcy Court found the Disclosure Statement adequate and authorized the Company to submit the Plan to the
Company's creditors for approval.It is anticipated that a confirmation hearing will be held in the Bankruptcy Court on May
20,2002.Consummation of the Plan is contingent upon receiving finalBankruptcy Court approval,as well as the approval
of certain classes of creditors.
The Plan contains separate classes and proposed recoveries for the holders of claims against interests in ICG
Holdings and ICG Services.The Plan does not provide for the substantive consolidation of ICG Holdings and ICG
Services.The Plan does,however,providefor the substantive consolidation of ICG Holdings and its subsidiaries,as well as
ICG Services and its subsidiaries for purposes of voting,confirmation and distribution of claims proceeds.The Plan
contemplates the conversion of the Company's existing unsecured debt into common equity of the post-bankruptcy,
reorganized Company.
In general,the Plan provides for the Company's capital restructuring by (i)reducing the Senior Facility by $25
million using the proceeds of a new senior subordinated term loan and exchanging the balance of the Senior Facility
(approximately $59.6 million)into new secured debt (the "Secured Notes")and (ii)converting general unsecured claims
4
(as defined by the Plan),which include the claims of the holders of the publicly held unsecured debentures issued by ICG
Holdings and ICG Services,into newly issued common stock of the reorganized ICG (the "New Common Shares").Under
the Plan,the Company will issue approximately 8 million new shares.Additionally,the Company intends to issue
approximately $40 million of new convertible notes that will be convertible into New Common Shares.Under the Plan,
there will be no recovery for holders of existing preferred or common equity securities of the Company,whose interests
will be cancelled.
The Plan also provides for separate classes for holders of unsecured claims up to the amount of $5,000,or
unsecured claims that are reduced to $5,000 by the election of the holders thereof to reduce all of their unsecured claims in
the aggregate to $5,000.These claims will receive a distribution of cash equal to fifty percent (50%)of the amount of such
claims.
The Plan contains the endorsement of the Company's official committee of unsecured creditors and their
recommendation that the creditors vote to accept the Plan;however,there is no assurance that the Bankruptcy Court and
the Company's crediton;will approve the proposed Plan.Further,due to the bankruptcy filing and related events,there is
no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the
amounts recorded.Consequently,there is substantial doubt about the Company's ability to continue as a going concem.
The ability of the Company to continue as a going concem is dependent upon approval and confirmation of the Plan,
adequate sources of capital,customer and employee retention,the ability to providehigh quality services and the ability to
sustain positive results of operations and cash flows sufficient to continue to operate.
ICG continues to focus on improvingits overall profitabilityand its restructuring process that began in the second
half of 2000 and which has resulted in a substantial reduction in operating and capital expenditures.These reductions
included reducing the full-time employee count from 2,975 at the end of the second quarter of 2000 to 1,368 as of
December 31,2001.The Company has met with essential vendors in an effort to ensure continued access to required
equipment and services.The Company is also executing a customer retention campaign designed to enhance customer
relationships throughout the restructuring process and thereafter.ICG anticipates these restructuring efforts will conserve
capital,enhance profitabilityand assist in retaining key customers.
During the pendancy of its Chapter 11 case,the Company has continued to provide on-going services to its
customers while implementing a revised strategy intended to meet customer commitments and maximize short-term cash
flow.Under the revised strategy,the Company's operations focus on markets where the Company has capacity thereby
allowing the Company to add customers for nominal incremental cost and earn a better return on existing assets.In
addition,the Company is focusing on product sales that utilize existing infrastructure to reduce capital required in the short-
term.In general,the Company will scale its geographic expansion and delivery of new products to better match its network
capacity,technical capabilities and capital availability.
INDUSTRY
Industry trends suggest that the Company's primary lines of business will experience substantial revenue growth
over the next several years for Point-to-Point Broadband services and DIA semices and flat to declining revenue for Dial-
Up service and local telecom semice to businesses.The Company expects to benefit from the growth trends in Point-to-
Point Broadband services and DIA and also expects to benefit from gaining an increased market share for Dial-Upsemice
as providers of this service are consolidating.
Dial-up semice competes with broadband services such as cable and DSL for end-users.While Dial-up
subscribers are projected to decline in coming years,the ports required to support end-user customers are anticipated to
decline at a slower rate because,as end-users spend more time on-line,their ISPs (ICG'scustomers)require more ports to
support their customer base.In addition,there has been,and is expected to continue to be,consolidation among regional
ISPs into larger national ISPs that require nationwide network infrastructure such as ICG's.Further,there has been
consolidation among the providers of Internet infrastructure as certain providers have either exited the business or have
liquidated.
5
DIA is expected to be a high growth service with revenue projections for T1/T3 services to grow from Sl4 billion
in 2001 to $21 billion in 2006.As industry demand for dedicated Internet service grows,pricing pressure is expected to be
more than offset by increased sales volume.
Revenue from Point-to-Point Broadband services,also referred to as local special access or private line semice.is
forecast to grow from an estimated industry total of approximately $18 billion in 2001 to $46 billion in 2006;a 21%
compounded annual growth rate.
Local telecom service to business customers is forecast to have relativelystable industry revenue ofapproximately
$37 billion through 2006.However,competitive local exchange carriers ("CLECs")are expected to take an increasing
market share from incumbent providers,estimated to be 20%market share in 2001 to 33%market share in 2006.
Notwithstanding the anticipated long-term growth potential in the telecommunications industry,durmg 200 I and
into 2002 telecom providers have experienced greater chum levels than have happened historically.The general economic
downturn and the severe downturn in the telecommunications and Intemet industries have resulted in increased risk to the
Company in the form of exposure to credit risk from existing customers;increased chum (especially in Point-to-Point
Broadband services);and oversupply of backbone and other services creating increased pricing pressures.
A significant source of revenue for the Company is derived from providing services to other competitive
telecommunications companies and ISPs some of which have,or are in the process of,experiencing fmancial distress
including filing for Chapter 11 bankruptcy protection.As a result,the Company's ability to collect receivables or its future
operating results could be compromised.
ICG also provides services to long-distance carriers and inter-exchange carriers,primarily Point-to-Point
Broadband services.Duringslow economic periods,the Company's customers have cutback on services,causing reduced
demand and network "clean-up"from the Company's carrier customers.During 2001,the Company experienced
significant churn in its Point-to-Point services.The Company cannot forecast the duration of continued churn,which
industry observers have estimated will continue through the first half of 2002 and possibly longer.
The immense capital investments made in the telecommunications industry have created substantial supply of
network infrastructure.Oversupply combined with rapid technological advancements that have the potential to reduce
operating costs have resulted in significant pricing pressure in each of the Company's main service areas.While the
Company believes it is price competitive overall,Company management cannot predict the extent of further pricing
pressures and potential adverse impacts to future operating results.
BUSINESS AND STRATEGY
ICG's business plan is focused on a set of services that combine its core competencies,market outlook and
customer and vendor relationships with the ability to leverage its existing capital and network infrastructure.Its product
offerings include Dial-UpIntemet access,Point-to-Point Broadband and Corporate Services,with an emphasis in growth
from DIA going forward.The Company has withdrawn certain products and services and has indefinitely postponed plans
to offer certain new products and enter new markets.Moreover,the Company has transitioned all of its DSL customers to
other vendors and terminated all contracts with customers using the voice over Internet protocol ("VoIP")product.
Product Offerings
Dial-Up Services (TSP Rusiness)
The Company's Dial-Up services are supported by its nationwide fiber optic backbone that connects to major
public and private peering sites with major ISPs and IXCs.The network,in combination with certain leased long-haul
assets,carries data traffic associated with the Company's ISP business.The design of the physical network permits the
Company to offerflexible,high-speed services to its customers.
The Company targets a variety of data access and transport services to ISP and corporate customers.It is not
economically feasible for many ISPs to build and maintain their own networks and consequently they prefer to outsource
6
network facilities management in order to focus internal resources on their core ISP business.To this end.ICG offers PRI
and Intemet remote access service ("IRAS")to ISPs to manage their Intemet access requirements from connection to
facilities management responsibilities.
ICG's Dial-Up customers include some of the largest national and regional ISPs.As of December 2001,the
Company had approximately 610,000 ISP customer ports providingPRI and remote access services.At an industry average
of nine end-users per port,ICG estimates that its systems have the capacity to serve more than 10%of all dial-up Internet
subscribers in the United States.
The current economic climate has negatively impacted many business sectors including ISPs,some of which are
customers of the Company's Dial-Up services.As a result,certain of the Company's ISP customers have scaled back
services ordered from the Company or,in some instances,have filed for bankruptcy protection.However,the vast majority
of the Company's Dial-Up access revenue is generated by large ISPs who have greater resources and are expected to
maintain their businesses and ability to pay through the current economic downturn.In addition,the Company's largest ISP
customers have increased Dial-Upservices obtained from ICG since the beginning of2001.
The value proposition offered by ICG to ISP customers is:
Outsource network management:ICG's services providenetwork efficiency for the ISP end-user and
allow the ISP to focus on core activities such as marketing,customer acquisition and retention.
Time-to-market advantage:ICG's nationwide network provides a growing ISP with a national presence
in major U.S.markets,which allows the ISP to quickly expand its geographical customer reach.
Improved capital utilization:As a result of the current industry competition and the capital required to
provide quality networks,economies of scale are essential for cost effective priemg.ICG's services
enable ISPs to eliminate substantial selling,general and administrative costs associated with complex
network management,because ICG aggregates these costs for multiple ISPs.
ICG provides the followingDial-Upservices:
PRI
PRI uses ICG's network to route ISP end-user calls from the public switched network to the ISP-owned modem
banks.The end-user dials up the ISP and the call is sent through the public network and routed to the ICG switch,which
then routes the call to the ISP-owned modem banks or RAS equipment.The RAS equipment is typically collocated at an
ICG central officefacility.If the ISP is not collocated,a Point-to-Point Broadband connection is required between the ISP's
POP and the ICG central office.
PRI is priced per port,per month.The Company's direct costs are mainly for leased DS3 lines that connect the
public network to the JCG switch or for leased T1 lines between the ICG switch and an ISP POP that is not collocated.
1RAS
IRAS adds network management services as it "connects,sends and routes"customer data traffic.This service has
the capability to send data directly over ICG's network to the Internet,allowing the ISP to outsource its infrastructure and
create a national footprint with minimal investment in fixed assets.The Company estimates that approximately 65%of ISP
traffic can bypass the ISP.
IRAS is charged per port,per month,typically under multi-year contracts.In January 2002,the Company began
offering metered remote access service ("mRAS"),which is a RAS product charged by the hour based on usage.The
Company's costs to provide this service are mainly related to the connection charges to the public network,either for a
leased DS3 for on-switch traffic or for a leased PRI for off-switch traffic.Costs also include network backbone and
backhaul costs to transfer trafficto the ICG hub closest to the ISP POP.
7
Point-to-Point Rrondhand
The Company provides the following Point-to-Point Broadband services to a customer base that is comprised
primarily of IXCs and large-sized businesses:
Special Access
ICG provides special access services to long distance companies,long-haul providers,ISPs and large end-user
business customers.Special access involvesprovidinga dedicated facility used:(i)to connect end-user customers to a long
distance carrier's facilities;(ii)to connect a long distance carrier's facilities to the local telephone company's central
offices;or (iii)to connect differentfacilities of the same carrier or one carrier to another within the same local calling area.
Special access is offered at DS1,DS3,OC-3,OC-12,OC-48 and OC-192 capacities (with availabilitydepending upon
location).ICG offers a time to market advantage over the ILECs,it provides metro fiber with local technical support and is
a non-competitive supplier.Special access services are high-margin and a growing business that accounted for
approximately 84%of this category's revenues.
Switched Access
Switched access services include interstate and intrastate transport and switching of calls between two carriers or a
carrier and an end-user.By using ICG to switch (terninateor originate)a call,it reduces the long distance carrier's local
access cost,which is a major operating expense.
SS7
SS7 services are used to connect long distance (including wireless)and local exchange carriers'networks,and the
SS7 signals between network elements to providefaster call set-up and more efficient use of network resources.
Corporate Services
After the passage of the Federal Telecommunications Act of 1996,ICG positioned itself as a competitive local
exchange carrier ("CLEC")and targeted the small to medium-sized business market.The Company is currently targeting
the medium to large-sized business market,which it believes represents a good growth opportunity.While the demand for
voice services by businesses has been relativelystable,the demand for data services in commercial applications is expected
to increase significantly over the next several years as this customer segment addresses its growing need for data
connections,greater bandwidth and the need to outsource network and information technology ("IT")infrastructure.ICG is
positioning itself to take advantage of these industry trends.The Company has the ability to leverage its established CLEC
customer base and existing voice and data networks to expand its Corporate Services business.The Company continues to
add new services and offers fast response times and excellent network performance.It provides the following Corporate
Services:
Voice
Competitive local dialtone service consists of basic local exchange lines and trunks with business-related voice
line features (e.g.voicemail),local calling,and local toll calling.Under the Company's business strategy,sales of voice
services will concentrate on customers with a mmimum of 12 lines in areas where the Company has switch capacity.The
Company has focused on providingvoice services in the following five operating regions in the United States:California,
Colorado,Ohio,Texas and parts of the Southeast.
DIA
DIA provides dedicated bandwidth from a customer's premises directly to the Internet at T1 and T3 speeds using
ICG's numerous Intemet peering arrangements.In order to meet corporate customer needs for Internet connectivity,the
Company introduced DIA service in late 2001.The Company plans to emphasize this product going forward,offeringfull
Tl and full or fractional T3 connections.The Company began ofering its DIA services in a limited number of markets in
8
2001 and has now expanded its footprint to 27 markets.ICG is well positioned to penetrate this market by leveraging its
existing investment in metropolitan fiber and nationwide backbone capacity.
The Company reduced the types of service and regions in which it would offer voice services as part of the
Company's 2001 business plan.As a result,affected customers have been.or are in the process of being,transitioned to
other providers.The Company had approximately 230,000 primarily business customer voice lines in service at year-end
2000,which was reduced to approximately 131,000 by year-end 2001.Growth in the Corporate Service business is
anticipated to come primarily from expansion of DIA sales and enhanced voice services to generate incremental margin.
SALES,CUSTOMERCARE,MARKETING AND CUSTOMER CONCENTRATION
Sales
Direct Sales
The Company's sales organization includes a direct sales force and third party sales partners.Its direct sales force
includes two sales organizations.
ICG's regional sales organization focuses on medium-sized customers and larger or growing businesses withm a
market and multi-market accounts.The Company's national sales organization focuses on targeted larger and national
accounts,and specific enterprise and carrier channels and customer segments.
The national sales organization is made up of approximately 24 national account managers in addition to
approximately ten technical and service support personnel.National account managers'responsibilities include new sales,
relationship management and contract negotiation.The regional sales team consists of approximately 56 managers and
account executives together with a technical consultant and order coordinator for each account executive.This team is
responsible for the account from the initial sale through post-installation customer care.The team structure is designed to
streamline the order process and assure a positive customer experience.Teams are present in each of the Company's 27
markets.The Company increased it sales force in late 2001 and early 2002.
Other Sales Channels
The direct sales force is complemented by development of altemative sales channels to distribute the increasing
number of products and services available to the broadening customer base.These channels include third party sales
partners.The Company currently has distribution arrangements with a number of national,regional and local agents and
agency firms,whose representatives market a broad range of the Company s services.The alternate distribution channel
includes approximately 50 indirect agents in markets throughout the United States.
Customer Care
Once a customer's services have been installed,customer care operations support customer retention and
satisfaction.Customer care operations is centralized into two primary centers.The Company's goal continues to be to
provide customers with a customer care group that has the ability and resources to respond to and resolve customer
questions and issues as they arise.The customer care organization had approximately 116 employees at December 31,
2001.The Company's Network Operations Center ("NOC")provides 24 x 7 surveillance and monitoring of the network to
maintain the Company's network reliability and performance.
Marketing
During 2001,the Company's marketing department underwent a reorganization to better align with the sales
department in the shared effort of achieving the Company's strategic objectives.Paramount to the reorganization of the
marketing department was the division of the department into specific teams dedicated to managing and marketing ICG's
product offerings:Point-to-Point Broadband,Corporate Services and Dial-Up services.The individualteams providethe
Company with critical knowledge about each product offering set and are accountable for revenue and ICG's ultimate
9
success.During 2001,the Company suspended the majority of advertising and promotions expenditures as a result of the
bankruptcy proceedings.
Customer Concentration
The Company has substantial business relationships with a few large customers.For the year ended December 31,
2001,the Company's top ten customers accounted for approximately 52%of its total revenue.The Company's largest
customer for the three and 12 months ended December 31,2001,accounted for 28%and 18%,respectively,of total
revenue.In 2001,the companies that individually represented more than 5%of total 2001 revenue were Qwest
Communications,Inc.,Cable and Wireless,Inc.and UUNet(a division of WorldCom,Inc.).
NETWORK AND FACILITIES
Regional Network Assets
ICG's regional network assets included 43 voice and data switches in 27 metropolitan service areas ("MSAs").
The Company has approximately 5,540 miles of leased or owned regional and metropolitan fibercomprising 165,850 local
fiber strand miles.The majority of the Company's local fiber networks are built in SONET rings that encircle a
metropolitan area.This ring architecture is intended to be accessible to the largest concentration of telecommunications
intensive business customers within a given market and provides fiber redundancy to ensure uninterrupted service.ICG
connects approximately 6,600 buildings to its network through on-net (i.e.,connected to the ICG network via ICG-owned
fiber)and hybrid (i.e.,connected to the ICG network via third-party fiber)applications,of which approximately 900
buildings are connected on-net.In addition,the network is constructed to access long distance carriers as well as end-user
telecommunications traffic in a cost efficient manner that lends itself to providing cost-competitive special access and
switched access semices to long distance companies and long-haul providers.
ICG has considerable assets under various stages of construction,many of which are substantially complete.The
majority of these assets are uninstalled transport and switch equipment,software development and new network
construction.The Company plans to sell,or retum to vendors,10 switches and to complete the installation of five switches
that remained under construction as of December 31,2001.
Nationwide Network Architecture
ICG's nationwide data backbone includes OC-12 long-haul fiber capacity connecting nine major metropolitan
areas.The fiber backbone is connected to 27 ATM switches and numerous POPs with high performance routers.The
Company has Intemet peering arrangements at seven public sites:MAE East ATM,MAE West (Santa Clara,CA),MAE
West ATM,MAE Dallas ATM,PacBell (San Jose,CA),Sprint NAP (Newark,NJ),and Ameritech (Chicago,IL).In
addition,the Company has numerous arrangements with private companies such as IXCs and major ISPs,some with
multiple locations.The Company also owns and leases dedicated lines throughout the United States.The Company is
currently in the process of consolidating numerous data POPs as part of its cost reduction efforts.
The majority of the Company's long-haul capacity is obtained through 20 year indefeasible right of use ("IRU")
agreements with Qwest.The Company currently has OC-12 capacity in service connectmg:San Jose,Los Angeles,Denver,
Dallas,Atlanta,Washington D.C.,Newark,Chicago,and Seattle.The Company has the potential to upgrade the current
OC-12 routes to OC-48 capacity by placing its additional capacity into service.
COMPETITION
The Company participates in several sectors of the telecommunications service industry,all of which are highly
competitive.In addition,numerous competitors,including major telecommunications carriers,have rapidly expanded their
network capabilities in order to service the ISP industry.
The Company's competitors in the dial-up Internet access market possess (or will possess)significant network
infrastructure enabling them to provideISPs with capacity and access to the Intemet.The Company's primary competitors
in this revenue category include Level 3,MCI WorldCom,Genuity and the incumbent local exchange carriers ("ILECs").
10
While the Company believes that its network and products will enable it to compete in this industry sector,some of the
Company's competitors have significantly greater market presence,brand recognition,financial,technical and personnel
resources than the Company.There can be no assurance that the Company will be able to compete effectively with these
compames.
In the Corporate Services and Point-to-Point Broadband sectors,the Company competes in an environment
dominated by the ILECs.The ILECs have long-standing relationships with their customers and provide those customers
with various transmission and switching services.The ILECs also have the potential to subsidize access and switched
services with revenue from a variety of businesses and historically have benefited from certain state and federal regulations
that have provided the ILECs with advantages over the Company.Among the Company's current competitors in this sector
are other CLECs,wireless service providers and private networks built by large end-users.In addition,competitors in this
industry sector include IXCssuch as AT&T and MCI WorldCom.Potential competitors have also arisen by using different
technologies,including cable television companies,utilities,ISPs,ILECs outside their current local service areas,and the
local access operations of long distance carriers.Many of the Company's actual and potential competitors have greater
financial,technical and marketing resources than the Company.
The Company is aware that consolidation of telecommunications companies,including mergers between certain
of the ILECs,between long distance companies and cable television companies,between long distance companies and
CLECs,and the formation of strategic alliances within the telecommunications industry,as well as the development of new
technologies,could give rise to increased competition.One of the primary purposes of the Federal Telecommunications
Act of 1996 (the "Telecommunications Act")is to promote competition,particularly in the local telephone market.Since its
enactment,several telecommunications companies have indicated their intention to aggressively expand into many
segments of the telecommunications industry,including segments in which the Company participates or expects to
participate.This may result in more participants than can ultimately be successful in a given market.
While strong competition currently exists in all sectors of the industry,the Company believes that the demand for
voice and data services by business customers provides expanded opportunities for providers such as the Company.There
can be no assurance,however,that sufficient demand will exist for the Company's network services in its selected markets,
that market prices will not dramatically decline or that the Company will be successful in executing its revised business
strategy in time to meet new competitors,or at all.
REGULATORY ACTIVITY
Each of the services within ICG's current product offerings (Dial-Up,Point-to-Point Broadband and Corporate
Services)is subject to some form of regulatory oversight from state and/or federal regulatory authorities.
With respect to the Dial-Up services category,the managed modem services are unregulated.However,the PRI
component,which is a material offeringwith respect to the Company's Dial-Up services,incurs traditional regulatory
oversight such as restrictions on price discrimination,various service quality standards and associated reciprocal
compensation revenue.
The Company's Point-to-Point Broadband service offerings are significantly structured according to the
application and collection of interstate and intrastate access charges for telecommunications traffic that originates and
terninates on the Company's network.In most cases,both state and federal regulatory authorities regulate the applicable
access charges.
Corporate Services,which includes the provisioningof facilities used to carry traditional voice traffic,incurs the
greatest amount regulatory oversight.Accordingly,in its offerings related to this specific service category,the Company
encounters regulatory frameworks relating,but not limited to reciprocal compensation,resale,interconnection,unbundled
network elements ("UNE"),number portability and dialing parity.
General OperationalIssues
The Telecommunications Act generally requires Incumbent Local Exchange Carriem (ILECs)to provide
interconnection and nondiscriminatory access to their local telecommunications networks and other essential facilities.
11
Such access and interconnections are typically facilitated through written agreements between the parties entitled traffic
terminating agreements,which are more commonly known as interconnection agreements.Interconnection agreements are
negotiated and enforced on a state-by-state basis.The negotiations involvingeach agreement are highly complex and often
contentious.Where the parties cannot reach agreement,the Company must petition the applicable state regulatory agency
to arbitrate the disputed issues.Rulings ofthat particular agency are subject to judicialreviewby the appropriate state court
and,with respect to certain issues,the Federal District Court.
The Company has executed interconnection agreements with every regional bell operating company ("RBOC")
and similar traffic terminating agreements with a number of smaller telecommunications carriers.While the initial terms of
some of those agreements have expired,or are due to expire in the near future,the Company maintains an aggressive
posture with respect to renegotiating and extending the terms of those agreements.
Reciprocal compensation has historically been an important source of revenue for the Company.In general,
reciprocal compensation is the reimbursement of costs incurred by a carrier that terminates telecommunications traffic
originated on the network of another carrier.The Company maintains that reciprocal compensation is an appropriate
regulatory mechanism,regardless of whether the telecommunications traffic is routed to a conventional end user or an ISP.
For the Company's purposes,reciprocal compensation is dividedinto to discrete elements.The first element relates to costs
incurred as a result of the terninationof traffic that both originates and terminates within the same local access transport
area ("LATA").The second element,which is comprised of intra-LATA toll traffic,refers to those calls that originate
within a specific LATA,but are terminated in a differentlocal calling area in that same LATA.
The Company maintains that it is entitled to receive reciprocal compensation for the transport and termination of
Internet bound calls originating on other carrier's telecommunications networks regardless of whether those calls constitute
either local or in some cases toll traffic.The Company's position has been affirmed by a number of state utility
commissions as a result of the arbitration of certain terms and conditions articulated in various RBOC interconnection
agreements.While the Company did in fact prevailin a number of arbitrations,in the interest of gaining certainty with
respect to the collection of reciprocal compensation,the Company negotiated voluntary settlement agreements with certain
RBOCs that providefor the payment of reciprocal compensation for both traditional voice,as well as Intemet bound traffic.
These settlement agreements expire at dates ranging from December 2002 to May 2003.
In April 2001,the Federal Communications Commission ("FCC"),in response to an opinion by the U.S.Court of
Appeals for the District of Columbia Circuit (the "D.C.Circuit Court"),issued a ruling regarding reciprocal compensation
for Internet bound traffic.Assuming that the April 2001 ruling is not overturned on appeal,reciprocal compensation for the
termination of ISP traffic will end after a 36-month transition period,which will be approximately mid-2004.Additionally,
the FCC order placed limits on the volume of reciprocal compensation eligible traffic,the recovery of reciprocal
compensation in new markets entered after April 200 1,as well as on the actual applicable rate.An appeal of the FCC order
was filed in Febmary 2002 before the D.C.Circuit Court and a decision is expected in mid-2002.
In view of the aforementioned voluntary settlements,the Company believes that the FCC order will not have a
material effect on those interconnection agreements that require the payment of reciprocal compensation.However,with
respect to those interconnection agreements where the Company has not reached a voluntarysettlement,both the Company
and the carrier are bound by the FCC order as it relates to the exchange of reciprocal compensation for Internet bound
traffic.Thus,while the FCC order will have no material effect on the ability of the Company to collect reciprocal
compensation with respect to RBOCs subject to settlement agreements,the Company will be limited in its ability to collect
reciprocal compensation as to other RBOCs.Further,in most cases disputes regarding the accuracy of the Company's
reciprocal compensation invoices by the originating carrier continue to require a significant allocation of resources by the
Company.The Company has historically had to threaten or file legal action in order to compel the RBOCs to pay
undisputed portions of the Company's invoices in a timely manner.While such practices by the Company are becoming
less common,full and timely payment of legitimate traffic tennination charges by the RBOCs remains a problem for the
Company.Regardless of the outcome of the appeal of the FCC order,the Company anticipates that reciprocal
compensation will be a decreasing source of revenue.
12
Federal Regulation
As a result of a previous order adopted by the FCC,carriers were classified for regulatory purposes as either
dominant (i.e.,generally RBOCs)or non-dominant (i.e.,generally CLECs).With respect to most issues,the Company
qualifies as a facilities-based CLEC.Consequently,the Company benefits from a reduced regulatory compliance burden as
compared to the RBOCs.Nevertheless,the Company must still comply with the certain requirements of the
Telecommunications Act,such as offering service on a non-discriminatory basis and at reasonable rates.Further,the
Company,being classified as a non-dominant carrier,was required as of August 1,2001 to cancel all tariffs for whatever
interstate services that it was providingat that time.The Company complied with that order and subsequent requirements to
cancel tariffs for international services.In the absence ofthese public statements of the Company's terms and conditions for
providingservice,the Company believes it is in compliance with the FCC's requirement that all such information be made
available at the Company's web site.
Finally,the FCC's non-dominant carrier rules have had no effect on the Company's intra-state tariffs or other
functional equivalent rate filings.The Company is not subject to rate-of-return regulation in any jurisdiction,nor is it
currently required to obtain FCC authorization for the installation,operation or maintenance of its fiber optic network
facilities,which are used to providevanous services in the United States.
State Regulation
In general,state public utility commissions have regulatory jurisdiction over the Company with respect to local
and other intrastate telecommunications services.To provide intrastate service (particularly local dial tone service),the
Company generally must obtain a Certificate of Public Convenience and Necessity ("CPCN")from the state regulatory
agency prior to offering service.Additionally,most states require the Company to file tariffs,which articulate the terms and
conditions for seivices that are classified as regulated intrastate services.In some states,the Company may also be subject
to various reporting and record-keeping requirements.
Under the Telecommunications Act,state commissions continue to set regulatory requirements,including service
quahty standards and guidelines,for certificated providers of local and intrastate long distance services.Importantly,state
regulatory authorities specify permissible terms and conditions (i.e.,price)for interconnection with the RBOCs'
telecommunications networks.Moreover,these same authorities regulate the provisionof unbundled network elements by
the RBOCs and enforce performance measurements and other material standards related to local competition and
interconnection.In certain states,the utility commission has the authority to scmtinize the rates charged by CLECs for
intrastate long distance and local services.The Company's provision of local dial tone and intrastate switched and
dedicated services are classified as intrastate and therefore subject to state regulation.
Loen!Government Authorizations
Under the Telecommunications Act,municipalities typically obtain jurisdiction under applicable state law to
control the Company's access to municipally owned or controlled rights of way and to require the Company to obtain street
opening and construction permits to install and expand its fiber-optic network.In addition,many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20 years)and to pay license or franchise
fees,often based on a percentage of gross revenue,in order to providetelecommunications services.However,in certain
states,including California and Colorado,current law limits the amount of such fees to be paid to local jurisdictions to
actual costs incurred by the municipality for maintaining the public rights of way.Further,there is no assurance that certain
cities that currently do not impose fees will not seek to impose fees in the future nor is there any assurance that,following
the expiration of existing franchises,the municipality will be obligated to renew a previous agreement or that previously
agreed upon fees will remain at their current levels.
The Telecommunications Act requires that local governmental authorities treat telecommunications carriers in a
non-discriminatory and competitively neutral manner.The Act also mandates that any compensation received in exchange
for access to the public rights of way be just and reasonable.Where a particular municipality has required unreasonable
rights of way access fees,the Company has historically taken an aggressive position,up to and including litigation.If any
of the Company's existing franchise or license agreements are terminated priorto their expiration dates or are not renewed,
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and consequently the Company is forced to remove its facilities from the public rights of way,such termination could have
a material adverse effect on the Company.
FINANCING ACTIVITIES
2001 Activities
CreditAgreement
On December 4,2000,the Company finalized its Debtor-in-Possession RevolvingCredit Agreement ("Credit
Agreement"),The Credit Agreement originallyprovidedfor up to $350 million in financing,subject to certain conditions.
This amount was subsequently amended to providefor up to $200 million.The Company terninated the Credit Agreement
on November7,2001 after it was determined that funds would not be drawn under the Credit Agreement.The Company's
$146.6 million cash and cash equivalent balances as of December 31,2001,are expected to be sufficient to fund operations
through the end of the bankruptcyprocess.
Proposed Ref inancingofSenior Facility
On August 12,1999,ICG Equipment,Inc.and ICG NetAhead,Inc.("NetAhead")entered into a $200.0 million
senior secured financing facility ("Senior Facility")consisting of a $75.0 million term loan,a $100.0 million tern loan and
a $25.0 million revolvingline of credit.The Senior Facility is guaranteed by ICG Services and ICG Mountain View,Inc.
and is secured by the assets of ICG Equipment,Inc.and NetAhead.On December 19,2000,the Bankmptcy Court issued
an order directing ICG Services and certain of its subsidiaries to provideadequate protection to the lenders of the Senior
Facility in the form of a first priority,post-petition security interest.The Company continues to be subject to certain
financial covenants based on results of operations under the Senior Facility.The Company also continues to make interest-
only payments on the Senior Facility balance as approved by the Bankruptcy Court.Interest is paid based on the prime rate
plus 4.25%on $36 million of the outstanding balance and the prime rate plus 3.875%on the remaining $48.6 million.
Under the Company's proposed Plan,the Senior Facility will be restructured with new terms and new notes (the
"Secured Notes")which will be issued to the lenders.The balance due on the Secured Notes will be approximately $59.6
million.The Secured Notes will mature three (3)years from the effectivedate of the Plan (hereinafter,the "Effective
Date").The Secured Notes will bear interest at a fluctuating rate currently estimated to be 8.0%if issued at March 31,
2002,payable monthly in arrears.The Secured Notes will also contain new financial covenants that will be established
based on the Company's business plan.
Proposed Exit Financing
The Company's Plan,in addition to restructuring and replacing the Senior Facility with the Secured Notes,is
premised upon obtaining $65 million of new exit financing comprised of three components:(i)a $25 million new senior
subordinated secured term loan (the "Senior Subordinated Term Loan"),the proceeds of which will be used to repay $25
million of the Senior Facility;(ii)the issuance by the Company of $40 million of new unsecured convertible notes (the
"ConvertibleNotes"),the proceeds of which will be utilized by the Company for general working capital and corporate
purposes;and (iii)the Secured Notes.(The Senior Subordinated Term Loan,the Convertible Notes and the Secured Notes
are collectively referred to as the "Exit Financing".)
As proposed in the Company's Plan,the Senior Subordinated Term Loan will be arranged by Cerberus Capital
Management,L.P.("CCM")and the Convertible Notes will be purchased by a group of institutions with CCM being the
predominant investor.Among other terms and conditions,the Senior Subordinated Term Loan (i)shall be subordinated to
the Secured Notes,(ii)shall be secured by liens on substantially all assets of the Company,junior to the liens securing the
Secured Notes,(iii)shall mature four (4)years from the EffectiveDate,(iv)shall have no amortization prior to maturity,
and (v)shall bear interest at the rate of fourteen percent (14%)per annum,payable monthly in arrears.
Among other terms and conditions,the Convertible Notes shall:(i)be unsecured,(ii)be subordinated to the
Secured Notes and the Senior Subordinated Term Loan,(iii)shall be convertible at any time into 2,250,000 New Common
shares,and (iv)shall be issued with non-detachable shares of preferred stock of the reorganized ICG with an aggregate
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liquidation preference of $10.000.The holders of the Convertible Notes will have voting rights equivalent to the voting
rights of the holders of the New Common Shares on an as converted basis.In addition,subject to certain percentage
ownership requirements,the Convertible Notes will entitle CCM to appoint five (5)directors to the reorganized Company's
Board of Directors,W.R.Huff Asset Management Co.L.L.P.will be entitled to appoint two (2)directors and Morgan
Stanley &Co.,on behalf of the Company's unsecured creditors,will be entitled to select one board member.The
Company's current CEO,Mr.Randall Curran,will serve as Chairman of the Board of Directors.In addition,certain
corporate actions will require the approval of a supermajority of the Board.
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 of the outstanding
balance of the Secured Notes.Certain of these financial covenants will be established based on the Company's projected
financial results set forth in the Plan.The Company's Plan,however,is based on the good faith assumptions and
projections of management,which are inherently uncertain.Actual results could differ materially from the Company's
Plan,which in turn could negatively impact the Company's compliance with the fmancial covenants.
Additionally,the minimum cash covenant will be established by the secured lenders without reference to the
Company's financial projections.Based on the Company's current EBITDA and capital expenditure 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 covenant by the fourth quarter of 2003.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
obtain a waiver or altemative financing.In such event,the secured lenders could declare a default and take certain actions
that would require the Company to accelerate repayment.
The proposed Exit Financing is entirely contingent upon the Company consummating its Plan,which will include
obtaining the necessary approvals from the Bankruptcy Court and the Company's creditors.The Plan contains the
endorsement of the Company's official committee of unsecured creditors and their recommendation that the creditors vote
to accept the Plan;however,there is no assurance that the Bankmptcy Court and the Company's creditors will approve the
proposed Plan.Additionally,the Exit Financing remains subject to a number of conditions precedent,including the
completion of final documentation,the absence of any material adverse change in the Company's business or fmancial
condition and the absence of any material disruption in the financial markets.There is no assurance that such conditions
will be satisfied.
EMPLOYEES
As of December 31,2001,the Company employed 1,368 full-time employees.None of the Company's employees
are represented by a union.The Company believes that the successful implementation of its business strategy will depend
upon its continued ability to attract and retain qualified employees.The Company,however,does not expect to add
significant new employees to the organization in the near future.In March 2002,the Company approved a bonus plan for
the fiscal year 2002.Payment of bonuses under the plan are contingent on,among other things,the Company's financial
performance for 2002.The Company believes that it generally offers compensation packages that are comparable with
those of its competitors who are similar in size and capital structure.Due to numerous factors,including the uncertainty
facing the Company as a result of filing for bankruptcy,qualified personnel are difficult to recmit and retain and the
Company cannot guarantee that it will be able to attract and retain the personnel necessary to implement its revised
business strategy.
CERTAIN RISK FACTORS
The Company is subject to a number of significant risks.The current state of the telecommunications industry is
inherently high risk,and the Company faces risks specific to its own operations.Certain risks are addressed below as well
as in other sections ofthis Report.These risks include,but are not limited to:
15
The Company's abHig to retain its major customers on profitable terms
As of the fourth quarter 2001,the Company had three customers that accounted for 5%or more of revenue and
the loss of any one or more of these customers,absent new customers to replace the operating profit generated,would have
a significant impact on the Company's operating results.Further,the uncertainty surrounding the Company's bankruptcy
filing could have an adverse impact on the Company's ability to retain its major customers,or attract new customers,
particularly if the bankmptcy process is longer than anticipated.
The Company's abHity to access capital markets in a timely manner,at reasonable costs and on satisfactory terms and
conditions
The terms and conditions of the Exit Financing require repayment of certain debt in 2004 and 2005 that is
expected to exceed intemally generated funds available to meet these payments.Depending upon actual cash earmngs and
actual capital expenditures,ICG may need to raise additional funds through public or private debt or equity financing.
Futther,the Company may need to raise additional funds to:take advantage of unanticipated opportunities,
including expansion or acquisitions of complementary businesses or technologies;develop new products or services;or,
respond to unanticipated competitive pressures.
If ICG does not have sufficient cash to fund its growth or contractual cash commitments,it may be required to
delay or abandon certain development plans or seek additional capital earlier than anticipated.The Company cannot
provide any assurance that additional financing arrangements will be available to it on acceptable terms,or at all.
Moreover,ICG's outstanding indebtedness may adversely affect its ability to engage in additional financings.If adequate
funds are not available,ICG's business,results of operations and financial condition could be materially adversely affected.
The exit financing will contain certain covenants that wul restnct the Company'sfinancial and operationalflexibility
Under the terms of the proposed Secured Notes and Senior Subordinated Term Loan,the Company will be
required to adhere to a number of affirmative,negative and financial covenants.All of these covenants will impact the
Company's flexibility.As an example,the Company's ability to increase indebtedness will be severely limited.Further,the
Company will be subject to a number of financial covenants which will,among other things,require it to maintain a
minimum cash balance and minimum EBITDA.If actual results differ materially from the Company's Plan,it could impact
the Company's ability to comply with the financial covenants.In such an event,absent the Company's ability to secure
additional capital or altemative financing,the secured lenders could declare a default requiring the Company to accelerate
repayment.
The Company's ability to successfully maintain commercial relationships with its critical vendors and suppliers
The Company relies in part on other companies to provide data communications capacity via leased
telecommunications lines.If its suppliers are unable or unwilling to provideor expand their current levels of service to the
Company in the future,or are unable to providethese services in a timely manner,ICG's operations could be materially
affected.Although leased telecommunications lines are available from several alternative suppliers,there can be no
assurance that ICG could obtain substitute services from other providers at reasonable prices or in a timely fashion.ICG is
also subject to risks relating to potential disruptions in its suppliers'services,and there are no assurances that such
interruptions will not occur in the future.Service interruptions can produce substantial customer dissatisfaction and lead to
higher rates of customer churn.
The Company is also dependent on certain third party suppliers of software and hardware components.Although
it attempts to maintain a minimum of two vendors for each required product,certain components used by ICG in providing
its networking services are currently acquired from only one source,including high performance routers manufactured by
Cisco Systems,Inc.("Cisco"),switches and switch software manufactured by Lucent Technologies ("Lucent")and servers
from Sun Microsystems,Inc.("Sun Microsystems").The Company has also from time to time experienced delays in the
receipt of certain software and hardware components.A failure by a supplier to deliverquality products on a timely basis,
or the inability to develop alternative sources if and as required,could result in delays that could materially affect the
Company's business,operating results and fmancial condition.
16
The Company's ability to attract and retain qualifiedmanagement and employees
The Company's success depends on the performance of its officers and key employees.In order to pursue its
business plan and product development plans,ICG will need to hire,train and retain highly qualified management,
technical,sales,marketing and customer care personnel.The Company faces intense competition for qualified personnel,
particularly in the areas of software development,network engineering and product management.Moreover,ICG's
industry has a high level of employee mobility and aggressive recruiting of skilled personnel.The loss of any of ICG s key
personnel or its failure to recruit and retain personnel will harm its business and its ability to compete.
The approvaland confirmationofa plan ofreorganization
The Plan,as amended on April 3,2002,contains the endorsement of the Company's official committee of
unsecured creditors and their recommendation that all other creditors vote to accept the Plan.This Plan has been submitted
to certain creditors for a vote and a confirmation hearing has been set forMay 20,2002.Management believes the Plan will
be approved at this time;however,there can be no assurance that the Plan will be approved as submitted or within the
expected time frame.
If the Company is unable to obtain the confirmation of the Plan as submitted or if there is a significant delay in
obtaining confirmation,it could have a material negative impact on the operations of the Company.It is not possible for the
Company to accurately predict what the effect would be as a result of a delay in exiting bankruptcy,although it could result
in the Company significantly scaling back its proposed operating plan or being forced into liquidation.
The sigmficant amount of indebtedness incurred by the Company and the Company's ability to successfully restructure
this indebtedness within the bankruptcy proceeding
Prior to filing for Chapter 11 protection,the Company incurred a significant amount of indebtedness.In the
Company's current business plan,management does not project sufficient operating revenue such that it would be possible
to service its existing debt obligations without the restructuring as proposed in the Plan.As such,in the event the Company
is unable to restructure its existing indebtedness,it is possible that the Company's creditors would seek liquidation.
The existence ofhistorical operating losses and the possibility of continued operating losses
Since its inception,the Company has incurred substantial net losses and negative cash flows from operating
activities.While the Company expects its losses will narrow,it is possible that the Company will continue to incur losses
and experience negative operating cash flows in the foreseeable future.Further,there can be no assurance that the
Company will achieve or sustain profitability or positive EBITDA in the future or at any time have sufficient resources to
make principal and interest payments on the Exit Financing.
The extensive competition and downwardpricingpressure
The telecommunications industry is extremely competitive,particularly with regard to price and service.Many of
the Company's existing and potential competitors have significantly greater financial,personnel,marketing and other
resources than ICG.Competitors may also have established brand names and larger customer bases to better promote their
services.The industry is also faced with oversupply for certain services and certain services are considered to have low
barriers to entry for new competition.As a result,this competition will place downward pressure on prices for many of the
Company's services which may adversely affect operating results.There can be no assurance that sufficient demand will
exist for the Company's network services in its selected markets,that prices will not dramatically decline or that the
Company can successfully compete in its selected markets.
The development ofnew technolog
The Company faces competition from companies deploymg alternative technologies (such as cable and DSL for
Dial-Up),and it is possible that these altemative technologies will obtain market share faster than currently anticipated by
Company management.Additionally,integrating new technologies into the Company's network may prove difficult and
17
may be subject to delays and cost overruns.Further,technological upgrades to the Company's network may not become
available in a timely fashion at a reasonable cost,or at all.
Moreover,the development and introduction of new technologies may reduce the cost of services similar to those
the Company provides and could give rise to new competition not currently anticipated.If the Company is not able to
deploy superior new technology and if its technology and equipment become obsolete,the Company will be unable to
compete effectively.
Changes in,or the Company's inabilityto comply with,existing governmentregulations
Communications services are subject to significant regulation at the federal,state and local levels.ICG'sbusiness
plans require it to exploit new opportunities afforded by recent regulatory changes.The regulatory environment,however,
could adversely affect the Company in a number of ways,including:
Delays in receiving required regulatory approvals or the imposition of onerous conditions for these
approvals;
difficulties in completing and obtaining regulatory approval of interconnection agreements,which
provide for the interconnection of ICG networks with existing local telephone companies'networks;
enactment of new and adverse legislation or regulatory requirements or changes in the interpretation of
existing laws or regulations;
enactment of new and adverse legislation which increases the Company's tax burden or the tax burden of
the Company's customer;and
an accelerated decline in the Company's ability to collect current and past due reciprocal compensation.
Many regulatory proceedings regarding issues that are important to the Company's business are currently
underway or are being contemplated by federal and state authorities.Changes in regulations or future regulations adopted
by federal,state or local regulators,or other legislative or judicial initiatives relating to the telecommunications industry
could cause ICG'spricing and business models to fluctuate or otherwise have a material adverse effect on the Company.
Of particular concern to the Company is the "Internet Freedom and Broadband Deployment Act of 2000"(H.R
1542)which was approved by the House of Representatives in February 2002.The proposed legislation would permit the
RBOCs to offer long distance services within their respective regions without meeting the local competition requirements
set forth in the Telecommunications Act.Those requirements include the mandate that RBOCs open their networks to
competitors through reasonable network interconnection arrangements and access to UNEs.Moreover,the proposed
legislation would eliminate the provisionthat allows new entrants to gain access to fiber-based local loops.While it is
uncertain whether H.R.1542 will be approved by the Senate,the Company believes that the proposed legislation poses a
serious threat to local competition and,if passed,would significantly alter ICG's ability to compete in the local
telecommunications market.
General economic conditions and the related impact on demand for the Company's services
The national economy,and in particular,the telecommunications industry have been significantly affected by the
current economic slowdown.Many of the Company's customers have experienced substantial financial difficulty over the
last year,in some cases leading to bankruptcies and liquidations.The financial difficulties of the Company's customers
could have a material impact if the Company is unable to collect revenues from these customers.In addition,customers
experiencing financial difficulty are less likely to order additional services,and the Company's business plan is predicated
upon increasing both the number of customers and the services current customers order.
Additionally,the financial difficulties experienced by the telecommunications industry diminish the Company's
ability to obtain additional capital and may adversely affect the willingness of potential customers to move their
telecommunications services to an emerging providersuch as ICG.
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ITEM 2.PROPERTIES
The Company's real estate portfolio includes numerous properties for administrative,warehouse,equipment,
collocation and POP sites.
As of December 31,2001,the Company had 316,200 square feet of leased office,warehouse,and equipment
space in the Denver metropolitan area including its corporate headquarters building,and approximately 999,772 square feet
of space leased in other areas of the United States.Since November 2000,the Company has reduced its real estate portfolio
by approximately 154 sites by rejecting leases through the bankruptcy process,through lease terninations directly with
landlords,and through lease expirations.The Company continues to evaluate its real estate needs,and its portfolioof leased
locations will be further reduced in 2002 by rejecting leases through the bankruptcy process and by lease terninations as a
result of landlord negotiations.
Effective January 1,1999,ICG Services purchased the Company's corporate headquarters building,land and
improvements (collectively,the "Corporate Headquarters")for approximately $43.4 million.The Corporate Headquarters
is approximately 239,749 square feet.ICG Services financed the purchase primarilythrough a mortgage granted in favorof
an afEliate of the seller,which mortgage was secured by a deed of trust encumbering the Corporate Headquarters.Effective
May 1,1999,the Corporate Headquarters was transferred to ICG 161,L.P.("ICG 161"),a special purpose limited
partnership owned 99%by a subsidiary of ICG Services and 1%by an affiliateof the mortgagee and seller,and ICG 161
assumed the loan secured by the mortgage.The partnership agreement for ICG 161 granted to the 1%limited partner an
option to acquire all of ICG Services subsidiary's interest in the partnership for a purchase price of $43.1 million,which
option was exercisable from January 1,2004 through January 31,2012,or earlier if the Company was in default.As a
result of the Company's financial difficulties,on June 29,2001 the Company,with the Bankmptcy Court's approval,sold
its partnership interest to the limited partner for approximately $33.1 million in a cashless transaction.Under the terms of
the transaction,the new owner agreed to provideadditional funding to complete a new parking garage that the Company
had initiated but was unable to complete.The garage was completed in February 2002.As a result of the transaction,the
Company remains a tenant of the Corporate Headquarters property under a long-terncapital lease.
The Company also owns a 30,000 square foot officebuilding located in Englewood,Colorado.This property was
financed in part through a mortgage that currently has an outstanding principal amount owing of approximately $929,000.
The Company listed this property for sale as of May 2001.
On December 10,1999,a subsidiary of ICG Services acquired an 8.36 acre parcel of vacant land located adjacent
to the Corporate Headquarters for approximately $3.3 million.The Company had planned to use this land in connection
with the expansion of its corporate headquarters.As a result of the Company's on-going restructuring,expansion plans with
respect to this site have been abandoned and the property has been listed for sale since the fourth quarter 2000.
ITEM 3.T EGAL 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 presene cash and give the Company the opportunity to restructure its debt.
During the third and fourth quarters of 2000,the Company was sened 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 forner 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 forthe 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
19
financial officer,Harry R.Herbst.The consolidated amended complaint does not name the Company's forner president,
John Kane.In addition,the amended complaint does not name the Company as a defendant.The consolidated complamt,
however,indicates that,but for the fact that claims against ICG have been stayed pursuant to the Bankmptcy 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 individualdefendants are proceeding and these defendants have retained separate legal
counsel to prepare a defense.Under section 510(b)of the Bankmptcy Code,all pre-petition securities claims against ICG
are mandatorily subordinated and will be discharged upon the confirmation of the 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 or about March 29,2002 the Company and SBC entered into a settlement agreement regarding wholesale
services provided to the Company pursuant to its interconnection agreements,leaving only amounts allegedly owed for the
retail services to be resolved.The terms of the settlement were approved by the Bankruptcy Court on April 3,2002.The
impact of the settlement will be recognized when realization is assured.The Company anticipates that SBC's motions will
be amended and/or withdrawn,leaving only amounts allegedly owed for the retail services to be resolved.The Company
believes that the settlement and the ultimate resolution of the remaining items relating to retail services will not adversely
affect operating results.
In January 2001,certain shareholders of ICG Funding,LLC ("Funding")a wholly-ownedsubsidiary of the
Company,filed an adversary proceeding in the United States Bankruptcy Court for the District of Delaware (Case number
00-04238 PJW Jointly Administered,Adversary Proceeding No.01-000 PJW)against the Company and Funding.The
shareholders in this adversary action sought to recover approximately $2.3 million from an escrow account established to
fund certain dividend payments to holders of the Funding Exchangeable Preferred Securities.Because Funding filed for
bankruptcy protection,Funding did not declare the last dividendthat was to have been paid with the remaining proceeds of
the escrow account..In April 2001,the Company and Funding finalized a settlement agreement with the shareholders that
has been approved by the Bankruptcy Court.Under the terms of the settlement,the shareholders received approximately
two-thirds of the funds in the escrow account and the Company received the remaining one-third of the escrowed funds,
subject to certain contingencies and holdbacks related to shareholders that did not participate in the settlement.
The Company is a party to certain other litigation that has arisen in the ordinary course of business.In the opinion
of management,the ultimate resolution of these matters will not have a material adverse effect on the Company's financial
condition.results of operations or cash flows.The Company is not involvedin any administrative or judicial proceedings
relative to an environmental matter.
ITEM 4.SITRMISSTONOF MATTERS TO A VOTE OF SECURTTY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31,2001.
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PART II
ITEM E.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS
Under the Company's Plan of Reorganization,interests on account of the existing common shares and existing
preferred shares will be classified in Class H-5.Holders of interests on account of the common stock of ICG Services will
be classified in Class S-6.Under the Plan,holders of interests in Class H-5 and Class S-6 will not receive or retain any
property under the Plan on account of these interests.On the date the Plan becomes effective all of the existing common
shares,existing preferred shares and equity securities of ICG will be deemed cancelled and extinguished.Further,holders
of Interests in Class H-5 and Class S-6 are not entitled to vote on the Plan,are presumed to receive no distribution and are
therefore deemed to reject the Plan.As a result of the Company's proposed reorganization,the Company does not
anticipate holding an Annual Meeting of Shareholders during 2002.
ICG Common Stock,$.01 par value per share,was quoted on the NASDAQ National Market (NASDAQ)from
March 25,1997 until November 18,2000 under the symbol "ICGX"and was previously listed on the American Stock
Exchange (AMEX),from August 5,1996 to March 24,1997 under the symbol "ICG."Prior to August 5,1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol "ITR"from January 14,1993 through
February 28,1996,and under the symbol "ICG"thereafter through August 2,1996.Holdings-Canada Class A Common
Shares (the Class A Shares)ceased trading on the AMEX at the close of trading on August 2,1996.The Class A Shares,
which were listed on the Vancouver Stock Exchange (VSE)under the symbol "IHC.A,"ceased trading on the VSE at the
close of trading on March 12,1997.During 1998,all of the remaining Class A Shares outstanding held by third parties
were exchanged into shares of ICG Common Stock.
The following table sets forth the high and low closing prices of ICG Common Stock as reported by NASDAQ
for the quarterly periods indicated.The NASDAQhalted trading of the Company's common stock on November 14,2000
and delisted the stock on November 18,2000.Starting on November 19,2000,the Company's common stock has been
traded on the Over-the-Counter("OTC")Market.
NASDAQNational
Market
High Low
2000:
First Quarter $39.25 $16.31
Second Quarter 36.75 17.75
ThirdQuarter 23.25 0.41
Fourth Quarter delisted
The Company has never declared or paid dividends on ICG Common Stock and does not intend to pay cash
dividends on ICG Common Stock.
ITEM 6.SET ECTED FINANCIAT DATA
The selected financial data for the years ended December 31,1997,1998,1999,2000 and 2001 has been derived
from the audited consolidated financial statements of the Company.The Company's audited consolidated balance sheets as
of December 31,2000 and 2001,and the related consolidated statements of operations,stockholders'deficit and cash flows
for each of the years in the three-year period ended December 31,2001 include a going concem opinion.The information
set forth below should be read in conjunction with the Company's audited consolidated financial statements and the notes
thereto included elsewhere in this Annual Report.The Company's development and expansion activities,including
acquisitions,during the periods shown below materially affect the comparability of this data from one period to another.
See,"Management's Discussion and Analysis ofFinancial Condition and Results ofOperations."
21
Years Ended December 31,
1997 1998 1999 2000 2001
(in thousands,except per share data)
Statement of Operations Data:
Revenue(1)$149,358 $303,317 S 479,226 5 598,283 S 499,996
Operating costs and expenses:
Operating costs 147,338 187,260 238,927 440,090 351,973
Selling,general and administrative expenses 118,311 148,701 179,737 199,508 94,155
Bad debt expense 3,573 11,238 60,019 84,457 14.236
Depreciation and amortization 49,836 91,927 174,239 318,771 67,768
Provision for impairment of long-livedassets 5,169 -31,815 1,701,466 27,943
Other,net 292 4.877 387 4,108 11.949
Total operating costs and expenses 324.519 444,003 685,124 2,748.400 568.024
Operating loss (175,161)(140,686)(205,898)(2,150,117)(68,028)
Interest expense (117,521)(170,015)(212,420)(233,643)(32,214)
Interest income 21,828 28,401 16,300 22,370 -
Other income (expense),net (424)(1.118)(2.522)(15,166)1.028
Loss from continuing operations before reorganization
expenses,preferred dividends,discontinued operations,
extraordinary gain and cumulative effect of change in
accounting principle (271,278)(283,418)(404,540)(2,376,556)(99,214)
Reorganization expenses ---(53,897)(13,451)
Income tax expense -(90)(25)--
Accretion and preferred dividends on preferred securities
of subsidiaries,net of minority interest in share of
losses (39,019)(55,183)(61,897)(60,043)-
Loss from continuing operations before extraordinary gain
and cumulative effect of change in accounting principle (310,297)(338,691)(466,462)(2,490,496)(112,665)
Net income (loss)from discontinued operations (50,438)(79,354)36,789 4,342 -
Extraordinary gain on sales of operations ofNETCOM --195,511 ---
Cumulative effect of change in accounting principle(1)------(7.363)-
Net loss (360,735)(418,045)(234,162)(2,493,517)(112,665)
Accretion of 8%Series A Convertible Preferred Stock to
liquidation value and related dividends ---(158,249)-
Charge for beneficial conversion feature of 8%Series A
Convertible Preferred Stock ---(159,279)---
Other comprehensive loss (1.067)(263)---
Net loss attributable to common stockholders S (361,802)S (418,308)S (234.162)$(2,811,045)$(112.665)
Loss per share from continuing operations--basic and
diluted $(7.30)$(7.49)$(9.90)$(49.63)$(2.14)
Net loss per share basic and diluted $(8.49)$(9.25)$(4.97)$(56.02)S (2.14)
Weighted average number of shares outstanding--basic and
diluted(2)42,508 45.194 47.116 50.184 52.748
Other Data:
Net cash provided(used)by operating activities $(106,761)$(100,060)$(43,476)$22,483 $(11,981)
Net cash used by investing activities (422,585)(343,561)(122,412)(557,619)(17,519)
Net cash provided(used)by financing activities 308,804 525,601 67,018 528,444 (20,893)
EBITDA(3)(119,864)(43,882)543 (125,772)39,632
Capital expenditures of continuing operations(4)261,318 360,980 739,061 973,584 41,463
22
Years Ended December 31,
1997 1998 1999 2000 2001
(in thousands,except per share data)
Balance Sheet Data:
Cash,cash equivalents and short-term investments available
for sale S 232,855 $262,307 S 125,507 $214,713 S 146,587
Working capital (deficit)of continuing operations 263,674 294,934 (69,960)279,534 111,279
Property and equipment,net 603,988 908.058 1,527,879 590,500 531,187
Total assets 1,205,331 1,589,647 2,020,621 980,452 755,165
Liabilities subject to compromise -----2,870,130 2,729,590
Current portion of long-term debt and capital lease
obligations 7,096 4,892 8,886 --
Long-term liabilities and capital lease obligations,less current
portion 957,508 1,661,944 1,969,249 34,167 51,796
Redeemable preferred securities of subsidiaries 420,171 466,352 519,323 1,366,660 1,326,745
Common stock and additional paid-in capital 534,290 577,940 599,760 882,662 922,577
Accumulated deficit (791,417)(1,209,462)(1,443,624)(4,254,669)(4,367,334)
Stockholders'deficit (256,983)(631,177)(843,864)(3,372,007)(3,444,757)
(1)Duringthe year ended December 31,2000,the Company adopted Staff Accounting Bulletin No.101 (SAB 101),
which requires the recognition of installation revenue over the average customer term.This change resulted in a
cumulative effect of a change in accounting principle of $7.4 million and an increase in revenue for the year
ended December 31,2000 of approximately $0.9 million.
(2)Weighted average number of shares outstanding for the years ended December 31,1997 and 1998 represents ICG
Common Stock and ICG Holdings-CanadaClass A Shares (not owned by the Company)outstanding for the
periods from August 5,1996 through December 31,1998.During the year ended December 31,1998,all of the
remaining Class A Shares outstanding held by third parties were exchanged into shares of ICG Common Stock.
Accordingly,weighted average number of shares outstanding for the year ended December 31,1999 and
thereafter represents ICG Common Stock only.
(3)EBITDA consists of loss from continuing operations before interest,income taxes,reorganization expenses,
depreciation and amortization,other expense,net,accretion and preferred dividends on preferred securities of
subsidiaries.net of minority interest in share of losses,and certain nonrecurring charges such as the provisionfor
impairment of long-livedassets and other,net operating costs and expenses,including deferred compensation and
net loss (gain)on disposal of long-livedassets.Accordingly,EBITDA is not intended to replace operating (loss),
net (loss),cash flow,and other measures of financial performance and liquidity reported in accordance with
accounting principles generally accepted in the United Sates.Rather,EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to other measures.Management believes that
EBITDA is a standard measure of operating performance and liquidity that is commonly reported and widely used
by analysts,investors,and other interested parties in the telecommunications industry because it eliminates many
differences in financial,capitalization,and tax structures,as well as non-cash and non-operating charges to
earnings.EBITDA is used intemally by the Company's management to assess on-going operations.However,
EBITDA as used in this report may not be comparable to similarly titled measures reported by other companies.
Net cash flows from operating,investing and financing activities as determined using GAAP are also presented in
Other Data.The followingtable is a reconciliation of the net loss reported by the Company to EBITDA.
23
Years ended December 31,
1997 1998 1999 2000 2001
(in thousands)
Loss from continuing operations before discontinued
operations,extraordinary gain and cumulative effect of
change in accounting principle $(310,297)$(338,691)$(466.462)$(2,490,496)S (112,665)
Reorganization expenses --53,897 13,451
Income tax expense -90 25 ---
Accretion and preferred dividends on preferred securities of
subsidiaries,net ofminority interest in share of losses 39,019 55,183 61,897 60,043 -
Interest expense 117,521 170,015 212,420 233,643 32,214
Interest income (21,828)(28,401)(16,300)(22,370)-
Other expense (income)424 1,118 2,522 15,166 (1,028)
Other,net 292 4,877 1,293 1,693 2,412
Loss (gain)on disposal of long-livedassets ---(906)2,415 9,537
Provision for impairment of long-livedassets 5,169 -31,815 1,701,466 27,943
Depreciation and amortization 49,836 91.927 174.239 318,771 67,768
EBITDA $(119,864)$(43.882)$543 $(125,772)S 39.632
(4)Capital expenditures of continuing operations include assets acquired under capital leases and through the
issuance of debt or warrants and excludes corporate headquarters assets acquired through the issuance of long-
term debt or capital lease obligations.
24
TTEM 7.MANAGEMFNT'S DISCTISSION AND ANAT YSIS OF FTNANCIAI CONDITION AND RESTTI.TS OF
OPERATIONS
This section and other parts of this Report contain "forward-lookingstatements"intended to quali as safe
harbors from liability as established by the Private Securities Litigation Reform Act of l 995.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 futureplans,objectives or goals also are forward-lookingstatements.All forward-lookingstatements are
subject to certain risks and uncertainties that could cause actual results or outcomes to differ matenally from those
currentivanticipated.Factors that could affect actual results include,but are not limited to,the following:
The material uncertaintv of the Company's ability to continue as a going concern due to the filingfor
protection under bankruptcy law;
The approvaland confirmation ofa plan ofreorganization;
The significant amount of indebtedness incurred by the Company and the Company's ability to
successfully restructure this indebtedness within the bankruptcyproceeding;
The existence ofhistorical operating losses and the possibility ofcontinued operating losses;
The Company's ability to achieve and sustain a level of operating profitability sufficient to fund its
business;
The Company's ability to successfully maintain commercial relationships with its critical vendors and
suppliers;
The Company's ability to retain its major customers on profitableterms;
The extensive competition the Company will face;
The Company's ability to attract and retain qualified management and employees;
The Company's ability to access capital markets in a timely manner,at reasonable costs and on
satisfactory terms and conditions;
Changes in,or the Company's inability to comply with,eristing government regulations;and,.
General economic conditions and the related impact on demand for the Company's services.
The following discussion and analysis of financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and accompanying notes beginning on page F-1 of this annual
report.The Company's consolidated financial statements reflect the operations of NETCOM,Network Services and
Satellite Services as discontinued for all periods presented All dollaramounts are in U S.dollars.
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 most of its
subsidiaries (except for certain non-operating entities),filed voluntary petitions for protection under Chapter 11 of the
United States Bankruptcy Code in the Federal Court for the District of Delaware (the "Bankruptcy Court").The filings
were made in order to facilitate the restructuring of the Company's debt,trade liabilities and other obligations.The
25
Company and its filing subsidiaries are currently operating as debtors-in-possession under the supervision of the
Bankmptcy 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 busmess,
or the effects on the interests of creditos and shareholders.
On December 19,2001,the Company and its debtor subsidiaries filed a proposed Plan of Reorganization and a
Disclosure Statement in the Bankruptcy Court.The Company 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 and the Disclosure Statement,as amended,are collectively referred to herein as the "Plan".)
A hearing on the adequacy of the Disclosure Statement was held in the Bankruptcy Court on April 3,2002,at which time
the Bankruptcy Court found the Disclosure Statement adequate and authorized the Company to submit the Plan to the
Company's creditors for approval.It is anticipated that a confirmation hearing will be held in the Bankruptcy Court on May
20,2002.Consummation of the Plan is contingent upon receiving final Bankruptcy Court approval,as well as the approval
of cenain classes of creditors.
The Plan contains separate classes and proposed recoveries for the holders of claims against interests in ICG
Holdings and ICG Services.The Plan does not provide for the substantive consolidation of ICG Holdings and ICG
Services.The Plan does,however,providefor the substantive consolidation of ICG Holdings together with its subsidiaries,
as well as ICG Services together with its subsidiaries,for purposes of voting,confirmation and distribution of claims
proceeds.The Plan contemplates the conversion of the Company's existing unsecured debt into common equity of the post-
bankruptcy,reorganized Company.
In general,the Plan provides for the Company's capital restructuring by (i)reducing the Senior Facility by $25
million using the proceeds of a new senior subordinated term loan and exchanging the balance of the Senior Facility
(approximately $59.6 million)into new secured debt (the "Secured Notes")and (ii)converting general unsecured claims
(as defined by the Plan),which include the claims of the publicly held unsecured debentures,into newly issued common
stock of the reorganized ICG (the "New Common Shares").Under the Plan,the Company will issue approximately 8
million new shares.Additionally,the Company intends to issue approximately $40 million of new convertible notes that
will be convertible into New Common Shares.Under the Plan,there will be no recovery for holders of existing preferred or
common equity securities of the Company,whose interests will be cancelled.
The Company's management,assisted by its financial advisors,Dresdner Kleinwort &Wasserstein,Inc.,
evaluated the reorganization value of the Company in connection with the filing of the Plan.The reorganization value of
the Company on a going concem basis was estimated to be between $350 million and $500 million.This evaluation of the
Company resulted in a range of values for the new common equity of between approximately $102 million and $252
million.The Plan as submitted reflects a reorganization value of approximately $413 million,which includes a valuation of
the new common equity totaling $165 million.
Upon confirmation of the Plan,the Company will apply "Fresh-Start"reporting in accordance with generally
accepted accounting principles ("GAAP")and the requirements of AICPA Statement of Position ("SOP")90-7 "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code."Under Fresh Start reporting the reorganization value
of the Company,which generally represents the going concern value of the Company,is ultimately determined pumuant to
the approval of the Company's Plan by the Company's creditors and confirmation of the Plan by the Bankruptcy Court.
Upon the effectivedate of the Plan (hereinafter,the "EffectiveDate"),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 are determined in
conformity with the Financial Accounting Standards Board ("FASB")Statement of Financial Accounting Standards No.
109.
26
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 accountmg principles
generally accepted in the United States of America.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
deternined 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 reciprocal compensation and carrier access revenue in accordance with regulatory authority
approval and pursuant to interconnection agreements with incumbent local exchange carriers ("ILECs")and interexchange
carriers ("IXCs").The Company recognizes reciprocal compensation 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 ("LECs")for local exchange traffic it terninates on the LECs'facilities and such costs are recognized as
incurred.
Revenue attributable to leases of metropolitan fiber and other infrastructure pursuant to indefeasible rights-of-use
agreements ("IRUs")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 individualreceivables 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.
The Company had,as of December 31,2001,total accounts receivable outstanding of approximately $86 million
and an allowance for uncollectible accounts receivable of approximately $44 million.A substantial amount of the
27
allowance is for accounts receivable that were deternined to be uncollectible prior to December 31,2000,but for which .
collection efforts have not been exhausted.
Operanng Costs and Accrued Liabilides
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 ("BANs")in an
attempt to segregate the Company's pre-and post-Chapter 11 petition billing activity.Disconnected seivices 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 BANs 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 or litigation with certain providers.In determining the
amount of line cost expenses and related accrued liabilities to reflect in its fmancial 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 providerof the facilities.Significant judgment is
required in estimating the ultimate outcome of the dispute resolution process,as well as any other amounts which may be
incurred to conclude the negotiations or settle any litigation.The cost of leased facilities incurred during the year ended
December 31,2001,was approximately $221 million.
Long-LivedAssets
The Company's long-livedassets include property and equipment,in service,under construction or development
and held for disposal,as well as goodwilland identifiable intangible assets to be held and used.
Property and equipment in service is stated at historical cost,reduced by provisions to recognize economic
impairment in value.Costs associated directly with network construction,service installations and development of business
support systems,including employee related costs,and interest expense incurred during the construction period,are
capitalized.Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.The estimated
useful lives of telecommunications networks and acquired bandwidth is 5 to 20 years and 3 to 5 years for furniture fixtures,
equipment and other.These useful lives are determined based on historical usage with consideration given to technological
changes,trends in the industry and other economic factors that could impact the network architecture and asset utilization.
Assets held for disposal or sale are stated at the estimated proceeds from the sale,less costs to sell.
The Company provides for the impairment of long-livedassets,including goodwill,pursuant to SFAS No.121,
"Accounting for the Impairment of Long-LivedAssets and for Long-LivedAssets to be Disposed of',which requires that
long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.Such events include,
but are not limited to,a significant decrease in the market value of an asset,a significant adverse change in the business
climate that could affect the value of an asset or a current period operating or cash flow loss combined with a history of
operating or cash flow losses.An impairment loss is recognized when estimated undiscounted future cash flows,before
interest,expected to be generated by the asset are less than its carrying value.Measurement of the impairment loss is based
on the estimated fair value of the asset,which is generally determined using valuationtechniques such as the discounted
present value of expected future cash flows,appraisals or other pricing models as appropriate.
The Company recognized impairments of long-livedassets of approximately $1.7 billion and $28 million during
the years ended December 31,2000 and 2001,respectively.The Company expects to recognize a further write-down in the
value of long-livedassets of up to $220 million upon emergence from bankruptcy.
Financial Reponingby Enddes in Reorganizadon under the Bankruptcy Code
These consolidated financial statements have been prepared for the period from November 14,2000 through
December 31,2001,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
28
statements forperiods including and subsequent to filing the Chapter 11 petition should distinguish transactions and events
that are directly associated with the reorganization from the ongoing operations of the business.Expenses and other items
not directly related to ongoing operations are reflected separately in the consolidated statement of operations as
reorganization expenses.Reorganization expenses were approximately $54 million and $13 million,net of a gain of
approximately $39 million in 2001,during each of the years ended December 31,2000 and 2001,respectively.
Upon consummation of the Plan,the Company will apply "Fresh-Start"reporting in accordance with generally
accepted accounting principles ("GAAP")and the requirements of SOP 90-7.Under Fresh Start reporting the
reorganization value of the Company,which generally represents the going concern value of the Company,is ultimately
deternined pursuant to the approval of the Company's Plan by the Company's creditors and confirmation of the Plan by
the Court.Upon the EffectiveDate,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 are determined in confornity with the Financial Accounting
Standards Board ("FASB")Statement ofFinancial Accounting Standards ("SFAS")No.109.
As of the Effective Date,it is anticipated that approximately $2.5 billion of unsecured creditor and debt liabilities
will be discharged fornew equity with an estimated value of approximately $160 million.In addition,the existing preferred
and common stock outstanding,including warrants and options,will be extinguished.(See Liquidity and Capital Resources
section.)
Income Taxes
As of December 31,2001,the Company has federal NOL carryforwards of approximately $1.6 billion,which
expire in varying amounts through December 31,2021.Due to the provisions of Internal Revenue Code ("Code")sections
108,382 and certain other Code and Treasury Regulations,it is anticipated that a major portion of the NOLs will be
reduced by cancellation of indebtedness and that a change in ownership will occur as a result of the confirmation of the
Company's Plan.If the Plan results in the issuance of new stock and or the cancellation of existing stock as anticipated,the
remaining amount of NOLs (if any)that can be utilized in future years will be limited.
COMPANY OVERVIEW
ICG is a facilities-based,nationwide communications providerfocused on providingdata and voice services to
Internet service providers ("ISPs"),telecommunication carriers and corporate customers.The Company has metropolitan
fiber in 26 markets,fiber interconnection in five regional markets,voice and data switches in 27 major metropolitan areas
and a nationwide IP data network.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 (referred to in previous filings as "ISP Business"),providingwholesale 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 (referred
to in previous filings as the "Commercial Business"),providing voice and data services to corporate customers with an
emphasis on Dedicated Intemet Access ("DIA")services.
.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.As of December 31,2001,before the related reciprocal compensation,
revenue from these services accounted for approximately 36%of the Company's total revenue.Associated
reciprocal compensation revenue accounted forapproximately 13%of the Company's revenue.
.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 approximately 30%of the
Company's total revenue.
29
Corporate Services:The Company offers Internet access,data and voice service to corporate customers.The
Company's current customer base is located primarily in California,Ohio,Texas,Colorado and parts of the
Southeast.ICG is expanding its DIA services to medium and large-sized businesses in its 27 major markets.ICG
is well positioned to expand this service with its metropolitan asset base.data network infrastructure.and Internet
experience.Corporate Services accounted for approximately 21%of revenue.
To provide its service offerings,ICG combines its 5,540 route miles of metropolitan and regional fiber network
infrastructure,nationwide data backbone,data POPs,27 asynchronous transfer mode ("ATM")switches,numerous private
and public Internet peering arrangements and 43 voice and data switches in 27 markets.The Company's data network is
supported by an OC-48 capacity nationwide fiberoptic 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 ("SONET")rings to make the network accessible to the largest concentration of telecommunications intensive
business customers within a given market.This network architecture also offers the advantage of uninterrupted service in
the event of a fiber cut or equipment failure,thereby resulting in limited outages and increased network reliability in a cost
efficient manner.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Reorganized Capital Structure
On December 19,2001,the Company and its debtor subsidiaries filed a proposed Plan of Reorganization and a
Disclosure Statement in the Bankruptcy Court.The Company 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 and the Disclosure Statement,as amended,are collectively referred to herein as the "Plan").A
hearing on the adequacy of the Disclosure Statement was held in the Bankruptcy Court on April 3,2002 at which time the
Bankruptcy Court found the Disclosure Statement adequate and authorized the Company to submit the Plan to the
Company's creditors for approval.It is anticipated that a confirmation hearing will be held in the Bankruptcy Court on May
20,2002.Consummation of the Plan is contingent upon receiving final Bankruptcy Court approval,as well as the approval
of certain classes of creditors.
On August 12,1999,ICG Equipment,Inc.and ICG NetAhead,Inc.("NetAhead")entered into a $200.0 million
senior secured financing facility ("Senior Facility")consisting of a $75.0 million term loan,a $100.0 million tern loan and
a $25.0 million revolvingline of credit.The Senior Facility is guaranteed by ICG Services and ICG Mountain View,Inc.
and is secured by the assets of ICG Equipment,Inc.and NetAhead.On December 19,2000,the Bankruptcy Court issued
an order directing ICG Services and certain of its subsidiaries to provideadequate protection to the lenders of the Senior
Facility in the form of a first priority,post-petition security interest.The Company is also subject to certain financial
covenants based on results of operations under the Senior Facility.The Company continues to make interest-only payments
on the Senior Facility balance as approved by the Bankruptcy Court.Interest is paid based on the prime rate plus 4.25%on
$36 million of the outstanding balance and the prime rate plus 3.875%on the remaining $48.6 million.
Under the Company's proposed Plan,the Senior Facility will be restructured with new terms and new notes (the
"Secured Notes"),which will be issued to the lenders.The balance due on the Secured Notes will be approximately $59.6
million.The Secured Notes will mature three (3)years from the EffectiveDate.The Secured Notes will bear interest at a
fluctuating rate,payable monthly in arrears currently estimated to be 8.0%if issued at March 31,2002.The Secured Notes
will also contain new financial covenants that will be established based on the Company's business plan.
The Company's Plan,in addition to restructuring and replacing the Senior Facility with the Secured Notes,is
premised upon obtaining $65 million of new exit financing comprised of three components:(i)a $25 million new senior
subordinated secured term loan (the "Senior Subordinated Term Loan"),the proceeds of which will be utilized to repay $25
million of the Senior Facility;(ii)the issuance by the Company of $40 million of new unsecured convertible notes (the
30
"Convertible Notes"),the proceeds of which will be utilized by the Company for general working capital and corporate
purposes;and (iii)the Secured Notes.(The Senior Subordmated Term Loan,the Convertible Notes and the Secured Notes
are collectively referred to as the "Exit Financing".)
As proposed in the Company's Plan,the Senior Subordmated Term Loan will be arranged by Cerberus Capital
Management,L.P.("CCM")and the Convertible Notes will be purchased by a group of institutions with CCM being the
predominant investor.Among other terms and conditions,the Senior Subordinated Term Loan (i)shall be subordinated to
the Secured Notes,(ii)shall be secured by liens on substantially all assets of the Company,junior to the liens securing the
Secured Notes,(iii)shall mature four (4)years from the Effective Date,(iv)shall have no amortization prior to maturity,
and (v)shall bear interest at the rate of fourteen percent (14%)per annum,payable monthly in arrears.
Among other terms and conditions,the Convertible Notes shall:(i)be unsecured,(ii)be subordinated to the
Secured Notes and the Senior Subordinated Term Loan,(iii)shall be convertible at any time into 2,250,000 new common
shares,and (iv)shall be issued with non-detachable shares of preferred stock of the reorganized ICG with an aggregate
liquidation preference of $10,000.The holders of the Convertible Notes will have voting rights equivalent to the voting
rights of the holders of the New Common Shares on an as convened basis.In addition,subject to certain percentage
ownership requirements,the Convertible Notes will entitle CCM to appoint five (5)directors to the reorganized Company's
Board of Directors,W.R.Huff Asset Management Co.L.L.P.to appoint two (2)directors and Morgan Stanley &Co.,on
behalfof the Company's unsecured creditors,will be entitled to select one board member.The Company's current CEO,
Mr.Randall Curran,will serve as Chairman of the Board of Directors.In addition,certain corporate actions will require the
approval of a supermajority of the Board.
The proposed Exit Financing is entirely contingent upon the Company consummating its Plan,which will include
obtaining the necessary approvals from the Bankmptcy Court and the Company's creditors.The Plan contains the
endorsement of the Company's official committee of unsecured creditors and their recommendation that the creditors vote
to accept the Plan;however,there is no assurance that the Bankruptcy Court and the Company's creditors will approve of
the proposed Plan.Additionally,the Exit Financing remains subject to a number of conditions precedent,including the
completion of final documentation,the absence of any material adverse change in the Company's business or financial
condition and the absence of any material disruption in the financial markets.
The Company's management,assisted by its financial advisors,Dresdner Kleinwort &Wasserstein,Inc.,
evaluated the reorganization value of the Company in connection with the filing of the Plan.The reorganization value of
the Company on a going concern basis was estimated to be between $350 million and $500 million.This evaluation of the
Company resulted in a range of values for the new common equity of between approximately $102 million and $252
million.The Plan as submitted reflects a reorganization value of approximately $413 million,which includes a valuation of
the new common equity totaling $165 million.
The followingtable,Condensed Capital Structure,compares the capital structure of the Company as of December
31,2001,as reported in the Company's audited financial statements,with the projected pro forma reorganized capital
structure of the reorganized ICG upon confirmation of the Plan.Amounts presented below as the Projected Pro Forma
elements of the reorganized ICG's capital structure are taken from the Company's Plan that assumes an effective date of
confirmation of the Plan of April 30,2002.
31
Condensed Capital Structure
Projected Pro
Forma
Reorganized
Capital
Actual Structure
December 31,April 30,
2001 2002
(in thousands)
Capital lease obligations
Corporate headquarters $50,708 $50,902
Other 185,518 47,738
Total 236,226 98.640
Secured long-terndebt
Senior facility 84,574 -
Secured Notes -59,574
Other secured debt 929 24,463
85,503 84,037
Senior Subordinated Tern Loan -25,000
Convertible Notes,net of $5 million of debt discount --35,000
Unsecured long-term debt 1,968,781 --
Total debt 2.290,510 242,677
Preferred stock 1,326,745 --
Stockholders'equity (deficit)(3,444,757)165.000
Total debt and stockholders'equity $172.498 $407.677
The Company has received executed commitment letters for the Exit Financing,however,these commitments
remain subject to a number of conditions precedent,including without limitation (i)completion of final documentation and
(ii)absence of any material adverse change in the Company's business or material disruption in the financial markets.
There can be no assurance that these conditions will be satisfied (or waived),and if not,the Company will not obtain the
financing providedthereby.
As stated above,the Plan is premised upon reorganized ICG obtaining the Exit Financing.In the event the
Company does not obtain such financing,the Company's ability to execute its Plan and meet future commitments will be
materially adversely impacted.
Capital lease obligations primarily include long-term leases for certain fiber facilities and the headquarters
building and are projected to total $98.6 million at the EffectiveDate.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 are projected to have a principal balance of $59.6 million outstanding as of the EffectiveDate.
Interest on the Secured Notes will be accrued as a premium over LIBOR or a premium over the bank's prime rate and is
payable monthly in arrears.If outstanding at March 31,2002 the rate payable is estimated to have been 8.0%per annum.
The principal balance ofthe Secured Notes is projected to begin amortizing in 2003 and will mature in 2005.
The $25 million Senior Subordinated Term Loan accrues interest at 14%which is fixed and payable monthly in
arrears.The Senior Subordinated Term Loan matures in four years.In addition,warrants to purchase 200,000 New
Common shares of the reorganized ICG will be issued in connection with the Senior Subordinated Term Loan.The
warrants will have an exercise price equal to the reorganization value assigned to the Company and will expire,if
unexercised,on the fifth anniversary of EffectiveDate.
32
The 540 million of Convertible Notes are convertible into 2.250,000 New Common Shares of the reorganized
ICG at the EffectiveDate.This effective conversion price (i.e.517.78 per share)is 11.1%below the value of the New
Common shares as of the Effective Date (i.e.520.00 per share)representing a S5 million value associated with the
conversion rights.Interest accrues at the rate of 11%per annum compounded quarterly and is paid in the forn of additional
Convertible Notes and conversion rights.Payments on Convertible Notes,to the extent not converted.mature on the
seventh anniversary of the Effective Date.The $5 million value of the initial conversion rights associated with the
Convertible Notes has been established as debt discount with a corresponding increase to additional paid in capital of
stockholders'equity to reflect the impact of such beneficial conversion feature in the accompanying table.
The Secured Notes and the Senior Subordinated Term Loan will require the Company to meet certam 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 ration to the outstanding
balance of the Secured Notes.Certain of these financial covenants will be established based on the Company's projected
financial results set forth in the Plan.The Company's Plan,however,is based on the good faith assumptions and
projections of management,which are inherently uncertain.Actual results could differ materially from the Company's
Plan,which in turn could negatively impact the Company's compliance with the financial covenants.
Additionally,the minimum cash covenant will be established by the secured lenders without reference to the
Company's financial projections.Based on the Company's current EBITDAprojections,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 fourth quarter of 2003.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 secured lenders could declare a default and take certain actions that
would require the Company to accelerate repayment.
Other debt as of the Effective Date consists primarily of notes issued to vendors and taxing authorities and are
projected to have a principal balance totaling $24.5 million.Associated interest expense is projected at 7.0%to 10%per
annum,payable monthly.
Other Sources of Funding
The Company had cash and cash equivalents of approximately $147 million as of December 31,2001 and
anticipates having cash and cash equivalents of approximately $99 million on the Effective Date.The change in cash
reflects receipt of the Exit Financing,normal operating cash requirements and payment of restructuring fees and
comnntments at closing.
The Company expects that the demand for telecommunication services will grow and,not withstanding 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
providedby 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 facilities.
Capital Commitments
Contractual Cash Commitments
The followingtable summarizes the Company's contractual cash commitments.The table assumes the Plan will
be confirmed by the Court and the creditors and that the final provisions of the Exit Financing will exhibit terms and
conditions substantially in agreement with the executed commitments discussed above.
33
Summary of Contractual Cash Obligations
Four Eight
Months Months
Ended Ended Year Ended Two to Four to After
April 30,Dec.31,Dec.31,Three Five Five
2002 2002 2002 Years Years Years
(in thousands)
Capital lease obligations:
Corporate headquarters $-S ---$-$-S -S 50,902
Other 7,207 2,410 9,617 12.061 7.801 25,466
Total(1)7.207 2.410 9,617 12,061 7,801 76,368
Secured long-termdebt:
Senior facility 25,000 -25,000 --
Mortgage ------
Secured Notes ---I1,926 47,648 -
Other secured debt -5,719 5,719 12.165 6.066 512
25.000 5,719 30,719 24,091 53.714 512
Senior SubordinatedTerm Loan ----25,000 -
Convertible Notes,net of $5 million of
debt discount -----40.000
Total ------25.000 40,000
Total Capital Leases and Debt 32,207 8,129 40336 36.152 86.515 116.880
Other Obligations:
Restructuring fees and
commitments(2)25,466 -25,466 ---
Operating leases and rents 6,864 13,729 20,593 32,668 28,424 56,251
Maintenance and other contracts 873 1,746 2,619 200 400 -
Total 33203 15,475 48.678 32.868 28.824 56.251
Total Contractual Cash Obligations S 65.410 S 23.604 $89.014 $69.020 S 115.339 S 173.131
(1)Excludes the imputed interest component of the capital leases.
(2)Includes the estimated settlement of Administrative (Professional fees),Convenience and Priority Claims and cash
disbursed with the affinnationof certain executory contracts (as these terms are defined in the Plan).
Capital Expenditures
Capital expenditures are projected to be approximately $98 million in 2002 and $500 million through 2005.An
estimated 25%to 35%of the expenditures in 2002 will be incurred to maintain the current functionality of the network
infrastructure and information and business support systems,such as software upgrades,replacement of physically obsolete
equipment,etc.Capital expenditures,exclusive of amounts required to maintain the current 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
Plan,capital expenditures will be proportionally reduced.The Company has approximately $95 million of construction and
development in process as of December 31,2001.This includes 5 switch sites that are substantially complete and which
management anticipates will be generating revenue in the second halfof2002.
The Company also has available capacity on its data backbone and in its modem banks.It is the Company's
objective to use the capacity to support future revenue streams.
34
Assessment of Risks and Uncertainty
Availabilityof Financing
The Company believes that cash and short-term investments should enable the Company to fund operations into
2004 when the Company plans to refmance the Secured Note.There can be no assurance,however,that such resources will
be sufficient for anticipated or unanticipated working capital and capital expenditure requirements,or that the Company
will achieve or sustain profitabilityor positive EBITDA in the future,which will allow it to maintain cash reserve or attract
capital with which to refinance the Secured Notes.
As stated above,the Plan is premised upon the reorganized ICG obtaining the Exit Financing on the Effective
Date.In the event the Company does not obtain such financing,the Company's ability to execute the Plan and meet future
commitments will be materially adversely impacted.
Sustaining Positive Cash Flow
The general economic downturn and the severe downturn in the telecommunications industry have resulted in an
increased risk to the Company in the form of:exposure to credit risk from existing customers;increased churn (especially
in Point-to-Point Broadband services);and oversupply of backbone and other services,creating increased pricing pressures.
Due to the impacts of a slowing economy,which has resulted in customers going out of business,filing
bankruptcy,or looking for opportunities to cut costs,the Company has experienced an acceleration of customers
disconnecting services that has resulted in downward pressure on revenue performance.In addition,customers are taking
longer to make buying decisions,lengthening the sales cycle.During the fourth quarter 2001,recurring revenue of
approximately $3 million was eliminated due to customer disconnects.
Management believes that such pressure will continue to negatively impact revenue performance for the first half
of 2002 and possibly longer.Approximately 5.0%of the Company's monthly recurring revenue at December 31,2001 was
represented by customers the Company believes may be experiencing financial difEculties.The Company cannot predict
how much of that revenue will be lost to disconnections.In addition,the Company anticipates further disconnections by
other customers due to optimizing their existing networks,continued cost cutting efforts,and additional customer
bankruptcies or other customer financial difEculties.There is no assurance that the Company will be able to replace lost
revenue with new revenue from sales.
Factors that could negatively impact the Company's margms in a slowing economy includes below-cost pricing
by some competitors to increase short-term cash flow.In addition,pricing pressure from long-haul providers could impact
pricing ofinter-city point-to-point services.However,the Company believes that its margins will be improved by its ability
to sell services on its extensive networks that extend beyond these types of highly competitive routes onto its metropolitan
facilities.
Reciprocal compensation revenue is primarily associated with the Company's Dial-Up revenue that represents
compensation from 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
based on regulatory and judicial rulings in each of the states.Further,several significant settlement agreements were
renegotiated in 2000 and 2001.(See "Regulatory Activity".)In most states in which the Company provides services,
regulatory bodies have established lower traffictermination rates than the rates provided under the Company's agreements
and,as a result,the rates,while reasonable in light of the regulatory environment,are lower than the rates under the
expiring agreements.In addition,a 2001 FCC ruling on reciprocal compensation for ISP-bound traffic reduced rates in
2001 and will further reduce rates in January 2002 and June 2003.The ruling also capped the number of minutes that can
be billed for ISP-bound traffic.Reciprocal compensation represented approximately 30%,23%and 13%ofrevenue in each
of the years in the three year period ended December 31,2001.The Company believes that the revenue earned from
reciprocal compensation will be significantly reduced in future years.
The immense capital investments made in the telecommunications industry have created substantial supply of
network infrastructure.Oversupply combined with rapid technological advancements that have the potential to reduce
35
operating costs and intense competition from numerous participants in most of the Company's markets 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 extent of further pricing pressures and potential adverse impacts to future
operating results.
Loss ofsigmyicant customer
Several customers account for a significant portionof our revenue.
The Company has substantial business relationships with a few large customers.For the year ended December 31,
2001,the top ten customers accounted for approximately 52%of total revenue.The Company's largest customer for the
three and 12 months ended December 31,2001,accounted for 28%and 18%,respectively of total revenue.In 2001 the
companies that individuallyrepresented more than 5%of total revenue,were Qwest Communications,Inc.,Cable and
Wireless,Inc.and UUNet (a division of WorldCom,Inc.).
Off Balance Sheet Financing
The Company has no off balance sheet financing other than long term commitments for operating leases and rents
as shown in the Summary of Contractual Cash Commitments.
Historical Cash Activities
Net Cash Provided (Used)By Operadng Acávities
The Company's operating activities before reorganization items providedapproximately $74 million and $142
million in 2001 and 2000,respectively,and used $44 million in 1999.Net cash provided(used)by operating activities is
primarily due to losses from continuing operations,working capital items and non-cash expenses,such as depreciation and
amortization,deferred interest expense,provisionfor impairment of long-livedassets,accretion and preferred dividends on
subsidiary preferred securities.
In 2001,this source of cash is the result of a net loss before reorganization items of approximately $99 million
offset by non-cash charges of approximately $137 million and cash providedby working capital of $37 million.
In 2000,non-cash charges such as depreciation and amortization and the impairment of long-lived assets
substantially offset the net loss.Working capital,excluding deferred revenue,provided$44 million of cash and deferred
revenue provided$169 million of cash.
Reorganization items are primarilynon-cash charges derived from the bankruptcy process.
In 1999,net cash used by operating activities of $44 million included an increase in receivables of approximately
$121 million,which offset non-cash expenses and other changes in workingcapital.
Net Cash Used By InvestingActivities
Investing activities used $122.4 million,$557.6 million,and $17.5 million during each of the years in the three
year period ended December 31,2001,respectively.Net cash used by investing activities includes cash expended for the
acquisition of property,equipment and other assets of $530 million,$596 million,and $44 million,which is net of the
change in prepaid expenses,accounts payable and accrued liabilities related to the acquisition of property and equipment,
for each of the years in the three year period ended December 31,2001,respectively.
During 1999,the Company used $29 million for the purchase of long-term investments and $6 million to
purchase the minority interest of two of the Company's subsidiaries.Offsetting the expenditures of investing activities for
1999 are the net proceeds from the sales of NETCOM,NetworkServices and Satellite Services combined of $405 million,
including $30 million in proceeds from the sale of common stock of MindSpring,which the Company received as partial
36
consideration for the sale of the domestic operations of NETCOM.and proceeds from the sales of short-term investments
available for sale of S30 million.
Offsetting the expenditures for investing activities for 2000 are the proceeds from the sale of short-term
investments and marketable securities of $33 million.Offsetting the expenditures for investing activities in 2001 are the
proceeds from the sale of short-tern investments and marketable securities of $20 million and decrease in restricted cash of
$3 million due to settlement of liabilities subject to compromise.
The Company acquired assets under capital leases and IRU agreements of approximately $144 million,$231
million and $51 million during each of the years in the three year period ended December 31,2001 respectively,including
the capital lease for the Company's headquarters buildingin 2001.
Net Cash Provided (Used)By FinancingActivities
Financing activities provided $67.0 million,$528.4 million during 1999 and 2000 and used $20.9 million in 2001.
Due to the Company's ongoing bankruptcy proceedings,the Company's financing activities in 2001 were minimal.
Management of the Company has deternined that the Company has adequate cash and short-term investments to provide
for operations during the reorganization period.Accordingly,the Company terminated its Debtor-in-Possession Revolving
Credit Agreement on November 7,2001 without ever having drawn any amounts under this agreement.All prepetition
contractual debt and capital lease payments were suspended and subject to revised payment terms on a specific case basis.
The Company ceased accreting the discounts or accruing interest on all unsecured debt subject to compromise as of the
Petition Date.The Company continued to aceme and make interest payments on all fully secured long-term debt and
capital lease obligations.During 2001,the Company made principal payments on capital leases of $17.5 million.In
addition,the Company made $1.3 million in preferred stock dividend payments in 2001 as pait of a settlement approved by
the Bankoptcy Court.
Net cash provided by financing activities in 1999 and 2000 includes the Senior Facility completed in August
1999,and the 8%Series A Convertible Preferred Stock issued in April 2000.Historically,the funds to fmance the
Company's business acquisitions,capital expenditures,working capital requirements and operating losses have been
obtained through public and private offerings of the Company and Holdings-Canada common shares,convertible
subordinated notes,convertible preferred shares of Holdings-Canada,capital lease financings and various working capital
sources,including credit facilities,in addition to the privateplacement of the securities previously mentioned and other
securities offerings.Net cash provided by Snancing activities for 1999 and 2000 also includes proceeds from the issuance
of common stock in conjunction with the exercise of options and warrants and the Company's employee stock purchase
plan,offset by principal payments on long-term debt,capital leases and IRU agreements and payments of preferred
dividends on preferred securities of subsidiaries.
On August 12,1999,ICG Equipment and NetAhead entered into a $200.0 million senior secured financing
facility ("Senior Facility")consisting of a $75.0 million term loan,a $100.0 million term loan and a S25.0 million revolving
line of credit.During 1999 and 2000,the Company borrowed approximately $80.0 million and $95.0 million,respectively,
under the loans at variable interest rates.
During 2000,the Company received net proceeds of $707.7 million from the issuance of the 8%Series A
Convertible Preferred Stock.These proceeds were used to fund the Company's operating and expansion activities.Due to
the bankruptcy proceedings,the Company has fully written off the offeringcosts and fully accreted the discount associated
with the 8%Series A Convertible Preferred Stock totaling $118.1 million.
On December 4,2000,the Company finalized its Debtor-in-Possession RevolvingCredit Agreement with Chase
Manhattan Bank (the "Credit Agreement").The Credit Agreement originally providedfor up to $350 million in financing,
which was subsequently amended to $200 million.On November7,2001 the Company terminated the Credit Agreement
because it expects that it will have adequate cash and short-term investments to fund operations during the bankruptcy
process.
37
As a result of the Company's liquidity problems,the Company's directors did not declare a dividend on the 6 4%-
Preferred Securities that was otherwise payable on November15,2000.In addition,the Company has not declared
dividends on the 14%,14 '/4%Preferred Stock and the 8%Senes A Convertible Preferred Stock.
Capital Expenditures
The Company's capital expenditures of continuing operations (including assets acquired under capital leases)
were 5739.1 million,$973.6 million and $41.5 million for 1999,2000 and 2001,respectively.
Capital expenditures of continuing operations in 2001 excludes corporate headquarters assets acquired through
capital lease obligations.
RESULTSOF OPERATIONS
The followingtable provides certain statement of operations data and certain other financial data forthe Company
for the periods indicated.The table also presents revenue,operating costs and expenses,operating loss and EBITDA as a
percentage of the Company's revenue.
Years Ended December 31,
1999 2000 2001
$%$%$%
($values in thousands)
Statement of Operations Data:
Revenue 479,226 100 598,283 100 499,996 100
Operating costs 238,927 50 440,090 74 351,973 70
Selling,general and administrative 179,737 38 199,508 33 94,155 19
Bad debt expense 60,019 12 84,457 14 14,236 3
Depreciation and amortization 174,239 36 318,771 53 67,768 14
Provision for impairment oflong-lived assets 31,815 7 1,701,466 284 27,943 6
Other,net 387 -4,108 1 11,949 2
Operating loss (205,898)(43)(2,150,117)(359)(68,028)(14)
Other Data:
Net cash provided(used)by operating activities (43,476)122,483 (11,981)
Net cash used by investing activities (122,412)(557,619)(17,519)
Net cash provided(used)by fmancing activities 67,018 528,444 (20,893)
EBITDA(1)543 -(125,772)(21)39,632 8
Capital expenditures of continuing operations(2)739,061 973,584 41,463
Capital expenditures of discontinued operations(2)12,264 --
(1)See note 3 under "Selected FinancialData"for the definition of EBITDA and a reconciliation to net loss from
continuing operations.
(2)See note 4 under "Selected Financial Data"for the definitions of capital expenditures of continuing operations
and capital expenditures of discontinued operations.
LONG-LIVED ASSET IMPAIRMENT
As a result of adverse changes in the capital markets,specifically as related to the availabilityof capital to finance
competitive local exchange camer's growth,downward trends in certain segments of the economy,particularly with
respect to expected growth of demand in technology and telecommunications segments,the Company's Chapter 11 filing
and the subsequent deterioration in the value of the Company's operating assets,the Company undertook an extensive
analysis of its business plan during the fourth quarter of 2000 and the first quarter of 2001.As a result,the Company
prepared a detailed business plan that gave appropriate consideration to the environmental factors noted above.
38
SFAS No.121 requires that assets to be held and used are measured for impairment on the basis of undiscounted
future cash flows before interest determined at the lowest level for which there are identifiable cash flows.Due to the
Company's inability to allocate significant amounts of central support costs to the various markets,the impairment analysis
was performed on a Company-wide basis.This analysis indicated that there was a shortfall of cash flows compared to the
carrying value of the Company's long-livedtangible and intangible assets and that an impairment had occurred.For
purposes of calculating the amount of the impairment,the Company segregated its long-lived assets into three categories:
intangible assets,consisting primarily of goodwill;tangible assets to be disposed of;and,tangible assets to be utilized in
ongoing operations.
As a result of the analysis of shortfalls of cash flows to carrying values of assets noted above,all intangibles,
consisting primarily of goodwill relating to the Company's acquisitions under the purchase method of accounting,were
written off as of December 31,2000,resulting in an impairment charge of approximately $80 million.
Additionally,the Company determined that certain assets not utilized under the Company's business plan be held
for disposal or sale.The fair value of assets held for sale is based on current appraisals or purchase offers,less cost to sell.
Assets held for sale are comprised primarily of 1)assets that were under construction in late 2000 and for which the
incremental capital required to place the asset in service for revenue generation was not available,and 2)assets in service
that were not required to meet expected future customer demand as defined in the business plan.During2001,asset sales
valued at $4 million were completed.An impairment of approximately $124 million and $28 million was reflected in the
financial statements as of December 31,2000 and December 31,2001,respectively,to reduce these assets to their fair
value of approximately $41 million and $8 million in 2000 and 2001,respectively.These assets have not been segregated
as current assets in the accompanying consolidated financial statements and are included in property and equipment.
The fair value of tangible assets to be utilized in ongoing operations was determined to be $550 million at
December 31,2000.This value was derived primarily from the discounted cash flows from future operations;however,the
Company also took into consideration several other valuation techniques,including asset appraisal and current market
capitalization.
In order to reduce tangible assets to be used in ongoing operations to the fair value of $550 million,the Company
recorded an impairment charge as of December 31,2000 of approximately $1,500 million.No adjustment was made to
recorded depreciation during the year ended December 31,2000.
The book value of the impaired assets became the new cost basis of the assets.This amount is being depreciated
over the remaining estimated useful life of the assets.
The Company,during the year ended December 31,1999,also recorded a provision for impairment of long-lived
assets of $32 million,which relates to the impairment of software and other capitalized costs associated with Telecom
Services'billing and provisioning system projects under development.The provisionfor impairment of long-lived assets
was based on management's decision to abandon the billing and provisioning systems under development and to select new
vendors for these systems,which vendors were expected to provide the Company with billing and provisioning solutions
with improved functionality and earlier delivery dates at significantly lower costs.The Company's billing and provisioning
systems under development were either not operational or were serving minimal customers at the time management
determined the caryingvalue of the underlying assets was not recoverable.
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YEAR 2001 COMPARED TO YEAR 2000
A series of financial and operational events negatively impacted ICG during the second half of 2000.These events
reduced the Company's expected revenue and cash flow generation resulting ultimately in the Company's filing for
protection under Chapter 11 of the Bankruptcy Code.The Company,upon filing,immediately discontinued it expansion
plans,ceasing the construction of facilities and the installation of leased facilities to support the expansion.
Initiatives were put in place to conserve cash and focus on predictable profitable operations.The headcount was
reduced from 3,160 as of September 30,2000 to 1,476 at March 31,2001 and furtherto 1,368 by year end.This reduction
in force included a reduction in the sales organization.Operating costs,including line costs expenses,were reduced to $85
million for the quarter ended June 30,2001 from $136 million for the quarter ended December 31,2000.
The Company met with key customers and vendors.A customer retention campaign designed to enhance
customer relationships was initiated.Sales efforts were focused on selling services which could be provided with nominal
incremental cost,utilizing existing infrastructure to reduce the deployment of capital.
These efforts allowed the Company to maintain service to customers while conserving cash resources.The cash,
cash equivalents and short-term investments balances stabilized at approximately $140 million ($142 million as of March
31,2001 and $147 million at December 31,2001).
In late 2001 the Company commenced the roll out ofnew products,and in late 2001 and early 2002 the size of the
direct sales force was doubled and the sales partner program initiated.
Revenue
Year Ended December 31,
2000 2001
$%$%
($values in thousands)
Dial-Up 154,343 26 179,277 36
Point-to-Point Broadband 176,499 29 151,585 30
Corporate Services 128,378 22 105,400 21
Reciprocal Compensation 139.063 23 63.734 13
Total Revenue 598,283 2 499.996 y
Total revenue decreased 16%to $500 million in 2001 compared to 2000.Dial-Up revenues increased
significantly to account for 36%of the revenue generated in 2001.The contribution of reciprocal compensation as a
percent of total revenue decreased from 23%in 2000 to 13%in 2001.
Dial-Up revenue increased 16%to $179.3 million in 2001 from $154.3 million in 2000.The increase is primarily
attributable to a 2%increase in the average number of customer access ports and a significant reduction in service credits
issued to customers in 2001,offset by a reduction in the average revenue per port due to product mix and price reductions.
The Company issued approximately $30 million of service credit to customers in the third and fourth quarters of 2000.
Service levels significantly improved in early 2001.
Point-to-Point Broadband revenue,which includes switched access and SS7 revenues,decreased 14%to $151.6
million in 2001 from $176.5 million in 2000.The decrease is due primarily to a reduction of $12.1 million in switched
access revenues due to reduced customer demand and a reduction of $11.5 million of revenue recognized in 2000 on a fiber
optic lease agreement with a major interexchange carrier that did not recur in 2001.Switched access and SS7 services
providedapproximately 16%of the revenues in this revenue category in 2001.
Corporate Services revenue decreased 18%to $105.4 million in 2001 from $128.4 million in 2000.The decrease
is primarily attributable to a 21%decrease in the average number of access lines,many of which were resale lines that
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generated a higher than average revenue per line but low margins,and a reduction in revenue due to the transitioning of
long distance services to another carrier in late 2001.
Reciprocal compensation revenue declined 54%from $139.1 million in 2000 to $63.7 million in 2001.Reciprocal
compensation revenue is primarily earned under interconnection agreements with ILECs for terminating local traffic but
also includes revenue from transport and termination of other traffic for the ILECs.Reciprocal compensation is charged
based on a rate per minute of use (MOU).Reciprocal compensation MOU decreased approximately 9%in 2001 from 2000
as the number of ports and access lines decreased,and the average rate per MOU declined approximately 52%.In 2000,the
Company negotiated new interconnection agreements with several ILECs.These agreements assured the recognition and
receipt of compensation for terninating ISP traffic but at rates lower than the Company had historically received.The
Company anticipates that due to changes in the regulatory environment,reciprocal compensation revenue eamed after 2003
will be significantly reduced.
Operating costs
Total operating costs decreased 20%from $440.1 million in 2000 to $352.0 million in 2001.Operating costs
decreased as a percentage of revenue from 74%in 2000 to 70%in 2001.Operating costs consist primarilyof payments to
ILECs,other CLECs and long distance carriers for the use of network facilities to support Dial-Up,Voice,Point-to-Point
Broadband,Switched access and long distance services as well as internal network operating costs,right of way fees and
other operating costs.Internal network operating costs include the cost of engineering and operations personnel dedicated
to the operations and maintenance of the network.Operating costs have decreased as a percentage of revenue primarily due
to termination of circuits that were not generating revenue.
Selling,general and administrative expenses (SG&A)
Total SG&A expenses decreased from $199.5 million in 2000 to $94.2 million in 2001,a 53%decrease.SG&A
expenses as a percentage of revenue decreased from 33%in 2000 to 19%in 2001.The decrease in SG&A is attributable to
decreases in salaries and benefits,travel and entertainment,marketing,professional fees as well as other expenses as a
result of the Company's restructuring process which commenced in the second half of 2000.These reductions included
reducing the full-time employee count from 2,054 at December 31,2000 to 1,368 at December 31,2001 with the majority
of the headcount reductions taking place in the first quarter of 2001.
Bad debt expense
Bad debt expense decreased 83%from $84.5 million in 2000 to $14.2 million in 2001.The Company recorded a
provision for uncollectible accounts in 2000 of approximately $29 million and $53 million in the third and fourth quarters
of 2000,respectively.Of those amounts,approximately $6 million and $13 million related to reciprocal compensation for
the third and fourth quarters of 2000,respectively.This increase in the provisionin 2000 was attributable to (i)customers
in the ISP and Internet space that were unable to pay for semice,(ii)the resolution of billing disputes,(iii)customers that
stopped or deferred payments for semices as the Company entered bankruptcy and (iv)reduction in the resources that the
Company could afford to expend to enforce the payment of reciprocal compensation under the interconnection agreements.
The decrease in the provision for uncollectible accounts in 2001 was attributable to significant improvement in the
collection of current billings and past due accounts as well an improvement in customers'reactions to ICG'sreorganization
and satisfactory settlements of account balances with major customers.
Depreciation and amortizadon
Depreciation and amortization decreased 79%from $318.8 million in 2000 to $67.8 million in 2001.The decrease
is primarily due to the $1.7 billion impairment charge to reduce tangible and intangible assets to their fair value at as of
December 31,2000.The net book value of the tangible assets in service became the new cost basis for depreciation as of
December 31,2000.
Provision for impairment oflong-livedassets
(See Long-LivedAsset Impairment.)
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Loss on disposal oflong-livedassets
The Company recorded a loss of $2.4 million in 2000 and a loss of $9.5 million in 2001 for the disposal of long-
lived assets.The Company recognized a $7 million loss on the sale of its headquarters building in mid 2001.
Other,net
Other,net operating costs and expenses increased from $1.7 million in 2000 to $2.4 million in 2001.Other,net
operating costs and expenses consists primarily of $1.3 million and $2.4 million of deferred compensation from an
arrangement with its former chiefexecutive officerin 2000 and 2001,respectively.
Interest erpense
Interest expense decreased from $233.6 million in 2000 to $32.2 million in 2001.The decrease in interest expense
is a result of the Company's bankruptcy filing.Interest was not accrued or paid and discounts were not accreted on all
Prepetition debt subject to compromise.Contractual interest that was not recorded due to the bankruptcy proceedings
totaled 530.3 million for the period from the Petition Date through December 31,2000 and $249.3 million in 2001.
Included in interest expense for 2000 was $175.8 million of noncash interest.Additionally,interest expense is net of
interest capitalized related to construction in progress of $7.0 million and $1.2 million during 2000 and 2001,respectively.
The Company continued to accrue and make payments on all fully collateralized long-tern debt and capital lease
obligations not subject to compromise.
Interest income
Interest income decreased from $23.8 million in 2000 to $6.7 million in 2001.Interest income earned as a result
of the bankruptcy filing of $1.4 million and $6.7 million in 2000 and 2001,respectively,was classified as reorganization
expenses in accordance with the requirements of SOP 90-7.The decrease in total income is attributable to the decrease in
cash,cash equivalents and short-tern investments resulting from the use of the Company's cash balances in connection
with its reorganization under the bankruptcy proceedings and from generally lower interest rates and yields on its invested
cash.
Other erpense,net,includingrealized gains and losses on marketable tradingsecurities costs
Other expense,net decreased from $15.2 million of expense in 2000 to $1.0 million of income in 2001.Other
expense,net in 2001 consists primarilyof a net gain on the sale of investments.The 2000 amount relates primarily to the
loss on the investment in Teligent,partially offset by a gain on a litigation settlement.
Reorganization erpenses
Reorganization expenses associated with the Company's reorganization of $13.5 million and $53.9 million in
2001 and 2000,respectively,consist of costs associated with the bankruptcy proceedings that are not directly attributable to
the on-going operations of the Company.In 2001,such costs include a gain on settlement with major customers of $39.2
million and interest income earned as a result of the bankruptcy filing of $6.7 million offset by severance and employee
retention costs of $13.2 million,estimated loss on equipment returned to vendors of $10.3 million,legal and professional
fees of $16.5 million,switch site closure costs of $5.2 million,line cost termination expenses of $9.3 million and $4.9
million of other costs.In 2000,these costs include $36.5 million for the write-off of deferred financing and offeringcosts,
$9.6 million for severance and employee retention costs,$6.3 million in professional fees,$2.3 million in lease cancellation
charges and $0.6 million of other costs,offset by $1.4 million of interest income earned as a result of the bankruptcy filing.
Accredon and preferreddividends on preferredsecurities of subsidimies
Accretion of costs and preferred dividends on preferred securities of subsidiaries decreased from $60.0 million in
2000 to $0 in 2001.The decrease is due to the bankruptcy proceedings.The accretion of the preferred dividends and
amortization of offeringcosts on all preferred securities ceased as of the Petition Date.The Company fully accreted the
discount and fully wrote-off the offeringcosts totaling $9.7 million associated with the preferred stock subsequent to the
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