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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR  [  ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Commission File Number 1-11965) ICG COMMUNICATIONS, INC.  Delaware
    
    84-1342022(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 161 Inverness Drive West
Englewood, Colorado 80112
(Address of principal executive offices) Registrants telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000 Indicate by check mark whether the registrants: (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] [ ]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [   ]No [ X ] Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court. Yes [ X ]No [   ] As of July 12, 2004, 8,000,000 shares of ICG Communications, Inc. common stock,
$0.01 par value, were deemed issued and outstanding for financial reporting
purposes, of which 7,839,338 had actually been distributed to stockholders.




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Table of Contents PagePART I
    
    FINANCIAL INFORMATION.ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations (Unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit) (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
    
    
    16ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
    
    
    34ITEM 4. CONTROLS AND PROCEDURES.
    
    
    35PART II
    
    OTHER INFORMATION.
    
    
    36ITEM 1. LEGAL PROCEEDINGS.
    
    
    36ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
    
    
    36ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
    
    
    36ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
    
    
    36ITEM 5. OTHER INFORMATION.
    
    
    36ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
    
    
    36SIGNATURES.
    
    
    38EXHIBITS.Support AgreementKey Employee Retention PlanCertification of the Chief Executive OfficerCertification of the Chief Financial OfficerSection 1350 Certifications
  2




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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
 (Unaudited)
 As ofDecember 31,
    
    June 30,2003
    
    2004(in thousands, except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    38,079
    
    
    $
    30,786Restricted cash, current
    
    
    1,905
    
    
    
    Trade receivables, net of allowance of $7.0 million and $5.6 million at
December 31, 2003 and June 30, 2004, respectively
    
    
    20,536
    
    
    
    12,500Other receivables (note 3)
    
    
    2,805
    
    
    
    14,594Prepaid expenses
    
    
    7,339
    
    
    
    13,091Total current assets
    
    
    70,664
    
    
    
    70,971Property and equipment, net (note 5)
    
    
    112,152
    
    
    
    84,951Restricted cash, non-current
    
    
    4,848
    
    
    
    4,872Deposits
    
    
    5,214
    
    
    
    3,964Total Assets
    
    $
    192,878
    
    
    $
    164,758Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    6,586
    
    
    $
    7,674Accrued liabilities
    
    
    34,268
    
    
    
    34,833Restructuring accruals (note 6)
    
    
    3,634
    
    
    
    1,799Capital lease obligations, current portion
    
    
    700
    
    
    
    383Long-term debt, current portion
    
    
    10,702
    
    
    
    9,564Deferred revenue
    
    
    13,445
    
    
    
    13,625Total current liabilities
    
    
    69,335
    
    
    
    67,878Long-term liabilities:Capital lease obligations
    
    
    79,678
    
    
    
    78,065Long-term debt
    
    
    7,162
    
    
    
    4,443Deferred revenue
    
    
    10,768
    
    
    
    7,927Other long-term liabilities
    
    
    4,815
    
    
    
    5,327Total liabilities
    
    
    171,758
    
    
    
    163,640Commitments and contingencies (notes 1 and 6)Stockholders equity:Preferred stock, $0.001 par value, 10,000,000 shares authorized; 0
shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 100,000,000 shares authorized;
8,000,000 shares deemed issued and outstanding for financial reporting
purposes
    
    
    80
    
    
    
    80Additional paid-in capital
    
    
    82,509
    
    
    
    82,509Accumulated deficit
    
    
    (61,469
    )
    
    
    (81,471
    )Total stockholders equity
    
    
    21,120
    
    
    
    1,118Total liabilities and stockholders equity
    
    $
    192,878
    
    
    $
    164,758
 See accompanying notes to consolidated financial statements. 3




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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Operations
 (Unaudited)
 Three months ended June 30,
    
    Six months ended June 30,2003
    
    2004
    
    2003
    
    2004(in thousands, except per share data)Revenue (notes 1 and 2)
    
    $
    97,585
    
    
    $
    44,259
    
    
    $
    197,812
    
    
    $
    106,142Operating costs and expenses:Operating costs, excluding depreciation and
amortization
    
    
    60,788
    
    
    
    30,466
    
    
    
    122,526
    
    
    
    77,338Selling, general and administrative expenses
    
    
    24,458
    
    
    
    25,363
    
    
    
    44,765
    
    
    
    48,729Depreciation and amortization
    
    
    10,279
    
    
    
    3,143
    
    
    
    20,150
    
    
    
    6,801Impairment of long-lived assets (note 5)
    
    
    
    
    
    
    22,878
    
    
    
    
    
    
    
    22,878Gain on disposal of long-lived assets
    
    
    (91
    )
    
    
    (1,066
    )
    
    
    (173
    )
    
    
    (1,129
    )Other expense, net
    
    
    95
    
    
    
    121
    
    
    
    190
    
    
    
    243Total operating costs and expenses
    
    
    95,529
    
    
    
    80,905
    
    
    
    187,458
    
    
    
    154,860Operating income (loss)
    
    
    2,056
    
    
    
    (36,646
    )
    
    
    10,354
    
    
    
    (48,718
    )Other income (expense):Interest expense
    
    
    (6,513
    )
    
    
    (2,365
    )
    
    
    (12,768
    )
    
    
    (5,355
    )Interest income
    
    
    226
    
    
    
    161
    
    
    
    457
    
    
    
    535Other income, net (note 3)
    
    
    1,711
    
    
    
    33,059
    
    
    
    1,732
    
    
    
    33,536Total other income (expense), net
    
    
    (4,576
    )
    
    
    30,855
    
    
    
    (10,579
    )
    
    
    28,716Net loss
    
    $
    (2,520
    )
    
    $
    (5,791
    )
    
    $
    (225
    )
    
    $
    (20,002
    )Net loss per share:Basic
    
    $
    (0.32
    )
    
    $
    (0.72
    )
    
    $
    (0.03
    )
    
    $
    (2.50
    )Diluted
    
    $
    (0.32
    )
    
    $
    (0.72
    )
    
    $
    (0.03
    )
    
    $
    (2.50
    )Weighted average number of shares outstanding:Basic
    
    
    8,000
    
    
    
    8,000
    
    
    
    8,000
    
    
    
    8,000Diluted
    
    
    8,000
    
    
    
    8,000
    
    
    
    8,000
    
    
    
    8,000
 See accompanying notes to consolidated financial statements. 4




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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Stockholders Equity
 (Unaudited)
 Common Stock
    
    AdditionalPaid-in
    
    Accumulated
    
    TotalStockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    Equity(in thousands)Balances at January 1, 2004
    
    
    8,000
    
    
    $
    80
    
    
    $
    82,509
    
    
    $
    (61,469
    )
    
    $
    21,120Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,002
    )
    
    
    (20,002
    )Balances at June 30, 2004
    
    
    8,000
    
    
    $
    80
    
    
    $
    82,509
    
    
    $
    (81,471
    )
    
    $
    1,118
 See accompanying notes to consolidated financial statements. 5




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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Six months ended June 30,2003
    
    2004(in thousands)Cash flows from operating activities:Net loss
    
    $
    (225
    )
    
    $
    (20,002
    )Adjustments to reconcile net loss to net cash provided (used) by operating
activities before reorganization items:Impairment of long-lived assets (note 5)
    
    
    
    
    
    
    22,878Depreciation and amortization
    
    
    20,150
    
    
    
    6,801Gain on sale from Level 3 Agreement (note 3)
    
    
    
    
    
    
    (32,504
    )Gain on settlement of property tax claims
    
    
    
    
    
    
    (3,102
    )Other
    
    
    3,319
    
    
    
    720Changes in operating assets and liabilities:Receivables
    
    
    (2,346
    )
    
    
    6,143Prepaid expenses
    
    
    (234
    )
    
    
    (4,921
    )Accounts payable and accrued liabilities
    
    
    (3,457
    )
    
    
    3,720Deferred revenue
    
    
    (3,000
    )
    
    
    (2,633
    )Net cash provided (used) by operating activities before reorganization items
    
    
    14,207
    
    
    
    (22,900
    )Reorganization items:Change in post-petition restructuring accruals
    
    
    (11,367
    )
    
    
    (179
    )Net cash used by reorganization items
    
    
    (11,367
    )
    
    
    (179
    )Net cash provided (used) by operating activities
    
    
    2,840
    
    
    
    (23,079
    )Cash flows from investing activities:Acquisition of property and equipment
    
    
    (23,111
    )
    
    
    (6,219
    )Change in prepaid expenses, accounts payable and accrued liabilities for
acquisition of property and equipment
    
    
    118
    
    
    
    (939
    )Proceeds from disposition of property, equipment and other assets
    
    
    198
    
    
    
    1,944Decrease in restricted cash
    
    
    584
    
    
    
    1,881Decrease (increase) in long-term deposits
    
    
    (244
    )
    
    
    882Proceeds from Level 3 Agreement (note 3)
    
    
    
    
    
    
    24,986Payment of asset retirement obligations
    
    
    
    
    
    
    (34
    )Net cash provided (used) by investing activities
    
    
    (22,455
    )
    
    
    22,501Cash flows from financing activities:Principal payments on capital lease obligations
    
    $
    (3,011
    )
    
    $
    (3,483
    )Principal payments on long-term debt
    
    
    (3,162
    )
    
    
    (3,232
    )Net cash used by financing activities
    
    
    (6,173
    )
    
    
    (6,715
    )Net decrease in cash and cash equivalents
    
    
    (25,788
    )
    
    
    (7,293
    )Cash and cash equivalents, beginning of period
    
    
    50,729
    
    
    
    38,079Cash and cash equivalents end of period
    
    $
    24,941
    
    
    $
    30,786Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    8,587
    
    
    $
    893Cash paid for income taxes
    
    $
    
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Increase in property and equipment and asset retirement obligations,
resulting from the Companys adoption of the provisions of SFAS 143 on
January 1, 2003
    
    $
    2,531
    
    
    $
    Reduction in property and equipment and capital lease obligations,
resulting from the renegotiation of contractual terms, effective January 1,
2003
    
    $
    14,621
    
    
    $
    
 See accompanying notes to consolidated financial statements. 6




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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
  (1)
    
    Organization and Description of BusinessICG Communications, Inc., a Delaware corporation, and its subsidiaries
are collectively referred to as ICG or the Company. The Company
provides voice, data and Internet communication services. Headquartered
in Englewood, Colorado, the Company operates an integrated metropolitan
and nationwide fiber optic infrastructure to offer:  
    
    Converged and Data Services, which include services that were
classified under the Corporate Services category in the Companys
filings for periods prior to January 1, 2004. Such services include
VoicePipeTM, iConvergeTM, Dedicated Internet Access and
conferencing.
    
    Voice Services, which include services that were primarily
classified under the Corporate Services category in the Companys
filings for periods prior to January 1, 2004. Such services include
long-distance, digital trunks and business lines. In addition,
Signaling System 7 services, currently included in this category,
were previously classified under the Point-to-Point Broadband
category. Finally, primary rate interface  two way services,
currently included in this category, were previously classified
under the Dial-Up category.
    
    Private Line Services, which were previously classified under
the Point-to-Point Broadband category in the Companys filings for
periods prior to January 1, 2004, consist of local and intercity
dedicated facilities.
    
    Dial-Up Services, which include services that were classified
under the Dial-Up category in the Companys filings for periods
prior to January 1, 2004. Such services include remote access
service and primary rate interface  inbound service.
    
    Inter-Carrier Compensation, which includes services that were
classified under the Reciprocal Compensation category in the
Companys filings for periods prior to January 1, 2004. In
addition, Inter-Carrier Compensation includes switched access
service (previously classified under the Point-to-Point Broadband
category) and carrier access billed service (previously classified
under the Corporate Services category).  Please see note 2 for the recorded amounts for each revenue category for
the three and six months ended June 30, 2003 and 2004.Recent Business HistoryFollowing the Companys Chapter 11 reorganization in 2002, the Company
began to encounter financial difficulties arising from a decline in
revenues associated with the loss of certain key contracts. In September
2003 the Company terminated early four dial-up data services agreements
with Qwest Communications, Inc. (Qwest), formerly the Companys largest
customer, in exchange for a cash payment from Qwest of approximately
$106.8 million, which included payment of approximately $31.0 million for
dial-up data services provided and to be provided by the Company under
the agreements during the six months ended December 31, 2003, and
approximately $75.8 million of early termination revenue. In October 2003
the Company used approximately $81.2 million of the proceeds from the
Qwest transaction to prepay in full the balance of the Companys
outstanding secured notes and senior subordinated term loan, as required
by the terms of such indebtedness. In connection with the prepayment,
approximately $42.1 million of cash held in a cash collateral account for
the benefit of the Companys lenders was released to the Company. 7




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Although retirement of the secured notes and senior subordinated term
loan significantly reduced the Companys indebtedness, the Qwest
transaction resulted in a substantial decrease in revenues and resulting
operating income and cash flows to the Company. In the fourth quarter of
2003, the Company embarked on substantial cost cutting efforts in an
attempt to mitigate the impact of the loss of revenues from Qwest. These
efforts, however, were insufficient to stem significant ongoing operating
losses.Strategic Transaction and Preparations for BankruptcyBeginning in early 2004, in response to the Companys continuing
operating losses, the Company undertook an assessment of its financial
condition and prospects. Following this assessment, the Companys board
of directors (the Board) determined that the Companys financial
condition and prospects were subject to substantial uncertainties and
concluded that it was in the best interest of the Companys stockholders
and creditors to seek a strategic transaction in which the highest
currently available value for the Companys business and assets might be
realized.On February 13, 2004, the Board authorized the Company to retain an
investment banker to advise the Company regarding the possibility of such
a transaction. On February 16, 2004, the Company formally retained Lehman
Brothers to assist it in connection with its search of a strategic
transaction.In February 2004, the Company also retained insolvency counsel Pachulski
Stang Ziehl Young Jones & Weintraub, P.C. to provide legal advice and
assistance. Based on the advice of counsel, the Board determined that it
was in the best interests of the Companys creditors and stockholders to
pursue a dual strategy under which the Company would (a) prepare for a
voluntary Chapter 11 bankruptcy proceeding and (b) continue to seek a
strategic transaction for the purpose of maximizing the Companys value
for the benefit of its stockholders and creditors.In light of the Companys significant continuing negative cash flow, the
Company determined that it was necessary to improve its cash position in
order to facilitate an orderly sale of its assets. Accordingly, on April
1, 2004, the Company entered into an agreement with Level 3
Communications, Inc. (Level 3) whereby Level 3 agreed to pay $35
million in cash and other consideration for the right to provide remote
access service to certain of the Companys customers. The Level 3
transaction is discussed in detail in note 3.Merger AgreementOn July 19, 2004, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with MCCC ICG Holdings LLC (MCCC) and a
wholly owned subsidiary of MCCC. Pursuant to the Merger Agreement, as of
the effective time (the Effective Time) of the merger (the Merger),
stockholders of the Company will receive $0.75 in cash for each share of
common stock, for a total of approximately $6.35 million in cash.The completion of the Merger depends on the satisfaction or waiver of
certain conditions, including approval of the Merger Agreement by the
holders of a majority of the outstanding shares of the Companys common
stock entitled to vote at the special meeting of the Companys
stockholders (the Meeting). The Meeting is currently expected to take
place in late September or early October 2004. The Board has fixed the
close of business on August 16, 2004, as the record date (Record Date)
for the determination of stockholders of the Company entitled to receive
notice of and to vote at the Meeting. The Company expects to complete
the Merger shortly after all of the conditions to the Merger have been
satisfied or waived, which is expected to occur in the fourth quarter of
2004. The Merger Agreement may be terminated, and the stockholders will
not receive the merger consideration, under certain circumstances, as
discussed in more detail in note 4.Contemporaneously with the signing of the Merger Agreement, the Company
entered into a Credit and Guaranty Agreement (the Credit Agreement)
with MCCC under which the Company will be provided 8




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working capital financing through the Effective Time. In addition,
pursuant to the Merger Agreement, the Company agreed to enter into a
Management Agreement (the Management Agreement) with MCCC. Under the
Management Agreement, MCCC will, upon approval of the merger by ICG
stockholders, manage the Companys day-to-day operations subject to
supervision by the Board. Finally, contemporaneously with the Merger
Agreement, the Company entered into a Support Agreement (the Support
Agreement) with MCCC, a wholly owned subsidiary of MCCC, W.R. Huff Asset
Management Co., L.L.C. (Huff), Cerberus Capital Management, L.P.
(CCM) and certain affiliates of CCM (CCM and such affiliates, the
Cerberus Parties). Please see further discussion of the Merger
Agreement, the Credit Agreement, the Management Agreement and the Support
Agreement in note 4.(2)
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying interim unaudited financial statements should be read in
conjunction with ICGs Annual Report on Form 10-K for the year ended
December 31, 2003, as certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the United States Securities and Exchange
Commission. In the opinion of management, the Companys interim
financial statements reflect all necessary adjustments, which are of a
normal recurring nature, for a fair presentation. Operating results for
the three and six months ended June 30, 2004 are not indicative of the
results that may be expected for the fiscal year ending December 31,
2004. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain 2003 amounts have been reclassified
to conform to the 2004 presentation.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. 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. Such information forms the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results, however, may differ from
these estimates under different assumptions or conditions.The Companys independent auditors, KPMG LLP, issued a going concern
opinion modification in their report dated April 1, 2004 on the Companys
consolidated financial statements for the year ended December 31, 2003,
included in the Companys Annual Report on Form 10-K, stating that its
recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. The Companys consolidated
financial statements have been prepared assuming it will continue as a
going concern and do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that might result from the
outcome of this uncertainty.Revenue RecognitionThe Companys revenue was generated from the following products and
services: 9




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Three months ended June 30,
    
    Six months ended June 30,2003
    
    2004
    
    2003
    
    2004$
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %(dollar amounts in thousands)Converged and Data
Services
    
    
    1,817
    
    
    
    2
    
    
    
    3,011
    
    
    
    7
    
    
    
    3,530
    
    
    
    2
    
    
    
    5,463
    
    
    
    5Voice Services
    
    
    9,852
    
    
    
    10
    
    
    
    9,170
    
    
    
    21
    
    
    
    20,872
    
    
    
    11
    
    
    
    18,010
    
    
    
    17Private Line Services
    
    
    21,631
    
    
    
    22
    
    
    
    21,094
    
    
    
    47
    
    
    
    41,790
    
    
    
    21
    
    
    
    41,650
    
    
    
    39Dial-Up Services
    
    
    50,175
    
    
    
    51
    
    
    
    5,828
    
    
    
    13
    
    
    
    102,404
    
    
    
    52
    
    
    
    29,490
    
    
    
    28Inter-Carrier Compensation
    
    
    14,110
    
    
    
    15
    
    
    
    5,156
    
    
    
    12
    
    
    
    29,216
    
    
    
    14
    
    
    
    11,529
    
    
    
    1197,585
    
    
    
    100
    
    
    
    44,259
    
    
    
    100
    
    
    
    197,812
    
    
    
    100
    
    
    
    106,142
    
    
    
    100
  Net Loss Per ShareThe Companys weighted average outstanding common shares were used in
calculating basic and diluted net loss per share for the three and six
months ended June 30, 2003 and 2004. No potential common shares such as
options or warrants were included in the calculation, as their effect
would have been anti-dilutive. Common stock instruments outstanding at
the end of the period and excluded from the computation, as their effect
would have been anti-dilutive, were as follows: As of June 30,2003
    
    2004(underlying common shares,in thousands)Warrants
    
    
    1,474
    
    
    
    1,474Options
    
    
    703
    
    
    
    6752,177
    
    
    
    2,149
  Stock-Based CompensationThe Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations (APB 25).
Stock-based instruments issued to third parties are accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123).The Company has recorded no compensation expense for the stock options
granted under its employee stock option plan for the periods presented
pursuant to the intrinsic value based method of APB 25. The following
table illustrates the effect on net loss and net loss per share for the
three and six months ended June 30, 2003 and 2004, if the Company had
applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation (in thousands, except per share data): Three months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss:As reported
    
    $
    (2,520
    )
    
    $
    (5,791
    )
    
    $
    (225
    )
    
    $
    (20,002
    )Deduct: total
stock-based
employee
compensation
expense
determined under
fair value based
method for all
awards
    
    
    (197
    )
    
    
    (194
    )
    
    
    (673
    )
    
    
    (381
    )Pro forma
    
    $
    (2,717
    )
    
    $
    (5,985
    )
    
    $
    (898
    )
    
    $
    (20,383
    )
 10




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##### Table of Contents



As ReportedThree months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss per share:Basic
    
    $
    (0.32
    )
    
    $
    (0.72
    )
    
    $
    (0.03
    )
    
    $
    (2.50
    )Diluted
    
    $
    (0.32
    )
    
    $
    (0.72
    )
    
    $
    (0.03
    )
    
    $
    (2.50
    )
 Pro FormaThree months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net loss per share:Basic
    
    $
    (0.34
    )
    
    $
    (0.75
    )
    
    $
    (0.11
    )
    
    $
    (2.55
    )Diluted
    
    $
    (0.34
    )
    
    $
    (0.75
    )
    
    $
    (0.11
    )
    
    $
    (2.55
    )
  The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: option life of 5 years, volatility of 60%, risk-free
interest rate ranging from 2.7% to 3.0%, and no dividends.  The following table summarizes the status of the Companys stock option
plans: Shares
    
    Weightedunderlying
    
    averageoptions
    
    exercise priceOutstanding at December 31, 2003
    
    
    701,010
    
    
    $
    9.24Granted
    
    
    130,000
    
    
    
    6.20Cancelled
    
    
    (155,833
    )
    
    
    9.19Outstanding at June 30, 2004
    
    
    675,177
    
    
    $
    8.67
  (3)
    
    Level 3 AgreementOn April 1, 2004, the Company closed an agreement with Level 3, whereby
Level 3 agreed to pay the Company $35 million in cash in consideration
for the right to provide remote access service to ICGs customers. As of
June 30, 2004, $25.0 million had been paid and $5.0 million was due to be
paid on each of July 1, 2004, and October 1, 2004, subject to the
Companys performance under a transition services agreement with Level 3.
The total remaining consideration of $10.0 million is included in the
Companys condensed consolidated balance sheet as of June 30, 2004, as a
component of other receivables. The Company expects to complete
substantially all of the transition of the Companys remote access
service customers from ICGs network to Level 3s network by October
2004, during which time Level 3 will reimburse ICG for certain costs of
supporting the remote access service customers in accordance with the
agreement.The Level 3 agreement represents the assignment of customer contracts and
the future cash flows associated with them. While there are approximately
$2 million of network assets, net of accumulated depreciation, directly
attributable to providing remote access service, the majority of costs
cannot be segregated from network costs of providing other services.The Company recorded a gain of approximately $32.5 million on the sale of
the remote access service contracts to Level 3. Revenue from the remote
access service contracts began to accrue to the benefit of Level 3 on
April 1, 2004. Revenue generated from the remote access service contracts
sold to Level 3 accounted for approximately 32% of the Companys first
quarter 2004 revenue. After completing the Level 11




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##### Table of Contents



3 transaction, the Company will no longer provide or support remote
access service, which will allow the Company to eliminate certain fixed
and semi-fixed operating costs.(4)
    
    Subsequent Event  Merger and Related AgreementsAs discussed in note 1, on July 19, 2004, the Company entered into the
Merger Agreement, the Credit Agreement, the Management Agreement and the
Support Agreement. The following is a brief description of the terms and
conditions, to the extent such are considered material to the Company, of
these agreements. It is qualified in its entirety by reference to the
copies of such agreements previously filed with the SEC or filed with
this report.Merger AgreementThe Merger Agreement provides for the acquisition of the Company by MCCC.
As a result of the merger, the Company will become the wholly owned
subsidiary of MCCC. In the merger, all of the Companys outstanding stock
will be cancelled, and the holders of cancelled shares will receive $0.75
in cash per share, without interest. The merger consideration was
deposited by MCCC in escrow with JP Morgan Chase pending closing of the
merger or termination of the Merger Agreement.The Company was required to make customary representations and warranties
in the Merger Agreement. In addition, the Company and its subsidiaries
have agreed to various restrictions on the conduct of their business and
operations pending completion of the merger. The Company has agreed to
refrain from soliciting, discussing or entering into any competing merger
or acquisition proposals other than in limited circumstances. The Company
has agreed, in the event it enters into such a competing merger or
acquisition proposal, to pay a customary termination or break-up fee of
$5 million to MCCC.The closing of the merger is subject to the satisfaction of various
conditions, including but not limited to (a) the approval of the Merger
Agreement by the requisite vote of the Companys stockholders, (b) the
receipt of certain governmental consents or approvals, and (c) the
absence of certain legal impediments, such as any law, order or
injunction prohibiting or restricting the completion of the merger.The Merger Agreement is subject to termination in certain circumstances,
including upon the failure by the Company to obtain stockholder approval
on or before October 31, 2004. The Merger Agreement also may be
terminated if not consummated by the later of (a) 90 days after the
Companys stockholder approval is obtained (the Initial Closing
Deadline) or (b) if certain regulatory consents are not obtained on or
before the Initial Closing Deadline, at the election of MCCC, the 60th
day thereafter.In connection with termination of the Merger Agreement, the Company may
be required under certain circumstances to reimburse MCCC (in addition to
any required termination or break-up fee) for up to $1 million of
expenses and fees incurred by MCCC in connection with the transaction. In
addition, the merger consideration deposited in escrow is subject to
forfeiture by MCCC in connection with termination of the Merger Agreement
under certain circumstances.Credit AgreementThe Credit Agreement provides the Company with bridge financing
consisting of (i) a $2.4 million term loan, funded on July 19, 2004, to
cover certain restructuring activities to be undertaken by the Company
and (ii) a revolving credit facility of up to $15.7 million to cover
short-term budgeted cash shortfalls of the Company, generally available
following stockholder approval of the merger.All borrowings under the Credit Agreement accrue interest at an annual
rate of 6%, compounded quarterly, subject to default interest of up to
11%. The Company may also prepay for its borrowings at any time without
penalty. 12




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##### Table of Contents



The obligations of the Company under the Credit Agreement are guaranteed
by subsidiaries of the Company. All obligations under the Credit
Agreement, as well as certain obligations under the Merger Agreement, are
secured by first priority security interests in the assets of the Company
and its subsidiaries.Indebtedness under the Credit Agreement matures six months after the

Effective Time (or if applicable, the earlier of (i) the date on which
the Merger Agreement is terminated for any reason or (ii) November 30,
2004 in the event that the shareholder approval has not been obtained by
October 31, 2004).The Company is subject to certain representations, warranties, covenants
and restrictions under the Credit Agreement. Borrowings may be used only
for operational obligations and other obligations in connection with the
Companys restructuring activities, in accordance with an approved
budget. In addition, credit availability under the Credit Agreement is
dependent on certain conditions, including the absence of any default
under the Credit Agreement, any termination or default under the Merger
Agreement or Management Agreement, or the occurrence of any material
adverse change (prior to the date of stockholder approval) affecting the
Company.Management AgreementUnder the Management Agreement, following stockholder approval of the
merger, MCCC will be responsible for the day-to-day management of the
business operations of the Company and its subsidiaries, subject to the
supervision of the Companys board of directors.The Management Agreement will be signed and become effective upon
stockholder approval of the merger and will continue until the
consummation of the Merger, unless earlier terminated. MCCCs
responsibilities under the agreement include all Company operations,
assets, facilities and related billing, collection and administrative
functions, subject to the supervision of the Companys board of
directors.MCCC will not receive any compensation for its services as manager under
the Management Agreement, other than reimbursement for MCCCs reasonable
out-of-pocket expenses.Support AgreementUnder the Support Agreement, Huff and the Cerberus Parties have agreed to
vote their shares of the Companys common stock in favor of, and
otherwise to support, the Merger and to vote against alternative
transactions. Huff and the Cerberus Parties each beneficially owned
approximately 14.7% and 16.5%, respectively, of the Companys common
stock as of July 19, 2004. In addition, pursuant to the Support
Agreement, the Company has agreed to release Huff, the Cerberus Parties
and their officers, directors and certain other related parties from any
and all claims as of the Effective Time. Three of the Companys
directors (William J. Connors, Joseph R. Thornton and Timothy F. Price)
will be beneficiaries of this release. Mr. Connors is a manager of Huff
and Mr. Thornton is counsel to Huff. Mr. Price is a consultant of CCM.
In addition, the Company is subject to certain other limited obligations
under the Support Agreement, including the obligation to use reasonable
best efforts to ensure that certain state takeover laws do not become
applicable to the transactions contemplated by the Support Agreement in
any adverse way and to refrain from registering any transfers of common
stock that are made in contravention of the Support Agreement. 13




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##### Table of Contents



(5)
    
    Property and EquipmentProperty and equipment, including assets held under capital leases, was
comprised of the following: December 31,
    
    June 30,2003
    
    2004(in thousands)Buildings and Improvements
    
    $
    27,590
    
    
    $
    26,854Machinery and equipment
    
    
    1,609
    
    
    
    659Fiber optic equipment
    
    
    8,504
    
    
    
    5,100Circuit switch equipment
    
    
    22,258
    
    
    
    17,582Packet switch equipment
    
    
    5,334
    
    
    
    635Fiber optic network
    
    
    45,123
    
    
    
    32,948Construction in progress *
    
    
    561
    
    
    
    Assets held for sale *
    
    
    1,173
    
    
    
    1,173112,152
    
    
    
    84,951Less accumulated depreciation
    
    
    
    
    
    
    $
    112,152
    
    
    $
    84,951
  *
    
    Amounts not subject to
depreciationThe Company undertook an assessment of whether its network assets were
impaired under the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, in connection with its
evaluation of strategic alternatives, culminating in the Merger
Agreement. The result of this assessment was that long-lived assets were
impaired as of June 30, 2004.The estimated fair value of property and equipment balances as of June
30, 2004 was determined to be approximately $85.0 million. The fair value
of the ICG headquarters building was determined using a third party
appraisal. The capital lease obligation related to the building was
approximately $52.0 million as of June 30, 2004. The implied fair value of the network assets was determined using an
enterprise value model, based on the agreement to purchase the
Company's outstanding common stock through the Merger described
in note 4, adjusted for estimated changes in the financial
condition of the Company between June 30, 2004 and
September 30, 2004, the assumed date of shareholder approval of
the Merger Agreement and the Management Agreement, when the economic
risks and benefits of ownership will pass to the
buyer. In estimating the fair value of the assets, liabilities and
equity on September 30, 2004, we considered several factors, including:
(i) the consideration of $6.35 million to be paid to the stockholders;
(ii) the estimated cash flow for the three months ending September 30,
2004; (iii) the estimated fair value of deferred revenue as of
September 30, 2004; and (iv) the estimated value, as of
September 30, 2004, of remaining obligations under current
operating leases for network facilities that will not provide economic
value. Estimating future values and fair values requires significant judgment and actual
results may differ from these estimates under different assumptions or
conditions.In order to reduce property and equipment balances to their estimated
fair value, the Company recorded a non-cash impairment charge in the
three months ended June 30, 2004, of approximately $22.9 million. The
fair value of property and equipment was generally allocated to the
individual assets on a pro rata basis using the asset appraisals. The
book value of the impaired assets at June 30, 2004, became the new cost
basis of these assets. Subsequent depreciation of the new cost basis will
be calculated based on the remaining estimated useful life of the assets.(6)
    
    Commitments and ContingenciesPre-Petition ClaimsThe Company emerged from bankruptcy on October 10, 2002. However,
certain post-confirmation proceedings continue in the Bankruptcy Court
relating to pre-petition claims filed by creditors, administrative claims
and claims for damages on rejected executory contracts. As of June 30,
2004, the Companys condensed consolidated balance sheet included $1.8
million in estimated accrued liabilities for the settlement of such
claims. 14




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##### Table of Contents



ICG Key Employee Retention PlanIn May 2004 the Board approved the ICG Key Employee Retention Plan
(KERP) in which certain employees of the Company are participants.
Pursuant to the terms of the KERP, the Company has granted retention
awards that are payable in installments vesting on specified dates in
2004 (25% on August 3, 2004; 25% on November 3, 2004 and 50% on December
31, 2004) or upon a change of control or termination of employment other
than for cause. The Merger will constitute a change of control under
the KERP and, accordingly, may accelerate the Companys obligation to pay
retention awards to all participants in the KERP upon the Effective Time.In May 2004 the Company transferred approximately $3.7 million to a trust
for the benefit of certain KERP participants. This amount was recorded
as a prepaid expense in the Companys condensed consolidated balance
sheet and is being amortized to expense on a straight-line basis over the
vesting period of the payments due. Payments to the KERP participants
will be funded by the trust as they become due. The Company also
committed to pay $1.6 million to its four executive officers pursuant to
the KERP; however, no money was transferred to a trust for these
officers. This amount is being amortized to expense on a straight-line
basis over the vesting period of the payments due. The Company
recognized approximately $1.8 million of expense related to the KERP in
the three months ended June 30, 2004.Liability for Costs Associated with Exit or Disposal ActivitiesThe Company leases certain network facilities and accounts for them as
operating leases. As of June 30, 2004, the Company no longer used certain
of these leased facilities, and they no longer provided any economic
benefit to the Company. The Company has been unable to terminate these
leases before the end of their term without substantial economic penalty.
Therefore, in accordance with the provisions of SFAS 146, Accounting
for Costs Associated with Exit or Disposal Activities, in the six months
ended June 30, 2004 the Company recorded $4.3 million for the estimated
fair value of the remaining payments relating to such leases. This
amount was included in operating costs (excluding depreciation and
amortization) and accrued liabilities in the Companys condensed
consolidated statement of operations and condensed consolidated balance
sheet, respectively.(7)
    
    Major CustomersA significant amount of the Companys revenue has historically been
derived from long-term contracts with certain large customers, including
Qwest and MCI, Inc. (MCI), successor by merger to WorldCom, Inc. On
September 30, 2003, ICG executed an agreement (the Qwest Agreement)
with Qwest. In accordance with the Qwest Agreement, ICG ceased providing
dial-up services to Qwest by December 31, 2003. In the first six months
of 2003, ICG recorded $49.3 million of revenue in connection with the
provision of such dial-up services to Qwest. As of June 30, 2004, the
Company had $2.3 million in net trade receivables due from MCI. Revenue
amounts for the Companys major customers are summarized in the table
below: Three months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004(in percent of total revenue)Qwest
    
    
    30
    
    
    
    3
    
    
    
    29
    
    
    
    2MCI
    
    
    10
    
    
    
    15
    
    
    
    11
    
    
    
    13
 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Unless the context otherwise requires, the term ICG, we, us or our
means the combined business operations of ICG Communications, Inc. and its
subsidiaries. All dollar amounts are in U.S. dollars. The Managements
Discussion and Analysis of Financial Condition and Results of Operations
section and other parts of this Quarterly 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 ICGs future plans, objectives or goals also are
forward-looking statements. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual results or outcomes to
differ materially from those currently anticipated. We do not intend to update
or revise these forward-looking statements to reflect future events or
developments. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited consolidated
financial statements and accompanying notes included in this Quarterly Report. LIQUIDITY AND CAPITAL RESOURCES Our Recent Business History Following our Chapter 11 reorganization in 2002, we began to encounter
financial difficulties arising from a decline in revenues associated with the
loss of certain key contracts. In September 2003 we terminated early four
dial-up data services agreements with Qwest, formerly our largest customer, in
exchange for a cash payment from Qwest of approximately $106.8 million, which
included payment of approximately $31.0 million for dial-up data services
provided and to be provided by us under the agreements during the six months
ended December 31, 2003, and approximately $75.8 million of early termination
revenue. In October 2003 we used approximately $81.2 million of the proceeds
from the Qwest transaction to prepay in full the outstanding secured notes and
senior subordinated term loan, as required by the terms of such indebtedness.
In connection with the prepayment, approximately $42.1 million of cash held in
a cash collateral account for the benefit of our lenders was released to us. Although retirement of the secured notes and senior subordinated term loan
significantly reduced our indebtedness, the Qwest transaction resulted in a
substantial decrease in revenues and resulting operating income and cash flows
to us. In the fourth quarter of 2003, we embarked on substantial cost cutting
efforts in an attempt to mitigate the impact of the loss of revenues from
Qwest. These efforts, however, were insufficient to stem significant ongoing
operating losses. Strategic Transaction and Preparations for Bankruptcy Beginning in early 2004, in response to our continuing operating losses, we
undertook an assessment of our financial condition and prospects. Following
this assessment, the Board determined that our financial condition and
prospects were subject to substantial uncertainties and concluded that it was
in the best interest of our stockholders and creditors to seek a strategic
transaction in which the highest currently available value for our business and
assets might be realized. On February 13, 2004, the Board authorized us to retain an investment banker to
advise us regarding the possibility of such a transaction. On February 16,
2004, we formally retained Lehman Brothers to assist us in connection with our
search of a strategic transaction. In February 2004, we also retained insolvency counsel Pachulski Stang Ziehl
Young Jones & Weintraub, P.C. to provide legal advice and assistance. Based on
the advice of counsel, the Board determined that it was in the best interests
of our creditors and stockholders to pursue a dual strategy under which we
would (a) prepare for a voluntary 16




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##### Table of Contents



Chapter 11 bankruptcy proceeding and (b) continue to seek a strategic
transaction for the purpose of maximizing our value for the benefit of our
stockholders and creditors. In light of our significant continuing negative cash flow, we determined that
it was necessary to improve our cash position in order to facilitate an orderly
sale of our assets. Accordingly, on April 1, 2004, we entered into an agreement
with Level 3 Communications, Inc. (Level 3) whereby Level 3 agreed to pay $35
million in cash and other consideration for the right to provide remote access
service to certain of our customers. As of June 30, 2004, $25.0 million had
been paid and $5.0 million was due to be paid on each of July 1, 2004, and
October 1, 2004, subject to our performance under a transition services
agreement with Level 3. The total remaining consideration of $10.0 million is
included in our condensed consolidated balance sheet as of June 30, 2004, as a
component of other receivables. We recorded a gain of approximately $32.5
million on the sale of the remote access service contracts to Level 3. Revenue
from the remote access service contracts began to accrue to the benefit of
Level 3 on April 1, 2004. Pursuant to the agreement, Level 3 will continue to
reimburse ICG for certain costs of supporting the remote access service
customers until the transition to Level 3s network is substantially completed,
which is expected by October 2004. The majority of costs of providing remote access service cannot be segregated
from network costs of providing other services. After completing the Level 3
transaction, we will no longer provide or support remote access service and as
a result, we believe that we will be able to eliminate certain fixed and
semi-fixed operating costs attributable to those operations. Some of the cities
and markets we currently serve may become unprofitable once we no longer
generate revenue from remote access service. We are actively reviewing which
markets we will continue to serve, based on revenue considerations, contractual
obligations, and network configuration associated with each market. In many
markets, we have long-term contractual commitments that are significant enough
to prevent us from ceasing operations in such markets. Such contractual
commitments are discussed in more detail under Results of Operations. Merger and Related Agreements On July 19, 2004, we entered into an Agreement and Plan of Merger (the Merger
Agreement) with MCCC ICG Holdings LLC (MCCC) and a wholly owned subsidiary
of MCCC. Pursuant to the Merger Agreement, as of the effective time (the
Effective Time) of the merger (the Merger), ICG stockholders will receive
$0.75 in cash for each share of common stock, for a total of approximately
$6.35 million in cash. The completion of the Merger depends on the satisfaction or waiver of certain
conditions, including approval of the Merger Agreement by the holders of a
majority of the outstanding shares of ICG common stock entitled to vote at the
special meeting of ICG stockholders (the Meeting). The Meeting is currently
expected to take place in late September or early October 2004. The Board has
fixed the close of business on August 16, 2004, as the record date (Record
Date) for the determination of stockholders of ICG entitled to receive notice
of and to vote at the Meeting. We expect to complete the Merger shortly after
all of the conditions to the Merger have been satisfied or waived, which is
expected to occur in the fourth quarter of 2004. The Merger Agreement may be
terminated, and the stockholders will not receive the merger consideration,
under certain circumstances, as discussed in more detail below under Merger
Agreement. Contemporaneously with the signing of the Merger Agreement, we entered into a
Credit and Guaranty Agreement (the Credit Agreement) with MCCC under which we
will be provided working capital financing through the Effective Time. In
addition, pursuant to the Merger Agreement, we agreed to enter into a
Management Agreement (the Management Agreement) with MCCC. Under the
Management Agreement, MCCC will, upon approval of the merger by our
stockholders, manage our day-to-day operations subject to supervision by our
Board. Contemporaneously with the Merger Agreement, we also entered into a Support
Agreement (the Support Agreement) with MCCC, a wholly owned subsidiary of
MCCC, Huff and the Cerberus Parties. Pursuant to the Support Agreement, Huff
and the Cerberus Parties agreed to vote their shares of ICG common stock in
favor of, and otherwise to support, the Merger and to vote against alternative
transactions. In addition, pursuant to the Support Agreement, we have agreed
to release Huff, the Cerberus Parties and their officers, directors and certain
other related 17




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##### Table of Contents



parties from any and all claims as of the Effective Time. We are subject to
certain other limited obligations under the Support Agreement. MCCC is a newly organized Delaware limited liability company of which Columbia
Capital III LLC (Columbia Capital) and M/C Ventures Partners or their
affiliates are principal members. Columbia Capital and M/C Ventures Partners
are both venture capital firms specializing in the communications and
information technology industries. Columbia Capital is located at 201 North
Union Street, Suite 300, Alexandria, Virginia 22334. M/C Ventures Partners is
located at 75 State Street, Suite 2500, Boston, Massachusetts 02109. Neither we nor, to our knowledge, any of our affiliates have any material
relationship with MCCC, other than in connection with the agreements described
in this report. The following is a brief description of the terms and conditions, to the extent
such are considered material to us, of the Merger Agreement, the Credit
Agreement, the Management Agreement and the Support Agreement. It is qualified
in its entirety by reference to the copies of such agreements previously filed
with the SEC or filed with this report. Merger Agreement The Merger Agreement provides for the acquisition of us by MCCC. As a result of
the merger, we will become the wholly owned subsidiary of MCCC. In the merger,
all of our outstanding stock will be cancelled, and the holders of cancelled
shares will receive $0.75 in cash per share, without interest. The merger
consideration was deposited by MCCC in escrow with JP Morgan Chase pending
closing of the merger or termination of the Merger Agreement. We were required to make customary representations and warranties in the Merger
Agreement. In addition, we have agreed to various restrictions on the conduct
of their business and operations pending completion of the merger. We have
agreed to refrain from soliciting, discussing or entering into any competing
merger or acquisition proposals other than in limited circumstances. We have
agreed, in the event we enter into such a competing merger or acquisition
proposal, to pay a customary termination or break-up fee of $5 million to
MCCC. The closing of the merger is subject to the satisfaction of various conditions,
including but not limited to (a) the approval of the Merger Agreement by the
requisite vote of our stockholders, (b) the receipt of certain governmental
consents or approvals, and (c) the absence of certain legal impediments, such
as any law, order or injunction prohibiting or restricting the completion of
the merger. The Merger Agreement is subject to termination in certain circumstances,
including upon the failure by us to obtain stockholder approval on or before
October 31, 2004. The Merger Agreement also may be terminated if not
consummated by the later of (a) 90 days after stockholder approval is obtained
(the Initial Closing Deadline) or (b) if certain regulatory consents are not
obtained on or before the Initial Closing Deadline, at the election of MCCC,
the 60th day thereafter. In connection with termination of the Merger Agreement, we may be required
under certain circumstances to reimburse MCCC (in addition to any required
termination or break-up fee) for up to $1 million of expenses and fees
incurred by MCCC in connection with the transaction. In addition, the merger
consideration deposited in escrow is subject to forfeiture by MCCC in
connection with termination of the Merger Agreement under certain
circumstances. Credit Agreement The Credit Agreement provides us with bridge financing consisting of (i) a
$2.4 million term loan, funded on July 19, 2004, to cover certain restructuring
activities to be undertaken by us and (ii) a revolving credit facility of up to
$15.7 million to cover our short-term budgeted cash shortfalls, generally
available following stockholder approval of the merger. 18




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##### Table of Contents



All borrowings under the Credit Agreement accrue interest at an annual rate of
6%, compounded quarterly, subject to default interest of up to 11%. We may also
prepay for our borrowings at any time without penalty. Our obligations under the Credit Agreement are guaranteed by all of our
subsidiaries. All obligations under the Credit Agreement, as well as certain
obligations under the Merger Agreement, are secured by first priority security
interests in our assets. Indebtedness under the Credit Agreement matures six months after the Effective
Time (or if applicable, the earlier of (i) the date on which the Merger
Agreement is terminated for any reason or (ii) November 30, 2004 in the event
that shareholder approval has not been obtained by October 31, 2004). We are subject to certain representations, warranties, covenants and
restrictions under the Credit Agreement. Borrowings may be used only for
operational obligations and other obligations in connection with our
restructuring activities, in accordance with an approved budget. In addition,
credit availability under the Credit Agreement is dependent on certain
conditions, including the absence of any default under the Credit Agreement,
any termination or default under the Merger Agreement or Management Agreement,
or the occurrence of any material adverse change (prior to the date of
stockholder approval) affecting ICG. Management Agreement Under the Management Agreement, following stockholder approval of the merger,
MCCC will be responsible for the day-to-day management of our business
operations, subject to the supervision of our board of directors. The Management Agreement will be signed and become effective upon stockholder
approval of the merger and will continue until the consummation of the Merger,
unless earlier terminated. MCCCs responsibilities under the agreement include
all Company operations, assets, facilities and related billing, collection and
administrative functions, subject to the supervision of our board of directors. MCCC will not receive any compensation for its services as manager under the
Management Agreement, other than reimbursement for MCCCs reasonable
out-of-pocket expenses. Support Agreement Under the Support Agreement, Huff and the Cerberus Parties have agreed to vote
their shares of ICG common stock in favor of, and otherwise to support, the
Merger and to vote against alternative transactions. Huff and the Cerberus
Parties each beneficially owned approximately 14.7% and 16.5%, respectively, of
ICG common stock as of July 19, 2004. In addition, pursuant to the Support
Agreement, we have agreed to release Huff, the Cerberus Parties and their
officers, directors and certain other related parties from any and all claims
as of the Effective Time. Three of our directors (William J. Connors, Joseph
R. Thornton and Timothy F. Price) will be beneficiaries of this release. Mr.
Connors is a manager of Huff and Mr. Thornton is counsel to Huff. Mr. Price is
a consultant of CCM. In addition, we are subject to certain other limited
obligations under the Support Agreement, including the obligation to use
reasonable best efforts to ensure that certain state takeover laws do not
become applicable to the transactions contemplated by the Support Agreement in
any adverse way and to refrain from registering any transfers of common stock
that are made in contravention of the Support Agreement. ICG Key Employee Retention Plan In May 2004 the Board approved the ICG Key Employee Retention Plan (KERP) in
which certain of our employees are participants. Pursuant to the terms of the
KERP, we have granted retention awards that are payable in installments vesting
on specified dates in 2004 (25% on August 3, 2004; 25% on November 3, 2004 and
50% on December 31, 2004) or upon a change of control or termination of
employment other than for cause. The Merger will constitute a change of
control under the KERP and, accordingly, may accelerate our obligation to pay
retention awards to all participants in the KERP upon the Effective Time. 19




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In May 2004 we transferred approximately $3.7 million to a trust for the
benefit of certain KERP participants. This amount was recorded as a prepaid
expense in our condensed consolidated balance sheet and is being amortized to
expense on a straight-line basis over the vesting period of the payments due.
Payments to the KERP participants will be funded by the trust as they become
due. We also committed to pay $1.6 million to our four executive officers
pursuant to the KERP; however, no money was transferred to a trust for these
officers. This amount is being amortized to expense on a straight-line basis
over the vesting period of the payments due. We recognized approximately $1.8
million of expense related to the KERP in the three months ended June 30, 2004. Restructuring Activities In June 2004 we announced that we would be exiting the markets of Boston,
Chicago, New York, Seattle and Washington, D.C., as these markets were
unprofitable, and our ability to become profitable in these markets would have
required a level of resources that was no longer consistent with our business
plan. We are no longer selling products and services into these markets and
our existing customers in these markets will be transitioned to other providers
as soon as reasonably possible. In addition, concurrent with the announcement
of the merger, we announced on July 19, 2004 that we would reduce our employee
count, which decreased from 802 at June 30, 2004 to 589 at July 31, 2004. Assessment of Risks and Uncertainties Risk Factors Relating to the Failure to Consummate the Merger We may be forced to commence federal bankruptcy proceedings if the Merger does
not take place. In recent months, we have experienced declining revenues and significant
erosion of cash reserves and expect to continue to generate operating losses.
There is substantial doubt concerning our ability to continue as a going
concern. We have encountered difficulties in obtaining third party financing on
commercially reasonable terms, or at all. Based on our extensive efforts since
February of this year to locate a strategic partner, we do not believe there is
likely to be any transaction proposed as an alternative to the Merger. Based on
our negative cash flow, our liquidity and our historical difficulties in
obtaining third party financing, we will very likely need to file for
bankruptcy protection and secure debtor-in-possession financing if the Merger
is not approved by our stockholders and completed. Consummation of the Merger is subject to required approvals and other
conditions beyond our control. There can be no assurance that all such conditions will be satisfied or waived
by MCCC. For the Merger to take place, the Merger must be approved by the
holders of a majority of the outstanding shares of our common stock entitled to
vote. Under applicable law, the transfer of control of certain of our operating
licenses effected by the Merger must be approved by the Federal Communications
Commission and certain state public utilities commission and municipal
franchising authorities. We, MCCC and Merger Corp. have agreed that the absence
of such approvals will not be a condition to the consummation of the Merger and
that the Merger may be consummated without such approval; however, such
agreement is not binding on governmental agencies, which may assert that the
Merger is void or voidable. In addition, consummation of the Merger remains
subject to consents and approvals being obtained from, and to filings being
made with, other governmental entities, although we are not aware of any such
other governmental consents or approvals that would materially interfere with
the consummation of the Merger. Consummation of the Merger is subject to the
absence of any effective temporary restraining order, injunction, other order
or decree issued by a court or governmental entity, or other legal restraint or
prohibition which prevents such consummation, and to the absence of certain
legal actions by a governmental regulatory or administrative agency which, if
adversely determined, would have a material adverse effect on us or the ability
of any party to the Merger Agreement to perform its obligations thereunder or
which challenge, restrain or prohibit the consummation of the Merger. 20




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Pending consummation of the Merger, we will be dependent upon financing under
the Credit Agreement. As a result of continuing and projected operating losses, we will be unable to
continue in operation through the Effective Time without third party financing.
We have encountered difficulties in obtaining third party financing on
commercially reasonable terms, or at all. We have borrowed $2.4 million of
secured indebtedness from MCCC under the Credit Agreement to fund certain
restructuring activities and expect to borrow up to an additional $15.7 million
on a secured basis from MCCC in order to fund additional restructuring
activities and operating losses through the Effective Time. The continued availability of financing under the Credit Agreement is subject
to conditions and is not assured. The advance of funds under the Credit Agreement is subject to certain
conditions, and the availability of the revolving credit facility to fund
budgeted operating shortfalls is subject to approval of the Merger by our
stockholders. In addition, MCCC has been only recently organized for the
purpose of acquiring us and has no business assets or operations. We have been
advised that members of MCCC have committed up to $15.7 million in cash in
support of MCCCs future obligations under the Interim Credit Agreement.
However, there can be no assurance that such amounts will be available or
sufficient. Accordingly, no assurance can be given that financing under the
Interim Credit Agreement will continue to be available. If financing under the
Interim Credit Agreement ceases to be available, such event might cause us to
commence federal bankruptcy proceedings. MCCC may terminate the Merger Agreement under certain circumstances. MCCC may terminate the Merger Agreement if our stockholders do not approve the
Merger on or before October 31, 2004, or if the Merger has not been consummated
by the later of December 31, 2004, or (at the election of MCCC if certain
regulatory consents have not been obtained) the 60th day thereafter.
Additionally, MCCC may terminate the Merger Agreement if ICG or the Board
breaches any non-solicitation provision of the Merger Agreement, withdraws or
modifies the Boards recommendation of the Merger, enters into an acquisition
agreement with a third party with respect to a competing merger or acquisition
proposal, or commences federal bankruptcy proceedings. Additionally, MCCC may
be entitled to terminate the Merger Agreement if there is a material default by
ICG under the Interim Credit Agreement or if there is a material adverse change
affecting us before the date on which the Merger is approved by our
stockholders. In the event that the Merger Agreement is terminated, we may be
forced to commence federal bankruptcy proceedings. If the Merger Agreement is terminated, our secured indebtedness to MCCC could
become due and payable. If the Merger Agreement were terminated, all secured indebtedness under the
Interim Credit Agreement would become due and payable. In addition, in
connection with certain terminations of the Merger Agreement, we may incur
obligations under the Merger Agreement to pay MCCC a termination or break-up
fee of up to $5 million and to reimburse MCCC for certain expenses of up to $1
million. Such obligations are secured indebtedness under the Interim Credit
Agreement. Under such circumstances, we are unlikely to have sufficient cash
resources to pay all such indebtedness and might be forced to commence federal
bankruptcy proceedings. In a federal bankruptcy proceeding, the payment of
claims of MCCC and other secured creditors would have priority over the
interests of general unsecured creditors and the stockholders. Our common stock is unlikely to have any significant value in a federal
bankruptcy proceeding. We believe that we would be unable to reorganize in a Chapter 11 proceeding and
instead would pursue an orderly liquidation under protection of a federal
bankruptcy court pursuant Chapter 7 or 11 of the federal Bankruptcy Code. After
considerable efforts, we have developed few or no potential sales and merger
opportunities that involve substantially all of our equity, assets or business
other than the Merger. Accordingly, we believe that we would incur substantial
delays and costs in liquidating our assets in various markets in separate
transactions. Furthermore, under the applicable bankruptcy priority scheme,
creditors of a corporate debtor must be paid in full in respect of their claims
before stockholders are permitted to receive any distribution in respect of
their equity securities. We consider it unlikely that the net value of our
business assets will exceed our anticipated allowable claims and administrative 21




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expenses. Accordingly, if we were to liquidate under federal bankruptcy court
supervision, it is unlikely that stockholders would realize any recovery on
their interests in ICG. Risks Related to the Viability of ICG and Our Business We are subject to a number of significant risks in addition to the risk factors
and other considerations relating to the Merger. These risks include, but are
not limited to, the following: A significant portion of our revenue is derived from a small number of large
customers and we may not be able to retain them on profitable terms. A significant amount of our revenue has been derived from contracts with
certain large customers. In the second quarter of 2004, MCI Inc. (MCI) was
the only customer that represented more than 5% of our revenue. MCI accounted
for 15% of our second quarter 2004 revenue. We have two main service agreements
with MCI. The first agreement, under which we provide primary rate interface
services to MCI, expires September 30, 2004 and, upon expiration, will
automatically renew on a month-to-month basis unless either party provides
written notice to the other party of its intent to terminate the agreement. ICG
must provide 120 days notice of termination and MCI must provide 30 days prior
notice. Approximately 43% of our second quarter 2004 revenue from MCI was
generated in connection with this agreement. The second agreement, under which
we provide private line and switched access services to MCI, expired March 17,
2003. Upon expiration, this agreement automatically renews for successive
1-year periods unless terminated by either party upon written notice not less
than 60-days prior to the expiration of the then-current term. As such, the
current term expires March 17, 2005. Approximately 46% of our second quarter
2004 revenue from MCI was generated in connection with this agreement. The
remainder of the MCI revenue is generated in connection with other service and
interconnection agreements. In general, upon the contractual expiration of our agreements with our
customers, there can be no assurance that customers will elect to continue such
agreements. In fact, they may elect to significantly reduce service levels,
negotiate lower pricing, or disconnect services completely. Our success is dependent on the quality of services that we receive from our
suppliers. The quality of service that we deliver to our customers may be impacted if
there are disruptions in our suppliers services or if our suppliers are unable
to expand their current levels of services. There are no assurances that
interruptions will not occur or that our suppliers will be able to scale the
delivery of their services to meet our future needs. Service interruptions and
the inconsistent provision of supplier services could produce substantial
customer dissatisfaction, which could adversely affect our results of
operations and financial condition. Our reciprocal compensation revenue will likely decline as a result of
government regulation and the reduction of Internet bound traffic on our
network. Reciprocal compensation revenue is derived on a usage basis from terminating
other carriers traffic, primarily Internet bound traffic, on our network.
Reciprocal compensation rates are negotiated elements of inter-carrier
compensation established pursuant to interconnection agreements between two
parties. If reciprocal compensation rates continue their historical trend, they
will continue to decline, as they have in recent years. In addition, as a
result of the Level 3 transaction in April 2004, the majority of the Internet
bound traffic on our network will be eliminated as the transition of the
customer traffic from our network to the Level 3 network is completed. We
expect that reciprocal compensation revenue will be reduced from $2.4 million
in the second quarter of 2004 to approximately $1 million in the fourth quarter
of 2004. The introduction of new technologies may reduce the cost of services similar to
those that we provide. As a result, our most significant competitors in the future may be new entrants
to the telecommunications industry. These new entrants may not be burdened by
an installed base of outdated or undepreciated equipment and, therefore, may be
able to more quickly respond to customers demands at lower prices. In
addition, we may be required to 22




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shorten the estimated economic lives of our existing network infrastructure
assets, which could materially increase our depreciation expenses. Our pursuit of necessary technological advances may require substantial time
and expenses. Integrating new technologies into our network, when necessary, may prove to be
difficult and expensive, and technological upgrades to our network may not
become available in a timely fashion at a reasonable cost, or at all. If the
technology choices we make prove to be incorrect, ineffective or too costly,
our objective of meeting our customers demands for existing and future
telecommunication services could fail. If our network infrastructure becomes
obsolete and we are unable to maintain our competitive positioning, our
business, results of operations and financial condition will be adversely
affected in a material manner. The oversupply of telecommunications network infrastructure has resulted, and
may continue to result, in decreasing prices, which could have a material
impact on our results of operations. The immense capital investment made in the telecommunications industry in
recent years has resulted in an oversupply of network infrastructure and
capacity. Combined with this oversupply, rapid technological advancements and
intense competition have resulted in significant pricing pressure in each of
our main service areas. We cannot predict what impact such oversupply of
network infrastructure and capacity will have on our future operating results.
There can be no assurance that sufficient demand will exist for our services or
that prices will not continue to decline. Our Board is controlled by two stockholders; their interests may conflict with
each other and the interests of other stockholders. Currently, W.R. Huff Asset Management Co., L.L.C. (Huff) and Cerberus Capital
Management, L.P. and its affiliates (the Cerberus Parties) each beneficially
own approximately 14.7% and 16.5%, respectively, of our common stock as of July
19, 2004. As a result, they have significant voting power with regard to all
matters requiring stockholder action. They also control our Board. Pursuant to
our certificate of incorporation and our by-laws, our Board is comprised of
five directors, with us currently being obligated to nominate for election (in
connection with any meeting of or written consent solicited from our
stockholders called for the purpose of electing directors) two individuals
designated by the Cerberus Parties, two individuals designated by Huff and the
individual acting as our Chief Executive Officer. The number of directors
comprising our Board may only be increased above five by the affirmative vote
of all but one of the directors then in office. Additionally, the provisions of
our by-laws regarding each of Huffs and the Cerberus Parties director
nomination rights may not be amended, altered or repealed without their prior
consent unless the Cerberus Parties, with respect to their director nominees,
and Huff, with respect to its director nominees, in each instance, beneficially
own less than 1% of our shares of common stock at the time of the amendment. At
present, there are only four directors on the Board: two directors nominated by
Huff and two directors nominated by the Cerberus Parties. Consequently, it is
likely that, for the foreseeable future, Huff and the Cerberus Parties will
have the collective ability to control all matters requiring Board action,
including potential financing transactions, mergers and acquisitions, sales and
other dispositions of assets, the nomination of directors and our overall
management and the determination of our policies. In certain circumstances, the
interests of Huff and the Cerberus Parties may not coincide with our other
stockholders interests, and in some cases the respective interests of Huff and
the Cerberus Parties may not coincide with each other. This may make the value
of our stockholders investments less attractive to potential buyers and less
valuable generally. CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses our unaudited condensed consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of our 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. 23




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Our independent auditors, KPMG LLP, issued a going concern opinion modification
in their report dated April 1, 2004 on our consolidated financial statements
for the year ended December 31, 2003, included in our Annual Report on Form
10-K, stating that our recurring losses from operations raise substantial doubt
about our ability to continue as a going concern. Our consolidated financial
statements have been prepared assuming we will continue as a going concern and
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty. On an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, uncollectible accounts receivable, long-lived
assets, operating costs and accruals, litigation and contingencies. We base our
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. Such information forms the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results, however, may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies address the most significant judgments and
estimates used in the preparation of our consolidated financial statements. Revenue Recognition and Accounts Receivable We recognize revenue when the service is provided to the customer. Most revenue
is billed in advance on a fixed rate basis. The remainder of revenue is billed
in arrears on a transactional basis determined by customer usage. In the second
quarter of 2004, approximately 13% of total revenue was earned on a
transactional basis determined by customer usage. None of the Converged and
Data Services, Private Line or Dial-Up Services revenue, approximately 11% of
Voice Services revenue and approximately 91% of Inter-Carrier Compensation
revenue was earned on a transactional basis determined by customer usage. Fees
billed in connection with customer installations and other up-front charges are
deferred and recognized as revenue ratably over the estimated average contract
life. We recognize revenue at the amount we expect to realize, which includes billing
and service adjustments. Valuation allowances for uncollectible accounts
receivable are established through a charge to selling, general and
administrative expenses. We assess the adequacy of this reserve periodically,
evaluating general factors such as the length of time individual receivables
are past due, historical collection experience, the economic and competitive
environment, and changes in the credit worthiness of customers. We also assess
the ability of specific customers to meet their financial obligations and
establish specific valuation allowances based on the amount we expect 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 our trade
receivables may change. Operating Costs and Accrued Liabilities We lease certain network facilities, primarily circuits, from other local
exchange carriers to augment our owned infrastructure, for which we are
generally billed a fixed monthly fee. We also use the facilities of other
carriers for which we are billed on a usage basis. We recognize the cost of
these facilities or services when services are provided in accordance with
contractual requirements. We dispute incorrect billings. The most prevalent types of disputes include
disputes for circuits that are not disconnected on a timely basis and usage
bills with incorrect or inadequate call detail records. Depending on the type
and complexity of the issues involved, it may take several quarters to resolve
disputes. In determining the amount of such operating expenses and related
accrued liabilities to reflect in our financial statements, we consider the
adequacy of documentation of disconnect notices, compliance with prevailing
contractual requirements for submitting such disconnect notices and disputes to
the provider of the facilities, and compliance withour interconnection
agreements with these carriers. Significant judgment is required in estimating
the ultimate outcome of the dispute resolution process, as well as any other
amounts that may be incurred to conclude the negotiations or settle any
litigation. We had approximately $9.6 million and $9.9 million of disputes
outstanding as of December 31, 24




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2003 and June 30, 2004, respectively, and had provided reserves against those
disputes of approximately $4.0 million and $5.2 million for the respective
periods. In certain cases, we cease using leased network facilities prior to the leases
expiration; however, we are unable to terminate the lease before the end of its
term without substantial economic penalty. In these circumstances, where the
facilities do not provide any future economic benefit to us, in accordance with
the provisions of SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, we record the estimated fair value of the remaining
payments relating to such leases as a liability. As of June 30, 2004, we
recorded $4.3 million of operating costs as a liability for leased facilities
that do not provide any future economic benefit to us. Property and Equipment We provide for the impairment of long-lived assets pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of its assets may not be
recoverable. An impairment loss is recognized when the assets carrying value
exceeds both the assets estimated undiscounted future cash flows, excluding
interest, and the assets estimated fair value. Measurement of the impairment
loss is then based on the estimated fair value of the assets. Considerable
judgment is required to project such future cash flows and, if required, to
estimate the fair value of the long-lived assets and the amount of the
impairment. We undertook an assessment of whether our network assets were impaired under
the provisions of SFAS No. 144 in connection with our evaluation of strategic
alternatives, culminating in the Merger Agreement. The result of this
assessment was that long-lived assets were impaired as of June 30, 2004. The estimated fair value of property and equipment balances as of June
30, 2004 was determined to be approximately $85.0 million. The fair value
of the ICG headquarters building was determined using a third party
appraisal. The capital lease obligation related to the building was
approximately $52.0 million as of June 30, 2004. The implied fair value of the network assets was determined using an
enterprise value model, based on the agreement to purchase our
outstanding common stock through the Merger described
above adjusted for estimated changes in our financial
condition between June 30, 2004 and September 30, 2004, the
assumed date of shareholder approval of the Merger Agreement and the
Management Agreement, when the economic risks and benefits of
ownership will pass to the
buyer. In estimating the fair value of the assets, liabilities and
equity on September 30, 2004, we considered several factors, including:
(i) the consideration of $6.35 million to be paid to the stockholders;
(ii) the estimated cash flow for the three months ending September 30,
2004; (iii) the estimated fair value of deferred revenue as of
September 30, 2004; and (iv) the estimated value, as of
September 30, 2004, of remaining obligations under current
operating leases for network facilities that will not provide economic
value. Estimating future values and fair values requires significant judgment and actual
results may differ from these estimates under different assumptions or
conditions. In order to reduce property and equipment balances to their estimated fair
value, we recorded a non-cash impairment charge in the three months ended June
30, 2004, of approximately $22.9 million. The fair value of property and
equipment was generally allocated to the individual assets on a pro rata basis
using the asset appraisals. The book value of the impaired assets at June 30,
2004, became the new cost basis of these assets. Subsequent depreciation of the
new cost basis will be calculated based on the remaining estimated useful life
of the assets. 25




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RESULTS OF OPERATIONS Statement of Operations Data (unaudited)Three months ended June 30,
    
    Six months ended June 30,2003
    
    2004
    
    2003
    2004$
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %($ values in thousands)Revenue
    
    
    97,585
    
    
    
    100
    
    
    
    44,259
    
    
    
    100
    
    
    
    197,812
    
    
    
    100
    
    
    
    106,142
    
    
    
    100Operating costs and expenses:Operating costs, excluding
depreciation and amortization
    
    
    60,788
    
    
    
    62
    
    
    
    30,466
    
    
    
    69
    
    
    
    122,526
    
    
    
    62
    
    
    
    77,338
    
    
    
    73Selling, general and
administrative expenses
    
    
    24,458
    
    
    
    25
    
    
    
    25,363
    
    
    
    57
    
    
    
    44,765
    
    
    
    23
    
    
    
    48,729
    
    
    
    46Depreciation and amortization
    
    
    10,279
    
    
    
    11
    
    
    
    3,143
    
    
    
    7
    
    
    
    20,150
    
    
    
    10
    
    
    
    6,801
    
    
    
    6Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    22,878
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    22,878
    
    
    
    22Gain on disposal of long-lived
assets
    
    
    (91
    )
    
    
    
    
    
    
    (1,066
    )
    
    
    (2
    )
    
    
    (173
    )
    
    
    
    
    
    
    (1,129
    )
    
    
    (1
    )Other expense, net
    
    
    95
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    243
    
    
    
    Total operating costs and
expenses
    
    
    95,529
    
    
    
    98
    
    
    
    80,905
    
    
    
    183
    
    
    
    187,458
    
    
    
    95
    
    
    
    154,860
    
    
    
    146Operating income (loss)
    
    
    2,056
    
    
    
    2
    
    
    
    (36,646
    )
    
    
    (83
    )
    
    
    10,354
    
    
    
    5
    
    
    
    (48,718
    )
    
    
    (46
    )Other income (expense):Interest expense
    
    
    (6,513
    )
    
    
    (7
    )
    
    
    (2,365
    )
    
    
    (5
    )
    
    
    (12,768
    )
    
    
    (6
    )
    
    
    (5,355
    )
    
    
    (5
    )Interest income
    
    
    226
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    457
    
    
    
    
    
    
    
    535
    
    
    
    Other income, net
    
    
    1,711
    
    
    
    2
    
    
    
    33,059
    
    
    
    75
    
    
    
    1,732
    
    
    
    1
    
    
    
    33,536
    
    
    
    32Total other income
(expense), net
    
    
    (4,576
    )
    
    
    (5
    )
    
    
    30,855
    
    
    
    70
    
    
    
    (10,579
    )
    
    
    (5
    )
    
    
    28,716
    
    
    
    27Net loss
    
    
    (2,520
    )
    
    
    (3
    )
    
    
    (5,791
    )
    
    
    (13
    )
    
    
    (225
    )
    
    
    
    
    
    
    (20,002
    )
    
    
    (19
    )
 26




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Statistical DataJune 30,
    
    Sept. 30,
    
    Dec. 31,
    
    Mar. 31,
    
    June 30,2003
    
    2003
    
    2003
    
    2004
    
    2004Full time employees
    
    
    890
    
    
    
    953
    
    
    
    891
    
    
    
    959
    
    
    
    802
    (5)Access lines
in service, in thousands(1)
    
    
    862
    
    
    
    736
    
    
    
    283
    
    
    
    296
    
    
    
    174Buildings connected:On-net
    
    
    904
    
    
    
    905
    
    
    
    913
    
    
    
    915
    
    
    
    915Hybrid(2)
    
    
    4,266
    
    
    
    4,338
    
    
    
    4,345
    
    
    
    4,382
    
    
    
    4,268Total buildings connected
    
    
    5,170
    
    
    
    5,243
    
    
    
    5,258
    
    
    
    5,297
    
    
    
    5,183Operational switches:Circuit
    
    
    46
    
    
    
    46
    
    
    
    42
    
    
    
    42
    
    
    
    40
    (6)ATM
    
    
    23
    
    
    
    23
    
    
    
    23
    
    
    
    21
    
    
    
    13
    (6)Total operational switches
    
    
    69
    
    
    
    69
    
    
    
    65
    
    
    
    63
    
    
    
    53Operational
regional fiber route miles(3)
    
    
    5,532
    
    
    
    5,532
    
    
    
    5,508
    
    
    
    5,517
    
    
    
    5,519Operational
regional fiber strand miles(4)
    
    
    174,844
    
    
    
    174,844
    
    
    
    174,844
    
    
    
    169,142
    
    
    
    169,374Collocations with incumbent local exchange carriers
    
    
    145
    
    
    
    148
    
    
    
    148
    
    
    
    148
    
    
    
    139
    (6)
  (1)
    
    Access lines in service include only provisioned lines generating revenue.  (2)
    
    Hybrid buildings connected represent buildings connected to our network
via another carriers facilities.  (3)
    
    Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. As of June 30, 2004, we had 5,519 regional
fiber route miles, 3,481 of which were leased.  (4)
    
    Regional fiber strand miles refers to the number of regional fiber
route miles, including leased fiber, along a telecommunications path
multiplied by the number of fiber strands along that path. As of June 30,
2004, we had 169,374 regional fiber strand miles, 30,251 of which were
leased.  (5)
    
    The number of full time employees was reduced to 589 as of July 31, 2004.  (6)
    
    We expect to decommission approximately 7 to 11 circuit
switches, 8 ATM switches and 2 collocations by the fourth quarter of
2004. THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 Revenue Three Months Ended June 30,2003
    
    2004$
    
    %
    
    $
    
    %
    
    $ Change
    
    % Change($ values in thousands)Converged and Data Services
    
    
    1,817
    
    
    
    2
    
    
    
    3,011
    
    
    
    7
    
    
    
    1,194
    
    
    
    66Voice Services
    
    
    9,852
    
    
    
    10
    
    
    
    9,170
    
    
    
    21
    
    
    
    (682
    )
    
    
    (7
    )Private Line Services
    
    
    21,631
    
    
    
    22
    
    
    
    21,094
    
    
    
    47
    
    
    
    (537
    )
    
    
    (2
    )Dial-Up Services
    
    
    50,175
    
    
    
    51
    
    
    
    5,828
    
    
    
    13
    
    
    
    (44,347
    )
    
    
    (88
    )Inter-Carrier Compensation
    
    
    14,110
    
    
    
    15
    
    
    
    5,156
    
    
    
    12
    
    
    
    (8,954
    )
    
    
    (63
    )Total Revenue
    
    
    97,585
    
    
    
    100
    
    
    
    44,259
    
    
    
    100
    
    
    
    (53,326
    )
    
    
    (55
    )
 Revenue decreased $53.3 million, or 55%, for the three months ended June 30,
2004, as compared to the three months ended June 30, 2003, primarily due to
decreases in revenue earned from Dial-Up Services and Inter-Carrier
Compensation of $44.3 million and $9.0 million, respectively. 27




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Converged and Data Services Converged and Data Services include services that were classified under the
Corporate Services category in our filings for periods prior to January 1,
2004. Such services include VoicePipeTM, iConvergeTM, Dedicated Internet
Access and conferencing. Revenue from Converged and Data Services increased
$1.2 million, or 66%, for the three months ended June 30, 2004, as compared to
the three months ended June 30, 2003. Voice Services Voice Services include services that were primarily classified under the
Corporate Services category in our filings for periods prior to January 1,
2004. Such services include long-distance, digital trunks and business lines.
In addition, Signaling System 7 services, currently included in this category,
were previously classified under the Point-to-Point Broadband category.
Finally, primary rate interface  two way services, currently included in this
category, were previously classified under the Dial-Up category. Revenue
from Voice Services decreased $0.7 million, or 7%, for the three months ended
June 30, 2004, as compared to the three months ended June 30, 2003. This was
due primarily to a $1.0 million, or 12%, decrease in monthly recurring charges,
which was comprised of a 6% increase in lines in service, offset by an 18%
decrease in revenue per line. Private Line Services Private Line Services, which were previously classified under the
Point-to-Point Broadband category in our filings for periods prior to January
1, 2004, consist of local and intercity dedicated facilities. Revenue from
Private Line Services for the three months ended June 30, 2004, decreased $0.5
million, or 2%, as compared to the three months ended June 30, 2003. Dial-Up Services Dial-Up Services include services that were classified under the Dial-Up
category in our filings for periods prior to January 1, 2004. Such services
include remote access service and primary rate interface  inbound service.
Revenue from Dial-Up Services decreased $44.3 million, or 88%, for the three
months ended June 30, 2004, as compared to the three months ended June 30,
2003, primarily due to the elimination of revenue earned from Qwest, as well as
the elimination of remote access service revenue. The loss of Qwest revenue,
resulting from the September 2003 Qwest agreement, accounted for $24.6 million
of the decrease. In addition, pursuant to the agreement with Level 3, revenue
from providing remote access service began to accrue to the benefit of Level 3
effective April 1, 2004. Revenue earned from providing remote access service
in the three months ended June 30, 2003, was approximately $18.2 million. Inter-Carrier Compensation Inter-Carrier Compensation includes services that were classified under the
Reciprocal Compensation category in our filings for periods prior to January
1, 2004. In addition, Inter-Carrier Compensation includes switched access
service (previously classified under the Point-to-Point Broadband category)
and carrier access billed service (previously classified under the Corporate
Services category). Revenue from Inter-Carrier Compensation decreased $9.0
million, or 63%, for the three months ended June 30, 2004, as compared to the
three months ended June 30, 2003, primarily due to a $5.2 million, or 68%
decrease in reciprocal compensation, which occurred as a result of decreases in
both minutes of use (39% decrease) as well as revenue per minute of use (29%
decrease). In addition, revenue from carrier access billing service and
switched access service decreased approximately $0.9 million and $0.8 million,
respectively, due to decreases in usage and rates. Other Inter-Carrier
Compensation decreased $2.0 million primarily due to $2.8 million of revenue
from a settlement recorded in the three months ended June 30, 2003. Operating costs, excluding depreciation and amortization Operating costs, excluding depreciation and amortization, consist primarily of
(i) direct operating costs, which consist of payments to other carriers for the
use of network facilities to support local, special, switched access 28




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services, and long distance services, right of way fees and other operating
costs; and (ii) indirect operating costs, which include the cost of internal
engineering and operations personnel dedicated to the operations and
maintenance of the network, as well as business taxes and other expenses. Total operating costs decreased $30.3 million, or 50%, from $60.8 million in
the second quarter of 2003 to $30.5 million in the second quarter of 2004. As
a percentage of revenue, operating costs increased from 62% in the second
quarter of 2003 to 69% in the second quarter of 2004. Operating costs
reflected an $18.5 million, or 50%, decrease in direct operating costs and an
$11.8 million, or 50%, decrease in indirect operating costs. The decrease in
direct operating costs was due primarily to continued cost
containment measures. The decrease in indirect operating costs was due primarily to a $2.8 million,
or 33%, decrease in personnel expenses, including base compensation and overtime, which was due primarily to reductions in headcount that
occurred as a result of our reductions in personnel completed throughout fiscal
year 2003. In addition, business taxes decreased approximately $5.3 million
due primarily to lower assessed property valuations and revisions of estimates. We lease network facilities and account for them as operating leases. As of
June 30, 2004, we no longer used certain of these leased facilities, and they
no longer provided any economic benefit to us. We have been unable to
terminate these leases before the end of their term without substantial
economic penalty. Therefore, in accordance with the provisions of SFAS 146, in
the three months ended June 30, 2004 we recorded $4.3 million as a liability
for the estimated fair value of the remaining payments relating to such leases. During the transition of our remote access service customers from our network
to Level 3s network, Level 3 is reimbursing us for our costs of supporting the
remote access service business. In the second quarter of 2004, approximately
$14.4 million of operating costs has been or will be reimbursed by Level 3 in
connection with the Level 3 agreement. After the substantial completion of the
transition expected by October 2004, ICG will be contractually committed to pay
approximately $13 million through the expiration of these commitments.
Approximately $2 million of this amount was recorded as a liability in our
condensed consolidated balance sheet as of June 30, 2004, in accordance with
SFAS 146, as discussed above. Selling, general and administrative expenses (SG&A) SG&A
expenses increased 4% from $24.5 million in the second quarter of 2003 to
$25.4 million in the second quarter of 2004. As a percentage of revenue, SG&A
expenses increased from 25% in the second quarter of 2003 to 57% of revenue in
the second quarter of 2004. Significant fluctuations in SG&A expenses in the three months ended June 30,
2004, as compared to the three months ended June 30, 2003, were as follows:  
    
    Personnel expenses increased $1.5 million, or 9%, comprised primarily of
the following:  
    
    A $1.7 million increase in retention bonus expense, due
primarily to the implementation of the KERP in the second quarter of
2004;
    
    A $1.2 million increase in base compensation (including
overtime), due primarily to an increase in sales headcount, which
was offset by reductions in headcount in other departments that
occurred as a result of our reductions in personnel completed
throughout fiscal year 2003;
    
    A $1.5 million increase in benefits expense, due primarily to
a revision, in 2003, of an estimate relating to our 401-K plan
forfeitures.
    
    A $0.5 million increase in contract and temporary expenses,
due primarily to an increase in the number of contractors. The
contractors were required to staff special projects, including our
initiative to reduce operating costs implemented in late 2003; and
    
    A $3.6 million decrease in severance expenses, due to a
reduction in employee headcount implemented in the second quarter of
2003. 29




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
    
    Marketing expenses decreased $0.7 million, or 89%, due primarily to a decrease in VoicePipeTM advertising.
    
    Computer and communications expenses decreased $0.8 million, or 32%, due primarily to decreases in telephone and software
maintenance expenses. Concurrent with the announcement of the Merger Agreement, we announced on July
19, 2004 that we would reduce our employee count, which decreased from 802 at
June 30, 2004 to 589 at July 31, 2004. Depreciation and amortization We reviewed our property and equipment balances as of December 31, 2003, for
impairment in accordance with the provisions of SFAS No. 144. This review
indicated that the carrying value of our property and equipment exceeded
estimated future undiscounted cash flows and estimated fair value, indicating
that the property and equipment balances were impaired. The fair value of
property and equipment balances as of December 31, 2003 was determined to be
approximately $112 million, using several valuation techniques, including
discounted cash flows, asset appraisals obtained in the fourth quarter of 2003
and current market capitalization. In order to reduce property and equipment
balances to the estimated fair value of $112 million, we recorded an impairment
charge as of December 31, 2003, of approximately $89 million. The estimated
fair value of property and equipment was generally allocated to the individual
assets using the asset appraisals. The book value of the impaired assets at
December 31, 2003, became the new cost basis of these assets. Subsequent
depreciation of the new cost basis is being calculated based on the remaining
estimated useful life of the assets. Due to the reduced cost basis of property
and equipment, depreciation expense decreased 69% from $10.3 million in the
second quarter of 2003 to $3.1 million in the second quarter of 2004. Impairment of long-lived assets The estimated fair value of property and equipment balances as of June
30, 2004 was determined to be approximately $85.0 million. The fair value
of the ICG headquarters building was determined using a third party
appraisal. The capital lease obligation related to the building was
approximately $52.0 million as of June 30, 2004. The implied fair value of the network assets was determined using an
enterprise value model, based on the agreement to purchase our
outstanding common stock through the Merger described
above adjusted for estimated changes in our financial
condition between June 30, 2004 and September 30, 2004, the
assumed date of shareholder approval of the Merger Agreement and the
Management Agreement, when the economic risks and benefits of
ownership will pass to the
buyer. In estimating the fair value of the assets, liabilities and
equity on September 30, 2004, we considered several factors, including:
(i) the consideration of $6.35 million to be paid to the stockholders;
(ii) the estimated cash flow for the three months ending September 30,
2004; (iii) the estimated fair value of deferred revenue as of
September 30, 2004; and (iv) the estimated value, as of
September 30, 2004, of remaining obligations under current
operating leases for network facilities that will not provide economic
value. Estimating future values and fair values requires significant judgment and actual
results may differ from these estimates under different assumptions or
conditions. In order to reduce property and equipment balances to their estimated fair
value, we recorded a non-cash impairment charge in the three months ended June
30, 2004, of approximately $22.9 million. The fair value of property and
equipment was generally allocated to the individual assets on a pro rata basis
using the asset appraisals. The book value of the impaired assets at June 30,
2004, became the new cost basis of these assets. Subsequent depreciation of the
new cost basis will be calculated based on the remaining estimated useful life
of the assets. Interest expense Interest expense of $6.5 million incurred in the second quarter of 2003 related
primarily to our secured debt, our senior subordinated term loan, other debt
and capital leases. In October 2003 we paid off the $81.2 million aggregate
balance of the secured debt and the senior subordinated term loan. Interest
expense of $2.4 million incurred in the second quarter of 2004 related
primarily to our remaining other debt and capital leases. Other income, net Other income, net was $1.7 million and $33.1 million for the three months ended
June 30, 2003 and 2004, respectively. The increase in other income, net was
due primarily to a $32.5 million gain we recorded on the Level 30




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3 transaction. The $32.5 million gain was comprised of $35.0 million of
expected cash proceeds less incremental direct costs of $2.5 million to
complete the sale. SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Revenue Six Months Ended June 30,2003
    
    2004$
    
    %
    
    $
    
    %
    
    $ Change
    
    % Change($ values in thousands)Converged and Data Services
    
    
    3,530
    
    
    
    2
    
    
    
    5,463
    
    
    
    5
    
    
    
    1,933
    
    
    
    55Voice Services
    
    
    20,872
    
    
    
    11
    
    
    
    18,010
    
    
    
    17
    
    
    
    (2,862
    )
    
    
    (14
    )Private Line Services
    
    
    41,790
    
    
    
    21
    
    
    
    41,650
    
    
    
    39
    
    
    
    (140
    )
    
    
    (
    )Dial-Up Services
    
    
    102,404
    
    
    
    52
    
    
    
    29,490
    
    
    
    28
    
    
    
    (72,914
    )
    
    
    (71
    )Inter-Carrier Compensation
    
    
    29,216
    
    
    
    14
    
    
    
    11,529
    
    
    
    11
    
    
    
    (17,687
    )
    
    
    (61
    )Total Revenue
    
    
    197,812
    
    
    
    100
    
    
    
    106,142
    
    
    
    100
    
    
    
    (91,670
    )
    
    
    (46
    )
 Revenue decreased $91.7 million, or 46%, for the six months ended June 30,
2004, as compared to the six months ended June 30, 2003, primarily due to
decreases in revenue earned from Dial-Up Services, Inter-Carrier Compensation
and Voice Services of $72.9 million, $17.7 million and $2.9 million,
respectively. Converged and Data Services Revenue from Converged and Data Services increased $1.9 million, or 55%, for
the six months ended June 30, 2004, as compared to the six months ended June
30, 2003. Voice Services Revenue from Voice Services decreased $2.9 million, or 14%, for the six months
ended June 30, 2004, as compared to the six months ended June 30, 2003. This
was due primarily to a $2.9 million, or 16%, decrease in monthly recurring
charges, which was comprised of a 7% increase in lines in service, offset by a
24% decrease in revenue per line. Private Line Services Revenue from Private Line Services decreased $0.1 million, or less than 1%,
for the six months ended June 30, 2004, as compared to the six months ended
June 30, 2003. Dial-Up Services Revenue from Dial-Up Services decreased $72.9 million, or 71%, for the six
months ended June 30, 2004, as compared to the six months ended June 30, 2003,
primarily due to the elimination of revenue earned from Qwest, as well as the
elimination of remote access service revenue. The loss of Qwest revenue,
resulting from the September 2003 Qwest agreement, accounted for $49.3 million
of the decrease. In addition, pursuant to the agreement with Level 3, revenue
from providing remote access service began to accrue to the benefit of Level 3
effective April 1, 2004. Revenue earned from providing remote access service
in the three months ended June 30, 2003, was approximately $18.2 million. Inter-Carrier Compensation Revenue from Inter-Carrier Compensation decreased $17.7 million, or 61%, for
the six months ended June 30, 2004, as compared to the six months ended June
30, 2003, primarily due to a $11.2 million, or 67% decrease in reciprocal
compensation, which occurred as a result of decreases in both minutes of use
(36% decrease) as well as revenue per minute of use (31% decrease). In
addition, revenue from carrier access billing service and switched access
service 31




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decreased approximately $2.8 million and $1.9 million, respectively, due to
decreases in usage and rates. Other Inter-Carrier Compensation decreased $1.7
million primarily due to $2.8 million of revenue from a settlement recorded in
the six months ended June 30, 2003. Operating costs, excluding depreciation and amortization Total operating costs decreased $45.2 million, or 37%, from $122.5 million in
the six months ended June 30, 2003 to $77.3 million in six months ended June
30, 2004. As a percentage of revenue, operating costs increased from 62% in
the six months ended June 30, 2003 to 73% in the six months ended June 30,
2004. Operating costs reflected a $26.6 million, or 35%, decrease in direct
operating costs and an $18.6 million, or 39%, decrease in indirect operating
costs. The decrease in direct operating costs was due primarily to
continued cost containment measures. The decrease in indirect operating costs
was due primarily to a $6.4 million, or 35%, decrease in personnel expenses,
including base compensation and overtime, which was due
primarily to reductions in headcount that occurred as a result of our
reductions in personnel completed throughout fiscal year 2003. In addition,
business taxes decreased approximately $7.0 million due primarily to lower
assessed property valuations and revisions of estimates. We lease network facilities and account for them as operating leases. As of
June 30, 2004, we no longer used certain of these leased facilities, and they
no longer provided any economic benefit to us. We have been unable to
terminate these leases before the end of their term without substantial
economic penalty. Therefore, in accordance with the provisions of SFAS 146, in
the six months ended June 30, 2004 we recorded $4.3 million as a liability for
the estimated fair value of the remaining payments relating to such leases. During the transition of our remote access service customers from our network
to Level 3s network, Level 3 is reimbursing us for our costs of supporting the
remote access service business. In the six months ended June 30, 2004,
approximately $14.4 million of operating costs has been or will be reimbursed
by Level 3 in connection with the Level 3 agreement for the period from April
1, 2004 through June 30, 2004. After the substantial completion of the
transition expected by October 2004, ICG will be contractually committed to pay
approximately $13 million through the expiration of these commitments.
Approximately $2 million of this amount was recorded as a liability in our
condensed consolidated balance sheet as of June 30, 2004, in accordance with
SFAS 146, as discussed above. Selling, general and administrative expenses (SG&A) SG&A expenses increased 9% from $44.8 million in the six months ended June 30,
2003 to $48.7 million in the six months ended June 30, 2004. As a percentage
of revenue, SG&A expenses increased from 23% in the six months ended June 30,
2003 to 46% of revenue in the six months ended June 30, 2004. Significant fluctuations in SG&A expenses in the three months ended June 30,
2004, as compared to the three months ended June 30, 2003, were as follows:  
    
    Personnel expenses increased $5.4 million, or 19%, comprised primarily of
the following:  
    
    A $1.7 million increase in retention bonus expense, due
primarily to the implementation of the KERP in the second quarter of
2004;
    
    A $3.7 million increase in base compensation (including
overtime), due primarily to an increase in sales headcount, which
was offset by reductions in headcount in other departments that
occurred as a result of our reductions in personnel completed
throughout fiscal year 2003;
    
    A $1.7 million increase in benefits expense, due primarily to
a revision, in 2003, of an estimate relating to our 401-K plan
forfeitures.
    
    A $0.9 million increase in contract and temporary expenses,
due primarily to an increase in the number of contractors. The
contractors were required to staff special projects, including our
initiative to reduce operating costs implemented in late 2003; 32




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
    
    A $3.2 million decrease in severance expenses, due to a
reduction in employee headcount implemented in the second quarter of
2003.  
    
    Marketing expenses decreased $1.0 million, or 85%, due primarily to a decrease in VoicePipeTM advertising.
    
    Computer and communications expenses decreased $1.4 million, or 27%, due primarily to decreases in telephone and software
maintenance expenses. Concurrent with the announcement of the Merger Agreement, we announced on July
19, 2004 that we would reduce our employee count, which decreased from 802 at
June 30, 2004 to 589 at July 31, 2004. Depreciation and amortization We reviewed our property and equipment balances as of December 31, 2003, for
impairment in accordance with the provisions of SFAS No. 144. This review
indicated that the carrying value of our property and equipment exceeded
estimated future undiscounted cash flows and estimated fair value, indicating
that the property and equipment balances were impaired. The fair value of
property and equipment balances as of December 31, 2003 was determined to be
approximately $112 million, using several valuation techniques, including
discounted cash flows, asset appraisals obtained in the fourth quarter of 2003
and current market capitalization. In order to reduce property and equipment
balances to the estimated fair value of $112 million, we recorded an impairment
charge as of December 31, 2003, of approximately $89 million. The estimated
fair value of property and equipment was generally allocated to the individual
assets using the asset appraisals. The book value of the impaired assets at
December 31, 2003, became the new cost basis of these assets. Subsequent
depreciation of the new cost basis is being calculated based on the remaining
estimated useful life of the assets. Due to the reduced cost basis of property
and equipment, depreciation expense decreased 66% from $20.2 million in the six
months ended June 30, 2003 to $6.8 million in six months ended June 30, 2004. Impairment of long-lived assets The estimated fair value of property and equipment balances as of June
30, 2004 was determined to be approximately $85.0 million. The fair value
of the ICG headquarters building was determined using a third party
appraisal. The capital lease obligation related to the building was
approximately $52.0 million as of June 30, 2004. The implied fair value of the network assets was determined using an
enterprise value model, based on the agreement to purchase our
outstanding common stock through the Merger described
above adjusted for estimated changes in our financial
condition between June 30, 2004 and September 30, 2004, the
assumed date of shareholder approval of the Merger Agreement and the
Management Agreement, when the economic risks and benefits of
ownership will pass to the
buyer. In estimating the fair value of the assets, liabilities and
equity on September 30, 2004, we considered several factors, including:
(i) the consideration of $6.35 million to be paid to the stockholders;
(ii) the estimated cash flow for the three months ending September 30,
2004; (iii) the estimated fair value of deferred revenue as of
September 30, 2004; and (iv) the estimated value, as of
September 30, 2004, of remaining obligations under current
operating leases for network facilities that will not provide economic
value. Estimating future values and fair values requires significant judgment and actual
results may differ from these estimates under different assumptions or
conditions. In order to reduce property and equipment balances to their estimated fair
value, we recorded a non-cash impairment charge in the three months ended June
30, 2004, of approximately $22.9 million. The fair value of property and
equipment was generally allocated to the individual assets on a pro rata basis
using the asset appraisals. The book value of the impaired assets at June 30,
2004, became the new cost basis of these assets. Subsequent depreciation of the
new cost basis will be calculated based on the remaining estimated useful life
of the assets. Interest expense Interest expense of $12.8 million incurred in the six months ended June 30,
2003 related primarily to our secured debt, our senior subordinated term loan,
other debt and capital leases. In October 2003 we paid off the $81.2 million
aggregate balance of the secured debt and the senior subordinated term loan.
Interest expense of $5.4 million incurred in the six months ended June 30, 2004
related primarily to our remaining other debt and capital leases. 33




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Other income, net Other income, net was $1.7 million and $33.5 million for the six months ended
June 30, 2003 and 2004, respectively. The increase in other income, net was
due primarily to a $32.5 million gain we recorded on the Level 3 transaction.
The $32.5 million gain was comprised of $35.0 million of expected cash proceeds
less incremental direct costs of $2.5 million to complete the sale. Historical Cash Activities Net Cash Provided (Used) By Operating Activities Operating activities used $23.1 million of cash in the six months ended June 30, 2004. Operating activities before reorganization items used $22.9 million
of cash in the six months ended June 30, 2004. Operating activities before
reorganization items consisted of a net loss of $20.0 million, the gain on sale
from Level 3 agreement of $32.5 million and the gain on settlement of property
tax claims of $3.1 million. These were offset by the $22.9 million charge for
impairment of long-lived assets, $6.8 million of depreciation and amortization,
other non-cash charges of $0.7 million and net cash provided by working capital
of $2.3 million. Reorganization items, consisting of the change in
post-petition restructuring accruals, used $0.2 million of cash. Operating
activities provided $2.8 million of cash in the six months ended
June 30, 2003. Operating activities before reorganization items provided $14.2 million of cash in the six months ended June 30, 2003. Operating activities
before reorganization items consisted of depreciation and amortization of $20.1
million and other net non-cash charges of $3.3 million, offset by the net loss
of $0.2 million and net cash used by working capital of $9.0 million.
Reorganization items, consisting of the change in post-petition restructuring
accruals, used $11.4 million of cash. Net Cash Provided (Used) By Investing Activities Investing activities provided $22.5 million of cash in the six months ended
June 30, 2004, primarily due to proceeds from Level 3 agreement of $25.0
million, proceeds from disposition of property, equipment and other assets of
$1.9 million and a decrease in restricted cash of $1.9 million. These sources
of cash were offset by $6.2 million in capital expenditures. Investing activities used $22.6 million of cash in the six months ended June
30, 2003, which was comprised primarily of capital expenditures for network
infrastructure upgrades, enhancements to back office systems and labor costs
associated with the installation of new services. Net Cash Used By Financing Activities Financing activities used $6.2 million and $6.7 million of cash in the six
months ended June 30, 2003 and 2004, respectively, which amounts were comprised
primarily of principal payments on long-term debt and capital lease
obligations. Supplemental Disclosure of Non-cash Investing and Financing Activities Our property and equipment and asset retirement obligations each increased by
$2.5 million in the six months ended June 30, 2003, as a result of our adoption
of the provisions of SFAS 143, Accounting for Asset Retirement Obligations,
on January 1, 2003. In addition, we renegotiated the contractual terms of a
capital lease effective January 1, 2003, which resulted in a $14.6 million
decrease in property and equipment and a corresponding decrease in capital
lease obligations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our obligations are not subject to market risk arising from changes in interest
rates. We do not, in the normal course of business, use derivative financial
instruments for trading or speculative purposes. 34




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ITEM 4. CONTROLS AND PROCEDURES  (a)
    
    Disclosure Controls and Procedures. The Companys management, with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report. Based
on such evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act.(b)
    
    Internal Control Over Financial Reporting. There have not been any
changes in the Companys internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 35




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PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On November 14, 2000, ICG and most of its subsidiaries filed voluntary
petitions for protection under the Bankruptcy Code in the Delaware Bankruptcy
Court (Joint Case Number 00-4238 (PJW)). The bankruptcy petition was filed in
order to preserve cash and give us the opportunity to restructure our debt. Our
plan of reorganization was confirmed and became effective on October 10, 2002.
The Bankruptcy Court continues to retain exclusive jurisdiction over all
matters arising out of and related to our bankruptcy case, including, but not
limited to, the resolution and disposition of pre-petition and administrative
claims. We expect that these claims will be resolved in 2004, and that the
Bankruptcy Court will enter a final decree shortly thereafter closing the
Chapter 11 case. We are 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 impact on our financial condition or
results of operations. We are not involved in any administrative or judicial
proceedings relative to an environmental matter. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. 
 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 June 30, 2004. 
 ITEM 5. OTHER INFORMATION. As discussed in more detail under Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
resources, and incorporated herein by reference, on July 19, 2004, we entered
into the Merger Agreement 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS  2.11
    
    Support Agreement10.20
    
    Asset Purchase Agreement by and among Level 3 Communications, LLC,
ICG Telecom Group, Inc., and ICG Communications, Inc., dated as of
April 1, 2004 [Incorporated by reference to Exhibit 10.20 to the
Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.]10.21
    
    Transition Services Agreement by and among Level 3 Communications,
LLC and ICG Telecom Group, Inc., dated as of April 1, 2004
[Incorporated by reference to Exhibit 10.21 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31,
2003.] 36




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10.22
    
    Non-Disclosure, Non-Competition, and Non-Solicitation Agreement by
and between Level 3 Communications, LLC, ICG Communications, Inc.
and ICG Telecom Group, Inc., dated as of April 1, 2004 [Incorporated
by reference to Exhibit 10.22 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.]10.23
    
    Key Employee Retention Plan31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer32.1
    
    Section 1350 Certifications (B) REPORTS ON FORM 8-K The registrant did not file any reports on Form 8-K during
the quarter ended June 30, 2004. 37




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. ICG COMMUNICATIONS, INC.Date: August 16, 2004
    /s/ Richard E. Fish, Jr.Richard E. Fish, Jr.Executive Vice President and Chief Financial Officer

(Principal Financial Officer) Date: August 16, 2004
    /s/ John V. ColganJohn V. ColganSenior Vice President and Controller

(Principal Accounting Officer) 38




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EXHIBIT INDEX 2.11
    
    Support Agreement10.20
    
    Asset Purchase Agreement by and among Level 3 Communications, LLC,
ICG Telecom Group, Inc., and ICG Communications, Inc., dated as of
April 1, 2004 [Incorporated by reference to Exhibit 10.20 to the
Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.]10.21
    
    Transition Services Agreement by and among Level 3 Communications,
LLC and ICG Telecom Group, Inc., dated as of April 1, 2004
[Incorporated by reference to Exhibit 10.21 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31,
2003.]10.22
    
    Non-Disclosure, Non-Competition, and Non-Solicitation Agreement by
and between Level 3 Communications, LLC, ICG Communications, Inc.
and ICG Telecom Group, Inc., dated as of April 1, 2004 [Incorporated
by reference to Exhibit 10.22 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.]10.23
    
    Key Employee Retention Plan31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer32.1
    
    Section 1350 Certifications