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Table of Contents
PART IV
FINANCIAL STATEMENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the year ended December 31, 2001 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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(Commission File Number 1-11965)
ICG COMMUNICATIONS, INC.
(Debtor-in-Possession as of November 14, 2000)
(Exact names of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
84-1342022 (IRS Employer Identification No.) |
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161 Inverness Drive West Englewood, Colorado 80112 (Address of principal executive offices) |
Not applicable (Address of U.S. agent for service) |
Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Not applicable
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class |
Name of each exchange on which registered |
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|---|---|---|
| Common Stock, $.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 ý 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
As of April 9, 2002 the aggregate market value of ICG Communications, Inc. Common Stock held by non-affiliates (using the closing price of $0 on April 9, 2002) was approximately $0.
Unless the context otherwise requires, the term "Company", "ICG" or "Registrant" means the combined business operations of ICG Communications, Inc. and its subsidiaries, including ICG Holdings (Canada) Co. ("Holdings-Canada"), ICG Holdings, Inc. ("Holdings") and ICG Services, Inc. ("ICG Services"). All dollar amounts are in U.S. dollars.
The Business section and other parts of this Report contain "forward-looking statements" intended to qualify as safe harbors from liability as established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statements include words such as "intends," "anticipates," "expects," "estimates," "plans," "believes" and other similar words. Additionally, statements that describe the Company's future plans, objectives or goals also are forward-looking statements. More specifically, as a result of the Company's bankruptcy filing (discussed below), the Company has provided certain 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-looking statements are subject to certain risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. See "Certain Risk Factors."
ICG provides voice, data and Internet communication services. Headquartered in Englewood, Colorado, the Company operates an integrated metropolitan and nationwide fiber optic infrastructure offering:
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's customers 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 carriers ("IXCs") and end-user business customers. This service provides dedicated bandwidth and offers DS1 to OC-192 capacity to connect: (i) long-haul carriers to a local market, to large companies and to other long-haul carrier facilities; or (ii) large companies to their long distance carriers and other corporate facilities. Point-to-Point Broadband services are an expanding segment of the telecommunications market.
The Company's Corporate Services revenue category (referred to in previous filings primarily as 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.
To provide its 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 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.
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 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 Bankruptcy Court.
Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and shareholders will be substantially altered. As a result of these bankruptcy proceedings, virtually all liabilities, litigation and claims against the Company that were in existence as of the Petition Date are stayed unless the stay is modified or lifted or payment has been otherwise authorized by the Bankruptcy Court. Because of the bankruptcy filings, all of the Company's liabilities incurred prior to the Petition Date, including certain secured debt, are subject to compromise. At this time, it is not possible to predict with certainty the outcome of the Chapter 11 cases in general, the effects of such cases on the Company's business, or the effects on the interests of creditors 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 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, provide for 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 (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 creditors 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 concern. The ability of the Company to continue as a going concern is dependent upon approval and confirmation of the Plan, adequate sources of capital, customer and employee retention, the ability to provide high quality services and the ability to sustain positive results of operations and cash flows sufficient to continue to operate.
ICG continues to focus on improving its overall profitability and 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 profitability and assist in retaining key customers.
During the pendancy of its Chapter 11 case, the Company has continued to provide on-going services to its customers while implementing a revised strategy intended to meet customer commitments and maximize short-term cash flow. Under the revised strategy, the Company's operations 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 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 services and flat to declining revenue for Dial-Up service and local telecom service 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-Up service as providers of this service are consolidating.
Dial-up service 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's customers) 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.
DIA is expected to be a high growth service with revenue projections for T1/T3 services to grow from $14 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 service, 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 relatively stable industry revenue of approximately $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, during 2001 and into 2002 telecom providers have experienced greater churn levels than have happened historically. The general economic downturn and the severe downturn in the telecommunications and Internet industries have resulted in 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.
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 financial 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. During slow 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.
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-Up Internet 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.
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 offer flexible, high-speed services to its customers.
The Company targets a variety of data access and transport services to ISP and corporate customers. It is not economically feasible for many ISPs to build and maintain their own networks and consequently they prefer to outsource network facilities management in order to focus internal resources on their core ISP business. To this end, ICG offers PRI and Internet remote access service ("IRAS") to ISPs to manage their Internet 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 providing PRI and remote access services. At an industry average of nine end-users per port, ICG estimates that its systems have the capacity to serve 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-Up services obtained from ICG since the beginning of 2001.
The value proposition offered by ICG to ISP customers is:
associated with complex network management, because ICG aggregates these costs for multiple ISPs.
ICG provides the following Dial-Up services:
PRI
PRI uses ICG's network to route ISP end-user calls from the public switched network to the ISP-owned modem banks. The end-user dials up the ISP and the call is sent through the public network and routed to the ICG switch, which then routes the call to the ISP-owned modem banks or RAS equipment. The RAS equipment is typically collocated at an ICG central office facility. If the ISP is not collocated, a Point-to-Point Broadband connection is required between the ISP's POP and the ICG central office.
PRI is priced per port, per month. The Company's direct costs are mainly for leased DS3 lines that connect the public network to the ICG switch or for leased T1 lines between the ICG switch and an ISP POP that is not collocated.
IRAS
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 traffic to the ICG hub closest to the ISP POP.
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 involves providing a dedicated facility used: (i) to connect end-user customers to a long distance carrier's facilities; (ii) to connect a long distance carrier's facilities to the local telephone company's central offices; or (iii) to connect different facilities of the same carrier or one carrier to another within the same local calling area. Special access is offered at DS1, DS3, OC-3, OC-12, OC-48 and OC-192 capacities (with availability depending 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 (terminate or originate) a call, it reduces the long distance carrier's local access cost, which is a major operating expense.
SS7
SS7 services are used to connect long distance (including wireless) and local exchange carriers' networks, and the SS7 signals between network elements to provide faster call set-up and more efficient use of network resources.
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 relatively stable, the demand for data services in commercial applications is expected to increase significantly over the next several years as this customer segment addresses its growing need for data connections, greater bandwidth and the need to outsource network and information technology ("IT") infrastructure. ICG 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 minimum of 12 lines in areas where the Company has switch capacity. The Company has focused on providing voice services in the following five operating regions in the United States: California, Colorado, Ohio, Texas and parts of the Southeast.
DIA
DIA provides dedicated bandwidth from a customer's premises directly to the Internet at T1 and T3 speeds using ICG's numerous Internet 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, offering full T1 and full or fractional T3 connections. The Company began offering its DIA services in a limited number of markets in 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, CUSTOMER CARE, MARKETING AND CUSTOMER CONCENTRATION
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 within 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.
The direct sales force is complemented by development of alternative 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.
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 × 7 surveillance and monitoring of the network to maintain the Company's network reliability and performance.
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 individual teams provide the Company with critical knowledge about each product offering set and are accountable for revenue and ICG's ultimate success. During 2001, the Company suspended the majority of advertising and promotions expenditures as a result of the bankruptcy proceedings.
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.).
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 fiber comprising 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 services 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 return 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 Internet 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 connecting: 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.
The Company participates in several sectors of the telecommunications service industry, all of which are highly competitive. In addition, numerous competitors, including major telecommunications carriers, have rapidly expanded their network capabilities in order to service the ISP industry.
The Company's competitors in the dial-up Internet access market possess (or will possess) significant network infrastructure enabling them to provide ISPs with capacity and access to the Internet. The Company's primary competitors in this revenue category include Level 3, MCI WorldCom, Genuity and the incumbent local exchange carriers ("ILECs"). While the Company believes that its network and products will enable it to compete in this industry sector, some of the Company's competitors have significantly greater market presence, brand recognition, financial, technical and personnel resources than the Company. There can be no assurance that the Company will be able to compete effectively with these companies.
In the Corporate Services and Point-to-Point Broadband sectors, the Company competes in an environment dominated by the ILECs. The ILECs have long-standing relationships with their customers and provide those customers with various transmission and switching services. The ILECs also have the potential to subsidize access and switched services with revenue from a variety of businesses and historically have benefited from certain state and federal regulations that have provided the ILECs with advantages over the Company. Among the Company's current competitors in this sector are other CLECs, wireless service providers and private networks built by large end-users. In addition, competitors in this industry sector include IXCs such as AT&T and MCI WorldCom. 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.
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 offering with 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 terminates on the Company's network. In most cases, both state and federal regulatory authorities regulate the applicable access charges.
Corporate Services, which includes the provisioning of 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.
The Telecommunications Act generally requires Incumbent Local Exchange Carriers (ILECs) to provide interconnection and nondiscriminatory access to their local telecommunications networks and other essential facilities. 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 involving each 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 of that particular agency are subject to judicial review by 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 divided into to discrete elements. The first element relates to costs incurred as a result of the termination of 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 different local 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 prevail in 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 provide for the payment of reciprocal compensation for both traditional voice, as well as Internet 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 2001, as well as on the actual applicable rate. An appeal of the FCC order was filed in February 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 voluntary settlement, 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 termination 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.
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 providing at that time. The Company complied with that order and subsequent requirements to cancel tariffs for international services. In the absence of these public statements of the Company's terms and conditions for providing service, 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 provide various services in the United States.
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 services 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 quality 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 provision of 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 scrutinize the rates charged by CLECs for intrastate long distance and local services. The Company's provision of local dial tone and intrastate switched and dedicated services are classified as intrastate and therefore subject to state regulation.
Local 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 provide telecommunications services. However, in certain states, including California and Colorado, current law limits the amount of such fees to be paid to local jurisdictions to actual costs incurred by the municipality for maintaining the public rights of way. 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 prior to their expiration dates or are not renewed, and consequently the Company is forced to remove its facilities from the public rights of way, such termination could have a material adverse effect on the Company.
2001 Activities
Credit Agreement
On December 4, 2000, the Company finalized its Debtor-in-Possession Revolving Credit Agreement ("Credit Agreement"). The Credit Agreement originally provided for up to $350 million in financing, subject to certain conditions. This amount was subsequently amended to provide for up to $200 million. The Company terminated the Credit Agreement on November 7, 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 bankruptcy process.
Proposed Refinancing of Senior Facility
On August 12, 1999, ICG Equipment, Inc. and ICG NetAhead, Inc. ("NetAhead") entered into a $200.0 million senior secured financing facility ("Senior Facility") consisting of a $75.0 million term loan, a $100.0 million term loan and a $25.0 million revolving line of credit. The Senior Facility is guaranteed by ICG Services and ICG Mountain View, Inc. and is secured by the assets of ICG Equipment, Inc. and NetAhead. On December 19, 2000, the Bankruptcy Court issued an order directing ICG Services and certain of its subsidiaries to provide adequate protection to the lenders of the Senior Facility in the form of a first priority, post-petition security interest. The Company 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 effective date 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 "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 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 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 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 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 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 alternative 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 Bankruptcy 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 financial condition and the absence of any material disruption in the financial markets. There is no assurance that such conditions will be satisfied.
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 recruit and retain and the Company cannot guarantee that it will be able to attract and retain the personnel necessary to implement its revised business strategy.
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 of this Report. These risks include, but are not limited to:
The Company's ability 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 bankruptcy process is longer than anticipated.
The Company's ability 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 internally generated funds available to meet these payments. Depending upon actual cash earnings and actual capital expenditures, ICG may need to raise additional funds through public or private debt or equity financing.
Further, 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 will restrict the Company's financial and operational flexibility
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 alternative 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 provide or expand their current levels of service to the Company in the future, or are unable to provide these 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 deliver quality 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 financial condition.
The Company's ability to attract and retain qualified management 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 approval and confirmation of a plan of reorganization
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 for May 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 significant 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 of historical 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 downward pricing pressure
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 of new technology
The Company faces competition from companies deploying alternative technologies (such as cable and DSL for Dial-Up), and it is possible that these alternative 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 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 inability to comply with, existing government regulations
Communications services are subject to significant regulation at the federal, state and local levels. ICG's business 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:
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's pricing 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 provision that 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 provider such as ICG.
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 terminations directly with landlords, and through lease expirations. The Company continues to evaluate its real estate needs, and its portfolio of leased locations will be further reduced in 2002 by rejecting leases through the bankruptcy process and by lease terminations 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 primarily through a mortgage granted in favor of an affiliate 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 affiliate of the mortgagee and seller, and ICG 161 assumed the loan secured by the mortgage. The partnership agreement for ICG 161 granted to the 1% limited partner an option to acquire all of ICG Services subsidiary's interest in the partnership for a purchase price of $43.1 million, which option was exercisable from January 1, 2004 through January 31, 2012, or earlier if the Company was in default. As a result of the Company's financial difficulties, on June 29, 2001 the Company, with the Bankruptcy Court's approval, sold its partnership interest to the limited partner for approximately $33.1 million in a cashless transaction. Under the terms of the transaction, the new owner agreed to provide additional 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-term capital lease.
The Company also owns a 30,000 square foot office building 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.
On November 14, 2000, the Company and most of its subsidiaries filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code in the Federal District of Delaware (Joint Case Number 00-4238 (PJW)). The Company is currently operating as a debtor-in-possession under the supervision of the Bankruptcy Court. The bankruptcy petition was filed in order to preserve cash and give the Company the opportunity to restructure its debt.
During the third and fourth quarters of 2000, the Company was served with fourteen lawsuits filed by various shareholders in the United States District Court for the District of Colorado (the "District Court"). The complaints sought class action certification for similarly situated shareholders. All of the initial suits named as defendants the Company, the Company's former Chief Executive Officer, J. Shelby Bryan, and the Company's former President, John Kane. Additionally, one of the complaints named the Company's former President, William S. Beans, Jr., as a defendant. (Both Messrs. Bryan and Beans remain on the Company's Board of Directors.) The claims against the Company were stayed pursuant to the Company's filing for bankruptcy.
In October 2001, the District Court consolidated the various actions and appointed lead plaintiffs' counsel. In February 2002, lead plaintiffs' counsel for the various shareholders filed a consolidated amended complaint. In addition to naming Messrs. Bryan and Beans as defendants, the amended complaint names as a defendant the Company's former chief financial officer, Harry R. Herbst. The consolidated amended complaint does not name the Company's former president, John Kane. In addition, the amended complaint does not name the Company as a defendant. The consolidated complaint, however, indicates that, but for the fact that claims against ICG have been stayed pursuant to the Bankruptcy Code, the Company would be named as a defendant. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and seeks class action certification under Rule 23 of the Federal Rules of Civil Procedure. The complaint seeks unspecified compensatory damages.
The claims against the individual defendants are proceeding and these defendants have retained separate legal counsel to prepare a defense. Under section 510(b) of the Bankruptcy Code, all pre-petition securities claims against ICG are mandatorily subordinated and will be discharged upon the confirmation of the 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-owned subsidiary of the Company, filed an adversary proceeding in the United States Bankruptcy Court for the District of Delaware (Case number 00-04238 PJW Jointly Administered, Adversary Proceeding No. 01-000 PJW) against the Company and Funding. The shareholders in this adversary action sought to recover approximately $2.3 million from an escrow account established to fund certain dividend payments to holders of the Funding Exchangeable Preferred Securities. Because Funding filed for bankruptcy protection, Funding did not declare the last dividend that was to have been paid with the remaining proceeds of the escrow account. In April 2001, the Company and Funding finalized a settlement agreement with the shareholders that has been approved by the Bankruptcy Court. Under the terms of the settlement, the shareholders received approximately two-thirds of the funds in the escrow account and the Company received the remaining one-third of the escrowed funds, subject to certain contingencies and holdbacks related to shareholders that did not participate in the settlement.
The Company is a party to certain other litigation that has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company is not involved in any administrative or judicial proceedings relative to an environmental matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 NASDAQ halted 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.
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| First Quarter | $ | 39.25 | $ | 16.31 | |||
| Second Quarter | 36.75 | ||||||