UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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.
(Commission file Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission file Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)
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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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161 Inverness Drive West Not applicable
Englewood, Colorado 80112
161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
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Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Not applicable
Not applicable
Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Stock, $.01 par value Nasdaq National Market
(46,770,440 shares outstanding on
March 29, 1999)
Not applicable Not applicable
Not applicable Not applicable
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Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 29, 1999 the aggregate market value of ICG Communications, Inc.
Common Stock held by non-affiliates (using the closing price of $18.63 on March
29, 1999) was approximately $871,333,297.
ICG Canadian Acquisition, Inc., a wholly owned subsidiary of ICG
Communications, Inc., owns all of the issued and outstanding common shares of
ICG Holdings (Canada) Co.
ICG Holdings (Canada) Co. owns all of the issued and outstanding shares of
common stock of ICG Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
of ICG Communications, Inc. to be filed with the Securities and Exchange
Commission not later than April 30, 1999 has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 of ICG Communications,
Inc.
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TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recent Developments. . . . . . . . . . . . . . . . . . . . . 6
Telecom Services . . . . . . . . . . . . . . . . . . . . . . 10
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 10
Networks . . . . . . . . . . . . . . . . . . . . . . . . . 11
Services . . . . . . . . . . . . . . . . . . . . . . . . . 12
Industry . . . . . . . . . . . . . . . . . . . . . . . . . 14
Network Services . . . . . . . . . . . . . . . . . . . . . . 14
Satellite Services . . . . . . . . . . . . . . . . . . . . . 15
Customers And Marketing . . . . . . . . . . . . . . . . . . 16
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 17
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 18
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 23
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . . . . 57
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . . . . . 58
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 59
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K. 60
Financial Statements . . . . . . . . . . . . . . . . . . . . 60
Report on Form 8-K . . . . . . . . . . . . . . . . . . . . . 66
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Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Financial Statement Schedule . . . . . . . . . . . . . . . . 66
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . S-1
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PART I
Unless the context otherwise requires, the term "Company" or "ICG" means
the combined business operations of ICG Communications, Inc. ("ICG") and its
subsidiaries, including ICG Holdings (Canada) Co. ("Holdings-Canada") and ICG
Holdings, Inc. ("Holdings"); the terms "fiscal" and "fiscal year" refer to ICG's
fiscal years ending December 31 for 1997 and 1998 and September 30 for years
prior to 1997. The Company changed its fiscal year end to December 31 from
September 30, effective January 1, 1997. All dollar amounts are in U.S. dollars.
ITEM 1. BUSINESS
Overview
The Company is one of the nation's leading competitive integrated
communications providers ("ICPs"), based on estimates of the industry's 1998
revenue. ICPs seek to provide an alternative to incumbent local exchange
carriers ("ILECs"), long distance carriers and other communications service
providers for a full range of communications services in the increasingly
deregulated telecommunications industry. Through its competitive local exchange
carrier ("CLEC") operations, the Company operates fiber networks in regional
clusters covering major metropolitan statistical areas in California, Colorado,
Ohio, the Southeast and Texas. The Company also provides a wide range of network
systems integration services and maritime and international satellite
transmission services. Additionally, the Company began providing wholesale
network services over its nationwide data network in February 1999. As a leading
participant in the rapidly growing competitive local telecommunications
industry, the Company has experienced significant growth, with total revenue
increasing from approximately $154.1 million for fiscal 1996 to approximately
$397.6 million for fiscal 1998. The Company's rapid growth is the result of the
initial installation, acquisition and subsequent expansion of its fiber optic
networks and the expansion of its communications service offerings.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act")
and pro-competitive state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Under the
Telecommunications Act, the Company is permitted to offer all interstate and
intrastate telephone services, including competitive local dial tone. In early
1997, the Company began marketing and selling local dial tone services in major
metropolitan areas in California, Colorado, Ohio and the Southeast and, in
December 1998, began offering services in Texas through an acquired business.
During fiscal 1997 and 1998, the Company sold 178,470 and 206,458 local access
lines, respectively, net of cancellations, of which 354,482 were in service at
December 31, 1998. The Company had 29 operating high capacity digital voice
switches and 16 data communications switches at December 31, 1998, and plans to
install additional switches as demand warrants. As a complement to its local
exchange services offered to business end users, the Company markets bundled
service offerings provided over its regional fiber network which include long
distance, enhanced telecommunications services and data services. Additionally,
the Company owns and operates a nationwide data network, with 236 points of
presence ("POPs") over which the Company recently began providing wholesale
Internet access and enhanced network services to MindSpring Enterprises, Inc.
("MindSpring") and intends to offer similar services to other Internet service
providers ("ISPs") and telecommunications providers in the future.
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In developing its telecommunications service offerings, the Company
continues to invest significant resources to expand its network. This expansion
is being undertaken through a combination of constructing owned facilities,
entering into long-term agreements with other telecommunications carriers and
through mergers and acquisitions. See "-Recent Developments."
Recent Developments
Sale of Operations of NETCOM On-Line Communication Services, Inc. On
January 21, 1998, the Company acquired NETCOM On-Line Communication Services,
Inc., a Delaware corporation and provider of Internet connectivity and Web site
hosting services and other value-added services located in San Jose, California
("NETCOM") in a transaction accounted for as a pooling of interests for
approximately 10.2 million shares of common stock of ICG ("ICG Common Stock"),
valued at approximately $284.9 million on the date of the merger. On February
17, 1999, the Company sold certain of the operating assets and liabilities of
NETCOM to MindSpring, an ISP located in Atlanta, Georgia. Total proceeds from
the sale were $245.0 million, consisting of $215.0 million in cash and 376,116
shares of unregistered common stock of MindSpring, valued at approximately
$79.76 per share at the time of the transaction. Assets and liabilities sold to
MindSpring include those directly related to the domestic operations of NETCOM's
Internet dial-up, dedicated access and Web site hosting services. On March 16,
1999, the Company sold all of the capital stock of NETCOM's international
operations for total proceeds of approximately $41.1 million. MetroNET
Communications Corp. ("MetroNET"), a Canadian entity, and Providence Equity
Partners ("Providence"), located in Providence, Rhode Island, together purchased
the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9
million in cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Access Services Limited, NETCOM's operations in the United
Kingdom, for approximately $12.2 million in cash. The Company expects to record
a combined gain on the NETCOM transactions of approximately $200 million, net of
income taxes of approximately $6.5 million, during the three months ended March
31, 1999.
In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 POPs serving
approximately 700 cities nationwide. PST intends to utilize the retained network
operating assets to provide wholesale Internet access and enhanced network
services to MindSpring and other ISPs and telecommunications providers. On
February 17, 1999, the Company entered into an agreement to lease to MindSpring
for a one-year period the capacity of certain network operating assets for a
minimum of $27.0 million, although subject to increase dependent upon network
usage. MindSpring will utilize the capacity to provide Internet access to the
dial-up services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.
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Effective November 3, 1998, the Company's board of directors adopted the
formal plan to dispose of the operations of NETCOM and accordingly, the
Company's consolidated financial statements reflect the operations of NETCOM as
discontinued for all periods presented. For fiscal 1996, 1997 and 1998, NETCOM
reported revenue of $120.5 million, $160.7 million and $164.6 million,
respectively, and EBITDA (before nonrecurring charges) of $(31.0) million,
$(9.4) million and $(14.7) million, respectively.
Announcement of New Service Offerings. In August 1998, the Company began
offering enhanced telephony services via Internet protocol ("IP") technology.
The Company currently offers these services in 230 major cities in the United
States, covering more than 90% of the commercial long distance market. The
Company carries the IP traffic over its nationwide data network and terminates a
large portion of the traffic via its own POPs, thereby eliminating terminating
charges from the use of other carriers' network facilities. Calls that cannot be
terminated over the Company's own facilities are billed at higher per minute
rates to compensate for the charges associated with using other carriers'
facilities. The Company currently does not generate any significant revenue from
this service.
In December 1998, the Company announced its plans to offer three new
network services, to be available beginning in early 1999:
Modemless remote access service ("RAS") allows the Company to provide modem
access at its own switch location, rather than requiring ISPs to deploy modems
physically at each of their POPs. This service will enable the Company to act as
an aggregator for ISP traffic while limiting the ISP's capital deployment.
Through its strategic relationship with Lucent Technologies, Inc. ("Lucent"),
the Company is currently retrofitting all of its Lucent-5ESS switches with the
new Lucent product that allows for RAS functionality. This service eliminates
the need for ISPs to separately purchase modems and shifts the network
management responsibilities to the Company. The Company plans to be the first to
market RAS using Lucent's modem technology and expects the service will be
available to customers in the second quarter of 1999.
Through the same technology that allows it to provide RAS, the Company
plans to offer interLATA (local access and transport area) expanded originating
service ("EOS"), enabling regional or local ISPs to expand their geographical
footprint outside their current physical locations by carrying the ISP's
out-of-region traffic on the Company's own nationwide data network. The Company
will initially offer this service within its CLEC regional clusters during the
first quarter of 1999, and plans to expand EOS offerings to other areas as
demand warrants.
Through digital subscriber line ("DSL") technology, the Company plans to
provide high-speed data transmission services primarily to business end users
and, on a wholesale basis, to ISPs. DSL technology utilizes the existing ILEC
twisted copper pair connection to the customer, giving the customer
significantly greater bandwidth, and consequently speed, when connecting to the
Internet. The Company expects to offer DSL in over 400 central offices by the
end of 1999 through alliances with other companies focusing on DSL service. For
example, on February 18, 1999, the Company entered into a letter of intent with
NorthPoint Communications, Inc., a privately held data CLEC based in San
Francisco, California ("NorthPoint"). If this agreement is finalized, NorthPoint
will be designated as the Company's preferred DSL provider for a two-year period
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and the Company will purchase up to 75,000 DSL lines from NorthPoint over the
two-year term. This alliance will enable the Company to accelerate the expansion
of its DSL service offerings and allow NorthPoint to gain access to the
Company's collocation facilities in markets where NorthPoint currently has
limited or no operations. If the agreement is finalized, NorthPoint will
provision and manage all of the Company's DSL services offered under this
agreement. The Company expects to begin offering DSL services under this
agreement in the second quarter of 1999.
Acquisition of CSW/ICG ChoiceCom, L.P. In January 1997, the Company
announced a strategic alliance with Central and South West Corporation ("CSW")
formed for the purpose of developing and marketing telecommunications services
in certain cities in Texas. Based in Austin, Texas, the venture entity was a
limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"). On December 31,
1998, the Company purchased 100% of the partnership interests in ChoiceCom from
CSW for approximately $55.7 million in cash and the assumption of certain
liabilities of approximately $7.3 million. In addition, the Company converted
approximately $31.6 million of receivables from prior advances made to ChoiceCom
by the Company to its investment in ChoiceCom. The acquired company currently
provides local exchange and long distance services in Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom
reported revenue of $0.3 million and $5.8 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(5.5) million and $(13.6) million,
respectively.
Acquisition of DataChoice Network Services, L.L.C. On July 27, 1998, the
Company acquired DataChoice Network Services, L.L.C., a Colorado limited
liability company providing point-to-point data transmission resale services
through its long-term agreements with multiple regional carriers and nationwide
providers ("DataChoice"). The Company paid total consideration of approximately
$5.9 million, consisting of 145,997 shares of ICG Common Stock and approximately
$1.1 million in cash. The historical results of operations of DataChoice are not
significant to the Company's consolidated results of operations.
Acquisition of NikoNET, Inc. The Company completed a series of transactions
on July 30, 1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, "NikoNET"). The Company paid
total consideration of approximately $13.8 million in cash, which included
dividends payable by NikoNET to its former owners and amounts to satisfy
NikoNET's former line of credit, assumed approximately $0.7 million in
liabilities and issued 356,318 shares of ICG Common Stock with a fair market
value of approximately $10.7 million on the date of the acquisition, for all the
capital stock of NikoNET. Located in Atlanta, Georgia, NikoNET provides
broadcast facsimile services and enhanced messaging services to financial
institutions, corporate investor and public relations departments and other
customers. The Company believes the acquisition of NikoNET enables the Company
to offer expanded services to its existing customers. The historical results of
operations of NikoNET are not significant to the Company's consolidated results
of operations.
Discontinuance of Operations of Zycom. Due primarily to the loss of a major
customer, which generated a significant obligation under a volume discount
agreement with its call transport provider, the board of directors of Zycom
Corporation, a 70%-owned subsidiary of the Company which operated an 800/888/900
number services bureau and switch platform ("Zycom"), approved a plan on August
25, 1998 to wind down and ultimately discontinue Zycom's operations. On October
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22, 1998, Zycom completed the transfer of all customer traffic to other
providers and on January 4, 1999, the Company completed the sale of the
remainder of Zycom's operating assets to an unrelated third party. For fiscal
1996, 1997 and 1998, Zycom reported revenue of $14.9 million, $28.3 million and
$17.0 million, respectively, and EBITDA (before nonrecurring charges) of $0.6
million, $(2.7) million and $(3.3) million, respectively. The Company's
consolidated financial statements reflect the operations of Zycom as
discontinued for all periods presented.
Sale of Satellite Services Operating Subsidiaries. On August 12 and
November 18, 1998, the Company completed the sales of the capital stock of
MarineSat Communications, Inc. ("MCN") and Nova-Net Communications, Inc.
("Nova-Net"), respectively, two wholly owned subsidiaries within the Company's
Satellite Services operations. MCN is a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels and land-based
mobile units. Nova-Net provides private data networks utilizing very small
aperture terminals ("VSATs") and specializes in data collection and in
monitoring and control of customer production and transmission facilities in
various industries, including oil and gas, electric and water utilities and
environmental monitoring industries. The Company recorded a gain on the sale of
MCN of approximately $0.9 million and a loss on the sale of Nova-Net of
approximately $0.2 million in its consolidated statement of operations during
fiscal 1998. The Company believes that the dispositions of MCN and Nova-Net will
further management's ability to focus on the development and deployment of its
core Telecom Services. The combined historical results of operations of MCN and
Nova-Net are not significant to the Company's consolidated results of
operations. The Company's remaining Satellite Services operations consists
principally of the operations of Maritime Telecommunications Network, Inc.
("MTN"). See "-Satellite Services."
Financings. On February 12, 1998, ICG Services, Inc., a Delaware
corporation and newly formed wholly owned subsidiary of the Company ("ICG
Services"), completed a private placement of 10% Senior Discount Notes due 2008
(the "10% Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting and other offering costs of
approximately $9.7 million, were approximately $290.9 million. The 10% Notes are
unsecured senior obligations of ICG Services that mature on February 15, 2008,
at a maturity value of $490.0 million. Interest will accrue at 10% per annum,
beginning February 15, 2003, and is payable in cash each February 15 and August
15, commencing August 15, 2003. The 10% Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act").
On April 27, 1998, ICG Services completed a private placement of 9 7/8%
Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross proceeds of
approximately $250.0 million. Net proceeds from the offering, after underwriting
and other offering costs of approximately $7.9 million, were approximately
$242.1 million. The 9 7/8% Notes are unsecured senior obligations of ICG
Services that mature on May 1, 2008, at a maturity value of $405.3 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes
have been registered under the Securities Act.
ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment,
Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG
Equipment"), for the principal purpose of purchasing telecommunications
equipment, software, network capacity and related services for sale or lease to
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other operating subsidiaries of ICG ("Holdings' Subsidiaries"). By purchasing
assets through ICG Equipment, the Company defers sales tax on asset purchases
over the term of the operating leases between ICG Equipment and Holdings'
Subsidiaries, which sales tax would otherwise be paid in full at the time of the
purchase. The equipment and services provided to Holdings' Subsidiaries are
utilized to upgrade and expand the Company's network infrastructure. All such
arrangements are intended to be conducted on the basis of fair market value and
on comparable terms that Holdings' Subsidiaries would be able to obtain from a
third party. As of December 31, 1998, approximately $195.0 million of
telecommunications equipment, software, network capacity and related services
were under lease to Holdings' Subsidiaries by ICG Equipment.
Telecom Services
The Company operates local exchange networks in the following markets
within its regional clusters: California (Sacramento, San Diego and portions of
the Los Angeles and San Francisco metropolitan areas); Colorado (Denver,
Colorado Springs and Boulder); Ohio (Akron, Cincinnati, Cleveland, Columbus, and
Dayton); the Southeast (Atlanta, Georgia; Birmingham, Alabama; Charlotte, North
Carolina; Louisville, Kentucky; and Nashville, Tennessee); and Texas (Austin,
Corpus Christi, Dallas, Houston and San Antonio). The Company will continue to
expand its network through construction, leased facilities and strategic
alliances and, potentially, through acquisitions. The Company's operating
regional fiber networks have grown from 2,143 fiber route miles at the end of
fiscal 1996 to 4,255 fiber route miles as of December 31, 1998. Telecom Services
revenue has increased from approximately $72.8 million for fiscal 1996 to
approximately $303.3 million for fiscal 1998. Since February 1999, the Company
also operates a nationwide data network with 236 POPs over which the Company
provides wholesale Internet access services to MindSpring and intends to provide
such services and enhanced network services to other ISPs and telecommunications
providers in the future.
Strategy
The Company's objective is to be a premier provider of high quality
communications services to its targeted business, ISP and carrier customers. The
key elements of this strategy are:
Increase Revenue and Margins through Bundled Services to Business End
Users. The Company believes that its commercial customers are increasingly
demanding a broad, full service approach to providing telecommunications
services. By offering integrated technology-based communications solutions,
management believes the Company will be better able to capture business from
telecommunications-intensive commercial accounts. To this end, the Company is
complementing its competitive local service offerings with long distance and
data service offerings, including its recently offered IP telephony services,
and marketing these combined products through ICG's direct sales force and sales
agents. Management believes a targeted business end user strategy can better
leverage ICG's network footprint and telecommunications investment.
Increase Revenue and Margins through New Wholesale Network Products Offered
to ISPs and Telecommunications Providers. The Company believes the Internet
business is one of the fastest growing segments of the telecommunications
service sector, thereby providing enormous growth opportunities for network
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service providers supporting the growing base of ISPs. The Company plans to take
advantage of these opportunities through the offering of wholesale Internet
access and other enhanced network services to ISPs and other telecommunications
providers, and expanding its current primary rate interface ("PRI") offerings
with RAS, EOS and DSL. See "-Recent Developments." Management believes these new
products will leverage the Company's relationships with ISPs and will position
the Company to lead in the provisioning of new services to this emerging
customer base.
Concentrate Networks in Regional Clusters. The Company believes that by
focusing on regional clusters it will be able to more effectively service its
customers' needs and efficiently market, operate and control its networks and
expanded service offerings. As a result, the Company has concentrated its fiber
networks in regional clusters serving major metropolitan areas in California,
Colorado, Ohio, the Southeast and Texas.
Networks
The Company's networks generally comprise fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. The Company typically designs a ring architecture with a view toward
making the network accessible to the largest concentration of
telecommunications-intensive businesses in a given market.
The Company's networks are generally configured in redundant synchronous
optical network ("SONET") rings that offer the advantage of uninterrupted
service in the event of a fiber cut or equipment failure, resulting in limited
outages and increased network reliability. The Company generally markets its
services at prices below those charged by the ILEC. Management believes these
factors combine to create a more reliable and cost effective alternative to ILEC
networks and services.
The Company's networks are constructed to access long distance carriers as
well as areas of significant end user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network infrastructure.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation from such
network. Based upon its experience of using ILEC facilities to provide initial
customer service and the Company's agreements to use utilities' existing fiber,
the Company has experienced revenue generation within nine months after
commencing network design. After installing the initial network backbone,
extensions to additional buildings and expansions to other regions of a
metropolitan area are evaluated, based on detailed assessments of market
potential. The Company is currently expanding all of its existing networks to
reduce its reliance on the ILECs and evaluating development of new networks both
inside and outside its existing regional clusters.
Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end user-specified termination sites. The switch
is required in order for the Company to provide the full range of local
telephone services. By contrast, the special access services provided by the
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Company and other CLECs involve a fixed communications link or "pipe," usually
between an end user and a specific long distance carrier's POP. With a switch
and interconnection to various carriers' networks, it is possible for the
Company to direct a long distance carrier's traffic to any end user regardless
of whether the end user is physically connected to the Company's owned or leased
network. The Company is marketing and selling competitive local dial tone
services in California, Colorado, Ohio, the Southeast and Texas. See
"-Regulation - State Regulation."
The Company's network monitoring center in Denver, Colorado monitors and
manages the Company's regional fiber networks and provides high-level monitoring
of the Company's local exchange switches. Centralized electronic monitoring and
control of the Company's networks allows the Company to avoid duplication of
this function in each city, thereby reducing costs.
The Company owns and operates a nationwide data network consisting of 236
POPs and 13 hubs containing frame relay switches and high-performance routers
connecting a backbone of leased Asynchronous Transfer Mode ("ATM") switches and
leased high-speed dedicated data lines in the United States. The design and
architecture of the physical network permits the Company to offer highly
flexible, reliable high-speed services to its customers. The data network
infrastructure is monitored by a network operations center in San Jose,
California.
Services
The Company's competitive local exchange services include local dial tone,
long distance, enhanced telephony, data, special access and interstate and
intrastate switched access services. Competitive local dial tone services
consist of basic local exchange lines and trunks for business, related line
features (such as voice mail, Direct Inward Dialing (DID), hunting and custom
calling features), local calling, and intraLATA, also called local toll,
calling. The Company believes that having a full complement of communications
services, including local, long distance and data services, will strengthen its
overall market position and help the Company to better penetrate the local
exchange marketplace. The Company has also developed long distance services,
including calling and debit cards, to complement its local exchange services
family of products. The Company offers a bundled service of local, long distance
and data services, delivered over a T-1 connection in several markets and
intends to expand this bundled service offering to its remaining markets in the
future.
The Company offers long distance services to end user customers. Although
the Company carries some of its long distance traffic on its own switches, it
relies upon obtaining long distance transmission capacity from other carriers to
provide its services. Therefore, the Company has entered into transmission
agreements, which typically provide for transmission on a per minute basis, with
long distance carriers to fulfill such needs. To reduce its cost of services,
the Company leases point-to-point circuits on a monthly or longer term fixed
cost basis where it anticipates high traffic volume.
The Company also offers enhanced telephony services via IP technology in
230 major cities in the United States, covering more than 90% of the commercial
long distance market. The Company carries the IP traffic over its nationwide
data network and terminates a large portion of the traffic via its own POPs,
thereby eliminating terminating charges from the use of other carriers' network
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facilities. Calls that cannot be terminated over the Company's own facilities
are billed at higher per minute rates to compensate for the charges associated
with using other carriers' facilities.
Private line services are generally used to connect the separate locations
of a single business outside of the local calling area or LATA. Special access
services are generally used to connect end user customers to a long distance
telephone carrier's facilities, to connect long distance carrier's facilities to
the local telephone company's central offices, and to connect different
facilities of the same long distance carrier or facilities of different long
distance carriers all within the same LATA. As part of its initial "carrier's
carrier" strategy, the Company targeted the transport between long distance
company facilities and the local telephone company central offices, and, for
high volume customers, between the long distance company and the end user
customer's office. In order to leverage its significant network investment, the
Company also markets these services directly to end user business customers.
The Company's interstate and intrastate switched access services include
the transport and switching of calls between the long distance carrier's
facilities and either the local telephone company's central offices or end
users. By performing the switching services, the Company can reduce the long
distance carriers' local access costs, which constitute their major operating
expense. Until recently, the Company experienced negative operating margins from
the provision of wholesale switched services because it relies on ILEC networks
to terminate and originate customers' switched traffic. The Company has raised
prices on its wholesale switched services product in order to improve margins
and has de-emphasized its wholesale switched services to focus on its higher
margin products.
The Company's Signaling System 7 ("SS7") services provide signaling
connections between long distance and local exchange carriers, and between long
distance carriers' networks. SS7, sometimes referred to as "look-ahead routing,"
is used by local exchange companies, long distance carriers, wireless carriers
and others to signal between network elements, creating faster call set-up and
resulting in more efficient use of network resources. SS7 is now the standard
method for telecommunications signaling worldwide. The Company has deployed
signal transfer points ("STPs") throughout its networks to efficiently route SS7
data across the United States. SS7 is also the enabling technology for advanced
intelligence network platforms, a set of services and signaling options that
carriers can use to create new services or customer options. Carriers purchase
connections into the Company's SS7 network, and also purchase connections to
other local and long distance carriers on a monthly recurring basis. The Company
has also developed a nationwide SS7 service with Southern New England
Telecommunications Corporation ("SNET"), a subsidiary of SBC Communications,
Inc. The Company believes that, together with SNET, it is one of the largest
independent suppliers of SS7 services. The Company's STPs are integrated with
two SNET "gateway" STPs in Connecticut.
Through NikoNET, the Company provides broadcast facsimile services and
enhanced messaging services to financial institutions, corporate investor and
public relations departments and other customers. NikoNET also provides
facsimile to e-mail and e-mail to facsimile translation services. This product
leverages the Company's network and creates high margin minutes of use.
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As part of its new strategy to maximize the value of its nationwide data
network by including high-growth ISPs in its customer base, the Company is
currently offering Internet access services and recently announced its plans to
offer other new wholesale network services, including RAS, EOS and DSL, to ISPs,
to be available beginning in early 1999. See "-Recent Developments."
Industry
The Company operates in the local telephone services market as an ICP. The
Company is competing in the local, long distance, enhanced telephony and data
communications markets, to provide "full service" to its business, ISP and
carrier customers. The Company believes it can maximize revenue and profit
opportunities by leveraging its extensive network facilities in providing
multiple communications services to its customers.
Local telephone service competition was made possible by the
Telecommunications Act and by deregulatory actions at the state level. Prior to
passage of the Telecommunications Act, firms like the Company were generally
limited to providing private line and special access services. These firms,
including the Company, installed fiber optic cable connecting long distance
telephone carriers' POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government entities) with
long distance carrier POPs. The greater capacity and economies of scale inherent
in fiber optic cable enabled competitive access providers to offer customers
less expensive services at higher quality than the ILECs.
The Telecommunications Act, subsequent Federal Communications Commission
("FCC") decisions and many state legislative and regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. Due to these regulatory changes, CLECs are now legally able to
offer many communications services, including local dial tone and all interstate
and intrastate switched services, effectively opening up the local telephone
market to full competition. Because of these changes in state and federal
regulations, CLECs have expanded their services from providing competitive
access and private line services to providing all local exchange services to
become true competitors to the ILECs. See "-Regulation."
Network Services
Through the Company's wholly owned subsidiary, ICG Fiber Optic
Technologies, Inc. ("FOTI"), the Company supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users, including
Fortune 1000 firms and other large businesses and telecommunications companies.
Revenue from Network Services was approximately $53.9 million for fiscal 1998.
The Company provides network infrastructure, systems and support services,
including the design, engineering and installation of local and wide area
networks ("LANs/WANs") for its customers. These networks (within end user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
requirements. The Company also provides professional network support services.
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These services include move, add and change services and ongoing maintenance and
support services. Network Services revenue is expected to constitute a smaller
percentage of the Company's future revenue as Telecom Services revenue
increases.
The Company offers these network integration and support services through
offices located within five regions. The regional headquarters are located in
Dallas, Denver, Portland (Oregon), Los Angeles and San Francisco.
Satellite Services
The Company's Satellite Services operations consist of satellite voice,
data and video services provided to major cruise lines, the U.S. Navy, the
offshore oil and gas industry and other ICPs. The Company also owns a teleport
facility which provides international voice and data transmission services.
Revenue from Satellite Services was approximately $40.5 million for fiscal 1998.
MTN. MTN provides digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil and gas platforms
utilizing an experimental radio frequency license and a grant of Special
Temporary Authority ("STA") issued by the FCC. MTN provides private
communications networks to various cruise lines allowing for the transmission of
data communications and allowing passengers to make calls from their cabins to
anywhere in the world. MTN additionally provides its communications services to
seismic vessels, to commercial shipping vessels and to the U.S. Navy in
conjunction with a major long distance provider, which serves as the long
distance carrier, while MTN provides the shipboard communications equipment. The
Company believes that the radio spectrum employed under an experimental license
and a grant of STA, which uses C-band radio frequencies, enables it to provide a
higher quality maritime service than is available through the radio frequencies
currently allocated to other maritime service providers.
In April 1996, the FCC issued a waiver allowing MTN to apply for a
permanent FCC license to utilize C-band frequencies authorized under a
previously issued experimental license. MTN's application is pending.
Additionally, in January 1997, the FCC granted the STA, which enables MTN to
conduct operations, for up to an initial six-month period, which period can be
renewed for six-month terms, while the FCC's review of the permanent license
application is pending. The most recent extension of the STA was received by MTN
on January 29, 1999. MTN's FCC experimental license allows it to operate its
shipboard earth stations on a fixed and mobile basis throughout domestic waters
on a non-interference basis using C-band frequencies. MTN filed an application
for renewal of the experimental authorization on January 22, 1999. MTN may
continue to operate under the terms of its experimental authorization pending
action on the renewal application. There can be no assurance that the Company
will be granted permanent licenses, that the experimental license and STA
currently being used will continue to be renewed for future terms or that any
license granted by the FCC will not require substantial payments from the
Company. See "-Regulation."
Teleport. The teleport in Holmdel, New Jersey, acquired as part of the
Company's acquisition of MTN, is located 20 miles south of Newark and
specializes in international digital voice and data communications services with
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full fiber interconnect to the local telephone company facilities in New York
City. Teleport services are also provided to the maritime industry, including
support of the Company's cruise ship, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to
offer a broad range of local, long distance, enhanced telephony and data
services, to the Company's business and ISP customers at cost effective rates.
Wholesale customers typically re-market the Company's services to the retailer's
end user, under the retailer's brand name. The Company markets its services in
regional clusters, which it believes is the most effective and efficient way to
penetrate its markets.
The Company markets its Telecom Services products through direct sales to
end users and wholesale accounts, sales agents and direct mail, to a limited
extent. Telecom Services revenue from major long distance carriers and resellers
constituted approximately 83%, 76% and 34% of the Company's Telecom Services
revenue in fiscal 1996, 1997 and 1998, respectively. The balance of the
Company's Telecom Services revenue was derived from end users. The Company
anticipates revenue from business and ISP customers will increase in the future
as it continues to expand its bundled service offerings, increases its sales and
marketing teams and focuses more on these segments of the market. In support of
this strategy, the Company has substantially increased its direct sales and
marketing staff. Telecommunications service agreements with its customers
typically provide for terms of one to five years, fixed prices and early
termination penalties.
The Company has telecommunications sales offices in: Irvine, Los Angeles,
Oakland, Sacramento, San Diego, San Francisco and San Jose, California; Denver,
Colorado Springs and Boulder, Colorado; Akron, Columbus, Dayton, and
Independence, Ohio; Birmingham, Alabama; Atlanta, Georgia; Louisville, Kentucky;
Charlotte, North Carolina; and Nashville, Tennessee; and Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas. The Company's marketing staff is located
in Denver, Colorado.
The Company markets its network systems integration products and services
through a direct sales force located in the Rocky Mountains, Pacific Northwest,
Texas and California regions. The Company also has entered into resale
agreements with manufacturers of network integration products and services.
The Company offers satellite private line transmission services from its
teleport to business customers that can benefit from the Company's international
and domestic transmission capabilities. The Company also markets voice and data
communications to the maritime industry, including cruise ships, U.S. Navy
vessels, offshore oil and gas platforms and mobile land-based units.
The Company is currently utilizing its nationwide data network to provide
wholesale Internet access services to MindSpring for a one-year period. During
the term of this agreement, the Company plans to evaluate various strategies to
identify and market similar services and other enhanced network services to
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primarily local and regional ISPs and other telecommunications providers.
Competition
The Company operates in an increasingly competitive environment dominated
by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE
which are among the Company's current competitors. Also included among the
Company's current competitors are other ILECs, other CLECs, other ICPs, network
systems integration service providers, microwave and satellite service
providers, teleport operators and private networks built by large end users.
Potential competitors (using similar or different technologies) include cable
television companies, utilities, ISPs, ILECs outside their current local service
areas, and the local access operations of long distance carriers. Consolidation
of telecommunications companies, including mergers between certain of the RBOCs,
between long distance companies and cable television companies and between long
distance companies and CLECs, and the formation of strategic alliances within
the telecommunications industry, as well as the development of new technologies,
could give rise to increased competition. One of the primary purposes of the
Telecommunications Act is to promote competition, particularly in the local
telephone market. Since the enactment of the Telecommunications Act, several
telecommunications companies have indicated their intention to aggressively
expand their ability to address many segments of the telecommunications
industry, including segments in which the Company participates and expects to
participate. This may result in more participants than can ultimately be
successful in a given market.
Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed, technological innovation and availability. The Company
believes that its expertise in developing and operating highly reliable,
advanced digital networks which offer substantial transmission capacity at
competitive prices enables the Company to compete effectively against the ILECs,
other CLECs and others providing local and enhanced telephony services.
In every market in which the Company operates telecom service networks, the
ILECs (which are the historical monopoly providers of local telephone services)
are the primary competitors. The ILECs have long-standing relationships with
their customers and provide those customers with various transmission and
switching services. The ILECs also have the potential to subsidize access and
switched services with revenue from a variety of businesses and historically
have benefited from certain state and federal regulations that have favored the
ILECs over the Company. In certain markets where the Company operates, other
CLECs also operate or have announced plans to enter the market. Some of those
CLECs are affiliated with major long distance companies which have resources
available to sustain an initially capital-intensive business through the point
of profitability. Current competitors also include network systems integration
services providers, wireless telecommunications providers and private networks
built by large end users. Additional competition may emerge from cable
television operators and electric utilities. Many of the Company's actual and
potential competitors have greater financial, technical and marketing resources
than the Company.
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In addition, the long distance and data transmission businesses are
extremely competitive and prices have declined substantially in recent years and
are expected to continue to decline.
As a recent entrant into the wholesale network services sector, the Company
faces competition from existing providers of the Company's planned services,
primarily UUNet Technologies, Inc., PSINet, Inc. and, ultimately, Level 3
Communications, Inc. and Qwest Communications International, Inc. once their
networks have been sufficiently developed. Other competitors also include GTE,
AT&T, Sprint Corporation and the RBOCs that currently offer similar wholesale
network service products to ISPs. While strong competition currently exists in
this sector, the Company believes that the recent growth in the Internet
industry provides expanded opportunity and demand for new providers such as the
Company, and that early participants in this growing sector have increased
opportunity for establishing and, once experienced, growing market share. There
can be no assurance that sufficient demand will exist for the Company's
wholesale network services in its selected markets, that market prices will not
dramatically decline or the Company will be successful in executing its strategy
in time to meet new competitors, or at all.
Network Services. The bases of competition in the network services market
are primarily technological capability and experience, value-added services and
price. In this market, the Company competes with a variety of local and regional
system integrators.
Satellite Services. In the delivery of domestic and international satellite
services, the Company competes with other full service teleports in the
northeast region of the United States. The bases of competition are primarily
reliability, price and transmission quality. Most of the Company's satellite
competitors focus on the domestic video market. Competition is expected
principally from a number of domestic and foreign telecommunications carriers,
many of which have substantially greater financial and other resources than the
Company. In the maritime telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications services.
COMSAT has FCC licenses that are similar to MTN's and it is the sole point of
control in the United States for direct access to Intelsat satellites.
Regulation
The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opened the local and long distance markets to
additional competition and changed the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility to some extent for implementing and
enforcing the pro-competitive policies and the provisions for the
Telecommunications Act.
The Telecommunications Act generally requires ILECs to negotiate agreements
to provide interconnection and nondiscriminatory access to their networks on
more favorable terms than were previously available in the past. However, such
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new agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the federal courts.
Additionally, the Company is in the process of renegotiating and extending the
terms of certain of the interconnection agreements executed by the Company.
There can be no assurance that the Company will be able to negotiate and/or
arbitrate acceptable new interconnection agreements.
On August 8, 1996, in two separate decisions, the FCC adopted rules and
policies implementing the local competition provisions of the Telecommunications
Act. The FCC, among other things, adopted national guidelines with respect to
the unbundling of ILECs' network elements, resale of ILEC services, the pricing
of interconnection services and unbundled elements, and other local competition
issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit
Court, and in 1997, the Eighth Circuit Court issued a decision which upheld
certain of the FCC's rules but reversed many of the FCC's rules on other issues,
including the pricing rules.
On January 25, 1999, the United States Supreme Court (the "Supreme Court")
largely reversed the Eighth Circuit Court's decision and reestablished the
validity of many of the FCC's interconnection rules including the FCC's
jurisdiction to adopt pricing guidelines under the Telecommunications Act. The
Supreme Court also upheld the FCC's "pick and choose" rules, which allow CLECs
to adopt individual rates, terms and conditions from agreements that an ILEC has
with other carriers. The Supreme Court did not, however, evaluate the specific
pricing methodologies adopted by the FCC, and the appellate court will further
consider those methodologies. Additionally, the Supreme Court vacated the FCC
rules defining what network elements must be unbundled and made available to the
CLECs by the ILECs. The Supreme Court held that the FCC must provide a stronger
rationale to support the degree of unbundling ordered. As a result, the FCC
likely will soon hold a rulemaking proceeding to revise its rules on unbundled
network elements. Management views the Supreme Court decision as a favorable
development for the CLEC industry, although the ultimate outcome of the further
FCC and court proceedings resulting from the decision cannot be predicted.
On December 31, 1997, the United States District Court for the Northern
District of Texas (the "District Court"), in a case brought by SBC
Communications, Inc., issued a decision holding that Sections 271 through 275 of
the Telecommunications Act are unconstitutional. The decision addressed the
restrictions contained in Sections 271 through 275 of the Telecommunications Act
on the lines of businesses in which the RBOCs may engage, including establishing
the conditions that the RBOCs must satisfy before they may provide interLATA
long distance telecommunications services in their local telephone service
areas. On September 4, 1998, the Fifth Circuit Court of Appeals reversed the
District Court decision and ruled that Sections 271 through 275 are not
unconstitutional. A separate decision by the D.C. Circuit Court of Appeals
issued in December 1998 also ruled that Section 271 is not unconstitutional.
The Company believes that it is entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet traffic from ILEC
customers as local traffic pursuant to various interconnection agreements. The
ILECs have not paid most of the bills they have received from the Company and
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have disputed substantially all of these charges based on the argument that ISP
traffic is not local traffic as defined by the various interconnection
agreements and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility commissions
and/or by the FCC. See "-Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity - Transport and Termination
Charges."
Federal Regulation. The Company generally operates as a regulated carrier
with fewer regulatory obligations than the ILECs. The Company must comply with
the requirements of the Telecommunications Act, such as offering service on a
non-discriminatory basis at just and reasonable rates. The FCC treats the
Company as a non-dominant carrier. The FCC has established different levels of
regulation for dominant and non-dominant carriers. Of domestic common carriers,
only the ILECs are classified as dominant carriers for the provision of access
services, and all other providers of domestic common carrier services are
classified as non-dominant. Under the FCC's streamlined regulation of
non-dominant carriers, the Company must file tariffs with the FCC for domestic
and international long distance services on an ongoing basis. The Company's
provision of international long distance services requires prior authorization
by the FCC pursuant to Section 214 of the Telecommunications Act, which the
Company has obtained. The FCC recently eliminated the requirement that
non-dominant interstate access carriers must file tariffs. The Company is not
subject to price cap or rate of return regulation, nor is it currently required
to obtain FCC authorization for the installation or operation of its fiber optic
network facilities used for services in the United States. The Company may
install and operate non-radio facilities for the transmission of domestic
interstate communications without prior FCC authorization. The Company's use of
digital microwave radio frequencies and satellite earth stations in connection
with certain of its telecommunications services is subject to FCC radio
frequency licensing regulation. See "-Federal Regulation of Microwave and
Satellite Radio Frequencies."
State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide local and other intrastate services. Under the Telecommunications Act,
state commissions continue to set the requirements for providers of local and
intrastate services, including quality of services criteria. State regulators
also can regulate the rates charged by CLECs for intrastate and local services
and can set prices for interconnection by CLECs with the ILEC networks. The
Company's provision of local dial tone and intrastate switched and dedicated
services are classified as intrastate and therefore subject to state regulation.
The Company expects that it will offer more intrastate services as its business
and product lines expand. To provide intrastate service (particularly local dial
tone service), the Company generally must obtain a Certificate of Public
Convenience and Necessity ("CPCN") from the state regulatory agency prior to
offering service. In most states, the Company also is required to file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate, and to update or amend its tariffs as rates change or new
products are added. The Company may also be subject to various reporting and
record-keeping requirements.
The Company currently holds CPCNs (or their equivalents) to provide
competitive local services in the following states: Alabama, California,
Colorado, Delaware, Florida, Georgia, Hawaii, Indiana, Kansas, Kentucky,
Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West
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Virginia, and Wisconsin. Additionally, the Company holds CPCNs (or their
equivalents) to provide intrastate long distance services in the following
states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
West Virginia, Wisconsin and Wyoming.
Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, often based on a percentage of
gross revenue, in order to provide telecommunications services, although in
certain states including California and Colorado, current state law prescribes
the amount of such fees. Certain municipalities in Colorado, however, are
continuing to charge franchise fees pending enforcement by the Colorado courts.
There is no assurance that certain cities that do not impose fees will not seek
to impose fees, nor is there any assurance that, following the expiration of
existing franchises, fees will remain at their current levels. In many markets,
the ILECs have been excused from paying such franchise fees or pay fees that are
materially lower than those required to be paid by the Company for access to
public rights of way. However, under the Telecommunications Act, while
municipalities may still regulate use of their streets and rights of way,
municipalities may not prohibit or effectively prohibit any entity from
providing any telecommunications services. In addition, the Telecommunications
Act requires that local governmental authorities treat telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements are terminated prior to their
expiration dates or not renewed, and the Company is forced to remove its fiber
from the streets or abandon its network in place, such termination could have a
material adverse effect on the Company.
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC
continues to regulate radio frequency use by both private and common carriers
under the Telecommunications Act. Unlike common carriers, private carriers
contract with select customers to provide services tailored to the customer's
specific needs. The FCC does not currently regulate private carriers (other than
their use of radio frequencies) and has preempted the states from regulating
private carriers. The Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use of
radio frequencies to provide satellite and wireless services. The Company holds
a number of point-to-point microwave radio licenses that are used to provide
telecommunications services in California. Additionally, the Company holds a
number of satellite earth station licenses in connection with its operation of
satellite-based networks. The Company also provides maritime communications
services pursuant to an experimental license and a grant of STA. The Company's
experimental license has been renewed by the FCC on several occasions. On
January 22, 1999, the Company submitted an application for an additional
two-year renewal of the experimental license, which was due to expire in
February 1999. Under the FCC's procedures, the experimental license remains
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valid pending FCC action on the renewal application. The STA was first granted
on January 30, 1997 and enables the Company to conduct operations pursuant to
the STA of the Company's application for a permanent license. The Company
applied for six-month extensions of the STA, most recently on January 29, 1999,
and received verbal grants by the FCC of each of the requested extensions. The
Company also filed 32 applications for permanent full-term FCC licenses to
operate shipboard earth stations in fixed ports. Those applications are pending.
There can be no assurance that the Company will be granted permanent licenses,
that the experimental license and STA currently being used will continue to be
renewed for future terms or that any license granted by the FCC will not require
substantial payments from the Company.
Employees
On December 31, 1998, the Company employed a total of 3,415 individuals on
a full time basis. There are 39 employees in the Company's Oregon and Washington
network systems integration services offices who are represented by collective
bargaining agreements. The collective bargaining agreement with certain IBEW
(International Brotherhood of Electrical Workers) employees in Oregon and
southern Washington expires on December 31, 2000. Additionally, several IBEW
employees in other areas of Washington are currently in negotiations for a new
collective bargaining agreement. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in Englewood, Colorado which houses a
portion of the Company's Telecom Services business. Currently, the Company
leases approximately 324,000 square feet of office space for operations located
in the Denver metropolitan area and approximately 846,000 square feet in other
areas of the United States.
As of December 31, 1998, the Company's corporate headquarters building,
land and improvements were leased by the Company under an operating lease from
an unrelated third party. The Company has entered into a letter of intent to
purchase the approximately 265,000 square foot facility located in Englewood,
Colorado, as well as the other previously leased assets, and expects to complete
the purchase of those assets in early 1999.
ITEM 3. LEGAL PROCEEDINGS
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages, purportedly
on behalf of all of the minority shareholders of Zycom, in the District Court of
Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain
of their subsidiaries. This complaint alleges that the Company and certain of
its subsidiaries breached certain duties owed to the plaintiffs. The plaintiffs
were denied class certification by the trial court and this decision has been
appealed. Trial has been tentatively set for August 1999. The Company is
vigorously defending the claims. While it is not possible to predict the outcome
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of this litigation, management believes these proceedings will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
A putative class action lawsuit was filed on July 15, 1997 in Superior
Court of California, Orange County, alleging unfair business practices and
related causes of action against NETCOM in connection with its offers of free
trial periods and cancellation procedures and claiming damages of at least $10.0
million. Although the case is plead as a class action, the class has not been
certified. The parties are currently conducting discovery. Trial has been
tentatively set for June 1999. The Company believes it has meritorious defenses
to such claims and intends to vigorously defend the action.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
(the "Class A Shares") ceased trading on the AMEX at the close of trading on
August 2, 1996. The Class A Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997. During fiscal 1998, all of the remaining
Class A Shares outstanding held by third parties were exchanged into shares of
ICG Common Stock.
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the ICG Common Stock as reported on the AMEX through
March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated
below. The VSE reported no trading activity for the Class A Shares from January
1, 1997 through March 12, 1997, the date on which the Class A Shares ceased
trading on the VSE.
American Stock
Exchange/Nasdaq National Market
--------------------------------------
High Low
----------------- -----------------
Fiscal 1997:
First Quarter $ 18.13 $ 10.38
Second Quarter 21.13 8.63
Third Quarter 24.63 17.75
Fourth Quarter 28.63 19.75
Fiscal 1998:
First Quarter $ 44.25 $ 24.38
Second Quarter 38.88 28.50
Third Quarter 36.63 15.50
Fourth Quarter 26.56 11.13
Fiscal 1999:
Through March 29, 1999 $ 24.13 $ 15.25
See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of ICG Common Stock. On March 29, 1999, there were
281 holders of record.
The Company has never declared or paid dividends on the ICG Common Stock
and does not intend to pay cash dividends on the ICG Common Stock in the
24
<PAGE>
foreseeable future. The Company intends to retain future earnings, if any, to
finance the development and expansion of its business. In addition, the payment
of any dividends on the ICG Common Stock is effectively prohibited by the
restrictions contained in the Company's indentures to the Company's senior
indebtedness and in the Second Amended and Restated Articles of Incorporation of
Holdings, which prohibits Holdings from making any material payment to the
Company. Certain of the Company's debt facilities contain covenants which also
may restrict the Company's ability to pay cash dividends.
In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Notes. Morgan Stanley &
Co. Incorporated acted as placement agent for the offering and received
placement fees of approximately $7.5 million. In February 1998, ICG Services
sold $490.0 million principal amount at maturity ($300.6 million original issue
price) of 10% Notes. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $9.0 million.
In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company ("ICG Funding"),
completed a private placement of $132.25 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities"). The 6 3/4% Preferred Securities are mandatorily
redeemable November 15, 2009 at the liquidation preference of $50.00 per
security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred
Securities are cumulative at the rate of 6 3/4% per annum and are payable in
cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into ICG Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of ICG Common Stock equals or exceeds,
for at least 20 days of any consecutive 30-day trading period, 160% of the
exchange price through November 15, 1999, and 150% of the exchange price from
November 16, 1999 through November 15, 2000. Morgan Stanley & Co. Incorporated
and Deutsche Morgan Grenfell Inc. acted as placement agents for the offering and
received aggregate placement fees of approximately $4.0 million.
In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007
(the "11 5/8% Notes") and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock"), having a liquidation preference of
$1,000 per share. These securities are guaranteed by the Company on a full and
unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $7.5 million.
In April 1996, Holdings sold $550.3 million principal amount at maturity
($300.0 million original issue price) of 12 1/2% Senior Discount Notes due 2006
(the "12 1/2% Notes") and 150,000 shares of 14 1/4% Preferred Stock Mandatorily
Redeemable 2007 (the "14 1/4% Preferred Stock"), having a liquidation preference
of $1,000 per share. These securities are guaranteed by the Company on a full
and unconditional basis. Morgan Stanley & Co. Incorporated acted as placement
agent for the offering and received placement fees of approximately $16.5
million.
25
<PAGE>
Each of the foregoing offerings were exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. The securities sold in each of the
foregoing offerings were subsequently registered under the Securities Act.
In October 1997, the Company issued 687,221 shares of Common Stock (the
"CBG Shares") to certain shareholders of CBG in connection with the acquisition
of CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Section 4(2) of the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.
In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice, valued at approximately $32.88
per share on the date of the sale (the "DataChoice Shares"). The sale of the
DataChoice Shares was exempt from registration under Section 4(2) of the
Securities Act because the offers and sales were made to a limited number of
investors in a private transaction. The Company is required to register the
resale of the DataChoice Shares.
Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNET, valued at approximately $30.03 per
share on the date of the sale (the "NikoNET Shares"). The sale of the NikoNET
Shares was exempt from registration under Section 4 (2) of the Securities Act
because the offer and sales were made to a limited number of investors in a
private transaction.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for fiscal years ended September 30, 1994, 1995
and 1996, the three months ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998 has been derived from the audited consolidated
financial statements of the Company. The information set forth below should be
read in conjunction with the Company's audited consolidated financial statements
and the notes thereto included elsewhere in this Annual Report. The Company's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another. The Company's consolidated financial statements reflect the operations
of Zycom and NETCOM as discontinued for all periods presented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
26
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended Fiscal Years Ended
Fiscal Years Ended September 30, December 31, December 31,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997 1998
----------- ----------- ---------- --------------- ---------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue (1) $ 59,112 110,188 154,143 49,477 245,022 397,619
Operating costs and expenses:
Operating costs 38,165 77,944 121,983 42,485 217,927 254,689
Selling, general and
administrative expenses 28,015 61,305 75,646 23,868 148,254 183,683
Depreciation and amortization 8,198 16,350 30,030 9,691 56,501 101,545
Provision for impairment of
long-lived assets - 7,000 9,994 - 9,261 -
Net loss (gain) on disposal
of long-lived assets - 241 5,128 (772) 243 4,055
Restructuring costs - - - - - 2,339
----------- ----------- ---------- --------------- ---------- -------------
Total operating costs and
expenses 74,378 162,840 242,781 75,272 432,186 546,311
Operating loss (15,266) (52,652) (88,638) (25,795) (187,164) (148,692)
Interest expense (8,481) (24,389) (85,714) (24,454) (117,520) (170,127)
Other income, net 925 3,141 15,585 5,898 21,549 23,762
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before income taxes, preferred
dividends, share of losses
and cumulative effect of change
in accounting (22,822) (73,900) (158,767) (44,351) (283,135) (295,057)
Income tax benefit (expense) - - 5,131 - - (90)
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before preferred dividends,
share of losses and cumulative
effect of change in accounting (22,822) (73,900) (153,636) (44,351) (283,135) (295,147)
Accretion and preferred dividends
on preferred securities of
subsidiaries, net of minority
interest in share of losses 435 (1,636) (25,409) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,481) (741) (1,814) - - -
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before cumulative effect of
change in accounting (23,868) (76,277) (180,859) (49,339) (321,252) (350,330)
Loss from discontinued operations (100,000) (14,435) (44,060) (11,974) (39,483) (67,715)
Cumulative effect of change in
accounting (1) - - (3,453) - -
----------- ----------- ---------- --------------- ---------- -------------
Net loss $ (123,868) (90,712) (228,372) (61,313) (360,735) (418,045)
=========== =========== ========== =============== ========== =============
Loss per share from continuing
operations - basic and
diluted $ (1.17) (2.48) (4.90) (1.18) (7.56) (7.75)
=========== =========== ========== =============== ========== =============
Net loss per share -
basic and diluted $ (6.06) (2.94) (6.19) (1.47) (8.49) (9.25)
=========== =========== ========== =============== ========== =============
Weighted average number of
shares outstanding - basic
and diluted (2) 20,455 30,808 36,875 41,760 42,508 45,194
=========== =========== ========== =============== ========== =============
Other Data:
Net cash used by operating
activities of continuing
operations (7,532) (41,947) (39,099) (6,436) (117,191) (105,358)
Net cash used by investing
activities of continuing
operations (51,452) (65,772) (134,832) (82,342) (429,512) (349,082)
Net cash (used) provided
by financing activities
of continuing operations (49,428) 377,772 355,811 (1,886) 308,136 530,915
EBITDA (3) (7,068) (36,302) (58,608) (16,104) (130,663) (47,147)
EBITDA (before nonrecurring
charges) (3) (7,068) (29,061) (43,486) (16,876) (121,159) (40,753)
Capital expenditures of
continuing operations (4) 54,921 82,623 176,935 70,297 268,796 368,946
Capital expenditures of
discontinued operations (4) 11,143 49,714 54,364 8,554 18,055 25,981
(Continued)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
-------------------------------------- -------------------------------------------
1994 1995 1996 1996 1997 1998
----------- ----------- ------------ ------------ ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments available for sale $ 6,025 269,404 457,388 391,891 230,850 262,831
Net current assets (liabilities) of
discontinued operations (5) 15,551 131,571 54,226 54,481 38,331 (23,272)
Working capital 6,988 381,006 499,810 415,247 263,674 294,934
Property and equipment, net 118,875 201,038 334,646 402,251 631,454 934,134
Net non-current assets of discontinued
operations (5) 12,413 59,936 97,561 97,425 76,577 54,243
Total assets 229,955 767,072 1,081,896 1,086,734 1,217,440 1,615,425
Current portion of long-term debt and
capital lease obligations 23,118 23,487 8,282 25,500 7,421 5,132
Long-term debt and capital lease
obligations, less current portion 97,811 405,535 739,827 761,504 957,507 1,662,357
Redeemable preferred securities of
subsidiaries - 24,336 153,318 159,120 420,171 466,352
Common stock and additional paid-in
capital 129,483 420,516 504,851 508,182 534,290 578,404
Accumulated deficit (61,737) (152,487) (380,859) (430,682) (791,417) (1,209,462)
Stockholders' equity (deficit) 67,746 268,001 125,203 78,711 (256,983) (631,177)
</TABLE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Accounting Change."
(2) Weighted average number of shares outstanding for fiscal years 1994 and
1995 represents Holdings-Canada common shares outstanding. Weighted average
number of shares outstanding for fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997 and 1998 represents Holdings-Canada
common shares outstanding for the period October 1, 1995 through August 2,
1996, and represents ICG Common Stock and Class A Shares (not owned by ICG)
outstanding for the periods subsequent to August 5, 1996. During fiscal
1998, all of the remaining Class A Shares outstanding held by third parties
were exchanged into shares of ICG Common Stock.
(3) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses, or simply,
operating loss plus depreciation and amortization. EBITDA (before
nonrecurring charges) represents EBITDA before certain nonrecurring charges
such as the net loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with generally accepted accounting
principles ("GAAP") for the periods indicated. EBITDA and EBITDA (before
nonrecurring charges) are not measurements under GAAP and are not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities of
28
<PAGE>
continuing operations as determined using GAAP are also presented in Other
Data.
(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes payments for
construction of the Company's corporate headquarters. Capital expenditures
of discontinued operations includes the capital expenditures of Zycom and
NETCOM combined for all periods presented.
(5) Net non-current assets of discontinued operations and net current assets
(liabilities) of discontinued operations represents the assets and
liabilities of Zycom and NETCOM combined for all periods presented.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, enhanced telephony and wholesale and retail data services,
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the 12 months
ended December 31, 1996 and for fiscal 1997 and 1998 have been derived from the
Company's audited consolidated financial statements included elsewhere herein
and the Company's unaudited consolidated financial statements included in the
Company's Forms 10-Q filed with the Securities and Exchange Commission. The
Company's consolidated financial statements reflect the operations of Zycom and
NETCOM as discontinued for all periods presented. The Company changed its fiscal
year end to December 31 from September 30, effective January 1, 1997. All dollar
amounts are in U.S. dollars.
Company Overview
The Company is one of the nation's leading competitive ICPs, based on
estimates of the industry's 1998 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers and other communications service providers for a
full range of communications services in the increasingly deregulated
telecommunications industry. The Company's Telecom Services primarily include
its CLEC operations, in which the Company operates fiber networks in regional
clusters covering major metropolitan statistical areas in California, Colorado,
Ohio, the Southeast and Texas, offering local, long distance, data and enhanced
telephony services to business end users and ISPs. Additionally, in February
1999, the Company began providing wholesale network services over its nationwide
data network. The Company also provides a wide range of network systems
integration services and maritime and international satellite transmission
services. Network Services consists of information technology services and
selected networking products, focusing on network design, installation,
maintenance and support. Satellite Services consists of satellite voice, data
and video services provided to major cruise lines, the U.S. Navy, the offshore
oil and gas industry and ICPs. As a leading participant in the rapidly growing
competitive local telecommunications industry, the Company has experienced
significant growth, with total revenue increasing from approximately $154.1
million for fiscal 1996 to approximately $397.6 million for fiscal 1998. The
Company's rapid growth is the result of the initial installation, acquisition
and subsequent expansion of its fiber optic networks and the expansion of its
communications service offerings.
The Telecommunications Act and pro-competitive state regulatory initiatives
have substantially changed the telecommunications regulatory environment in the
United States. Under the Telecommunications Act, the Company is permitted to
offer all interstate and intrastate telephone services, including competitive
local dial tone. In early 1997, the Company began marketing and selling local
dial tone services in major metropolitan areas in California, Colorado, Ohio and
the Southeast and, in December 1998, began offering services through an acquired
business. During fiscal 1997 and 1998, the Company sold 178,470 and 206,458
30
<PAGE>
local access lines, respectively, net of cancellations, of which 354,482 were in
service at December 31, 1998. In addition, the Company's regional fiber networks
have grown from 2,143 fiber route miles at the end of fiscal 1996 to 4,255 fiber
route miles at December 31, 1998. The Company had 29 operating high capacity
digital voice switches and 16 data communications switches at December 31, 1998,
and plans to install additional switches as demand warrants. As a complement to
its local exchange services offered to business end users, the Company markets
bundled service offerings provided over its regional fiber network which include
long distance, enhanced telecommunications services and data services.
Additionally, the Company owns and operates a nationwide data network with 236
POPs over which the Company recently began providing wholesale Internet access
and enhanced network services to MindSpring and intends to offer similar
services to other ISPs and telecommunications providers in the future.
The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, on December 31, 1998, the Company purchased from CSW 100% of the
partnership interests in ChoiceCom, a strategic alliance with CSW formed for the
purpose of developing and marketing telecommunications services in certain
cities in Texas. ChoiceCom is based in Austin, Texas and currently provides
local exchange and long distance services in Austin, Corpus Christi, Dallas,
Houston, and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom reported
revenue of $0.3 million and $5.8 million, respectively, and EBITDA losses
(before nonrecurring charges) of $(5.5) million and $(13.6) million,
respectively. Additionally, ChoiceCom has five operating high capacity digital
voice switches and two data communications switches as of December 31, 1998 and
has 19,569 access lines in service, including 15,282 access lines previously
sold by ICG on behalf of ChoiceCom.
To better focus its efforts on its core Telecom Services operations, the
Company progressed toward the disposal of certain assets which management
believes do not complement its overall business strategy. On August 12 and
November 18, 1998, the Company completed the sales of the capital stock of MCN
and Nova-Net, respectively, two wholly owned subsidiaries within the Company's
Satellite Services operations. The results of operations of MCN and Nova-Net,
which are not significant to the Company's consolidated results, have been
included in the Company's consolidated results of operations through the closing
date of each sale. Due primarily to the loss of a major customer, which
generated a significant obligation under a volume discount agreement with its
call transport provider, the board of directors of Zycom approved a plan on
August 25, 1998 to wind down and ultimately discontinue Zycom's operations. On
October 22, 1998, Zycom completed the transfer of all customer traffic to other
providers and on January 4, 1999, the Company completed the sale of the
remainder of Zycom's operating assets to an unrelated third party. Additionally,
effective November 3, 1998, the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM. On February 17, 1999, the Company
sold certain of the operating assets and liabilities of NETCOM to MindSpring for
total proceeds of $245.0 million, and on March 16, 1999, the Company sold all of
the capital stock of NETCOM's international operations in Canada and the United
Kingdom to other unrelated third parties for total proceeds of approximately
$41.1 million. Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998 of approximately $10.8 million. The
Company expects to record a combined gain on the NETCOM transactions of
approximately $200 million, including the recognition of the deferred losses of
NETCOM from November 3, 1998 through the sale dates and net of income taxes of
31
<PAGE>
approximately $6.5 million, during the three months ended March 31, 1999. Since
the operations sold were acquired by the Company in a transaction accounted for
as a pooling of interests, the gain on the NETCOM transaction will be classified
in the Company's consolidated statement of operations as an extraordinary item.
For fiscal 1996, 1997 and 1998, Zycom and NETCOM combined reported revenue of
$135.4 million, $189.0 million and $181.6 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(30.4) million, $(12.1) million and
$(18.0) million, respectively. The Company's consolidated financial statements
reflect the operations of Zycom and NETCOM as discontinued for all periods
presented. The Company will from time to time evaluate all of its assets as to
their core need and, based on such analysis, may sell or otherwise dispose of
assets which do not complement its overall business strategy.
In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 POPs serving
approximately 700 cities nationwide. PST intends to utilize the retained network
operating assets to provide wholesale Internet access and enhanced network
services to MindSpring and other ISPs and telecommunications providers. On
February 17, 1999, the Company entered into an agreement to lease to MindSpring
for a one-year period the capacity of certain network operating assets for a
minimum of $27.0 million, although subject to increase dependent upon network
usage. MindSpring will utilize the capacity to provide Internet access to the
dial-up services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.
In August 1998, the Company began offering enhanced telephony services via
IP technology. The Company currently offers these services in 230 major cities
in the United States, covering more than 90% of the commercial long distance
market. The Company carries the IP traffic over its nationwide data network and
terminates a large portion of the traffic via its own POPs, thereby eliminating
terminating charges from the use of other carriers' network facilities. Calls
that cannot be terminated over the Company's own facilities are billed at higher
per minute rates to compensate for the charges associated with using other
carriers' facilities. The Company currently does not generate any significant
revenue from this service.
In December 1998, the Company announced its plans to offer three new
network services (RAS, EOS and DSL), to be available beginning in 1999. RAS
allows the Company to provide modem access at its own switch location, rather
than requiring ISPs to deploy modems physically at each of their POPs. This
service will enable the Company to act as an aggregator for ISP traffic, while
limiting the ISP's capital deployment. Through its strategic relationship with
Lucent, the Company is currently retrofitting all of its Lucent-5ESS switches
with the new Lucent product that allows for RAS functionality. This service
eliminates the need for ISPs to separately purchase modems and shifts network
management responsibilities to the Company. The Company plans to be the first to
market RAS using Lucent's modem technology and expects the service will be
available to customers in the second quarter of 1999. Through the same
technology that allows it to provide RAS, the Company plans to offer EOS,
enabling regional or local ISPs to expand their geographical footprint outside
their current physical locations by carrying the ISP's out-of-region traffic on
32
<PAGE>
the Company's own nationwide data network. The Company will initially offer this
service within its CLEC regional clusters during the first quarter of 1999, and
plans to expand EOS offerings to other areas as demand warrants. Through DSL
technology, the Company plans to provide high-speed data transmission services
primarily to business end users and, on a wholesale basis, to ISPs. DSL
technology utilizes the existing ILEC twisted copper pair connection to the
customer, giving the customer significantly greater bandwidth, and consequently
speed, when connecting to the Internet. The Company expects to offer DSL in over
400 central offices by the end of 1999 through alliances with other companies
focusing on DSL service. For example, on February 18, 1999, the Company entered
into a letter of intent with NorthPoint which, if the agreement is finalized,
will designate NorthPoint as the Company's preferred DSL provider for a two-year
period and the Company will purchase up to 75,000 DSL lines from NorthPoint over
the two-year term. This alliance will enable the Company to accelerate the
expansion of its DSL service offerings and allow NorthPoint to gain access to
the Company's collocation facilities in markets where NorthPoint currently has
limited or no operations. If the agreement is finalized, NorthPoint will
provision and manage all of the Company's DSL services offered under this
agreement. The Company expects to begin offering DSL services under this
agreement in the second quarter of 1999. The Company is not presently able to
determine the impact that the offerings of RAS, EOS and DSL will have on revenue
or EBITDA in 1999, 2000 or future years. These service offerings are dependent
upon demand from ISPs and, while the Company believes this market sector will
benefit from these new services, there is no assurance that the Company will be
able to successfully deploy and market these services efficiently, or at all, or
obtain and retain new customers in a competitive marketplace.
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on sales, marketing,
customer service, engineering and support personnel prior to the generation of
corresponding revenue. EBITDA, EBITDA (before nonrecurring charges), and
operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network expansion and development of new
services. Since the quarter ended June 30, 1996, EBITDA losses (before
nonrecurring charges) have improved for each consecutive quarter, through and
including the quarter ended December 31, 1998 for which the Company reported
positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company
provides a greater volume of higher margin services, principally local exchange
services, carries more traffic on its own facilities rather than ILEC facilities
and obtains the right to use unbundled ILEC facilities, while experiencing
decelerating increases in personnel and other selling, general and
administrative expenses supporting its operations, any or all of which may not
occur, the Company anticipates that EBITDA performance will continue to improve
in the near term.
Results of Operations
The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for Telecom Services, Network
Services and Satellite Services and certain other financial data for the Company
for the periods indicated. The table also shows certain revenue, expenses,
operating loss and EBITDA as a percentage of the Company's total revenue.
33
<PAGE>
<TABLE>
<CAPTION>
12 Months Ended Fiscal Years Ended December 31,
December 31, ----------------------------------------------
1996 (1) 1997 1998
-------------------- --------------------- ----------------------
$ % $ % $ %
----------- ------- ------------ ------ ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Telecom services $ 87,379 52 149,358 61 303,317 76
Network services 60,380 36 65,678 27 53,851 14
Satellite services 21,317 12 29,986 12 40,451 10
----------- ------- ------------ ------ ------------ -------
Total revenue 169,076 100 245,022 100 397,619 100
Operating costs:
Telecom services 81,110 147,338 187,260
Network services 46,545 53,911 47,321
Satellite services 10,241 16,678 20,108
----------- ------- ------------ ------ ------------ -------
Total operating costs 137,896 82 217,927 89 254,689 64
Selling, general and
administrative:
Telecom services 32,633 94,037 137,207
Network services 15,841 13,136 12,275
Satellite services 13,152 13,234 13,255
Corporate services (2) 19,640 27,811 20,946
----------- ------- ------------ ------ ------------ -------
Total selling, general and
administrative 81,266 48 148,254 60 183,683 46
Depreciation and amortization 34,888 20 56,501 23 101,545 25
Provision for impairment of
long-lived assets 9,994 6 9,261 4 - -
Net loss on disposal of
long-lived assets 3,326 2 243 - 4,055 1
Restructuring costs - - - - 2,339 1
----------- ------- ------------ ------ ------------ -------
Operating loss (98,294) (58) (187,124) (76) (148,692) (37)
Other Data:
Net cash used by operating
activities of continuing
operations (40,829) (117,191) (105,358)
Net cash used by investing
activities of continuing
operations (191,932) (429,512) (349,082)
Net cash provided by financing
activities of continuing
operations 362,338 308,136 530,915
EBITDA (3) (63,406) (130,663) (47,147)
EBITDA (before nonrecurring
charges) (3) (50,086) (38) (121,159) (53) (40,753) (12)
Capital expenditures of
continuing operations 220,350 (30) 268,796 (49) 368,946 (10)
Capital expenditures of
discontinued operations 49,770 18,055 25,981
</TABLE>
(1) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997. The results for the 12 months ended December 31,
1996 have been derived from the Company's unaudited consolidated financial
statements included in the Company's Forms 10-Q filed with the Securities
and Exchange Commission and reclassified to present such periods in
conformity with the fiscal 1998 presentation.
(2) Corporate Services consists of the operating activities of ICG
Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG
Holdings (Canada) Co., ICG Holdings, Inc., ICG Services, Inc. and ICG
Equipment, Inc., which primarily hold securities and provide certain legal,
accounting and finance, personnel and other administrative support services
to the business units.
34
<PAGE>
(3) See note 3 under "Selected Financial Data" for the definitions of EBITDA
and EBITDA (before nonrecurring charges).
Fiscal 1998 Compared to Fiscal 1997
Revenue. Total revenue for fiscal 1998 increased $152.6 million, or 62%,
from fiscal 1997. Telecom Services revenue increased 103% to $303.3 million due
to an increase in revenue from local services (dial tone), long distance and
special access services, offset in part by a decline in average unit pricing and
in wholesale switched services revenue. Local services revenue increased from
$21.3 million (14% of Telecom Services revenue) for fiscal 1997 to $157.1
million (52% of Telecom Services revenue) for fiscal 1998, primarily due to an
increase in local access lines from 141,035 lines in service at December 31,
1997 to 354,482 lines in service at December 31, 1998. In addition, local access
revenue includes revenue of approximately $4.9 million and $58.3 million for
fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of ILECs
pursuant to various interconnection agreements. These agreements are subject to
renegotiation over the next several months. While management believes that these
agreements will be replaced by agreements offering the Company some form of
compensation for ISP traffic, the renegotiated agreements may reflect rates for
reciprocal compensation which are lower than the rates under the current
contracts. See "Liquidity -Transport and Termination Charges." Revenue from long
distance services generated $22.7 million for fiscal 1998, compared to no
reported revenue for fiscal 1997. Special access revenue increased from $55.4
million (37% of Telecom Services revenue) for fiscal 1997 to $74.5 million (25%
of Telecom Services revenue) for 1998. Switched access (terminating long
distance) revenue decreased to approximately $49.0 million for fiscal 1998,
compared to $72.7 million for fiscal 1997. The Company has raised prices on its
wholesale switched services product in order to improve margins and has
de-emphasized its wholesale switched services to focus on its higher margin
products. Revenue from data services did not generate a material portion of
total revenue during either period.
Network Services revenue decreased 18% to $53.9 million for fiscal 1998
compared to $65.7 million for fiscal 1997. The decrease in Network Services
revenue is partially due to the decline in network integration services projects
from new and existing customers during fiscal 1998 and project delays by
customers from 1998 into 1999, offset slightly by increases in integrated
cabling services revenue. In addition, Network Services provides certain cabling
and other service installation on behalf of Telecom Services, as Telecom
Services provisions new customers and services. Due to the growth of Telecom
Services during fiscal 1998, Network Services has been and will continue to be
required to spend increasing management attention and resources on providing
cabling and other service installation for Telecom Services. Amounts received
from Telecom Services for work performed is eliminated in consolidation.
Satellite Services revenue increased $10.5 million, or 35%, to $40.5
million for fiscal 1998. This increase is due to the operations of MTN, which
comprised $30.0 million of total Satellite Services revenue for fiscal 1998,
compared to $19.0 million for fiscal 1997, offset by decreases in revenue of MCN
and Nova-Net, which the Company sold in August and November 1998, respectively.
35
<PAGE>
MTN's C-band installations, which include both military and cruise vessels,
increased from 57 at December 31, 1997 to 76 at December 31, 1998, an increase
of 33%.
Operating costs. Total operating costs for fiscal 1998 increased $36.8
million, or 17%, from fiscal 1997. Telecom Services operating costs increased
from $147.3 million, or 99% of Telecom Services revenue, for fiscal 1997, to
$187.3 million, or 62% of Telecom Services revenue, for fiscal 1998. Telecom
Services operating costs consist of payments to ILECs for the use of network
facilities to support special and switched access services, network operating
costs, right of way fees and other costs. The increase in operating costs in
absolute dollars is attributable to the increase in volume of local and special
access services and the addition of network operating costs which include
engineering and operations personnel dedicated to the development and launch of
local exchange services. The decrease in operating costs as a percentage of
Telecom Services revenue is due primarily to a greater volume of higher margin
services, principally local exchange services. The Company expects the Telecom
Services ratio of operating costs to revenue will further improve as the Company
provides a greater margin of higher volume services, principally local exchange
services, carries more traffic on its own facilities rather than the ILEC
facilities and obtains the right to use unbundled ILEC facilities on
satisfactory terms, any or all of which may not occur.
Network Services operating costs decreased 12% to $47.3 million and
increased as a percentage of revenue from 82% for fiscal 1997 to 88% for fiscal
1998. The decrease in operating costs in absolute dollars is due to a decrease
in general business volume from external customers between the comparative
periods. Network Services operating costs increased as a percentage of Network
Services revenue due to cost overruns and the decline in higher margin network
integration services projects during fiscal 1998.
Satellite Services operating costs increased to $20.1 million for fiscal
1998, from $16.7 million for fiscal 1997. Satellite Services operating costs, as
a percentage of Satellite Services revenue, decreased from 56% for fiscal 1997
to 50% for fiscal 1998, due to the increase in revenue of MTN, which provides
relatively higher margins than other maritime services. Satellite Services
operating costs consist primarily of transponder lease costs and the cost of
equipment sold.
Selling, general and administrative expenses. Total selling, general and
administrative ("SG&A") expenses for fiscal 1998 increased $35.4 million, or
24%, compared to fiscal 1997, and decreased as a percentage of total revenue
from 61% for fiscal 1997 to 46% for fiscal 1998. Telecom Services SG&A expense
increased from $94.1 million, or 63% of Telecom Services revenue, for fiscal
1997, to $137.2 million, or 45% of Telecom Services revenue, for fiscal 1998.
The increase in absolute dollars is principally due to the continued rapid
expansion of the Company's Telecom Services networks and related significant
additions to the Company's management information systems, customer service,
marketing and sales staffs dedicated to the expansion of the Company's networks
and implementation of the Company's expanded services strategy, primarily the
development of local and long distance telephone services. As the Company begins
to benefit from the revenue generated by newly developed services requiring
substantial administrative, selling and marketing expense prior to initial
service offerings, Telecom Services has experienced and expects to continue to
experience declining SG&A expenses as a percentage of Telecom Services revenue.
36
<PAGE>
Network Services SG&A expense decreased $0.9 million to $12.3 million for
fiscal 1998 compared to fiscal 1997. This decrease is primarily due to a
reduction in personnel as a result of the decentralization of Network Services
during fiscal 1998. In addition, certain long-term operating leases on field
offices expired during fiscal 1998.
Satellite Services SG&A expense was $13.2 million for both fiscal 1997 and
1998. SG&A expense decreased as a percentage of Satellite Services revenue from
44% for fiscal 1997 to 33% for fiscal 1998 due to the growth of MTN revenue,
without proportional increases in SG&A expenses, and the sales of MCN and
Nova-Net in August and November, 1998, respectively, which companies generated
higher SG&A expenses in relation to revenue than MTN.
Corporate Services SG&A expense decreased $6.9 million to $20.9 million for
fiscal 1998 compared to $27.8 million for fiscal 1997. This decrease is
primarily due to a change in the allocation of payroll costs associated with the
Company's information technology and human resources personnel, which costs were
allocated to Corporate Services for fiscal 1997 and to Telecom Services for
fiscal 1998.
Depreciation and amortization. Depreciation and amortization increased
$45.0 million, or 80%, for fiscal 1998 compared to fiscal 1997, primarily due to
increased investment in depreciable assets resulting from the continued
expansion of the Company's networks and services. Additionally, the Company
experienced increased amortization arising from goodwill recorded in conjunction
with the purchases of NikoNET and DataChoice during fiscal 1998 as well as the
full year impact of goodwill amortization from the purchase of Communications
Buying Group, Inc. in October 1997. The Company expects that depreciation and
amortization will continue to increase as the Company continues to invest in the
expansion and upgrade of its regional fiber and nationwide data networks and
begins amortization of the goodwill arising from the purchase of ChoiceCom on
December 31, 1998.
Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ("StarCom") ($5.2
million), MCN ($2.9 million) and Nova-Net ($0.9 million) as well as a write-down
of other operating assets ($0.3 million). Provision for impairment of long-lived
assets was recorded based on management's estimate of the net realizable value
of the Company's assets at December 31, 1997. No such provision for impairment
was recorded for fiscal 1998.
Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets increased from $0.2 million for fiscal 1997 to $4.1 million
for fiscal 1998. Net loss on disposal of long-lived assets for fiscal 1997
primarily relates to losses recorded on the disposal of the Company's investment
in its Melbourne network. For fiscal 1998, net loss on disposal of long-lived
assets relates to the write-off of certain installation costs of disconnected
special access customers ($0.5 million), the write-off of certain costs
associated with an abandoned operating support system project ($0.8 million),
general disposal of furniture, fixtures and office equipment ($3.5 million) and
the loss on the sale of Nova-Net ($0.2 million), offset by the gain on the sale
of MCN ($0.9 million).
37
<PAGE>
Restructuring costs. For fiscal 1998, restructuring costs of $2.3 million
include $0.2 million in costs, primarily severance costs, related to the
facility closure of a subsidiary of NikoNET, $0.6 million in costs, primarily
severance costs, related to the decentralization of the Company's Network
Services subsidiary and $1.5 million related to the combined restructuring of
Telecom Services and Corporate Services, designed to support the Company's
increased strategic focus on its ISP customer base, as well as to improve the
efficiency of operations and general and administrative support functions.
Restructuring costs under this plan include severance and other employee benefit
costs, of which $0.9 million has been paid as of December 31, 1998.
Interest expense. Interest expense increased $52.6 million, from $117.5
million for fiscal 1997, to $170.1 million for fiscal 1998, which includes
$158.2 million of non-cash interest. This increase was primarily attributable to
an increase in long-term debt, primarily the 10% Notes issued in February 1998
and the 9 7/8% Notes issued in April 1998. In addition, the Company's interest
expense increased, and will continue to increase, because the principal amount
of its indebtedness increases until the Company's senior indebtedness begins to
pay interest in cash.
Interest income. Interest income increased $6.5 million, from $21.9 million
for fiscal 1997 to $28.4 million for fiscal 1998. The increase is attributable
to the increase in cash and invested cash balances from the proceeds from the
issuances of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998.
Other expense, net. Other expense, net increased from $0.4 million net
expense for fiscal 1997 to $4.7 million net expense for fiscal 1998. Other
expense, net recorded in fiscal 1997 consists primarily of litigation settlement
costs and the loss on disposal of non-operating assets. For fiscal 1998, other
expense, net primarily includes $3.2 million in settlement costs paid to the
former minority shareholders and warrantholders of MTN, $1.1 million in
litigation settlement costs and a write-off of notes receivable of $0.4 million.
Income tax expense. Income tax expense of $0.1 million for fiscal 1998
relates to current state income taxes of NikoNET.
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $17.1 million, from $38.1 million for fiscal 1997 to $55.2
million for fiscal 1998. The increase is due primarily to the issuances of the 6
3/4% Preferred Securities in September and October 1997. Accretion and preferred
dividends on preferred securities of subsidiaries, net of minority interest in
share of losses recorded during fiscal 1998 consists of the accretion of
issuance costs ($1.3 million) and the accrual of the preferred securities
dividends ($53.9 million) associated with the 6 3/4% Preferred Securities, the
14% Preferred Stock and the 14 1/4% Preferred Stock.
Loss from continuing operations. Loss from continuing operations increased
$29.1 million, or 9%, to $350.3 million due to the increases in operating costs,
SG&A expenses, depreciation and amortization, interest expense and accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses, offset by an increase in revenue, as noted above.
38
<PAGE>
Loss from discontinued operations. For fiscal 1997 and 1998, loss from
discontinued operations was $39.5 million and $67.7 million, respectively, or
11% and 16%, respectively, of the Company's net loss. Loss from discontinued
operations consists of the combined net loss of Zycom and NETCOM for the
respective periods and, for fiscal 1998, includes $1.8 million for estimated
losses on the disposal of Zycom. The remaining increase in loss from
discontinued operations between the comparative periods is due to increases in
SG&A expenses and depreciation and amortization incurred by NETCOM and
approximately $9.4 million for merger costs incurred by NETCOM relating to
NETCOM's merger with ICG in January 1998. Loss from discontinued operations for
fiscal 1998 includes the net loss of NETCOM from January 1, 1998 through
November 2, 1998. Since the Company expects to record a gain on the disposition
of NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998, to be recognized as a component of
the gain on the disposition.
Fiscal 1997 Compared to 12 Months Ended December 31, 1996
Revenue. Total revenue for fiscal 1997 increased $75.9 million, or 45%,
from the 12 months ended December 31, 1996. Telecom Services revenue increased
71% to $149.4 million due to an increase in network usage for both switched and
special access services, offset in part by a decline in average unit pricing.
Local services revenue was $21.3 million (14% of Telecom Services revenue) for
fiscal 1997, but did not generate a material portion of total revenue for the 12
months ended December 31, 1996. Special access revenue increased from $39.3
million (45% of Telecom Services revenue) for the 12 months ended December 31,
1996 to $55.4 million (37% of Telecom Services revenue) for fiscal 1997.
Switched access (terminating long distance) revenue increased to approximately
$72.7 million for fiscal 1997, compared to $48.1 million for the 12 months ended
December 31, 1996. Revenue from long distance and data services did not generate
a material portion of total revenue during either period.
Network Services revenue increased 9% to $65.7 million for fiscal 1997
compared to $60.4 million for the 12 months ended December 31, 1996. The
increase in Network Services revenue is due to a single equipment sale during
fiscal 1997 for $3.2 million as well as general increases in business volume
from external customers.
Satellite Services revenue increased $8.7 million, or 41%, to $30.0 million
for fiscal 1997, compared to $21.3 million for the 12 months ended December 31,
1996. This increase is primarily due to the operations of MCN, which comprised
$6.3 million of total Satellite Services revenue for fiscal 1997 compared to
$1.8 million during the same 12-month period in 1996. The remaining increase can
be attributed to the general growth of MTN and its increased sales of C-Band
equipment to offshore oil and gas customers.
Operating costs. Total operating costs for fiscal 1997 increased $80.0
million, or 58%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $81.1 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $147.3 million, or 99% of
Telecom Services revenue, for fiscal 1997. The increase in operating costs in
absolute dollars is attributable to the increase in local and special access
services and the addition of network operating costs which include engineering
and operations personnel dedicated to the development and launch of local
39
<PAGE>
exchange services. The increase in operating costs as a percentage of Telecom
Services revenue is due primarily to the increase in switched access services
revenue, and the investment in the development of local exchange services
without the benefit of substantial corresponding revenue in the same period.
Network Services operating costs increased 16% to $53.9 million and
increased as a percentage of Network Services revenue from 77% for the 12 months
ended December 31, 1996 to 82% for fiscal 1997. The increase is due to a
substantially lower margin earned on equipment sales (which constituted a larger
portion of 1997 revenue) relative to other services and certain indirect project
costs included in operating costs during fiscal 1997 which were treated as SG&A
expenses during the comparable 12-month period in 1996.
Satellite Services operating costs increased to $16.7 million for fiscal
1997, from $10.2 million for the 12 months ended December 31, 1996. Satellite
Services operating costs as a percentage of Satellite Services revenue also
increased from 48% for the 12 months ended December 31, 1996 to 56% for fiscal
1997. This increase is due to an increase in MCN's sales as well the increased
volume of equipment sales, both of which provide lower margins than other
maritime services.
Selling, general and administrative expenses. Total SG&A expenses for
fiscal 1997 increased $67.0 million, or 82%, compared to the 12 months ended
December 31, 1996. This increase was principally due to the continued rapid
expansion of the Company's Telecom Services networks and related significant
additions to the Company's management information systems, customer service,
marketing and sales staffs dedicated to the expansion of the Company's networks
and implementation of the Company's expanded services strategy, primarily the
development of local and long distance telephone services. Total SG&A expenses
as a percentage of total revenue increased from 48% for the 12 months ended
December 31, 1996 to 61% for fiscal 1997. There is typically a period of higher
administrative and marketing expense prior to the generation of appreciable
revenue from newly developed networks or services.
Depreciation and amortization. Depreciation and amortization increased
$21.6 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased investment in depreciable assets resulting from the
continued expansion of the Company's networks and services. The Company reports
high levels of depreciation expense relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight-line method despite the low rate of capacity utilization in
the early stages of network operation.
Provision for impairment of long-lived assets. For the 12 months ended
December 31, 1996, provision for impairment of long-lived assets includes
valuation allowances for the amounts receivable for advances made to the
formerly owned Phoenix network joint venture included in long-term note
receivable ($5.8 million), the investments in the formerly owned Melbourne
network ($2.7 million) and the formerly owned Satellite Services Mexico
subsidiary ($0.1 million) and the note receivable from NovoComm, Inc. ($1.3
million). Provision for impairment of long-lived assets for fiscal 1997 includes
the write-down of the Company's investment in StarCom ($5.2 million), MCN ($2.9
million) and Nova-Net ($0.9 million) as well as a write-down of other operating
40
<PAGE>
assets ($0.3 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at December 31, 1996 and 1997.
Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets decreased from $3.3 million for the 12 months ended December
31, 1996 to $0.2 million for fiscal 1997. Net loss on disposal of long-lived
assets for the 12 months ended December 31, 1996 includes the loss recorded on
the sale of four of the Company's teleports used in its Satellite Services
operations ($1.1 million), the loss recorded on the disposal of other operating
assets ($2.7 million) and a write-off of an investment ($0.3 million), offset by
a gain on the sale of the Company's 50% interest in the Phoenix network joint
venture ($0.8 million). For fiscal 1997, net loss on disposal of long-lived
assets primarily relates to losses recorded on the disposal of the Company's
investment in its formerly owned Melbourne network.
Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $109.3 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Notes issued in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until the Company's senior indebtedness begins to pay
interest in cash.
Interest income. Interest income increased $0.5 million, from $21.4 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
Other expense, net. Other expense, net decreased from $3.7 million net
expense for the 12 months ended December 31, 1996 to $0.4 million net expense
for fiscal 1997. Other expense, net recorded for the 12 months ended December
31, 1996 consists primarily of the write-off of deferred financing costs
associated with the conversion or repayment of debt and litigation settlement
costs. For fiscal 1997, other, net consists primarily of litigation settlement
costs and the loss on disposal of non operating assets.
Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $11.0 million, from $27.1 million for the 12 months ended
December 31, 1996 to $38.1 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings redeemed in April 1996. Accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses recorded during fiscal 1997 consists of the
accretion of issue costs ($0.9 million) and the accrual of the preferred
security dividends ($38.9 million) associated with the 6 3/4% Preferred
Securities, the 14% Preferred Stock and the 14 1/4% Exchangeable Preferred Stock
Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"), offset by minority
interest in losses of subsidiaries of $1.7 million.
41
<PAGE>
Share of losses of joint venture. Effective October 1, 1996, the Company
sold its 50% interest in the Phoenix network joint venture. As a result, no
share of losses in joint venture was recorded during fiscal 1997, as compared to
the $1.6 million loss recorded during the comparable 12-month period in 1996.
Loss from continuing operations. Loss from continuing operations increased
$122.2 million, or 61%, to $321.3 million due to the increases in operating
costs, SG&A expenses, depreciation and amortization, interest expense and
accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses, offset by an increase in revenue, as
noted above.
Loss from discontinued operations. For the 12 months ended December 31,
1996 and fiscal 1997, loss from discontinued operations was $50.5 million and
$39.5 million, respectively, or 20% and 11%, respectively, of the Company's net
loss. Loss from discontinued operations consists of the combined net loss of
Zycom and NETCOM for the respective periods. The decrease in loss from
discontinued operations between the comparative periods is due to an increase in
revenue and a decrease in operating costs as a percentage of revenue incurred by
NETCOM.
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods during fiscal 1997 and 1998. The Company believes
that all necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Annual Report. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.
42
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-----------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 55,450 57,937 60,615 71,020 78,867 90,657 106,467 121,628
Operating loss (39,747) (45,515) (46,045) (55,857) (39,082) (39,649) (27,717) (42,244)
Loss from continuing
operations (66,039) (75,919) (79,372) (99,922) (81,564) (89,435) (80,082) (99,249)
Loss from discontinued
operations (9,953) (10,830) (7,502) (11,198) (20,191) (11,401) (16,582) (19,541)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (75,992) (86,749) (86,874) (111,120) (101,755) (100,836) (96,664) (118,790)
=========== =========== =========== =========== =========== =========== =========== ===========
Loss per share from continuing
operations - basic and
diluted $ (1.57) (1.80) (1.87) (2.29) (1.84) (1.99) (1.76) (2.16)
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted average number of
shares outstanding - basic
and diluted 42,003 42,122 42,359 43,553 44,311 44,865 45,588 46,010
=========== =========== =========== =========== =========== =========== =========== ===========
Other Data:
Net cash used by operating
activities of continuing
operations (13,089) (20,755) (30,823) (52,524) (6,539) (30,950) (13,941) (53,928)
Net cash (used) provided by
investing activities of
continuing operations (60,197) (50,554) (193,445) (125,316) 36,681 (70,471) (151,395) (163,897)
Net cash provided (used) by
financing activities of
continuing operations 172,689 (4,418) 110,288 29,577 294,197 238,628 (7,432) 5,522
EBITDA (1) (29,000) (32,581) (32,528) (36,554) (25,479) (16,814) (2,834) (2,020)
EBITDA (before nonrecurring
charges) (1) (29,319) (32,581) (31,174) (28,085) (24,974) (16,268) (3,648) 4,137
Capital expenditures of
continuing operations (2) (58,556) (64,233) (64,347) (81,660) (65,748) (87,166) (107,108) (108,924)
Capital expenditures of
discontinued operations (5,303) (5,771) (3,259) (3,722) (6,511) (8,696) (5,021) (5,753)
Statistical Data (3):
Full time employees 2,347 2,623 2,861 3,032 3,050 3,089 3,251 3,415
Telecom services:
Access lines in service (4) 5,371 20,108 50,551 141,035 186,156 237,458 290,983 354,482
Buildings connected (5):
On-net 545 560 590 626 637 665 684 777
Hybrid (6) 1,550 1,704 1,726 2,527 3,294 3,733 4,217 4,620
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total buildings
connected 2,095 2,264 2,316 3,153 3,931 4,398 4,901 5,397
Operational switches:
Voice 16 17 18 19 20 20 21 29
Data 10 15 15 15 15 15 15 16
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operational
switches 26 32 33 34 35 35 36 45
Fiber route miles (7) :
Operational 2,483 2,898 3,021 3,043 3,194 3,812 3,995 4,255
Under construction - - - - - - - 625
Fiber strand miles (8) :
Operational 83,334 101,788 109,510 111,435 118,074 124,642 127,756 134,152
Under construction - - - - - - - 15,284
Satellite services:
C-Band installations (9) 57 57 54 57 59 66 69 76
</TABLE>
(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses, or simply,
operating loss plus depreciation and amortization. EBITDA (before
nonrecurring charges) represents EBITDA before certain nonrecurring charges
such as the net loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures
43
<PAGE>
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with GAAP for the periods indicated.
EBITDA and EBITDA (before nonrecurring charges) are not measurements under
GAAP and are not necessarily comparable with similarly titled measures of
other companies. Net cash flows from operating, investing and financing
activities of continuing operations as determined using GAAP are also
presented in Other Data.
(2) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's corporate headquarters.
Capital expenditures of discontinued operations includes the capital
expenditures of Zycom and NETCOM combined for all periods presented.
(3) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(4) Access lines in service at December 31, 1998 includes 271,928 lines which
are provisioned through the Company's switch and 82,554 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there is no assurance that it
will be successful in executing this strategy.
(5) Prior to the fourth quarter of 1997, buildings connected includes only
special access buildings connected. Beginning December 31, 1997, buildings
connected includes both dial tone and special access buildings connected.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.
(7) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1998, the Company had 4,255
fiber route miles, of which 47 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(8) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1998, the Company had
134,152 fiber strand miles, of which 1,595 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.
(9) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. EBITDA, EBITDA (before nonrecurring charges),
and operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network expansion and development of new
services. Since the quarter ended June 30, 1996, EBITDA losses (before
nonrecurring charges) have improved for each consecutive quarter, through and
including the quarter ended December 31, 1998 for which the Company reported
44
<PAGE>
positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company
provides a greater volume of higher margin services, principally local exchange
services, carries more traffic on its own facilities rather than ILEC facilities
and obtains the right to use unbundled ILEC facilities, while experiencing
decelerating increases in personnel and other SG&A expenses supporting its
operations, any or all of which may not occur, the Company anticipates that
EBITDA performance will continue to improve in the near term.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1998, the Company had federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0 million,
respectively, which expire at various times in varying amounts through 2019.
However, due to the provisions of Section 382, regulations issued under Section
1502 and certain other provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the utilization of a portion of the NOLs may be limited.
In addition, the Company is also subject to certain state income tax laws which
may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code limits the use of NOLs, as well as other tax
attributes, following significant changes in ownership of a corporation's stock,
as defined in the Code. The limitation is expressed as the amount of NOL or
other tax attributes arising during a period prior to the change in ownership
that may be used by the Company in any tax year subsequent to the change in
ownership. Other factors may act to increase or decrease the annual limitation
for any year subsequent to a change in ownership. Future events beyond the
control of the Company could reduce or eliminate the Company's ability to
utilize its NOLs. Future ownership changes under Section 382 will require a new
Section 382 computation which could further restrict the use of the NOLs. In
addition, the Section 382 limitation could be reduced to zero if the Company
fails to satisfy the continuity of business enterprise requirement for the
two-year period following an ownership change.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1998, the Company had current assets of
$422.8 million, including $262.8 million of cash, cash equivalents and
short-term investments available for sale which exceeded current liabilities of
$127.9 million, providing working capital of $294.9 million. In addition, during
the first quarter of 1999, the Company completed the sales of NETCOM's
operations for total proceeds of $286.1 million. The Company invests excess
funds in short-term, interest-bearing investment-grade securities until such
funds are used to fund the capital investments and operating needs of the
Company's business. The Company's short term investment objectives are safety,
liquidity and yield, in that order.
45
<PAGE>
Net Cash Used By Operating Activities of Continuing Operations
The Company's operating activities of continuing operations used $39.1
million in fiscal 1996, $4.7 million and $6.4 million for the three months ended
December 31, 1995 and 1996, respectively, and $117.2 million and $105.4 million
for fiscal 1997 and 1998, respectively. Net cash used by operating activities of
continuing operations is primarily due to net losses from continuing operations
and increases in receivables, which are partially offset by changes in other
working capital items and non-cash expenses, such as depreciation and
amortization expense, deferred interest expense, accretion and preferred
dividends on subsidiary preferred securities.
The Company does not anticipate that cash provided by operations will be
sufficient to fund operating activities, the future expansion of existing
networks or the construction and acquisition of new networks in the near term.
As the Company provides a greater volume of higher margin services, principally
local exchange services, carries more traffic on its own facilities rather than
ILEC facilities and obtains the right to use unbundled ILEC facilities, while
experiencing decelerating increases in personnel and other SG&A expenses
supporting its operations, any or all of which may not occur, the Company
anticipates that net cash used by operating activities of continuing operations
will continue to improve in the near term.
Net Cash Used By Investing Activities of Continuing Operations
Investing activities of continuing operations used $134.8 million (net of
$21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1996, $25.2 million (net of $21.1
million received in connection with the aforementioned equipment sale) and $82.3
million for the three months ended December 31, 1995 and 1996, respectively, and
$429.5 million and $349.1 million for fiscal 1997 and 1998, respectively. Net
cash used by investing activities of continuing operations includes cash
expended for the acquisition of property, equipment and other assets of $121.9
million for fiscal 1996, $26.8 million and $50.8 million for the three months
ended December 31, 1995 and 1996, respectively, and $268.8 million and $367.5
million for fiscal 1997 and 1998, respectively. Additionally, net cash used by
investing activities of continuing operations includes payments for construction
of the Company's corporate headquarters of $1.5 million for fiscal 1996, $7.9
million for the three months ended December 31, 1996, and $29.4 million and $4.9
million for fiscal 1997 and 1998, respectively. The Company used $45.9 million
in fiscal 1997 to acquire CBG and $67.8 million in fiscal 1998 for the
acquisitions of ChoiceCom, NikoNET and DataChoice combined. During fiscal 1998,
the Company used $9.5 million to purchase the minority interest of two of the
Company's operating subsidiaries. Offsetting the expenditures for investing
activities of continuing operations for fiscal 1998 are the proceeds from the
sale of the Company's corporate headquarters of $30.3 million and the sale of
short-term investments of $60.3 million. The Company will continue to use cash
in 1999 and subsequent periods for the construction of new networks, the
expansion of existing networks and, potentially, for acquisitions. The Company
acquired assets under capital leases and through the issuance of debt or
warrants of $55.0 million in fiscal 1996, $0.1 million and $19.5 million for the
three months ended December 31, 1995 and 1996, respectively, and $1.4 million
for fiscal 1998.
46
<PAGE>
Net Cash Provided (Used) By Financing Activities of Continuing Operations
Financing activities of continuing operations provided $355.8 million in
fiscal 1996, used $8.4 million and $1.9 million in the three months ended
December 31, 1995 and 1996, respectively, and provided $308.1 million and $530.9
million in fiscal 1997 and 1998, respectively. Net cash provided by financing
activities of continuing operations for these periods includes cash received in
connection with the private placement of the 11 5/8% Notes and the 14% Preferred
Stock in March 1997, the 6 3/4% Preferred Securities in September and October
1997 and the 10% Notes and the 9 7/8% Notes in February and April 1998,
respectively. Historically, the funds to finance the Company's business
acquisitions, capital expenditures, working capital requirements and operating
losses have been obtained through public and private offerings of ICG and
Holdings-Canada common shares, convertible subordinated notes, convertible
preferred shares of Holdings-Canada, capital lease financings and various
working capital sources, including credit facilities, in addition to the private
placement of the securities previously mentioned and other securities offerings.
On February 12, 1998, ICG Services completed a private placement of 10%
Notes, with a maturity value of approximately $490.0 million for net proceeds,
after underwriting and other offering costs, of approximately $290.9 million.
Interest will accrue at 10% per annum, beginning February 15, 2003, and is
payable in cash each February 15 and August 15, commencing August 15, 2003. The
10% Notes will be redeemable at the option of ICG Services, in whole or in part,
on or after February 15, 2003.
On April 27, 1998, ICG Services completed a private placement of 9 7/8%
Notes, with a maturity value of approximately $405.3 million, for net proceeds,
after underwriting and other offering costs, of approximately $242.1 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes
will be redeemable at the option of ICG Services, in whole or in part, on or
after May 1, 2003.
As of December 31, 1998, the Company had an aggregate of approximately
$68.4 million of capital lease obligations of continuing operations and an
aggregate accreted value of approximately $1.6 billion was outstanding under the
13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes"), the 12 1/2% Notes,
the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require
payments of interest to be made in cash commencing March 15, 2001 and mature on
September 15, 2005. The 12 1/2% Notes require payments of interest to be made in
cash commencing November 1, 2001 and mature on May 1, 2006. The 11 5/8% Notes
require payments of interest to be made in cash commencing September 15, 2002
and mature on March 15, 2007. The 10% Notes require payments of interest in cash
commencing August 15, 2003 and mature February 15, 2008. The 9 7/8% Notes
require payments of interest in cash commencing November 1, 2003 and mature May
1, 2008. The 6 3/4% Preferred Securities require payments of dividends to be
made in cash through November 15, 2000. In addition, the 14% Preferred Stock and
the 14 1/4% Preferred Stock require payments of dividends to be made in cash
commencing June 15, 2002 and August 1, 2001, respectively. As of December 31,
1998, the Company had $1.1 million of other indebtedness outstanding. With
respect to indebtedness outstanding on December 31, 1998, the Company has cash
interest payment obligations of approximately $113.3 million in 2001, $158.0
47
<PAGE>
million in 2002 and $212.6 million in 2003. With respect to preferred securities
currently outstanding, the Company has cash dividend obligations of
approximately $6.7 million remaining in 1999 and $8.9 million in 2000, for which
the Company has restricted cash balances available for such dividend payments,
$21.5 million in 2001, $57.0 million in 2002 and $70.9 million in 2003.
Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to March 2001. The
Company's ability to do so will depend on, among other things, its financial
condition at the time, restrictions in the instruments governing its
indebtedness, and other factors, including market conditions, beyond the control
of the Company. There can be no assurance that the Company will be able to
refinance such indebtedness, including such capital leases, or obtain such
additional funds, and if the Company is unable to effect such refinancings or
obtain additional funds, the Company's ability to make principal and interest
payments on its indebtedness or make payments of cash dividends on, or the
mandatory redemption of, its preferred securities, would be adversely affected.
Capital Expenditures
The Company's capital expenditures of continuing operations (including
assets acquired under capital leases and excluding payments for construction of
the Company's corporate headquarters) were $176.9 million for fiscal 1996, $26.9
million and $70.3 million for the three months ended December 31, 1995 and 1996,
respectively, and $268.8 million and $368.9 million for fiscal 1997 and 1998,
respectively. The Company anticipates that the expansion of existing networks,
construction of new networks and further development of the Company's products
and services will require capital expenditures of approximately $380.0 million
during 1999. To facilitate the expansion of its services and networks, the
Company has entered into equipment purchase agreements with various vendors
under which the Company has committed to purchase a substantial amount of
equipment and other assets, including a full range of switching systems, fiber
optic cable, network electronics, software and services. If the Company fails to
meet the minimum purchase level in any given year, the vendor may discontinue
certain discounts, allowances and incentives otherwise provided to the Company.
Actual capital expenditures will depend on numerous factors, including certain
factors beyond the Company's control. These factors include the nature of future
expansion and acquisition opportunities, economic conditions, competition,
regulatory developments and the availability of equity, debt and lease
financing.
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capital expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited consolidated financial statements for the fiscal year ended December 31,
1998 included elsewhere herein.
In view of the continuing development of the Company's products and
services, the expansion of existing networks and the construction, leasing and
licensing of new networks, the Company will require additional amounts of cash
in the future from outside sources. Management believes that the Company's cash
on hand and amounts expected to be available through asset sales, including the
48
<PAGE>
proceeds from the sales of the operations of NETCOM, cash flows from operations,
including collection of receivables from transport and termination charges,
vendor financing arrangements and credit facilities will provide sufficient
funds necessary for the Company to expand its business as currently planned and
to fund its operations through 2000. Additional sources of cash may include
public and private equity and debt financings, sales of non-strategic assets,
capital leases and other financing arrangements. In the past, the Company has
been able to secure sufficient amounts of financing to meet its capital needs.
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on terms acceptable to the
Company.
The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings and sales of non-strategic assets until the Company establishes a
sufficient revenue-generating customer base could have a material adverse effect
on the Company's liquidity.
Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million and $58.3
million for fiscal 1997 and 1998, respectively, for reciprocal compensation
relating to the transport and termination of local traffic to ISPs from
customers of ILECs pursuant to various interconnection agreements. The ILECs
have not paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that such calls
are not local traffic as defined by the various agreements and under state and
federal laws and public policies. As a result, the Company expects receivables
from transport and termination charges will continue to increase until these
disputes have been resolved.
The resolution of these disputes will be based on rulings by state public
utility commissions and/or by the FCC. To date, there have been favorable final
rulings from 29 states that ISP traffic is subject to the payment of reciprocal
compensation under interconnection agreements. On February 25, 1999, the FCC
issued a decision that ISP-bound traffic is largely jurisdictionally interstate
traffic. The decision relies on the long-standing federal policy that ISP
traffic, although jurisdictionally interstate, is treated as though it is local
traffic for pricing purposes. The decision also emphasizes that because there
are no federal rules governing intercarrier compensation for ISP traffic, the
determination as to whether such traffic is subject to reciprocal compensation
under the terms of interconnection agreements properly is made by the state
commissions and that carriers are bound by their interconnection agreements and
state commission decisions regarding the payment of reciprocal compensation for
ISP traffic. The FCC has initiated a rulemaking proceeding regarding the
adoption of prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of rulemaking, the FCC expresses its preference that
compensation rates for this traffic continue to be set by negotiations between
carriers, with disputes resolved by arbitrations conducted by state commissions,
pursuant to the Telecommunications Act.
On March 4, 1999, the Alabama Public Service Commission (the "Alabama PSC")
issued a decision that found that reciprocal compensation is owed for Internet
traffic under four CLEC interconnection agreements with BellSouth Corporation
49
<PAGE>
("BellSouth"), which agreements were at issue in the proceeding. With respect to
the Company's interconnection agreement, which also was at issue, the state
commission interpreted certain language in the Company's agreement to exempt
ISP-bound traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider the intent of the
parties in negotiating and executing the Company's interconnection agreement,
the specific language of the Company's interconnection agreement and the impact
of Alabama PSC and FCC policies, and thereby misinterpreted the agreement. The
Company intends to file a request with the Alabama PSC by April 1, 1999 seeking
determination that the ruling with respect to the Company's agreement be
reconsidered, and that the Company should be treated the same as the other CLECs
that participated in the proceeding and for which the Alabama PSC ordered the
payment of reciprocal compensation. While the Company intends to pursue
vigorously a petition for reconsideration with the Alabama PSC, and if the
Company deems it necessary, judicial review, the Company cannot predict the
final outcome of this issue.
The Company has also recorded revenue of approximately $19.1 million for
fiscal 1998, related to other transport and termination charges to the ILECs,
pursuant to the Company's interconnection agreements with these ILECs. Included
in the Company's trade receivables at December 31, 1997 and 1998 are $4.3
million and $72.8 million, respectively, for all receivables related to
transport and termination charges. The receivables balance at December 31, 1998
is net of an allowance of $5.6 million for disputed amounts.
Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth that the
Company may continue billing BellSouth under the pricing terms within the
expired interconnection agreement, until such agreement is renegotiated or
arbitrated by the relevant state commissions. The Company's remaining
interconnection agreements expire in 1999 and 2000. While the Company believes
that all revenue recorded through December 31, 1998 is collectible and that
future revenue from transport and termination charges billed under the Company's
current interconnection agreements will be realized, there can be no assurance
that future regulatory and judicial rulings will be favorable to the Company,
that the Alabama PSC will reconsider its ruling, or that different pricing plans
for transport and termination charges between carriers will not be adopted when
the Company's interconnection agreements are renegotiated or as a result of the
FCC's rulemaking proceeding on future compensation methods. In fact, the Company
believes that different pricing plans will be considered and adopted and
although the Company expects that revenue from transport and termination charges
likely will decrease as a percentage of total revenue from local services in
periods subject to future interconnection agreements, the Company's local
termination services still will be required by the ILECs and must be provided
under the Telecommunications Act, and likely will result in increasing volume in
minutes due to the growth of the Internet and related services markets. The
Company expects to negotiate reasonable compensation and collection terms for
local termination services, although there is no assurance that such
compensation will remain consistent with current levels. Additionally, the
Company expects to supplement its current operations with revenue, and
ultimately EBITDA, from new services offerings such as RAS, EOS and DSL,
however, the Company may or may not be successful in its efforts to deploy such
services profitably.
50
<PAGE>
Year 2000 Compliance
Importance
Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with "20" and the familiar "19." If these systems and products
are not modified or replaced, many will fail, create erroneous results and/or
may cause interfacing systems to fail.
Year 2000 compliance issues are of particular importance to the Company
since its operations rely heavily upon computer systems, software applications
and other electronics containing date-sensitive embedded technology. Some of
these technologies were internally developed and others are standard purchased
systems which may or may not have been customized for the Company's particular
application. The Company also relies heavily upon various vendors and suppliers
that are themselves very reliant on computer systems, software applications and
other electronics containing date-sensitive embedded technology. These vendors
and suppliers include: (i) ILECs and other local and long distance carriers with
which the Company has interconnection or resale agreements; (ii) manufacturers
of the hardware and related operating systems that the Company uses directly in
its operations; (iii) providers that create custom software applications that
the Company uses directly in its operations; and (iv) providers that sell
standard or custom equipment or software which allow the Company to provide
administrative support to its operations.
Strategy
The Company's approach to addressing the potential impact of Year 2000
compliance issues is focused upon ensuring, to the extent reasonably possible,
the continued, normal operation of its business and supporting systems.
Accordingly, the Company has developed a four-phase plan which it is applying to
each functional category of the Company's computer systems and components. Each
of the Company's computer systems, software applications and other electronics
containing date-sensitive embedded technology is included within one of the
following four functional categories:
o Networks and Products, which consists of all components whether
hardware, software or embedded technology used directly in the
Company's operations, including components used by the Company's voice
and data switches and collocations and telecommunications products;
o IT Systems, which consists of all components used to support the
Company's operations, including provisioning and billing systems;
o Building and Facilities, which consists of all components with
embedded technology used at the Company's headquarters building and
other leased facilities, including security systems, elevators and
internal use telephone systems;
51
<PAGE>
o Office Equipment, which consists of all office equipment with
date-sensitive embedded technology.
For each of the categories described above, the Company will apply the
following four-phase approach to identifying and addressing the potential impact
of Year 2000 compliance issues:
o Phase I - Assessment
During this phase, the Company's technology staff will perform an
inventory of all components currently in use by the Company. Based
upon this inventory, the Company's business executives and technology
staff will jointly classify each component as a "high," "medium" or
"low" priority item, determined primarily by the relative importance
that the particular component has to the Company's normal business
operations, the number of people internally and externally which would
be affected by any failure of such component and the interdependence
of such component with other components used by the Company that may
be of higher or lower priority.
Based upon such classifications, the Company's business executives and
information technology staff will jointly set desired levels of Year
2000 readiness for each component inventoried, using the following
criteria, as defined by the Company:
- Capable, meaning that such computer system or component will be
capable of managing and expressing calendar years in four digits;
- Compliant, meaning that the Company will be able to use such
component for the purpose for which the Company intended it by
adapting to its ability to manage and express calendar years in
only two digits;
- Certified, meaning that the Company has received testing results
to demonstrate, or the vendor or supplier is subject to
contractual terms which requires, that such component requires no
Year 2000 modifications to manage and express calendar years in
four digits; or
- Non-critical, meaning that the Company expects to be able to
continue to use such component unmodified or has determined that
the estimated costs of modification exceed the estimated costs
associated with its failure.
o Phase II - Remediation
During this phase, the Company will develop and execute a remediation
plan for each component based upon the priorities set in Phase I.
Remediation may include component upgrade, reprogramming, replacement,
receipt of vendor and supplier certification or other actions as
deemed necessary or appropriate.
o Phase III - Testing
During this phase, the Company will perform testing sufficient to
confirm that the component meets the desired state of Year 2000
readiness. This phase will consist of: (i) testing the component in
isolation, or unit testing; (ii) testing the component jointly with
52
<PAGE>
other components, or system testing; and (iii) testing interdependent
systems, or environment testing.
o Phase IV - Implementation
During the last phase, the Company will implement each act of
remediation developed and tested for each component, as well as
implement adequate controls to ensure that future upgrades and changes
to the Company's computer systems, for operational reasons other than
Year 2000 compliance, do not alter the Company's Year 2000 state of
readiness.
Current State of Readiness
The Company has commenced certain of the phases within its Year 2000
compliance strategy for each of its functional system categories, as shown by
the table set forth below. The Company does not intend to wait until the
completion of a phase for all functional category components together before
commencing the next phase. Accordingly, the information set forth below
represents only a general description of the phase status for each functional
category.
<TABLE>
<CAPTION>
- ------------------------------- ----------------------------------------------------------------------------------------------
Phase
- ------------------------------- ----------------------------------------------------------------------------------------------
I II III IV
System and Level of Priority Assessment Remediation Testing Implementation
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Networks and Products
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
High Complete In progress In progress To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Low Complete Complete Complete Complete
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
IT Systems
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Low Complete In progress To be determined based on the results of
To complete Q2 1999 Phase II
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Building and Facilities
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
High In progress In progress To be determined based on the results of
To complete Q2 1999 To complete Q2 1999 Phase II
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Medium In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low To begin Q2 1999 To be determined based on the results of Phase I
To complete Q3 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Office Equipment
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q4 1999
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Low Complete In progress To be determined based on the results of
To complete Q2 1999 Phase II
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
</TABLE>
Separately, the Company is in the process of reviewing the Company's
material contracts with contractors and vendors/suppliers and considering the
necessity of renegotiating certain existing contracts, to the extent that the
contracts fail to address the allocation of potential Year 2000 liabilities
53
<PAGE>
between parties. Prior to entering into any new material contracts, the Company
will seek to address the allocation of potential Year 2000 liabilities as part
of the initial negotiation.
Costs
The Company expenses all incremental costs to the Company associated with
Year 2000 compliance issues as incurred. Through December 31, 1998, such costs
incurred were approximately $0.5 million, consisting of approximately $0.4
million of replacement hardware and software and approximately $0.1 million of
consulting fees and other miscellaneous costs of Year 2000 compliance reference
and planning materials. The Company has also incurred certain internal costs,
including salaries and benefits for employees dedicating various portions of
their time to Year 2000 compliance issues, of which costs the Company believes
has not exceeded $0.5 million through December 31, 1998. The Company expects
that total future incremental costs of Year 2000 compliance efforts will be
approximately $3.8 million, consisting of $2.3 million in consulting fees, $1.5
million in replacement hardware and software and other miscellaneous costs.
These anticipated costs have been included in the Company's fiscal 1999 budget
and represent approximately 4% of the Company's budgeted expenses for
information technology through fiscal 1999. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000
compliance costs, as necessary.
Risk, Contingency Planning and Reasonably Likely Worst Case Scenario
While the Company is heavily reliant upon its computer systems, software
applications and other electronics containing date-sensitive embedded technology
as part of its business operations, such components upon which the Company
primarily relies were developed with current state-of-the-art technology and,
accordingly, the Company has reasonably assumed that its four-phase approach
will demonstrate that many of its high-priority systems do not present material
Year 2000 compliance issues. For computer systems, software applications and
other electronics containing date-sensitive embedded technology that have met
the Company's desired level of Year 2000 readiness, the Company will use its
existing contingency plans to mitigate or eliminate problems it may experience
if an unanticipated system failure were to occur. For components that have not
met the Company's desired level of readiness, the Company will develop a
specific contingency plan to determine the actions the Company would take if
such component failed.
At the present time, the Company is unable to develop a most reasonably
likely worst case scenario for failure to achieve adequate Year 2000 compliance.
The Company will be better able to develop such a scenario once the status of
Year 2000 compliance of the Company's material vendors and suppliers is
complete. The Company will monitor its vendors and suppliers, particularly the
other telecommunications companies upon which the Company relies, to determine
whether they are performing and implementing an adequate Year 2000 compliance
plan in a timely manner.
The Company acknowledges the possibility that the Company may become
subject to potential claims by customers if the Company's operations are
interrupted for an extended period of time. However, it is not possible to
predict either the probability of such potential litigation, the amount that
54
<PAGE>
could be in controversy or upon which party a court would place ultimate
responsibility for any such interruption.
The Company views Year 2000 compliance as a process that is inherently
dynamic and will change in response to changing circumstances. While the Company
believes that through execution and satisfactory completion of its Year 2000
compliance strategy its computer systems, software applications and electronics
will be Year 2000 compliant, there can be no assurance until the Year 2000
occurs that all systems and all interfacing technology when running jointly will
function adequately. Additionally, there can be no assurance that the
assumptions made by the Company within its Year 2000 compliance strategy will
prove to be correct, that the strategy will succeed or that the remedial actions
being implemented will be able to be completed by the time necessary to avoid
system or component failures. In addition, disruptions with respect to the
computer systems of vendors or customers, which systems are outside the control
of the Company, could impair the Company's ability to obtain necessary products
or services to sell to its customers. Disruptions of the Company's computer
systems, or the computer systems of the Company's vendors or customers, as well
as the cost of avoiding such disruption, could have a material adverse effect on
the Company's financial condition and results of operations.
Accounting Change
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Annual Report.
55
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and, subsequent to February 17, 1999, equity
prices. The Company routinely assesses these risks and has established policies
and business practices to protect against the adverse effects of these and other
potential exposures. The Company does not, in the normal course of business, use
derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its senior indebtedness.
The Company invests primarily in high grade short-term investments which
consist of money market instruments, commercial paper, certificates of deposit,
government obligations and corporate bonds, all of which are considered to be
available for sale and generally have maturities of one year or less. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order. As of December 31, 1998, the Company had approximately $262.8
million in cash and cash equivalents and short-term investments available for
sale, at a weighted average fixed interest rate of 5.12%. A hypothetical 10%
fluctuation in market rates of interest would cause a change in the fair value
of the Company's investment in marketable securities at December 31, 1998 of
approximately $0.7 million, and accordingly, would not cause a material impact
on the Company's financial position, results of operations or cash flows.
At December 31, 1998, the Company's outstanding indebtedness includes $1.6
billion under the 13 1/2 % Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9
7/8% Notes and $466.4 million under the 14 1/4% Preferred Stock, 14% Preferred
Stock and 6 3/4% Preferred Securities. These instruments contain fixed annual
interest and dividend rates, respectively, and accordingly, any change in market
interest rates would have no impact on the Company's financial position, results
of operations or cash flows. Future increases in interest rates could increase
the cost of any new borrowings by the Company. The Company does not hedge
against future changes in market rates of interest.
Equity Price Risk
On February 17, 1999, the Company completed the sale of the domestic
operations of NETCOM to MindSpring, in exchange for a combination of cash and
376,116 shares of unregistered common stock of MindSpring, valued at
approximately $79.76 per share at the time of the transaction. Currently, the
Company bears some risk of market price fluctuations in its investment in
MindSpring. The common stock of MindSpring is traded on the Nasdaq National
Market and has, at March 29, 1999, a fair market value of $92.50 per share.
Although changes in the fair market value of MindSpring common stock may affect
the fair market value of the Company's investment and cause unrealized gains or
losses, such gains or losses will not be realized until the securities are sold.
In order to mitigate the risk associated with a decrease in the market value of
56
<PAGE>
the Company's investment in MindSpring, the Company has entered into a hedging
contract. During the term of the hedging contract, a hypothetical 10%
fluctuation in the fair value of the common stock of MindSpring would not cause
a material impact on the Company's financial position, results of operations or
cash flows. The Company intends to liquidate its investment in MindSpring upon
the effectiveness of the registration of common stock of MindSpring with the
Securities and Exchange Commission, which is expected to occur in the near
future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page F-1 of
this Annual Report. The financial statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1
of this Annual Report.
Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
The information required under Item 10 with respect to the Company is
incorporated by reference from the definitive Proxy Statement for the 1999
Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the
Securities and Exchange Commission not later than April 30, 1999. The Directors
and executive officers of each of Holdings-Canada and Holdings are set forth
below.
Holdings-Canada
The Directors of Holdings-Canada are:
Harry R. Herbst
H. Don Teague
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer
Harry R. Herbst - Executive Vice President and Chief Financial Officer
H. Don Teague - Executive Vice President, General Counsel and Secretary
Holdings
The Directors of Holdings are:
J. Shelby Bryan (Chairman)
Douglas I. Falk
Harry R. Herbst
H. Don Teague
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Telecom
Harry R. Herbst - Executive Vice President and Chief Financial Officer
H. Don Teague - Executive Vice President, General Counsel and Secretary
J. Shelby Bryan, 53, was appointed President and Chief Executive Officer of
Holdings-Canada and Holdings in May 1995. He has 19 years of experience in the
telecommunications industry, primarily in the cellular business. He co-founded
Millicom International Cellular S.A., a publicly owned corporation providing
cellular service internationally, served as its President and Chief Executive
Officer from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk, 49, has been Executive Vice President-Telecom and Director of
58
<PAGE>
Holdings since September 1998 and was President of ICG Satellite Services, Inc.
from August 1996 to May 1998. Prior to joining the Company, Mr. Falk held
several positions in the cruise line industry, including President of Norwegian
Cruise Line, Senior Vice President - Marketing and Sales with Holland America
Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his
work in the cruise line industry, Mr. Falk held executive positions with MTI
Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning
Associates and The Procter and Gamble Company.
Harry R. Herbst, 47, was appointed Executive Vice President, Chief Financial
Officer and Director of Holdings-Canada and Holdings in August 1998 and has been
a member of the Board of Directors of Holdings-Canada and Holdings since October
1995. Prior to joining the Company, Mr. Herbst was Vice President of Finance and
Strategic Planning for Gulf Canada Resources Ltd. from November 1995 to June
1998 and Vice President and Treasurer of Gulf Canada Resources Ltd. from January
to November 1995. Previously, Mr. Herbst was Vice President of Taxation for
Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp.
from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with
Coopers & Lybrand.
H. Don Teague, 56, joined the Company as Executive Vice President, General
Counsel, Secretary and Director of Holdings-Canada and Holdings in May 1997.
Prior to this position, Mr. Teague was Senior Vice President, Administration and
Legal with Falcon Seaboard Holdings, L.P. and its predecessors from April 1994
through April 1997. From 1974 to April 1994, Mr. Teague was a partner in the law
firm of Vinson & Elkins L.L.P.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 is incorporated by reference from
the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of
ICG Communications, Inc. to be filed with the Securities and Exchange Commission
not later than April 30, 1999. Neither Holdings-Canada nor Holdings pays any
form of compensation to any of their respective Directors or executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 is incorporated by reference from
the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of
ICG Communications, Inc. to be filed with the Securities and Exchange Commission
not later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included
in Item 8 of Part II:
Page
Independent Auditors' Report - Report of KPMG LLP . . . . . . . F-2
Independent Auditors' Report - Report of Ernst & Young LLP, as
of December 31, 1996 and 1997 and for each of the Two Years
in the Period Ended December 31, 1997 . . . . . . . . . . . . F-4
Independent Auditors' Report - Report of Ernst & Young LLP, as
of December 31, 1996 and for the Three Months Then Ended. . . F-5
Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . F-6
Consolidated Statements of Operations, Fiscal Year Ended
September 30, 1996, the Three Months Ended December 31, 1995
(unaudited) and 1996, and Fiscal Years Ended December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Year Ended September 30, 1996, the Three Months Ended
December 31, 1996, and Fiscal Years Ended December 31, 1997
and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated Statements of Cash Flows, Fiscal Year Ended
September 30, 1996, the Three Months Ended December 31, 1995
(unaudited) and 1996, and Fiscal Years Ended December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-11
Notes to Consolidated Financial Statements, December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-14
(2) Financial Statement Schedule. The following Financial Statement
Schedule is submitted herewith:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . . S-2
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1
to Registration Statement on Form S-4 of ICG Communications,
Inc. (Commission File No. 333-4226)].
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<PAGE>
(3) Corporate Organization.
3.1: Certificate of Incorporation of ICG Communications, Inc.
dated April 11, 1996. [Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
3.2: By-laws of ICG Communications, Inc. [Incorporated by
reference to Exhibit 3.2 to Registration Statement on Form
S-4 of ICG Communications, Inc., File No. 333-4226].
3.3: Agreement and Plan of Reorganization by and among ICG
Communications, Inc., ICG Canadian Acquisition, Inc., ICG
Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated
November 4, 1998.
3.4: Order of Amalgamation between ICG Holdings (Canada), Inc.
and ICG Holdings (Canada) Co., dated December 22, 1998.
3.5: Memorandum and Articles of Association of ICG Holdings
(Canada) Co. filed with the Registrar of Joint Stock
Companies, Halifax, Nova Scotia.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
4.1: Note Purchase Agreement, dated as of July 14, 1995, among
the Registrant, IntelCom Group (U.S.A.), Inc., Morgan
Stanley Group Inc., Princes Gate Investors, L.P., Acorn
Partnership I, L.P., PGI Investments Limited, PGI
Investments Limited, PGI Sweden AB, and Gregor von Opel and
Morgan Stanley Group, Inc., as Agent for the Purchasers
[Incorporated by reference to Exhibit 4.1 to Form 8-K of
IntelCom Group Inc., dated July 18, 1995].
4.2: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference
to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.3: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group
(U.S.A.), Inc., File No. 333-04569].
4.4: Indenture, dated August 8, 1995, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank
Colorado, National Association [Incorporated by reference to
Exhibit 4.6 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.) Inc., File Number 33-96540].
4.5: Indenture, dated April 30, 1996, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank
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<PAGE>
Colorado, National Association [Incorporated by reference to
Exhibit 4.14 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.) Inc., File No. 333-04569].
4.6: Indenture, dated March 11, 1997, among ICG Holdings, Inc.,
ICG Communications, Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4 of ICG Communications,
Inc., File No. 333-24359].
4.7: Written Action of the Manager of ICG Funding, LLC, dated as
of September 24, 1997, with respect to the terms of the 6
3/4% Exchangeable Limited Liability Company Preferred
Securities [Incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3 of ICG Funding, LLC, File
No. 333-40495].
4.8: Amended and Restated Limited Liability Company Agreement of
ICG Funding, LLC, dated as of September 23, 1997
[Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 of ICG Funding, LLC, File No.
333-40495].
4.9: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of February 12,
1998 [Incorporated by reference to Exhibit 4.4 to ICG
Services, Inc. Registration Statement on Form S-4 File No.
333-51037].
4.10:Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of April 27, 1998
[Incorporated by reference to Exhibit 4.4 to ICG Services,
Inc. Registration Statement on Form S-4 File No. 333-60653,
as amended].
4.11:Second Amended and Restated Articles of Incorporation of
ICG Holdings, Inc., dated March 10, 1997.
(9) Voting Trust Agreement.
None.
(10) Material Contracts.
10.1:Arrangement and Support Agreement dated June 27, 1996
between ICG Communications, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
10.2:Incentive Stock Option Plan #2 [Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.3:Form of Stock Option Agreement for Incentive Stock Option
Plan #2 [Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.4:Incentive Stock Option Plan #3 [Incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
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<PAGE>
10.5:Form of Stock Option Agreement for Incentive Stock Option
Plan #3 [Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.6:1994 Employee Stock Option Plan [Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.7:Form of Stock Option Agreement for 1994 Employee Stock
Option Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.8:Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.9:Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.10: Indemnification Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.7 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.11: Placement Agreement, dated as of August 3, 1995, among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain
subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan
Stanley & Co. Incorporated [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 9, 1995].
10.12: Employment Agreement between IntelCom Group Inc. and James
D. Grenfell, dated November 1, 1995. [Incorporated by
reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended September
30, 1995].
10.13: Purchase and Sale Agreement, dated as of October 19, 1995,
by and among ICG Wireless Services, Inc., IntelCom Group
(U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc.
[Incorporated by reference to Exhibit 10.40 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the fiscal year
ended September 30, 1995].
10.14: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to Exhibit
10.42 to ICG Communications, Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1996.]
10.15: ICG Communications, Inc. 1996 Employee Stock Purchase
Plan. [Incorporated by reference to the Registration
Statement on Form S-8 of ICG Communications, Inc., File No.
33-14127, filed on October 14, 1996].
10.16: Consulting Services Agreement, by and between IntelCom
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<PAGE>
Group Inc. and International Communications Consulting,
Inc., effective January 1, 1996 [Incorporated by reference
to Exhibit 10.44 to ICG Communications, Inc.'s Transition
Report on Form 10-K/A for the three months ended December
31, 1996].
10.17: Confidential General Release and Covenant Not to Sue, by
and between ICG Communications, Inc. and John D. Field,
dated November 5, 1996 [Incorporated by reference to Exhibit
10.45 to ICG Communications, Inc.'s Transition Report on
Form 10-K/A for the three months ended December 31, 1996].
10.18: Amendment, dated as of March 26, 1997, between ICG
Communications, Inc. and J. Shelby Bryan, to Employment
Agreement, dated as of May 30, 1995, between IntelCom Group
Inc. and J. Shelby Bryan [Incorporated by reference to
Exhibit 10 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997].
10.19: 1996 Stock Option Plan [Incorporated by reference to
Exhibit 4.6 to the Registration Statement on Form S-8 of ICG
Communications, Inc., File No. 333-25957, filed on April 28,
1997].
10.20: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.21: Employment Agreement, dated as of April 22, 1997, between
ICG Communications, Inc. and Don Teague [Incorporated by
reference to Exhibit 10.2 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997].
10.22: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock
Option Plan [Incorporated by reference to Exhibit 10.1 to
ICG Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997].
10.23a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.23a: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc.,
dated January 15, 1998.
10.23c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.23c: Commercial Lease - Net between TriNet Essential
Facilities X, Inc. and ICG Holdings, Inc., dated January 15,
1998.
10.23e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.23f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc.
to TriNet Essential Facilities X, Inc., dated January 20,
1998.
10.24: Agreement and Plan of Merger, dated October 12, 1997, by
and among ICG Communications, Inc., ICG Acquisition, Inc.
and NETCOM On-Line Communication Services, Inc.
[Incorporated by reference to Exhibit 2.1 to Form 8-K, dated
January 21, 1998].
10.25: Amendment to Agreement and Plan of Merger, dated December
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<PAGE>
15, 1997, by and among ICG Communications, Inc., ICG
Acquisition, Inc. and NETCOM On-Line Communication Services,
Inc. [Incorporated by reference to Exhibit 2.2 to Form 8-K,
dated January 21, 1998].
10.26: Employment Agreement, dated July 1, 1998, between ICG
Communications, Inc. and Harry R. Herbst [Incorporated by
reference to Exhibit 10.1 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998].
10.27: Employment Agreement, dated September 23, 1998, between
ICG Communications, Inc. and Douglas I. Falk [Incorporated
by reference to Exhibit 10.1 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998].
10.28: Asset Purchase Agreement by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication Services,
Inc., dated as of January 5, 1999 [Incorporated by reference
to Exhibit 10.1 to ICG Communications, Inc.'s Current Report
on Form 8-K, dated March 4, 1999].
10.29: ICG Communications, Inc. 1998 Stock Option Plan.
10.30: Form of Stock Option Agreement for 1998 Stock Option Plan.
10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock
Option Plan, dated December 15, 1998.
10.32: Form of Agreement regarding Gross-Up Payments, by and
between ICG Communications, Inc. and each of J. Shelby
Bryan, Harry R. Herbst, Douglas I. Falk and H. Don Teague,
dated December 16, 1998.
(11) Statement re Computation of per Share Earnings.
Not Applicable
(12) Statement re Computation of Ratios.
Not Applicable
(13) Annual Report to Security Holders.
Not Applicable
(21) Subsidiaries of the Registrant.
21.1: Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security Holders
Not Applicable
(23) Consents.
23.1: Consent of KPMG LLP.
23.2: Consent of Ernst & Young LLP.
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<PAGE>
(24) Power of Attorney.
Not Applicable
(27) Financial Data Schedule.
27.1:Financial Data Schedule of ICG Communications, Inc. for the
Fiscal Year Ended December 31, 1998.
(B) Report on Form 8-K. The following report on Form 8-K was filed by the
Registrants during the fiscal quarter ended December 31, 1998:
ICG Communications, Inc. (i) Current Report on Form 8-K dated
ICG Holdings (Canada), Inc. November 4, 1998, regarding the
ICG Holdings, Inc.: announcement of the Company's earnings
information and results of operations for
the quarterended September 30, 1998.
(C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required
by this Item is listed under Item 14(A)(2).
66
<PAGE>
FINANCIAL STATEMENTS
Page
Independent Auditors' Report - Report of KPMG LLP . . . . . . . . . . . F-2
Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and 1997 and for each of the Two Years in the
Period Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-4
Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and for the Three Months Then Ended. . . . . . . . . F-5
Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . . . . . F-6
Consolidated Statements of Operations, Fiscal Year Ended September 30,
1996, the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998. . . . . . . . . . . F-8
Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Year
Ended September 30, 1996, the Three Months Ended December 31, 1996,
and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-10
Consolidated Statements of Cash Flows, Fiscal Year Ended September 30,
1996, the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-11
Notes to Consolidated Financial Statements, December 31, 1997 and 1998 . F-14
F-1
<PAGE>
Independent Auditors' Report - Report of KPMG LLP
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1998 and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of NETCOM On-Line Communication
Services, Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the
Company, as of December 31, 1997 or for the fiscal year ended December 31, 1996,
the three-month period ended December 31, 1996, or the fiscal year ended
December 31, 1997, whose total assets constitute 11.7 percent at December 31,
1997, and whose loss from operations constitutes 100.5 percent in fiscal 1996,
96.0 percent in the three months ended December 31, 1996, and 83.8 percent in
fiscal 1997 of the consolidated loss from discontinued operations. Those
consolidated financial statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for NETCOM, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ICG Communications, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998, in conformity with generally accepted accounting
principles.
F-2
<PAGE>
As explained in note 2 to the consolidated financial statements, during fiscal
year ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.
KPMG LLP
Denver, Colorado
February 15, 1999
F-3
<PAGE>
Independent Auditors' Report - Report of Ernst & Young LLP
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line Communication
Services, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NETCOM
On-Line Communication Services, Inc. at December 31, 1997 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
San Jose, California
February 13, 1998
F-4
<PAGE>
Independent Auditors' Report - Report of Ernst & Young LLP
The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.
We have audited the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NETCOM On-Line Communication Services, Inc. at December 31, 1996 and the
consolidated results of its operations and its cash flows for the three months
then ended, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
April 16, 1998
F-5
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
Assets 1997 1998
- ------ ------------------------ ----------------------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 118,569 210,831
Short-term investments available for sale (note 6) 112,281 52,000
Receivables:
Trade, net of allowance of $5,254 and $15,473 at
December 31, 1997 and 1998, respectively (note 14) 57,163 132,920
Revenue earned, but unbilled 8,599 11,063
Due from affiliate (note 13) 9,384 -
Other (note 13) 1,696 1,156
------------------------ ----------------------
76,842 145,139
------------------------ ----------------------
Inventory 3,901 2,821
Prepaid expenses and deposits 10,495 12,036
Net current assets of discontinued operations (note 3) 38,331 -
------------------------ ----------------------
Total current assets 360,419 422,827
------------------------ ----------------------
Property and equipment (notes 7, 9 and 10) 737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
------------------------ ----------------------
Net property and equipment 631,454 934,134
------------------------ ----------------------
Long-term notes receivable from affiliate and others, net (note 13) 10,375 -
Restricted cash (note 11) 24,649 16,912
Other assets, net of accumulated amortization:
Goodwill (note 4) 75,673 130,503
Deferred financing costs (note 10) 23,196 35,958
Transmission and other licenses 6,031 5,659
Deposits and other (note 8) 9,066 25,189
------------------------ ----------------------
113,966 197,309
------------------------ ----------------------
Net non-current assets of discontinued operations (note 3) 76,577 54,243
------------------------ ----------------------
Total assets (note 15) $ 1,217,440 1,625,425
======================== ======================
(Continued)
</TABLE>
F-6
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
Liabilities and Stockholders' Deficit 1997 1998
- ------------------------------------- ------------------------ ---------------------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 27,458 33,781
Accrued liabilities 56,817 55,816
Deferred revenue 5,049 9,892
Current portion of capital lease obligations (notes 9 and 14) 5,637 5,086
Current portion of long-term debt (note 10) 1,784 46
Net current liabilities of discontinued operations
(note 3) - 23,272
------------------------ ---------------------
Total current liabilities 96,745 127,893
------------------------ ---------------------
Capital lease obligations, less current portion (notes 9 and 14) 66,939 63,359
Long-term debt, net of discount, less current portion (note 10) 890,568 1,598,998
------------------------ ---------------------
Total liabilities 1,054,252 1,790,250
------------------------ ---------------------
Redeemable preferred stock of subsidiary ($301.2 million and
$346.2 million liquidation value at December 31, 1997 and 1998,
respectively) (note 11) 292,442 338,310
Company-obligated mandatorily redeemable preferred securities
of subsidiary limited liability company which holds solely
Company preferred stock ($133.4 million liquidation value at
December 31, 1997 and 1998) (note 11) 127,729 128,042
Stockholders' deficit (note 12):
Common stock, $.01 par value, 100,000,000 shares authorized;
43,974,659 and 46,360,185 shares issued and outstanding at
December 31, 1997 and 1998, respectively (notes 1 and 12) 749 584
Additional paid-in capital 533,541 577,820
Accumulated deficit (791,417) (1,209,462)
Accumulated other comprehensive income (loss) 144 (119)
------------------------ ---------------------
Total stockholders' deficit (256,983) (631,177)
------------------------ ---------------------
Commitments and contingencies (notes 10, 11, 13 and 14)
Total liabilities and stockholders' deficit $ 1,217,440 1,625,425
======================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year
ended Three months ended Fiscal years ended
September 30, December 31, December 31,
-------------------------------- ------------------------------
1996 1995 1996 1997 1998
-------------- --------------- ---------------- ---------------- -------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue (notes 2, 14 and 15) $ 154,143 34,544 49,477 245,022 397,619
Operating costs and expenses:
Operating costs 121,983 26,572 42,485 217,927 254,689
Selling, general and administrative expenses 75,646 18,248 23,868 148,254 183,683
Depreciation and amortization (notes 7 and
15) 30,030 4,833 9,691 56,501 101,545
Provision for impairment of long-lived
assets (note 16) 9,994 - - 9,261 -
Net loss (gain) on disposal of long-lived
assets note 5) 5,128 1,030 (772) 243 4,055
Restructuring costs (note 17) - - - - 2,339
-------------- --------------- ---------------- ---------------- -------------
Total operating costs and expenses 242,781 50,683 75,272 432,186 546,311
-------------- --------------- ---------------- ---------------- -------------
Operating loss (88,638) (16,139) (25,795) (187,164) (148,692)
Other income (expense):
Interest expense (notes 10 and 15) (85,714) (15,215) (24,454) (117,520) (170,127)
Interest income 19,212 3,750 5,962 21,907 28,414
Other (expense) income, net (3,627) 7 (64) (358) (4,652)
-------------- --------------- ---------------- ---------------- -------------
(70,129) (11,458) (18,556) (95,971) (146,365)
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before income
taxes, preferred dividends, share of losses
and cumulative effect of change in accounting (158,767) (27,597) (44,351) (283,135) (295,057)
Income tax benefit (expense) (note 18) 5,131 - - - (90)
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before preferred
dividends, share of losses and cumulative
effect of change in accounting (153,636) (27,597) (44,351) (283,135) (295,147)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses (note 11) (25,409) (3,294) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,814) (228) - - -
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before
cumulative effect of change in accounting $ (180,859) (31,119) (49,339) (321,252) (350,330)
-------------- --------------- ---------------- ---------------- -------------
(Continued)
</TABLE>
F-8
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, -------------------------------- --------------------------------
1996 1995 1996 1997 1998
---------------- --------------- ---------------- ---------------- ---------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Discontinued operations (notes 1 and 3):
Loss from discontinued operations $ (44,060) (5,516) (11,974) (39,483) (65,938)
Loss on disposal of discontinued operations - - - - (1,777)
---------------- --------------- ---------------- ---------------- ---------------
(44,060) (5,516) (11,974) (39,483) (67,715)
---------------- --------------- ---------------- ---------------- ---------------
Loss before cumulative effect of change in
accounting (224,919) (36,635) (61,313) (360,735) (418,045)
---------------- --------------- ---------------- ---------------- ---------------
Cumulative effect of change in accounting
(note 2) (3,453) (3,453) - - -
---------------- --------------- ---------------- ---------------- ---------------
Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045)
================ =============== ================ ================ ===============
Other comprehensive income (loss):
Foreign currency translation adjustment 699 (28) 544 (527) (263)
Unrealized gain (loss) on short-term
investments available for sale (note 6) 540 - 540 (540) -
---------------- --------------- ---------------- ---------------- ---------------
Other comprehensive income (loss) 1,239 (28) 1,084 (1,067) (263)
---------------- --------------- ---------------- ---------------- ---------------
Comprehensive loss $ (227,133) (40,116) (60,229) (361,802) (418,308)
================ =============== ================ ================ ===============
Loss per share - basic and diluted:
Continuing operations before cumulative
effect of change in accounting $ (4.90) (0.96) (1.18) (7.56) (7.75)
Discontinued operations (1.20) (0.17) (0.29) (0.93) (1.50)
Cumulative effect of change in accounting (0.09) (0.11) - - -
---------------- --------------- ---------------- ---------------- ---------------
Net loss per share - basic and diluted $ (6.19) (1.24) (1.47) (8.49) (9.25)
================ =============== ================ ================ ===============
Weighted average number of shares
outstanding - basic and diluted 36,875 32,343 41,760 42,508 45,194
================ =============== ================ ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Total
Common stock Additional other stockholders'
---------------------------- paid-in Accumulated comprehensive equity
Shares Amount capital deficit (loss) income (deficit)
-------------- -------------- ------------ ------------- --------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1995 34,565 $ 190,849 229,667 (152,487) (28) 268,001
Shares issued for cash in connection
with the exercise of options and
warrants (note 12) 1,983 1,747 2,498 - - 4,245
Shares issued as repayment of debt
and related accrued interest 130 687 - - - 687
Shares issued in connection with
business combinations (note 4) 64 749 - - - 749
Conversion of ICG Holdings (Canada),
Inc. preferred shares 496 3,780 - - - 3,780
Shares issued as contribution to
401(k) plan (note 19) 87 856 300 - - 1,156
Shares issued upon conversion of
subordinated notes 4,413 76,336 - - - 76,336
Repurchase of warrants - - (2,671) - - (2,671)
Compensation expense related to
issuance of common stock options - - 53 - - 53
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (248,682) 248,682 - - -
Unrealized gains on short-term
investmentsavailable for sale - - - - 540 540
Cumulative foreign currency
translation adjustment - - - - 699 699
Net loss - - - (228,372) - (228,372)
-------------- -------------- ------------ ------------- --------------- --------------
Balances at September 30, 1996 41,738 26,322 478,529 (380,859) 1,211 125,203
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 132 1,800 284 - - 2,084
Shares issued in connection with
business combination (note 4) 18 - 350 - - 350
Shares issued as contribution to
401(k) plan (note 19) 19 - 480 - - 480
Shares issued upon conversion of
subordinated notes 23 417 - - - 417
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (20,350) 20,350 - - -
Net loss - - - (61,313) - (61,313)
Net loss of NETCOM for the three
months ended December 31, 1996 (note 2) - - - 11,490 - 11,490
------------- -------------- -------------- ------------- --------------- --------------
Balances at December 31, 1996 41,930 8,189 499,993 (430,682) 1,211 78,711
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 938 5 4,111 - - 4,116
Shares issued in connection with
business combination (note 4) 687 7 15,953 - - 15,960
Shares issued for cash in connection
with employee stock purchase
plan (note 12) 240 2 3,020 - - 3,022
Shares issued as contribution to
401(k) plan (note 19) 179 2 3,008 - - 3,010
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (7,456) 7,456 - - -
Reversal of unrealized gains on
short-term investments available for
sale - - - - (540) (540)
Cumulative foreign currency translation
adjustment - - - - (527) (527)
Net loss - - - (360,735) - (360,735)
------------- ------------- ------------- -------------- --------------- --------------
Balances at December 31, 1997 43,974 749 533,541 (791,417) 144 (256,983)
Shares issued for cash by subsidiary,
net of selling costs 127 1 3,384 - - 3,385
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 1,519 15 19,268 - - 19,283
Shares issued in connection with
business combinations (note 4) 502 5 15,527 - - 15,532
Shares issued for cash in connection
with the employee stock
purchase plan (note 12) 111 1 2,249 - - 2,250
Shares issued as contribution to
401(k) plan (note 19) 127 2 3,662 - - 3,664
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (189) 189 - - -
Cumulative foreign currency
translation adjustment - - - - (263) (263)
Net loss - - - (418,045) - (418,045)
------------- ------------- ------------- -------------- --------------- --------------
Balances at December 31, 1998 46,360 $ 584 577,820 (1,209,462) (119) (631,177)
============= ============= ============= ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ---------------------------- ----------------------------
1996 1995 1996 1997 1998
--------------- ------------- ------------- ------------- --------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045)
Loss from discontinued operations 44,060 5,516 11,974 39,483 67,715
Adjustments to reconcile net loss to net cash used by
operating activities of continuing operations:
Cumulative effect of change in accounting 3,453 3,453 - - -
Share of losses of joint venture 1,814 228 - - -
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses 24,383 2,268 4,988 37,002 55,183
Depreciation and amortization 30,030 4,833 9,691 56,501 101,545
Provision for uncollectible accounts 1,531 977 914 3,985 12,031
Compensation expense related to issuance of common
stock options 53 14 - - -
Interest expense deferred and included in long-term
debt, net of amounts capitalized on assets
under construction 63,951 12,004 22,087 102,947 152,601
Interest expense deferred and included in capital
lease obligations 4,416 - 1,716 6,345 5,637
Amortization of deferred financing costs included
in interest expense 2,573 527 612 2,514 4,478
Write-off of non-operating assets 2,650 - - 200 250
Contribution to 401(k) plan through issuance of
common shares 1,156 405 480 3,010 3,664
Deferred income tax benefit (5,329) - - - -
Provision for impairment of long-lived assets 9,994 - - 9,261 -
Net loss (gain) on disposal of long-lived assets 5,128 1,030 (772) 243 4,055
Change in operating assets and liabilities,
excluding the effects of business
combinations, dispositions and non-cash
transactions:
Receivables (14,150) (3,865) (8,632) (28,891) (96,659)
Inventory (1,200) (272) 361 (2,822) 1,198
Prepaid expenses and deposits (2,938) (459) (901) (5,405) (1,492)
Accounts payable and accrued liabilities 16,244 7,944 9,784 19,541 (2,452)
Deferred revenue 1,454 779 2,575 (370) 4,933
--------------- ------------- ------------- ------------- --------------
Net cash used by operating activities of
continuing operations $ (39,099) (4,706) (6,436) (117,191) (105,358)
--------------- ------------- ------------- ------------- --------------
(Continued)
</TABLE>
F-11
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------------- --------------------------
1996 1995 1996 1997 1998
--------------- ------------ ------------ ------------ ------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Decrease (increase) in notes receivable from affiliate
and others $ 4 (1,263) 133 (9,552) (4,880)
Advances to affiliates (109) (15) - - -
Investment in and advances to joint venture (4,308) - - - -
Payments for business acquisitions, net of cash acquired (8,441) - - (45,861) (67,841)
Acquisition of property, equipment and other assets (121,905) (26,798) (50,818) (268,796) (367,519)
Payments for construction of corporate headquarters (1,501) - (7,945) (29,432) (4,944)
Proceeds from disposition of property, equipment and
other assets 21,593 21,146 2,057 15,125 386
Proceeds from sale of subsidiary, net of selling costs
and cash included in sale - - - - 6,874
Proceeds from sale of corporate headquarters, net of
selling and other costs - - - - 30,283
(Purchase) sale of short-term investments available for
sale (6,832) (4,979) (25,769) (65,580) 60,281
(Increase) decrease in restricted cash (13,333) (13,333) - (25,416) 7,737
Purchase of minority interest in subsidiaries - - - - (9,459)
--------------- ------------ ------------ ------------ ------------
Net cash used by investing activities of continuing
operations (134,832) (25,242) (82,342) (429,512) (349,082)
--------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sale by subsidiary - - - - 3,385
Business combination - - - 15,960 -
Exercise of options and warrants 1,894 101 2,084 4,116 19,283
Employee stock purchase plan - - - 1,319 2,250
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance costs 144,000 - - 223,628 -
Payments of preferred dividends - - - (1,240) (8,927)
Redemption of preferred shares (5,570) (5,570) - - -
Repurchase of redeemable preferred stock of subsidiary
and payment of accrued dividend (32,629) - - - -
Repurchase of redeemable warrants (2,671) - - - -
Proceeds from issuance of short-term debt 17,500 17,500 - - -
Principal payments on short-term debt (21,192) (3,692) - - -
Proceeds from issuance of long-term debt 300,034 - - 99,908 550,574
Deferred long-term debt issuance costs (11,915) - - (3,554) (17,591)
Principal payments on capital lease obligations (16,720) (2,991) (3,691) (30,403) (11,195)
Principal payments on long-term debt (16,920) (13,761) (279) (1,598) (6,864)
--------------- ------------ ------------ ------------ ------------
Net cash provided (used) by financing activities of
continuing operations 355,811 (8,413) (1,886) 308,136 530,915
--------------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents
of continuing operations 181,880 (38,361) (90,664) (238,567) 76,475
Net cash (used) provided by discontinued operations (728) (359) (602) (2,154) 15,787
Cash and cash equivalents, beginning of period 269,404 269,404 450,556 359,290 118,569
--------------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 450,556 230,684 359,290 118,569 210,831
=============== ============ ============ ============ ============
(Continued)
</TABLE>
F-12
<PAGE>
ICG COMMUNICATIONS, INC.
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, -------------------------- --------------------------
1996 1995 1996 1997 1998
----------------- ------------ ------------ ------------ -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flows information
of continuing operations:
Cash paid for interest $ 14,774 2,684 39 5,714 7,411
================= ============ ============ ============ ==========
Cash paid for income taxes $ - - - - 90
================= ============ ============ ============ ==========
Supplemental schedule of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations, repayment of debt or conversion of
liabilities to equity $ 77,772 - 350 - 15,532
================= ============ ============ ============ ==========
Assets acquired under capital leases $ 55,030 84 19,479 - 1,427
================= ============ ============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
- --------------------------------------------------------------------==--------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. On September 17, 1997, ICG formed a new
special purpose entity, ICG Funding, LLC, a Delaware limited liability
company and wholly owned subsidiary of ICG ("ICG Funding").
On January 21, 1998, ICG completed a merger with NETCOM On-Line
Communication Services, Inc. ("NETCOM"). At the effective time of the
merger, each outstanding share of NETCOM common stock, $.01 par value, was
automatically converted into shares of ICG common stock, $.01 par value
("ICG Common Stock"), at an exchange ratio of 0.8628 shares of ICG Common
Stock per NETCOM common share. The Company issued approximately 10.2
million shares of ICG Common Stock in connection with the merger, valued at
approximately $284.9 million on the date of the merger. The business
combination was accounted for as a pooling of interests. Effective November
3, 1998, the Company's board of directors adopted a formal plan to dispose
of the operations of NETCOM (see note 3) and, accordingly, the Company's
consolidated financial statements reflect the operations and net assets of
NETCOM as discontinued for all periods presented. The Company completed the
sales of the operations of NETCOM on February 17 and March 16, 1999. In
conjunction with the sales, the legal name of the NETCOM subsidiary was
changed to ICG PST, Inc. ("PST").
On January 23, 1998, ICG formed ICG Services, Inc., a Delaware corporation
and wholly owned subsidiary of ICG ("ICG Services"). ICG Services is the
parent company of PST (formerly NETCOM) and ICG Equipment, Inc., a Colorado
corporation formed on January 23, 1998 to purchase or lease
telecommunications equipment, software, network capacity and related
services, and in turn, lease such assets to Holdings' subsidiaries. ICG and
its subsidiaries, including ICG Services and its subsidiaries, are
collectively referred to as the "Company."
Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved
by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court
of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged
their common shares on a one-for-one basis for either (i) shares of ICG
Common Stock, or (ii) Class A common shares of Holdings-Canada (the "Class
A Shares"), which were exchangeable,
F-14
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
(1) Organization and Nature of Business (continued)
prior to January 1, 1999, at any time on a one-for-one basis into shares of
ICG Common Stock. On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the Arrangement
was accounted for in a manner similar to a pooling of interests since ICG
and Holdings-Canada had common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflected
the equivalent shares outstanding for the combined companies. On November
25, 1998, the shareholders of Holdings-Canada approved the Plan of
Reorganization (the "Reorganization") among ICG, Holdings-Canada, ICG
Canadian Acquisition, Inc., a newly formed Delaware corporation and wholly
owned subsidiary of ICG ("ICG Acquisition"), and ICG Holdings (Canada) Co.,
a newly formed Nova Scotia unlimited liability company and wholly owned
subsidiary of ICG Acquisition. Pursuant to the Reorganization, on December
1, 1998, ICG Acquisition acquired 100% of the issued and outstanding Class
A Shares of Holdings-Canada, including those Holdings-Canada common shares
owned by ICG, in exchange solely for voting common stock of ICG Acquisition
which was contributed to ICG Acquisition as part of the Reorganization. On
January 1, 1999, Holdings-Canada merged with and into ICG Holdings (Canada)
Co. The merger and Reorganization was accounted for in a manner similar to
a pooling of interests since the transactions involved entities under
common control.
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services.
Telecom Services consists primarily of the Company's competitive local
exchange carrier operations which provide services to business end users,
Internet service providers ("ISPs") and long distance carriers and
resellers. Network Services supplies information technology services and
selected networking products, focusing on network design, installation,
maintenance and support for a variety of end users, including Fortune 1000
firms and other large businesses and telecommunications companies.
Satellite Services consists of satellite voice, data and video services
provided to major cruise ship lines, the U.S. Navy, the offshore oil and
gas industry and integrated communications providers.
F-15
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements give retroactive
effect to the merger of ICG and NETCOM on January 21, 1998, which was
accounted for as a pooling of interests, and include the accounts of
NETCOM and its subsidiaries as of the end of and for the periods
presented. Effective November 3, 1998, the Company's board of
directors adopted a formal plan to dispose of the operations of NETCOM
(see note 3) and, accordingly, the accompanying consolidated financial
statements reflect the operations of NETCOM as discontinued for all
periods presented. Financial information prior to the completion of
the Arrangement on August 2, 1996 represents the combined financial
position and results of operations of NETCOM as well as
Holdings-Canada and Holdings, which are considered to be predecessor
entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Fiscal Year Ends of ICG and NETCOM
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1996, 1997 and
1998 relate to the years ended September 30, 1996 and December 31,
1997 and 1998, respectively.
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
Prior to the merger, NETCOM's consolidated financial statements were
prepared using a year end of December 31. Accordingly, the
consolidated statements of operations for fiscal 1996 reflect the
combination of NETCOM's results of operations for the year ended
December 31, 1996 with ICG's results of operations for the year ended
September 30, 1996. Consequently, NETCOM's results of operations for
the three months ended December 31, 1996 have been combined with ICG's
results of operations for the same period in the accompanying
consolidated statement of operations, although they have been
presented as discontinued (see note 3). The
F-16
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
net loss of NETCOM for the three months ended December 31, 1996 has
been eliminated in the consolidated statement of stockholders' equity
(deficit).
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents at cost, which approximates fair value. Short-term
investments available for sale are carried at amortized cost, which
approximates fair market value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity
(deficit). Realized gains and losses and declines in value judged to
be other than temporary are included in the statement of operations.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments representing an interest of 20% or more, but less than 50%
are accounted for using the equity method of accounting, under which
the Company's share of earnings or losses are reflected in operations
and dividends are credited against the investment when received.
Losses recognized in excess of the Company's investment due to
additional investment or financing requirements, or guarantees, are
recorded as a liability in the consolidated financial statements.
Investments of less than a 20% equity interest are accounted for using
the cost method, unless the Company exercises significant influence
and/or control over the operations of the
F-17
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
investee company, in which case the equity method is used. As of
December 31, 1998, the Company held no equity interests in investee
companies of 50% or less.
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment
are as follows:
Furniture, fixtures and office equipment 3 to 7 years
Machinery and equipment 3 to 8 years
Fiber optic equipment 8 years
Switch equipment 10 years
Fiber optic network 20 years
Buildings and improvements 31.5 years
(g) Capitalized Labor Costs
Also included in property and equipment are capitalized labor and
other costs associated with network development, service installation
and internal-use software development.
The Company capitalizes costs of direct labor and other employee
benefits associated with the development, installation and expansion
of the Company's networks. Depreciation begins in the period the
network is substantially complete and available for use and is
recorded on a straight-line basis over the estimated useful life of
the equipment or network, ranging from 8 to 20 years.
F-18
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
The Company capitalizes costs of direct labor and other employee
benefits associated with installing and provisioning local access
lines for new customers and providing new services to existing
customers, since these costs are directly associated with
multi-period, contractual, revenue-producing activities. Direct labor
costs are capitalized only when directly related to the provisioning
of customer services with multi-period contracts. Capitalization
begins upon the acceptance of the customer order and continues until
the installation is complete and the service is operational.
Capitalized service installation costs are depreciated on a
straight-line basis over 2 years, the average customer contract term.
The Company capitalizes costs of direct labor and other employee
benefits associated with the development of internal-use computer
software in accordance with Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." Internal-use software costs are depreciated over the estimated
useful life of the software, typically 2 to 5 years, beginning in the
period when the software is substantially complete and ready for use.
(h) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
(i) Foreign Currency Translation Adjustments
The functional currency for all foreign operations of NETCOM, which
were sold subsequent to December 31, 1998, is the local currency. As
such, all assets and liabilities denominated in foreign currencies are
translated at the exchange rate on
F-19
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
the balance sheet date. Revenue and costs and expenses are translated
at weighted average rates of exchange prevailing during the period.
Translation adjustments are included in other comprehensive income
(loss), which is a separate component of stockholders' equity
(deficit). Gains and losses resulting from foreign currency
transactions are included in discontinued operations and are not
significant for the periods presented.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(k) Revenue Recognition
The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communications systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer, is included in
revenue earned, but unbilled in the consolidated financial statements.
Deferred revenue includes monthly advance billings to customers for
certain services provided by the Company's Telecom Services and
Satellite Services, as well as Network Services revenue which has been
billed to the customer in compliance with contract terms, but not yet
earned under the percentage of completion method.
F-20
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
NETCOM recognizes revenue and operating costs on the same basis as
Telecom Services and Satellite Services, although such amounts are
included in loss from discontinued operations for all periods
presented.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess of
normal monthly billings during the year was limited to an amount which
did not exceed such installation and selling expense. The remaining
revenue from the contract was recognized ratably over the remaining
non-cancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue
and related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.
(l) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-21
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(m) Net Loss Per Share
Net loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average number
of shares outstanding for the three months ended December 31, 1995
represents outstanding Holdings-Canada common shares and ICG Common
Stock resulting from the exchange of NETCOM common shares. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996, and fiscal 1997 and 1998 represents
Holdings-Canada common shares outstanding for the period from October
1, 1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
presented subsequent to August 5, 1996.
Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share
("SFAS 128"), which revises the calculation and presentation
provisions of Accounting Principles Board Opinion No. 15 and related
interpretations. Under SFAS 128, basic loss per share is computed on
the basis of weighted average common shares outstanding. Diluted loss
per share considers potential common stock instruments in the
calculation of weighted average common shares outstanding. Potential
common stock instruments, which include options, warrants and
convertible subordinated notes and preferred securities, are not
included in the net loss per share calculation as their effect is
anti-dilutive.
(n) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and net
loss per share as if the fair value based method of accounting for
these plans, as prescribed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied. Pro forma disclosures include the effects of
employee and non-employee director stock options granted during fiscal
1996, the three months ended December 31, 1996, and fiscal 1997 and
1998.
F-22
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(o) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets,
including goodwill, pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), which
requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows expected to be generated by
the asset are less than its carrying value. Measurement of the
impairment loss is based on the estimated fair value of the asset,
which is generally determined using valuation techniques such as the
discounted present value of expected future cash flows.
(p) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
(3) Discontinued Operations
Loss from discontinued operations consists of the following:
<TABLE>
<CAPTION>
Three months ended Fiscal years ended
Fiscal year ended December 31, December 31,
September 30, ------------------------------- ----------------------------
1996 1995 1996 1997 1998
------------------- --------------- -------------- ------------ --------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Zycom (a) $ 205 (70) (484) (6,391) (4,848)
NETCOM (b) (44,265) (5,446) (11,490) (33,092) (61,090)
------------------- ---------------- ------------- ------------ --------------
Loss from discontinued
operations $ (44,060) (5,516) (11,974) (39,483) (65,938)
=================== ================ ============= ============ ==============
</TABLE>
F-23
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Discontinued Operations (continued)
(a) Zycom
The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc.
("ZNSI"), operated an 800/888/900 number services bureau and a switch
platform in the United States and supplied information providers and
commercial accounts with audiotext and customer support services. In
June 1998, Zycom was notified by its largest customer of the
customer's intent to transfer its call traffic to another service
bureau. In order to minimize the obligation that this loss in call
traffic would generate under Zycom's volume discount agreements with
AT&T Corp. ("AT&T"), its call transport provider, ZNSI entered into an
agreement on July 1, 1998 with an unaffiliated entity, ICN Limited
("ICN"), whereby ZNSI assigned the traffic of its largest audiotext
customer and its other 900-number customers to ICN, effective October
1, 1998. As part of this agreement, ICN assumed all minimum call
traffic volume obligations to AT&T.
The call traffic assigned to ICN represents approximately 86% of
Zycom's revenue for the year ended December 31, 1997. The loss of this
significant portion of Zycom's business, despite management's best
efforts to secure other sources of revenue, raised substantial doubt
as to Zycom's ability to operate in a manner which would benefit
Zycom's or the Company's shareholders. Accordingly, on August 25,
1998, Zycom's board of directors approved a plan to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom
completed the transfer of all customer traffic to other providers and
Zycom anticipates that the disposition of its remaining assets and the
discharge of its remaining liabilities will be completed in 1999.
The Company's consolidated financial statements reflect the operations
of Zycom as discontinued for all periods presented. Zycom incurred net
losses from operations of approximately $1.2 million for the period
from August 25, 1998 to December 31, 1998. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of Zycom:
F-24
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Discontinued Operations (continued)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1998
------------------- --------------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents $ 265 47
Receivables 1,879 90
Prepaid expenses and deposits 48 11
Accounts payable and accrued liabilities (2,559) (1,092)
------------------- --------------------
Net current liabilities of Zycom $ (367) (944)
=================== ====================
Property and equipment, net $ 1,050 220
Other assets, net 1,890 -
------------------- --------------------
Net non-current assets of Zycom $ 2,940 220
=================== ====================
</TABLE>
On January 4, 1999, the Company completed the sale of the remainder of
Zycom's operating assets to an unrelated third party for total
proceeds of $0.2 million. As Zycom's assets were recorded at estimated
fair market value at December 31, 1998, no gain or loss was recorded
on the sale.
(b) NETCOM
Effective November 3, 1998, the Company's board of directors adopted
the formal plan to dispose of the operations of NETCOM and,
accordingly, the Company's consolidated financial statements reflect
the operations of NETCOM as discontinued for all periods presented.
Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM
from November 3, 1998 through December 31, 1998, to be recognized as a
component of the gain on the disposition. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of NETCOM:
F-25
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Discontinued Operations (continued)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1998
------------------- --------------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents $ 63,368 -
Receivables 2,397 3,936
Inventory 341 423
Prepaid expenses and deposits 3,554 2,436
Deferred losses of NETCOM - 10,847
Accounts payable and accrued liabilities (28,471) (37,009)
Current portion of capital lease obligations (2,491) (2,961)
------------------- --------------------
Net current assets (liabilities) of NETCOM $ 38,698 (22,328)
=================== ====================
Property and equipment, net $ 72,945 50,394
Other assets, net 4,242 5,703
Capital lease obligations, less current portion (3,550) (2,074)
------------------- --------------------
Net non-current assets of NETCOM $ 73,637 54,023
=================== ====================
</TABLE>
On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet
service provider ("ISP") located in Atlanta, Georgia ("MindSpring").
Total proceeds from the sale were $245.0 million, consisting of $215.0
million in cash and 376,116 shares of unregistered common stock of
MindSpring, valued at approximately $79.76 per share at the time of
the transaction. Assets and liabilities sold to MindSpring include
those directly related to the domestic operations of NETCOM's Internet
dial-up, dedicated access and Web site hosting services. On March 16,
1999, the Company sold all of the capital stock of NETCOM's
international operations for total proceeds of approximately $41.1
million. MetroNET Communications Corp. ("MetroNET"), a Canadian
entity, and Providence Equity Partners ("Providence"), located in
Providence, Rhode Island, together purchased the 80% interest in
NETCOM Canada Inc. owned by NETCOM for approximately $28.9 million in
cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Access Services Limited, NETCOM's operations in the
United Kingdom, for approximately $12.2 million in cash. The Company
expects to record a combined gain on the NETCOM
F-26
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Discontinued Operations (continued)
transactions of approximately $200 million, net of income taxes of
approximately $6.5 million, during the three months ended March 31,
1999. Since the operations sold were acquired by the Company in a
transaction accounted for as a pooling of interests, the gain on the
NETCOM transactions will be classified in the Company's consolidated
statement of operations as an extraordinary item.
In conjunction with the sale to MindSpring, the Company entered into
an agreement to lease to MindSpring for a one-year period the capacity
of certain network operating assets formerly owned by NETCOM and
retained by the Company for a minimum of $27.0 million, although
subject to increase dependent upon network usage. MindSpring will
utilize the capacity to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by
MindSpring from the dedicated access customers formerly owned by
NETCOM. The Company intends to utilize the retained network operating
assets to provide similar wholesale capacity and other enhanced
network services to MindSpring and other ISPs and telecommunications
providers, beginning in 1999.
(4) Purchase Acquisitions and Investments
The acquisitions described below have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
operations of the acquired businesses are included in the Company's
consolidated financial statements from the respective dates of acquisition.
Revenue, net loss and net loss per share on a pro forma basis, assuming the
acquisitions were completed at the beginning of the periods presented, are
not significantly different from the Company's historical results for the
periods presented herein.
(a) Fiscal 1998
On July 27, 1998, the Company acquired DataChoice Network Services,
L.L.C. ("DataChoice") for total consideration of $5.9 million,
consisting of 145,997 shares of ICG Common Stock and approximately
$1.1 million in cash. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $5.7 million has been
recorded as goodwill and is being amortized on a straight-line basis
F-27
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(4) Purchase Acquisitions and Investments (continued)
over five years. DataChoice, a Colorado limited liability company,
provides point-to-point data transmission resale services through its
long-term agreements with multiple regional carriers and nationwide
providers.
The Company completed a series of transactions on July 30, 1998 to
acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced
Messaging Services, Inc. (collectively, "NikoNET"). The Company paid
approximately $13.8 million in cash, which included dividends payable
by NikoNET to its former owners and amounts to satisfy NikoNET's
former line of credit, assumed approximately $0.7 million in
liabilities and issued 356,318 shares of ICG Common Stock with a fair
market value of approximately $10.7 million on the date of the
acquisition, for all the capital stock of NikoNET. The excess of the
purchase price over the fair value of the net identifiable assets
acquired of $22.6 million has been recorded as goodwill and is being
amortized on a straight-line basis over five years. Located in
Atlanta, Georgia, NikoNET provides broadcast facsimile services and
enhanced messaging services to financial institutions, corporate
investor and public relations departments and other customers. The
Company believes the acquisition of NikoNET enables the Company to
offer expanded services to its Telecom Services customers.
On August 27, 1998, the Company purchased, for $9.0 million in cash,
the remaining 20% equity interest in ICG Ohio LINX, Inc. ("ICG Ohio
LINX") which it did not already own. ICG Ohio LINX is a
facilities-based competitive local exchange carrier which operates a
fiber optic telecommunications network in Cleveland and Dayton, Ohio.
The Company's additional investment in ICG Ohio LINX, including
incremental costs of obtaining that investment of $0.1 million, is
included in goodwill in the accompanying consolidated balance sheet at
December 31, 1998.
In January 1997, the Company announced a strategic alliance with
Central and South West Corporation ("CSW") formed for the purpose of
developing and marketing telecommunications services in certain cities
in Texas. Based in Austin, Texas, the venture entity was a limited
partnership named CSW/ICG ChoiceCom, L.P ("ChoiceCom"). On December
31, 1998, the Company purchased 100% of the partnership interests in
ChoiceCom from CSW for approximately $55.7 million in cash and the
assumption of certain liabilities of approximately $7.3 million. In
F-28
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(4) Purchase Acquisitions and Investments (continued)
addition, the Company converted approximately $31.6 million of
receivables from prior advances made to ChoiceCom by the Company to
its investment in ChoiceCom. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $28.9 million
has been recorded as goodwill and is being amortized on a
straight-line basis over 10 years. The acquired company currently
provides local exchange and long distance services in Austin, Corpus
Christi, Dallas, Houston and San Antonio, Texas.
(b) Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and Centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997, the Company sold 687,221 shares of ICG Common Stock for
approximately $16.0 million to certain shareholders of CBG. On March
24, 1998, the Company purchased the remaining approximate 9% interest
in CBG for approximately $2.9 million in cash. The excess of the
purchase price over the fair value of the net identifiable assets
acquired in the combined transactions of $48.9 million has been
recorded as goodwill and is being amortized on a straight-line basis
over six years.
(c) Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million. The Company's Network
Services are provided by FOTI.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner
F-29
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(4) Purchase Acquisitions and Investments (continued)
of Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
(5) Dispositions
(a) Fiscal 1998
On July 17, 1998, the Company entered into separate definitive
agreements to sell the capital stock of MCN and Nova-Net
Communications, Inc. ("Nova-Net"), two wholly owned subsidiaries
within the Company's Satellite Services operations. The sale of MCN
was completed on August 12, 1998 and, accordingly, the Company's
consolidated financial statements include the results of operations of
MCN through that date. The Company recorded a gain on the sale of MCN
of approximately $0.9 million during fiscal 1998. The sale of Nova-Net
was completed on November 18, 1998 and, accordingly, the Company's
consolidated financial statements include the results of operations of
Nova-Net through that date. The Company recorded a loss on the sale of
Nova-Net of approximately $0.2 million during the three months
F-30
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(5) Dispositions (continued)
ended December 31, 1998. The combined revenue, net loss or net loss
per share of MCN and Nova-Net do not represent a significant portion
of the Company's historical consolidated revenue, net loss or net loss
per share.
(b) Fiscal 1996
In October 1996, the Company sold its interest in its Phoenix network
joint venture to its venture partner, GST Telecommunications, Inc. The
Company received approximately $2.1 million in cash, representing $1.3
million of consideration for its 50% interest and $0.8 million for
equipment and amounts advanced to the joint venture. In addition, the
Company received equipment with a net book value of $2.4 million and
assumed liabilities of $0.3 million. A gain on sale of the joint
venture of approximately $0.8 million was recorded in the consolidated
financial statements during the three months ended December 31, 1996.
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain
related assets, and entered into a management agreement with the
purchaser whereby the purchaser assumed control of the teleport
operations. Upon approval of the transaction by the Federal
Communications Commission ("FCC"), the Company completed the sale in
March 1996 and received an additional $0.4 million due to certain
closing adjustments, for total proceeds of $21.5 million. The Company
recognized a loss of approximately $1.1 million on the sale. Revenue
associated with these operations was approximately $2.5 million for
fiscal 1996. The Company has reported results of operations from these
assets through December 31, 1995.
F-31
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(6) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
-------------------------------------
1997 1998
----------------- ----------------
(in thousands)
Certificates of deposit $ - 31,000
Commercial paper 4,000 16,000
U.S. Treasury securities 108,281 5,000
================= ================
$ 112,281 52,000
================= ================
At December 31, 1997 and 1998, the estimated fair value of the Company's
certificates of deposit, commercial paper and U.S. Treasury securities
approximated cost. All certificates of deposit, commercial paper and U.S.
Treasury securities mature within one year.
(7) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
F-32
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(7) Property and Equipment (continued)
December 31,
-----------------------------------------
1997 1998
------------------ ------------------
(in thousands)
Land $ 709 709
Buildings and improvements 2,238 2,296
Furniture, fixtures and
office equipment 42,295 123,108
Internal-use software costs 3,681 13,655
Machinery and equipment 12,600 20,998
Fiber optic equipment 181,000 259,015
Satellite equipment 29,760 32,418
Switch equipment 85,546 156,313
Fiber optic network 179,705 225,453
Site improvements 13,898 20,029
Service installation costs - 20,679
Construction in progress 185,992 237,394
------------------ ------------------
737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
================== ==================
$ 631,454 934,134
================== ==================
Property and equipment includes approximately $237.4 million of equipment
which has not been placed in service at December 31, 1998, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment and new network construction.
For fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and
1998, the Company capitalized interest costs on assets under construction
of $4.9 million, $2.0 million, $3.2 million and $10.4 million,
respectively. Such costs are included in property and equipment as
incurred. The Company recognized interest expense of $85.7 million, $24.5
million, $117.5 million and $170.1 million for fiscal 1996, the three
months ended December 31, 1996, fiscal 1997 and 1998, repectively.
F-33
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(7) Property and Equipment (continued)
Also included in property and equipment at December 31, 1997 and 1998 are
unamortized costs associated with the development of internal-use computer
software of $2.3 million and $11.5 million, respectively. The Company
capitalized $0.7 million, $0.1 million, $2.4 million and $10.0 million of
such costs during fiscal 1996, the three months ended December 31, 1996,
fiscal 1997 and 1998, respectively.
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1998. The
following is a summary of property and equipment held under capital leases:
December 31,
---------------------------------------
1997 1998
----------------- ------------------
(in thousands)
Machinery and equipment $ 3,926 7,072
Fiber optic equipment 6,314 798
Switch equipment 21,380 12,957
Fiber optic network 58,806 77,523
Construction in progress 17,895 -
----------------- ------------------
108,321 98,350
Less accumulated depreciation (8,409) (7,875)
================= ==================
$ 99,912 90,475
================= ==================
Amortization of capital leases is included in depreciation and amortization
in the Company's consolidated statements of operations for all periods
presented.
F-34
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(8) Other Assets
Other assets are comprised of the following:
December 31,
----------------------------------------
1997 1998
----------------- ------------------
(in thousands)
Deposits $ 2,429 17,035
Pace customer base 2,805 2,805
Collocation costs 2,998 5,472
Non-compete agreements 1,386 1,050
Right of entry costs 1,984 2,684
Other 588 2,486
----------------- ------------------
12,190 31,532
Less accumulated amortization (3,124) (6,343)
================= ==================
$ 9,066 25,189
================= ==================
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for equipment. Required payments due each year on or before December 31
under the Company's capital lease obligations are as follows (in
thousands):
1999 $ 14,406
2000 15,000
2001 17,098
2002 11,085
2003 11,008
Thereafter 82,607
---------------------
Total minimum lease payments 151,204
Less amounts representing interest (82,759)
---------------------
Present value of net minimum lease payments 68,445
Less current portion (5,086)
=====================
$ 63,359
=====================
F-35
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
---------------- ----------------
(in thousands)
<S> <C> <C>
9 7/8% Senior discount notes of ICG Services, net of discount (a) $ - 266,918
10% Senior discount notes of ICG Services, net of discount (b) - 327,699
11 5/8% Senior discount notes of Holdings, net of discount (c) 109,436 122,528
12 1/2% Senior discount notes of Holdings, net of discount (d) 367,494 414,864
13 1/2% Senior discount notes of Holdings, net of discount (e) 407,409 465,886
Note payable with interest at the 90-day commercial paper rate plus 4
3/4%, paid in full on August 19, 1998 4,932 -
Note payable with interest at 11%, paid in full on June 12, 1998 1,860 -
Mortgage payable with interest at 8 1/2%, due monthly through 2009,
secured by building 1,131 1,084
Other 90 65
---------------- ----------------
892,352 1,599,044
Less current portion (1,784) (46)
---------------- ----------------
$ 890,568 1,598,998
================ ================
</TABLE>
(a) 9 7/8% Notes
On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross
proceeds of approximately $250.0 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$7.9 million, were approximately $242.1 million.
The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million. Interest
will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
each May 1 and November 1, commencing November 1, 2003. The indenture
for the 9 7/8% Notes contains certain covenants which provide
limitations on indebtedness, dividends, asset sales and certain other
transactions.
F-36
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes is being accreted through
May 1, 2003, the date on which the 9 7/8% Notes may first be redeemed.
The accretion of the discount and the amortization of the debt
issuance costs are included in interest expense in the accompanying
consolidated statements of operations.
(b) 10% Notes
On February 12, 1998, ICG Services completed a private placement of
10% Senior Discount Notes due 2008 (the "10% Notes") for gross
proceeds of approximately $300.6 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$9.7 million, were approximately $290.9 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
The 10% Notes were originally recorded at approximately $300.6
million. The discount on the 10% Notes is being accreted through
February 15, 2003, the date on which the 10% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(c) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
F-37
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the 11 5/8% Notes
contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes is being accreted through
March 15, 2002, the date on which the 11 5/8% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
(d) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Mandatorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes is being accreted through
May 1, 2001, the date on which the 12 1/2% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.
F-38
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to accretion and preferred dividends on preferred securities
of subsidiaries, net of minority interest in share of losses of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(e) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on indebtedness, dividends, asset sales
and certain other transactions and effectively prohibit the payment of
cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes is being accreted over five years until September 15, 2000, the
date on which the 13 1/2% Notes may first be redeemed. The value
F-39
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
assigned to the Unit Warrants, representing additional debt discount,
is also being accreted over the five-year period. The accretion of the
total discount and the amortization of the debt issuance costs are
included in interest expense in the accompanying consolidated
statements of operations. Holdings may redeem the 13 1/2% Notes on or
after September 15, 2000, in whole or in part, at the redemption
prices set forth in the agreement, plus unpaid interest, if any, at
the date of redemption.
The Unit Warrants entitled the holder to purchase one common share of
Holdings-Canada, which was exchangeable into one share of ICG Common
Stock, through August 8, 2005 at the exercise price of $12.51 per
share. In connection with the Reorganization of Holdings-Canada, all
Unit Warrants outstanding are exchangeable only for shares of ICG
Common Stock on a one-for-one basis and are no longer exchangeable for
shares of Holdings-Canada.
(f) Subsequent to December 31, 1998
As of December 31, 1998, the Company's corporate headquarters
building, land and improvements (collectively, the "Corporate
Headquarters") were leased by the Company under an operating lease
from an unrelated third party. Subsequent to December 31, 1998, the
Company entered into a letter of intent to purchase the Corporate
Headquarters for approximately $43.7 million, which amount represents
historical cost and approximates fair value. The Company intends to
finance the purchase through the conversion of a $10.0 million
security deposit previously paid on the existing operating lease and
through a mortgage on the Corporate Headquarters' assets. Payments on
the mortgage will be due monthly through January 1, 2013, at an
initial interest rate of approximately 14% per annum.
F-40
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
Scheduled principal maturities of long-term debt as of December 31, 1998
are as follows (in thousands):
Fiscal year:
1999 $ 111
2000 50
2001 50
2002 50
2003 50
Thereafter 2,206,688
-----------------------
2,206,999
Less unaccreted discount (607,955)
Less current portion (46)
=======================
$ 1,598,998
=======================
(11) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
December 31,
---------------------------------------
1997 1998
---------------- ------------------
(in thousands)
14% Exchangeable preferred
stock of Holdings, mandatorily
redeemable in 2008 (a) $ 108,022 124,867
14 1/4% Exchangeable preferred
stock of Holdings, mandatorily
redeemable in 2007 (b) 184,420 213,443
================ ==================
$ 292,442 338,310
================ ==================
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock
F-41
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
into 14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.
(c) 6 3/4% Preferred Securities
On September 24, 1997 and October 3, 1997, ICG Funding completed a
private placement of 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs of
approximately $4.7 million, were approximately $127.6 million.
Restricted cash at December 31, 1998 of $16.9 million consists of the
proceeds from the private placement which are designated for the
payment of cash dividends on the 6 3/4% Preferred Securities through
November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of
F-42
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
2.0812 shares of ICG Common Stock per preferred security, or $24.025
per share, subject to adjustment. ICG Funding may, at its option,
redeem the 6 3/4% Preferred Securities at any time on or after
November 18, 2000. Prior to that time, ICG Funding may redeem the 6
3/4% Preferred Securities if the current market value of ICG Common
Stock equals or exceeds, for at least 20 days of any 30-day trading
period, 160% of the exchange price prior to November 15, 1999, and
150% of the exchange price from November 16, 1999 through November 15,
2000. The 6 3/4% Preferred Securities are subject to mandatory
redemption on November 15, 2009.
On February 13, 1998, ICG made a capital contribution of 126,750
shares of ICG Common Stock to ICG Funding. Immediately thereafter, ICG
Funding sold the contributed shares to unrelated third parties for
proceeds of approximately $3.4 million. ICG Funding recorded the
contribution of the ICG Common Stock as additional paid-in capital at
the then fair market value and, consequently, no gain or loss was
recorded by ICG Funding on the subsequent sale of those shares.
Also, on February 13, 1998, ICG Funding used the remaining proceeds
from the private placement of the 6 3/4% Preferred Securities, which
were not restricted for the payment of cash dividends, along with the
proceeds from the sale of the contributed ICG Common Stock to purchase
approximately $112.4 million of ICG Communications, Inc. Preferred
Stock ("ICG Preferred Stock") which pays dividends each February 15,
May 15, August 15 and November 15 in additional shares of ICG
Preferred Stock through November 15, 2000. Subsequent to November 15,
2000, dividends on the ICG Preferred Stock are payable in cash or
shares of ICG Common Stock, at the option of ICG. The ICG Preferred
Stock is exchangeable, at the option of ICG Funding, at any time prior
to November 15, 2009 into shares of ICG Common Stock at an exchange
rate based on the exchange rate of the 6 3/4% Preferred Securities and
is subject to mandatory redemption on November 15, 2009. The ICG
Preferred Stock has been eliminated in consolidation of the Company's
consolidated financial statements.
F-43
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1998.
Included in accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses is approximately
$27.0 million, $5.8 million, $39.8 million and $55.2 million for fiscal
1996, the three months ended December 31, 1996, and fiscal 1997 and 1998,
respectively, associated with the accretion of issuance costs, discount and
preferred security dividend accruals for the 6 3/4% Preferred Securities,
the 14% Preferred Stock, the 14 1/4% Preferred Stock and the Redeemable
Preferred Stock (issued in connection with the 1995 Private Offering and
redeemed in April 1996). These costs are partially offset by the minority
interest share in losses of subsidiaries of approximately $1.6 million,
$0.8 million and $1.7 million for fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997, respectively. There was no reported
minority interest share in losses of subsidiaries for fiscal 1998.
(12) Stockholders' Equity (Deficit)
(a) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.
F-44
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The NETCOM 1993 Stock Option Plan was assumed by ICG at the time of
the merger, and approved by ICG's Board of Directors as an incentive
and non-qualified stock option plan which provides for the granting of
options to certain directors, officers and employees to purchase
2,720,901 shares of ICG Common Stock. A total of 2,224,273 options,
net of 2,155,856 cancellations, have been granted under this plan at
exercise prices ranging from $0.65 to $92.14, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
this plan are subject to various vesting requirements, generally three
and five years, and expire within ten years from the date of grant.
From fiscal 1994 through fiscal 1998, the Company's Board of Directors
approved incentive and non-qualified stock option plans and
replenishments to those plans which provide for the granting of
options to certain directors, officers and employees to purchase
2,536,000 shares of the Company's Common Stock under the 1994 plan, an
aggregate of 2,700,000 shares of the Company's Common Stock under the
1995 and 1996 plans and 3,400,000 shares of ICG Common Stock under the
1998 plan. A total of 6,922,696 options, net of 4,587,300
cancellations, have been granted under these plans at original
exercise prices ranging from $7.94 to $35.75, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
these plans are subject to various vesting requirements and expire in
five and ten years from the date of grant.
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of ICG
Common Stock on the Nasdaq National Market on April 16, 1997.
Approximately 598,000 options, with original exercise prices ranging
from $15.875 to $26.25, were canceled and regranted on April 16, 1997.
For the same business purpose, all employee stock options outstanding
on September 18, 1998 with exercise prices at or in excess of $22.00
were canceled by the Stock Option Committee of the Company's Board of
Directors and regranted with an exercise price of $16.875, the closing
price of ICG Common Stock on the Nasdaq National
F-45
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
Market on September 18, 1998. A total of 2,413,260 options, with
original exercise prices ranging from $22.00 to $35.75 were canceled
and regranted on September 18, 1998. There was no effect on the
Company's consolidated financial statements as a result of the
cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary to be used to purchase shares of ICG Common Stock, up to
a limit of $25,000 in ICG Common Stock each year, at a 15% discount to
fair market value. Stock purchases occur four times a year on February
1, May 1, August 1 and November 1, with the price per share equaling
the lower of 85% of the market price at the beginning or end of the
offering period. The Company is authorized to issue a total of
1,000,000 shares of ICG Common Stock to participants in the plan.
During fiscal 1997 and 1998, the Company sold 109,213 and 111,390
shares of ICG Common Stock, respectively, to employees under this
plan.
During fiscal 1994, NETCOM's Board of Directors approved and adopted
an Employee Stock Purchase Plan which was dissolved upon NETCOM's
merger with ICG. Shares purchased under this plan were converted into
an estimated 119,000 shares of ICG Common Stock.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.1 million for fiscal 1996 pursuant to the intrinsic value based
method of APB 25. Had compensation expense for the Company's plans
been determined based on the fair market value of the options at the
grant dates for awards under those plans consistent with the
provisions of SFAS 123, the Company's pro forma net loss and loss per
share would have been as presented below. Pro forma disclosures
include the effects of employee and non-employee director stock
options granted during fiscal 1996, the three months ended December
31, 1996, and fiscal 1997 and 1998.
F-46
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
Fiscal years ended
Fiscal year ended Three months ended December 31,
September 30, December 31, ------------------------------------
1996 1996 1997 1998
---------------------- --------------------------- --------------- ----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net loss:
As reported $ (228,372) (61,313) (360,735) (418,045)
Pro forma (242,974) (64,985) (369,677) (439,362)
Net loss per share-
basic and diluted:
As reported $ (6.19) (1.47) (8.49) (9.25)
Pro forma (6.59) (1.56) (8.70) (9.72)
</TABLE>
The fair value of each option grant to employees and non-employee
directors other than NETCOM employees and non-employee directors was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: an expected
option life of three years for directors, officers and other
executives, and two years for other employees, for all periods;
expected volatility of 50% for fiscal 1996, the three months ended
December 31, 1996 and fiscal 1997, and 70% for fiscal 1998; and
risk-free interest rates ranging from 5.03% to 7.42% for fiscal 1996
and the three months ended December 31, 1996, 5.61% to 6.74% for
fiscal 1997 and 4.09% to 5.77% for fiscal 1998. Risk-free interest
rates, as were currently available on the grant date, were assigned to
each granted option based on the zero-coupon rate of U.S. Treasury
bills to be held for the same period as the assumed option life. Since
the Company does not anticipate issuing any dividends on the ICG
Common Stock, the dividend yield for all options granted was assumed
to be zero. The weighted average fair market value of combined ICG and
NETCOM options granted during fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997 and 1998 was approximately $11.10,
$9.48, $10.31 and $13.23 per option, respectively.
F-47
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
As options outstanding at December 31, 1998 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans; accordingly, the above pro forma results
are not necessarily indicative of the impact on net loss and net loss
per share in future periods.
The following table summarizes the status of the Company's stock-based
compensation plans:
<TABLE>
<CAPTION>
Shares underlying Weighted average Options
options exercise price exercisable
---------------------- ---------------------- ---------------------
(in thousands) (in thousands)
<S> <C> <C> <C>
Outstanding at October 1, 1995 4,828 $ 14.92 1,230
Granted 2,054 18.30
Exercised (415) 7.35
Canceled (631) 24.73
----------------------
Outstanding at September 30, 1996 5,836 15.49 2,771
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
----------------------
Outstanding at December 31, 1996 6,084 15.68 3,476
Granted 3,377 14.94
Exercised (709) 8.13
Canceled (2,604) 25.32
----------------------
Outstanding at December 31, 1997 6,148 11.97 3,532
Granted 5,968 23.34
Exercised (1,395) 12.08
Canceled (3,941) 25.62
----------------------
Outstanding at December 31, 1998 6,780 13.95 3,299
======================
</TABLE>
F-48
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------- --------------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------- ------------------ ----------------- ------------------ ------------------- -----------------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
$2.60 - 7.94 1,558 6.40 $ 7.91 1,558 $ 7.91
8.50 - 14.58 1,714 7.15 11.07 1,099 11.31
14.93 - 16.75 381 8.37 15.67 296 15.67
16.88 - 46.65 3,127 9.37 18.32 346 21.02
------------------ -------------------
6,780 3,299
================== ===================
</TABLE>
(b) Warrants
Between fiscal 1993 and fiscal 1995, the Company issued a series of
warrants at varying prices to purchase common shares of
Holdings-Canada which, after August 5, 1996, were exchangeable on a
one-for-one basis for Class A Shares of ICG Common Stock. The
following table summarizes warrant activity for fiscal 1996, the three
months ended December 31, 1996, and fiscal 1997 and 1998:
F-49
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(12) Stockholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
Outstanding Exercise
warrants price range
------------------- ------------------------
(in thousands)
<S> <C> <C> <C>
Outstanding, October 1, 1995 5,502 $ 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
--------------------
Outstanding, December 31, 1997 1,974 12.51 - 21.51
Exercised (113) 12.51 - 21.51
Canceled (9) 20.01 - 21.51
====================
Outstanding, December 31, 1998 1,852 12.51
====================
</TABLE>
All warrants outstanding at December 31, 1998 have an expiration date of
August 6, 2005 and, in connection with the Reorganization of
Holdings-Canada, are exchangeable only for shares of ICG Common Stock on a
one-for-one basis.
(c) Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock
and 50,000 shares of ICG Preferred Stock. At December 31, 1998, the
Company had no shares of preferred stock outstanding. All of the
issued and outstanding shares of ICG Preferred Stock at December 31,
1998 are held by ICG Funding.
F-50
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(13) Related Party Transactions
At December 31, 1997, the Company had $10.0 million outstanding under a
promissory note from ChoiceCom, which was payable on demand at LIBOR plus
2% per annum (7.97% at December 31, 1997). During fiscal 1998, the Company
advanced another $5.0 million to ChoiceCom under a separate promissory note
with similar terms. Additionally, the Company agreed to perform certain
administrative services for ChoiceCom and make certain payments to vendors
on behalf of ChoiceCom, for which such services and payments were to be
conducted on an arm's length basis and reimbursed by ChoiceCom. At December
31, 1997, amounts outstanding under this arrangement and included in notes
receivable from affiliate were approximately $9.4 million. All amounts due
from ChoiceCom were included in the purchase price of the Company's
acquisition of ChoiceCom on December 31, 1998.
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996,
fiscal 1997 and 1998, the Company paid approximately $1.3 million, $0.3
million, $1.1 million and $1.0 million, respectively, related to this
consulting agreement. William W. Becker, a stockholder and former director
of the Company, is President and Chief Executive Officer of ICC.
(14) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
("SCE") entered into a 25-year agreement under which the Company will
license 1,258 miles of fiber optic cable in Southern California, and
can install up to 500 additional miles of fiber optic cable. This
network, which will be maintained and operated primarily by the
Company, stretches from Los Angeles to southern Orange County. Under
the terms of this agreement, SCE will be entitled to receive an annual
fee for ten years, certain fixed quarterly payments, a quarterly
payment equal to a percentage of certain network revenue, and certain
other installation and fiber connection fees. The aggregate fixed
payments remaining under the agreement totaled approximately $135.3
million at December 31, 1998. The agreement has been accounted for as
a capital lease in the accompanying consolidated balance sheets.
F-51
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast.
Network construction is ongoing and is expected to be completed in
1999. The Company is responsible for payment on the construction as
segments of the network are completed and has incurred approximately
$19.2 million as of December 31, 1998, with remaining costs
anticipated to be approximately $15.8 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1999.
(b) Network Capacity Commitments
In November 1998, the Company entered into two service agreements with
WorldCom Network Services, Inc. ("WorldCom"). Both of the agreements
have three-year terms and were effective in September 1998. Under the
Telecom Services Agreement, WorldCom provides, at designated rates,
switched telecommunications services and other related services to the
Company, including termination services, toll-free origination,
switched access, dedicated access and travel card services. Under the
Carrier Digital Services Agreement, WorldCom provides the Company, at
designated rates, with the installation and operation of dedicated
digital telecommunications interexchange services, local access and
other related services, which the Company believes expedites service
availability to its customers. Both agreements require that the
Company provide WorldCom with certain minimum monthly revenue, which
if not met, would require payment by the Company for the difference
between the minimum commitment and the actual monthly revenue.
Additionally, both agreements limit the Company's ability to utilize
vendors other than WorldCom for certain telecommunications services
specified in the agreements. The Company's policy is to accrue and
include in operating costs the effect of any shortfall in minimum
revenue commitments under these agreements in the period in which the
shortfall occurred. The Company has successfully achieved all minimum
revenue commitments to WorldCom under these agreements through
December 31, 1998.
F-52
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(c) Other Commitments
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise
provided to the Company. In addition, the agreements may be terminated
by either the Company or the vendor upon prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $80.6 million at December 31, 1998.
(d) Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $4.9 million, $1.2
million, $11.8 million and $27.0 million for fiscal 1996, the three
months ended December 31, 1996 and fiscal 1997 and 1998, respectively.
Minimum lease payments due each year on or before December 31 under
the Company's operating leases are as follows (in thousands):
1999 $ 30,327
2000 28,734
2001 25,509
2002 19,890
2003 16,384
Thereafter 64,802
=========================
$ 185,646
=========================
(e) Transport and Termination Charges
The Company has recorded revenue of approximately $4.9 million and
$58.3 million for fiscal 1997 and 1998, respectively, for reciprocal
compensation relating to the transport and termination of local
traffic to ISPs from customers of incumbent local exchange carriers
("ILECs") pursuant to various interconnection agreements. The
F-53
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
ILECs have not paid most of the bills they have received from the
Company and have disputed substantially all of these charges based on
the belief that such calls are not local traffic as defined by the
various agreements and under state and federal laws and public
policies.
The resolution of these disputes will be based on rulings by state
public utility commissions and/or by the Federal Communications
Commission ("FCC"). To date, there have been favorable final rulings
from 29 states that ISP traffic is subject to the payment of
reciprocal compensation under interconnection agreements. On February
25, 1999, the FCC issued a decision that ISP-bound traffic is largely
jurisdictionally interstate traffic. The decision relies on the
long-standing federal policy that ISP traffic, although
jurisdictionally interstate, is treated as though it is local traffic
for pricing purposes. The decision also emphasizes that because there
are no federal rules governing intercarrier compensation for ISP
traffic, the determination as to whether such traffic is subject to
reciprocal compensation under the terms of interconnection agreements
properly is made by the state commissions and that carriers are bound
by their interconnection agreements and state commission decisions
regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of rulemaking, the FCC expresses its preference
that compensation rates for this traffic continue to be set by
negotiations between carriers, with disputes resolved by arbitrations
conducted by state commissions pursuant to the Telecommunications Act
of 1996 (the "Telecommunications Act").
On March 4, 1999, the Alabama Public Service Commission (the "Alabama
PSC") issued a decision that found that reciprocal compensation is
owed for Internet traffic under four CLEC interconnection agreements
with BellSouth Corporation ("BellSouth"), which agreements were at
issue in the proceeding. With respect to the Company's interconnection
agreement, which was also at issue, the state commission interpreted
certain language in the Company's agreement to exempt ISP-bound
traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider the intent of
the parties in negotiating and executing the Company's interconnection
agreement, the specific language of the Company's interconnection
agreement and the impact of Alabama
F-54
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
PSC and FCC policies, and thereby misinterpreted the agreement. The
Company intends to file a request with the Alabama PSC by April 1,
1999 seeking determination that the ruling with respect to the
Company's agreement be reconsidered, and that the Company should be
treated the same as the other CLECs that participated in the
proceeding and for which the Alabama PSC ordered the payment of
reciprocal compensation. While the Company intends to pursue
vigorously a petition for reconsideration with the Alabama PSC, and if
the Company deems it necessary, judicial review, the Company cannot
predict the final outcome of this issue.
The Company has also recorded revenue of approximately $19.1 million
for fiscal 1998, related to other transport and termination charges to
the ILECs, pursuant to the Company's interconnection agreements with
these ILECs. Included in the Company's trade receivables at December
31, 1997 and 1998 are $4.3 million and $72.8 million, respectively,
for all receivables related to transport and termination charges. The
receivables balance at December 31, 1998 is net of an allowance of
$5.6 million for disputed amounts.
Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth
that the Company may continue billing BellSouth under the pricing
terms within the expired interconnection agreement, until such
agreement is renegotiated or arbitrated by the relevant state
commissions. The Company's remaining interconnection agreements expire
in 1999 and 2000. While the Company believes that all revenue recorded
through December 31, 1998 is collectible and that future revenue from
transport and termination charges billed under the Company's current
interconnection agreements will be realized, there can be no assurance
that future regulatory and judicial rulings will be favorable to the
Company, that the Alabama PSC will reconsider its ruling, or that
different pricing plans for transport and termination charges between
carriers will not be adopted when the Company's interconnection
agreements are renegotiated or as a result of the FCC's rulemaking
proceeding on future compensation methods. In fact, the Company
believes that different pricing plans will be considered and adopted,
and although the Company expects that revenue from transport and
termination charges likely will decrease as a percentage of total
revenue from local services in periods subject to future
interconnection agreements, the Company's local
F-55
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
termination services still will be required by the ILECs and must be
provided under the Telecommunications Act, and likely will result in
increasing volume in minutes due to the growth of the Internet and
related services markets. The Company expects to negotiate reasonable
compensation and collection terms for local termination services,
although there is no assurance that such compensation will remain
consistent with current levels.
(f) Litigation
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Cause No. 97-17777)
against the Company, Zycom and certain of their subsidiaries. This
complaint alleges that the Company and certain of its subsidiaries
breached certain duties owed to the plaintiffs. The plaintiffs were
denied class certification by the trial court and this decision has
been appealed. Trial has been tentatively set for August 1999. The
Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these
proceedings will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(15) Business Units
The Company conducts transactions with external customers through the
operations of its Telecom Services, Network Services and Satellite
Services business units. Shared administrative services are provided
to the business units by Corporate Services. Corporate Services
consists of the operating activities of ICG Communications, Inc., ICG
Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada)
Co., ICG Holdings, Inc. and ICG Services, Inc., which primarily hold
securities and provide certain
F-56
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Business Units (continued)
legal, accounting and finance, personnel and other administrative
support services to the business units.
Direct and certain indirect costs incurred by Corporate Services on
behalf of the business units are allocated among the business units
based on the nature of the underlying costs. Transactions between the
business units for services performed in the normal course of business
are recorded at amounts which are intended to approximate fair value.
Set forth below are revenue, EBITDA (before nonrecurring charges),
which represents the measure of operating performance used by
management to evaluate operating results, depreciation and
amortization, interest expense, total assets and capital expenditures
of continuing operations for each of the Company's business units and
for Corporate Services. As described in note 3, the operating results
of the Company reflect the operations of Zycom and NETCOM as
discontinued for all periods presented.
F-57
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Business Units (continued)
<TABLE>
<CAPTION>
Fiscal Three months ended Fiscal years ended
year ended December 31, December 31,
September 30, ----------------------------- --------------------------------
1996 1995 1996 1997 1998
-------------------- -------------- -------------- -------------- ----------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom Services $ 72,815 12,743 27,307 149,358 305,612
Network Services 61,080 15,826 16,460 69,881 62,535
Satellite Services 21,297 6,168 6,188 29,986 40,451
Elimination of intersegment
revenue (1,049) (193) (478) (4,203) (10,979)
================ ============== ============== ============== ================
Total revenue $ 154,143 34,544 49,477 245,022 397,619
================ ============== ============== ============== ================
EBITDA (before nonrecurring
charges) (a):
Telecom Services $ (19,902) (4,462) (10,924) (92,053) (19,995)
Network Services (2,417) (423) 295 (544) (3,245)
Satellite Services (2,999) (1,371) (448) 74 7,088
Corporate Services (17,953) (3,996) (5,682) (27,811) (20,909)
Eliminations (215) (24) (117) (825) (3,692)
================ ============== ============== ============== ================
Total EBITDA (before
nonrecurring charges) $ (43,486) (10,276) (16,876) (121,159) (40,753)
================ ============== ============== ============== ================
Depreciation and amortization (b):
Telecom Services $ 21,295 2,871 7,442 45,798 86,775
Network Services 1,086 145 441 2,110 2,305
Satellite Services 4,809 1,272 1,133 4,462 7,314
Corporate Services 2,447 444 750 3,744 4,286
Eliminations 393 101 (75) 387 865
================ ============== ============== ============== ================
Total depreciation and
amortization $ 30,030 4,833 9,691 56,501 101,545
================ ============== ============== ============== ================
(Continued)
</TABLE>
F-58
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Business Units (continued)
<TABLE>
<CAPTION>
Fiscal Three months ended Fiscal years ended
year ended December 31, December 31,
September 30, ------------------------------ --------------------------------
1996 1995 1996 1997 1998
----------------- -------------- -------------- -------------- ---------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest expense (b):
Telecom Services $ 6,814 2,432 1,744 11,996 2,693
Network Services 240 148 - 6 23
Satellite Services 175 52 13 - 88
Corporate Services 78,485 12,583 22,697 105,518 167,323
---------------- -------------- -------------- -------------- ---------------
Total interest expense $ 85,714 15,215 24,454 117,520 170,127
================ ============== ============== ============== ===============
Total assets:
Telecom Services (c) $ 349,786 218,579 400,003 663,864 1,135,937
Network Services 25,994 23,214 33,308 31,911 34,378
Satellite Services (c) 46,087 56,498 46,212 46,797 46,760
Corporate Services (c) 761,720 307,188 709,412 353,898 376,796
Eliminations (253,478) (28,312) (254,107) 6,062 (22,689)
Net current assets of discontinued
operations (d) 54,226 131,902 54,481 38,331 -
Net non-current assets of
discontinued operations 97,561 59,850 97,425 76,577 54,243
---------------- -------------- -------------- -------------- ---------------
Total assets $ 1,081,896 768,919 1,086,734 1,217,440 1,625,425
================ ============== ============== ============== ===============
Capital expenditures of continuing
operations (e):
Telecom Services $ 159,997 24,036 67,192 252,008 357,991
Network Services 2,983 279 764 1,577 1,804
Satellite Services 11,442 1,484 2,020 5,901 11,107
Corporate Services 2,728 1,108 438 10,384 960
Eliminations (215) (25) (117) (1,074) (2,916)
---------------- -------------- -------------- -------------- ---------------
Total capital expenditures of
continuing operations $ 176,935 26,882 70,297 268,796 368,946
================ ============== ============== ============== ===============
</TABLE>
F-59
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(15) Business Units (continued)
(a) EBITDA (before nonrecurring charges) consists of net loss from
continuing operations before interest, income taxes, depreciation and
amortization, provision for impairment of long-lived assets, net loss
(gain) on disposal of long-lived assets, restructuring costs, other
expense, net and accretion and preferred dividends on preferred
securities of subsidiaries, or simply, revenue less operating costs
and selling, general and administrative expenses. EBITDA (before
nonrecurring charges) is presented as the Company's measure of
operating performance because it is a measure commonly used in the
telecommunications industry. EBITDA (before nonrecurring charges) is
presented to enhance an understanding of the Company's operating
results and is not intended to represent cash flows or results of
operations in accordance with generally accepted accounting principles
("GAAP") for the periods indicated. EBITDA (before nonrecurring
charges) is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures of other companies.
(b) Although not included in EBITDA (before nonrecurring charges), which
represents the measure of operating performance used by management to
evaluate operating results, the Company has supplementally provided
depreciation and amortization and interest expense for each of the
Company's business units and Corporate Services. Interest expense
excludes amounts charged for interest on outstanding cash advances and
expense allocations among the business units and Corporate Services.
(c) Total assets of Telecom Services, Satellite Services and Corporate
Services excludes investments in consolidated subsidiaries which
eliminate in consolidation.
(d) At December 31, 1998, the Company had net current liabilities of
discontinued operations of $23.3 million, and accordingly, such amount
was not included within net current assets of discontinued operations
on that date.
(e) Capital expenditures include assets acquired under capital leases and
excludes payments for construction of the Company's corporate
headquarters.
F-60
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(16) Provision for Impairment of Long-Lived Assets
For fiscal 1997, provision for impairment of long-lived assets includes the
impairment of the Company's Corporate Services investments in StarCom
International Optics Corporation, Inc. ("StarCom") and Zycom of
approximately $5.2 million and $2.7 million, respectively, and the
Company's Satellite Services investments in MCN and Nova-Net of
approximately $2.9 million and $0.9 million, respectively. The Company
recorded its impairment in the investment in StarCom upon notification by a
senior secured creditor of StarCom that it intended to foreclose on its
collateral in StarCom, which subsequently caused the bankruptcy of StarCom.
Based on circumstances of continuing net operating losses and management's
assessment of the estimated fair value of related long-lived assets at
December 31, 1997, the Company recorded an impairment of its investments in
Zycom, MCN and Nova-Net.
For fiscal 1996, provision for impairment of long-lived assets includes the
Company's Telecom Services investments in the Phoenix and Melbourne
networks of approximately $5.8 million and $2.7 million, respectively, and
the Company's Satellite Services investment in its subsidiary in Mexico of
approximately $0.2 million. The provision for impairment of long-lived
assets was based on circumstances of continuing net operating losses and
management's assessment of the estimated fair value of related long-lived
assets at September 30, 1996. Additionally, the Company provided an
allowance for a note receivable from NovoComm, Inc. of approximately $1.3
million based on management's assessment at September 30, 1996 of the
collectibility of amounts due.
(17) Restructuring Costs
During fiscal 1998, the Company completed a decentralization of the
Company's Network Services business unit. The Company recorded
approximately $0.6 million in restructuring costs, consisting primarily of
severance costs, resulting from the decentralization.
Also during fiscal 1998, the Company recorded approximately $1.5 million of
restructuring costs associated with a combined restructuring plan for
Telecom Services and Corporate Services, which was designed to support the
Company's increased strategic focus on its ISP customer base, as well as to
improve the efficiency of operations and general and administrative support
functions. Restructuring costs under this plan include severance and other
employee benefit costs. At December 31, 1998, approximately $0.6 million
remains in accrued liabilities related to the Telecom Services
F-61
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(17) Restructuring Costs (continued)
and Corporate Services restructuring plan, which is expected to be paid
during the first quarter of 1999.
Following the Company's acquisition of NikoNET in July 1998, the Company
closed a regional facility of a newly acquired subsidiary of NikoNET.
Restructuring costs, consisting primarily of severance costs, of
approximately $0.2 million were recorded as a result of the facility
closure during fiscal 1998. Approximately $0.2 million remains in accrued
liabilities at December 31, 1998 related to the facility closure.
(18) Income Taxes
The components of income tax benefit for fiscal 1996 are as follows (in
thousands):
Current income tax expense $ (198)
Deferred income tax benefit 5,329
----------------
Total $ 5,131
================
Current income tax expense of $0.2 million and $0.1 million for fiscal 1996
and 1998, respectively, represents state income tax relating to operations
of a subsidiary company in a state requiring a separate entity tax return.
Accordingly, this entity's taxable income cannot be offset by the Company's
consolidated net operating loss carryforwards. During fiscal 1996, the
deferred tax liability was adjusted for the effects of certain changes in
estimated lives of property and equipment as discussed in note 2. As a
result, the Company recognized an income tax benefit of $5.3 million. No
income tax expense or benefit was recorded in the three months ended
December 31, 1996 or fiscal 1997.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1998 are as follows:
F-62
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(18) Income Taxes (continued)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1998
------------------- --------------------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 6,254 10,173
------------------- --------------------
Deferred income tax assets:
Net operating loss carryforwards (141,185) (247,126)
Accrued interest on high yield debt obligations
deductible when paid (72,330) (108,895)
Accrued expenses not currently deductible for
tax purposes, including deferred revenue (7,968) (9,275)
Less valuation allowance 215,229 355,123
------------------- --------------------
Deferred income tax assets (6,254) (10,173)
------------------- --------------------
Net deferred income tax liability $ - -
=================== ====================
</TABLE>
As of December 31, 1998, the Company has federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0
million, respectively, which expire in varying amounts through 2019.
However, due to the provisions of Section 382, Section 1502 and certain
other provisions of the Internal Revenue Code (the "Code"), the utilization
of these NOLs will be limited. The Company is also subject to certain state
income tax laws, which will also limit the utilization of NOLs. As a result
of ICG's merger with NETCOM, which created a change in ownership of NETCOM
of greater than 50%, the NOLs generated by NETCOM prior to January 21, 1998
that can be used to reduce future taxable income are limited to
approximately $15.0 million per year, before realization of unrecognized
built-in gains.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management is not presently able to determine
when the Company will generate future taxable income.
F-63
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(19) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plans after
meeting minimum service and age requirements. Under the plan available to
NETCOM employees from January 1, 1997 through July 1, 1998, the Company
made a matching contribution of 100% of each NETCOM employee's contribution
up to a maximum of 3% of the employee's eligible earnings. Prior to 1997,
NETCOM's matching contribution was limited to 50% of each NETCOM employee's
contribution up to a maximum of 6% of the employee's eligible earnings.
Under the plan available to all ICG employees, including NETCOM employees
subsequent to July 1, 1998, the Company makes a matching contribution of
ICG Common Stock up to a maximum of 6% of the employee's eligible earnings.
Aggregate matching contributions under the Company's employee benefit plans
were approximately $1.6 million, $0.6 million, $3.6 million and $4.0
million during fiscal 1996, the three months ended December 31, 1996, and
fiscal 1997 and 1998, respectively. The portion of this expense which
relates directly to employees of NETCOM is included in loss from
discontinued operations for all periods presented.
(20) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada.
The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized combined financial information for Holdings and
subsidiaries and affiliates is as follows:
F-64
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1998
----------------- ------------------
(in thousands)
<S> <C> <C>
Current assets $ 213,625 277,098
Property and equipment, net 631,117 636,747
Other non-current assets, net 120,878 170,151
Net non-current assets of
discontinued operations 2,940 220
Current liabilities 95,792 81,299
Net current liabilities of discontinued
operations 367 944
Long-term debt, less current portion 890,503 1,004,316
Capital lease obligations, less current
portion 66,939 63,359
Due to parent 30,970 191,889
Due to ICG Services - 137,762
Redeemable preferred stock 292,442 338,311
Stockholders' deficit (408,453) (733,664)
</TABLE>
Summarized Consolidated and Combined Statement of Operations Information
<TABLE>
<CAPTION>
Three months ended Fiscal years ended
Fiscal year ended December 31, December 31,
September 30, -------------------------------- -------------------------------
1996 1995 1996 1997 1998
---------------------- --------------- -------------- --------------- ---------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ 154,143 34,544 49,477 245,022 400,309
Total operating costs
and expenses 239,343 50,322 75,199 430,816 546,850
Operating loss (85,200) (15,778) (25,722) (185,794) (146,541)
Loss from continuing
operations before
cumulative effect
of change in accounting (169,439) (34,211) (49,266) (321,802) (320,363)
Net loss (172,687) (34,281) (49,750) (328,193) (325,211)
</TABLE>
F-65
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(21) Condensed Financial Information of ICG Holdings (Canada) Co.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
-----------------------------------------
1997 1998
---------------------- ----------------
(in thousands)
Current assets $ 162 162
Advances to subsidiaries 30,970 191,889
Non-current assets, net 2,604 2,414
Current liabilities 107 73
Long-term debt, less
current portion 65 65
Due to parent 21,146 182,101
Share of losses of subsidiary 408,453 733,664
Shareholders' deficit (396,035) (721,438)
Condensed Statement of Operations Information
<TABLE>
<CAPTION>
Fiscal year ended Three months ended December Fiscal years ended December 31,
September 30, 31,
------------------------------- ----------------------------------
1996 1995 1996 1997 1998
-------------------- --------------- -------------- --------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ - - - - -
Total operating costs
and expenses 3,438 361 73 195 192
Operating loss (3,438) (361) (73) (195) (192)
Losses from subsidiaries (172,687) (34,281) (49,750) (328,193) (325,211)
Net loss attributable to
common shareholders (184,107) (34,642) (49,823) (328,388) (325,403)
</TABLE>
F-66
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
At December 31, 1998, the primary assets of ICG are its investments in ICG
Services, ICG Funding, ICG Acquisition and NikoNET, including advances to
those subsidiaries. Certain corporate expenses of the parent company are
included in ICG's statement of operations and were approximately $1.2
million and $2.2 million for fiscal 1997 and 1998, respectively. At
December 31, 1998, ICG had no operations other than those of ICG Services,
ICG Funding, ICG Acquisition and their subsidiaries.
F-67
<PAGE>
FINANCIAL STATEMENT SCHEDULE
ICG Communications, Inc. Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . . . S-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of February 15, 1999, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1997 and
1998 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the fiscal years ended September 30, 1996, the
three months ended December 31, 1996, and the fiscal years ended December 31,
1997 and 1998 as contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement Schedule II: Valuation and Qualifying Accounts. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. We did not audit the consolidated financial statements and
related financial statement schedule of NETCOM On-Line Communication Services,
Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the Company, as of
December 31, 1997 or for the fiscal year ended December 31, 1996, the
three-month period ended December 31, 1996, or the fiscal year ended December
31, 1997, whose total assets constitute 11.7 percent in fiscal 1997, and whose
loss from operations constitutes 100.5 percent in fiscal 1996, 96.0 percent in
the three months ended December 31, 1996, and 83.8 percent in fiscal 1997 of the
consolidated loss from discontinued operations. Those consolidated financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included in the
financial statement schedule for NETCOM, is based solely on the reports of the
other auditors.
In our opinion, based on our audits and the reports of the other auditors, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG LLP
Denver, Colorado
February 15, 1999
S-1
<PAGE>
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- ------------------------------------------------ ------------ ------------- -------------- ------------- -------------
(in thousands)
Allowance for uncollectible trade receivables:
<S> <C> <C> <C> <C> <C>
Fiscal year ended September 30, 1996 $ 2,142 1,531 - (1,293) 2,380
------------ ------------- -------------- ------------- -------------
Three months ended December 31, 1996 $ 2,380 914 - (883) 2,411
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1997 $ 2,411 3,985 - (1,142) 5,254
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1998 $ 5,254 12,031 - (1,812) 15,473
------------ ------------- -------------- ------------- -------------
Allowance for uncollectible note receivable:
Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275
------------ ------------- -------------- ------------- -------------
Three months ended December 31, 1996 $ 7,275 - - - 7,275
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1997 $ 7,275 - - (3,975) 3,300
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1998 $ 3,300 - - (2,000) 1,300
------------ ------------- -------------- ------------- -------------
Allowance for impairment of long-lived assets:
Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000
------------ ------------- -------------- ------------- -------------
Three months ended December 31, 1996 $ 2,000 - - - 2,000
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1997 $ 2,000 5,170 - (2,000) 5,170
------------ ------------- -------------- ------------- -------------
Fiscal year ended December 31, 1998 $ 5,170 - - - 5,170
------------ ------------- -------------- ------------- -------------
</TABLE>
See accompanying independent auditors' report.
S-2
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
EXHIBITS
3.3: Agreement and Plan of Reorganization by and among ICG Communications, Inc.,
ICG Canadian Acquisition, Inc., ICG Holdings (Canada), Inc. and ICG
Holdings (Canada) Co., dated November 4, 1998.
3.4:Order of Amalgamation between ICG Holdings (Canada), Inc. and ICG Holdings
(Canada) Co., dated December 22, 1998.
3.5: Memorandum and Articles of Association of ICG Holdings (Canada) Co. filed
with the Registrar of Joint Stock Companies, Halifax, Nova Scotia.
4.11:Second Amended and Restated Articles of Incorporation of ICG Holdings,
Inc., dated March 10, 1997.
10.29: ICG Communications, Inc. 1998 Stock Option Plan.
10.30: Form of Stock Option Agreement for 1998 Stock Option Plan.
10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock Option Plan,
dated December 15, 1998.
10.32: Form of Agreement regarding Gross-Up Payments, by and between ICG
Communications, Inc. and each of J. Shelby Bryan, Harry R. Herbst, Douglas
I. Falk and H. Don Teague, dated December 16, 1998.
21.1: Subsidiaries of the Registrant.
23.1: Consent of KPMG LLP.
23.2: Consent of Ernst & Young LLP.
27.1:Financial Data Schedule of ICG Communications, Inc. for the Fiscal Year
Ended December 31, 1998.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Incorporation Doing Business
Name of Subsidiary As
- ---------------------------------------------------------------------- ------------------------ ----------------------------
<S> <C> <C>
Bay Area Teleport, Inc. Delaware --
Communications Buying Group, Inc. Ohio --
DataChoice Network Services, L.L.C. Nevada --
Fiber Optic Technologies of the Northwest, Inc.
(formerly known as Fiber Optic Technologies of
Oregon, Inc.) Oregon --
ICG Access Services - Southeast, Inc.
(formerly known as PrivaCom, Inc.) Delaware --
ICG Canadian Acquisition, Inc. Delaware --
ICG ChoiceCom, L.P. Delaware --
(formerly known as CSW/ICG ChoiceCom, L.P.)
ICG ChoiceCom Management, LLC
(formerly known as Southwest TeleChoice Management, LLC
and CSW/ICG ChoiceCom Management, LLC) Delaware --
ICG Enhanced Services, Inc. Colorado --
ICG Equipment, Inc. Colorado --
ICG Fiber Optic Technologies, Inc.
(formerly known as Fiber Optic Technologies, Inc.) Colorado --
ICG Funding, LLC Delaware --
ICG Holdings, Inc.
(formerly known as IntelCom Group (U.S.A.), Inc.) Colorado --
ICG Holdings (Canada) Co. Nova Scotia --
ICG Ohio LINX, Inc.
(formerly known as Ohio Local Interconnection Network
Exchange Co.) Ohio --
ICG PST, Inc.
(formerly known as NETCOM On-Line Communication Services,
Inc.) Delaware --
ICG Satellite Services, Inc.
(formerly known as Commden Ltd. and as ICG Wireless
Services, Inc.) Colorado --
ICG Services, Inc. Delaware --
ICG Telecom Canada, Inc. Federal Canadian --
ICG Telecom Group, Inc.
(formerly known as ICG Access Services, Inc.) Colorado --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
State of Incorporation Doing Business
Name of Subsidiary As
- ---------------------------------------------------------------------- ------------------------ ----------------------------
<S> <C> <C>
ICG Telecom Group of Virginia, Inc. Virginia --
ICG Telecom of San Diego, L.P. California --
(formerly known as Linkatel of California, L.P.)
Maritime Telecommunications Network, Inc. Colorado --
NikoNET, LLC Georgia --
PTI Harbor Bay, Inc. Washington --
TransAmerican Cable, Inc. Kentucky MidAmerican Cable
UpSouth Corporation Georgia --
Zycom Corporation Alberta, Canada --
(formerly known as Camber Sports, Inc.)
Zycom Corporation Texas --
Zycom Network Services, Inc. Texas --
(formerly known as Travel Phone, Inc.)
</TABLE>
<PAGE>
Consent of KPMG LLP
The Board of Directors
ICG Communications, Inc.:
We consent to incorporation by reference in the registration statements Nos.
33-96660, 333-08729, 333-18839, 333-38823, 333-40495 and 333-40495-01 on Form
S-3 of IntelCom Group Inc. and Nos. 33-14127, 333-25957, 333-39737, 333-45213
and 333-56835 on Form S-8 of ICG Communications, Inc. of our reports dated
February 15, 1999, relating to the consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fiscal years ended September 30, 1996, the three-month
period ended December 31, 1996, and the fiscal years ended December 31, 1997 and
1998, and the related financial statement schedule, which reports appear in the
December 31, 1998 Annual Report on Form 10-K of ICG Communications, Inc.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG LLP
Denver, Colorado
March 29, 1999
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 of IntelCom Group Nos. 33-96660 and 333-08729; Forms S-3 of ICG
Communications, Inc. Nos. 333-18839, 333-38823, 333-40495 and 333-40495-01; and
Forms S-8 of ICG Communications, Inc. Nos. 33-14127, 333-25957, 333-39737, and
333-45213) of our reports (a) dated February 13, 1998 with respect to the
consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997
(not presented separately herein), and (b) dated April 16, 1998 with respect to
the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as
of December 31, 1996 and the related statements of operations, stockholders'
equity and cash flows for the three months then ended (not presented separately
herein), included in this Annual Report (Form 10-K) of ICG Communications, Inc.,
ICG Holdings (Canada) Co. and ICG Holdings, Inc.
Ernst & Young LLP
San Jose, California
March 26, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ICG Communications, Inc.
By: /s/J. Shelby Bryan
--------------------------------------
J. Shelby Bryan
President and Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/William J. Laggett Chairman of the Board of Directors March 30, 1999
- -------------------------------
William J. Laggett
President and Chief Executive Officer (Principal
/s/J. Shelby Bryan Executive Officer) March 30, 1999
- -------------------------------
J. Shelby Bryan
Executive Vice President and Chief
Financial Officer (Principal Financial
/s/Harry R. Herbst Officer) March 30, 1999
- -------------------------------
Harry R. Herbst
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- -------------------------------
Richard Bambach
/s/John U. Moorhead Director March 30, 1999
- -------------------------------
John U. Moorhead
/s/Leontis Teryazos Director March 30, 1999
- -------------------------------
Leontis Teryazos
/s/Walter Threadgill Director March 30, 1999
- -------------------------------
Walter Threadgill
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ICG Holdings (Canada) Co.
By: /s/J. Shelby Bryan
----------------------------------------
J. Shelby Bryan
President and Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
President and Chief Executive Officer (Principal
/s/J. Shelby Bryan Executive Officer) March 30, 1999
- -------------------------------
J. Shelby Bryan
Executive Vice President, Chief Financial Officer
/s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999
- -------------------------------
Harry R. Herbst
Executive Vice President, General Counsel,
/s/H. Don Teague Secretary and Director March 30, 1999
- -------------------------------
H. Don Teague
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- -------------------------------
Richard Bambach
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan
-------------------------------------
J. Shelby Bryan
President, Chief Executive Officer and
Director
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board of Directors, President and
Chief Executive Officer (Principal Executive
/s/J. Shelby Bryan Officer) March 30, 1999
- ------------------------------
J. Shelby Bryan
Executive Vice President, Chief Financial Officer
/s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999
- ------------------------------
Harry R. Herbst
Executive Vice President, General Counsel,
/s/H. Don Teague Secretary and Director March 30, 1999
- ------------------------------
H. Don Teague
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- ------------------------------
Richard Bambach
/s/Douglas I. Falk Executive Vice President - Telecom and Director March 30, 1999
- ------------------------------
Douglas I. Falk
</TABLE>
AGREEMENT AND PLAN OF REORGANIZATION
among
ICG COMMUNICATIONS, INC.,
ICG CANADIAN ACQUISITION, INC.,
ICG HOLDINGS (CANADA), INC.,
and
ICG HOLDINGS (CANADA) CO.
Dated as of November 4, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND CONSTRUCTION......................................1
1.1 Certain Definitions...............................................1
1.2 Terms Generally...................................................4
ARTICLE II
THE REORGANIZATION AND RELATED MATTERS............................4
2.1 The Reorganization................................................4
(a) Exchange of Class A Shares...............................4
(b) Acquisition of Company Common Shares Owned by ICG........5
(c) Treatment of Warrants....................................5
(d) Continuation of the Company..............................5
2.2 Closing...........................................................6
2.3 Exchange of Shares................................................6
(a) Appointment of Exchange Agent............................6
(b) Letter of Transmittal....................................6
(c) Exchange Procedure.......................................6
(d) Unregistered Transfers of Company Common Shares..........6
(e) Lost, Stolen or Destroyed Certificates...................7
(f) No Dividends Before Surrender of Certificates............7
(g) No Further Ownership Rights in Company Common Shares.....7
(h) Abandoned Property Laws..................................7
ARTICLE III
CERTAIN ACTIONS...................................................8
3.1 Shareholder Meeting...............................................8
3.2 Reasonable Efforts................................................8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................9
4.1 Organization and Qualification....................................9
4.2 Authorization and Validity of Agreement...........................9
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ICG, ACQUISITION AND NOVA
SCOTIA............................................................9
5.1 Organization......................................................9
5.2 Authorization and Validity of Agreement..........................10
ARTICLE VI
TRANSACTIONS PRIOR TO CLOSING....................................10
6.1 Access to Information............................................10
6.2 Expenses.........................................................10
6.3 Notification of Certain Matters..................................10
6.4 Actions by ICG and Acquisition...................................11
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT.............................................11
7.1 Conditions Precedent to the Obligations of ICG, Acquisition,
Nova Scotia and the Company......................................11
(a) Shareholder Approval....................................11
(b) Absence of Injunctions..................................11
7.2 Conditions Precedent to the Obligations of ICG, Acquisition and
Nova Scotia......................................................11
(a) Accuracy of Representations and Warranties..............12
(b) Performance of Agreements...............................12
(c) Officers' Certificates..................................12
(d) No Adverse Enactments...................................12
(e) Receipt of Licenses, Permits and Consents...............12
7.3 Conditions Precedent to the Obligations of the Company...........12
(a) Accuracy of Representations and Warranties..............13
(b) Performance of Agreements...............................13
(c) Officers' Certificates..................................13
(d) No Adverse Enactments...................................13
(e) Receipt of Licenses, Permits and Consents...............13
ARTICLE VIII
TERMINATION......................................................13
8.1 Termination and Abandonment......................................13
8.2 Effect of Termination............................................14
ARTICLE IX
MISCELLANEOUS....................................................14
9.1 Effectiveness of Representations, Warranties and Agreements......14
9.2 Notices..........................................................14
9.3 Entire Agreement.................................................15
9.4 Assignment; Binding Effect; Benefit..............................15
9.5 Amendment........................................................15
9.6 Extension; Waiver................................................15
9.7 Headings.........................................................16
9.8 Counterparts.....................................................16
9.9 Applicable Law...................................................16
9.10 Limited Liability................................................16
9.11 Severability.....................................................16
Exhibit A Articles of Amendment
Exhibit B Sole Shareholder's Resolution
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of the fourth day of November, 1998, by and among ICG
Communications, Inc., a Delaware corporation ("ICG"), ICG Canadian Acquisition,
Inc., a Delaware corporation ("Acquisition"), ICG Holdings (Canada), Inc., a
corporation organized under the Canadian Business Corporations Act (the
"Company"), and ICG Holdings (Canada) Co. ("Nova Scotia"), a newly organized
unlimited liability company organized under the laws of the Province of Nova
Scotia.
WHEREAS, ICG is the parent of the Company and beneficially owns
approximately 99.93% of the outstanding common shares of the Company;
WHEREAS, ICG desires to cause Acquisition to acquire ownership of all of
the common shares of the Company not owned by it;
WHEREAS, the Boards of Directors of ICG, Acquisition and the Company each
have determined that it is advisable and in the best interests of their
respective stockholders for ICG to so acquire such shares and, to that end, for
Acquisition to acquire all of the outstanding shares of the Company upon the
terms and subject to the conditions of this Agreement, and thereafter for the
Company to be continued as an unlimited liability company under the laws of Nova
Scotia; and
WHEREAS, for United States federal income tax purposes, it is intended that
the Reorganization (as defined below) qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND CONSTRUCTION
I.1 Certain Definitions. As used in this Agreement, the following terms
will have the following meanings unless the context otherwise requires:
"Acquisition" has the meaning specified in the preamble.
"Affiliate" means, with respect to any Person, any Person controlling,
controlled by or under common control with such Person.
"Agreement" means this Agreement and Plan of Reorganization, including
the attached Exhibits.
<PAGE>
"Articles of Amendment" has the meaning set forth in Section 2.1(a).
"Certificates" means certificates evidencing shares of Company Common
Shares held by Persons other than ICG or Acquisition.
"Closing" means the consummation of the transactions contemplated by
this Agreement.
"Closing Date" means the date on which the Closing occurs pursuant to
Section 2.2.
"Code" has the meaning specified in the preamble.
"Company" has the meaning specified in the preamble.
"Company Board" means the Board of Directors of the Company.
"Company Charter" means the Articles of Arrangement of the Company, as
amended to the date of this Agreement and as they may be further amended
prior to the Closing.
"Company Common Shares" means shares of the Company's Class A Shares.
"Control" means, with respect to any Person, the possession, direct or
indirect, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities or partnership interests, by contract or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" has the meaning specified in Section 2.3(a).
"Exchange Agent Agreement" has the meaning specified in Section
2.3(a).
"Governmental Entity" means any court, arbitrator, administrative or
other governmental department, agency, commission, authority or
instrumentality, domestic or foreign.
"ICG" has the meaning specified in the preamble.
"ICG Common Stock" means shares of common stock of ICG, par value $.01
per share.
"Injunction" has the meaning specified in Section 3.2.
2
<PAGE>
"License" means any license, franchise, ordinance, authorization,
permit, certificate, variance, exemption, concession, lease, right of way,
easement, instrument, order and approval, domestic or foreign.
"Material Adverse Effect" means (A) with respect to ICG, a material
adverse effect on the business, properties, operations or financial
condition of ICG and its subsidiaries (including the Company and its
subsidiaries) taken as a whole, other than any such effect arising out of
or resulting from general business or economic conditions in the United
States, and (B) with respect to the Company, a material adverse effect on
the business, properties, operations or financial condition of the Company
and its subsidiaries taken as a whole, other than any such effect arising
out of or resulting from general business or economic conditions in areas
where the Company does business.
"Nova Scotia" has the meaning set forth in the preamble.
"Person" means an individual, partnership, corporation, limited
liability company, trust, unincorporated organization, association,
unlimited liability company, or joint venture or a government, agency,
political subdivision, or instrumentality thereof.
"Reorganization" has the meaning specified in Section 2.1.
"Special Meeting" has the meaning specified in Section 3.1.
"Subsidiary" when used with respect to any Person, means any other
Person, of which (x) in the case of a corporation, at least (A) a majority
of the equity and (B) a majority of the voting interests are owned or
controlled, directly or indirectly, by such first Person, by any one or
more of its subsidiaries, or by such first Person and one or more of its
subsidiaries or (y) in the case of any Person other than a corporation,
such first Person, one or more of its subsidiaries, or such first Person
and one or more of its subsidiaries (A) owns a majority of the equity
interests thereof and (B) has the power to elect or direct the election of
a majority of the members of the governing body thereof or otherwise has
control over such organization or entity; provided that, for purposes of
the agreements set forth in Article 3 and Article 6, references to
subsidiaries will not include any Person as to which such first Person's
voting interests are subject to a voting agreement, proxy, management
contract or other arrangement as a result of which such first Person does
not control such other Person. For purposes of this Agreement, unless
otherwise specified, neither the Company nor any of its subsidiaries will
be deemed to be subsidiaries of ICG or any of ICG's subsidiaries, whether
or not they otherwise would be subsidiaries of ICG or any of ICG's
subsidiaries under the foregoing definition.
"Warrant Agreement" means the Warrant Agreement between Intelcom Group
Inc. and Norwest Bank Colorado National Association, dated August 8, 1995.
3
<PAGE>
"Warrants" means each of the rights to subscribe for shares of Company
Common Shares issued and outstanding under the Warrant Agreement.
"Wholly-Owned Subsidiary" will mean, as to any Person, a Subsidiary of
such Person 100% of the equity and voting interest in which is owned,
directly or indirectly, by such Person.
I.2 Terms Generally. The definitions in Section 1.1 will apply equally
to both the singular and plural forms of the terms defined. Whenever the context
may require, any pronoun will include the corresponding masculine, feminine and
neuter forms. The words "include," "includes" and "including" will be deemed to
be followed by the phrase "without limitation." The words "herein," "hereof" and
"hereunder" and words of similar import refer to this Agreement (including the
Exhibits) in its entirety and not to any part hereof unless the context will
otherwise require. All references herein to Articles, Sections, and Exhibits
will be deemed references to Articles and Sections of, and Exhibits to, this
Agreement unless the context otherwise requires. Unless the context otherwise
requires, any references to any agreement or other instrument or statute or
regulation are to it as amended and supplemented from time to time (and, in the
case of a statute or regulation, to any successor provisions). Any reference in
this Agreement to a "day" or number of "days" (without the explicit
qualification of "business") will be interpreted as a reference to a calendar
day or number of calendar days. If any action or notice is to be taken or given
on or by a particular calendar day, and such calendar day is not a business day,
then such action or notice will be deferred until, or may be taken or given on,
the next business day. As used herein, the phrase "made available" means that
the information referred to has been made available if requested by the party to
whom such information is to be made available.
ARTICLE II
THE REORGANIZATION AND RELATED MATTERS
2.1 The Reorganization.
The "Reorganization" will consist of the following transactions,
all of which will be considered part of one integrated and mutually
interdependent plan undertaken by the parties:
(a) Exchange of Class A Shares. The following actions will be
undertaken to facilitate the acquisition of Class A Shares held by Persons
other than ICG or Acquisition:
(i) The Company will prepare and file with the Director
appointed under the Canada Business Corporations Act,
Articles of Amendment to the provisions of the Company
Charter attaching to the Company Shares, in the form
attached as Exhibit A (the "Articles of Amendment").
4
<PAGE>
(ii) The Company will declare an Automatic Redemption Date on
December 1, 1998 or as soon as possible thereafter.
(iii)ICG will assign the Redemption Call Right contained in the
Company Charter to Acquisition and Acquisition will exercise
the Redemption Call Right in respect of the Automatic
Redemption Date declared pursuant to the foregoing clause
(ii).
(iv) The effect of the foregoing clauses (i), (ii) and (iii) will
be to provide for the automatic exchange on the Closing Date
of each Company Common Share outstanding and held by Persons
other than ICG or Acquisition for an equal number of shares
of ICG Common Stock. As a result, on the Closing Date,
Acquisition will acquire all of the Company Common Shares
held by Persons other than ICG or Acquisition in exchange
for an equal number of shares of ICG Common Stock.
(b) Acquisition of Company Common Shares Owned by ICG. On or prior to
the Closing Date, in addition to the Company Common Shares held by Persons
other than ICG or Acquisition acquired by Acquisition pursuant to Section
2.1(a), Acquisition will acquire from ICG, in exchange for 100 newly issued
shares of Acquisition common stock (representing all of Acquisition's
issued capital stock), all of the Company Common Shares owned by ICG and
22,370 shares of ICG Common Stock. Notwithstanding the prior sentence, the
consideration for the Company Common Shares acquired by Acquisition from
ICG shall be deemed to be an equal number of shares of ICG Common Stock
deemed to have been contributed to the capital of Acquisition by ICG. Thus,
to avoid the inconvenience of authorizing, issuing, contributing and
returning actual shares of ICG Common Stock, ICG and Acquisition will
dispense with this formality, resulting in a constructive contribution of
ICG Common Stock by ICG to Acquisition and a constructive issuance of ICG
Common Stock by Acquisition to ICG in exchange for the Company Common
Shares owned by ICG.
(c) Treatment of Warrants. On and after January 1, 1999, as a result
of and pursuant to the Reorganization, (i) each of the Warrants will no
longer be exercisable for Company Common Shares; (ii) each of the Warrants
will become exercisable for ICG Common Stock issuable by ICG (and not
issuable by the Company); and (iii) the holders of the Warrants will be
entitled to purchase ICG Common Stock solely from ICG (and not from the
Company) on the same terms and conditions as are set forth in the Warrant
Agreement with respect to the purchase of Company Common Shares. In
accordance with this Section 2.1(c), on and after the Closing Date the
Warrant Agreement will provide solely for the issuance of ICG Common Stock
by ICG upon the exercise of Warrants rather than Company Common Shares. All
other terms and conditions of the Warrant Agreement will remain in full
force and effect.
(d) Continuation of the Company. On or prior to the Closing Date,
Acquisition will organize Nova Scotia. Promptly after the Closing,
5
<PAGE>
Acquisition will adopt a sole shareholder's resolution (the form of which
is attached as Exhibit B) approving the continuation of the Company under
the laws of the Province of Nova Scotia. As soon as practicable following
such continuance, the Company will be amalgamated with and into Nova
Scotia, with Nova Scotia as the survivor, and the Company will continue as
an unlimited liability company organized under the laws of the Province of
Nova Scotia.
2.2 Closing. Unless this Agreement shall have been terminated pursuant
to Section 8.1 and subject to the satisfaction or, when permissible, waiver
of the conditions set forth in Article 7, the Closing will take place (a)
at 10:00 a.m. (Denver time) at the executive offices of ICG in Denver,
Colorado, on the later of (i) December 1, 1998 or (ii) the date on which
the last of the conditions set forth in Article 7 (other than any such
conditions which by their terms are not capable of being satisfied until
the Closing Date or thereafter) is satisfied or, when permissible, waived,
or (b) on such other date and/or at such other time and/or place as the
parties may mutually agree.
2.3 Exchange of Shares.
(a) Appointment of Exchange Agent. On or before the Closing Date, ICG
and the Company will enter into an agreement (the "Exchange Agent
Agreement") with an exchange agent selected by ICG and reasonably
acceptable to the Company (the "Exchange Agent"), authorizing such Exchange
Agent to act as Exchange Agent hereunder.
(b) Letter of Transmittal. Prior to the Closing, ICG will instruct the
Exchange Agent to mail to each holder of record (other than ICG or
Acquisition) of a Certificate or Certificates which immediately prior to
such mailing evidenced issued and outstanding Company Common Shares: (i) a
Management Proxy Circular describing the Articles of Amendment and (ii) a
letter of transmittal (which will state that delivery will be effected, and
risk of loss and title to the Certificates will pass, only upon proper
delivery of the Certificates to the Exchange Agent) with instructions for
use in effecting the surrender and exchange of the Certificates. Such
notice, letter of transmittal and instructions will contain such provisions
and be in such form as ICG and the Company may jointly specify.
(c) Exchange Procedure. Promptly following the surrender, in
accordance with such instructions, of a Certificate to the Exchange Agent
(or such other agent or agents as may be appointed by the Exchange Agent or
ICG pursuant to the Exchange Agent Agreement), together with such letter of
transmittal (duly executed) and any other documents required by such
instructions or letter of transmittal, ICG will, subject to Section 2.3(d),
cause to be distributed to the Person in whose name such Certificate shall
have been issued a certificate registered in the name of such Person
representing the number of shares of ICG Common Stock into which the shares
previously represented by the surrendered Certificate will have been
exchanged at the Closing pursuant to this Article 2. Each Certificate so
surrendered will be canceled.
(d) Unregistered Transfers of Company Common Shares. In the event of a
transfer of ownership of Company Common Shares which is not registered in
6
<PAGE>
the transfer records of the Company, a certificate representing the proper
number of shares of ICG Common Stock may be issued to the transferee of
such shares if the Certificate evidencing such shares of Company Common
Shares surrendered to the Exchange Agent in accordance with Section 2.3(c)
is properly endorsed for transfer or is accompanied by appropriate and
properly endorsed stock powers and is otherwise in proper form to effect
such transfer, if the Person requesting such transfer pays to the Exchange
Agent any transfer or other taxes payable by reason of such transfer or
establishes to the satisfaction of the Exchange Agent that such taxes have
been paid or are not required to be paid and if such Person establishes to
the satisfaction of ICG that such transfer would not violate applicable
federal or state securities laws.
(e) Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the Person claiming such Certificate to be
lost, stolen or destroyed satisfactory to ICG and complying with any other
reasonable requirements imposed by ICG, ICG will cause to be delivered to
such Person in respect of such lost, stolen or destroyed Certificate the
shares of ICG Common Stock or other property deliverable in respect thereof
as determined in accordance with this Article 2. ICG may, in its
discretion, require the owner of such lost, stolen or destroyed Certificate
to give ICG a bond in such sum as it may direct as indemnity against any
claim that may be made against ICG or the Company with respect to the
Certificate alleged to have been lost, stolen or destroyed.
(f) No Dividends Before Surrender of Certificates. No dividends or
other distributions declared or made after the Closing with respect to ICG
Common Stock with a record date after the Closing Date will be paid to the
holder of any unsurrendered Certificate with respect to the shares of ICG
Common Stock represented thereby, until the holder of record of such
Certificate surrenders such Certificate as provided herein. Subject to the
effect of applicable laws, following surrender of any such Certificate,
there will be paid to the record holder of the certificates representing
whole shares of ICG Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions, if any, with a record date after the Closing
theretofore paid by ICG with respect to such whole shares of ICG Common
Stock, and (ii) at the appropriate payment date, the amount of dividends or
other distributions, if any, with a record date after the Closing but prior
to surrender and with a payment date subsequent to surrender payable with
respect to such whole shares of ICG Common Stock.
(g) No Further Ownership Rights in Company Common Shares. All shares
of ICG Common Stock issued to holders of Certificates upon the surrender
for exchange of Company Common Shares in accordance with the terms of this
Article 2 will be deemed to have been issued in full satisfaction of all
rights pertaining to such Company Common Shares, and there will be no
further registration of transfers on the stock transfer books of the
Company of the Company Common Shares which were outstanding immediately
prior to the Closing (other than shares owned by ICG or Acquisition prior
to the Closing). Subject to Section 2.3(i), if, after the Closing,
Certificates are presented to the Company for any reason, they will be
exchanged as provided in this Article 2.
7
<PAGE>
(h) Abandoned Property Laws. Payment or delivery of the shares of ICG
Common Stock and any dividends or distributions with respect thereto in
accordance with the terms hereof will be subject to applicable abandoned
property, escheat and similar laws and none of ICG, Acquisition or the
Company will be liable to any holder of Company Common Shares or ICG Common
Stock for any such shares, for any dividends or distributions with respect
thereto or for any cash in lieu of fractional shares which may be delivered
to any public official pursuant to any abandoned property, escheat or
similar law.
ARTICLE III
CERTAIN ACTIONS
3.1 Shareholder Meeting. The Company, acting through the Company Board,
will, in accordance with applicable law, the Company Charter and the Company's
By-laws, duly call, give notice of, convene and hold, as soon as reasonably
practicable after the date of this Agreement, a meeting of the Company's
shareholders (the "Special Meeting") for the purpose of considering and voting
upon the Articles of Amendment, and the Company will, through the Company Board,
recommend to its shareholders the adoption of the Articles of Amendment.
3.2 Reasonable Efforts. Subject to the terms and conditions of this
Agreement and applicable law, each of the parties hereto will use its reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, all things reasonably necessary, proper or advisable under applicable
laws and regulations or otherwise to consummate and make effective the
Reorganization and the other transactions contemplated by this Agreement as soon
as reasonably practicable, including such actions or things as any other party
hereto may reasonably request in order to cause any of the conditions to such
other party's obligation to consummate such transactions specified in Article 7
to be fully satisfied. Without limiting the generality of the foregoing, the
parties will (and will cause their respective directors, officers and
subsidiaries, and use their reasonable best efforts to cause their respective
affiliates, employees, agents, attorneys, accountants and representatives, to)
consult and fully cooperate with and provide reasonable assistance to each other
in (i) obtaining all necessary consents, approvals, waivers, licenses, permits,
authorizations, registrations, qualifications, or other permission or action by,
and giving all necessary notices to and making all necessary filings with and
applications and submissions to, any Governmental Entity or other Person; (ii)
lifting any permanent or preliminary injunction or restraining order or other
similar order issued or entered by any court or Governmental Entity of competent
jurisdiction (an "Injunction") of any type referred to in Section 7.1(b); and
(iii) in general, consummating and making effective the transactions
contemplated hereby; provided, however, that in order to obtain any consent,
approval, waiver, license, permit, authorization, registration, qualification,
or other permission or action or the lifting of any Injunction referred to in
clause (i) or (ii) of this sentence, no party will be required to pay any
consideration, to divest itself of any of, or otherwise rearrange the
composition of, its assets or to agree to any conditions or requirements which,
individually or in the aggregate, would have a Material Adverse Effect on the
8
<PAGE>
Company or ICG. Prior to making any application to or filing with any
Governmental Entity or other Person in connection with this Agreement, each
party will provide the other party with drafts thereof and afford the other
party a reasonable opportunity to comment on such drafts.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to ICG and Acquisition as
follows:
4.1 Organization and Qualification. The Company (i) is a corporation, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization, (ii) has all requisite power
and authority to own, lease and operate its properties and to carry on its
business as it is now being conducted and (iii) is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or license necessary, except in such jurisdictions
where the failure to be so duly qualified or licensed or in good standing has
not had and is not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on the Company. The Company has heretofore furnished
or made available to ICG a true and complete copy of the Company Charter and the
Company's By-laws, each as amended through and in effect on the date hereof.
4.2 Authorization and Validity of Agreement. The Company has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder and consummate the transactions contemplated hereby. The
execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Company Board and by all other necessary corporate action on the part of
the Company, subject, in the case of the consummation by it of the automatic
exchange described in Section 2.1(a), to the approval of the Company's
shareholders. This Agreement has been duly executed and delivered by the Company
and (assuming the due execution and delivery of this Agreement by the other
parties hereto) constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF
ICG, ACQUISITION AND NOVA SCOTIA
9
<PAGE>
ICG, Acquisition and Nova Scotia each hereby represents and warrants, as to
itself, to the Company as follows:
5.1 Organization. It (i) is a corporation or unlimited liability company,
as the case may be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization, (ii) has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted and (iii) is duly qualified
or licensed and in good standing to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or license necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed or in good
standing has not had and is not reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on ICG, Acquisition or Nova Scotia, as
the case may be.
5.2 Authorization and Validity of Agreement. It has all requisite corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution,
delivery and performance by it of this Agreement and the consummation by it of
the transactions contemplated hereby have been approved by its respective Board
of Directors and, in the case of Acquisition, by ICG as the sole stockholder of
Acquisition, and have been duly authorized by all other necessary corporate
action on its part. This Agreement has been duly executed and delivered by it
and (assuming the due execution and delivery of this Agreement by the other
parties to this Agreement) constitutes a valid and binding agreement of it,
enforceable against it in accordance with its terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
ARTICLE VI
TRANSACTIONS PRIOR TO CLOSING
6.1 Access to Information. From the date hereof to the Closing, upon
reasonable notice, each of ICG and the Company will (and will cause each of its
subsidiaries, and use its reasonable best efforts to cause its other Affiliates,
to) afford to the officers, employees, counsel, accountants and other authorized
representatives of the other reasonable access during normal business hours to
all its properties, personnel, books and records and furnish promptly to such
Persons such information concerning its business, properties, personnel and
affairs as such Persons will from time to time reasonably request.
6.2 Expenses. Except as otherwise provided in this Section 6.2, whether or
not the Reorganization is consummated, all costs and expenses incurred or to be
incurred in connection with this Agreement and the transactions contemplated
hereby will be paid by the party incurring such cost or expense.
10
<PAGE>
6.3 Notification of Certain Matters. Between the date hereof and the
Closing, each party will give prompt notice in writing to the other party of (i)
any information that indicates that any of its representations or warranties
contained herein was not true and correct as of the date hereof or will not be
true and correct at and as of the Closing with the same force and effect as if
made at and as of the Closing (except for changes permitted or contemplated by
this Agreement), (ii) the occurrence or non-occurrence of any event which will
result, or has a reasonable prospect of resulting, in the failure of any
condition, covenant or agreement contained in this Agreement to be complied with
or satisfied, (iii) any failure of the Company or ICG (or Acquisition or Nova
Scotia), as the case may be, to comply with or satisfy any condition, covenant
or agreement to be complied with or satisfied by it hereunder and (iv) any
notice or other communication from any third party alleging that the consent of
such third party is or may be required in connection with the transactions
contemplated by this Agreement or that such transactions otherwise may violate
the rights of or confer remedies upon such third party.
6VI.4 Actions by ICG and Acquisition. In its capacity as a beneficial owner
of Company Common Shares, ICG hereby consents to the adoption of this Agreement
and agrees to cause the Company Common Shares beneficially owned by ICG to be
voted in favor of the adoption of Articles of Amendment at the Special Meeting.
In its capacity as the sole stockholder of Acquisition, ICG will cause
Acquisition to take all corporate action necessary on its part to consummate the
Reorganization and the transactions contemplated hereby.
ARTICLE VII
CONDITIONS PRECEDENT
7VII.1 Conditions Precedent to the Obligations of ICG, Acquisition, Nova
Scotia and the Company. The respective obligations of ICG, Acquisition, Nova
Scotia and the Company to consummate the transactions contemplated by this
Agreement are subject to the satisfaction at or prior to the Closing of each of
the following conditions, any or all of which, to the extent permitted by
applicable law, may be waived by ICG, for itself, Acquisition and Nova Scotia
(but not for the Company), or by the Company for itself (but not for ICG,
Acquisition or Nova Scotia):
(a) Shareholder Approval. The Articles of Amendment shall have been
duly adopted by the requisite vote of the shareholders of the Company at
the Special Meeting, in accordance with the Canadian Business Corporations
Act, the Company Charter and the Company's By-laws.
(b) Absence of Injunctions. No permanent or preliminary Injunction or
restraining order or other order by any court or other Governmental Entity
of competent jurisdiction, or other legal restraint or prohibition,
preventing consummation of the transactions contemplated by this Agreement
shall be in effect, or permitting such consummation only subject to any
condition or restriction that has or would have a Material Adverse Effect
on ICG or the Company.
11
<PAGE>
7.2 Conditions Precedent to the Obligations of ICG, Acquisition and Nova
Scotia. The obligations of ICG, Acquisition and Nova Scotia to consummate the
transactions contemplated by this Agreement are also subject to the satisfaction
at or prior to the Closing Date of each of the following conditions, unless
waived by ICG:
(a) Accuracy of Representations and Warranties. All representations
and warranties of the Company contained in this Agreement shall be true and
correct in all material respects in each case as of the date of this
Agreement and (except to the extent such representations and warranties
speak as of a specified earlier date) on and as of the Closing Date as
though made on and as of the Closing Date, except for changes permitted or
contemplated by this Agreement.
(b) Performance of Agreements. The Company shall have performed in all
material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to or on the Closing
Date.
(c) Officers' Certificates. ICG, Acquisition and Nova Scotia shall
have received such certificates of the Company, dated the Closing Date, in
each case signed by an executive officer of the Company (but without
personal liability thereto), to evidence satisfaction of the conditions set
forth in Sections 7.1(a), 7.2(a) and 7.2(b) (insofar as each relates to the
Company), as may be reasonably requested by ICG.
(d) No Adverse Enactments. There shall not have been any action taken,
or any statute, rule, regulation, order, judgment or decree proposed,
enacted, promulgated, entered, issued, enforced or deemed applicable by any
foreign or United States federal, state or local Governmental Entity, and
there shall be no action, suit or proceeding pending or, to the knowledge
of the parties, threatened, which (i) makes or may make this Agreement, the
Reorganization, or any of the other transactions contemplated by this
Agreement illegal or imposes or may impose material damages or penalties in
connection therewith; or (ii) otherwise prohibits, restricts, or
unreasonably delays consummation of the Reorganization or any of the other
transactions contemplated by this Agreement or increases or may increase in
any material respect the liabilities or obligations of ICG arising out of
this Agreement, the Reorganization, or any of the other transactions
contemplated by this Agreement.
(e) Receipt of Licenses, Permits and Consents. All consents as are
required in connection with the consummation of the transactions
contemplated by this Agreement shall have been obtained and shall be in
full force and effect, and all governmental filings as are required in
connection with the consummation of such transactions shall have been made,
other than those which, if not obtained, in force or effect, or made (as
the case may be) would not, either individually or in the aggregate, (i)
have a material adverse effect on the transactions contemplated hereby or
(ii) assuming consummation of the Reorganization, have a Material Adverse
Effect, as of or after the Closing, on the Company or ICG.
12
<PAGE>
7VII.3 Conditions Precedent to the Obligations of the Company. The
obligation of the Company to consummate the transactions contemplated by this
Agreement is also subject to the satisfaction at or prior to the Closing Date of
each of the following conditions, unless waived by the Company:
(a) Accuracy of Representations and Warranties. All representations
and warranties of ICG, Acquisition and Nova Scotia contained in this
Agreement shall be true and correct in all material respects in each case
as of the date of this Agreement and (except to the extent such
representations and warranties speak of a specified earlier date) on and as
of the Closing Date as though made on and as of the Closing Date, except
for changes permitted or contemplated by this Agreement.
(b) Performance of Agreements. Each of ICG, Acquisition and Nova
Scotia shall have performed in all material respects all obligations and
agreements, and complied in all material respects with all covenants and
conditions, contained in this Agreement to be performed or complied with by
each of them prior to or on the Closing Date.
(c) Officers' Certificates. The Company shall have received such
certificates of ICG, dated the Closing Date, in each case signed by an
executive officer of ICG (but without personal liability thereto) to
evidence satisfaction of the conditions set forth in Sections 7.1(b),
7.3(a) and 7.3(b) (insofar as each relates to ICG, Acquisition or Nova
Scotia), as may be reasonably requested by the Company.
(d) No Adverse Enactments. There shall not have been any action taken,
or any statute, rule, regulation, order, judgment or decree proposed,
enacted, promulgated, entered, issued, enforced or deemed applicable by any
foreign or United States federal, state or local Governmental Entity, and
there shall be no action, suit or proceeding pending or, to the knowledge
of the parties, threatened, which makes or may make this Agreement, the
Reorganization, or any of the other transactions contemplated by this
Agreement illegal or imposes or may impose material damages or penalties in
connection therewith.
(e) Receipt of Licenses, Permits and Consents. All consents as are
required in connection with the consummation of the transactions
contemplated by this Agreement shall have been obtained and shall be in
full force and effect, and all governmental filings as are required in
connection with the consummation of such transactions shall have been made,
other than those which, if not obtained, in force or effect, or made (as
the case may be), would not, either individually or in the aggregate,
assuming consummation of the Reorganization, have a Material Adverse
Effect, as of or after the Closing, on ICG or the Company.
13
<PAGE>
ARTICLE VIII
TERMINATION
8.1 Termination and Abandonment. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing, whether before or after adoption of the Articles of Amendment by the
stockholders of the Company:
(a) by mutual consent of ICG and the Company; or
(b) by either the Company, on the one hand, or ICG, Acquisition and
Nova Scotia, on the other hand: (i) if the Reorganization shall not have
been consummated before January 1, 1999, provided that the right to
terminate this Agreement pursuant to this clause (b)(i) will not be
available to any party whose failure to perform any of its obligations
under this Agreement required to be performed by it at or prior to the
Closing has been the cause of or resulted in the failure of the
Reorganization to be consummated before such date, (ii) if there has been a
material breach of any representation, warranty, covenant or agreement on
the part of the other party contained in this Agreement and such breach is
incapable of being cured, (iii) if any court of competent jurisdiction or
other competent governmental authority will have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Reorganization and such order, decree, ruling or
other action will have become final and nonappealable, or (iv) if the
required adoption of the Articles of Amendment by the stockholders of the
Company shall not have been duly obtained.
8.2 Effect of Termination. In the event of any termination of this
Agreement by the Company or ICG pursuant to Section 8.1, this Agreement
forthwith will become void and there will be no liability or obligation on the
part of ICG, Acquisition, Nova Scotia, the Company or their respective
Affiliates, stockholders, directors, officers, agents or representatives except
to the extent such termination results from the willful breach by ICG,
Acquisition, Nova Scotia or the Company of any of its representations,
warranties, covenants or agreements contained in this Agreement.
ARTICLE IX
MISCELLANEOUS
IX.1 Effectiveness of Representations, Warranties and Agreements. Except as
set forth in the next sentence, the respective representations, warranties and
agreements of the parties contained in this Agreement or in any certificate or
other instrument delivered pursuant hereto prior to or at the Closing will
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of the other parties hereto, whether prior to or after the
execution of this Agreement. The representations, warranties, covenants or
agreements contained in this Agreement or in any certificate or other instrument
14
<PAGE>
delivered pursuant to this Agreement will terminate at the Closing, except for
the agreements contained in Article 2, Section 6.3 and in this Article 9.
9.2 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given if delivered to a party
personally or mailed, certified or registered mail with postage prepaid, or sent
by telegram or confirmed telex or telecopier, addressed as follows:
c/o ICG Communications, Inc.
161 Inverness Drive West
Englewood, Colorado 80112
Attention: H. Don Teague
Executive Vice President,
General Counsel and Secretary
Facsimile: (303) 414-8839
or to such other Person or address as any party will specify by notice in
writing to the other party. All such notices, requests, demands, waivers and
communications will be deemed to have been received on the date of delivery or
on the third business day after the mailing thereof, except that any notice of a
change of address will be effective only upon actual receipt thereof.
9.3 Entire Agreement. This Agreement (including the Exhibits) constitutes
the entire agreement of the parties and supersedes all prior agreements and
understandings, oral and written, between the parties with respect to the
subject matter hereof.
9.4 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, benefits or obligations hereunder may be assigned by any party
(whether by operation of law or otherwise) without the prior written consent of
each other party. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns. Nothing in this Agreement, expressed or
implied, is intended to confer on, or to make enforceable by, any Person other
than the parties or their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
9.5 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
prior to the Closing. This Agreement may not be amended except by an instrument
in writing signed by the parties.
9.6 Extension; Waiver. At any time prior to the Closing, any of the
parties, by action taken or authorized by such party's Board of Directors, may,
to the extent legally allowed, (i) extend the time specified herein for the
performance of any of the obligations of any other party, (ii) waive any
inaccuracies in the representations and warranties of any other party contained
herein or in any document delivered pursuant hereto, (iii) waive compliance by
any other party with any of the agreements or covenants of such other party
15
<PAGE>
contained herein or (iv) waive any condition to such waiving party's obligation
to consummate the transactions contemplated hereby or to any of such waiving
party's other obligations hereunder. Any such extension or waiver will be valid
only if set forth in a written instrument signed by the party or parties to be
bound thereby. Any such extension or waiver by any party will be binding on such
party but not on the other party entitled to the benefits of the provision of
this Agreement affected unless such other party also has agreed to such
extension or waiver. No such waiver will constitute a waiver of, or estoppel
with respect to, any subsequent or other breach or failure to strictly comply
with the provisions of this Agreement. The failure of any party to exercise any
of its rights, powers or remedies hereunder or with respect hereto or to insist
on strict compliance with this Agreement will not constitute a waiver by such
party of its right to exercise any such or other rights, powers or remedies or
to demand such compliance. Whenever this Agreement requires or permits consent
or approval by any party, such consent or approval will be effective if given in
writing in a manner consistent with the requirements for a waiver of compliance
as set forth in this Section 9.6.
9.7 Headings. The table of contents and headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original, and all of which
together will be deemed to be one and the same instrument.
9.9 Applicable Law. This Agreement and the legal relations between the
parties will be governed by and construed in accordance with the laws of the
State of Delaware, without regard to the conflict of laws rules thereof.
9.10 Limited Liability. Notwithstanding any other provision of this
Agreement, no stockholder, director, officer, Affiliate, agent or representative
of any party (other than ICG as the sole stockholder of Acquisition or
Acquisition as the sole shareholder of Nova Scotia) will have any liability in
respect of or relating to the covenants, obligations, representations or
warranties of such party hereunder or in respect of any certificate delivered
with respect thereto and, to the fullest extent legally permissible, each party,
for itself and its stockholders, directors, officers and Affiliates, waives and
agrees not to seek to assert or enforce any such liability which any such Person
otherwise might have pursuant to applicable law.
9.11 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any Section or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
will negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement and Plan of Reorganization as of the date first above written.
ICG COMMUNICATIONS, INC.
By: /s/ H. Don Teague
--------------------------------------------
H. Don Teague
Executive Vice President, General Counsel and
Secretary
ICG CANADIAN ACQUISITION, INC.
By: /s/ H. Don Teague
--------------------------------------------
H. Don Teague
Executive Vice President, General Counsel and
Secretary
ICG HOLDINGS (CANADA), INC.
By: /s/ H. Don Teague
--------------------------------------------
H. Don Teague
Executive Vice President, General Counsel and
Secretary
ICG HOLDINGS (CANADA) CO.
By: /s/ H. Don Teague
--------------------------------------------
H. Don Teague
Executive Vice President, General Counsel and
Secretary
17
<PAGE>
EXHIBIT A
Articles of Amendment
18
<PAGE>
EXHIBIT B
Sole Shareholder's Resolution
19
1998 S.H. No. 152764
IN THE SUPREME COURT OF NOVA SCOTIA
IN THE MATTER OF: The Companies Act of Nova Scotia, being Chapter 81
of the Revised Statutes of Nova Scotia, 1989
- and -
IN THE MATTER OF: The Amalgamation of ICG Holdings (Canada), Incorporated
and ICG Holdings (Canada) Co.
ORDER OF AMALGAMATION
BEFORE THE HONOURABLE JUSTICE GRUCHY IN CHAMBERS.
UPON HEARING READ the affidavits of H. Don Teague, each sworn December 23,
1998;
AND UPON HEARING READ the amalgamation agreement dated December 22, 1998
between ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. (the
Amalgamation Agreement) a copy of which is annexed hereto as Schedule A;
AND UPON IT APPEARING that all the shareholders of ICG Holdings (Canada),
Incorporated and ICG Holdings (Canada) Co. have approved the Amalgamation
Agreement and that none of the creditors will be affected by the amalgamation
provided for in the Amalgamation Agreement;
AND UPON IT APPEARING that ICG Holdings (Canada) Co. has no creditors
notice to whom of the time and place of an application for an order of this
Court approving the Amalgamation Agreement is required pursuant to subsection
(7) of Section 134 of the Companies Act.
<PAGE>
AND UPON IT APPEARING that the Applicants are private companies and no
useful purpose would be served by having the financial statements of the
Applicants filed herein produced as public documents after being examined by the
Court at the hearing of this Application;
AND UPON HEARING Charles S. Reagh, counsel for the applicants;
AND UPON MOTION IT IS HEREBY ORDERED that the Amalgamation Agreement be and
the same is hereby approved.
AND IT IS FURTHER ORDERED that ICG Holdings (Canada), Incorporated not be
required to give notice to its creditors, if any, of the time and place of an
application for an order of this Court approving the Amalgamation Agreement and
that such notice be and the same is hereby dispensed with pursuant to subsection
(7) of Section 134 of the Companies Act.
IT IS FURTHER ORDERED that the filing with the Registrar of Joint Stock
Companies of a copy of this order certified under the hand of the Prothonotary
be sufficient compliance with the provisions of subsection (9) of Section 134 of
the Companies Act.
AND IT IS FURTHER ORDERED that the Affidavit of H. Don Teague, sworn
December 23, 1998 filed herein, to which are appended as Exhibits certain
financial statements, be sealed by the Prothonotary and not opened except upon
further Order of this Honourable Court.
DATED at Halifax, Nova Scotia, this _30__ day of December, 1998.
/s/ Crystal Yio
-----------------------
Deputy Prothonotary
<PAGE>
1998 S.H. No. 152764
-----------------------------------------------------
IN THE MATTER OF:
The Amalgamation of ICG Holdings (Canada),
Incorporated and ICG Holdings (Canada) Co.
- and -
IN THE MATTER OF:
The Companies Act of Nova Scotia, being Chapter
81 of the Revised Statutes of Nova Scotia, 1989
as amended
=====================================================
ORDER
=====================================================
STEWART McKELVEY STIRLING SCALES
1959 Upper Water Street
Purdy's Wharf Tower One
P. 0. Box 997
Halifax, Nova Scotia
B3J 2X2
<PAGE>
Schedule A
THIS AGREEMENT OF AMALGAMATION dated December 22, 1998.
BETWEEN:
ICG HOLDINGS (CANADA), INCORPORATED, a body corporate
OF THE ONE PART
- and -
ICG HOLDINGS (CANADA) CO., a body corporate
OF THE OTHER PART
WHEREAS ICG Holdings (Canada), Incorporated was continued under the laws of
Nova Scotia on December 17, 1998 and has an authorized capital consisting of
50,000,000 Class A shares common shares without nominal or par value;
AND WHEREAS ICG Holdings (Canada) Co. was incorporated under the laws of
Nova Scotia on November 2, 1998 and has an authorized capital consisting of
1,000,000 common shares without nominal or par value;
AND WHEREAS the shareholders of ICG Holdings (Canada), Incorporated and ICG
Holdings (Canada) Co. deem it desirable and in the best interests of each of
them that they be amalgamated pursuant to the provisions of Section 134 of the
Companies Act of Nova Scotia;
NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the
premises the parties hereto agree as follows:
1. ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. shall be
amalgamated and continue as one company (the Amalgamated Company) pursuant
to Section 134 of the Companies Act of Nova Scotia.
2. The attributes and characteristics of the Amalgamated Company shall be as
follows:
(a) The name of the Amalgamated Company shall be "ICG Holdings (Canada)
Co.".
(b) The registered office of the Amalgamated Company shall be situate at
Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, B3J 3N2.
(c) The authorized capital of the Amalgamated Company shall consist of
such number and class of shares as set out in Schedule B hereto.
(d) The liability of the members of the Amalgamated Company shall be
unlimited.
<PAGE>
-2-
(e) The memorandum of association of the Amalgamated Company, including
its objects, shall be as set out in Schedule A attached hereto.
(f) The names, occupations and places of residence of the first directors
of the Amalgamated Company are as follows:
Name Occupation Place of Residence
Harry R. Herbst Executive 4450 E. Prentice Place,
Greenwood Village, CO 80121
H. Don Teague Executive 140 Downing Street,
Denver, CO 80218.
Such directors are to hold office until the first annual meeting of
the shareholders of the Amalgamated Company.
(g) Subsequent directors are to be elected at the first annual general
meeting of the shareholders of the Amalgamated Company and are to hold
office while qualified until their successors are from time to time
elected in the manner provided for in the Articles of Association of
the Amalgamated Company.
(h) The manner of converting the authorized and issued capital of ICG
Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. into
that of the Amalgamated Company shall be as follows:
(i) Each registered holder of Class A shares without nominal or par
value in the capital stock of ICG Holdings (Canada), Incorporated
shall be entitled to one fully paid and non-assessable common
share without nominal or par value in the capital stock of the
Amalgamated Company for each common share in the capital stock of
ICG Holdings (Canada), Incorporated held by such registered
shareholder on the date of the Order of the Judge of the Supreme
Court of Nova Scotia, in Chambers, approving the amalgamation of
ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co.
(ii) Each registered holder of common shares without nominal or par
value in the capital stock of ICG Holdings (Canada) Co. shall be
entitled to one fully paid and non-assessable common share
without nominal or par value in the capital stock of the
Amalgamated Company for each common share in the capital stock of
ICG Holdings (Canada) Co. held by such registered shareholder on
the date of the Order of the Judge of the Supreme Court of Nova
Scotia, in Chambers, approving the amalgamation of ICG Holdings
(Canada), Incorporated and ICG Holdings (Canada) Co.
3. The Articles of Association of the Amalgamated Company shall be those
attached and marked Schedule B to this Agreement until repealed, amended,
altered or added to.
<PAGE>
-3-
4. The Amalgamated Company shall possess all the property, rights, privileges
and franchises, and shall be subject to all the liabilities, contracts and
debts of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co..
5. All rights of creditors against the property, rights and assets of ICG
Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. respectively
and all mortgages, liens or claims upon their respective properties, rights
and assets shall be unimpaired by the proposed amalgamation and all debts,
contracts, liabilities and duties of ICG Holdings (Canada), Incorporated
and ICG Holdings (Canada) Co. respectively shall thenceforth attach to the
Amalgamated Company and may be enforced against it to the same extent as if
the said debts, contracts, liabilities and duties had been incurred or
contracted by it.
6. No action or proceeding by or against ICG Holdings (Canada), Incorporated
or ICG Holdings (Canada) Co. shall abate or be affected by the proposed
amalgamation but for all purposes of such action or proceeding by or
against ICG Holdings (Canada), Incorporated or ICG Holdings (Canada) Co. as
the case may be, they shall be deemed still to exist and the Amalgamated
Company may be substituted in such action or proceeding in the place
thereof.
8. ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. may by
resolution of their Boards of Directors or their shareholders assent to
such alterations or modifications of this Agreement as they see fit and the
expression "this Agreement" as used herein shall be read and construed to
mean and include this Agreement as so altered or modified.
IN WITNESS WHEREOF the parties hereto have caused the same to be executed in
their names and on their behalf and their corporate seals to be thereunto
affixed by their proper officers duly authorized in that behalf.
SIGNED, SEALED AND DELIVERED ) ICG HOLDINGS (CANADA), INCORPORATED
in the presence of: )
)
) By: /s/ Don Teague
--------------------------------------
/s/ Mary Lynn Biegen )
Witness )
) ICG HOLDINGS (CANADA) CO.
)
)
) By: /s/Don Teague
--------------------------------------
/s/ Mary Lynn Biegen )
Witness )
<PAGE>
SCHEDULE A
MEMORANDUM OF ASSOCIATION
OF
ICG HOLDINGS (CANADA) CO.
1. The name of the Company is ICG Holdings (Canada) Co..
2. There are no restrictions on the objects and powers of the Company and the
Company shall expressly have the following powers:
(1) to sell or dispose of its undertaking, or a substantial part thereof;
(2) to distribute any of its property in specie among its members; and
(3) to amalgamate with any company or other body of persons.
3. The liability of the members is unlimited.
<PAGE>
SCHEDULE B
ARTICLES OF ASSOCIATION
OF
ICG HOLDINGS (CANADA) CO.
INTERPRETATION
1. In these Articles, unless there be something in the subject or context
inconsistent therewith:
(1) "Act" means the Companies Act (Nova Scotia);
(2) "Articles" means these Articles of Association of the Company and all
amendments hereto;
(3) "Company" means the company named above;
(4) "director" means a director of the Company;
(5) "Memorandum" means the Memorandum of Association of the Company and
all amendments thereto;
(6) "month" means calendar month;
(7) "Office" means the registered office of the Company;
(8) "person" includes a body corporate;
(9) "proxyholder" includes an alternate proxyholder;
(10) "Register" means the register of members kept pursuant to the Act, and
where the context permits includes a branch register of members;
(11) "Registrar" means the Registrar as defined in the Act;
(12) "Secretary" includes any person appointed to perform the duties of the
Secretary temporarily;
(13) "shareholder" means member as that term is used in the Act in
connection with an unlimited company having share capital and as that
term is used in the Memorandum;
(14) "special resolution" has the meaning assigned by the Act;
(15) "in writing" and "written" includes printing, lithography and other
modes of representing or reproducing words in visible form;
<PAGE>
-2-
(16) words importing number or gender include all numbers and genders
unless the context otherwise requires.
2. The regulations in Table A in the First Schedule to the Act shall not apply
to the Company.
3. The directors may enter into and carry into effect or adopt and carry into
effect any agreement made by the promoters of the Company on behalf of the
Company and may agree to any modification in the terms of any such
agreement, either before or after its execution.
4. The directors may, out of the funds of the Company, pay all expenses
incurred for the amalgamation and organization of the Company.
5. The Company may commence business on the day of amalgamation or so soon
thereafter as the directors think fit, notwithstanding that part only of
the shares has been allotted.
SHARES
6. The capital of the company shall consist of 100,000,000 common shares
without nominal or par value, with the power to divide the shares in the
capital for the time being into classes or series and to attach thereto
respectively any preferred, deferred or qualified rights, privileges or
conditions, including restrictions on voting rights and including
redemption, purchase and other acquisition of such shares, subject,
however, to the provisions of the Act.
7. The directors shall control the shares and, subject to the provisions of
these Articles, may allot or otherwise dispose of them to such person at
such times, on such terms and conditions and, if the shares have a par
value, either at a premium or at par, as they think fit.
8. The directors may pay on behalf of the Company a reasonable commission to
any person in consideration of subscribing or agreeing to subscribe
(whether absolutely or conditionally) for any shares in the Company, or
procuring or agreeing to procure subscriptions (whether absolute or
conditional) for any shares in the Company. Subject to the Act, the
commission may be paid or satisfied in shares of the Company.
9. On the issue of shares the Company may arrange among the holders thereof
differences in the calls to be paid and in the times for their payment.
10. If the whole or part of the allotment price of any shares is, by the
conditions of their allotment, payable in instalments, every such
instalment shall, when due, be payable to the Company by the person who is
at such time the registered holder of the shares.
11. Shares may be registered in the names of joint holders not exceeding three
in number.
12. Joint holders of a share shall be jointly and severally liable for the
payment of all instalments and calls due in respect of such share. On the
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death of one or more joint holders of shares the survivor or survivors of
them shall alone be recognized by the Company as the registered holder or
holders of the shares.
13. Save as herein otherwise provided, the Company may treat the registered
holder of any share as the absolute owner thereof and accordingly shall
not, except as ordered by a court of competent jurisdiction or required by
statute, be bound to recognize any equitable or other claim to or interest
in such share on the part of any other person.
14. The Company is a private company, and:
(1) no transfer of any share or prescribed security of the Company shall
be effective unless or until approved by the directors;
(2) the number of holders of issued and outstanding prescribed securities
or shares of the Company, exclusive of persons who are in the
employment of the Company or in the employment of an affiliate of the
Company and exclusive of persons who, having been formerly in the
employment of the Company or the employment of an affiliate of the
Company, were, while in that employment, and have continued after
termination of that employment, to own at least one prescribed
security or share of the Company, shall not exceed 50 in number, two
or more persons or companies who are the joint registered owners of
one or more prescribed securities or shares being counted as one
holder; and
(3) the Company shall not invite the public to subscribe for any of its
securities.
In this Article, "private company" and "securities" have the meanings
ascribed to those terms in the Securities Act (Nova Scotia), and
"prescribed security" means any of the securities prescribed by the Nova
Scotia Securities Commission from time to time for the purpose of the
definition of "private company" in the Securities Act (Nova Scotia).
CERTIFICATES
15. Certificates of title to shares shall comply with the Act and may otherwise
be in such form as the directors may from time to time determine. Unless
the directors otherwise determine, every certificate of title to shares
shall be signed manually by at least one of the Chairman, President,
Secretary, Treasurer, a vice-president, an assistant secretary, any other
officer of the Company or any director of the Company or by or on behalf of
a share registrar transfer agent or branch transfer agent appointed by the
Company or by any other person whom the directors may designate. When
signatures of more than one person appear on a certificate all but one may
be printed or otherwise mechanically reproduced. All such certificates when
signed as provided in this Article shall be valid and binding upon the
Company. If a certificate contains a printed or mechanically reproduced
signature of a person, the Company may issue the certificate,
notwithstanding that the person has ceased to be a director or an officer
of the Company and the certificate is as valid as if such person were a
director or an officer at the date of its issue.
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16. Except as the directors may determine, each shareholder's shares may be
evidenced by any number of certificates so long as the aggregate of the
shares stipulated in such certificates equals the aggregate registered in
the name of the shareholder.
17. Where shares are registered in the names of two or more persons, the
Company shall not be bound to issue more than one certificate or set of
certificates, and such certificate or set of certificates shall be
delivered to the person first named on the Register.
18. Any certificate that has become worn, damaged or defaced may, upon its
surrender to the directors, be cancelled and replaced by a new certificate.
Any certificate that has become lost or destroyed may be replaced by a new
certificate upon proof of such loss or destruction to the satisfaction of
the directors and the furnishing to the Company of such undertakings of
indemnity as the directors deem adequate.
19. The sum of one dollar or such other sum as the directors from time to time
determine shall be paid to the Company for every certificate other than the
first certificate issued to any holder in respect of any share or shares.
20. The directors may cause one or more branch Registers of shareholders to be
kept in any place or places, whether inside or outside of Nova Scotia.
CALLS
21. The directors may make such calls upon the shareholders in respect of all
amounts unpaid on the shares held by them respectively and not made payable
at fixed times by the conditions on which such shares were allotted, and
each shareholder shall pay the amount of every call so made to the person
and at the times and places appointed by the directors. A call may be made
payable by instalments.
22. A call shall be deemed to have been made at the time when the resolution of
the directors authorizing such call was passed.
23. At least 14 days' notice of any call shall be given, and such notice shall
specify the time and place at which and the person to whom such call shall
be paid.
24. If the sum payable in respect of any call or instalment is not paid on or
before the day appointed for the payment thereof, the holder for the time
being of the share in respect of which the call has been made or the
instalment is due shall pay interest on such call or instalment at the rate
of 9% per year or such other rate of interest as the directors may
determine from the day appointed for the payment thereof up to the time of
actual payment.
25. At the trial or hearing of any action for the recovery of any amount due
for any call, it shall be sufficient to prove that the name of the
shareholder sued is entered on the Register as the holder or one of the
holders of the share or shares in respect of which such debt accrued, that
the resolution making the call is duly recorded in the minute book and that
such notice of such call was duly given to the shareholder sued in
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pursuance of these Articles. It shall not be necessary to prove the
appointment of the directors who made such call or any other matters
whatsoever and the proof of the matters stipulated shall be conclusive
evidence of the debt.
FORFEITURE OF SHARES
26. If any shareholder fails to pay any call or instalment on or before the day
appointed for payment, the directors may at any time thereafter while the
call or instalment remains unpaid serve a notice on such shareholder
requiring payment thereof together with any interest that may have accrued
and all expenses that may have been incurred by the Company by reason of
such non-payment.
27. The notice shall name a day (not being less than 14 days after the date of
the notice) and a place or places on and at which such call or instalment
and such interest and expenses are to be paid. The notice shall also state
that, in the event of non-payment on or before the day and at the place or
one of the places so named, the shares in respect of which the call was
made or instalment is payable will be liable to be forfeited.
28. If the requirements of any such notice are not complied with, any shares in
respect of which such notice has been given may at any time thereafter,
before payment of all calls or instalments, interest and expenses due in
respect thereof, be forfeited by a resolution of the directors to that
effect. Such forfeiture shall include all dividends declared in respect of
the forfeited shares and not actually paid before the forfeiture.
29. When any share has been so forfeited, notice of the resolution shall be
given to the shareholder in whose name it stood immediately prior to the
forfeiture and an entry of the forfeiture shall be made in the Register.
30. Any share so forfeited shall be deemed the property of the Company and the
directors may sell, re-allot or otherwise dispose of it in such manner as
they think fit.
31. The directors may at any time before any share so forfeited has been sold,
re-allotted or otherwise disposed of, annul the forfeiture thereof upon
such conditions as they think fit.
32. Any shareholder whose shares have been forfeited shall nevertheless be
liable to pay and shall forthwith pay to the Company all calls,
instalments, interest and expenses owing upon or in respect of such shares
at the time of the forfeiture together with interest thereon at the rate of
9% per year or such other rate of interest as the directors may determine
from the time of forfeiture until payment. The directors may enforce such
payment if they think fit, but are under no obligation to do so.
33. A certificate signed by the Secretary stating that a share has been duly
forfeited on a specified date in pursuance of these Articles and the time
when it was forfeited shall be conclusive evidence of the facts therein
stated as against any person who would have been entitled to the share but
for such forfeiture.
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LIEN ON SHARES
34. The Company shall have a first and paramount lien upon all shares (other
than fully paid-up shares) registered in the name of a shareholder (whether
solely or jointly with others) and upon the proceeds from the sale thereof
for debts, liabilities and other engagements of the shareholder, solely or
jointly with any other person, to or with the Company, whether or not the
period for the payment, fulfilment or discharge thereof has actually
arrived, and such lien shall extend to all dividends declared in respect of
such shares. Unless otherwise agreed, the registration of a transfer of
shares shall operate as a waiver of any lien of the Company on such shares.
35. For the purpose of enforcing such lien the directors may sell the shares
subject to it in such manner as they think fit, but no sale shall be made
until the period for the payment, fulfilment or discharge of such debts,
liabilities or other engagements has arrived, and until notice in writing
of the intention to sell has been given to such shareholder or the
shareholder's executors or administrators and default has been made by them
in such payment, fulfilment or discharge for seven days after such notice.
36. The net proceeds of any such sale after the payment of all costs shall be
applied in or towards the satisfaction of such debts, liabilities or
engagements and the residue, if any, paid to such shareholder.
VALIDITY OF SALES
37. Upon any sale after forfeiture or to enforce a lien in purported exercise
of the powers given by these Articles the directors may cause the
purchaser's name to be entered in the Register in respect of the shares
sold, and the purchaser shall not be bound to see to the regularity of the
proceedings or to the application of the purchase money, and after the
purchaser's name has been entered in the Register in respect of such shares
the validity of the sale shall not be impeached by any person and the
remedy of any person aggrieved by the sale shall be in damages only and
against the Company exclusively.
TRANSFER OF SHARES
38. The instrument of transfer of any share in the Company shall be signed by
the transferor. The transferor shall be deemed to remain the holder of such
share until the name of the transferee is entered in the Register in
respect thereof and shall be entitled to receive any dividend declared
thereon before the registration of the transfer.
39. The instrument of transfer of any share shall be in writing in the
following form or to the following effect:
For value received, hereby sell, assign, and transfer unto , shares in
the capital of the Company represented by the within certificate, and
do hereby irrevocably constitute and appoint attorney to transfer such
shares on the books of the Company with full power of substitution in
the premises.
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Dated the day of ,
Witness:
40. The directors may, without assigning any reason therefor, decline to
register any transfer of shares
(1) not fully paid-up or upon which the Company has a lien, or
(2) the transfer of which is restricted by any agreement to which the
Company is a party.
41. Every instrument of transfer shall be left for registration at the Office
of the Company, or at any office of its transfer agent where a Register is
maintained, together with the certificate of the shares to be transferred
and such other evidence as the Company may require to prove title to or the
right to transfer the shares.
42. The directors may require that a fee determined by them be paid before or
after registration of any transfer.
43. Every instrument of transfer shall, after its registration, remain in the
custody of the Company. Any instrument of transfer that the directors
decline to register shall, except in case of fraud, be returned to the
person who deposited it.
TRANSMISSION OF SHARES
44. The executors or administrators of a deceased shareholder (not being one of
several joint holders) shall be the only persons recognized by the Company
as having any title to the shares registered in the name of such
shareholder. When a share is registered in the names of two or more joint
holders, the survivor or survivors or the executors or administrators of
the deceased survivor, shall be the only persons recognized by the Company
as having any title to, or interest in, such share.
45. Notwithstanding anything in these Articles, if the Company has only one
shareholder (not being one of several joint holders) and that shareholder
dies, the executors or administrators of the deceased shareholder shall be
entitled to register themselves in the Register as the holders of the
shares registered in the name of the deceased shareholder whereupon they
shall have all the rights given by these Articles and by law to
shareholders.
46. Any person entitled to shares upon the death or bankruptcy of any
shareholder or in any way other than by allotment or transfer, upon
producing such evidence of entitlement as the directors require, may be
registered as a shareholder in respect of such shares, or may, without
being registered, transfer such shares subject to the provisions of these
Articles respecting the transfer of shares. The directors shall have the
same right to refuse registration as if the transferee were named in an
ordinary transfer presented for registration.
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SURRENDER OF SHARES
47. The directors may accept the surrender of any share by way of compromise of
any question as to the holder being properly registered in respect thereof.
Any share so surrendered may be disposed of in the same manner as a
forfeited share.
INCREASE AND REDUCTION OF CAPITAL
48. Subject to the Act, the shareholders may by special resolution amend these
Articles to increase or alter the share capital of the Company as they
think expedient. Without prejudice to any special rights previously
conferred on the holders of existing shares, any share may be issued with
such preferred, deferred or other special rights, or with such
restrictions, whether in regard to dividends, voting, return of share
capital or otherwise, as the shareholders may from time to time determine
by special resolution. Except as otherwise provided by the conditions of
issue, or by these Articles, any capital raised by the creation of new
shares shall be considered part of the original capital and shall be
subject to the provisions herein contained with reference to payment of
calls and instalments, transfer and transmission, forfeiture, lien and
otherwise.
49. The Company may, by special resolution where required, reduce its share
capital in any way and with and subject to any incident authorized and
consent required by law. Subject to the Act and any provisions attached to
such shares, the Company may redeem, purchase or acquire any of its shares
and the directors may determine the manner and the terms for redeeming,
purchasing or acquiring such shares and may provide a sinking fund on such
terms as they think fit for the redemption, purchase or acquisition of
shares of any class or series.
MEETINGS AND VOTING BY CLASS OR SERIES
50. Where the holders of shares of a class or series have, under the Act, the
terms or conditions attaching to such shares or otherwise, the right to
vote separately as a class in respect of any matter then, except as
provided in the Act, these Articles or such terms or conditions, all the
provisions in these Articles concerning general meetings (including,
without limitation, provisions respecting notice, quorum and procedure)
shall, mutatis mutandis, apply to every meeting of holders of such class or
series of shares convened for the purpose of such vote.
51. Unless the rights, privileges, terms or conditions attached to a class or
series of shares provide otherwise, such class or series of shares shall
not have the right to vote separately as a class or series upon an
amendment to the Memorandum or Articles to:
(1) increase or decrease any maximum number of authorized shares of such
class or series, or increase any maximum number of authorized shares
of a class or series having rights or privileges equal or superior to
the shares of such class or series;
(2) effect an exchange, reclassification or cancellation of all or part of
the shares of such class or series; or
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(3) create a new class or series of shares equal or superior to the shares
of such class or series.
BORROWING POWERS
52. The directors on behalf of the Company may:
(1) raise or borrow money for the purposes of the Company or any of them;
(2) secure, subject to the sanction of a special resolution where required
by the Act, the repayment of funds so raised or borrowed in such
manner and upon such terms and conditions in all respects as they
think fit, and in particular by the execution and delivery of
mortgages of the Company's real or personal property, or by the issue
of bonds, debentures or other securities of the Company secured by
mortgage or other charge upon all or any part of the property of the
Company, both present and future including its uncalled capital for
the time being;
(3) sign or endorse bills, notes, acceptances, cheques, contracts, and
other evidence of or securities for funds borrowed or to be borrowed
for the purposes aforesaid;
(4) pledge debentures as security for loans;
(5) guarantee obligations of any person.
53. Bonds, debentures and other securities may be made assignable, free from
any equities between the Company and the person to whom such securities
were issued.
54. Any bonds, debentures and other securities may be issued at a discount,
premium or otherwise and with special privileges as to redemption,
surrender, drawings, allotment of shares, attending and voting at general
meetings of the Company, appointment of directors and other matters.
GENERAL MEETINGS
55. Ordinary general meetings of the Company shall be held at least once in
every calendar year at such time and place as may be determined by the
directors and not later than 15 months after the preceding ordinary general
meeting. All other meetings of the Company shall be called special general
meetings. Ordinary or special general meetings may be held either within or
without the Province of Nova Scotia.
56. The President, a vice-president or the directors may at any time convene a
special general meeting, and the directors, upon the requisition of
shareholders in accordance with the Act shall forthwith proceed to convene
such meeting or meetings to be held at such time and place or times and
places as the directors determine.
57. The requisition shall state the objects of the meeting requested, be signed
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by the requisitionists and deposited at the Office of the Company. It may
consist of several documents in like form each signed by one or more of the
requisitionists.
58. At least seven clear days' notice, or such longer period of notice as may
be required by the Act, of every general meeting, specifying the place, day
and hour of the meeting and, when special business is to be considered, the
general nature of such business, shall be given to the shareholders
entitled to be present at such meeting by notice given as permitted by
these Articles. With the consent in writing of all the shareholders
entitled to vote at such meeting, a meeting may be convened by a shorter
notice and in any manner they think fit, or notice of the time, place and
purpose of the meeting may be waived by all of the shareholders.
59. When it is proposed to pass a special resolution, the two meetings may be
convened by the same notice, and it shall be no objection to such notice
that it only convenes the second meeting contingently upon the resolution
being passed by the requisite majority at the first meeting.
60. The accidental omission to give notice to a shareholder, or non-receipt of
notice by a shareholder, shall not invalidate any resolution passed at any
general meeting.
RECORD DATES
61.
(1) The directors may fix in advance a date as the record date for the
determination of shareholders
(a) entitled to receive payment of a dividend or entitled to receive
any distribution;
(b) entitled to receive notice of a meeting; or
(c) for any other purpose.
(2) If no record date is fixed, the record date for the determination of
shareholders
(a) entitled to receive notice of a meeting shall be the day
immediately preceding the day on which the notice is given, or,
if no notice is given, the day on which the meeting is held; and
(b) for any other purpose shall be the day on which the directors
pass the resolution relating to the particular purpose.
PROCEEDINGS AT GENERAL MEETINGS
62. The business of an ordinary general meeting shall be to receive and
consider the financial statements of the Company and the report of the
directors and the report, if any, of the auditors, to elect directors in
the place of those retiring and to transact any other business which under
these Articles ought to be transacted at an ordinary general meeting.
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63. No business shall be transacted at any general meeting unless the requisite
quorum is present at the commencement of the business. A corporate
shareholder of the Company that has a duly authorized agent or
representative present at any such meeting shall for the purpose of this
Article be deemed to be personally present at such meeting.
64. One person, being a shareholder, proxyholder or representative of a
corporate shareholder, present and entitled to vote shall constitute a
quorum for a general meeting, and may hold a meeting.
65. The Chairman shall be entitled to take the chair at every general meeting
or, if there be no Chairman, or if the Chairman is not present within
fifteen 15 minutes after the time appointed for holding the meeting, the
President or, failing the President, a vice-president shall be entitled to
take the chair. If the Chairman, the President or a vice-president is not
present within 15 minutes after the time appointed for holding the meeting
or if all such persons present decline to take the chair, the shareholders
present entitled to vote at the meeting shall choose another director as
chairman and if no director is present or if all the directors present
decline to take the chair, then such shareholders shall choose one of their
number to be chairman.
66. If within half an hour from the time appointed for a general meeting a
quorum is not present, the meeting, if it was convened pursuant to a
requisition of shareholders, shall be dissolved; if it was convened in any
other way, it shall stand adjourned to the same day, in the next week, at
the same time and place. If at the adjourned meeting a quorum is not
present within half an hour from the time appointed for the meeting, the
shareholders present shall be a quorum and may hold the meeting.
67. Subject to the Act, at any general meeting a resolution put to the meeting
shall be decided by a show of hands unless, either before or on the
declaration of the result of the show of hands, a poll is demanded by the
chairman, a shareholder or a proxyholder; and unless a poll is so demanded,
a declaration by the chairman that the resolution has been carried, carried
by a particular majority, lost or not carried by a particular majority and
an entry to that effect in the Company's book of proceedings shall be
conclusive evidence of the fact without proof of the number or proportion
of the votes recorded in favour or against such resolution.
68. When a poll is demanded, it shall be taken in such manner and at such time
and place as the chairman directs, and either at once or after an interval
or adjournment or otherwise. The result of the poll shall be the resolution
of the meeting at which the poll was demanded. The demand of a poll may be
withdrawn. When any dispute occurs over the admission or rejection of a
vote, it shall be resolved by the chairman and such determination made in
good faith shall be final and conclusive.
69. The chairman shall not have a casting vote in addition to any vote or votes
that the chairman has as a shareholder.
70. The chairman of a general meeting may with the consent of the meeting
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adjourn the meeting from time to time and from place to place, but no
business shall be transacted at any adjourned meeting other than the
business left unfinished at the meeting that was adjourned.
71. Any poll demanded on the election of a chairman or on a question of
adjournment shall be taken forthwith without adjournment.
72. The demand of a poll shall not prevent the continuance of a meeting for the
transaction of any business other than the question on which a poll has
been demanded.
VOTES OF SHAREHOLDERS
73. Subject to the Act and to any provisions attached to any class or series of
shares concerning or restricting voting rights:
(1) on a show of hands every shareholder entitled to vote present in
person, every duly authorized representative of a corporate
shareholder, and, if not prevented from voting by the Act, every
proxyholder, shall have one vote; and
(2) on a poll every shareholder present in person, every duly authorized
representative of a corporate shareholder, and every proxyholder,
shall have one vote for every share held;
whether or not such representative or proxyholder is a shareholder.
74. Any person entitled to transfer shares upon the death or bankruptcy of any
shareholder or in any way other than by allotment or transfer may vote at
any general meeting in respect thereof in the same manner as if such person
were the registered holder of such shares so long as the directors are
satisfied at least 48 hours before the time of holding the meeting of such
person's right to transfer such shares.
75. Where there are joint registered holders of any share, any of such holders
may vote such share at any meeting, either personally or by proxy, as if
solely entitled to it. If more than one joint holder is present at any
meeting, personally or by proxy, the one whose name stands first on the
Register in respect of such share shall alone be entitled to vote it.
Several executors or administrators of a deceased shareholder in whose name
any share stands shall for the purpose of this Article be deemed joint
holders thereof.
76. Votes may be cast either personally or by proxy or, in the case of a
corporate shareholder by a representative duly authorized under the Act.
77. A proxy shall be in writing and executed in the manner provided in the Act.
A proxy or other authority of a corporate shareholder does not require its
seal.
78. A shareholder of unsound mind in respect of whom an order has been made by
any court of competent jurisdiction may vote by guardian or other person in
the nature of a guardian appointed by that court, and any such guardian or
other person may vote by proxy.
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79. A proxy and the power of attorney or other authority, if any, under which
it is signed or a notarially certified copy of that power or authority
shall be deposited at the Office of the Company or at such other place as
the directors may direct. The directors may, by resolution, fix a time not
exceeding 48 hours excluding Saturdays and holidays preceding any meeting
or adjourned meeting before which time proxies to be used at that meeting
must be deposited with the Company at its Office or with an agent of the
Company. Notice of the requirement for depositing proxies shall be given in
the notice calling the meeting. The chairman of the meeting shall determine
all questions as to validity of proxies and other instruments of authority.
80. A vote given in accordance with the terms of a proxy shall be valid
notwithstanding the previous death of the principal, the revocation of the
proxy, or the transfer of the share in respect of which the vote is given,
provided no intimation in writing of the death, revocation or transfer is
received at the Office of the Company before the meeting or by the chairman
of the meeting before the vote is given.
81. Every form of proxy shall comply with the Act and its regulations and
subject thereto may be in the following form:
I, of being a shareholder of hereby appoint of (or failing him/her of
) as my proxyholder to attend and to vote for me and on my behalf at
the ordinary/special general meeting of the Company, to be held on the
day of and at any adjournment thereof, or at any meeting of the
Company which may be held prior to [insert specified date or event].
[If the proxy is solicited by or behalf of the management of the
Company, insert a statement to that effect.]
Dated this day of .
----------------------------
Shareholder
82. Subject to the Act, no shareholder shall be entitled to be present or to
vote on any question, either personally or by proxy, at any general meeting
or be reckoned in a quorum while any call is due and payable to the Company
in respect of any of the shares of such shareholder.
83. Any resolution passed by the directors, notice of which has been given to
the shareholders in the manner in which notices are hereinafter directed to
be given and which is, within one month after it has been passed, ratified
and confirmed in writing by shareholders entitled on a poll to three-fifths
of the votes, shall be as valid and effectual as a resolution of a general
meeting. This Article shall not apply to a resolution for winding up the
Company or to a resolution dealing with any matter that by statute or these
Articles ought to be dealt with by a special resolution or other method
prescribed by statute.
84. A resolution, including a special resolution, in writing and signed by
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every shareholder who would be entitled to vote on the resolution at a
meeting is as valid as if it were passed by such shareholders at a meeting
and satisfies all of the requirements of the Act respecting meetings of
shareholders.
DIRECTORS
85. Unless otherwise determined by resolution of shareholders, the number of
directors shall not be less than one or more than ten.
86. Notwithstanding anything herein contained the persons named in the
agreement providing for the formation of the Company by amalgamation shall
be the first directors of the Company.
87. The directors may be paid out of the funds of the Company as remuneration
for their service such sums, if any, as the Company may by resolution of
its shareholders determine, and such remuneration shall be divided among
them in such proportions and manner as the directors determine. The
directors may also be paid their reasonable travelling, hotel and other
expenses incurred in attending meetings of directors and otherwise in the
execution of their duties as directors.
88. The continuing directors may act notwithstanding any vacancy in their body,
but if their number falls below the minimum permitted, the directors shall
not, except in emergencies or for the purpose of filling vacancies, act so
long as their number is below the minimum.
89. A director may, in conjunction with the office of director, and on such
terms as to remuneration and otherwise as the directors arrange or
determine, hold any other office or place of profit under the Company or
under any company in which the Company is a shareholder or is otherwise
interested.
90. The office of a director shall ipso facto be vacated, if the director:
(1) becomes bankrupt or makes an assignment for the benefit of creditors;
(2) is, or is found by a court of competent jurisdiction to be, of unsound
mind;
(3) by notice in writing to the Company, resigns the office of director;
or
(4) is removed in the manner provided by these Articles.
91. No director shall be disqualified by holding the office of director from
contracting with the Company, either as vendor, purchaser, or otherwise,
nor shall any such contract, or any contract or arrangement entered into or
proposed to be entered into by or on behalf of the Company in which any
director is in any way interested, either directly or indirectly, be
avoided, nor shall any director so contracting or being so interested be
liable to account to the Company for any profit realized by any such
contract or arrangement by reason only of such director holding that office
or of the fiduciary relations thereby established, provided the director
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makes a declaration or gives a general notice in accordance with the Act.
No director shall, as a director, vote in respect of any contract or
arrangement in which the director is so interested, and if the director
does so vote, such vote shall not be counted. This prohibition may at any
time or times be suspended or relaxed to any extent by a resolution of the
shareholders and shall not apply to any contract by or on behalf of the
Company to give to the directors or any of them any security for advances
or by way of indemnity.
ELECTION OF DIRECTORS
92. At the dissolution of every ordinary general meeting at which their
successors are elected, all the directors shall retire from office and be
succeeded by the directors elected at such meeting. Retiring directors
shall be eligible for re-election.
93. If at any ordinary general meeting at which an election of directors ought
to take place no such election takes place, or if no ordinary general
meeting is held in any year or period of years, the retiring directors
shall continue in office until their successors are elected.
94. The Company may by resolution of its shareholders elect any number of
directors permitted by these Articles and may determine or alter their
qualification.
95. The Company may, by special resolution or in any other manner permitted by
statute, remove any director before the expiration of such director's
period of office and may, if desired, appoint a replacement to hold office
during such time only as the director so removed would have held office.
96. The directors may appoint any other person as a director so long as the
total number of directors does not at any time exceed the maximum number
permitted. No such appointment, except to fill a casual vacancy, shall be
effective unless two-thirds of the directors concur in it. Any casual
vacancy occurring among the directors may be filled by the directors, but
any person so chosen shall retain office only so long as the vacating
director would have retained it if the vacating director had continued as
director.
MANAGING DIRECTOR
97. The directors may appoint one or more of their body to be managing
directors of the Company, either for a fixed term or otherwise , and may
remove or dismiss them from office and appoint replacements.
98. Subject to the provisions of any contract between a managing director and
the Company, a managing director shall be subject to the same provisions as
to resignation and removal as the other directors of the Company. A
managing director who for any reason ceases to hold the office of director
shall ipso facto immediately cease to be a managing director.
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99. The remuneration of a managing director shall from time to time be fixed by
the directors and may be by way of any or all of salary, commission and
participation in profits.
100. The directors may from time to time entrust to and confer upon a managing
director such of the powers exercisable under these Articles by the
directors as they think fit, and may confer such powers for such time, and
to be exercised for such objects and purposes and upon such terms and
conditions, and with such restrictions as they think expedient; and they
may confer such powers either collaterally with, or to the exclusion of,
and in substitution for, all or any of the powers of the directors in that
behalf; and may from time to time revoke, withdraw, alter or vary all or
any of such powers.
CHAIRMAN OF THE BOARD
101. The directors may elect one of their number to be Chairman and may
determine the period during which the Chairman is to hold office. The
Chairman shall perform such duties and receive such special remuneration as
the directors may provide.
PRESIDENT AND VICE-PRESIDENTS
102. The directors shall elect the President of the Company, who need not be a
director, and may determine the period for which the President is to hold
office. The President shall have general supervision of the business of the
Company and shall perform such duties as may be assigned from time to time
by the directors.
103. The directors may also elect vice-presidents, who need not be directors,
and may determine the periods for which they are to hold office. A
vice-president shall, at the request of the President or the directors and
subject to the directions of the directors, perform the duties of the
President during the absence, illness or incapacity of the President, and
shall also perform such duties as may be assigned by the President or the
directors.
SECRETARY AND TREASURER
104. The directors shall appoint a Secretary of the Company to keep minutes of
shareholders' and directors' meetings and perform such other duties as may
be assigned by the directors. The directors may also appoint a temporary
substitute for the Secretary who shall, for the purposes of these Articles,
be deemed to be the Secretary.
105. The directors may appoint a treasurer of the Company to carry out such
duties as the directors may assign.
OFFICERS
106. The directors may elect or appoint such other officers of the Company,
having such powers and duties, as they think fit.
107. If the directors so decide the same person may hold more than one of the
offices provided for in these Articles.
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PROCEEDINGS OF DIRECTORS
108. The directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings and proceedings, as they think fit, and
may determine the quorum necessary for the transaction of business. Until
otherwise determined, one director shall constitute a quorum and may hold a
meeting.
109. If all directors of the Company entitled to attend a meeting either
generally or specifically consent, a director may participate in a meeting
of directors or of a committee of directors by means of such telephone or
other communications facilities as permit all persons participating in the
meeting to hear each other, and a director participating in such a meeting
by such means is deemed to be present at that meeting for purposes of these
Articles.
110. Meetings of directors may be held either within or without the Province of
Nova Scotia and the directors may from time to time make arrangements
relating to the time and place of holding directors' meetings, the notices
to be given for such meetings and what meetings may be held without notice.
Unless otherwise provided by such arrangements:
(1) A meeting of directors may be held at the close of every ordinary
general meeting of the Company without notice.
(2) Notice of every other directors' meeting may be given as permitted by
these Articles to each director at least 48 hours before the time
fixed for the meeting.
(3) A meeting of directors may be held without formal notice if all the
directors are present or if those absent have signified their assent
to such meeting or their consent to the business transacted at such
meeting.
111. The President or any director may at any time, and the Secretary, upon the
request of the President or any director, shall summon a meeting of the
directors to be held at the Office of the Company. The President, the
Chairman or a majority of the directors may at any time, and the Secretary,
upon the request of the President, the Chairman or a majority of the
directors shall, summon a meeting to be held elsewhere.
112.
(1) Questions arising at any meeting of directors shall be decided by a
majority of votes. The chairman of the meeting may vote as a director
but shall not have a second or casting vote.
(2) At any meeting of directors the chairman shall receive and count the
vote of any director not present in person at such meeting on any
question or matter arising at such meeting whenever such absent
director has indicated by telegram, letter or other writing lodged
with the chairman of such meeting the manner in which the absent
director desires to vote on such question or matter and such question
<PAGE>
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or matter has been specifically mentioned in the notice calling the
meeting as a question or matter to be discussed or decided thereat. In
respect of any such question or matter so mentioned in such notice any
director may give to any other director a proxy authorizing such other
director to vote for such first named director at such meeting, and
the chairman of such meeting, after such proxy has been so lodged,
shall receive and count any vote given in pursuance thereof
notwithstanding the absence of the director giving such proxy.
113. If no Chairman is elected, or if at any meeting of directors the Chairman
is not present within five minutes after the time appointed for holding the
meeting, or declines to take the chair, the President, if a director, shall
preside. If the President is not a director, is not present at such time or
declines to take the chair, a vice-president who is also a director shall
preside. If no person described above is present at such time and willing
to take the chair, the directors present shall choose some one of their
number to be chairman of the meeting.
114. A meeting of the directors at which a quorum is present shall be competent
to exercise all or any of the authorities, powers and discretions for the
time being vested in or exercisable by the directors generally.
115. The directors may delegate any of their powers to committees consisting of
such number of directors as they think fit. Any committee so formed shall
in the exercise of the powers so delegated conform to any regulations that
may be imposed on them by the directors.
116. The meetings and proceedings of any committee of directors shall be
governed by the provisions contained in these Articles for regulating the
meetings and proceedings of the directors insofar as they are applicable
and are not superseded by any regulations made by the directors.
117. All acts done at any meeting of the directors or of a committee of
directors or by any person acting as a director shall, notwithstanding that
it is afterwards discovered that there was some defect in the appointment
of the director or person so acting, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed
and was qualified to be a director.
118. A resolution in writing and signed by every director who would be entitled
to vote on the resolution at a meeting is as valid as if it were passed by
such directors at a meeting.
119. If any one or more of the directors is called upon to perform extra
services or to make any special exertions in going or residing abroad or
otherwise for any of the purposes of the Company or the business thereof,
the Company may remunerate the director or directors so doing, either by a
fixed sum or by a percentage of profits or otherwise. Such remuneration
shall be determined by the directors and may be either in addition to or in
substitution for remuneration otherwise authorized by these Articles.
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REGISTERS
120. The directors shall cause to be kept at the Company's Office in accordance
with the provisions of the Act a Register of the shareholders of the
Company, a register of the holders of bonds, debentures and other
securities of the Company and a register of its directors. Branch registers
of the shareholders and of the holders of bonds, debentures and other
securities may be kept elsewhere, either within or without the Province of
Nova Scotia, in accordance with the Act.
MINUTES
121. The directors shall cause minutes to be entered in books designated for the
purpose:
(1) of all appointments of officers;
(2) of the names of directors present at each meeting of directors and of
any committees of directors;
(3) of all orders made by the directors and committees of directors; and
(4) of all resolutions and proceedings of meetings of shareholders and of
directors.
Any such minutes of any meeting of directors or of any committee of
directors or of shareholders, if purporting to be signed by the chairman of
such meeting or by the chairman of the next succeeding meeting, shall be
receivable as prima facie evidence of the matters stated in such minutes.
POWERS OF DIRECTORS
122. The management of the business of the Company is vested in the directors
who, in addition to the powers and authorities by these Articles or
otherwise expressly conferred upon them, may exercise all such powers and
do all such acts and things as may be exercised or done by the Company and
are not hereby or by statute expressly directed or required to be exercised
or done by the shareholders, but subject nevertheless to the provisions of
any statute, the Memorandum or these Articles. No modification of the
Memorandum or these Articles shall invalidate any prior act of the
directors that would have been valid if such modification had not been
made.
123. Without restricting the generality of the terms of any of these Articles
and without prejudice to the powers conferred thereby, the directors may:
(1) take such steps as they think fit to carry out any agreement or
contract made by or on behalf of the Company;
(2) pay costs, charges and expenses preliminary and incidental to the
promotion, formation, establishment, and registration of the Company;
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(3) purchase or otherwise acquire for the Company any property, rights or
privileges that the Company is authorized to acquire, at such price
and generally on such terms and conditions as they think fit;
(4) pay for any property, rights or privileges acquired by, or services
rendered to the Company either wholly or partially in cash or in
shares (fully paid-up or otherwise), bonds, debentures or other
securities of the Company;
(5) subject to the Act, secure the fulfilment of any contracts or
engagements entered into by the Company by mortgaging or charging all
or any of the property of the Company and its unpaid capital for the
time being, or in such other manner as they think fit;
(6) appoint, remove or suspend at their discretion such experts, managers,
secretaries, treasurers, officers, clerks, agents and servants for
permanent, temporary or special services, as they from time to time
think fit, and determine their powers and duties and fix their
salaries or emoluments and require security in such instances and to
such amounts as they think fit;
(7) accept a surrender of shares from any shareholder insofar as the law
permits and on such terms and conditions as may be agreed;
(8) appoint any person or persons to accept and hold in trust for the
Company any property belonging to the Company, or in which it is
interested, execute and do all such deeds and things as may be
required in relation to such trust, and provide for the remuneration
of such trustee or trustees;
(9) institute, conduct, defend, compound or abandon any legal proceedings
by and against the Company, its directors or its officers or otherwise
concerning the affairs of the Company, and also compound and allow
time for payment or satisfaction of any debts due and of any claims or
demands by or against the Company;
(10) refer any claims or demands by or against the Company to arbitration
and observe and perform the awards;
(11) make and give receipts, releases and other discharges for amounts
payable to the Company and for claims and demands of the Company;
(12) determine who may exercise the borrowing powers of the Company and
sign on the Company's behalf bonds, debentures or other securities,
bills, notes, receipts, acceptances, assignments, transfers,
hypothecations, pledges, endorsements, cheques, drafts, releases,
contracts, agreements and all other instruments and documents;
(13) provide for the management of the affairs of the Company abroad in
such manner as they think fit, and in particular appoint any person to
be the attorney or agent of the Company with such powers (including
power to sub-delegate) and upon such terms as may be thought fit;
<PAGE>
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(14) invest and deal with any funds of the Company in such securities and
in such manner as they think fit; and vary or realize such
investments;
(15) subject to the Act, execute in the name and on behalf of the Company
in favour of any director or other person who may incur or be about to
incur any personal liability for the benefit of the Company such
mortgages of the Company's property, present and future, as they think
fit;
(16) give any officer or employee of the Company a commission on the
profits of any particular business or transaction or a share in the
general profits of the Company;
(17) set aside out of the profits of the Company before declaring any
dividend such amounts as they think proper as a reserve fund to meet
contingencies or provide for dividends, depreciation, repairing,
improving and maintaining any of the property of the Company and such
other purposes as the directors may in their absolute discretion think
in the interests of the Company; and invest such amounts in such
investments as they think fit, and deal with and vary such
investments, and dispose of all or any part of them for the benefit of
the Company, and divide the reserve fund into such special funds as
they think fit, with full power to employ the assets constituting the
reserve fund in the business of the Company without being bound to
keep them separate from the other assets;
(18) make, vary and repeal rules respecting the business of the Company,
its officers and employees, the shareholders of the Company or any
section or class of them;
(19) enter into all such negotiations and contracts, rescind and vary all
such contracts, and execute and do all such acts, deeds and things in
the name and on behalf of the Company as they consider expedient for
or in relation to any of the matters aforesaid or otherwise for the
purposes of the Company;
(20) provide for the management of the affairs of the Company in such
manner as they think fit.
SOLICITORS
124. The Company may employ or retain solicitors any of whom may, at the request
or on the instruction of the directors, the Chairman, the President or a
managing director, attend meetings of the directors or shareholders,
whether or not the solicitor is a shareholder or a director of the Company.
A solicitor who is also a director may nevertheless charge for services
rendered to the Company as a solicitor.
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THE SEAL
125. The directors shall arrange for the safe custody of the common seal of the
Company (the "Seal"). The Seal may be affixed to any instrument in the
presence of and contemporaneously with the attesting signature of (i) any
director or officer acting within such person's authority or (ii) any
person under the authority of a resolution of the directors or a committee
thereof. For the purpose of certifying documents or proceedings the Seal
may be affixed by any director or the President, a vice-president, the
Secretary, an assistant secretary or any other officer of the Company
without the authorization of a resolution of the directors.
126. The Company may have facsimiles of the Seal which may be used
interchangeably with the Seal.
127. The Company may have for use at any place outside the Province of Nova
Scotia, as to all matters to which the corporate existence and capacity of
the Company extends, an official seal that is a facsimile of the Seal of
the Company with the addition on its face of the name of the place where it
is to be used; and the Company may by writing under its Seal authorize any
person to affix such official seal at such place to any document to which
the Company is a party.
DIVIDENDS
128. The directors may from time to time declare such dividend as they deem
proper upon shares of the Company according to the rights and restrictions
attached to any class or series of shares, and may determine the date upon
which such dividend will be payable and that it will be payable to the
persons registered as the holders of the shares on which it is declared at
the close of business upon a record date. No transfer of such shares
registered after the record date shall pass any right to the dividend so
declared.
129. Dividends may be paid as permitted by law and, without limitation, may be
paid out of the profits, retained earnings or contributed surplus of the
Company. No interest shall be payable on any dividend except insofar as the
rights attached to any class or series of shares provide otherwise.
130. The declaration of the directors as to the amount of the profits, retained
earnings or contributed surplus of the Company shall be conclusive.
131. The directors may from time to time pay to the shareholders such interim
dividends as in their judgment the position of the Company justifies.
132. Subject to these Articles and the rights and restrictions attached to any
class or series of shares, dividends may be declared and paid to the
shareholders in proportion to the amount of capital paid-up on the shares
(not including any capital paid-up bearing interest) held by them
respectively.
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133. The directors may deduct from the dividends payable to any shareholder
amounts due and payable by the shareholder to the Company on account of
calls, instalments or otherwise, and may apply the same in or towards
satisfaction of such amounts so due and payable.
134. The directors may retain any dividends on which the Company has a lien, and
may apply the same in or towards satisfaction of the debts, liabilities or
engagements in respect of which the lien exists.
135. The directors may retain the dividends payable upon shares to which a
person is entitled or entitled to transfer upon the death or bankruptcy of
a shareholder or in any way other than by allotment or transfer, until such
person has become registered as the holder of such shares or has duly
transferred such shares.
136. When the directors declare a dividend on a class or series of shares and
also make a call on such shares payable on or before the date on which the
dividend is payable, the directors may retain all or part of the dividend
and set off the amount retained against the call.
137. The directors may declare that a dividend be paid by the distribution of
cash, paid-up shares (at par or at a premium), debentures, bonds or other
securities of the Company or of any other company or any other specific
assets held or to be acquired by the Company or in any one or more of such
ways.
138. The directors may settle any difficulty that may arise in regard to the
distribution of a dividend as they think expedient, and in particular
without restricting the generality of the foregoing may issue fractional
certificates, may fix the value for distribution of any specific assets,
may determine that cash payments will be made to any shareholders upon the
footing of the value so fixed or that fractions may be disregarded in order
to adjust the rights of all parties, and may vest cash or specific assets
in trustees upon such trusts for the persons entitled to the dividend as
may seem expedient to the directors.
139. Any person registered as a joint holder of any share may give effectual
receipts for all dividends and payments on account of dividends in respect
of such share.
140. Unless otherwise determined by the directors, any dividend may be paid by a
cheque or warrant delivered to or sent through the post to the registered
address of the shareholder entitled, or, when there are joint holders, to
the registered address of that one whose name stands first on the register
for the shares jointly held. Every cheque or warrant so delivered or sent
shall be made payable to the order of the person to whom it is delivered or
sent. The mailing or other transmission to a shareholder at the
shareholder's registered address (or, in the case of joint shareholders at
the address of the holder whose name stands first on the register) of a
cheque payable to the order of the person to whom it is addressed for the
amount of any dividend payable in cash after the deduction of any tax which
the Company has properly withheld, shall discharge the Company's liability
for the dividend unless the cheque is not paid on due presentation. If any
cheque for a dividend payable in cash is not received, the Company shall
issue to the shareholder a replacement cheque for the same amount on such
terms as to indemnity and evidence of non-receipt as the directors may
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impose. No shareholder may recover by action or other legal process against
the Company any dividend represented by a cheque that has not been duly
presented to a banker of the Company for payment or that otherwise remains
unclaimed for 6 years from the date on which it was payable.
ACCOUNTS
141. The directors shall cause proper books of account to be kept of the amounts
received and expended by the Company, the matters in respect of which such
receipts and expenditures take place, all sales and purchases of goods by
the Company, and the assets, credits and liabilities of the Company.
142. The books of account shall be kept at the head office of the Company or at
such other place or places as the directors may direct.
143. The directors shall from time to time determine whether and to what extent
and at what times and places and under what conditions the accounts and
books of the Company or any of them shall be open to inspection of the
shareholders, and no shareholder shall have any right to inspect any
account or book or document of the Company except as conferred by statute
or authorized by the directors or a resolution of the shareholders.
144. At the ordinary general meeting in every year the directors shall lay
before the Company such financial statements and reports in connection
therewith as may be required by the Act or other applicable statute or
regulation thereunder and shall distribute copies thereof at such times and
to such persons as may be required by statute or regulation.
AUDITORS AND AUDIT
145. Except in respect of a financial year for which the Company is exempt from
audit requirements in the Act, the Company shall at each ordinary general
meeting appoint an auditor or auditors to hold office until the next
ordinary general meeting. If at any general meeting at which the
appointment of an auditor or auditors is to take place and no such
appointment takes place, or if no ordinary general meeting is held in any
year or period of years, the directors shall appoint an auditor or auditors
to hold office until the next ordinary general meeting.
146. The first auditors of the Company may be appointed by the directors at any
time before the first ordinary general meeting and the auditors so
appointed shall hold office until such meeting unless previously removed by
a resolution of the shareholders, in which event the shareholders may
appoint auditors.
147. The directors may fill any casual vacancy in the office of the auditor but
while any such vacancy continues the surviving or continuing auditor or
auditors, if any, may act.
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148. The Company may appoint as auditor any person, including a shareholder, not
disqualified by statute.
149. An auditor may be removed or replaced in the circumstances and in the
manner specified in the Act.
150. The remuneration of the auditors shall be fixed by the shareholders, or by
the directors pursuant to authorization given by the shareholders, except
that the remuneration of an auditor appointed to fill a casual vacancy may
be fixed by the directors.
151. The auditors shall conduct such audit as may be required by the Act and
their report, if any, shall be dealt with by the Company as required by the
Act.
NOTICES
152. A notice (including any communication or document) shall be sufficiently
given, delivered or served by the Company upon a shareholder, director,
officer or auditor by personal delivery at such person's registered address
(or, in the case of a director, officer or auditor, last known address) or
by prepaid mail, telegraph, telex, facsimile machine or other electronic
means of communication addressed to such person at such address.
153. Shareholders having no registered address shall not be entitled to receive
notice.
154. All notices with respect to registered shares to which persons are jointly
entitled may be sufficiently given to all joint holders thereof by notice
given to whichever of such persons is named first in the Register for such
shares.
155. Any notice sent by mail shall be deemed to be given, delivered or served on
the earlier of actual receipt and the third business day following that
upon which it is mailed, and in proving such service it shall be sufficient
to prove that the notice was properly addressed and mailed with the postage
prepaid thereon. Any notice given by electronic means of communication
shall be deemed to be given when entered into the appropriate transmitting
device for transmission. A certificate in writing signed on behalf of the
Company that the notice was so addressed and mailed or transmitted shall be
conclusive evidence thereof.
156. Every person who by operation of law, transfer or other means whatsoever
becomes entitled to any share shall be bound by every notice in respect of
such share that prior to such person's name and address being entered on
the Register was duly served in the manner hereinbefore provided upon the
person from whom such person derived title to such share.
157. Any notice delivered, sent or transmitted to the registered address of any
shareholder pursuant to these Articles, shall, notwithstanding that such
shareholder is then deceased and that the Company has notice thereof, be
deemed to have been served in respect of any registered shares, whether
held by such deceased shareholder solely or jointly with other persons,
until some other person is registered as the holder or joint holder
thereof, and such service shall for all purposes of these Articles be
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deemed a sufficient service of such notice on the heirs, executors or
administrators of the deceased shareholder and all joint holders of such
shares.
158. Any notice may bear the name or signature, manual or reproduced, of the
person giving the notice written or printed.
159. When a given number of days' notice or notice extending over any other
period is required to be given, the day of service and the day upon which
such notice expires shall not, unless it is otherwise provided, be counted
in such number of days or other period.
INDEMNITY
160. Every director or officer, former director or officer, or person who acts
or acted at the Company's request, as a director or officer of the Company,
a body corporate, partnership or other association of which the Company is
or was a shareholder, partner, member or creditor, and the heirs and legal
representatives of such person, in the absence of any dishonesty on the
part of such person, shall be indemnified by the Company against, and it
shall be the duty of the directors out of the funds of the Company to pay,
all costs, losses and expenses, including an amount paid to settle an
action or claim or satisfy a judgment, that such director, officer or
person may incur or become liable to pay in respect of any claim made
against such person or civil, criminal or administrative action or
proceeding to which such person is made a party by reason of being or
having been a director or officer of the Company or such body corporate,
partnership or other association, whether the Company is a claimant or
party to such action or proceeding or otherwise; and the amount for which
such indemnity is proved shall immediately attach as a lien on the property
of the Company and have priority as against the shareholders over all other
claims.
161. No director or officer, former director or officer, or person who acts or
acted at the Company's request, as a director or officer of the Company, a
body corporate, partnership or other association of which the Company is or
was a shareholder, partner, member or creditor, in the absence of any
dishonesty on such person's part, shall be liable for the acts, receipts,
neglects or defaults of any other director, officer or such person, or for
joining in any receipt or other act for conformity, or for any loss, damage
or expense happening to the Company through the insufficiency or deficiency
of title to any property acquired for or on behalf of the Company, or
through the insufficiency or deficiency of any security in or upon which
any of the funds of the Company are invested, or for any loss or damage
arising from the bankruptcy, insolvency or tortious acts of any person with
whom any funds, securities or effects are deposited, or for any loss
occasioned by error of judgment or oversight on the part of such person, or
for any other loss, damage or misfortune whatsoever which happens in the
execution of the duties of such person or in relation thereto.
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REMINDERS
162. The directors shall comply with the following provisions of the Act or the
Corporations Registration Act (Nova Scotia) where indicated:
(1) Keep a current register of shareholders (Section 42).
(2) Keep a current register of directors, officers and managers, send to
the Registrar a copy thereof and notice of all changes therein
(Section 98).
(3) Keep a current register of holders of bonds, debentures and other
securities (Section 111 and Third Schedule).
(4) Call a general meeting every year within the proper time (Section 83).
Meetings must be held not later than 15 months after the preceding
general meeting.
(5) Send to the Registrar copies of all special resolutions (Section 88).
(6) When shares are issued for a consideration other than cash, file a
copy of the contract with the Registrar on or before the date on which
the shares are issued (Section 109).
(7) Send to the Registrar notice of the address of the Company's Office
and of all changes in such address (Section 79).
(8) Keep proper minutes of all shareholders' meetings and directors'
meetings in the Company's minute book kept at the Company's Office
(Sections 89 and 90).
(9) Obtain a certificate under the Corporations Registration Act (Nova
Scotia) as soon as business is commenced.
(10) Send notice of recognized agent to the Registrar under the
Corporations Registration Act (Nova Scotia).
MEMORANDUM
AND
ARTICLES OF ASSOCIATION
OF
ICG HOLDINGS (CANADA) Co.
STEWART McKELVEY STIRLING SCALES
BARRISTERS & SOLICITORS
Halifax, Nova Scotia
<PAGE>
MEMORANDUM OF ASSOCIATION
OF
ICG HOLDINGS (CANADA) Co.
1. The name of the Company is ICG Holdings (Canada) Co.
2. There are no restrictions on the objects and powers of the Company and the
Company shall expressly have the following powers:
(1) to sell or dispose of its undertaking, or a substantial part thereof:
(2) to distribute any of its property in specie among its members; and
(3) to amalgamate with any company or other body of persons.
3. The liability of the members is unlimited.
I, the undersigned, whose name, address and occupation are subscribed, am
desirous of being formed into a company in pursuance of this Memorandum of
Association, and I agree to take the number and kind of shares in the capital
stock of the Company written opposite my name.
<TABLE>
<CAPTION>
Address Occupation No. and Kind of Shares
Name of the Subscriber of the Subscriber taken by Subscriber
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1959 Upper Water Street
/s/ Charles S. Reagh Suite 800 Solicitor 1 common share
Halifax, Nova Scotia
- -----------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL SHARES TAKEN: one common share
Dated this 2nd day of November 1998
/s/ Dawn Cottreau
Witness to the above signature: -------------------------------------
Name of Witness
900-195 Upper Water St.,
Halifax, Nova Scotia, B3J 2X2
--------------------------------------
Address
Manager
--------------------------------------
Occupation
<PAGE>
ARTICLES OF ASSOCIATION
OF
ICG HOLDINGS (CANADA) Co.
INTERPRETATION
1. In these Articles, unless there be something in the subject or context
inconsistent therewith:
(1) "Act" means the Companies Act (Nova Scotia);
(2) "Articles" means these Articles of Association of the Company and all
amendments hereto;
(3) "Company" means the company named above;
(4) "director" means a director of the Company;
(5) "Memorandum" means the Memorandum of Association of the Company and
all amendments thereto;
(6) "month" means calendar month;
(7) "Office" means the registered office of the Company;
(8) "person" includes a body corporate;
(9) "proxyholder" includes an alternate proxyholder;
(10) "Register" means the register of members kept pursuant to the Act, and
where the context permits includes a branch register of members;
(11) "Registrar" means the Registrar as defined in the Act;
(12) "Secretary" includes any person appointed to perform the duties of the
Secretary temporarily;
(13) "shareholder" means member as that term is used in the Act in
connection with an unlimited company having share capital and as that
term is used in the Memorandum;
(14) "special resolution" has the meaning assigned by the Act;
(15) "in writing" and "written" includes printing, lithography and other
modes of representing or reproducing words in visible form;
(16) words importing number or gender include all numbers and genders
unless the context otherwise requires.
<PAGE>
-2-
2. The regulations in Table A in the First Schedule to the Act shall not apply
to the Company.
3. The directors may enter into and carry into effect or adopt and carry into
effect any agreement made by the promoters of the Company on behalf of the
Company and may agree to any modification in the terms of any such
agreement, either before or after its execution.
4. The directors may, out of the funds of the Company, pay all expenses
incurred for the incorporation and organization of the Company.
5. The Company may commence business on the day following incorporation or so
soon thereafter as the directors think fit, notwithstanding that part only
of the shares has been allotted.
SHARES
6. The capital of the company shall consist of 1,000,000 common shares without
nominal or par value, with the power to divide the shares in the capital
for the time being into classes or series and to attach thereto
respectively any preferred, deferred or qualified rights, privileges or
conditions, including restrictions on voting rights and including
redemption, purchase and other acquisition of such shares, subject,
however, to the provisions of the Act.
7. The directors shall control the shares and, subject to the provisions of
these Articles, may allot or otherwise dispose of them to such person at
such times, on such terms and conditions and, if the shares have a par
value, either at a premium or at par, as they think fit.
8. The directors may pay on behalf of the Company a reasonable commission to
any person in consideration of subscribing or agreeing to subscribe
(whether absolutely or conditionally) for any shares in the Company, or
procuring or agreeing to procure subscriptions (whether absolute or
conditional) for any shares in the Company. Subject to the Act, the
commission may be paid or satisfied in shares of the Company.
9. On the issue of shares the Company may arrange among the holders thereof
differences in the calls to be paid and in the times for their payment.
10. If the whole or part of the allotment price of any shares is, by the
conditions of their allotment, payable in installments, every such
installment shall, when due, be payable to the Company by the person who is
at such time the registered holder of the shares.
11. Shares may be registered in the names of joint holders not exceeding three
in number.
12. Joint holders of a share shall be jointly and severally liable for the
payment of all installments and calls due in respect of such share. On the
death of one or more joint holders of shares the survivor or survivors of
them shall alone be recognized by the Company as the registered holder or
holders of the shares.
<PAGE>
-3-
13. Save as herein otherwise provided, the Company may treat the registered
holder of any share as the absolute owner thereof and accordingly shall
not, except as ordered by a court of competent jurisdiction or required by
statute, be bound to recognize any equitable or other claim to or interest
in such share on the part of any other person.
14. The Company is a private company, and:
(1) no transfer of any share or prescribed security of the Company shall
be effective unless or until approved by the directors;
(2) the number of holders of issued and outstanding prescribed securities
or shares of the Company, exclusive of persons who are in the
employment of the Company or in the employment of an affiliate of the
Company and exclusive of persons who, having been formerly in the
employment of the Company or the employment of an affiliate of the
Company, were, while in that employment, and have continued after
termination of that employment, to own at least one prescribed
security or share of the Company, shall not exceed 50 in number, two
or more persons or companies who are the joint registered owners of
one or more prescribed securities or shares being counted as one
holder; and
(3) the Company shall not invite the public to subscribe for any of its
securities.
In this Article, "private company" and "securities" have the meanings
ascribed to those terms in the Securities Act (Nova Scotia), and
"prescribed security" means any of the securities prescribed by the Nova
Scotia Securities Commission from time to time for the purpose of the
definition of "private company" in the Securities Act (Nova Scotia).
CERTIFICATES
15. Certificates of title to shares shall comply with the Act and may otherwise
be in such form as the directors may from time to time determine. Unless
the directors otherwise determine, every certificate of title to shares
shall be signed manually by at least one of the Chairman, President,
Secretary, Treasurer, a vice-president, an assistant secretary, any other
officer of the Company or any director of the Company or by or on behalf of
a share registrar transfer agent or branch transfer agent appointed by the
Company or by any other person whom the directors may designate. When
signatures of more than one person appear on a certificate all but one may
be printed or otherwise mechanically reproduced. All such certificates when
signed as provided in this Article shall be valid and binding upon the
Company. If a certificate contains a printed or mechanically reproduced
signature of a person, the Company may issue the certificate,
notwithstanding that the person has ceased to be a director or an officer
of the Company and the certificate is as valid as if such person were a
director or an officer at the date of its issue.
<PAGE>
-4-
16. Except as the directors may determine, each shareholder's shares may be
evidenced by any number of certificates so long as the aggregate of the
shares stipulated in such certificate equals the aggregate registered in
the name of the shareholder.
17. Where shares are registered in the names of two or more persons, the
Company shall not be bound to issue more than one certificate or set of
certificates, and such certificate or set of certificates shall be
delivered to the person first named on the Register.
18. Any certificate that has become worn, damaged or defaced may, upon its
surrender to the directors, be cancelled and replaced by a new certificate.
Any certificate that has become lost or destroyed may be replaced by a new
certificate upon proof of such loss or destruction to the satisfaction of
the directors and the furnishing to the Company of such undertakings of
indemnity as the directors deem adequate.
19. The sum of one dollar or such other sum as the directors from time to time
determine shall be paid to the Company for every certificate other than the
first certificate issued to any holder in respect of any share or shares.
20. The directors may cause one or more branch Registers of shareholders to be
kept in any place or places, whether inside or outside of Nova Scotia.
CALLS
21. The directors may make such calls upon the shareholders in respect of all
amounts unpaid on the shares held by them respectively and not made payable
at fixed times by the conditions on which such shares were allotted, and
each shareholder shall pay the amount of every call so made to the person
and at the times and places appointed by the directors. A call may be made
payable by installments.
22. A call shall be deemed to have been made at the time when the resolution of
the directors authorizing such call was passed.
23. At least 14 days' notice of any call shall be given, and such notice shall
specify the time and place at which and the person to whom such call shall
be paid.
24. If the sum payable in respect of any call or installment is not paid on or
before the day appointed for the payment thereof, the holder for the time
being of the share in respect of which the call has been made or the
installment is due shall pay interest on such call or installment at the
rate of 9% per year or such other rate of interest as the directors may
determine from the day appointed for the payment thereof up to the time of
actual payment.
25. At the trial or hearing of any action for the recovery of any amount due
for any call, it shall sufficient to prove that the name of the shareholder
sued is entered on the Register as the holder or one of the holders of the
share or shares in respect of which such debt accrued, that the resolution
making the call is duly recorded in the minute book and that such notice of
such call was duly given to the shareholder sued in pursuance of these
Articles. It shall not
<PAGE>
-5-
be necessary to prove the appointment of the directors who made such call
or any other matters whatsoever and the proof of the matters stipulated
shall be conclusive evidence of the debt.
FORFEITURE OF SHARES
26. If any shareholder fails to pay any call or installment on or before the
day appointed for payment, the directors may at any time thereafter while
the call or installment remains unpaid serve a notice on such shareholder
requiring payment thereof together with any interest that may have accrued
and all expenses that may have been incurred by the Company by reason of
such non-payment.
27. The notice shall name a day (not being less than 14 days after the date of
the notice) and a place or places on and at which such call or installment
and such interest and expenses are to be paid. The notice shall also state
that, in the event of non-payment on or before the day and at the place or
one of the places so named, the shares in respect of which the call was
made or installment is payable will be liable to be forfeited.
28. If the requirements of any such notice are not complied with, any shares in
respect of which such notice has been given may at any time thereafter,
before payment of all calls or installments, interest and expenses due in
respect thereof, be forfeited by a resolution of the directors to that
effect. Such forfeiture shall include all dividends declared in respect of
the forfeited shares and not actually paid before the forfeiture.
29. When any share has been so forfeited, notice of the resolution shall be
given to the shareholder in whose name it stood immediately prior to the
forfeiture and an entry of the forfeiture shall be made in the Register.
30. Any share so forfeited shall be deemed the property of the Company and the
directors may sell, re-allot or otherwise dispose of it in such manner as
they think fit.
31. The directors may at any time before any share so forfeited has been sold,
re-allotted or otherwise disposed of, annul the forfeiture thereof upon
such conditions as they think fit.
32. Any shareholder whose shares have been forfeited shall nevertheless be
liable to pay and shall forthwith pay to the Company all calls,
installments, interest and expenses owing upon or in respect of such shares
at the time of the forfeiture together with interest thereon at the rate of
9% per year or such other rate of interest as the directors may determine
from the time of forfeiture until payment. The directors may enforce such
payment if they think fit, but are under no obligation to do so.
33. A certificate signed by the Secretary stating that a share has been duly
forfeited on a specified date in pursuance of these Articles and the time
when it was forfeited shall be conclusive evidence of the facts therein
stated as against any person who would have been entitled to the share but
for such forfeiture.
<PAGE>
-6-
LIEN ON SHARES
34. The Company shall have a first and paramount lien upon all shares (other
than filly paid-up shares) registered in the name of a shareholder (whether
solely or jointly with others) and upon the proceeds from the sale thereof
for debts, liabilities and other engagements of the shareholder, solely or
jointly with any other person, to or with the Company, whether or not the
period for the payment, fulfilment or discharge thereof has actually
arrived, and such lien shall extend to all dividends declared in respect of
such shares. Unless otherwise agreed, the registration of a transfer of
shares shall operate as a waiver of any lien of the Company on such shares.
35. For the purpose of enforcing such lien the directors may sell the shares
subject to it in such manner as they think fit, but no sale shall be made
until the period for the payment, fulfilment or discharge of such debts,
liabilities or other engagements has arrived, and until notice in writing
of the intention to sell has been given to such shareholder or the
shareholder's executors or administrators and default has been made by them
in such payment, fulfilment or discharge for seven days after such notice.
36. The net proceeds of any such sale after the payment of all costs shall be
applied in or towards the satisfaction of such debts, liabilities or
engagements and the residue, if any, paid to such shareholder.
VALIDITY OF SALES
37. Upon any sale after forfeiture or to enforce a lien in purported exercise
of the powers given by these Articles the directors may cause the
purchaser's name to be entered in the Register in respect of the shares
sold, and the purchaser shall not be bound to see to the regularity of the
proceedings or to the application of the purchase money, and after the
purchaser's name has been entered in the Register in respect of such shares
the validity of the sale shall not be impeached by any person and the
remedy of any person aggrieved by the sale shall be in damages only and
against the Company exclusively.
TRANSFER OF SHARES
38. The instrument of transfer of any share in the Company shall be signed by
the transferor. The transferor shall be deemed to remain the holder of such
share until the name of the transferee is entered in the Register in
respect thereof and shall be entitled to receive any dividend declared
thereon before the registration of the transfer.
39. The instrument of transfer of any share shall be in writing in the
following form or to the following effect:
For value received, _____ hereby sell, assign, and transfer unto
__________ , ______ shares in the capital of the Company represented
by the within certificate, and do hereby irrevocably constitute and
appoint _________ attorney to transfer such shares on the books of the
Company with full power of substitution in the premises.
<PAGE>
-7-
Dated the __ day of ____________, ____
Witness:
40. The directors may, without assigning any reason therefor, decline to
register any transfer of shares (1) not fully paid-up or upon which the
Company has a lien, or (2) the transfer of which is restricted by any
agreement to which the Company is a party.
41. Every instrument of transfer shall be left for registration at the Office
of the Company, or at any office of its transfer agent where a Register is
maintained, together with the certificate of the shares to be transferred
and such other evidence as the Company may require to prove title to or the
right to transfer the shares.
42. The directors may require that a fee determined by them be paid before or
after registration of any transfer.
43. Every instrument of transfer shall, after its registration, remain in the
custody of the Company. Any instrument of transfer that the directors
decline to register shall, except in case of fraud, be returned to the
person who deposited it.
TRANSMISSION OF SHARES
44. The executors or administrators of a deceased shareholder (not being one of
several joint holders) shall be the only persons recognized by the Company
as having any title to the shares registered in the name of such
shareholder. When a share is registered in the names of two or more joint
holders, the survivor or survivors or the executors or administrators of
the deceased survivor, shall be the only persons recognized by the Company
as having any title to, or interest in, such share.
45. Notwithstanding anything in these Articles, if the Company has only one
shareholder (not being one of several joint holders) and that shareholder
dies, the executors or administrators of the deceased shareholder shall be
entitled to register themselves in the Register as the holders of the
shares registered in the name of the deceased shareholder whereupon they
shall have all the rights given by these Articles and by law to
shareholders.
46. Any person entitled to shares upon the death or bankruptcy of any
shareholder or in any way other than by allotment or transfer, upon
producing such evidence of entitlement as the directors require, may be
registered as a shareholder in respect of such shares, or may, without
being registered, transfer such shares subject to the provisions of these
Articles respecting the transfer of shares. The directors shall have the
same right to refuse registration as if the transferee were named in an
ordinary transfer presented for registration.
<PAGE>
-8-
SURRENDER OF SHARES
47. The directors may accept the surrender of any share by way of compromise of
any question as to the holder being properly registered in respect thereof.
Any share so surrendered may be disposed of in the same manner as a
forfeited share.
INCREASE AND REDUCTION OF CAPITAL
48. Subject to the Act, the shareholders may by special resolution amend these
Articles to increase or alter the share capital of the Company as they
think expedient. Without prejudice to any special rights previously
conferred on the holders of existing shares, any share may be issued with
such preferred, deferred or other special rights, or with such
restrictions, whether in regard to dividends, voting, return of share
capital or otherwise, as the shareholders may from time to time determine
by special resolution. Except as otherwise provided by the conditions of
issue, or by these Articles, any capital raised by the creation of new
shares shall be considered part of the original capital and shall be
subject to the provisions herein contained with reference to payment of
calls and installments, transfer and transmission, forfeiture, lien and
otherwise.
49. The Company may, by special resolution where required, reduce its share
capital in any way and with and subject to any incident authorized and
consent required by law. Subject to the Act and any provisions attached to
such shares, the Company may redeem, purchase or acquire any of its shares
and the directors may determine the manner and the terms for redeeming,
purchasing or acquiring such shares and may provide a sinking fund on such
terms as they think fit for the redemption, purchase or acquisition of
shares of any class or series
MEETINGS AND VOTING BY CLASS OR SERIES
50. Where the holders of shares of a class or series have, under the Act, the
terms or conditions attaching to such shares or otherwise, the right to
vote separately as a class in respect of any matter then, except as
provided in the Act, these Articles or such terms or conditions, all the
provisions in these Articles concerning general meetings (including,
without limitation, provisions respecting notice, quorum and procedure)
shall, mutatis mutandis, apply to every meeting of holders of such class or
series of shares convened for the purpose of such vote.
51. Unless the rights, privileges, terms or conditions attached to a class or
series of shares provide otherwise, such class or eries of shares shall not
have the right to vote separately as a class or series upon an amendment to
the Memorandum or Articles to:
(1) increase or decrease any maximum number of authorized shares of such
class or series, or increase any maximum number of authorized shares
of a class or series having rights or privileges equal or superior to
the shares of such class or series;
(2) effect an exchange, reclassification or cancellation of all or part of
the shares of such class or series; or
<PAGE>
-9-
(3) create a new class or series of shares equal or superior to the shares
of such class or series.
BORROWING POWERS
52. The directors on behalf of the Company may:
(1) raise or borrow money for the purposes of the Company or any of
them;
(2) secure, subject to the sanction of a special resolution where
required by the Act, the repayment of funds so raised or borrowed
in such manner and upon such terms and conditions in all respects
as they think fit, and in particular by the execution and
delivery of mortgages of the Company's real or personal property,
or by the issue of bonds, debentures or other securities of the
Company secured by mortgage or other charge upon all or any part
of the property of the Company, both present and future including
its uncalled capital for the time being;
(3) sign or endorse bills, notes, acceptances, cheques, contracts,
and other evidence of or securities for funds borrowed or to be
borrowed for the purposes aforesaid;
(4) pledge debentures as security for loans;
(5) guarantee obligations of any person.
53. Bonds, debentures and other securities may be made assignable, free
from any equities between the Company and the person to whom such
securities were issued.
54. Any bonds, debentures and other securities may be issued at a discount,
premium or otherwise and with special privileges as to redemption,
surrender, drawings, allotment of shares, attending and voting at
general meetings of the Company, appointment of directors and other
matters.
GENERAL MEETINGS
55 Ordinary general meetings of the Company shall be held at least once in
every calendar year at such time and place as may be determined by the
directors and not later than 15 months after the preceding ordinary
general meeting. All other meetings of the Company shall be called
special general meetings. Ordinary or special general meetings may be
held either within or without the Province of Nova Scotia.
56. The President, a vice-president or the directors may at any time
convene a special general meeting, and the directors, upon the
requisition of shareholders in accordance with the Act shall forthwith
proceed to convene such meeting or meetings to be held at such time and
place or times and places as the directors determine.
<PAGE>
-10-
57. The requisition shall state the objects of the meeting requested, be signed
by the requisitionists and deposited at the Office of the Company. It may
Consist of several documents in like form each signed by one or more of the
requisitionists.
58. At least seven clear days notice, or such longer period of notice as may be
required by the Act, of every general meeting, specifying the place, day
and hour of the meeting and, when special business is to be considered, the
general nature of such business, shall be given to the shareholders
entitled to be present at such meeting by notice given as permitted by
these Articles. With the consent in writing of all the shareholders
entitled to vote at such meeting, a meeting may be convened by a shorter
notice and in any manner they think fit, or notice of the time, place and
purpose of the meeting may be waived by all of the shareholders.
59. When it is proposed to pass a special resolution, the two meetings may be
convened by the same notice, and it shall be no objection to such notice
that it only convenes the second meeting contingently upon the resolution
being passed by the requisite majority at the first meeting.
60. The accidental omission to give notice to a shareholder, or non-receipt of
notice by a shareholder, shall not invalidate any resolution passed at any
general meeting.
RECORD DATES
61. (1) The directors may fix in advance a date as the record date for the
determination of shareholders
(a) entitled to receive payment of a dividend or entitled to receive
any distribution;
(b) entitled to receive notice of a meeting; or
(c) for any other purpose.
(2) If no record date is fixed, the record date for the determination of
shareholders
(a) entitled to receive notice of a meeting shall be the day
immediately preceding the day on which the notice is given, or,
if no notice is given, the day on which the meeting is held; and
(b) for any other purpose shall be the day on which the directors
pass the resolution relating to the particular purpose.
PROCEEDINGS AT GENERAL MEETINGS
62. The business of an ordinary general meeting shall be to receive and
consider the financial statements of the Company and the report of the
directors and the report, if any, of the
<PAGE>
-11-
auditors, to elect directors in the place of those retiring and to transact
any other business which under these Articles ought to be transacted
at an ordinary general meeting.
63. No business shall be transacted at any general meeting unless the requisite
quorum is present at the commencement of the business. A corporate
shareholder of the Company that has a duly authorized agent or
representative present at any such meeting shall for the purpose of his
Article be deemed to be personally present at such meeting.
64. One person, being a shareholder, proxyholder or representative of a
corporate shareholder, present and entitled to vote shall constitute a
quorum for a general meeting, and may hold a meeting.
65. The Chairman shall be entitled to take the chair at every general meeting
or, if there be no Chairman, or if the Chairman is not present within
fifteen 15 minutes after the time appointed for holding the meeting, the
President or, failing the President, a vice-president shall be entitled to
take the chair. If the Chairman, the President or a vice-president is not
present within 15 minutes after the time appointed for holding the meeting
or if all such persons present decline to take the chair, the shareholders
present entitled to vote at the meeting shall choose another director as
chairman and if no director is present or if all the directors present
decline to take the chair, then such shareholders shall choose one of their
number to be chairman.
66. If within half an hour from the time appointed for a general meeting a
quorum is not present the meeting, if it was convened pursuant to a
requisition of shareholders, shall be dissolved; if it was convened in any
other way, it shall stand adjourned to the same day, in the next week, at
the same time and place. If at the adjourned meeting a quorum is not
present within half an hour from the time appointed for the meeting, the
shareholders present shall be a quorum and may hold the meeting.
67. Subject to the Act, at any general meeting a resolution put to the meeting
shall be decided by a show of hands unless, either before or on the
declaration of the result of the show of hands, a poll is demanded by the
chairman, a shareholder or a proxyholder; and unless a poll is so demanded,
a declaration by the chairman that the resolution has been carried, carried
by a particular majority, lost or not carried by a particular majority and
an entry to that effect in the Company's book of proceedings shall be
conclusive evidence of the fact without proof of the number or proportion
of the votes recorded in favor or against such resolution.
68. When a poll is demanded, it shall be taken in such manner and at such time
and place as the chairman directs, and either at once or after an interval
or adjournment or otherwise. The result of the poll shall be the resolution
of the meeting at which the poll was demanded. The demand of a poll may be
withdrawn. When any dispute occurs over the admission or rejection of a
vote, it shall be resolved by the chairman and such determination made in
good faith shall be final and conclusive.
69. The chairman shall not have a casting vote in addition to any vote or votes
that the chairman has as a shareholder.
<PAGE>
-12-
70. The chairman of a general meeting may with the consent of the meeting
adjourn the meeting from time to time and from place to place, but no
business shall be transacted at any adjourned meeting other than the
business left unfinished at the meeting that was adjourned.
71. Any poll demanded on the election of a chairman or on a question of
adjournment shall be taken forthwith without adjournment.
72. The demand of a poll shall not prevent the continuance of a meeting for the
transaction of any business other than the question on which a poll has
been demanded.
VOTES OF SHAREHOLDERS
73. Subject to the Act and to any provisions attached to any class or series of
shares concerning or restricting voting rights:
(1) on a show of hands every shareholder entitled to vote present in
person, every duly authorized representative of a corporate
shareholder, and, if not prevented from voting by the Act, every
proxyholder, shall have one vote; and
(2) on a poll every shareholder present in person, every duly authorized
representative of a corporate shareholder, and every proxyholder,
shall have one vote for every share held; whether or not such
representative or proxyholder is a shareholder.
74. Any person entitled to transfer shares upon the death or bankruptcy of
any shareholder or in any way other than by allotment or transfer may
vote at any general meeting in respect thereof in the same manner as
if such person were the registered holder of such shares so long as
the directors are satisfied at least 48 hours before the time of
holding the meeting of such person's right to transfer such shares
75. Where there are joint registered holders of any share, any of such
holders may vote such share at any meeting, either personally or by
proxy, as if solely entitled to it. If more than one joint holder is
present at any meeting, personally or by proxy, the one whose name
stands first on the Register in respect of such share shall alone be
entitled to vote it. Several executors or administrators of a deceased
shareholder in whose name any share stands shall for the purpose of
this Article be deemed joint holders thereof.
76. Votes may be cast either personally or by proxy or, in the case of a
corporate shareholder by a representative duly authorized under the
Act.
77. A proxy shall be in writing and executed in the manner provided in the
Act. A proxy or other authority of a corporate shareholder does not
require its seal.
<PAGE>
-13-
78. A shareholder of unsound mind in respect of whom an order has been
made by any court of competent jurisdiction may vote by guardian or
other person in the nature of a guardian appointed by that court, and
any such guardian or other person may vote by proxy.
79. A proxy and the power of attorney or other authority, if any, wider
which it is signed or a notarially certified copy of that power or
authority shall be deposited at the Office of the Company or at such
other place as the directors may direct. The directors may, by
resolution, fix a time not exceeding 48 hours excluding Saturdays and
holidays preceding any meeting or adjourned meeting before which time
proxies to be used at that meeting must be deposited with the Company
at its Office or with an agent of the Company. Notice of the
requirement for depositing proxies shall be given in the notice
calling the meeting. The chairman of the meeting shall determine all
questions as to validity of proxies and other instruments of
authority.
80. A vote given in accordance with the terms of a proxy shall be valid
notwithstanding the previous death of the principal, the revocation of
the proxy, or the transfer of the share in respect of which the vote
is given, provided no intimation in writing of the death, revocation
or transfer is received at the Office of the Company before the
meeting or by the chairman of the meeting before the vote is given.
81. Every form of proxy shall comply with the Act and its regulations and
subject thereto may be in the following form:
I,____________ of___________being a shareholder of____________ hereby
appoint_____________of________________(or failing him/her_____________
of-) as my proxyholder to attend and to vote for me and on my behalf
at the ordinary/special general meeting of the Company, to be held on
the day of and at any adjournment thereof, or at any meeting of the
Company which may be held prior to [insert specified date or event].
[If the proxy is solicited by or behalf of the management of the
Company, insert a statement to that effect.]
Dated this_________ day of_______ _________.
------------------------
Shareholder
82. Subject to the Act, no shareholder shall be entitled to be present or to
vote on any question either personally or by proxy, at any general meeting
or be reckoned in a quorum while any call is due and payable to the Company
in respect of any of the shares of such shareholder.
83. Any resolution passed by the directors, notice of which has been given to
the shareholders in the manner in which notices are hereinafter directed to
be given and which is, within one month after it has been passed, ratified
and confirmed in writing by shareholders entitled on a poll to three-fifths
of the votes, shall be as valid and effectual as a resolution of a general
meeting. This Article shall not apply to a resolution for winding up the
Company or to a
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resolution dealing with any matter that by statute or these Articles ought
to be dealt with by a special resolution or other method prescribed by
statute.
84. A resolution, including a special resolution, in writing and signed by
every shareholder who would be entitled to vote on the resolution at a
meeting is as valid as if it were passed by such shareholders at a meeting
and satisfies all of the requirements of the Act respecting meetings of
shareholders.
DIRECTORS
85. Unless otherwise determined by resolution of shareholders, the number of
directors shall not be less than one or more than ten.
86 Notwithstanding anything herein contained the subscribers to the Memorandum
shall be the first directors of the Company.
87. The directors may be paid out of the funds of the Company as remuneration
for their service such sums, if any, as the Company may by resolution of
its shareholders determine, and such remuneration shall be divided among
them in such proportions and manner as the directors determine. The
directors may also be paid their reasonable traveling, hotel and other
expenses incurred in attending meetings of directors and otherwise in the
execution of their duties as directors.
88. The continuing directors may act notwithstanding any vacancy in their body,
but if their number falls below the minimum permitted, the directors shall
not, except in emergencies or for the purpose of filling vacancies, act so
long as their number is below the minimum.
89. A director may, in conjunction with the office of director, and on such
terms as to remuneration and otherwise as the directors arrange or
determine, hold any other office or place of profit under the Company or
under any company in which the Company is a shareholder or is otherwise
interested.
90. The office of a director shall ipso facto be vacated, if the director:
(1) becomes bankrupt or makes an assignment for the benefit of creditors;
(2) is, or is found by a court of competent jurisdiction to be, of unsound
mind;
(3) by notice in writing to the Company, resigns the office of director;
or
(4) is removed in the manner provided by these Articles.
91. No director shall be disqualified by holding the office of director
from contracting with the Company, either as vendor, purchaser, or
otherwise, nor shall any such contract, or any contract or arrangement
entered into or proposed to be entered into by or on behalf of the
Company in which any director is in any way interested, either
directly or indirectly, be
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avoided, nor shall any director so contracting or being so interested
be liable to account to the Company for any profit realized by any such
contract or arrangement by reason only of such director holding that
office or of the fiduciary relations thereby established, provided the
director makes a declaration or gives a general notice in accordance
with the Act. No director shall, as a director, vote in respect of any
contract or arrangement in which the director is so interested, and if
the director does so vote, such vote shall not be counted. This
prohibition may at any time or times be suspended or relaxed to any
extent by a resolution of the shareholders and shall not apply to any
contract by or on behalf of the Company to give to the directors or any
of them any security for advances or by way of indemnity.
ELECTION OF DIRECTORS
92. At the dissolution of every ordinary general meeting at which their
successors are elected, all the directors shall retire from office and be
succeeded by the directors elected at such meeting. Retiring directors
shall be eligible for re-election.
93. If at any ordinary general meeting at which an election of directors ought
to take place no such election takes place, or if no ordinary general
meeting is held in any year or period of years, the retiring directors
shall continue in office until their successors are elected.
94. The Company may by resolution of its shareholders elect any number of
directors permitted by these Articles and may determine or alter their
qualification.
95. The Company may, by special resolution or in any other manner permitted by
statute, remove any director before the expiration of such director's
period of office and may, if desired, appoint a replacement to hold office
during such time only as the director so removed would have held office.
96. The directors may appoint any other person as a director so long as the
total number of directors does not at any time exceed the maximum number
permitted. No such appointment, except to fill a casual vacancy, shall be
effective unless two-thirds of the directors concur in it. Any casual
vacancy occurring among the directors may be filled by the directors, but
any person so chosen shall retain office only so long as the vacating
director would have retained it if the vacating director had continued as
director.
MANAGING DIRECTOR
97. The directors may appoint one or more of their body to be managing
directors of the Company, either for a fixed term or otherwise, and may
remove or dismiss them from office and appoint replacements.
98. Subject to the provisions of any contract between a managing director and
the Company, a managing director shall be subject to the same provisions as
to resignation and removal as the other directors of the Company. A
managing director who for any reason ceases to hold the office of director
shall ipso facto immediately cease to be a managing director.
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99. The remuneration of a managing director shall from time to time be fixed by
the directors and may be by way of any or all of salary, commission and
participation in profits.
100. The directors may from time to time entrust to and confer upon a managing
director such of the powers exercisable under these Articles by the
directors as they think fit, and may confer such powers for such time, and
to be exercised for such objects and purposes and upon such terms and
conditions, and with such restrictions as they think expedient; and they
may confer such powers either collaterally with, or to the exclusion of and
in substitution for, all or any of the powers of the directors in that
behalf; and may from time to time revoke, withdraw, alter or vary all or
any of such powers.
CHAIRMAN OF THE BOARD
101. The directors may elect one of their number to be Chairman and may
determine the period during which the Chairman is to hold office. The
Chairman shall perform such duties and receive such special remuneration as
the directors may provide.
PRESIDENT AND VICE-PRESIDENTS
102. The directors shall elect the President of the Company, who need not be a
director, and may determine the period for which the President is to hold
office. The President shall have general supervision of the business of the
Company and shall perform such duties as may be assigned from time to time
by the directors.
103. The directors may also elect vice-presidents, who need not be directors,
and may determine the periods for which they are to hold office. A
vice-president shall, at the request of the President or the directors and
subject to the directions of the directors, perform the duties of the
President during the absence, illness or incapacity of the President, and
shall also perform such duties as may be assigned by the President or the
directors.
SECRETARY AND TREASURER
104. The directors shall appoint a Secretary of the Company to keep minutes of
shareholders' and directors' meetings and perform such other duties as may
be assigned by the directors. The directors may also appoint a temporary
substitute for the Secretary who shall, for the purposes of these Articles,
be deemed to be the Secretary.
105. The directors may appoint a treasurer of the Company to carry out such
duties as the directors may assign.
OFFICERS
106. The directors may elect or appoint such other officers of the Company,
having such powers and duties, as they think fit.
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107. If the directors so decide the same person may hold more than one of the
offices provided for in these Articles.
PROCEEDINGS OF DIRECTORS
108. The directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings and proceedings, as they think fit, and
may determine the quorum necessary for the transaction of business. Until
otherwise determined, one director shall constitute a quorum and may hold a
meeting.
109. If all directors of the Company entitled to attend a meeting either
generally or specifically consent, a director may participate in a meeting
of directors or of a committee of directors by means of such telephone or
other communications facilities as permit all persons participating in the
meeting to hear each other, and a director participating in such a meeting
by such means is deemed to be present at that meeting for purposes of these
Articles.
110. Meetings of directors may be held either within or without the Province of
Nova Scotia and the directors may from time to time make arrangements
relating to the time and place of holding directors meetings, the notices
to be given for such meetings and what meetings may be held without notice.
Unless otherwise provided by such arrangements:
(1) A meeting of directors may be held at the close of every ordinary
general meeting of the Company without notice.
(2) Notice of every other directors' meeting may be given as permitted by
these Articles to each director at least 48 hours before the time
fixed for the meeting.
(3) A meeting of directors may be held without formal notice if all the
directors are present or if those absent have signified their assent
to such meeting or their consent to the business transacted at such
meeting.
1ll. The President or any director may at any time, and the Secretary, upon
the request of the President or any director, shall summon a meeting of
the directors to be held at the Office of the Company. The President,
the Chairman or a majority of the directors may at any time, and the
Secretary, upon the request of the President, the Chairman or a
majority of the directors shall, summon a meeting to be held elsewhere.
112.
(1) Questions arising at any meeting of directors shall be decided by a
majority of votes. The chairman of the meeting may vote as a director
but shall not have a second or casting vote.
(2) At any meeting of directors the chairman shall receive and count the
vote of any director not present in person at such meeting on any
question or matter arising at such meeting whenever such absent
director has indicated by telegram, letter or other writing lodged
with the chairman of such meeting the manner in which the absent
director desires to vote on such question or matter and such question
or matter has
<PAGE>
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been specifically mentioned in the notice calling the meeting as a
question or matter to be discussed or decided thereat. In respect of
any such question or matter so mentioned in such notice any director
may give to any other director a proxy authorizing such other director
to vote for such first named director at such meeting, and the
chairman of such meeting, after such proxy has been so lodged, shall
receive and count any vote given in pursuance thereof notwithstanding
the absence of the director giving such proxy.
113. If no Chairman is elected, or if at any meeting of directors the Chairman
is not present within five minutes after the time appointed for holding the
meeting, or declines to take the chair, the President, if a director, shall
preside. If the President is not a director, is not present at such time or
declines to take the chair, a vice-president who is also a director shall
preside. If no person described above is present at such time and willing
to take the chair, the directors present shall choose some one of their
number to be chairman of the meeting.
114. A meeting of the directors at which a quorum is present shall be competent
to exercise all or any of the authorities, powers and discretions for the
time being vested in or exercisable by the directors generally.
115. The directors may delegate any of their powers to committees consisting of
such number of directors as they think fit. Any committee so formed shall
in the exercise of the powers so delegated conform to any regulations that
may be imposed on them by the directors.
116. The meetings and proceedings of any committee of directors shall be
governed by the provisions contained in these Articles for regulating the
meetings and proceedings of the directors insofar as they are applicable
and are not superseded by any regulations made by the directors.
117. All acts done at any meeting of the directors or of a committee of
directors or by any person acting as a director shall, notwithstanding that
it is afterwards discovered that there was some defect in the appointment
of the director or person so acting, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed
and was qualified to be a director.
118. A resolution in writing and signed by every director who would be entitled
to vote on the resolution at a meeting is as valid as if it were passed by
such directors at a meeting.
119. If any one or more of the directors is called upon to perform extra
services or to make any special exertions in going or residing abroad or
otherwise for any of the purposes of the Company or the business thereof,
the Company may remunerate the director or directors so doing, either by a
fixed sum or by a percentage of profits or otherwise. Such remuneration
shall be determined by the directors and may be either in addition to or in
substitution for remuneration otherwise authorized by these Articles.
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REGISTERS
120. The directors shall cause to be kept at the Company's Office in accordance
with the provisions of the Act a Register of the shareholders of the
Company, a register of the holders of bonds, debentures and other
securities of the Company and a register of its directors. Branch registers
of the shareholders and of the holders of bonds, debentures and other
securities may be kept elsewhere, either within or without the Province of
Nova Scotia, in accordance with the Act.
MINUTES
121. The directors shall cause minutes to be entered in books designated for the
purpose:
(1) of all appointments of officers;
(2) of the names of directors present at each meeting of directors and of
any committees of directors;
(3) of all orders made by the directors and committees of directors; and
(4) of all resolutions and proceedings of meetings of shareholders and of
directors.
Any such minutes of any meeting of directors or of any committee of
directors or of shareholders, if purporting to be signed by the
chairman of such meeting or by the chairman of the next succeeding
meeting, shall be receivable as prima facie evidence of the matters
stated in such minutes.
POWERS OF DIRECTORS
122. The management of the business of the Company is vested in the directors
who, in addition to the powers and authorities by these Articles or
otherwise expressly conferred upon them, may exercise all such powers and
do all such acts and things as may be exercised or done by the Company and
are not hereby or by statute expressly directed or required to be exercised
or done by the shareholders, but subject nevertheless to the provisions of
any statute, the Memorandum or these Articles. No modification of the
Memorandum or these Articles shall invalidate any prior act of the
directors that would have been valid if such modification had not been
made.
123. Without restricting the generality of the terms of any of these Articles
and without prejudice to the powers conferred thereby, the directors may:
(1) take such steps as they think fit to carry out any agreement or
contract made by or on behalf of the Company;
(2) pay costs, charges and expenses preliminary and incidental to the
promotion, formation, establishment, and registration of the Company;
<PAGE>
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(3) purchase or otherwise acquire for the Company any property, rights or
privileges that the Company is authorized to acquire, at such price
and generally on such terms and conditions as they think fit;
(4) pay for any property, rights or privileges acquired by, or services
rendered to the Company either wholly or partially in cash or in
shares (fully paid-up or otherwise), bonds, debentures or other
securities of the Company;
(5) subject to the Act, secure the fulfilment of any contracts or
engagements entered into by the Company by mortgaging or charging all
or any of the property of the Company and its unpaid capital for the
time being, or in such other manner as they think fit;
(6) appoint, remove or suspend at their discretion such experts, managers,
Secretaries, treasurers, officers, clerks, agents and servants for
permanent, temporary or special services, as they from time to time
think fit, and determine their powers and duties and fix their
salaries or emoluments and require security in such instances and to
such amounts as they think fit;
(7) accept a surrender of shares from any shareholder insofar as the law
permits and on such terms and conditions as may be agreed;
(8) appoint any person or persons to accept and hold in trust for the
Company any property belonging to the Company, or in which it is
interested, execute and do all such deeds and things as may be
required in relation to such trust, and provide for the remuneration
of such trustee or trustees;
(9) institute, conduct, defend, compound or abandon any legal proceedings
by and against the Company, its directors or its officers or otherwise
concerning the affairs of the Company, and also compound and allow
time for payment or satisfaction of any debts due and of any claims or
demands by or against the Company;
(10) refer any claims or demands by or against the Company to arbitration
and observe and perform the awards;
(11) make and give receipts, releases and other discharges for amounts
payable to the Company and for claims and demands of the Company;
(12) determine who may exercise the borrowing powers of the Company and
sign on the Company's behalf bonds, debentures or other securities,
bills, notes, receipts, acceptances, assignments, transfers,
hypothecations, pledges, endorsements, cheques, drafis, releases,
contracts, agreements and all other instruments and documents;
(13) provide for the management of the affairs of the Company abroad in
such manner as they think fit, and in particular appoint any person to
be the attorney or agent of the Company with such powers (including
power to sub-delegate) and upon such terms as may be thought fit;
<PAGE>
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(14) invest and deal with any finds of the Company in such securities and
in such manner as they think fit; and vary or realize such
investments;
(15) subject to the Act, execute in the name and on behalf of the Company
in favour of any director or other person who may incur or be about to
incur any personal liability for the benefit of the Company such
mortgages of the Company's property, present and future, as they think
fit;
(16) give any officer or employee of the Company a commission on the
profits of any particular business or transaction or a share in the
general profits of the Company;
(17) set aside out of the profits of the Company before declaring any
dividend such amounts as they think proper as a reserve find to meet
contingencies or provide for dividends, depreciation, repairing,
improving and maintaining any of the property of the Company and such
other purposes as the directors may in their absolute discretion think
in the interests of the Company; and invest such amounts in such
investments as they think fit, and deal with and vary such
investments, and dispose of all or any part of them for the benefit of
the Company, and divide the reserve find into such special finds as
they think fit, with fill power to employ the assets constituting the
reserve find in the business of the Company without being bound to
keep them separate from the other assets;
(18) make, vary and repeal rules respecting the business of the Company,
its officers and employees, the shareholders of the Company or any
section or class of them;
(19) enter into all such negotiations and contracts, rescind and vary all
such contracts, and execute and do all such acts, deeds and things in
the name and on behalf of the Company as they consider expedient for
or in relation to any of the matters aforesaid or otherwise for the
purposes of the Company;
(20) provide for the management of the affairs of the Company in such
manner as they think fit.
SOLICITORS
124. The Company may employ or retain solicitors any of whom may, at the request
or on the instruction of the directors, the Chairman, the President or a
managing director, attend meetings of the directors or shareholders,
whether or not the solicitor is a shareholder or a director of the Company.
A solicitor who is also a director may nevertheless charge for services
rendered to the Company as a solicitor.
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THE SEAL
125. The directors shall arrange for the safe custody of the common seal of the
Company (the ("Seal"). The Seal may be affixed to any instrument in the
presence of and contemporaneously with the attesting signature of (i) any
director or officer acting within such person's authority or (ii) any
person under the authority of a resolution of the directors or a committee
thereof. For the purpose of certifying documents or proceedings the Seal
may be affixed by any director or the President, a vice-president, the
Secretary, an assistant secretary or any other officer of the Company
without the authorization of a resolution of the directors
126. The Company may have facsimiles of the Seal which may be used
interchangeably with the Seal
127 The Company may have for use at any place outside the Province of Nova
Scotia, as to all matters to which the corporate existence and capacity of
the Company extends, an official seal that is a facsimile of the Seal of
the Company with the addition on its face of the name of the place where it
is to be used; and the Company may by writing under its Seal authorize any
person to affix such official seal at such place to any document to which
the Company is a party.
DIVIDENDS
128. The directors may from time to time declare such dividend as they deem
proper upon shares of the Company according to the rights and restrictions
attached to any class or series of shares, and may determine the date upon
which such dividend will be payable and that it will be payable to the
persons registered as the holders of the shares on which it is declared at
the close of business upon a record date. No transfer of such shares
registered after the record date shall pass any right to the dividend so
declared.
129. Dividends may be paid as permitted by law and, without limitation, may be
paid out of the profits, retained earnings or contributed surplus of the
Company. No interest shall be payable on any dividend except insofar as the
rights attached to any class or series of shares provide otherwise.
130. The declaration of the directors as to the amount of the profits, retained
earnings or contributed surplus of the Company shall be conclusive.
131. The directors may from time to time pay to the shareholders such interim
dividends as in their judgment the position of the Company justifies
132. Subject to these Articles and the rights and restrictions attached to any
class or series of shares, dividends may be declared and paid to the
shareholders in proportion to the amount of capital paid-up on the shares
(not including any capital paid-up bearing interest) held by them
respectively.
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133. The directors may deduct from the dividends payable to any shareholder
amounts due and payable by the shareholder to the Company on account of
calls, installments or otherwise, and may apply the same in or towards
satisfaction of such amounts so due and payable.
134. The directors may retain any dividends on which the Company has a lien, and
may apply the same in or towards satisfaction of the debts, liabilities or
engagements in respect of which the lien exists.
135. The directors may retain the dividends payable upon shares to which a
person is entitled or entitled to transfer upon the death or bankruptcy of
a shareholder or in any way other than by allotment or transfer, until such
person has become registered as the holder of such shares or has duly
transferred such shares.
136. When the directors declare a dividend on a class or series of shares and
also make a call on such shares payable on or before the date on which the
dividend is payable, the directors may retain all or part of the dividend
and set off the amount retained against the call.
137. The directors may declare that a dividend be paid by the distribution of
cash, paid-up shares (at par or at a premium), debentures, bonds or other
securities of the Company or of any other company or any other specific
assets held or to be acquired by the Company or in any one or more of such
ways.
138. The directors may settle any difficulty that may arise in regard to the
distribution of a dividend as they think expedient, and in particular
without restricting the generality of the foregoing may issue fractional
certificates, may fix the value for distribution of any specific assets,
may determine that cash payments will be made to any shareholders upon the
footing of the value so fixed or that fractions may be disregarded in order
to adjust the rights of all parties, and may vest cash or specific assets
in trustees upon such trusts for the persons entitled to the dividend as
may seem expedient to the directors.
139. Any person registered as a joint holder of any share may give effectual
receipts for all dividends and payments on account of dividends in respect
of such share.
140. Unless otherwise determined by the directors, any dividend may be paid by a
cheque or warrant delivered to or sent through the post to the registered
address of the shareholder entitled, or, when there are joint holders, to
the registered address of that one whose name stands first on the register
for the shares jointly held. Every cheque or warrant so delivered or sent
shall be made payable to the order of the person to whom it is delivered or
sent. The mailing or other transmission to a shareholder at the
shareholders registered address (or, in the case of joint shareholders at
the address of the holder whose name stands first on the register) of a
cheque payable to the order of the person to whom it is addressed for the
amount of any dividend payable in cash after the deduction of any tax which
the Company has properly withheld, shall discharge the Company's liability
for the dividend unless the cheque is not paid on due presentation. If any
cheque for a dividend payable in cash is not received, the Company shall
issue to the shareholder a replacement cheque for the same amount on such
terms as to indemnity and evidence of non-receipt as the directors may
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impose. No shareholder may recover by action or other legal process against
the Company any dividend represented by a cheque that has not been duly
presented to a banker of the Company for payment or that otherwise remains
unclaimed for 6 years from the date on which it was payable.
ACCOUNTS
141. The directors shall cause proper books of account to be kept of the amounts
received and expended by the Company, the matters in respect of which such
receipts and expenditures take place, all sales and purchases of goods by
the Company, and the assets, credits and liabilities of the Company
142. The books of account shall be kept at the head office of the Company or at
such other place or places as the directors may direct.
143. The directors shall from time to time determine whether and to what extent
and at what times and places and under what conditions the accounts and
books of the Company or any of them shall be open to inspection of the
shareholders, and no shareholder shall have any right to inspect any
account or book or document of the Company except as conferred by statute
or authorized by the directors or a resolution of the shareholders.
144. At the ordinary general meeting in every year the directors shall lay
before the Company such financial statements and reports in connection
therewith as may be required by the Act or other applicable statute or
regulation thereunder and shall distribute copies thereof at such times and
to such persons as may be required by statute or regulation.
AUDITORS AND AUDIT
145. Except in respect of a financial year for which the Company is exempt from
audit requirements in the Act, the Company shall at each ordinary general
meeting appoint an auditor or auditors to hold office until the next
ordinary general meeting. If at any general meeting at which the
appointment of an auditor or auditors is to take place and no such
appointment takes place, or if no ordinary general meeting is held in any
year or period of years, the directors shall appoint an auditor or auditors
to hold office until the next ordinary general meeting.
146. The first auditors of the Company may be appointed by the directors at any
time before the first ordinary general meeting and the auditors so
appointed shall hold office until such meeting unless previously removed by
a resolution of the shareholders, in which event the shareholders may
appoint auditors.
147. The directors may fill any casual vacancy in the office of the auditor but
while any such vacancy continues the surviving or continuing auditor or
auditors, if any, may act.
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148. The Company may appoint as auditor any person, including a shareholder, not
disqualified by statute.
149. An auditor may be removed or replaced in the circumstances and in the
manner specified in the Act.
150. The remuneration of the auditors shall be fixed by the shareholders, or by
the directors pursuant to authorization given by the shareholders, except
that the remuneration of an auditor appointed to fill a casual vacancy may
be fixed by the directors.
151. The auditors shall conduct such audit as may be required by the Act and
their report, if any, shall be dealt with by the Company as required by the
Act.
NOTICES
152. A notice (including any communication or document) shall be sufficiently
given, delivered or served by the Company upon a shareholder, director,
officer or auditor by personal delivery at such person's registered address
(or, in the case of a director, officer or auditor, last known address) or
by prepaid mail, telegraph, telex, facsimile machine or other electronic
means of communication addressed to such person at such address.
153. Shareholders having no registered address shall not be entitled to receive
notice.
154. All notices with respect to registered shares to which persons are jointly
entitled may be sufficiently given to all joint holders thereof by notice
given to whichever of such persons is named first in the Register for such
shares.
155. Any notice sent by mail shall be deemed to be given, delivered or served on
the earlier of actual receipt and the third business day following that
upon which it is mailed, and in proving such service it shall be sufficient
to prove that the notice was properly addressed and mailed with the postage
prepaid thereon. Any notice given by electronic means of communication
shall be deemed to be given when entered into the appropriate transmitting
device for transmission. A certificate in writing signed on behalf of the
Company that the notice was so addressed and mailed or transmitted shall be
conclusive evidence thereof.
156. Every person who by operation of law, transfer or other means whatsoever
becomes entitled to any share shall be bound by every notice in respect of
such share that prior to such person's name and address being entered on
the Register was duly served in the manner hereinbefore provided upon the
person from whom such person derived title to such share.
157. Any notice delivered, sent or transmitted to the registered address of any
shareholder pursuant to these Articles, shall, notwithstanding that such
shareholder is then deceased and that the Company has notice thereof, be
deemed to have been served in respect of any registered shares, whether
held by such deceased shareholder solely or jointly with other persons,
until some other person is registered as the holder or joint holder
thereof, and such service shall for all purposes of these Articles be
deemed a sufficient service of such notice
<PAGE>
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on the heirs, executors or administrators of the deceased shareholder and
all joint holders of such shares.
158. Any notice may bear the name or signature, manual or reproduced, of the
person giving the notice written or printed.
159. When a given number of days notice or notice extending over any other
period is required to be given, the day of service and the day upon which
such notice expires shall not, unless it is otherwise provided, be counted
in such number of days or other period.
INDEMNITY
160. Every director or officer, former director or officer, or person who acts
or acted at the Company's request, as a director or officer of the Company,
a body corporate, partnership or other association of which the Company is
or was a shareholder, partner, member or creditor, and the heirs and legal
representatives of such person, in the absence of any dishonesty on the
part of such person, shall be indemnified by the Company against, and it
shall be the duty of the directors out of the funds of the Company to pay,
all costs, losses and expenses, including an amount paid to settle an
action or claim or satisfy a judgment, that such director, officer or
person may incur or become liable to pay in respect of any claim made
against such person or civil, criminal or administrative action or
proceeding to which such person is made a party by reason of being or
having been a director or officer of the Company or such body corporate,
partnership or other association, whether the Company is a claimant or
party to such action or proceeding or otherwise; and the amount for which
such indemnity is proved shall immediately attach as a lien on the property
of the Company and have priority as against the shareholders over all other
claims.
161. No director or officer, former director or officer, or person who acts or
acted at the Company's request, as a director or officer of the Company, a
body corporate, partnership or other association of which the Company is or
was a shareholder, partner, member or creditor, in the absence of any
dishonesty on such person's part, shall be liable for the acts, receipts,
neglects or defaults of any other director, officer or such person, or for
joining in any receipt or other act for conformity, or for any loss, damage
or expense happening to the Company through the insufficiency or deficiency
of title to any property acquired for or on behalf of the Company, or
through the insufficiency or deficiency of any security in or upon which
any of the funds of the Company are invested, or for any loss or damage
arising from the bankruptcy, insolvency or tortious acts of any person with
whom any funds, securities or effects are deposited, or for any loss
occasioned by error o judgment or oversight on the part of such person, or
for any other loss, damage or misfortune whatsoever which happens in the
execution of the duties of such person or in relation thereto.
<PAGE>
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REMINDERS
162. The directors shall comply with the following provisions of the Act or the
Corporations Registration Act (Nova Scotia) where indicated:
(1) Keep a current register of shareholders (Section 42).
(2) Keep a current register of directors, officers and managers, send to
the Registrar a copy thereof and notice of all changes therein
(Section 98).
(3) Keep a current register of holders of bonds, debentures and other
securities (Section 11l and Third Schedule).
(4) Call a general meeting every year within the proper time (Section 83).
Meetings must be held not later than 15 months after the preceding
general meeting.
(5) Send to the Registrar copies of all special resolutions (Section 88).
(6) When shares are issued for a consideration other than cash, file a
copy of the contract with the Registrar on or before the date on which
the shares are issued (Section 109).
(7) Send to the Registrar notice of the address of the Company's Office
and of all changes in such address (Section 79).
(8) Keep proper minutes of all shareholders' meetings and directors
meetings in the Company's minute book kept at the Company's Office
(Sections 89 and 90).
(9) Obtain a certificate under the Corporations Registration Act (Nova
Scotia) as soon as business is commenced.
(10) Send notice of recognized agent to the Registrar under the
Corporations Registration Act (Nova Scotia).
Name of Subscriber
Dated at Halifax, Nova Scotia the 2nd day of November, 1998.
Witness to above signature
_____________________
Halifax, Nova Scotia
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ICG HOLDINGS, INC.
Pursuant to the provisions of the Colorado Business Corporation Act, ICG
Holdings, Inc. (the "Corporation") adopts the following Second Amended and
Restated Articles of Incorporation. These articles correctly set forth the
provisions of the Articles of Incorporation, as amended, and supersede the
original Articles of Incorporation and all amendments thereto.
ARTICLE I
The name of the Corporation is ICG Holdings, Inc.
ARTICLE II
The period of its duration is perpetual.
ARTICLE III
3.1 Purposes. The nature, objects and purposes of the business to be
transacted shall be as follows:
(a) To own and operate. To own and operate domestic and international
telecommunications companies and telecommunications facilities, including,
but not limited to, earth satellite stations, channels of communications,
orbital satellite stations, satellite transponders, very small aperture
satellite terminals ("VSAT") and systems, microwave radio transmission
systems, fiber optic transmission systems, telecommunications cable,
telecommunications conduits, telephone systems, and telecommunications
systems of any kind.
(b) To acquire business. To acquire (whether for cash or in exchange
for its assets or securities, or otherwise), operate and deal in other
businesses of all types and interests therein.
(c) To engage in other lawful business. To engage in any other lawful
business or activity for which corporations may be incorporated under the
laws of Colorado.
ARTICLE IV
The aggregate number of shares of stock the Corporation is authorized to
issue is 40,000 shares of a class designated as common stock, no par value per
share, and
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1,000,000 shares of a class designated as preferred stock, no par value per
share, and the relative rights of the shares of each class are as follows:
4.1 Common Stock.
(a) The holders of common stock shall have and possess all rights as
shareholders of the Corporation except as such rights may be limited by the
preferences, privileges and voting powers, and the restrictions and
limitations of the preferred stock. All common stock, when duly issued,
shall be fully paid and nonassessable. The holders of common stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors. The holders of the common stock shall also be
entitled to receive their pro rata share of the net assets of the
Corporation upon dissolution.
(b) The shares of such class of common stock shall have unlimited
voting rights and shall constitute the sole voting group of the
Corporation, except to the extent that any additional voting group or
groups have been or may hereafter be established in accordance with the
Colorado Business Corporation Act and except to the extent of the voting
rights of the holders of preferred stock under Article IV.
(c) Each shareholder of record shall have one vote for each share of
common stock standing in his name on the books of the Corporation and
entitled to vote, except that in the election of directors each shareholder
shall have as many votes for each share held by him as there are directors
to be elected and for whose election the shareholder has a right to vote.
Cumulative voting shall not be permitted in the election of directors or
otherwise.
4.2 Preferred Stock, Generally.
The Corporation may divide and issue the preferred stock in series. The
preferred shares of each series when issued shall be designated to distinguish
them from the shares of all other series. The Board of Directors hereby is
expressly vested with authority to divide the class of preferred stock into one
or more series and to fix and determine by resolution the relative rights,
limitations and preferences of the shares of any such series so established to
the full extent permitted by these Second Amended and Restated Articles of
Incorporation and the laws of the State of Colorado in respect of the following:
(a) The number of shares to constitute such series, and the
distinctive designations thereof;
(b) The rate and preference of any dividends and the time of payment
of any dividends, whether dividends are cumulative or noncumulative and the
date from which any dividend shall accrue;
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(c) Whether shares may be redeemed and, if so, the redemption price
and the terms and conditions of redemption;
(d) The amount payable with respect to shares in the event of
involuntary liquidation;
(e) The amount payable with respect to shares in the event of
voluntary liquidation;
(f) Sinking fund or other provisions, if any, for the redemption or
purchase of shares;
(g) The terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion;
(h) Voting rights, if any; and
(i) Any other relative rights and preferences of shares of such
series, including without limitation any restriction on an increase in the
number of shares of any series theretofore authorized and any limitations
or restrictions of rights or powers to which shares of any future series
shall be subject.
4.2.1 Cumulative Exchangeable Redeemable Preferred Stock; Statement of
Designation of Preferences and Rights.
A series of preferred stock of the Corporation has been created with
the designation and amount thereof and the voting powers, preferences and
relative, optional and other special rights of the shares of such series, and
the qualifications, limitations, or restrictions thereof, as follows:
1. Certain Definitions: Set forth below are certain defined terms used in
this Section 4.2.1.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Corporation and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Corporation or any of its Restricted Subsidiaries) has a joint interest and the
net income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Corporation or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph 11(b)(i)(3) of this
Section 4.2.1 (and in such case, except to the extent includable pursuant to
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clause (i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated with
the Corporation or any of its Restricted Subsidiaries or all or substantially
all of the property and assets of such Person are acquired by the Corporation or
any of its Restricted Subsidiaries; (iii) the net income of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
paragraph 11(b)(i)(3) of this Section 4.2.1, any amount paid or accrued as
dividends on preferred stock of the Corporation or any Restricted Subsidiary
owned by Persons other than the Corporation and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise; provided that, with
respect to the Corporation and any of its Subsidiaries, the term "Affiliate"
shall be deemed to include Mr. William Becker, Mr. Lawrence Becker and any
person related by blood or marriage to either of them.
"Asset Acquisition" means (i) an investment by the Corporation or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Corporation or shall be merged into
or consolidated with the Corporation or any of its Restricted Subsidiaries;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of the Corporation and its Restricted
Subsidiaries on the date of such investment or (ii) an acquisition by the
Corporation or any of its Restricted Subsidiaries of the property and assets of
any Person other than the Corporation or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person;
provided that the property and assets acquired are related, ancillary or
complementary to the businesses of the Corporation and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by the Corporation or any of its Restricted
Subsidiaries to any Person other than the Corporation or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Corporation or any of its Restricted
Subsidiaries or (iii) any other property and assets of the Corporation or any of
its Restricted Subsidiaries outside the ordinary course of business of the
Corporation or such Restricted Subsidiary and, in each case, that is not
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<PAGE>
governed by the provisions of paragraph 11(g) of this Section 4.2.1; provided
that the meaning of "Asset Sale" shall not include (A) sales or other
dispositions of inventory, receivables and other current assets, and (B)
dispositions of assets of the Corporation or any of its Restricted Subsidiaries,
in substantially simultaneous exchanges for consideration consisting of any
combination of cash, Temporary Cash Investments and assets that are used or
useful in the telecommunications business of the Corporation or its Restricted
Subsidiaries, if such consideration has an aggregate fair market value
substantially equal to the fair market value of the assets so disposed of;
provided, however, that fair market value shall be determined in good faith by
the Board of Directors of the Corporation, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors delivered to
the Transfer Agent.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Business Day" means any day except a Saturday, Sunday, or other day on
which commercial banks in the City of New York, or in the city of the Transfer
Agent Office, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after April 29, 1996, including, without limitation, all common stock and
preferred stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under any such Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock having more than 40% of the voting power of the total Voting Stock
of Holdings on a fully diluted basis; (ii) individuals who on the Closing Date
constitute the Board of Directors of Holdings (together with any new directors
whose election by the Board of Directors or whose nomination for election by
Holdings' stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office; or (iii) all
of the common stock of the Corporation is not beneficially owned by Holdings;
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<PAGE>
provided, however, that a Change of Control shall be deemed not to occur solely
as a result of a Reorganization.
"Closing Date" means the date on which the Exchangeable Preferred is
originally issued.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (other than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains or
losses on sales of assets), (iv) depreciation expense, to the extent such amount
was deducted in calculating Adjusted Consolidated Net Income, (v) amortization
expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted
Consolidated Net Income (other than items that will require cash payments and
for which an accrual or reserve is, or is required by GAAP to be, made), less
all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Corporation and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding common stock of such Restricted Subsidiary
not owned on the last day of such period by the Corporation or any of its
Restricted Subsidiaries divided by (2) the total number of shares of outstanding
common stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by the Corporation or any of its Restricted Subsidiaries) and all but
the principal component of rentals in respect of Capitalized Lease Obligations
paid, accrued or scheduled to be paid or to be accrued by the Corporation and
its Restricted Subsidiaries during such period; excluding, however, without
duplication, (i) any amount of such interest of any Restricted Subsidiary if the
net income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees
and expenses (and any amortization thereof) payable in connection with the
offering of the 132% Notes and the warrants issued therewith, the Senior
Discount Notes and/or the Exchangeable Preferred, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
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<PAGE>
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Corporation and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Corporation or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Corporation or any of its Restricted Subsidiaries against fluctuations in
currency values to or under which the Corporation or any of its Restricted
Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party
or a beneficiary thereafter.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Event of Default" means a Voting Rights Triggering Event as defined in
paragraph 10(b) of this Section 4.2.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FOTI" means Fiber Optic Technologies Inc., a Colorado corporation.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of August 8, 1995, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained in this Section
4.2.1 shall be computed in conformity with GAAP applied on a consistent basis,
except that calculations made for purposes of determining compliance with the
terms of the covenants and with other provisions of this Section 4.2.1 shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the 132% Notes and the warrants issued
therewith, the Senior Discount Notes and/or the Exchangeable Preferred and (ii)
except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
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"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holders" means the registered holders of shares of Exchangeable Preferred.
"Holdings," as used in this Section 4.2.1, means IntelCom Group, Inc., a
Canadian federal corporation, or any successor thereto, and, if a Reorganization
is completed, shall be deemed to refer also to "Newco" as defined in the
definition of Reorganization.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Indebtedness by reason of the acquisition of more
than 50% of the Capital Stock of any Person; provided that neither the accrual
of interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except trade payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
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the occurrence of the contingency giving rise to the obligation, provided (i)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the original issue price of such Indebtedness and (ii) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Corporation and its
Restricted Subsidiaries on a consolidated basis as at the date of determination
(the "Determination Date") to (ii) the Consolidated EBITDA of the Corporation
for the then most recent four full fiscal quarters for which reports have been
filed pursuant to paragraph 11(i) of this Section 4.2.1 (such four full fiscal
quarter period being referred to herein as the "Four Quarter Period"); provided
that (x) pro forma effect shall be given to any Indebtedness Incurred from the
beginning of the Four Quarter Period through the Determination Date (including
any Indebtedness Incurred on the Determination Date), to the extent outstanding
on the Determination Date, (y) if during the period commencing on the first day
of such Four Quarter Period through the Determination Date (the "Reference
Period"), the Corporation or any of the Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if such
Asset Sale and related retirement of Indebtedness had occurred on the first day
of such Reference Period or (z) if during such Reference Period the Corporation
or any of the Restricted Subsidiaries shall have made any Asset Acquisition,
Consolidated EBITDA of the Corporation shall be calculated on a pro forma basis
as if such Asset Acquisition and any related financing had occurred on the first
day of such Reference Period. In calculating this ratio for purposes hereof, the
amount of outstanding Indebtedness shall be deemed to include the liquidation
preference of any preferred stock then outstanding.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect the Corporation or any of its Restricted Subsidiaries against
fluctuations in interest rates in respect of Indebtedness to or under which the
Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on
the Closing Date or becomes a party or a beneficiary thereafter; provided that
the notional principal amount thereof does not exceed the principal amount of
the Indebtedness of the Corporation and its Restricted Subsidiaries that bears
interest at floating rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Corporation or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
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debentures or other similar instruments issued by, such Person and shall include
the designation of a Restricted Subsidiary as an Unrestricted Subsidiary. For
purposes of the definition of "Unrestricted Subsidiary" and paragraph 11(b) of
this Section 4.2.1, (i) "Investment" shall include the fair market value of the
assets (net of liabilities) of any Restricted Subsidiary of the Corporation at
the time that such Restricted Subsidiary of the Corporation is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of the Corporation
and (ii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"MTN" means Maritime Telecommunications Network, Inc., a Colorado
corporation, and its successors.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Corporation or any Restricted Subsidiary of the
Corporation) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Corporation
and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Corporation or any Restricted Subsidiary as a reserve against
any liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Corporation or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
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placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase shares of Exchangeable
Preferred by the Corporation from the Holders commenced by mailing a notice to
the Transfer Agent and each Holder stating: (i) the covenant pursuant to which
the offer is being made and that all shares of Exchangeable Preferred validly
tendered will be accepted for payment on a pro rata basis; (ii) the purchase
price and the date of purchase (which shall be a Business Day no earlier than 30
days nor later than 60 days from the date such notice is mailed) (the "Payment
Date"); (iii) that any shares of Exchangeable Preferred not tendered will
continue to accrue dividends pursuant to its terms; (iv) that, unless the
Corporation defaults in the payment of the purchase price, any shares of
Exchangeable Preferred accepted for payment pursuant to the Offer to Purchase
shall cease to accrue dividends on and after the Payment Date; (v) that Holders
electing to have any shares of Exchangeable Preferred purchased pursuant to the
Offer to Purchase will be required to surrender the shares of Exchangeable
Preferred together with a form entitled "Option of the Holder to Elect Purchase"
(the form of which will be mailed with such notice) completed, to the paying
agent at the address specified in the notice prior to the close of business on
the Business Day immediately preceding the Payment Date; (vi) that Holders will
be entitled to withdraw their election if the paying agent receives, not later
than the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the liquidation preference of the shares of Exchangeable
Preferred delivered for purchase and a statement that such Holder is withdrawing
his election to have such shares of Exchangeable Preferred purchased; and (vii)
that Holders whose shares of Exchangeable Preferred are being purchased only in
part will be issued new shares of Exchangeable Preferred equal in liquidation
preference to the unpurchased portion of the shares of Exchangeable Preferred
surrendered; provided that each share of Exchangeable Preferred purchased and
each new share of Exchangeable Preferred issued shall be in a principal amount
of $1,000 or integral multiples thereof. On the Payment Date, the Corporation
shall (i) accept for payment on a pro rata basis shares of Exchangeable
Preferred or portions thereof tendered pursuant to an Offer to Purchase; (ii)
deposit with the paying agent money sufficient to pay the purchase price of all
shares of Exchangeable Preferred or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Transfer Agent all shares of
Exchangeable Preferred or portions thereof so accepted together with an
Officers' Certificate specifying the shares of Exchangeable Preferred or
portions thereof accepted for payment by the Corporation. The paying agent shall
promptly mail to the Holders of shares of Exchangeable Preferred so accepted,
payment in an amount equal to the purchase price, and the Transfer Agent shall
promptly authenticate and mail to such Holders new shares of Exchangeable
Preferred equal in liquidation preference to any unpurchased portion of the
shares of Exchangeable Preferred surrendered; provided that each share of
Exchangeable Preferred purchased and each new share of Exchangeable Preferred
issued shall be in a principal amount of $1,000 or integral multiples thereof.
The Corporation will publicly announce the results of an Offer to Purchase as
soon as practicable after the Payment Date. The Transfer Agent shall act as the
paying agent for an Offer to Purchase. The Corporation will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
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thereunder, to the extent such laws and regulations are applicable, in the event
that the Corporation is required to repurchase shares of Exchangeable Preferred
pursuant to an Offer to Purchase.
"Ohio LINX" means ICG Ohio LINX, Inc., an Ohio corporation.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Corporation or a Restricted Subsidiary;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of the Corporation and its Restricted
Subsidiaries on the date of such Investment; (ii) a Temporary Cash Investment;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) loans or advances to employees made in the ordinary course of
business in accordance with past practice of the Corporation or its Restricted
Subsidiaries and that do not in the aggregate exceed $2 million at any time
outstanding; (v) stock, obligations or securities received in satisfaction of
judgments; and (vi) Indebtedness of Holdings owed to the Corporation, in an
amount not to exceed the reasonable expenses of Holdings as a holding company
that are actually incurred, and paid, by Holdings; provided that such
Indebtedness of Holdings is evidenced by an unsubordinated promissory note that
provides that it will be paid prior to any mandatory redemption of the
Exchangeable Preferred if such payment would be necessary to effectuate such
redemption.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights of way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Corporation or any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or personal
property acquired after the Closing Date; provided that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with
paragraph 11(a) of this Section 4.2.1, (1) to finance the cost (including the
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cost of improvement or construction) of the item of property or assets subject
thereto and such Lien is created prior to, at the time of or within six months
after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Corporation and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Corporation or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation becomes,
or becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Corporation or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Corporation or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Corporation or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed to protect the
Corporation or any of its Restricted Subsidiaries from fluctuations in the price
of commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by the
Corporation or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Corporation and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales
of receivables.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Preferred stock" or "preferred stock" means, with respect to any Person,
any and all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after April 29, 1996,
including, without limitation, all series and classes of such preferred or
preference stock.
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"Public Equity Offering" means a bona fide underwritten primary public
offering of common stock of Holdings or the Corporation pursuant to an effective
registration statement under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
mandatory redemption date of the shares of Exchangeable Preferred, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time prior to the mandatory redemption date of the shares of Exchangeable
Preferred, or (iii) convertible into or exchangeable for Capital Stock referred
to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior
to the mandatory redemption date of the shares of Exchangeable Preferred;
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of a "change of
control" occurring prior to the mandatory redemption date of the shares of
Exchangeable Preferred shall not constitute Redeemable Stock if the "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the "Change
of Control" provisions contained in paragraph 7(b) of this Section 4.2.1 and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Corporation's
repurchase of Exchangeable Preferred as provided in paragraph 7(b) of this
Section 4.2.1.
"Reorganization" means the transaction or series of transactions in which
the Voting Stock of Holdings is changed into or exchanged for Voting Stock of a
corporation organized under the laws of any State in the United States
("Newco").
"Restricted Subsidiary" means any Subsidiary of the Corporation other than
an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Discount Notes," as used in this Section 4.2.1, means the Senior
Discount Notes Due 2006 of the Corporation, Guaranteed by Holdings on a senior
unsecured basis and issued on the Closing Date.
"Senior Discount Notes Indenture," as used in this Section 4.2.1, means the
Indenture dated as of the Closing Date among the Corporation, Holdings and the
Trustee pursuant to which the Senior Discount Notes are issued.
"StarCom" means StarCom International Optics Corporation, a British
Columbia corporation, and its Subsidiaries.
"Strategic Investor" means any Person engaged in the telecommunications
business which has a net worth or equity market capitalization of at least $1
billion.
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"Strategic Investor Subordinated Indebtedness" means all Indebtedness of
the Corporation owed to a Strategic Investor that is contractually subordinate
in right of payment to the shares of Exchangeable Preferred to at least the
following extent: no payment of principal (or premium, if any) or interest on or
otherwise payable in respect of such Indebtedness may be made (whether as a
result of a default or otherwise) prior to the payment in full of all of the
Corporation's obligations under the shares of Exchangeable Preferred; provided,
however, that prior to the payment of such obligations, interest on Strategic
Investor Subordinated Indebtedness may be payable solely in kind or in common
stock (other than Redeemable Stock) of Holdings or the Corporation.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 270 days of the date of acquisition thereof,
bankers' acceptances with maturities not exceeding 270 days, and overnight bank
deposits, in each case issued by or with a bank or trust company which is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $100
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) commercial paper, maturing not more than
180 days after the date of acquisition, issued by a corporation (other than an
Affiliate of Holdings) organized and in existence under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group, and (v)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.
"13 1/2% Notes" means the 13 1/2% Senior Discount Notes Due 2005 of the
Corporation Guaranteed by Holdings on a senior unsecured basis.
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"13 1/2% Notes Indenture" means the Indenture dated as of August 8, 1995
among the Corporation, Holdings and the Trustee pursuant to which the
Corporation issued the 13 1/2% Notes.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Corporation or any of its Restricted Subsidiaries or the
issuance of any Redeemable Stock of the Corporation, the date such Indebtedness
is to be Incurred or such issuance is to be made and, with respect to any
Restricted Payment, the date such Restricted Payment is to be made.
"Transfer Agent" means American Stock Transfer and Trust Company, 40 Wall
Street, 46th Floor, New York, New York 10005, or such other Person as may become
the transfer agent with respect to the Exchangeable Preferred.
"Transfer Agent Office" means the principal office of the Transfer Agent at
any particular time, which office is, at the date hereof, located at 40 Wall
Street, 46th Floor, New York, New York 10005.
"Trustee" means Norwest Bank Colorado, National Association, or such other
Person as may become the trustee under the Indenture, the Senior Discount Notes
Indenture, or the 132% Notes Indenture, as the context requires.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Corporation that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Corporation (including any newly acquired or newly formed Subsidiary of
the Corporation), to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Corporation or any Restricted Subsidiary; provided that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under paragraph 11(b) of this Section 4.2.1. The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the
Corporation; provided that immediately after giving effect to such designation
(x) the Corporation could Incur $1.00 of additional Indebtedness under paragraph
11(a)(i) of this Section 4.2.1 and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Transfer Agent by promptly filing with the Transfer Agent a
copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
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"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
"Zycom" means Zycom Corporation, an Alberta, Canada corporation.
2. Designation Amount. The distinctive serial designation of this series
shall be "Cumulative Exchangeable Redeemable Preferred Stock" (as used in this
Section 4.2.1, "Exchangeable Preferred"). The number of shares of Exchangeable
Preferred shall initially be 150,000, which number may from time to time be
increased (but not above the number that would cause the aggregate number of all
shares of preferred stock of all series to exceed 1,000,000 shares) or decreased
(but not below the number then outstanding) by the Board of Directors. Shares of
Exchangeable Preferred redeemed, purchased by the Corporation or exchanged for
Exchange Debentures (as defined in paragraph 8(a) of this Section 4.2.1) shall
be canceled and shall revert to authorized but unissued shares of preferred
stock undesignated as to series; provided, however, that no such issued and
reacquired shares of such series shall be reissued or sold as shares of
Exchangeable Preferred unless reissued as a stock dividend on outstanding shares
of Exchangeable Preferred.
3. Rank. The Exchangeable Preferred shall, with respect to dividend rights
and distribution rights on liquidation, winding-up and dissolution of the
Corporation, rank (i) senior to all classes of common stock of the Corporation
and to each other class of Capital Stock or series of preferred stock
established after April 25, 1996, by the Board of Directors the terms of which
do not expressly provide that it ranks senior to or on a parity with the
Exchangeable Preferred as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Corporation (collectively
referred to with the common stock of the Corporation as "Junior Securities");
(ii) on a parity with any class of Capital Stock or series of preferred stock
issued by the Corporation established after April 25, 1996, by the Board of
Directors, the terms of which expressly provide that such class or series will
rank on a parity with the Exchangeable Preferred as to dividend distributions
and distributions upon the liquidation, winding-up and dissolution of the
Corporation (collectively referred to as "Parity Securities"); and (iii) subject
to certain conditions described below, junior to each class of Capital Stock or
series of preferred stock issued by the Corporation established after April 25,
1996, by the Board of Directors, the terms of which expressly provide that such
class or series will rank senior to the Exchangeable Preferred as to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of the Corporation (collectively referred to as "Senior Securities"). The
Exchangeable Preferred will be subject to the issuance of series of Junior
Securities, Parity Securities and Senior Securities; provided that the
Corporation may not issue any new class of Senior Securities without the
approval of the Holders of at least a majority of the shares of Exchangeable
Preferred then outstanding, voting or consenting, as the case may be, separately
as one class, except that without such approval of Holders of the Exchangeable
Preferred, the Corporation may issue shares of Senior Securities (1) in exchange
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for, or the proceeds of which are used to redeem or repurchase, all, but not
less than all, shares of Exchangeable Preferred then outstanding, or (2) in
exchange for, or the proceeds of which are used to repay, any outstanding
Indebtedness of the Corporation.
4. Dividends.
(a) The Holders of shares of the Exchangeable Preferred shall be
entitled to receive, when, as and if declared by the Board of Directors of
the Corporation, out of funds legally available therefor, dividends at the
annual rate of 143% of the liquidation preference per share, subject to the
provisions of paragraph 4(e) below. Such dividends shall be cumulative,
whether or not earned or declared, on a daily basis from the date of
issuance of the Exchangeable Preferred, and shall be payable quarterly in
arrears on February 1, May 1, August 1, and November 1 of each year
commencing on August 1, 1996 (each of such dates being a "dividend payment
date"), with respect to the period commencing with the date of issuance of
the particular shares of Exchangeable Preferred or the immediately
preceding dividend payment date and ending on the day preceding such
respective dividend payment date (each of such periods being a "dividend
period"), to shareholders of record on the preceding January 15, April 15,
July 15, and October 15, respectively (each, a "regular record date"). Any
dividend payments made with respect to shares of Exchangeable Preferred on
or before May 1, 2001, may be made, in the sole discretion of the Board of
Directors, in cash or in such number of additional fully paid and
nonassessable shares of Exchangeable Preferred having an aggregate
liquidation preference equal to the amount of such dividends, and the
issuance of such additional shares of Exchangeable Preferred shall
constitute full payment of such dividend. All dividends paid with respect
to shares of Exchangeable Preferred pursuant to this paragraph 4(a) shall
be paid pro rata to the Holders entitled thereto. The Corporation may, at
the option of the Board of Directors, elect not to issue fractions of a
share of Exchangeable Preferred ("Fractional Shares") in payment of any
dividend in additional shares of Exchangeable Preferred. In such event, in
lieu of any Fractional Shares, each record Holder of Exchangeable Preferred
otherwise entitled to receive a Fractional Share shall receive a payment in
cash equal to such Holder's proportionate interest in the net proceeds from
the sale or sales in the open market by the Transfer Agent or other agent
selected by the Corporation, on behalf of all such Holders of the aggregate
of all Fractional Shares otherwise payable as a dividend. Such sale shall
be effected promptly after the record date fixed for determining the
Holders entitled to payment of the dividend. All shares of Exchangeable
Preferred issued as a dividend with respect to the Exchangeable Preferred
will thereupon be duly authorized, validly issued, fully paid and
nonassessable and free of all liens and charges. After May 1, 2001,
dividends on the Exchangeable Preferred shall be paid only in cash to the
Holders of record at the close of business on the regular record date with
respect to the applicable dividend payment date.
(b) Accumulated unpaid dividends for any past dividend periods may be
declared by the Board of Directors and paid on any date fixed by the Board
of Directors, whether or not a regular dividend payment date, to Holders of
record on the books of the Corporation on such record date as may be fixed
by the Board of Directors. Holders of Exchangeable Preferred will not be
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entitled to any dividends, whether payable in cash, property or stock, in
excess of full cumulative dividends. If any dividend (or portion thereof)
payable on any dividend payment date on or before May 1, 2001, is not
declared or paid in full in cash or in shares of Exchangeable Preferred as
described in paragraph 4(a) above on such dividend payment date, the amount
of the accrued and unpaid dividend will bear interest at the dividend rate
on the Exchangeable Preferred, compounding quarterly from such dividend
payment date until paid in full. If any dividend (or portion thereof)
payable on any dividend payment date after May 1, 2001, is not declared or
paid in full in cash on such dividend payment date, the amount of the
accrued and unpaid dividend will bear interest at the dividend rate on the
Exchangeable Preferred, compounding quarterly from such dividend payment
date until paid in full.
(c) So long as any shares of the Exchangeable Preferred are
outstanding, the Corporation shall not (i) declare, pay or set apart for
payment any dividend on any shares of Junior Securities or Parity
Securities or (ii) make any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the purchase, redemption,
retirement or other acquisition for value of any of, or redeem, purchase,
retire or otherwise acquire for value any of, the Junior Securities or
Parity Securities or any warrants, rights, calls or options exercisable for
or convertible into any of the Junior Securities or Parity Securities or
(iii) make any distribution in respect of the Junior Securities or Parity
Securities or any warrants, rights, calls or options exercisable for or
convertible into any of the Junior Securities or Parity Securities, in any
such case either directly or indirectly, and whether in cash, obligations
or shares of the Corporation or other property (other than distributions or
dividends of a particular class or series of Junior Securities to holders
of such Junior Securities or distributions or dividends of a particular
class or series of Parity Securities to holders of such Parity Securities),
and shall not permit any corporation or other entity directly or indirectly
controlled by the Corporation to purchase, redeem or otherwise acquire for
value any of the Junior Securities or Parity Securities or any warrants,
rights, calls or options exercisable for or convertible into any of the
Junior Securities or Parity Securities, unless, as to any of the actions
described in clauses (i), (ii) or (iii) above, prior to or concurrently
with such declaration, payment, setting apart for payment, purchase,
redemption, other acquisition for value or distribution, as the case may
be, all accrued and unpaid dividends, if any, on shares of the Exchangeable
Preferred not paid on the dates provided for in paragraphs 4(a) or 4(b)
hereof (including accrued dividends, if any, not paid by reason of the
terms and conditions of paragraph 4(d) hereof) shall have been paid or
shall have been declared and, if payable in cash, a sum in cash set apart
for such payment. If full cumulative dividends on the Exchangeable
Preferred are not so paid, the Exchangeable Preferred will share dividends
pro rata with the Parity Securities. If full cumulative dividends on the
Exchangeable Preferred have not been so paid, the Exchangeable Preferred
may not be optionally redeemed in part as provided in paragraph 6(d) of
this Section 4.2.1.
(d) Notwithstanding anything contained herein to the contrary, no cash
dividends on shares of Exchangeable Preferred, or any other shares of
Junior Securities or Parity Securities, or other series of the
Corporation's preferred stock, shall be declared by the Board of Directors
or paid or set apart for payment by the Corporation at such time as the
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terms and provisions of any contract or other agreement of the Corporation
or any of its Restricted Subsidiaries entered into or assumed prior to, on,
or after the Closing Date specifically prohibits such declaration, payment
or setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder; provided, however, that nothing contained in this paragraph
4(d) shall be construed or deemed to require the Board of Directors to
declare, or the Corporation to pay or set apart for payment, any cash
dividends on shares of the Exchangeable Preferred, whether permitted by any
of such agreements or not.
(e) If, on or prior to November 1, 1996, the Corporation does not, as
more fully provided in the Registration Rights Agreement with respect to
the Exchangeable Preferred dated the Closing Date, either (i) consummate an
offer by the Corporation to such Holders to exchange the Exchangeable
Preferred for an issue of preferred stock of the Corporation with terms
identical to the Exchangeable Preferred pursuant to an effective
registration statement under the Securities Act with respect to such
exchange offer, or (ii) file and cause to become effective under the
Securities Act a shelf registration statement with respect to resales of
the Exchangeable Preferred, then dividends, in addition to the dividends
described in paragraph 4(a) of this Section 4.2.1, will accrue at the
annual rate of 0.5% of the liquidation preference per share on the
Exchangeable Preferred from November 1, 1996, payable in additional shares
of Exchangeable Preferred quarterly in arrears on February 1, May 1, August
1, and November 1 of each year commencing on February 1, 1997.
5. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, then, before
any distribution or payment shall be made to the holders of any Junior
Securities, including common stock of the Corporation, the Holders of
Exchangeable Preferred then outstanding shall be entitled to be paid, out
of the assets of the Corporation available for distribution to its
shareholders, an amount in cash equal to $1,000 for each share outstanding
(which amount is hereinafter referred to as the "liquidation preference"),
plus an amount in cash equal to all accrued and unpaid dividends and
interest thereon to the date fixed for liquidation, dissolution or
winding-up (including an amount equal to a prorated dividend for the period
from the dividend payment date immediately preceding the date fixed for
liquidation, dissolution or winding-up to the date fixed for liquidation,
dissolution or winding-up). Except as provided in the preceding sentence,
Holders of Exchangeable Preferred shall not be entitled to any distribution
in the event of liquidation, dissolution or winding-up of the affairs of
the Corporation. If the assets of the Corporation are not sufficient to pay
in full the liquidation payments payable to the holders of outstanding
shares of the Exchangeable Preferred and all other Parity Securities, then
the holders of all such shares shall share ratably in any distribution of
assets of the Corporation with respect to the Exchangeable Preferred and
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Parity Securities in accordance with the amount that would be payable on
such distribution if the amounts to which the holders of outstanding shares
of Exchangeable Preferred and all other Parity Securities are entitled were
paid in full. After payment of the full amount of the liquidation
preference and accrued and unpaid dividends or interest to which each
Holder is entitled, such Holders of shares of Exchangeable Preferred will
not be entitled to any further participation in any distribution of the
assets of the Corporation.
(b) For purposes of this paragraph 5, a merger, consolidation or sale
of substantially all of the Corporation's assets that complies with the
provisions of paragraph 11(g) of this Section 4.2.1 shall not be deemed to
be a voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation.
6. Optional Redemption.
(a) Subject to subparagraph (d) of this paragraph 6, and subject to
the legal availability of funds therefor and to any contractual and other
restrictions with respect thereto, at any time on or after May 1, 2001, the
Corporation, at the option of the Board of Directors, may redeem, in whole
or in part, the shares of Exchangeable Preferred at the time outstanding,
at any time or from time to time, upon notice given as provided in
paragraph 9 of this Section 4.2.1, at the redemption prices (expressed as a
percentage of the liquidation preference thereof) set forth below, plus an
amount in cash equal to all accumulated and unpaid dividends (including an
amount in cash equal to a prorated dividend for the period from the
dividend payment date immediately prior to the redemption date to the
redemption date, subject to the right of holders of preferred stock on a
record date to receive dividends on a dividend payment date) if redeemed
during the 12-month period beginning May 1 of each of the years set forth
below:
Year Percentage
2001 ................................... 107.125%
2002 ................................... 104.750%
2003 ................................... 102.375%
2004 and thereafter......................... 100.000%
(b)......In addition, but subject to subparagraph (d) of this
paragraph 6, on or prior to May 1, 1999, the Corporation may, at the option
of the Board of Directors from time to time, subject to the legal
availability of funds therefor and to any contractual and other
restrictions with respect thereto, redeem shares of Exchangeable Preferred
having an aggregate liquidation preference of up to 35% of the aggregate
liquidation preference of all shares of Exchangeable Preferred issued on
the Closing Date, at a redemption price equal to 1143% of the liquidation
preference thereof (subject to the right of Holders of Exchangeable
Preferred on relevant record dates to receive dividends due on relevant
dividend payment dates), plus an amount in cash equal to a prorated
dividend for the period from the dividend payment date immediately prior to
the redemption date to the redemption date, with proceeds of one or more
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Public Equity Offerings of common stock of (A) the Corporation or (B)
Holdings, provided that (i) with respect to a Public Equity Offering
referred to in clause (B) above, cash proceeds of such Public Equity
Offering in an amount sufficient to effect the redemption of Exchangeable
Preferred to be so redeemed are contributed by Holdings to the Corporation
prior to such redemption and used by the Corporation to effect such
redemption and (ii) such redemption occurs within 180 days after
consummation of such Public Equity Offering.
(c) In the event of partial redemptions of Exchangeable Preferred, the
shares to be redeemed will be determined pro rata, except that the
Corporation may redeem such shares held by any Holder of fewer than 100
shares without regard to such pro rata redemption requirement.
(d) Notwithstanding the foregoing provisions of paragraph 6(a) or (b)
of this Section 4.2.1, unless the full cumulative dividends for all past
dividend periods on all outstanding shares of Exchangeable Preferred shall
have been paid or contemporaneously are declared and paid or set apart for
payment (whether in cash or additional shares of Exchangeable Preferred, as
permitted under paragraph 4(a) of this Section 4.2.1), none of the shares
of Exchangeable Preferred shall be redeemed pursuant to paragraph 6(a) or
(b) of this Section 4.2.1 unless all outstanding shares of Exchangeable
Preferred are simultaneously redeemed and all such cumulative dividends are
paid in cash contemporaneously with such redemption.
7. Mandatory Redemption.
(a) The Exchangeable Preferred will be subject to mandatory redemption
(subject to the legal availability of funds therefor but without regard to
any contractual or other restriction with respect thereto) in whole on May
1, 2007, at a price, payable in cash, equal to the liquidation preference
thereof, plus all accumulated and unpaid dividends to the date of
redemption.
(b)Upon the occurrence of a Change of Control, the Corporation will
(subject to any contractual and other restrictions with respect thereto and
to the legal availability of funds therefor) offer (the "Change of Control
Offer") to each Holder of Exchangeable Preferred to repurchase all or any
part of such Holder's Exchangeable Preferred at a cash purchase price equal
to 101% of the liquidation preference thereof, plus an amount in cash equal
to all accumulated and unpaid dividends per share to the date of purchase
(including an amount in cash equal to a prorated dividend from the dividend
payment date immediately preceding the date of purchase to the date of
purchase). The Change of Control Offer will be made within 30 days
following a Change of Control, will remain open for at least 30 and not
more than 40 days, and will be made in compliance with the requirements of
Rule 14e-1 under the Exchange Act and any other applicable securities laws
and regulations. Notwithstanding the foregoing, the Corporation will not
make a Change of Control Offer if any of the Senior Discount Notes or 13
1/2% Notes are outstanding upon the occurrence of a Change of Control
unless all of the Senior Discount Notes and 13 1/2% Notes tendered pursuant
to the "change of control offers" with respect thereto are repurchased as a
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result of such Change of Control, in which case the date on which all
Senior Discount Notes and 13 1/2% Notes (and any other Indebtedness or
Senior Securities of the Corporation having provisions similar to Section
4.04(x) of the Senior Discount Notes Indenture) are so repurchased will be
deemed to be the date on which such Change of Control shall have occurred.
(c)If the Corporation shall fail to discharge its obligation to redeem
all outstanding shares of Exchangeable Preferred pursuant to paragraph 7(a)
or (b) of this Section 4.2.1 (the "Mandatory Redemption Obligation"), the
Corporation shall discharge the Mandatory Redemption Obligation as soon as
the Corporation is able to do so. If and so long as any Mandatory
Redemption Obligation with respect to the Exchangeable Preferred shall not
be fully discharged, the Corporation shall not declare or pay any dividend
or make any distribution on, or, directly or indirectly, purchase, redeem
or satisfy any mandatory redemption, sinking fund or other similar
obligations in respect of, Junior Securities or Parity Securities (other
than as a result of a reclassification of Junior Securities or Parity
Securities, or the exchange or conversion of one class or series of Junior
Securities for or into another class or series of Junior Securities, or the
exchange or conversion of one class or series of Parity Securities for or
into another class or series of Parity Securities, or other than through
the use of the proceeds of a substantially contemporaneous sale of other
Junior Securities or Parity Securities and in any case not involving the
payment of cash to holders of such securities) or any warrants, rights or
options exercisable for or convertible into any of the Junior Securities or
Parity Securities.
8. Exchange.
(a) The Corporation may, at the sole option of the Board of Directors
(subject to the legal availability of funds therefor), exchange all, but
not less than all, of the shares of Exchangeable Preferred then
outstanding, including any shares of Exchangeable Preferred issued as
payment for dividends, for a new series of 14 1/4% Exchange Debentures due
May 1, 2007, of the Corporation (the "Exchange Debentures") to be issued
pursuant to the indenture (the "Indenture") qualified under the Trust
Indenture Act of 1939, as amended, substantially in the form agreed to on
the Closing Date, a copy of which is on file with and can be obtained from
the Secretary of the Corporation on request, at any time following the date
on which such exchange is permitted by the terms of the Senior Discount
Notes Indenture, the 13 1/2% Notes Indenture, and the terms of all other
then-existing Indebtedness of the Corporation and subject to the conditions
contained in paragraph 8(b) below. The Exchange Debentures will be issued
in registered form, without coupons, be duly executed, authenticated as of
the date on which the exchange is effective and dated the date of exchange.
In the event of an exchange, Holders of Exchangeable Preferred shall be
entitled to receive on the date of exchange Exchange Debentures having an
aggregate principal amount equal to (i) the total of the liquidation
preference for each share of Exchangeable Preferred exchanged, plus (ii) an
amount equal to all accrued but unpaid dividends payable on such share
(including a prorated dividend for the period from the immediately
preceding dividend payment date to the date of exchange). In the event such
exchange would result in the issuance of Exchange Debentures in a principal
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amount which is less than $1,000 or which is not an integral multiple of
$1,000 (such principal amount less than $1,000 or the difference between
such principal amount and the highest integral of $1,000 which is less than
such principal amount, as the case may be, is hereinafter referred to as
the "Fractional Principal Amount"), the Corporation may, subject to any
restrictions in the Senior Discount Notes Indenture, the 132% Notes
Indenture, and the terms of all other then-existing Indebtedness of the
Corporation, at the option of the Board of Directors, pay cash to each
Holder of Exchangeable Preferred in lieu of Fractional Principal Amounts of
Exchange Debentures otherwise issuable upon exchange of the Exchangeable
Preferred. The Person entitled to receive the Exchange Debentures issuable
upon exchange shall be treated for all purposes as the registered holder of
such Exchange Debentures as of the date of exchange. In accordance with
paragraph 9 of this Section 4.2.1, the Corporation will mail to each Holder
of Exchangeable Preferred written notice of its intention to exchange no
less than 15 nor more than 60 days prior to the date of exchange.
(b)As a condition of the right of the Corporation to issue Exchange
Debentures in exchange for the Exchangeable Preferred under paragraph 8(a)
of this Section 4.2.1 on the date of exchange, (A) there shall be legally
available funds sufficient therefor (including, without limitation, legally
available funds sufficient therefor under Section 7-106-401 (or any
successor provision) of the Colorado Business Corporation Act); (B) a
registration statement relating to the Exchange Debentures shall have been
declared effective under the Securities Act prior to such exchange and
shall continue to be effective on the date of exchange, or the Corporation
shall have obtained a written opinion of its counsel that an exemption from
the registration requirements of the Securities Act is available for such
exchange and that upon receipt of such Exchange Debentures pursuant to such
an exchange made in accordance with such exemption, each holder of an
Exchange Debenture that is not an Affiliate of the Corporation will not be
subject to any restrictions imposed by the Securities Act upon the resale
of such Exchange Debenture, and such exemption is relied upon by the
Corporation for such exchange; (C) the Indenture and the Trustee thereunder
shall have been qualified under the Trust Indenture Act of 1939, as
amended; (D) immediately after giving effect to such exchange, no Default
or Event of Default would exist; and (E) the Corporation shall have
delivered to the Trustee under the Indenture a written opinion of counsel,
dated the date of exchange, regarding the satisfaction of the conditions
set forth in clauses (A), (B) and (C). In the event that (i) the issuance
of the Exchange Debentures is not permitted on the exchange date or (ii)
any of the conditions set forth in clauses (A) through (E) of the preceding
sentence are not satisfied on the exchange date, the Corporation shall use
its best efforts to satisfy such conditions and effect such exchange as
soon as practicable. Prior to initiating the exchange referred to in
paragraph (a) above, the Corporation shall certify, to the satisfaction of
the trustees under the 132% Notes Indenture and the Senior Discount Notes
Indenture, that such exchange is permitted under such respective
Indentures. The Corporation shall also provide such trustees with an
Officer's Certificate setting forth with specificity the basis for the
Corporation's conclusion that such exchange is so permitted.
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9. Procedures for Redemption or Exchange.
(a) In the event that fewer than all the outstanding shares of
Exchangeable Preferred are to be redeemed, the number of shares to be
redeemed shall be determined pro rata, except that in any redemption of
fewer than all the outstanding shares of Exchangeable Preferred, the
Corporation may redeem all shares held by any Holder of a number of shares
of Exchangeable Preferred not to exceed 100 as may be specified by the
Corporation. In the event of partial redemptions of Exchangeable Preferred,
new shares of Exchangeable Preferred having an aggregate liquidation
preference equal to the unredeemed portion will be issued in the name of
the Holder thereof upon cancellation of the original share certificate of
Exchangeable Preferred without cost to such Holder. On and after a
redemption date, unless the Corporation defaults in the payment of the
redemption price, dividends will cease to accrue on shares of Exchangeable
Preferred called for redemption and all rights of Holders of such shares
will terminate except for the right to receive the redemption price. On the
date fixed for exchange, the rights of Holders of the shares of
Exchangeable Preferred exchanged shall cease, except the right to receive
Exchange Debentures in exchange for their Exchangeable Preferred and cash
or additional Exchange Debentures in payment of accrued but unpaid
dividends on such shares to the date of exchange.
(b) In the event that the Corporation shall redeem or exchange shares
of Exchangeable Preferred, notice of every redemption or exchange of shares
of Exchangeable Preferred shall be mailed by first class mail, postage
prepaid, and mailed, in the case of exchange, not less than 15 nor more
than 60 days prior to the exchange date, and, in the case of redemption,
not less than 30 days nor more than 60 days prior to the redemption date,
addressed to the Holders of record of the shares to be redeemed or
exchanged at their respective last addresses as they shall appear on the
books of the Corporation; provided, however, that failure to give such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the proceeding for the redemption or exchange of any shares so
to be redeemed or exchanged except as to the Holder to whom the Corporation
has failed to give such notice or to whom notice was defective. Each such
notice shall state: (i) the redemption or exchange date; (ii) the number of
shares of Exchangeable Preferred to be redeemed or exchanged and, if less
than all the shares held by such Holder are to be redeemed, the number of
such shares or portion of the liquidation preference to be redeemed; (iii)
the redemption price or exchange rate; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price or exchanged for the Exchange Debentures; and (v) that
dividends on the shares to be redeemed or exchanged will cease to accrue on
such redemption date or exchange date.
(c) Notice having been mailed as aforesaid and provided that, on or
before the redemption date or exchange date, as the case may be, specified
in such notice, all duly authenticated and valid Exchange Debentures
necessary for any such exchange shall have been provided by the Corporation
and all funds necessary for such redemption or exchange shall have been set
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aside by the Corporation, separate and apart from its other funds, in trust
for the pro rata benefit of the Holders of the shares so called for
redemption or exchange, so as to be and to continue to be available
therefor, then, from and after the redemption date or exchange date, as the
case may be, dividends on the shares of Exchangeable Preferred so called
for redemption or exchange, as the case may be, shall cease to accrue, and
said shares shall no longer be deemed to be outstanding and shall not have
the status of shares of Exchangeable Preferred, and all rights of the
Holders thereof as shareholders of the Corporation (except the right to
receive from the Corporation the redemption price or the Exchange
Debentures upon exchange and any accrued and unpaid dividends or the right
to receive cash payments in lieu of fractional securities from the exchange
agent or other agent selected by the Corporation) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed or exchanged (properly endorsed or assigned for transfer, if
the Board of Directors of the Corporation shall so require and the notice
shall so state), such shares shall be redeemed or exchanged by the
Corporation at the redemption price or exchange rate aforesaid.
(d) If such notice of redemption shall have been duly given and if,
prior to the redemption date, the Corporation shall have irrevocably
deposited the funds by the Corporation with such bank or trust company in
trust for the pro rata benefit of the holders of the shares called for
redemption, then, notwithstanding that any certificate for shares so called
for redemption shall not have been surrendered for cancellation, from and
after the time of such deposit, Holders of the shares of Exchangeable
Preferred called for redemption shall cease to be shareholders with respect
to such shares and thereafter such shares shall no longer be transferable
on the books of the Corporation and such holders shall have no interest in
or claim against the Corporation with respect to such shares (including
dividends thereon accrued after such redemption date) except the right to
receive payment of the redemption price (including all dividends accrued
and unpaid to the date fixed for redemption) upon surrender of their
certificates. Any funds deposited and unclaimed at the end of two years
from the date fixed for redemption shall be repaid to the Corporation upon
its request, after which repayment the Holders of shares called for
redemption shall look only to the Corporation for payment of the redemption
price. The aforesaid bank or trust company shall be organized and in good
standing under the laws of the United States of America or of the State of
Colorado shall have capital, surplus and undivided profits aggregating at
least $100,000,000 according to its last published statement of condition,
and shall be identified in the notice of redemption. Any interest accrued
on such funds shall be paid to the Corporation from time to time.
10. Voting Rights.
(a) Except as otherwise provided in this paragraph 10 or as otherwise
from time to time provided by law, the Holders of shares of Exchangeable
Preferred shall have no voting rights.
(b) (i) If and whenever (A) (1) dividends on the Exchangeable
Preferred are in arrears and remain unpaid (or if after May 1, 2001, such
dividends have not been paid in cash) with respect to four quarterly
periods (whether or not consecutive), (2) the Corporation fails to
discharge any redemption obligation with respect to the Exchangeable
Preferred, (3) a breach or violation by the Corporation of the provisions
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of paragraph 8 of this Section 4.2.1 occurs, or the Corporation fails to
exchange Debentures for the Exchangeable Preferred tendered for exchange on
the exchange date, whether or not the Corporation satisfies the conditions
to permit such exchange, (4) the Corporation fails to make a Change of
Control Offer or cash payment with respect thereto if required by the
provisions of paragraph 7(b) of this Section 4.2.1, (5) a breach or
violation of any provision of paragraph 11 of this Section 4.2.1 occurs and
is not remedied within 30 days after notice thereof to the Corporation by
Holders of 25% or more of the liquidation preference of the Exchangeable
Preferred then outstanding, or (6) a default occurs in the obligation to
pay principal of, interest on or any other payment obligation when due (a
"Payment Default") at final maturity, on one or more classes of
Indebtedness of the Corporation or any Subsidiary of the Corporation,
whether such Indebtedness exists on the Closing Date or is Incurred
thereafter, having individually or in the aggregate an outstanding
principal amount of $10 million or more, or any other Payment Default
occurs on one or more such classes of Indebtedness and such class or
classes of Indebtedness are declared due and payable prior to their
respective maturities, and (B) in the case of clauses (A)(5) and (6) above,
such event continues for a period of 180 days or more (each such event
referred to as a "Voting Rights Triggering Event"), then the number of
directors then constituting the Board of Directors of the Corporation shall
be increased by two directors and the Holders of the majority of the then
outstanding shares of Exchangeable Preferred, voting separately as a class,
shall be entitled to elect the two additional directors at any annual
meeting of shareholders or special meeting held in place thereof, or at a
special meeting of the Holders of such shares of Exchangeable Preferred
called as hereinafter provided. For the purpose of determining the number
of quarterly periods for which accrued dividends have not been paid, any
accrued and unpaid dividend that is subsequently paid shall not be treated
as unpaid. Within 15 days of the time the Corporation becomes aware of the
occurrence of any default referred to in clause (A)(6) above, the
Corporation shall give notice thereof to Holders of the Exchangeable
Preferred at their addresses as they appear on the records of the Transfer
Agent.
(ii) Whenever a Voting Rights Triggering Event shall have
occurred, voting rights of the Holders of shares of the Exchangeable
Preferred may be exercised initially either at a special meeting of
the Holders of Exchangeable Preferred, called as hereinafter provided,
or at any annual meeting of shareholders held for the purpose of
electing directors, and thereafter at each such annual meeting or by
the written consent of the Holders of Exchangeable Preferred pursuant
to Section 7-107-104 of the Colorado Business Corporation Act. The
term of office of any such elected directors shall expire at the next
annual meeting of shareholders held for the purpose of electing
directors, subject to a new election of two directors by the Holders
of shares of Exchangeable Preferred at each successive annual meeting,
but such voting right and the term of office of any such elected
directors shall expire at such time as (A) all dividends accumulated
on Exchangeable Preferred shall have been paid in full (and in the
case of dividends payable with respect to any period after May 1,
2001, shall have been paid in full in cash) and (B) each failure,
breach or default referred to in paragraph 10(b)(i)(A)(2), (3), (4),
(5), and (6) above is remedied.
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(iii) At any time after a Voting Rights Triggering Event shall
have occurred and such voting rights shall not already have been
initially exercised, a proper officer of the Corporation may, and upon
the written request of any Holder of shares of Exchangeable Preferred
(addressed to the Secretary at the principal office of the
Corporation) shall, call a special meeting of the Holders of shares of
Exchangeable Preferred for the election of the two directors to be
elected by them as herein provided, such call to be made by notice
similar to that provided in the Bylaws for a special meeting of the
shareholders or as required by law.
(iv) Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of shareholders at the
place for holding annual meetings of shareholders of the Corporation
or, if none, at a place designated by the Secretary of the
Corporation. If such meeting shall not be called by a proper officer
of the Corporation within 30 days after the personal service of such
written request upon the Secretary of the Corporation, or within 30
days after mailing the same within the United States, by registered
mail, addressed to the Secretary of the Corporation at its principal
office (such mailing to be evidenced by the registry receipt issued by
the postal authorities), then the Holders of record of 10% of the
shares of Exchangeable Preferred then outstanding may designate in
writing a Holder of Exchangeable Preferred to call such meeting at the
expense of the Corporation, and such meeting may be called by such
person so designated upon the notice required for annual meetings of
shareholders and shall be held at the same place as is elsewhere
provided in this paragraph (10)(b)(iv) or at such other place as is
selected by such person so designated. Any Holder of Exchangeable
Preferred that would be entitled to vote at any such meeting shall
have access to the stock books of the Corporation for the purpose of
causing a meeting of shareholders to be called pursuant to the
provisions of this paragraph. Notwithstanding the provisions of this
paragraph, however, no such special meeting shall be called during a
period within 90 days immediately preceding the date fixed for the
next annual meeting of shareholders.
(v) At any meeting held for the purpose of electing directors at
which the Holders of Exchangeable Preferred shall have the right to
elect directors as provided herein, the presence in person or by proxy
of the Holders of the lesser of (A) a majority of the then outstanding
shares of Exchangeable Preferred or (B) a percentage of the then
outstanding shares of Exchangeable Preferred, which percentage is
equal to the percentage of then outstanding shares of common stock
then required to constitute a quorum for the election of directors by
holders of common stock, shall be required and be sufficient to
constitute a quorum of such class for the election of directors by
such class. At any such meeting or adjournment thereof (x) the absence
of a quorum of the Holders of Exchangeable Preferred shall not prevent
the election of directors other than those to be elected by the
Holders of stock of such class and the absence of a quorum or quorums
of the holders of Capital Stock entitled to elect such other directors
shall not prevent the election of directors to be elected by the
Holders of Exchangeable Preferred and (y) in the absence of a quorum
of the holders of any class of stock entitled to vote for the election
of directors, a majority of the holders present in person or by proxy
of such class shall have the power to adjourn the meeting for the
election of directors which the holders of such class are entitled to
elect, from time to time, without notice (except as required by law)
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other than announcement at the meeting, until a quorum shall be
present.
(vi) The term of office of all directors elected by the Holders
of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this
Section 4.2.1 in office at any time when the aforesaid voting rights
are vested in the Holders of Exchangeable Preferred shall terminate
upon the election of their successors at any meeting of shareholders
for the purpose of electing directors. Upon any termination of the
aforesaid voting rights in accordance with paragraph (10)(b)(ii) of
this Section 4.2.1, the term of office of all directors elected by the
Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of
this Section 4.2.1 then in office thereupon shall terminate and upon
such termination the number of directors constituting the Board of
Directors shall, without further action, be reduced by two, subject
always to the increase of the number of directors pursuant to
paragraph (10)(b)(i) of this Section 4.2.1 in case of the future right
of the Holders of Exchangeable Preferred to elect directors as
provided herein.
(vii) In case of any vacancy occurring among the directors so
elected, the remaining director who shall have been so elected may
appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant unless and until such vacancy
shall be filled by vote of the Holders entitled to elect the directors
in accordance with paragraph 10(b) of this Section 4.2.1. If all
directors so elected by the Holders of Exchangeable Preferred shall
cease to serve as directors before their terms shall expire, the
Holders of Exchangeable Preferred then outstanding may, at a special
meeting of the Holders called as provided above, elect successors to
hold office for the unexpired terms of the directors whose places
shall be vacant.
(c) In addition to any vote or consent of shareholders required by
law, the consent of the Holders of at least a majority of the shares of
Exchangeable Preferred at the time outstanding, voting or consenting, as
the case may be, separately as one class given in person or by proxy,
either in writing without a meeting or by vote at any meeting called for
the purpose, shall be necessary for effecting or validating:
(i) Except as provided in paragraph 13 of this Section 4.2.1, any
amendment, alteration or repeal of any of the provisions of the Second
Amended and Restated Articles of Incorporation, or of the Bylaws of
the Corporation, which affects adversely the voting rights, rights,
privileges, or preferences of the Holders of shares of Exchangeable
Preferred or authorizes the issuance of any additional shares of
Exchangeable Preferred (other than to pay dividends in kind on
Exchangeable Preferred); provided, however, that the amendment of the
provisions of the Second Amended and Restated Articles of
Incorporation so as to authorize or create, or to increase the
authorized amount of, any of the Corporation's Junior Securities or to
authorize the issuance of or to authorize or create any Parity
Securities (up to the amount of authorized preferred stock) shall not
be deemed to affect adversely the voting rights, rights, privileges,
or preferences of the Holders of shares of Exchangeable Preferred;
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(ii) Any amendment, alteration or repeal of any of the provisions
of the Indenture; provided, however, that no such consent of the
Holders of Exchangeable Preferred shall be required for such
amendments as would be permitted under the terms of the Indenture
without the consent of any of the holders of the Exchange Debentures;
or
(iii) The authorization or creation of, or the increase in the
authorized amount of, any Senior Securities or shares of any class of
any security convertible into shares of any Senior Securities;
provided, however, that on or after May 1, 2001, no such consent of
the Holders of Exchangeable Preferred shall be required if, at or
prior to the time when such amendment, alteration or repeal is to take
effect or when the issuance of any such Senior Securities or
convertible security is to be made, as the case may be, provision is
made, and funds are set aside, for the redemption of all shares of
Exchangeable Preferred at the time outstanding.
11. Certain Covenants.
(a) Incurrence of Indebtedness and Issuance of Preferred Stock.
(i) The Corporation will not, and will not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness (other than the
Senior Discount Notes, the Exchange Debentures and Indebtedness
existing on the Closing Date) or issue any Redeemable Stock; provided
that the Corporation may Incur Indebtedness or issue Redeemable Stock
if, after giving effect to the Incurrence of such Indebtedness or the
issuance of such Redeemable Stock and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
(ii) Notwithstanding the provisions of paragraph 11(a)(i) above,
the Corporation and any Restricted Subsidiary (except as specified
below) may Incur each and all of the following: (A) Indebtedness of
the Corporation or any Restricted Subsidiary or Redeemable Stock of
the Corporation outstanding at any time, which Indebtedness or
Redeemable Stock generates gross proceeds to the Corporation of up to
$900 million, less (without duplication) the gross proceeds of
Indebtedness permanently repaid as provided under the "Limitation on
Asset Sales" covenant contained in the 132% Notes Indenture and the
Senior Discount Notes Indenture; (B) Indebtedness to Holdings, the
Corporation or any of the Corporation's Wholly Owned Restricted
Subsidiaries; provided that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Restricted
Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to Holdings, the
Corporation or another Wholly Owned Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness
not permitted by this clause (B); (C) Indebtedness or Redeemable Stock
issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness or Redeemable
Stock, other than Indebtedness Incurred or Redeemable Stock issued
under clause (A), (B), (E), (F), (H), (I), (J) or (K) of this
paragraph 11(a)(ii), and any refinancings thereof in an amount not to
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exceed the amount so refinanced or refunded (plus premiums, accrued
interest, accrued dividends, fees and expenses); provided that such
new Indebtedness or Redeemable Stock, determined as of the date of
Incurrence of such new Indebtedness or issuance of Redeemable Stock,
does not mature prior to the stated maturity of the Indebtedness or
have a mandatory redemption date prior to the Redeemable Stock to be
refinanced or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the Indebtedness to
be refinanced or refunded; and provided further that in no event may
Indebtedness or Redeemable Stock of the Corporation be refinanced by
means of any Indebtedness or Redeemable Stock of any Restricted
Subsidiary of the Corporation pursuant to this clause (C); (D)
Indebtedness (1) in respect of performance, surety or appeal bonds
provided in the ordinary course of business, (2) under Currency
Agreements and Interest Rate Agreements; provided that such agreements
do not increase the Indebtedness of the obligor outstanding at any
time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, and (3) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Corporation or any
of its Restricted Subsidiaries pursuant to such agreements, in any
case Incurred in connection with the disposition of any business,
assets or Restricted Subsidiary of the Corporation (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of the
Corporation for the purpose of financing such acquisition), in a
principal amount at maturity not to exceed the gross proceeds actually
received by the Corporation or any Restricted Subsidiary in connection
with such disposition; (E) Indebtedness or Redeemable Stock of the
Corporation, to the extent the proceeds referred to below are
contributed to the Corporation, not to exceed, at any one time
outstanding, twice the amount of Net Cash Proceeds received by
Holdings after the Closing Date from the issuance and sale of its
Capital Stock (other than Redeemable Stock or preferred stock);
provided that such Indebtedness does not mature prior to the final
mandatory redemption date of the Exchangeable Preferred; (F) Strategic
Investor Subordinated Indebtedness; (G) Indebtedness or Redeemable
Stock of the Corporation, to the extent the proceeds thereof are
immediately used after the Incurrence or issuance thereof to purchase
Exchangeable Preferred tendered in a Change of Control Offer; (H)
Indebtedness of any Restricted Subsidiary of the Corporation Incurred
pursuant to any credit agreement of such Restricted Subsidiary in
effect on August 8, 1995 (or any agreement refinancing Indebtedness
under such credit agreement), up to the amount of the commitment under
such credit agreement (including equipment leasing or financing
agreements) on August 8, 1995; (I) Indebtedness of the Corporation, in
an amount not to exceed $100 million at any one time outstanding,
consisting of Capitalized Lease Obligations with respect to assets
that are used or useful in the telecommunications business of the
Corporation or its Restricted Subsidiaries; (J) Indebtedness or
Redeemable Stock of any Person that becomes a Restricted Subsidiary of
the Corporation after the Closing Date, which Indebtedness exists or,
with respect to such Indebtedness for which there is a commitment to
lend, at the time such Person becomes a Restricted Subsidiary and,
with respect to such Indebtedness, the subsequent Incurrence thereof
("Acquired Indebtedness"), in an accreted amount not to exceed $50
million at any one time outstanding in the aggregate for all such
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Restricted Subsidiaries; provided that such Acquired Indebtedness does
not exceed 65% of the consideration (calculated by including such
Acquired Indebtedness as a part of such consideration) paid by the
Corporation and its Restricted Subsidiaries for the acquisition of
such Person; and (K) Indebtedness of the Corporation, in an amount not
to exceed $30 million at any one time outstanding, consisting of
letters of credit and similar arrangements used to support obligations
of the Corporation or any of its Restricted Subsidiaries with respect
to the acquisition of (by purchase, lease or otherwise), construction
of, or improvements on, assets that will be used or useful in the
telecommunications business of the Corporation or its Restricted
Subsidiaries.
(iii) For purposes of determining any particular amount of
Indebtedness under paragraphs 11(a)(i) or (ii) above, (A) Indebtedness
of any Restricted Subsidiary of the Corporation incurred on or prior
to the Closing Date pursuant to any credit agreement (including
equipment leasing or financing agreements) of such Restricted
Subsidiary in effect on August 8, 1995, shall be treated as Incurred
pursuant to paragraph 11(a)(ii)(H) of this Section 4.2.1, and (B)
Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included. For purposes of
determining compliance with the covenants contained in paragraphs
11(a)(i) and (ii) above, in the event that an item of Indebtedness or
Redeemable Stock meets the criteria of more than one of the types of
Indebtedness or Redeemable Stock described in such clauses, the
Corporation, in its sole discretion, shall classify such item of
Indebtedness or Redeemable Stock and only be required to include the
amount and type of such Indebtedness or Redeemable Stock in one of
such clauses.
(b) Limitation on Restricted Payments.
(i) So long as any shares of the Exchangeable Preferred are
outstanding, the Corporation will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, (A) declare or pay
any dividend or make any distribution on Junior Securities held by
Persons other than the Corporation or any of its Restricted
Subsidiaries (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Junior Securities (other
than Redeemable Stock) of the same class held by such holders or in
options, warrants or other rights to acquire such shares of Junior
Securities and other than pro rata dividends or distributions on
common stock of Restricted Subsidiaries); (B) purchase, redeem, retire
or otherwise acquire for value any shares of Junior Securities of the
Corporation or any Restricted Subsidiary (including options, warrants
or other rights to acquire such shares of Junior Securities) held by
Persons other than the Corporation or any of its Wholly Owned
Restricted Subsidiaries (except for Junior Securities of MTN, StarCom,
Ohio LINX, FOTI and Zycom to the extent the consideration therefor
consists solely of common stock (other than Redeemable Stock) of
Holdings or Junior Securities of the Corporation, in each case
transferred in compliance with the Securities Act); or (C) make any
Investment, other than a Permitted Investment, in any Person (such
payments or any other actions described in clauses (i)(A) through (C)
being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment: (1) an event
referred to in clauses (1) through (6) of paragraph 10(b)(i)(A) of
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this Section 4.2.1 shall have occurred and be continuing, (2) the
Corporation could not Incur at least $1.00 of Indebtedness under
paragraph 11(a)(i) of this Section 4.2.1, (3) the aggregate amount
expended for all Restricted Payments (the amount so expended, if other
than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
board resolution) after April 29, 1996 shall exceed the sum of (aa)
50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
such amount) (determined by excluding income resulting from transfers
of assets by the Corporation or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the
period (taken as one accounting period) beginning on the first day of
the fiscal quarter immediately following the Closing Date and ending
on the last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed pursuant to paragraph 11(i) of
this Section 4.2.1 plus (bb) the aggregate Net Cash Proceeds received
by the Corporation after the Closing Date (x) from the issuance and
sale, permitted hereunder, of Junior Securities (other than Redeemable
Stock) to a Person who is not a Subsidiary of the Corporation, or from
the issuance to a Person who is not a Subsidiary of the Corporation of
any options, warrants or other rights to acquire Junior Securities of
the Corporation (in each case, exclusive of any Redeemable Stock or
any options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to the
stated maturity of the Exchangeable Preferred) or (y) as a capital
contribution from Holdings plus (cc) an amount equal to the net
reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Corporation or any Restricted
Subsidiary (except to the extent any such payment is included in the
calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments"),
not to exceed the amount of Investments previously made by the
Corporation and its Restricted Subsidiaries in such Person or (4)
dividends on the Exchangeable Preferred shall not have been paid in
full as provided in paragraph 4 of this Section 4.2.1.
(ii) The provisions of paragraph 11(b)(i) above shall not be
violated by reason of: (A) the payment of any dividend within 60 days
after the date of declaration thereof if, at said date of declaration,
such payment would comply with paragraph 11(b)(i) above; (B) the
repurchase, redemption or other acquisition of Junior Securities of
the Corporation (or options, warrants or other rights to acquire such
Junior Securities) and with respect to any Junior Securities, the
payment of accrued dividends thereon, in exchange for, or out of the
proceeds of a substantially concurrent issuance or sale of, shares of
Junior Securities (other than Redeemable Stock) of the Corporation;
provided that the redemption of any preferred stock pursuant to any
mandatory redemption feature thereof and any redemption of any other
Junior Securities and, in each case, the payment of accrued dividends
thereon (or options, warrants or other rights to acquire such Junior
Securities) and with respect to any Junior Securities, the payment of
accrued dividends thereon, shall be deemed to be "substantially
concurrent" with such issuance and sale if the required notice with
respect to such redemption is irrevocably given by a date which is no
later than five Business Days after receipt of the proceeds of such
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issuance and sale and such redemption and payment is consummated
within the period provided for in the document governing such
preferred stock or the documents governing the redemption of such
other Junior Securities, as the case may be; (C) payments or
distributions, in the nature of satisfaction of dissenters' rights,
pursuant to or in connection with a consolidation, merger or transfer
of assets that complies with the provisions of paragraph 11(g) of this
Section 4.2.1; (D) Investments, not to exceed $10 million in the
aggregate, each evidenced by a senior promissory note payable to the
Corporation that provides that it will become due and payable prior to
any required repurchase (including pursuant to an Offer to Purchase in
connection with a Change of Control) of the Exchangeable Preferred;
(E) Investments, not to exceed $5 million in the aggregate, that meet
the requirements of clause (D) above; provided that the Board of
Directors of the Corporation shall have determined, in good faith,
that each such Investment under this clause (E) will enable the
Corporation or one of its Restricted Subsidiaries to obtain additional
business that it might not be able to obtain without the making of
such Investment; (F) with respect to Junior Securities permitted to be
issued and sold by the provisions of paragraph 11(d) of this Section
4.2.1, the payment (1) of dividends on such Junior Securities in
additional shares of Junior Securities and (2) of cash dividends on
such Junior Securities in an amount not to exceed the dividend rate
thereon and accrued interest on unpaid dividends, in each case after
May 1, 2001; (G) the repurchase, in the event of a Change of Control,
of Junior Securities of the Corporation and Indebtedness of the
Corporation into which such Junior Securities have been exchanged;
provided that prior to repurchasing such Junior Securities or
Indebtedness, the Corporation shall have made a Change of Control
Offer to repurchase the shares of Exchangeable Preferred in accordance
with the terms of paragraph 7(b) of this Section 4.2.1 (and an offer
to repurchase other Indebtedness, if required by the terms thereof, in
accordance with the indenture or other document governing such other
Indebtedness) and shall have accepted and paid for any shares of
Exchangeable Preferred (and other Indebtedness) properly tendered in
connection with such Change of Control Offer for the shares of
Exchangeable Preferred or change of control offer for such other
Indebtedness; (H) the issuance of Junior Securities permitted to be
issued hereunder in exchange for Indebtedness; provided that the
Incurrence of such Indebtedness complies with the provisions of
paragraph 11(a) of this Section 4.2.1; and (I) (1) the payment of a
dividend or other transfer of funds to Holdings with a portion of the
proceeds of the issuance of the Exchangeable Preferred, in an amount
not to exceed the amount required to repurchase 916,666 warrants to
purchase common stock of Holdings and (2) the redemption of the 12%
Redeemable Preferred Stock of Holdings, in each case, in accordance
with the provisions of the documents governing such repurchase or
redemption, provided that, except in the case of clause (A), no
Default or Event of Default shall have occurred and be continuing or
occur as a consequence of the actions or payments set forth in this
paragraph 11(b)(ii).
(iii) Each Restricted Payment permitted pursuant to paragraph
11(b)(ii) above (other than the Restricted Payments referred to in
clauses (F)(1) and (H) thereof), and the Net Cash Proceeds from any
issuance of Junior Securities referred to in clause (B) thereof, shall
be included in calculating whether the conditions of clause (3) of
paragraph 11(b)(i) of this Section 4.2.1 have been met with respect to
any subsequent Restricted Payments. Notwithstanding the foregoing, in
the event the proceeds of an issuance of Junior Securities are used
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for the redemption, repurchase or other acquisition of the
Exchangeable Preferred, or Parity Securities, then the Net Cash
Proceeds of such issuance shall be included in clause (3) of paragraph
11(b)(i) of this Section 4.2.1 only to the extent such proceeds are
not used for such redemption, repurchase or other acquisition of
Exchangeable Preferred or Parity Securities.
(c) Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. So long as any shares of Exchangeable Preferred
are outstanding, the Corporation will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on
the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of
such Restricted Subsidiary owned by the Corporation or any other Restricted
Subsidiary, (ii) pay any Indebtedness owed to the Corporation or any other
Restricted Subsidiary, (iii) make loans or advances to the Corporation or
any other Restricted Subsidiary or (iv) transfer any of its property or
assets to the Corporation or any other Restricted Subsidiary. The foregoing
provisions shall not restrict any encumbrances or restrictions: (i)
existing on the Closing Date in any agreements in effect on the Closing
Date, and any extensions, refinancings, renewals or replacements of such
agreements; provided that the encumbrances and restrictions in any such
extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders of the Exchangeable Preferred than
those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Corporation or any
Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are
not applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired; (iv)
in the case of clause (iv) of the first sentence of this paragraph 11(c),
(A) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset, (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Corporation or any Restricted
Subsidiary not otherwise prohibited hereunder or (C) arising or agreed to
in the ordinary course of business, not relating to any Indebtedness, and
that do not, individually or in the aggregate, detract from the value of
property or assets of the Corporation or any Restricted Subsidiary in any
manner material to the Corporation or any Restricted Subsidiary; or (v)
with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this paragraph 11(c) shall
prevent the Corporation or any Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted
pursuant to paragraph 11(f) of this Section 4.2.1 or (2) restricting the
sale or other disposition of property or assets of the Corporation or any
of its Restricted Subsidiaries that secure Indebtedness of the Corporation
or any of its Restricted Subsidiaries.
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(d) Limitation on Issuances and Sale of Capital Stock of Restricted
Subsidiaries. The Corporation will not sell, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any shares
of Capital Stock of a Restricted Subsidiary (including options, warrants or
other rights to purchase shares of such Capital Stock) except (i) to the
Corporation or a Wholly Owned Restricted Subsidiary; (ii) issuances or
sales to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary; (iv) with
respect to common stock of MTN, StarCom and Zycom; provided that the
proceeds of any such sale under this clause (iv) shall be reinvested in the
business of the Corporation and its Restricted Subsidiaries or used to
repay Indebtedness of the Corporation or any of its Restricted Subsidiaries
or Senior Securities; and (v) with respect to common stock of FOTI;
provided that FOTI shall not retain any net proceeds from such sales or
issuances in excess of $10 million in the aggregate and any net proceeds in
excess of such $10 million shall be received by, or paid promptly by FOTI
to, the Corporation or any Wholly Owned Restricted Subsidiary of the
Corporation.
(e) Limitation on Transactions with Shareholders and Affiliates. The
Corporation will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or
any Affiliate of such holder) of 5% or more of any class of Capital Stock
of the Corporation or with any Affiliate of the Corporation or any
Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to the Corporation or such Restricted Subsidiary than could be
obtained, at the time of such transaction or at the time of the execution
of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate. The
foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors of the Corporation or (B) for which the Corporation or a
Restricted Subsidiary delivers to the Transfer Agent a written opinion of a
nationally recognized investment banking firm stating that the transaction
is fair to the Corporation or such Restricted Subsidiary from a financial
point of view; (ii) any transaction solely between the Corporation and any
of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries; (iii) the payment of reasonable and customary
regular fees to directors of the Corporation who are not employees of the
Corporation; (iv) any payments or other transactions pursuant to any
tax-sharing agreement (or a similar agreement that is not materially
adverse to the interests of Holders of the Exchangeable Preferred) between
the Corporation and any other Person with which the Corporation files a
consolidated tax return or with which the Corporation is part of a
consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by paragraph 11(b) of this Section 4.2.1. Notwithstanding the
foregoing, any transaction covered by the first sentence of this paragraph
11(e) and not covered by clauses (ii) through (iv) of the preceding
sentence, the aggregate amount of which exceeds $2 million in value, must
be approved or determined to be fair in the manner provided for in clause
(i)(A) or (B) of the preceding sentence.
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(f) Limitation on Liens. The Corporation will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any
Lien on any of its assets or properties, now or hereafter acquired, or any
shares of Capital Stock of or Indebtedness of any Restricted Subsidiary.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Corporation or its Restricted Subsidiaries created in
favor of the Holders of the Exchangeable Preferred; (iii) Liens with
respect to the assets of a Restricted Subsidiary granted by such Restricted
Subsidiary to the Corporation or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to the Corporation or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under paragraph
11(a)(ii)(C) of this Section 4.2.1; provided that such Liens do not extend
to or cover any property or assets of the Corporation or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced; (v) Liens with respect to assets or properties of any
Person that becomes a Restricted Subsidiary after the Closing Date;
provided that such Liens do not extend to or cover any assets or properties
of the Corporation or any of its Restricted Subsidiaries other than the
assets or properties of such Person subject to such Lien on the date such
Person becomes a Restricted Subsidiary; and provided further that such
Liens are not incurred in contemplation of, or in connection with, such
Person becoming a Restricted Subsidiary; (vi) Permitted Liens; and (vii)
Liens securing Indebtedness.
(g) Merger, Consolidation and Sale of Assets. The Corporation shall
not consolidate with, merge with or into, or sell, convey, transfer, lease
or otherwise dispose of all or substantially all of its property and assets
(as an entirety or substantially an entirety in one transaction or a series
of related transactions) to, any Person (other than a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive
net worth; provided that, in connection with any such merger or
consolidation, no consideration (other than common stock in the surviving
Person or the Corporation) shall be issued or distributed to the
shareholders of the Corporation) or permit any Person to merge with or into
the Corporation unless: (i) the Corporation shall be the continuing Person,
or the Person (if other than the Corporation) formed by such consolidation
or into which the Corporation is merged or that acquired or leased such
property and assets of the Corporation shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and the Exchangeable Preferred shall be converted into
or exchanged for and shall become shares of such successor company, having
in respect of such successor or resulting company substantially the same
powers, preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions thereon that the
Exchangeable Preferred had immediately prior to such transaction; (ii)
immediately after giving effect to such transaction, no event referred to
under paragraph 10(b)(i)(A)(1) through (5) of this Section 4.2.1 or any
default, breach or violation that would become such an event after the
giving of notice, the passage of time or both, shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a
pro forma basis, the Corporation or any Person becoming the successor
issuer of the Exchangeable Preferred, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth
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of the Corporation immediately prior to such transaction; (iv) immediately
after giving effect to such transaction on a pro forma basis the
Corporation, or any Person becoming the successor issuer of the
Exchangeable Preferred, as the case may be, could Incur at least $1.00 of
Indebtedness under paragraph 11(a)(i) of this Section 4.2.1; and (v) the
Corporation delivers to the Transfer Agent an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clauses (iii) and (iv) above) and an opinion of counsel, in each case
stating that such consolidation, merger or transfer complies with this
provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; provided, however, that clauses
(iii) and (iv) above shall not apply if, in the good faith determination of
the Board of Directors of the Corporation evidenced by a board resolution,
the principal purpose of such transaction is part of a plan to change the
jurisdiction of incorporation of the Corporation to a different state of
the United States; and provided further that any such transaction shall not
have as one of its purposes the evasion of the foregoing limitations.
(h) Senior Subordinated Indebtedness. So long as any shares of
Exchangeable Preferred are outstanding, the Corporation will not Incur any
Indebtedness, other than the Exchange Debentures, that is expressly made
subordinated in right of payment to any Senior Indebtedness (as defined in
the Indenture) unless such Indebtedness, by its terms and by the terms of
any agreement or instrument pursuant to which such Indebtedness is
outstanding is expressly made pari passu with, or subordinate in right of
payment to, the Exchange Debentures pursuant to provisions substantially
similar to those contained in Article Eleven of the Indenture; provided
that the foregoing limitations shall not apply to distinctions between
categories of Senior Indebtedness that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior
Indebtedness.
(i) Reports. So long as any shares of Exchangeable Preferred are
outstanding, the Corporation shall file with the Securities and Exchange
Commission (the "Commission") the annual reports, quarterly reports and the
information, documents and other reports required to be filed by the
Corporation with the Commission pursuant to Sections 13 or 15 of the
Exchange Act, whether or not the Corporation has or is required to have a
class of securities registered under the Exchange Act, at the time it is or
would be required to file the same with the Commission and, within 15 days
after the Corporation is or would be required to file such reports,
information or documents with the Commission, shall mail such reports,
information and documents to the Transfer Agent and to each Holder, or
shall supply such reports to the Transfer Agent for forwarding to each
Holder, at such Holder's address set forth on the register maintained by
the Transfer Agent.
12. Transfer and Legending of Shares. No transfer of shares of the
Exchangeable Preferred shall be effective until such transfer is registered on
the books of the Corporation. Until registered under the Securities Act or the
expiration of the time period referred to in Rule 144(k) (as then in effect)
under the Securities Act, all shares of Exchangeable Preferred will bear the
following legend:
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THIS PREFERRED STOCK HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS NOT A U.S.
PERSON AND IS ACQUIRING THIS PREFERRED STOCK IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT,
OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES
ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL
NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) UNDER THE
SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS
PREFERRED STOCK, RESELL OR OTHERWISE TRANSFER THIS PREFERRED STOCK
EXCEPT (A) TO INTELCOM GROUP (U.S.A.), INC. (THE "CORPORATION") OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE
UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904
UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE), (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE
TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS PREFERRED
STOCK (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER
AGENT) OR (F) AFTER REGISTRATION UNDER THE SECURITIES ACT AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS PREFERRED
STOCK IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS PREFERRED STOCK WITHIN
THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST EXECUTE A LETTER
(THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT)
RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO
THE TRANSFER AGENT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
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REGULATION S UNDER THE SECURITIES ACT. THE [FIRST] AMENDED AND
RESTATED ARTICLES OF INCORPORATION OF THE CORPORATION CONTAINS A
PROVISION REQUIRING THE TRANSFER AGENT TO REFUSE TO REGISTER ANY
TRANSFER OF THIS PREFERRED STOCK IN VIOLATION OF THE FOREGOING
RESTRICTIONS.
The Corporation shall refuse to register any attempted transfer of shares of
Exchangeable Preferred not in compliance with this paragraph 12.
13. Amendments and Waivers. Notwithstanding any other provisions hereof and
to the extent allowable from time to time by applicable law, the Board of
Directors may, by duly adopted resolution, amend any of the provisions of the
Second Amended and Restated Articles of Incorporation, without notice to or any
consent or approval of any of the Holders of Exchangeable Preferred, for the
following purposes:
(1) to cure any ambiguity, defect or inconsistency in the Second
Amended and Restated Articles of Incorporation; provided that such
amendment does not and will not adversely affect the interests of the
Holders of Exchangeable Preferred in any material respect; or
(2) to make any change that the Board of Directors determines in good
faith does not materially and adversely affect the rights of any Holder of
Exchangeable Preferred.
Except as provided in the preceding sentence, any right, preference, privilege
or power of, or restriction provided for the benefit of, the Exchangeable
Preferred set forth herein may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Corporation and the
affirmative vote or written consent of the Holders of at least a majority of the
shares of Exchangeable Preferred then outstanding, and any amendment or waiver
so effected shall be binding upon the Corporation and all Holders of the
Exchangeable Preferred.
14. Rules of Construction. The descriptive headings in this Section 4.2.1
are inserted for convenience of reference only and are not intended to be part
of or affect the meaning or interpretation of any provision of this Section
4.2.1. Words used in this Section 4.2.1, regardless of the gender and number
specifically used, shall be deemed and construed to include any other gender,
masculine, feminine, or neuter, and any other number, singular or plural, as the
context requires. As used in this Section 4.2.1, the word "including" is not
limiting, and the word "or" is not exclusive.
4.2.2 Cumulative Exchangeable Redeemable Preferred Stock; Statement of
Designation of Preferences and Rights.
A series of preferred stock of the Corporation has been created with the
designation and amount thereof and the voting powers, preferences and relative,
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optional and other special rights of the shares of such series, and the
qualifications, limitations, or restrictions thereof, as follows:
1. Certain Definitions: Set forth below are certain defined terms used in
this Section 4.2.2.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Corporation and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Corporation or any of its Restricted Subsidiaries) has a joint interest and the
net income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Corporation or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph 11(b)(i)(3) of this
Section 4.2.2 (and in such case, except to the extent includable pursuant to
clause (i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated with
the Corporation or any of its Restricted Subsidiaries or all or substantially
all of the property and assets of such Person are acquired by the Corporation or
any of its Restricted Subsidiaries; (iii) the net income of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
paragraph 11(b)(i)(C)(3) of this Section 4.2.2, any amount paid or accrued as
dividends on preferred stock of the Corporation or any Restricted Subsidiary
owned by Persons other than the Corporation and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Corporation or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Corporation or shall be merged into
or consolidated with the Corporation or any of its Restricted Subsidiaries;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of the Corporation and its Restricted
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Subsidiaries on the date of such investment or (ii) an acquisition by the
Corporation or any of its Restricted Subsidiaries of the property and assets of
any Person other than the Corporation or any of its Restricted Subsidiaries that
constitutes substantially all of a division or line of business of such Person;
provided that the property and assets acquired are related, ancillary or
complementary to the businesses of the Corporation and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by the Corporation or any of its Restricted
Subsidiaries to any Person other than the Corporation or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Corporation or any of its Restricted
Subsidiaries or (iii) any other property and assets of the Corporation or any of
its Restricted Subsidiaries outside the ordinary course of business of the
Corporation or such Restricted Subsidiary and, in each case, that is not
governed by the provisions of paragraph 11(g) of this Section 4.2.2; provided
that the meaning of "Asset Sale" shall not include (A) sales or other
dispositions of inventory, receivables and other current assets, and (B)
dispositions of assets of the Corporation or any of its Restricted Subsidiaries,
in substantially simultaneous exchanges for consideration consisting of any
combination of cash, Temporary Cash Investments and assets that are used or
useful in the telecommunications business of the Corporation or its Restricted
Subsidiaries, if such consideration has an aggregate fair market value
substantially equal to the fair market value of the assets so disposed of;
provided, however, that fair market value shall be determined in good faith by
the Board of Directors of the Corporation, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors delivered to
the Transfer Agent.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Business Day" means any day except a Saturday, Sunday, or other day on
which commercial banks in the City of New York, or in the city of the Transfer
Agent Office, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date hereof, including, without limitation, all common stock
and preferred stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
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Lease Obligations" means the discounted present value of the rental obligations
under any such Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock having more than 40% of the voting power of the total Voting Stock
of ICG on a fully diluted basis; (ii) individuals who on the Closing Date
constitute the Board of Directors of ICG (together with any new directors whose
election by the Board of Directors or whose nomination for election by ICG's
stockholders was approved by a vote of at least a majority of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office; or (iii) all of the common
stock of the Corporation is not beneficially owned, directly or indirectly, by
ICG.
"ChoiceCom" means CSW/ICG ChoiceCom, L.P., a Delaware limited partnership.
"Closing Date" means the date on which the Exchangeable Preferred is
originally issued.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (other than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets), (iv) depreciation expense, to the extent such amount
was deducted in calculating Adjusted Consolidated Net Income, (v) amortization
expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted
Consolidated Net Income (other than items that will require cash payments and
for which an accrual or reserve is, or is required by GAAP to be, made), less
all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Corporation and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding common stock of such Restricted Subsidiary
not owned on the last day of such period by the Corporation or any of its
Restricted Subsidiaries divided by (2) the total number of shares of outstanding
common stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
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respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by the Corporation or any of its Restricted Subsidiaries) and all but
the principal component of rentals in respect of Capitalized Lease Obligations
paid, accrued or scheduled to be paid or to be accrued by the Corporation and
its Restricted Subsidiaries during such period; excluding, however, without
duplication, (i) any amount of such interest of any Restricted Subsidiary if the
net income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees
and expenses (and any amortization thereof) payable in connection with the
offering of the 13 1/2% Notes and the warrants issued therewith, the 12 1/2%
Notes, the 14 1/4% Exchangeable Preferred, the Senior Discount Notes and/or the
Exchangeable Preferred, all as determined on a consolidated basis (without
taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Corporation and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Corporation or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Corporation or any of its Restricted Subsidiaries against fluctuations in
currency values to or under which the Corporation or any of its Restricted
Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party
or a beneficiary thereafter.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Event of Default" means a Voting Rights Triggering Event as defined in
paragraph 10(b) of this Section 4.2.2.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FOTI" means Fiber Optic Technologies Inc., a Colorado corporation.
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"14 1/4% Exchangeable Preferred" means the 14 1/4% Cumulative Exchangeable
Redeemable Preferred Stock mandatorily redeemable May 1, 2007 of the
Corporation, and any shares of preferred stock issued as payment in kind
dividends thereon.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of August 8, 1995, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained in this Section
4.2.2 shall be computed in conformity with GAAP applied on a consistent basis,
except that calculations made for purposes of determining compliance with the
terms of the covenants and with other provisions of this Section 4.2.2 shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the 13 1/2% Notes and the warrants issued
therewith, the 12 1/2% Notes, the 14 1/4% Exchangeable Preferred, the Senior
Discount Notes and/or the Exchangeable Preferred and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holders" means the registered holders of shares of Exchangeable Preferred.
"Holdings (Canada)" means ICG Holdings (Canada), Inc. and its successors
and assigns.
"ICG" means ICG Communications, Inc. and its successors and assigns.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Indebtedness by reason of the acquisition of more
than 50% of the Capital Stock of any Person; provided that neither the accrual
of interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
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"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (i)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the original issue price of such Indebtedness and (ii) that
Indebtedness shall not include (A) any amount of money borrowed, at the time of
the Incurrence of the related Indebtedness, for the purpose of prefunding any
interest payable on such related Indebtedness or (B) any liability for federal,
state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Corporation and its
Restricted Subsidiaries on a consolidated basis as at the date of determination
(the "Determination Date") to (ii) the Consolidated EBITDA of the Corporation
for the then most recent four full fiscal quarters for which reports have been
filed pursuant to paragraph 11(i) of this Section 4.2.2 (such four full fiscal
quarter period being referred to herein as the "Four Quarter Period"); provided
that (x) pro forma effect shall be given to any Indebtedness Incurred from the
beginning of the Four Quarter Period through the Determination Date (including
any Indebtedness Incurred on the Determination Date), to the extent outstanding
on the Determination Date, (y) if during the period commencing on the first day
of such Four Quarter Period through the Determination Date (the "Reference
Period"), the Corporation or any of the Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if such
Asset Sale and related retirement of Indebtedness had occurred on the first day
of such Reference Period or (z) if during such Reference Period the Corporation
or any of the Restricted Subsidiaries shall have made any Asset Acquisition,
Consolidated EBITDA of the Corporation shall be calculated on a pro forma basis
as if such Asset Acquisition and any related financing had occurred on the first
day of such Reference Period. In calculating this ratio for purposes hereof, the
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amount of outstanding Indebtedness shall be deemed to include the liquidation
preference of any preferred stock then outstanding.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect the Corporation or any of its Restricted Subsidiaries against
fluctuations in interest rates in respect of Indebtedness to or under which the
Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on
the Closing Date or becomes a party or a beneficiary thereafter; provided that
the notional principal amount thereof does not exceed the principal amount of
the Indebtedness of the Corporation and its Restricted Subsidiaries that bears
interest at floating rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Corporation or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
the designation of a Restricted Subsidiary as an Unrestricted Subsidiary. For
purposes of the definition of "Unrestricted Subsidiary" and paragraph 11(b) of
this Section 4.2.2, (i) "Investment" shall include the fair market value of the
assets (net of liabilities) of any Restricted Subsidiary of the Corporation at
the time that such Restricted Subsidiary of the Corporation is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of the Corporation
and (ii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"MTN" means Maritime Telecommunications Network, Inc., a Colorado
corporation, and its successors.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Corporation or any Restricted Subsidiary of the
Corporation) and proceeds from the conversion of other property received when
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converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Corporation
and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Corporation or any Restricted Subsidiary as a reserve against
any liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Corporation or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase shares of Exchangeable
Preferred by the Corporation from the Holders commenced by mailing a notice to
the Transfer Agent and each Holder stating: (i) the covenant pursuant to which
the offer is being made and that all shares of Exchangeable Preferred validly
tendered will be accepted for payment on a pro rata basis; (ii) the purchase
price and the date of purchase (which shall be a Business Day no earlier than 30
days nor later than 60 days from the date such notice is mailed) (the "Payment
Date"); (iii) that any shares of Exchangeable Preferred not tendered will
continue to accrue dividends pursuant to its terms; (iv) that, unless the
Corporation defaults in the payment of the purchase price, any shares of
Exchangeable Preferred accepted for payment pursuant to the Offer to Purchase
shall cease to accrue dividends on and after the Payment Date; (v) that Holders
electing to have any shares of Exchangeable Preferred purchased pursuant to the
Offer to Purchase will be required to surrender the shares of Exchangeable
Preferred together with a form entitled "Option of the Holder to Elect Purchase"
(the form of which will be mailed with such notice) completed, to the paying
agent at the address specified in the notice prior to the close of business on
the Business Day immediately preceding the Payment Date; (vi) that Holders will
be entitled to withdraw their election if the paying agent receives, not later
than the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the liquidation preference of the shares of Exchangeable
Preferred delivered for purchase and a statement that such Holder is withdrawing
his election to have such shares of Exchangeable Preferred purchased; and (vii)
that Holders whose shares of Exchangeable Preferred are being purchased only in
part will be issued new shares of Exchangeable Preferred equal to the
liquidation preference of the unpurchased portion of the shares of Exchangeable
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Preferred surrendered; provided that each share of Exchangeable Preferred
purchased and each new share of Exchangeable Preferred issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment Date,
the Corporation shall (i) accept for payment on a pro rata basis shares of
Exchangeable Preferred or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the paying agent money sufficient to pay the
purchase price of all shares of Exchangeable Preferred or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Transfer Agent all
shares of Exchangeable Preferred or portions thereof so accepted together with
an Officers' Certificate specifying the shares of Exchangeable Preferred or
portions thereof accepted for payment by the Corporation. The paying agent shall
promptly mail to the Holders of shares of Exchangeable Preferred so accepted,
payment in an amount equal to the purchase price, and the Transfer Agent shall
promptly authenticate and mail to such Holders new shares of Exchangeable
Preferred equal in liquidation preference to any unpurchased portion of the
shares of Exchangeable Preferred surrendered; provided that each share of
Exchangeable Preferred purchased and each new share of Exchangeable Preferred
issued shall be in a principal amount of $1,000 or integral multiples thereof.
The Corporation will publicly announce the results of an Offer to Purchase as
soon as practicable after the Payment Date. The Transfer Agent shall act as the
paying agent for an Offer to Purchase. The Corporation will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder, to the extent such laws and regulations are applicable, in the event
that the Corporation is required to repurchase shares of Exchangeable Preferred
pursuant to an Offer to Purchase.
"Ohio LINX" means ICG Ohio LINX, Inc., an Ohio corporation.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Corporation or a Restricted Subsidiary;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of the Corporation and its Restricted
Subsidiaries on the date of such Investment; (ii) a Temporary Cash Investment;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) loans or advances to employees made in the ordinary course of
business in accordance with past practice of the Corporation or its Restricted
Subsidiaries and that do not in the aggregate exceed $2 million at any time
outstanding; (v) stock, obligations or securities received in satisfaction of
judgments; (vi) Indebtedness of ICG or Holdings (Canada) owed to the
Corporation, in an amount not to exceed the reasonable expenses of ICG or
Holdings (Canada), as the case may be, as a holding company that are actually
incurred, and paid, by ICG or Holdings (Canada); provided that such Indebtedness
of ICG or Holdings (Canada), as the case may be, is evidenced by an
unsubordinated promissory note that provides that it will be paid prior to any
mandatory redemption of the Exchangeable Preferred if such payment would be
necessary to effectuate such redemption; and (vii) Investments in an amount not
to exceed, at any one time outstanding, all of the Net Cash Proceeds received by
the Corporation from the sale of common stock of ICG (to a person other than one
of ICG's Subsidiaries) after the Closing Date.
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"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights of way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Corporation or any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or personal
property acquired after the Closing Date; provided that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with
paragraph 11(a) of this Section 4.2.2, (1) to finance the cost (including the
cost of improvement or construction) of the item of property or assets subject
thereto and such Lien is created prior to, at the time of or within six months
after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Corporation and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Corporation or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation becomes,
or becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Corporation or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Corporation or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Corporation or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
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arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed to protect the
Corporation or any of its Restricted Subsidiaries from fluctuations in the price
of commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by the
Corporation or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Corporation and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales
of receivables.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Preferred stock" or "preferred stock" means, with respect to any Person,
any and all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after the date hereof,
including, without limitation, all series and classes of such preferred or
preference stock.
"Public Equity Offering" means a bona fide underwritten primary public
offering of common stock of ICG or the Corporation pursuant to an effective
registration statement under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
mandatory redemption date of the shares of Exchangeable Preferred, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time prior to the mandatory redemption date of the shares of Exchangeable
Preferred, or (iii) convertible into or exchangeable for Capital Stock referred
to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior
to the mandatory redemption date of the shares of Exchangeable Preferred;
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of a "change of
control" occurring prior to the mandatory redemption date of the shares of
Exchangeable Preferred shall not constitute Redeemable Stock if the "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the "Change
of Control" provisions contained in paragraph 7(b) of this Section 4.2.2 and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Corporation's
repurchase of Exchangeable Preferred as provided in paragraph 7(b) of this
Section 4.2.2.
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"Restricted Subsidiary" means any Subsidiary of the Corporation other than
an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Discount Notes," as used in this Section 4.2.2, means the Senior
Discount Notes Due 2007 of the Corporation, Guaranteed by ICG on a senior
unsecured basis and issued on the Closing Date.
"Senior Discount Notes Indenture," as used in this Section 4.2.2, means the
Indenture dated as of the Closing Date among the Corporation, ICG and the
Trustee pursuant to which the Senior Discount Notes are issued.
"StarCom" means StarCom International Optics Corporation, a British
Columbia corporation, and its Subsidiaries.
"Strategic Investor" means any Person engaged in the telecommunications
business which has a net worth or equity market capitalization of at least $1
billion.
"Strategic Investor Subordinated Indebtedness" means all Indebtedness of
the Corporation owed to a Strategic Investor that is contractually subordinate
in right of payment to the shares of Exchangeable Preferred to at least the
following extent: no payment of principal (or premium, if any) or interest on or
otherwise payable in respect of such Indebtedness may be made (whether as a
result of a default or otherwise) prior to the payment in full of all of the
Corporation's obligations under the shares of Exchangeable Preferred; provided,
however, that prior to the payment of such obligations, interest on Strategic
Investor Subordinated Indebtedness may be payable solely in kind or in common
stock (other than Redeemable Stock) of ICG or the Corporation.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 270 days of the date of acquisition thereof,
bankers' acceptances with maturities not exceeding 270 days, and overnight bank
deposits, in each case issued by or with a bank or trust company which is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $100
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least one
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nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) commercial paper, maturing not more than
180 days after the date of acquisition, issued by a corporation (other than an
Affiliate of ICG) organized and in existence under the laws of the United States
of America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard & Poor's Ratings Group, and (v)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.
"13 1/2% Notes" means the 13 1/2% Senior Discount Notes Due 2005 of the
Corporation Guaranteed by ICG and Holdings (Canada) on a senior unsecured basis.
"13 1/2% Notes Indenture" means the Indenture dated as of August 8, 1995,
as amended, among the Corporation, Holdings (Canada) and the Trustee pursuant to
which the Corporation issued the 13 1/2% Notes.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other debt or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person or any of its Subsidiaries arising in the ordinary
course of business in connection with the acquisition of goods or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Corporation or any of its Restricted Subsidiaries or the
issuance of any Redeemable Stock of the Corporation, the date such Indebtedness
is to be Incurred or such issuance is to be made and, with respect to any
Restricted Payment, the date such Restricted Payment is to be made.
"Transfer Agent" means American Stock Transfer and Trust Company, 40 Wall
Street, 46th Floor, New York, New York 10005, or such other Person as may become
the transfer agent with respect to the Exchangeable Preferred.
"Transfer Agent Office" means the principal office of the Transfer Agent at
any particular time, which office is, at the date hereof, located at 40 Wall
Street, 46th Floor, New York, New York 10005.
"Trustee" means Norwest Bank Colorado, National Association, or such other
Person as may become the trustee under the Indenture, the Senior Discount Notes
Indenture, the 12 1/2% Notes Indenture or the 13 1/2% Notes Indenture, as the
context requires.
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"12 1/2% Notes" means the 12 1/2% Senior Discount Notes due 2006 of the
Corporation guaranteed by ICG and Holdings (Canada) on a senior unsecured basis.
"12 1/2% Notes Indenture" means the Indenture dated as of April 30, 1996,
as amended, among the Corporation, Holdings (Canada) and the Trustee pursuant to
which the Corporation issued the 12 1/2% Notes.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Corporation that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Corporation (including any newly acquired or newly formed
Subsidiary of the Corporation), other than the Corporation or a Subsidiary that
has given a Subsidiary Guarantee, to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Corporation or any Restricted Subsidiary; provided that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under paragraph 11(b) of this Section 4.2.2. The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the
Corporation; provided that immediately after giving effect to such designation
(x) the Corporation could Incur $1.00 of additional Indebtedness under paragraph
11(a)(i) of this Section 4.2.2 and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Transfer Agent by promptly filing with the Transfer Agent a
copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if 98% or more of the outstanding Capital Stock in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
"Zycom" means Zycom Corporation, an Alberta, Canada corporation.
2. Designation Amount. The distinctive serial designation of this
series shall be "Cumulative Exchangeable Redeemable Preferred Stock" (as used in
this Section 4.2.2, "Exchangeable Preferred"). The number of shares of
Exchangeable Preferred shall initially be 200,000, which number may from time to
time be increased (but not above the number that would cause the aggregate
number of all shares of preferred stock of all series to exceed 1,000,000
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shares) or decreased (but not below the number then outstanding) by the Board of
Directors. Shares of Exchangeable Preferred redeemed, purchased by the
Corporation or exchanged for Exchange Debentures (as defined in paragraph 8(a)
of this Section 4.2.2) shall be canceled and shall revert to authorized but
unissued shares of preferred stock undesignated as to series; provided, however,
that no such issued and reacquired shares of such series shall be reissued or
sold as shares of Exchangeable Preferred unless reissued as a stock dividend on
outstanding shares of Exchangeable Preferred.
3. Rank. The Exchangeable Preferred shall, with respect to dividend rights
and distribution rights on liquidation, winding-up and dissolution of the
Corporation, rank (i) senior to all classes of common stock of the Corporation
and to each other class of Capital Stock or series of preferred stock
established after March 6, 1997, by the Board of Directors the terms of which do
not expressly provide that it ranks senior to or on a parity with the
Exchangeable Preferred as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Corporation (collectively
referred to with the common stock of the Corporation as "Junior Securities");
(ii) on a parity with the 14 1/4% Exchangeable Preferred and any class of
Capital Stock or series of preferred stock issued by the Corporation established
after March 6, 1997 by the Corporation's Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Exchangeable Preferred as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Corporation (collectively
referred to as "Parity Securities"); and (iii) subject to certain conditions
described below, junior to each class of Capital Stock or series of preferred
stock issued by the Corporation established after March 6, 1997 by the
Corporation's Board of Directors, the terms of which expressly provide that such
class or series will rank senior to the Exchangeable Preferred as to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of the Corporation (collectively referred to as "Senior Securities"). The
Exchangeable Preferred will be subject to the issuance of series of Junior
Securities, Parity Securities and Senior Securities; provided that the
Corporation may not issue any new class of Senior Securities without the
approval of the Holders of at least a majority of the shares of Exchangeable
Preferred then outstanding, voting or consenting, as the case may be, separately
as one class, except that without such approval of Holders of the Exchangeable
Preferred, the Corporation may issue shares of Senior Securities (1) in exchange
for, or the proceeds of which are used to redeem or repurchase, all, but not
less than all, shares of Exchangeable Preferred then outstanding, or (2) in
exchange for, or the proceeds of which are used to repay, any outstanding
Indebtedness of the Corporation.
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4. Dividends.
(a) The Holders of shares of the Exchangeable Preferred shall be
entitled to receive, when, as and if declared by the Board of Directors of
the Corporation, out of funds legally available therefor, dividends at the
annual rate of 14% of the liquidation preference per share, subject to the
provisions of paragraph 4(e) below. Such dividends shall be cumulative,
whether or not earned or declared, on a daily basis from the date of
issuance of the Exchangeable Preferred, and shall be payable quarterly in
arrears on March 15, June 15, September 15, and December 15 of each year
commencing on June 15, 1997 (each of such dates being a "dividend payment
date"), with respect to the period commencing with the date of issuance of
the particular shares of Exchangeable Preferred or the immediately
preceding dividend payment date and ending on the day preceding such
respective dividend payment date (each of such periods being a "dividend
period"), to shareholders of record on the preceding March 1, June 1,
September 1, and December 1, respectively (each, a "regular record date").
Any dividend payments made with respect to shares of Exchangeable Preferred
on or before March 15, 2002, may be made, in the sole discretion of the
Board of Directors of the Corporation, in cash or in such number of
additional fully paid and nonassessable shares of Exchangeable Preferred
having an aggregate liquidation preference equal to the amount of such
dividends, and the issuance of such additional shares of Exchangeable
Preferred shall constitute full payment of such dividend. All dividends
paid with respect to shares of Exchangeable Preferred pursuant to this
paragraph 4(a) shall be paid pro rata to the Holders entitled thereto. The
Corporation may, at the option of the Board of Directors, elect not to
issue fractions of a share of Exchangeable Preferred ("Fractional Shares")
in payment of any dividend in additional shares of Exchangeable Preferred.
In such event, in lieu of any Fractional Shares, each record Holder of
Exchangeable Preferred otherwise entitled to receive a Fractional Share
shall receive a payment in cash equal to such Holder's proportionate
interest in the net proceeds from the sale or sales in the open market by
the Transfer Agent or other agent selected by the Corporation, on behalf of
all such Holders of the aggregate of all Fractional Shares otherwise
payable as a dividend. Such sale shall be effected promptly after the
record date fixed for determining the Holders entitled to payment of the
dividend. All shares of Exchangeable Preferred issued as a dividend with
respect to the Exchangeable Preferred will thereupon be duly authorized,
validly issued, fully paid and nonassessable and free of all liens and
charges. After March 15, 2002, dividends on the Exchangeable Preferred
shall be paid only in cash to the Holders of record at the close of
business on the regular record date with respect to the applicable dividend
payment date.
(b) Accumulated unpaid dividends for any past dividend periods may be
declared by the Board of Directors and paid on any date fixed by the Board
of Directors, whether or not a regular dividend payment date, to Holders of
record on the books of the Corporation on such record date as may be fixed
by the Board of Directors. Holders of Exchangeable Preferred will not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of full cumulative dividends. If any dividend (or portion thereof)
payable on any dividend payment date on or before March 15, 2002, is not
declared or paid in full in cash or in shares of Exchangeable Preferred as
described in paragraph 4(a) above on such dividend payment date, the amount
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of the accrued and unpaid dividend will bear interest at the dividend rate
on the Exchangeable Preferred, compounding quarterly from such dividend
payment date until paid in full. If any dividend (or portion thereof)
payable on any dividend payment date after March 15, 2002, is not declared
or paid in full in cash on such dividend payment date, the amount of the
accrued and unpaid dividend will bear interest at the dividend rate on the
Exchangeable Preferred, compounding quarterly from such dividend payment
date until paid in full.
(c) So long as any shares of the Exchangeable Preferred are
outstanding, the Corporation shall not (i) declare, pay or set apart for
payment any dividend on any shares of Junior Securities or Parity
Securities or (ii) make any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the purchase, redemption,
retirement or other acquisition for value of any of, or redeem, purchase,
retire or otherwise acquire for value any of, the Junior Securities or
Parity Securities or any warrants, rights, calls or options exercisable for
or convertible into any of the Junior Securities or Parity Securities or
(iii) make any distribution in respect of the Junior Securities or Parity
Securities or any warrants, rights, calls or options exercisable for or
convertible into any of the Junior Securities or Parity Securities, in any
such case either directly or indirectly, and whether in cash, obligations
or shares of the Corporation or other property (other than distributions or
dividends of a particular class or series of Junior Securities to holders
of such Junior Securities or distributions or dividends of a particular
class or series of Parity Securities to holders of such Parity Securities),
and shall not permit any corporation or other entity directly or indirectly
controlled by the Corporation to purchase, redeem or otherwise acquire for
value any of the Junior Securities or Parity Securities or any warrants,
rights, calls or options exercisable for or convertible into any of the
Junior Securities or Parity Securities, unless, as to any of the actions
described in clauses (i), (ii) or (iii) above, prior to or concurrently
with such declaration, payment, setting apart for payment, purchase,
redemption, other acquisition for value or distribution, as the case may
be, all accrued and unpaid dividends, if any, on shares of the Exchangeable
Preferred not paid on the dates provided for in paragraphs 4(a) or 4(b)
hereof (including accrued dividends, if any, not paid by reason of the
terms and conditions of paragraph 4(d) hereof) shall have been paid or
shall have been declared and, if payable in cash, a sum in cash set apart
for such payment. If full cumulative dividends on the Exchangeable
Preferred are not so paid, the Exchangeable Preferred will share dividends
pro rata with the Parity Securities. If full cumulative dividends on the
Exchangeable Preferred have not been so paid, the Exchangeable Preferred
may not be optionally redeemed in part as provided in paragraph 6(d) of
this Section 4.2.2.
(d) Notwithstanding anything contained herein to the contrary, no cash
dividends on shares of Exchangeable Preferred, or any other shares of
Junior Securities or Parity Securities, or other series of the
Corporation's preferred stock, shall be declared by the Board of Directors
or paid or set apart for payment by the Corporation at such time as the
terms and provisions of any contract or other agreement of the Corporation
or any of its Restricted Subsidiaries entered into or assumed prior to, on,
or after the Closing Date specifically prohibits such declaration, payment
or setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
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thereunder; provided, however, that nothing contained in this paragraph
4(d) shall be construed or deemed to require the Board of Directors to
declare, or the Corporation to pay or set apart for payment, any cash
dividends on shares of the Exchangeable Preferred, whether permitted by any
of such agreements or not.
(e) If, on or prior to September 11, 1997, the Corporation does not,
as more fully provided in the Registration Rights Agreement with respect to
the Exchangeable Preferred dated the Closing Date, either (i) consummate an
offer by the Corporation to such Holders to exchange the Exchangeable
Preferred for an issue of preferred stock of the Corporation with terms
identical to the Exchangeable Preferred pursuant to an effective
registration statement under the Securities Act with respect to such
exchange offer, or (ii) file and cause to become effective under the
Securities Act a shelf registration statement with respect to resales of
the Exchangeable Preferred, then dividends, in addition to the dividends
described in paragraph 4(a) of this Section 4.2.2, will accrue at the
annual rate of 0.5% of the liquidation preference per share on the
Exchangeable Preferred from September 11, 1997, payable in additional
shares of Exchangeable Preferred quarterly in arrears on March 15, June 15,
September 15, and December 15 of each year commencing on December 15, 1997.
5. Liquidation Preference.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, then, before
any distribution or payment shall be made to the holders of any Junior
Securities, including common stock of the Corporation, the Holders of
Exchangeable Preferred then outstanding shall be entitled to be paid, out
of the assets of the Corporation available for distribution to its
shareholders, an amount in cash equal to $1,000 for each share outstanding
(which amount is hereinafter referred to as the "liquidation preference"),
plus an amount in cash equal to all accrued and unpaid dividends and
interest thereon to the date fixed for liquidation, dissolution or
winding-up (including an amount equal to a prorated dividend for the period
from the dividend payment date immediately preceding the date fixed for
liquidation, dissolution or winding-up to the date fixed for liquidation,
dissolution or winding-up). Except as provided in the preceding sentence,
Holders of Exchangeable Preferred shall not be entitled to any distribution
in the event of liquidation, dissolution or winding-up of the affairs of
the Corporation. If the assets of the Corporation are not sufficient to pay
in full the liquidation payments payable to the holders of outstanding
shares of the Exchangeable Preferred and all other Parity Securities, then
the holders of all such shares shall share ratably in any distribution of
assets of the Corporation with respect to the Exchangeable Preferred and
Parity Securities in accordance with the amount that would be payable on
such distribution if the amounts to which the holders of outstanding shares
of Exchangeable Preferred and all other Parity Securities are entitled were
paid in full. After payment of the full amount of the liquidation
preference and accrued and unpaid dividends or interest to which each
Holder is entitled, such Holders of shares of Exchangeable Preferred will
not be entitled to any further participation in any distribution of the
assets of the Corporation.
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(b) For purposes of this paragraph 5, a merger, consolidation or sale
of substantially all of the Corporation's assets that complies with the
provisions of paragraph 11(g) of this Section 4.2.2 shall not be deemed to
be a voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation.
6. Optional Redemption.
(a) Subject to subparagraph (d) of this paragraph 6, and subject to
the legal availability of funds therefor and to any contractual and other
restrictions with respect thereto, at any time on or after March 15, 2002,
the Corporation, at the option of the Board of Directors, may redeem, in
whole or in part, the shares of Exchangeable Preferred at the time
outstanding, at any time or from time to time, upon notice given as
provided in paragraph 9 of this Section 4.2.2, at the redemption prices
(expressed as a percentage of the liquidation preference thereof) set forth
below, plus an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period
from the dividend payment date immediately prior to the redemption date to
the redemption date, subject to the right of holders of preferred stock on
a record date to receive dividends on a dividend payment date) if redeemed
during the 12-month period beginning March 15 of each of the years set
forth below:
Year Percentage
2002 ................................ 107.0000%
2003 ................................ 104.6667%
2004 ................................ 102.3333%
2005 and thereafter...................... 100.0000%
(b) In addition, but subject to subparagraph (d) of this paragraph 6,
on or prior to March 15, 2000, the Corporation may, at the option of the
Board of Directors from time to time, subject to the legal availability of
funds therefor and to any contractual and other restrictions with respect
thereto, redeem shares of Exchangeable Preferred having an aggregate
liquidation preference of up to 35% of the aggregate liquidation preference
of all shares of Exchangeable Preferred issued on the Closing Date, at a
redemption price equal to 114% of the liquidation preference thereof
(subject to the right of Holders of Exchangeable Preferred on relevant
record dates to receive dividends due on relevant dividend payment dates),
plus an amount in cash equal to a prorated dividend for the period from the
dividend payment date immediately prior to the redemption date to the
redemption date, with proceeds of one or more Public Equity Offerings of
common stock of (A) the Corporation or (B) ICG, provided that (i) with
respect to a Public Equity Offering referred to in clause (B) above, cash
proceeds of such Public Equity Offering in an amount sufficient to effect
the redemption of Exchangeable Preferred to be so redeemed are contributed
by ICG to the Corporation prior to such redemption and used by the
Corporation to effect such redemption and (ii) such redemption occurs
within 180 days after consummation of such Public Equity Offering.
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(c) In the event of partial redemptions of Exchangeable Preferred, the
shares to be redeemed will be determined pro rata, except that the
Corporation may redeem such shares held by any Holder of fewer than 100
shares without regard to such pro rata redemption requirement.
(d) Notwithstanding the foregoing provisions of paragraph 6(a) or (b)
of this Section 4.2.2, unless the full cumulative dividends for all past
dividend periods on all outstanding shares of Exchangeable Preferred shall
have been paid or contemporaneously are declared and paid or set apart for
payment (whether in cash or additional shares of Exchangeable Preferred, as
permitted under paragraph 4(a) of this Section 4.2.2), none of the shares
of Exchangeable Preferred shall be redeemed pursuant to paragraph 6(a) or
(b) of this Section 4.2.2 unless all outstanding shares of Exchangeable
Preferred are simultaneously redeemed and all such cumulative dividends are
paid in cash contemporaneously with such redemption.
7. Mandatory Redemption.
(a) The Exchangeable Preferred will be subject to mandatory redemption
(subject to the legal availability of funds therefor but without regard to
any contractual or other restriction with respect thereto) in whole on
March 15, 2008, at a price, payable in cash, equal to the liquidation
preference thereof, plus all accumulated and unpaid dividends to the date
of redemption.
(b) Upon the occurrence of a Change of Control, the Corporation will
(subject to any contractual and other restrictions with respect thereto and
to the legal availability of funds therefor) offer (the "Change of Control
Offer") to each Holder of Exchangeable Preferred to repurchase all or any
part of such Holder's Exchangeable Preferred at a cash purchase price equal
to 101% of the liquidation preference thereof, plus an amount in cash equal
to all accumulated and unpaid dividends per share to the date of purchase
(including an amount in cash equal to a prorated dividend from the dividend
payment date immediately preceding the date of purchase to the date of
purchase). The Change of Control Offer will be made within 30 days
following a Change of Control, will remain open for at least 30 and not
more than 40 days, and will be made in compliance with the requirements of
Rule 14e-1 under the Exchange Act and any other applicable securities laws
and regulations. Notwithstanding the foregoing, the Corporation will not be
required to make a Change of Control Offer if any of the Senior Discount
Notes, 122% Notes or 132% Notes are outstanding upon the occurrence of a
Change of Control unless all of the Senior Discount Notes, 122% Notes and
132% Notes tendered pursuant to the "change of control offers" with respect
thereto are repurchased as a result of such Change of Control, in which
case the date on which all Senior Discount Notes, 122% Notes and 132% Notes
(and any other Indebtedness or Senior Securities of the Corporation having
provisions similar to Section 4.04(x) of the Senior Discount Notes
Indenture) are so repurchased will be deemed to be the date on which such
Change of Control shall have occurred.
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(c) If the Corporation shall fail to discharge its obligation to
redeem all outstanding shares of Exchangeable Preferred pursuant to
paragraph 7(a) or (b) of this Section 4.2.2 (the "Mandatory Redemption
Obligation"), the Corporation shall discharge the Mandatory Redemption
Obligation as soon as the Corporation is able to do so. If and so long as
any Mandatory Redemption Obligation with respect to the Exchangeable
Preferred shall not be fully discharged, the Corporation shall not declare
or pay any dividend or make any distribution on, or, directly or
indirectly, purchase, redeem or satisfy any mandatory redemption, sinking
fund or other similar obligations in respect of, Junior Securities or
Parity Securities (other than as a result of a reclassification of Junior
Securities or Parity Securities, or the exchange or conversion of one class
or series of Junior Securities for or into another class or series of
Junior Securities, or the exchange or conversion of one class or series of
Parity Securities for or into another class or series of Parity Securities,
or other than through the use of the proceeds of a substantially
contemporaneous sale of other Junior Securities or Parity Securities and in
any case not involving the payment of cash to holders of such securities)
or any warrants, rights or options exercisable for or convertible into any
of the Junior Securities or Parity Securities.
8. Exchange.
(a) The Corporation may, at the sole option of the Board of Directors
(subject to the legal availability of funds therefor), exchange all, but
not less than all, of the shares of Exchangeable Preferred then
outstanding, including any shares of Exchangeable Preferred issued as
payment for dividends, for a new series of 14% Exchange Debentures due
March 15, 2008, of the Corporation (the "Exchange Debentures") to be issued
pursuant to the indenture (the "Indenture") qualified under the Trust
Indenture Act of 1939, as amended, substantially in the form agreed to on
the Closing Date, a copy of which is on file with and can be obtained from
the Secretary of the Corporation on request, at any time following the date
on which such exchange is permitted by the terms of the Senior Discount
Notes Indenture, the 122% Notes Indenture, the 132% Notes Indenture, and
the terms of all other then-existing Indebtedness of the Corporation and
subject to the conditions contained in paragraph 8(b) below. The Exchange
Debentures will be issued in registered form, without coupons, be duly
executed, authenticated as of the date on which the exchange is effective
and be dated the date of exchange. In the event of an exchange, Holders of
Exchangeable Preferred shall be entitled to receive on the date of exchange
Exchange Debentures having an aggregate principal amount equal to (i) the
total of the liquidation preference for each share of Exchangeable
Preferred exchanged, plus (ii) an amount equal to all accrued but unpaid
dividends payable on such share (including a prorated dividend for the
period from the immediately preceding dividend payment date to the date of
exchange). In the event such exchange would result in the issuance of
Exchange Debentures in a principal amount which is less than $1,000 or
which is not an integral multiple of $1,000 (such principal amount less
than $1,000 or the difference between such principal amount and the highest
integral of $1,000 which is less than such principal amount, as the case
may be, is hereinafter referred to as the "Fractional Principal Amount"),
the Corporation may, subject to any restrictions in the Senior Discount
Notes Indenture, the 12 1/2% Notes Indenture, the 13 1/2% Notes Indenture,
and the terms of all other then-existing Indebtedness of the Corporation,
at
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the option of the Board of Directors, pay cash to each Holder of
Exchangeable Preferred in lieu of Fractional Principal Amounts of Exchange
Debentures otherwise issuable upon exchange of the Exchangeable Preferred.
The Person entitled to receive the Exchange Debentures issuable upon
exchange shall be treated for all purposes as the registered holder of such
Exchange Debentures as of the date of exchange. In accordance with
paragraph 9 of this Section 4.2.2, the Corporation will mail to each Holder
of Exchangeable Preferred written notice of its intention to exchange no
less than 15 nor more than 60 days prior to the date of exchange.
(b) As a condition of the right of the Corporation to issue Exchange
Debentures in exchange for the Exchangeable Preferred under paragraph 8(a)
of this Section 4.2.2 on the date of exchange, (A) there shall be legally
available funds sufficient therefor (including, without limitation, legally
available funds sufficient therefor under Section 7-106-401 (or any
successor provision) of the Colorado Business Corporation Act); (B) a
registration statement relating to the Exchange Debentures shall have been
declared effective under the Securities Act prior to such exchange and
shall continue to be effective on the date of exchange, or the Corporation
shall have obtained a written opinion of its counsel that an exemption from
the registration requirements of the Securities Act is available for such
exchange and that upon receipt of such Exchange Debentures pursuant to such
an exchange made in accordance with such exemption, each holder of an
Exchange Debenture that is not an Affiliate of the Corporation will not be
subject to any restrictions imposed by the Securities Act upon the resale
of such Exchange Debenture, and such exemption is relied upon by the
Corporation for such exchange; (C) the Indenture and the Trustee thereunder
shall have been qualified under the Trust Indenture Act of 1939, as
amended; (D) immediately after giving effect to such exchange, no Default
or Event of Default would exist; and (E) the Corporation shall have
delivered to the Trustee under the Indenture a written opinion of counsel,
dated the date of exchange, regarding the satisfaction of the conditions
set forth in clauses (A), (B) and (C). In the event that (i) the issuance
of the Exchange Debentures is not permitted on the exchange date or (ii)
any of the conditions set forth in clauses (A) through (E) of the preceding
sentence are not satisfied on the exchange date, the Corporation shall use
its best efforts to satisfy such conditions and effect such exchange as
soon as practicable. Prior to initiating the exchange referred to in
paragraph (a) above, the Corporation shall certify, to the satisfaction of
the trustees under the 13 1/2% Notes Indenture, the 12 1/2% Notes Indenture
and the Senior Discount Notes Indenture, that such exchange is permitted
under such respective Indentures. The Corporation shall also provide such
trustees with an Officer's Certificate setting forth with specificity the
basis for the Corporation's conclusion that such exchange is so permitted.
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9. Procedures for Redemption or Exchange.
(a) In the event that fewer than all the outstanding shares of
Exchangeable Preferred are to be redeemed, the number of shares to be
redeemed shall be determined pro rata, except that in any redemption of
fewer than all the outstanding shares of Exchangeable Preferred, the
Corporation may redeem all shares held by any Holder of a number of shares
of Exchangeable Preferred not to exceed 100 as may be specified by the
Corporation. In the event of partial redemptions of Exchangeable Preferred,
new shares of Exchangeable Preferred having an aggregate liquidation
preference equal to the unredeemed portion will be issued in the name of
the Holder thereof upon cancellation of the original share certificate of
Exchangeable Preferred without cost to such Holder. On and after a
redemption date, unless the Corporation defaults in the payment of the
redemption price, dividends will cease to accrue on shares of Exchangeable
Preferred called for redemption and all rights of Holders of such shares
will terminate except for the right to receive the redemption price. On the
date fixed for exchange, the rights of Holders of the shares of
Exchangeable Preferred exchanged shall cease, except the right to receive
Exchange Debentures in exchange for their Exchangeable Preferred and cash
or additional Exchange Debentures in payment of accrued but unpaid
dividends on such shares to the date of exchange.
(b) In the event that the Corporation shall redeem or exchange shares
of Exchangeable Preferred, notice of every redemption or exchange of shares
of Exchangeable Preferred shall be mailed by first class mail, postage
prepaid, and mailed, in the case of exchange, not less than 15 nor more
than 60 days prior to the exchange date, and, in the case of redemption,
not less than 30 days nor more than 60 days prior to the redemption date,
addressed to the Holders of record of the shares to be redeemed or
exchanged at their respective last addresses as they shall appear on the
books of the Corporation; provided, however, that failure to give such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the proceeding for the redemption or exchange of any shares so
to be redeemed or exchanged except as to the Holder to whom the Corporation
has failed to give such notice or to whom notice was defective. Each such
notice shall state: (i) the redemption or exchange date; (ii) the number of
shares of Exchangeable Preferred to be redeemed or exchanged and, if less
than all the shares held by such Holder are to be redeemed, the number of
such shares or portion of the liquidation preference to be redeemed; (iii)
the redemption price or exchange rate; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price or exchanged for the Exchange Debentures; and (v) that
dividends on the shares to be redeemed or exchanged will cease to accrue on
such redemption date or exchange date.
(c) Notice having been mailed as aforesaid and provided that, on or
before the redemption date or exchange date, as the case may be, specified
in such notice, all duly authenticated and valid Exchange Debentures
necessary for any such exchange shall have been provided by the Corporation
and all funds necessary for such redemption or exchange shall have been set
aside by the Corporation, separate and apart from its other funds, in trust
for the pro rata benefit of the Holders of the shares so called for
redemption or exchange, so as to be and to continue to be available
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therefor, then, from and after the redemption date or exchange date, as the
case may be, dividends on the shares of Exchangeable Preferred so called
for redemption or exchange, as the case may be, shall cease to accrue, and
said shares shall no longer be deemed to be outstanding and shall not have
the status of shares of Exchangeable Preferred, and all rights of the
Holders thereof as shareholders of the Corporation (except the right to
receive from the Corporation the redemption price or the Exchange
Debentures upon exchange and any accrued and unpaid dividends or the right
to receive cash payments in lieu of fractional securities from the exchange
agent or other agent selected by the Corporation) shall cease. Upon
surrender in accordance with said notice of the certificates for any shares
so redeemed or exchanged (properly endorsed or assigned for transfer, if
the Board of Directors of the Corporation shall so require and the notice
shall so state), such shares shall be redeemed or exchanged by the
Corporation at the redemption price or exchange rate aforesaid.
(d) If such notice of redemption shall have been duly given and if,
prior to the redemption date, the Corporation shall have irrevocably
deposited the funds by the Corporation with such bank or trust company in
trust for the pro rata benefit of the holders of the shares called for
redemption, then, notwithstanding that any certificate for shares so called
for redemption shall not have been surrendered for cancellation, from and
after the time of such deposit, Holders of the shares of Exchangeable
Preferred called for redemption shall cease to be shareholders with respect
to such shares and thereafter such shares shall no longer be transferable
on the books of the Corporation and such holders shall have no interest in
or claim against the Corporation with respect to such shares (including
dividends thereon accrued after such redemption date) except the right to
receive payment of the redemption price (including all dividends accrued
and unpaid to the date fixed for redemption) upon surrender of their
certificates. Any funds deposited and unclaimed at the end of two years
from the date fixed for redemption shall be repaid to the Corporation upon
its request, after which repayment the Holders of shares called for
redemption shall look only to the Corporation for payment of the redemption
price. The aforesaid bank or trust company shall be organized and in good
standing under the laws of the United States of America or of the State of
Colorado shall have capital, surplus and undivided profits aggregating at
least $100,000,000 according to its last published statement of condition,
and shall be identified in the notice of redemption. Any interest accrued
on such funds shall be paid to the Corporation from time to time.
10. Voting Rights.
(a) Except as otherwise provided in this paragraph 10 or as otherwise
from time to time provided by law, the Holders of shares of Exchangeable
Preferred shall have no voting rights.
(b)
(i) If and whenever (A) (1) dividends on the Exchangeable
Preferred are in arrears and remain unpaid (or if after March 15,
2002, such dividends have not been paid in cash) with respect to four
quarterly periods (whether or not consecutive), (2) the Corporation
fails to discharge any redemption obligation with respect to the
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Exchangeable Preferred, (3) a breach or violation by the Corporation
of the provisions of paragraph 8 of this Section 4.2.2 occurs, or the
Corporation fails to exchange Debentures for the Exchangeable
Preferred tendered for exchange on the exchange date, whether or not
the Corporation satisfies the conditions to permit such exchange, (4)
the Corporation fails to make a Change of Control Offer or cash
payment with respect thereto if required by the provisions of
paragraph 7(b) of this Section 4.2.2, (5) a breach or violation of any
provision of paragraph 11 of this Section 4.2.2 occurs and is not
remedied within 30 days after notice thereof to the Corporation by
Holders of 25% or more of the liquidation preference of the
Exchangeable Preferred then outstanding, or (6) a default occurs in
the obligation to pay principal of, interest on or any other payment
obligation when due (a "Payment Default") at final maturity, on one or
more classes of Indebtedness of the Corporation or any Subsidiary of
the Corporation, whether such Indebtedness exists on the Closing Date
or is Incurred thereafter, having individually or in the aggregate an
outstanding principal amount of $10 million or more, or any other
Payment Default occurs on one or more such classes of Indebtedness and
such class or classes of Indebtedness are declared due and payable
prior to their respective maturities, and (B) in the case of clauses
(A)(5) and (6) above, such event continues for a period of 180 days or
more (each such event referred to as a "Voting Rights Triggering
Event"), then the number of directors then constituting the Board of
Directors of the Corporation shall be increased by two directors and
the Holders of the majority of the then outstanding shares of
Exchangeable Preferred, voting separately as a class, shall be
entitled to elect the two additional directors at any annual meeting
of shareholders or special meeting held in place thereof, or at a
special meeting of the Holders of such shares of Exchangeable
Preferred called as hereinafter provided. For the purpose of
determining the number of quarterly periods for which accrued
dividends have not been paid, any accrued and unpaid dividend that is
subsequently paid shall not be treated as unpaid. Within 15 days of
the time the Corporation becomes aware of the occurrence of any
default referred to in clause (A)(6) above, the Corporation shall give
notice thereof to Holders of the Exchangeable Preferred at their
addresses as they appear on the records of the Transfer Agent.
(ii) Whenever a Voting Rights Triggering Event shall have
occurred, voting rights of the Holders of shares of the Exchangeable
Preferred may be exercised initially either at a special meeting of
the Holders of Exchangeable Preferred, called as hereinafter provided,
or at any annual meeting of shareholders held for the purpose of
electing directors, and thereafter at each such annual meeting or by
the written consent of the Holders of Exchangeable Preferred pursuant
to Section 7-107-104 of the Colorado Business Corporation Act. The
term of office of any such elected directors shall expire at the next
annual meeting of shareholders held for the purpose of electing
directors, subject to a new election of two directors by the Holders
of shares of Exchangeable Preferred at each successive annual meeting,
but such voting right and the term of office of any such elected
directors shall expire at such time as (A) all dividends accumulated
on Exchangeable Preferred shall have been paid in full (and in the
case of dividends payable with respect to any period after March 15,
2002, shall have been paid in full in cash) and (B) each failure,
breach or default referred to in paragraph 10(b)(i)(A)(2), (3), (4),
(5), and (6) above is remedied.
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(iii) At any time after a Voting Rights Triggering Event shall
have occurred and such voting rights shall not already have been
initially exercised, a proper officer of the Corporation may, and upon
the written request of any Holder of shares of Exchangeable Preferred
(addressed to the Secretary at the principal office of the
Corporation) shall, call a special meeting of the Holders of shares of
Exchangeable Preferred for the election of the two directors to be
elected by them as herein provided, such call to be made by notice
similar to that provided in the Bylaws for a special meeting of the
shareholders or as required by law.
(iv) Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of shareholders at the
place for holding annual meetings of shareholders of the Corporation
or, if none, at a place designated by the Secretary of the
Corporation. If such meeting shall not be called by a proper officer
of the Corporation within 30 days after the personal service of such
written request upon the Secretary of the Corporation, or within 30
days after mailing the same within the United States, by registered
mail, addressed to the Secretary of the Corporation at its principal
office (such mailing to be evidenced by the registry receipt issued by
the postal authorities), then the Holders of record of 10% of the
shares of Exchangeable Preferred then outstanding may designate in
writing a Holder of Exchangeable Preferred to call such meeting at the
expense of the Corporation, and such meeting may be called by such
person so designated upon the notice required for annual meetings of
shareholders and shall be held at the same place as is elsewhere
provided in this paragraph (10)(b)(iv) or at such other place as is
selected by such person so designated. Any Holder of Exchangeable
Preferred that would be entitled to vote at any such meeting shall
have access to the stock books of the Corporation for the purpose of
causing a meeting of shareholders to be called pursuant to the
provisions of this paragraph. Notwithstanding the provisions of this
paragraph, however, no such special meeting shall be called during a
period within 90 days immediately preceding the date fixed for the
next annual meeting of shareholders.
(v) At any meeting held for the purpose of electing directors at
which the Holders of Exchangeable Preferred shall have the right to
elect directors as provided herein, the presence in person or by proxy
of the Holders of the lesser of (A) a majority of the then outstanding
shares of Exchangeable Preferred or (B) a percentage of the then
outstanding shares of Exchangeable Preferred, which percentage is
equal to the percentage of then outstanding shares of common stock
then required to constitute a quorum for the election of directors by
holders of common stock, shall be required and be sufficient to
constitute a quorum of such class for the election of directors by
such class. At any such meeting or adjournment thereof (x) the absence
of a quorum of the Holders of Exchangeable Preferred shall not prevent
the election of directors other than those to be elected by the
Holders of stock of such class and the absence of a quorum or quorums
of the holders of Capital Stock entitled to elect such other directors
shall not prevent the election of directors to be elected by the
Holders of Exchangeable Preferred and (y) in the absence of a quorum
of the holders of any class of stock entitled to vote for the election
of directors, a majority of the holders present in person or by proxy
of such class shall have the power to adjourn the meeting for the
election of directors which the holders of such class are entitled to
elect, from time to time, without notice (except as required by law)
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other than announcement at the meeting, until a quorum shall be
present.
(vi) The term of office of all directors elected by the Holders
of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this
Section 4.2.2 in office at any time when the aforesaid voting rights
are vested in the Holders of Exchangeable Preferred shall terminate
upon the election of their successors at any meeting of shareholders
for the purpose of electing directors. Upon any termination of the
aforesaid voting rights in accordance with paragraph (10)(b)(ii) of
this Section 4.2.2, the term of office of all directors elected by the
Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of
this Section 4.2.2 then in office thereupon shall terminate and upon
such termination the number of directors constituting the Board of
Directors shall, without further action, be reduced by two, subject
always to the increase of the number of directors pursuant to
paragraph (10)(b)(i) of this Section 4.2.2 in case of the future right
of the Holders of Exchangeable Preferred to elect directors as
provided herein.
(vii) In case of any vacancy occurring among the directors so
elected, the remaining director who shall have been so elected may
appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant unless and until such vacancy
shall be filled by vote of the Holders entitled to elect the directors
in accordance with paragraph 10(b) of this Section 4.2.2. If all
directors so elected by the Holders of Exchangeable Preferred shall
cease to serve as directors before their terms shall expire, the
Holders of Exchangeable Preferred then outstanding may, at a special
meeting of the Holders called as provided above, elect successors to
hold office for the unexpired terms of the directors whose places
shall be vacant.
(c) In addition to any vote or consent of shareholders required by
law, the consent of the Holders of at least a majority of the shares of
Exchangeable Preferred at the time outstanding, voting or consenting, as
the case may be, separately as one class given in person or by proxy,
either in writing without a meeting or by vote at any meeting called for
the purpose, shall be necessary for effecting or validating:
(i) Except as provided in paragraph 13 of this Section 4.2.2, any
amendment, alteration or repeal of any of the provisions of the Second
Amended and Restated Articles of Incorporation, or of the Bylaws of
the Corporation, which affects adversely the voting rights, rights,
privileges, or preferences of the Holders of shares of Exchangeable
Preferred or authorizes the issuance of any additional shares of
Exchangeable Preferred (other than to pay dividends in kind on
Exchangeable Preferred); provided, however, that the amendment of the
provisions of the Second Amended and Restated Articles of
Incorporation so as to authorize or create, or to increase the
authorized amount of, any of the Corporation's Junior Securities or to
authorize the issuance of or to authorize or create any Parity
Securities (up to the amount of authorized preferred stock) shall not
be deemed to affect adversely the voting rights, rights, privileges,
or preferences of the Holders of shares of Exchangeable Preferred;
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(ii) Any amendment, alteration or repeal of any of the provisions
of the Indenture; provided, however, that no such consent of the
Holders of Exchangeable Preferred shall be required for such
amendments as would be permitted under the terms of the Indenture
without the consent of any of the holders of the Exchange Debentures;
or
(iii) The authorization or creation of, or the increase in the
authorized amount of, any Senior Securities or shares of any class of
any security convertible into shares of any Senior Securities;
provided, however, that on or after March 15, 2002, no such consent of
the Holders of Exchangeable Preferred shall be required if, at or
prior to the time when such amendment, alteration or repeal is to take
effect or when the issuance of any such Senior Securities or
convertible security is to be made, as the case may be, provision is
made, and funds are set aside, for the redemption of all shares of
Exchangeable Preferred at the time outstanding.
11. Certain Covenants.
(a) Incurrence of Indebtedness and Issuance of Preferred Stock.
(i) The Corporation will not, and will not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness (other than the
Senior Discount Notes, the Exchange Debentures and Indebtedness
existing on the Closing Date) or issue any Redeemable Stock; provided
that the Corporation may Incur Indebtedness or issue Redeemable Stock
if, after giving effect to the Incurrence of such Indebtedness or the
issuance of such Redeemable Stock and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
(ii) Notwithstanding the provisions of paragraph 11(a)(i) above,
the Corporation and any Restricted Subsidiary (except as specified
below) may Incur each and all of the following: (A) Indebtedness of
the Corporation or any Restricted Subsidiary or Redeemable Stock of
the Corporation outstanding at any time, which Indebtedness or
Redeemable Stock generates gross proceeds to the Corporation of up to
$900 million, less (without duplication) the gross proceeds of
Indebtedness permanently repaid as provided under the "Limitation on
Asset Sales" covenant contained in the 13 1/2% Notes Indenture, the 12
1/2% Notes Indenture and the Senior Discount Notes Indenture; (B)
Indebtedness to ICG, the Corporation or any of the Corporation's
Wholly Owned Restricted Subsidiaries; provided that any subsequent
issuance or transfer of any Capital Stock which results in any such
Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to ICG, the Corporation or another Wholly Owned Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence
of such Indebtedness not permitted by this clause (B); (C)
Indebtedness or Redeemable Stock issued in exchange for, or the net
proceeds of which are used to refinance or refund, then outstanding
Indebtedness or Redeemable Stock, other than Indebtedness Incurred or
Redeemable Stock issued under clause (A), (B), (E), (F), (H), (I), (J)
or (K) of this paragraph 11(a)(ii), and any refinancings thereof in an
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amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, accrued dividends, fees and expenses);
provided that such new Indebtedness or Redeemable Stock, determined as
of the date of Incurrence of such new Indebtedness or issuance of
Redeemable Stock, does not mature prior to the stated maturity of the
Indebtedness or have a mandatory redemption date prior to the
Redeemable Stock to be refinanced or refunded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and provided further
that in no event may Indebtedness or Redeemable Stock of the
Corporation be refinanced by means of any Indebtedness or Redeemable
Stock of any Restricted Subsidiary of the Corporation pursuant to this
clause (C); (D) Indebtedness (1) in respect of performance, surety or
appeal bonds provided in the ordinary course of business, (2) under
Currency Agreements and Interest Rate Agreements; provided that such
agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, and (3) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Corporation or any
of its Restricted Subsidiaries pursuant to such agreements, in any
case Incurred in connection with the disposition of any business,
assets or Restricted Subsidiary of the Corporation (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of the
Corporation for the purpose of financing such acquisition), in a
principal amount at maturity not to exceed the gross proceeds actually
received by the Corporation or any Restricted Subsidiary in connection
with such disposition; (E) Indebtedness or Redeemable Stock of the
Corporation, to the extent the proceeds referred to below are
contributed to the Corporation, not to exceed, at any one time
outstanding, twice the amount of Net Cash Proceeds received by ICG
after the Closing Date from the issuance and sale of its Capital Stock
(other than Redeemable Stock or preferred stock); provided that such
Indebtedness does not mature prior to the final mandatory redemption
date of the Exchangeable Preferred; (F) Strategic Investor
Subordinated Indebtedness; (G) Indebtedness or Redeemable Stock of the
Corporation, to the extent the proceeds thereof are immediately used
after the Incurrence or issuance thereof to purchase Exchangeable
Preferred or preferred stock, as the case may be, tendered in a Change
of Control Offer or a change of control offer, as the case may be; (H)
Indebtedness of any Restricted Subsidiary of the Corporation Incurred
pursuant to any credit agreement of such Restricted Subsidiary in
effect on August 8, 1995 (or any agreement refinancing Indebtedness
under such credit agreement), up to the amount of the commitment under
such credit agreement (including equipment leasing or financing
agreements) on August 8, 1995; (I) Indebtedness of the Corporation, in
an amount not to exceed $100 million at any one time outstanding,
consisting of Capitalized Lease Obligations with respect to assets
that are used or useful in the telecommunications business of the
Corporation or its Restricted Subsidiaries; (J) Indebtedness or
Redeemable Stock of any Person that becomes a Restricted Subsidiary of
the Corporation after the Closing Date, which Indebtedness exists or,
with respect to such Indebtedness for which there is a commitment to
lend, at the time such Person becomes a Restricted Subsidiary and,
with respect to such Indebtedness, the subsequent Incurrence thereof
("Acquired Indebtedness"), in an accreted amount not to exceed $50
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million at any one time outstanding in the aggregate for all such
Restricted Subsidiaries; provided that such Acquired Indebtedness does
not exceed 65% of the consideration (calculated by including such
Acquired Indebtedness as a part of such consideration) paid by the
Corporation and its Restricted Subsidiaries for the acquisition of
such Person; (K) Indebtedness of the Corporation, in an amount not to
exceed $30 million at any one time outstanding, consisting of letters
of credit and similar arrangements used to support obligations of the
Corporation or any of its Restricted Subsidiaries with respect to the
acquisition of (by purchase, lease or otherwise), construction of, or
improvements on, assets that will be used or useful in the
telecommunications business of the Corporation or its Restricted
Subsidiaries; and (L) Indebtedness Incurred to finance the cost
(including the cost of design, development, construction, installation
or integration) of assets, equipment or inventory used or useful in
the telecommunications business of ICG or any of the Restricted
Subsidiaries that is acquired by ICG or any of its Restricted
Subsidiaries after the Closing Date.
(iii) For purposes of determining any particular amount of
Indebtedness under paragraphs 11(a)(i) or (ii) above, (A) Indebtedness
of any Restricted Subsidiary of the Corporation incurred on or prior
to the Closing Date pursuant to any credit agreement (including
equipment leasing or financing agreements) of such Restricted
Subsidiary in effect on August 8, 1995, shall be treated as Incurred
pursuant to paragraph 11(a)(ii)(H) of this Section 4.2.2, and (B)
Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included. For purposes of
determining compliance with the covenants contained in paragraphs
11(a)(i) and (ii) above, in the event that an item of Indebtedness or
Redeemable Stock meets the criteria of more than one of the types of
Indebtedness or Redeemable Stock described in such clauses, the
Corporation, in its sole discretion, shall classify such item of
Indebtedness or Redeemable Stock and only be required to include the
amount and type of such Indebtedness or Redeemable Stock in one of
such clauses.
(b) Limitation on Restricted Payments.
(i) So long as any shares of the Exchangeable Preferred are
outstanding, the Corporation will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, (A) declare or pay
any dividend or make any distribution on Junior Securities held by
Persons other than the Corporation or any of its Restricted
Subsidiaries (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Junior Securities (other
than Redeemable Stock) of the same class held by such holders or in
options, warrants or other rights to acquire such shares of Junior
Securities and other than pro rata dividends or distributions on
common stock of Restricted Subsidiaries); (B) purchase, redeem, retire
or otherwise acquire for value any shares of Junior Securities of the
Corporation or any Restricted Subsidiary (including options, warrants
or other rights to acquire such shares of Junior Securities) held by
Persons other than the Corporation or any of its Wholly Owned
Restricted Subsidiaries (except for Junior Securities of ChoiceCom,
MTN, StarCom, Ohio LINX, FOTI and Zycom to the extent the
consideration therefor consists solely of common stock (other than
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Redeemable Stock) of ICG or Junior Securities of the Corporation, in
each case transferred in compliance with the Securities Act); or (C)
make any Investment, other than a Permitted Investment, in any Person
(such payments or any other actions described in clauses (i)(A)
through (C) being collectively "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment: (1)
an event referred to in clauses (1) through (6) of paragraph
10(b)(i)(A) of this Section 4.2.2 shall have occurred and be
continuing, (2) the Corporation could not Incur at least $1.00 of
Indebtedness under paragraph 11(a)(i) of this Section 4.2.2, (3) the
aggregate amount expended for all Restricted Payments (the amount so
expended, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and
evidenced by a board resolution) after the date hereof shall exceed
the sum of (aa) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income
is a loss, minus 100% of such amount) (determined by excluding income
resulting from transfers of assets by the Corporation or a Restricted
Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing
Date and ending on the last day of the last fiscal quarter preceding
the Transaction Date for which reports have been filed pursuant to
paragraph 11(i) of this Section 4.2.2 plus (bb) the aggregate Net Cash
Proceeds received by the Corporation after the Closing Date (x) from
the issuance and sale, permitted hereunder, of Junior Securities
(other than Redeemable Stock) to a Person who is not a Subsidiary of
the Corporation, or from the issuance to a Person who is not a
Subsidiary of the Corporation of any options, warrants or other rights
to acquire Junior Securities of the Corporation (in each case,
exclusive of any Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the stated maturity of the
Exchangeable Preferred) or (y) as a capital contribution from ICG plus
(cc) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans
or advances, or other transfers of assets, in each case to the
Corporation or any Restricted Subsidiary (except to the extent any
such payment is included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed the amount of Investments
previously made by the Corporation and its Restricted Subsidiaries in
such Person or (4) dividends on the Exchangeable Preferred shall not
have been paid in full as provided in paragraph 4 of this Section
4.2.2.
(ii) The provisions of paragraph 11(b)(i) above shall not be
violated by reason of: (A) the payment of any dividend within 60 days
after the date of declaration thereof if, at said date of declaration,
such payment would comply with paragraph 11(b)(i) above; (B) the
repurchase, redemption or other acquisition of Junior Securities of
the Corporation (or options, warrants or other rights to acquire such
Junior Securities) and with respect to any Junior Securities, the
payment of accrued dividends thereon, in exchange for, or out of the
proceeds of a substantially concurrent issuance or sale of, shares of
Junior Securities (other than Redeemable Stock) of the Corporation;
provided that the redemption of any preferred stock pursuant to any
mandatory redemption feature thereof and any redemption of any other
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Junior Securities and, in each case, the payment of accrued dividends
thereon (or options, warrants or other rights to acquire such Junior
Securities) and with respect to any Junior Securities, the payment of
accrued dividends thereon, shall be deemed to be "substantially
concurrent" with such issuance and sale if the required notice with
respect to such redemption is irrevocably given by a date which is no
later than five Business Days after receipt of the proceeds of such
issuance and sale and such redemption and payment is consummated
within the period provided for in the document governing such
preferred stock or the documents governing the redemption of such
other Junior Securities, as the case may be; (C) payments or
distributions, in the nature of satisfaction of dissenters' rights,
pursuant to or in connection with a consolidation, merger or transfer
of assets that complies with the provisions of paragraph 11(g) of this
Section 4.2.2; (D) Investments, not to exceed $10 million in the
aggregate, each evidenced by a senior promissory note payable to the
Corporation that provides that it will become due and payable prior to
any required repurchase (including pursuant to an Offer to Purchase in
connection with a Change of Control) of the Exchangeable Preferred;
(E) Investments, not to exceed $5 million in the aggregate, that meet
the requirements of clause (D) above; provided that the Board of
Directors of the Corporation shall have determined, in good faith,
that each such Investment under this clause (E) will enable the
Corporation or one of its Restricted Subsidiaries to obtain additional
business that it might not be able to obtain without the making of
such Investment; (F) with respect to Junior Securities permitted to be
issued and sold by the provisions of paragraph 11(d) of this Section
4.2.2, the payment (1) of dividends on such Junior Securities in
additional shares of Junior Securities and (2) of cash dividends on
such Junior Securities in an amount not to exceed the dividend rate
thereon and accrued interest on unpaid dividends, in each case after
May 1, 2001; (G) the repurchase, in the event of a Change of Control,
of Junior Securities of the Corporation and Indebtedness of the
Corporation into which such Junior Securities have been exchanged;
provided that prior to repurchasing such Junior Securities or
Indebtedness, the Corporation shall have made a Change of Control
Offer to repurchase the shares of Exchangeable Preferred in accordance
with the terms of paragraph 7(b) of this Section 4.2.2 (and an offer
to repurchase other Indebtedness, if required by the terms thereof, in
accordance with the indenture or other document governing such other
Indebtedness) and shall have accepted and paid for any shares of
Exchangeable Preferred (and other Indebtedness) properly tendered in
connection with such Change of Control Offer for the shares of
Exchangeable Preferred or change of control offer for such other
Indebtedness; and (H) the issuance of Indebtedness permitted to be
issued hereunder in exchange for preferred stock; provided that the
Incurrence of such Indebtedness complies with the provisions of
paragraph 11(a) of this Section 4.2.2; provided that, except in the
case of clause (A), no Default or Event of Default shall have occurred
and be continuing or occur as a consequence of the actions or payments
set forth in this paragraph 11(b)(ii).
(iii) Each Restricted Payment permitted pursuant to paragraph
11(b)(ii) above (other than the Restricted Payments referred to in
clauses (F)(1) and (H) thereof), and the Net Cash Proceeds from any
issuance of Junior Securities referred to in clause (B) thereof, shall
be included in calculating whether the conditions of clause (3) of
paragraph 11(b)(i) of this Section 4.2.2 have been met with respect to
any subsequent Restricted Payments. Notwithstanding the foregoing, in
the event the proceeds of an issuance of Junior Securities are used
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for the redemption, repurchase or other acquisition of the
Exchangeable Preferred, or Parity Securities, then the Net Cash
Proceeds of such issuance shall be included in clause (3) of paragraph
11(b)(i)(C) of this Section 4.2.2 only to the extent such proceeds are
not used for such redemption, repurchase or other acquisition of
Exchangeable Preferred or Parity Securities.
(c) Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. So long as any shares of Exchangeable Preferred
are outstanding, the Corporation will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on
the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of
such Restricted Subsidiary owned by the Corporation or any other Restricted
Subsidiary, (ii) pay any Indebtedness owed to the Corporation or any other
Restricted Subsidiary, (iii) make loans or advances to the Corporation or
any other Restricted Subsidiary or (iv) transfer any of its property or
assets to the Corporation or any other Restricted Subsidiary. The foregoing
provisions shall not restrict any encumbrances or restrictions: (i)
existing on the Closing Date in any agreements in effect on the Closing
Date, and any extensions, refinancings, renewals or replacements of such
agreements; provided that the encumbrances and restrictions in any such
extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders of the Exchangeable Preferred than
those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Corporation or any
Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are
not applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired; (iv)
in the case of clause (iv) of the first sentence of this paragraph 11(c),
(A) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset, (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Corporation or any Restricted
Subsidiary not otherwise prohibited hereunder or (C) arising or agreed to
in the ordinary course of business, not relating to any Indebtedness, and
that do not, individually or in the aggregate, detract from the value of
property or assets of the Corporation or any Restricted Subsidiary in any
manner material to the Corporation or any Restricted Subsidiary; or (v)
with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this paragraph 11(c) shall
prevent the Corporation or any Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted
pursuant to paragraph 11(f) of this Section 4.2.2 or (2) restricting the
sale or other disposition of property or assets of the Corporation or any
of its Restricted Subsidiaries that secure Indebtedness of the Corporation
or any of its Restricted Subsidiaries.
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(d) Limitation on Issuances and Sale of Capital Stock of Restricted
Subsidiaries. The Corporation will not sell, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any shares
of Capital Stock of a Restricted Subsidiary (including options, warrants or
other rights to purchase shares of such Capital Stock) except (i) to the
Corporation or a Wholly Owned Restricted Subsidiary; (ii) issuances or
sales to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary; (iv) with
respect to common stock of ChoiceCom, MTN, StarCom and Zycom; provided that
the proceeds of any such sale under this clause (iv) shall be reinvested in
the business of the Corporation and its Restricted Subsidiaries or used to
repay Indebtedness of the Corporation or any of its Restricted Subsidiaries
or Senior Securities; and (v) with respect to common stock of FOTI;
provided that FOTI shall not retain any net proceeds from such sales or
issuances in excess of $10 million in the aggregate and any net proceeds in
excess of such $10 million shall be received by, or paid promptly by FOTI
to, the Corporation or any Wholly Owned Restricted Subsidiary of the
Corporation.
(e) Limitation on Transactions with Shareholders and Affiliates. The
Corporation will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or
any Affiliate of such holder) of 5% or more of any class of Capital Stock
of the Corporation or with any Affiliate of the Corporation or any
Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to the Corporation or such Restricted Subsidiary than could be
obtained, at the time of such transaction or at the time of the execution
of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate. The
foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors of the Corporation or (B) for which the Corporation or a
Restricted Subsidiary delivers to the Transfer Agent a written opinion of a
nationally recognized investment banking firm stating that the transaction
is fair to the Corporation or such Restricted Subsidiary from a financial
point of view; (ii) any transaction solely between the Corporation and any
of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries; (iii) the payment of reasonable and customary
regular fees to directors of the Corporation who are not employees of the
Corporation; (iv) any payments or other transactions pursuant to any
tax-sharing agreement (or a similar agreement that is not materially
adverse to the interests of Holders of the Exchangeable Preferred) between
the Corporation and any other Person with which the Corporation files a
consolidated tax return or with which the Corporation is part of a
consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by paragraph 11(b) of this Section 4.2.2. Notwithstanding the
foregoing, any transaction covered by the first sentence of this paragraph
11(e) and not covered by clauses (ii) through (iv) of the preceding
sentence, the aggregate amount of which exceeds $2 million in value, must
be approved or determined to be fair in the manner provided for in clause
(i)(A) or (B) of the preceding sentence.
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(f) Limitation on Liens. The Corporation will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any
Lien on any of its assets or properties, now or hereafter acquired, or any
shares of Capital Stock of or Indebtedness of any Restricted Subsidiary.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Corporation or its Restricted Subsidiaries created in
favor of the Holders of the Exchangeable Preferred; (iii) Liens with
respect to the assets of a Restricted Subsidiary granted by such Restricted
Subsidiary to the Corporation or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to the Corporation or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under paragraph
11(a)(ii)(C) of this Section 4.2.2; provided that such Liens do not extend
to or cover any property or assets of the Corporation or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced; (v) Liens with respect to assets or properties of any
Person that becomes a Restricted Subsidiary after the Closing Date;
provided that such Liens do not extend to or cover any assets or properties
of the Corporation or any of its Restricted Subsidiaries other than the
assets or properties of such Person subject to such Lien on the date such
Person becomes a Restricted Subsidiary; and provided further that such
Liens are not incurred in contemplation of, or in connection with, such
Person becoming a Restricted Subsidiary; (vi) Permitted Liens; and (vii)
Liens securing Indebtedness.
(g) Merger, Consolidation and Sale of Assets. The Corporation shall
not consolidate with, merge with or into, or sell, convey, transfer, lease
or otherwise dispose of all or substantially all of its property and assets
(as an entirety or substantially an entirety in one transaction or a series
of related transactions) to, any Person (other than a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive
net worth; provided that, in connection with any such merger or
consolidation, no consideration (other than common stock in the surviving
Person or the Corporation) shall be issued or distributed to the
shareholders of the Corporation) or permit any Person to merge with or into
the Corporation unless: (i) the Corporation shall be the continuing Person,
or the Person (if other than the Corporation) formed by such consolidation
or into which the Corporation is merged or that acquired or leased such
property and assets of the Corporation shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and the Exchangeable Preferred shall be converted into
or exchanged for and shall become shares of such successor company, having
in respect of such successor or resulting company substantially the same
powers, preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions thereon that the
Exchangeable Preferred had immediately prior to such transaction; (ii)
immediately after giving effect to such transaction, no event referred to
under paragraph 10(b)(i)(A)(1) through (5) of this Section 4.2.2 or any
default, breach or violation that would become such an event after the
giving of notice, the passage of time or both, shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a
pro forma basis, the Corporation or any Person becoming the successor
issuer of the Exchangeable Preferred, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth
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of the Corporation immediately prior to such transaction; (iv) immediately
after giving effect to such transaction on a pro forma basis the
Corporation, or any Person becoming the successor issuer of the
Exchangeable Preferred, as the case may be, could Incur at least $1.00 of
Indebtedness under paragraph 11(a)(i) of this Section 4.2.2; and (v) the
Corporation delivers to the Transfer Agent an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clauses (iii) and (iv) above) and an opinion of counsel, in each case
stating that such consolidation, merger or transfer complies with this
provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; provided, however, that clauses
(iii) and (iv) above shall not apply if, in the good faith determination of
the Board of Directors of the Corporation evidenced by a board resolution,
the principal purpose of such transaction is part of a plan to change the
jurisdiction of incorporation of the Corporation to a different state of
the United States; and provided further that any such transaction shall not
have as one of its purposes the evasion of the foregoing limitations.
(h) Senior Subordinated Indebtedness. So long as any shares of
Exchangeable Preferred are outstanding, the Corporation will not Incur any
Indebtedness, other than the Exchange Debentures, that is expressly made
subordinated in right of payment to any Senior Indebtedness (as defined in
the Indenture) unless such Indebtedness, by its terms and by the terms of
any agreement or instrument pursuant to which such Indebtedness is
outstanding is expressly made pari passu with, or subordinate in right of
payment to, the Exchange Debentures pursuant to provisions substantially
similar to those contained in Article Eleven of the Indenture; provided
that the foregoing limitations shall not apply to distinctions between
categories of Senior Indebtedness that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior
Indebtedness.
(i) Reports. So long as any shares of Exchangeable Preferred are
outstanding, the Corporation shall file with the Securities and Exchange
Commission (the "Commission") the annual reports, quarterly reports and the
information, documents and other reports required to be filed by the
Corporation with the Commission pursuant to Sections 13 or 15 of the
Exchange Act, whether or not the Corporation has or is required to have a
class of securities registered under the Exchange Act, at the time it is or
would be required to file the same with the Commission and, within 15 days
after the Corporation is or would be required to file such reports,
information or documents with the Commission, shall mail such reports,
information and documents to the Transfer Agent and to each Holder, or
shall supply such reports to the Transfer Agent for forwarding to each
Holder, at such Holder's address set forth on the register maintained by
the Transfer Agent.
12. Transfer and Legending of Shares. No transfer of shares of the
Exchangeable Preferred shall be effective until such transfer is registered on
the books of the Corporation. Until registered under the Securities Act or the
expiration of the time period referred to in Rule 144(k) (as then in effect)
under the Securities Act, all shares of Exchangeable Preferred will bear the
following legend:
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THIS PREFERRED STOCK HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF,
THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT), (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS PREFERRED STOCK IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES
ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT
WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER
OF THIS PREFERRED STOCK, RESELL OR OTHERWISE TRANSFER THIS
PREFERRED STOCK EXCEPT (A) TO ICG HOLDINGS, INC. (THE
"CORPORATION") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE
144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR
TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS PREFERRED STOCK (THE FORM OF
WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) OR (F)
AFTER REGISTRATION UNDER THE SECURITIES ACT AND (3) AGREES THAT
IT WILL DELIVER TO EACH PERSON TO WHOM THIS PREFERRED STOCK IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
IN CONNECTION WITH ANY TRANSFER OF THIS PREFERRED STOCK WITHIN
THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST EXECUTE A
LETTER (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
TRANSFER AGENT) RELATING TO THE MANNER OF SUCH TRANSFER AND
SUBMIT THIS CERTIFICATE TO THE TRANSFER AGENT. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S.
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
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SECURITIES ACT. THE SECOND AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF THE CORPORATION CONTAINS A PROVISION REQUIRING
THE TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS
PREFERRED STOCK IN VIOLATION OF THE FOREGOING RESTRICTIONS.
The Corporation shall refuse to register any attempted transfer of shares of
Exchangeable Preferred not in compliance with this paragraph 12.
13. Amendments and Waivers. Notwithstanding any other provisions hereof and
to the extent allowable from time to time by applicable law, the Board of
Directors may, by duly adopted resolution, amend any of the provisions of the
Second Amended and Restated Articles of Incorporation, without notice to or any
consent or approval of any of the Holders of Exchangeable Preferred, for the
following purposes:
(1) to cure any ambiguity, defect or inconsistency in the First
Amended and Restated Articles of Incorporation; provided that such
amendment does not and will not adversely affect the interests of the
Holders of Exchangeable Preferred in any material respect; or
(2) to make any change that the Board of Directors determines in good
faith does not materially and adversely affect the rights of any Holder of
Exchangeable Preferred.
Except as provided in the preceding sentence, any right, preference, privilege
or power of, or restriction provided for the benefit of, the Exchangeable
Preferred set forth herein may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the Corporation and the
affirmative vote or written consent of the Holders of at least a majority of the
shares of Exchangeable Preferred then outstanding, and any amendment or waiver
so effected shall be binding upon the Corporation and all Holders of the
Exchangeable Preferred.
14. Rules of Construction. The descriptive headings in this Section 4.2.2
are inserted for convenience of reference only and are not intended to be part
of or affect the meaning or interpretation of any provision of this Section
4.2.2. Words used in this Section 4.2.2, regardless of the gender and number
specifically used, shall be deemed and construed to include any other gender,
masculine, feminine, or neuter, and any other number, singular or plural, as the
context requires. As used in this Section 4.2.2, the word "including" is not
limiting, and the word "or" is not exclusive.
ARTICLE V
Cumulative voting of shares of stock is not permitted.
Shareholders shall not have preemptive rights to acquire additional
unissued or treasury shares of the Corporation. The Corporation may issue and
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sell shares of its stock to its officers, directors or employees without first
offering such shares to its shareholders for such consideration and upon such
terms and conditions as shall be approved by the Board of Directors and without
approval by the shareholders of the Corporation.
ARTICLE VI
The Board of Directors may cause any shares issued by the Corporation to be
issued subject to such lawful restrictions, qualifications, limitations or
special rights as they deem fit, which restrictions, qualifications, limitations
or special rights shall be created by provisions in the Bylaws of the
Corporation or in the duly adopted resolutions of the Board of Directors;
provided that notice of such special restrictions, qualifications, limitations
or special rights must appear on the certificate evidencing ownership of such
shares.
ARTICLE VII
Subject to the provisions of Sections 4.2.1 and 4.2.2 of Article IV,
meetings of shareholders may be held at such time and place as the Bylaws shall
provide. A majority of the shares entitled to vote represented in person or by
proxy shall constitute a quorum at any meeting of the shareholders.
ARTICLE VIII
Subject to the provisions of Sections 4.2.1 and 4.2.2 of Article IV, the
number of directors to be elected at the annual meeting of shareholders or at a
special meeting called for the election of directors shall not be less than
three, nor more than nine, the exact number to be fixed by the Bylaws; provided,
however, that there need be only as many directors as there are shareholders in
the event that the outstanding shares are held of record by fewer than three
shareholders.
ARTICLE IX
A director of this Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except that this provision shall not limit the liability of a
director to the Corporation or to its shareholders for monetary damages for: (i)
any breach of the director's duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) acts specified in
Section 7-108-403 of the Colorado Business Corporation Act as the same may be
amended from time to time; or (iv) any transaction from which the director
derived an improper personal benefit. If the Colorado Business Corporation Act
is amended to authorize corporate actions further limiting or eliminating the
personal liability of directors, then the liability of a director of the
Corporation shall be limited or eliminated to the fullest extent permitted by
the Colorado Business Corporation Act, as so amended.
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Any repeal or modification of the foregoing Article IX by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE X
The officers, directors and other members of management of this Corporation
shall be subject to the doctrine of corporate opportunities only insofar as it
applies to business opportunities in which this Corporation has expressed an
interest as determined from time to time by the Corporation's Board of Directors
as evidenced by resolutions appearing in the Corporation's Minutes. When such
areas of interest are delineated, all such business opportunities within such
areas of interest which come to the attention of the officers, directors and
other members of management of this Corporation shall be disclosed promptly to
this Corporation and made available to it. The Board of Directors may reject any
business opportunity presented to it and thereafter any officer, director or
other member of management may avail himself/herself of such opportunity. Until
such time as this Corporation, through its Board of Directors, has designated an
area of interest, the officers, directors and other members of management of
this Corporation shall be free to engage in such areas of interest on their own
and this doctrine shall not limit the rights of any officer, director or other
member of management of this Corporation to continue a business existing prior
to the time that such area of interest is designated by this Corporation. This
provision shall not be construed to release any employee of the Corporation
(other than an officer, director or member of management) from any duties which
he/she may have to the Corporation.
ARTICLE XI
Any of the directors or officers of this Corporation shall not, in the
absence of fraud, be disqualified by his/her office from dealing or contracting
with this Corporation whether as vendor, purchaser or otherwise, nor shall any
firm, association, or Corporation of which he/she shall be a member, or in which
he/she may be pecuniarily interested in any manner be disqualified. No director
or officer, nor any firm, association or corporation with which he/she is
connected as aforesaid shall be liable to account to this Corporation or its
shareholders for any profit realized by him/her from or through any such
transaction or contract; it being the express purpose and intent of this Article
to permit this Corporation to buy from, sell to, or otherwise deal with
partnerships, firms or corporations of which the directors and officers of this
Corporation, or any one or more of them, may be members, directors, or officers,
or in which they or any of them have pecuniary interests; and the contracts of
this Corporation, in the absence of fraud, shall not be void or voidable or
affected in any manner by reason of any such membership. The interested director
or directors may be counted in determining the presence of a quorum at a meeting
of the Board of Directors or a committee thereof authorizing, approving, or
ratifying any such contract or transaction. Further, the vote of any such
interested director at a meeting of the Board of Directors or committee thereof
authorizing, approving or ratifying any such contract or transaction may be
counted if his/her relationship or interest with respect to any such contract or
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transaction (i) is disclosed and such transaction or contract is authorized,
approved or ratified by a majority of the directors without counting the vote or
consent of such interested director, or (ii) is disclosed to the shareholders of
the Corporation and authorized, approved or ratified by the shareholders by vote
or written consent, or (iii) such contract or transaction is fair and reasonable
to the Corporation.
ARTICLE XII
When with respect to any action to be taken by shareholders of this
Corporation, the Colorado Business Corporation Act requires the vote or
concurrence of the holders of two-thirds of the outstanding shares entitled to
vote thereon, or of any class or series, such action may be taken by the vote or
concurrence of a majority of such shares or class or series thereof.
ARTICLE XIII
Subject to repeal by action of the shareholders, the Board of Directors of
this Corporation is authorized to adopt, confirm, ratify, alter, amend, rescind
and repeal Bylaws or any portion thereof from time to time.
ARTICLE XIV
The address of the Corporation's registered office is 9605 E. Maroon
Circle, Englewood, Colorado 80112 and the name of the registered agent at such
address is James D. Grenfell.
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ICG COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
--------------------
Effective as of January 1, 1998
<PAGE>
ICG Communications, Inc.
1998 Stock Option Plan
INTRODUCTION
ICG Communications, Inc., a Delaware corporation (hereinafter referred to
as the "Corporation"), hereby establishes an incentive compensation plan to be
known as the "ICG Communications, Inc. 1998 Stock Option Plan" (hereinafter
referred to as the "Plan"), as set forth in this document. The Plan permits the
grant of Non-Qualified Stock Options and Incentive Stock Options.
The purpose of the Plan is to promote the success and enhance the value of
the Corporation by linking the personal interests of Participants to those of
the Corporation's stockholders by providing Participants with an incentive for
outstanding performance. The Plan is further intended to assist the Corporation
in its ability to motivate, and retain the services of, Participants upon whose
judgment, interest and special effort the successful conduct of its operations
is largely dependent.
<PAGE>
DEFINITIONS
For purposes of this Plan, the following terms shall be defined as follows
unless the context clearly indicates otherwise:
A. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder.
B. "Committee" shall mean the Stock Option Committee of the Board of
Directors of the Corporation.
C. "Common Stock" shall mean the common stock, $.01 par value, of the
Corporation.
D. "Corporation" shall mean ICG Communications, Inc., a Delaware
corporation.
E. "Director Participant" shall mean a director of the Corporation or of
any Parent or Subsidiary on the date of a grant of Options under Section V(B)
hereof who is not a common law employee of the Corporation, any Parent or any
Subsidiary.
F. "Disability" shall have the same meaning as the term "permanent and
total disability" under Section 22(e)(3) of the Code.
G. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
H. "Executive" shall mean an employee of the Corporation or of any Parent
or Subsidiary whose compensation is subject to the deduction limitations set
forth under Code Section 162(m).
I. "Fair Market Value" of the Corporation's Common Stock on a Trading Day
shall mean the last reported sale price for Common Stock or, in case no such
reported sale takes place on such Trading Day, the average of the closing bid
and asked prices for the Common Stock for such Trading Day, in either case on
the principal securities exchange on which the Common Stock is listed or
admitted to trading, or if the Common Stock is not listed or admitted to trading
on any securities exchange, but is traded in the over-the-counter market, the
closing sale price of the Common Stock or, if no sale is publicly reported, the
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<PAGE>
average of the closing bid and asked quotations for the Common Stock, as
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or any comparable system or, if the Common Stock is not listed
on NASDAQ or a comparable system, the closing sale price of the Common Stock or,
if no sale is publicly reported, the average of the closing bid and asked
prices, as furnished by two members of the National Association of Securities
Dealers, Inc. who make a market in the Common Stock selected from time to time
by the Corporation for that purpose. In addition, for purposes of this
definition, a "Trading Day" shall mean, if the Common Stock is listed on any
securities exchange, a business day during which such exchange was open for
trading and at least one trade of Common Stock was effected on such exchange on
such business day, or, if the Common Stock is not listed on any national
securities exchange but is traded in the over-the-counter market, a business day
during which the over-the-counter market was open for trading and at least one
"eligible dealer" quoted both a bid and asked price for the Common Stock. An
"eligible dealer" for any day shall include any broker-dealer who quoted both a
bid and asked price for such day, but shall not include any broker-dealer who
quoted only a bid or only an asked price for such day. In the event the
Corporation's Common Stock is not publicly traded, the Fair Market Value of such
Common Stock shall be determined by the Committee in good faith.
J. "Good Cause" shall mean (i) a Participant's willful or gross misconduct
or willful or gross negligence in the performance of his duties for the
Corporation or for any Parent or Subsidiary after prior written notice of such
misconduct or negligence and the continuance thereof for a period of 30 days
after receipt by such Participant of such notice, (ii) a Participant's
intentional or habitual neglect of his duties for the Corporation or for any
Parent or Subsidiary after prior written notice of such neglect, or (iii) a
Participant's theft or misappropriation of funds of the Corporation or of any
Parent or Subsidiary or commission of a felony.
K. "Incentive Stock Option" shall mean a stock option satisfying the
requirements for tax-favored treatment under Section 422 of the Code.
L. "Non-Qualified Option" shall mean a stock option which does not satisfy
the requirements for, or which is not intended to qualify for, tax-favored
treatment under Section 422 of the Code.
M. "Option" or "Plan Award" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option granted pursuant to the provisions of Section V
hereof.
N. "Optionee" shall mean a Participant who is granted an Option under the
terms of this Plan.
O. "Outside Directors" shall mean members of the Board of Directors of the
Corporation who are classified as "outside directors" under Section 162(m) of
the Code.
P. "Parent" shall mean a parent corporation of the Corporation within the
meaning of Section 424(e) of the Code.
Q. "Participant" shall mean any employee of the Corporation or any Parent
or Subsidiary, or a Director Participant, participating under the Plan.
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R. "Plan Quarter" shall mean the three calendar month periods beginning
January 1st, April 1st, July 1st and October 1st.
S. "Retirement" shall mean the termination of employment by a Participant
in the Plan from the Corporation or from any Parent or Subsidiary, who at the
time of such termination is at least fifty-five (55) years of age and who has
completed at least ten (10) years of service (at least 1,000 hours in any fiscal
year) with the Corporation or any Parent or Subsidiary, or any combination
thereof.
T. "Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
U. "Subsidiary" shall mean a subsidiary corporation of the Corporation
within the meaning of Section 424(f) of the Code.
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<PAGE>
SECTION I.
ADMINISTRATION
The Plan shall be administered by the Committee, which shall be composed
solely of at least two Non-Employee Directors, as defined in Rule 16b-3(b)(3)
promulgated under the Exchange Act, and who also qualify as Outside Directors.
Subject to the provisions of the Plan, the Committee may establish from time to
time such regulations, provisions, proceedings and conditions of awards which,
in its opinion, may be advisable in the administration of the Plan. A majority
of the Committee shall constitute a quorum, and, subject to the provisions of
Section IV of the Plan, the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a majority
of the Committee, shall be the acts of the Committee.
SECTION II.
SHARES AVAILABLE
Subject to the adjustments provided in Section VI of the Plan, the
aggregate number of shares of the Common Stock which may be granted for all
purposes under the Plan shall be 3,400,000 shares. Shares of Common Stock
underlying awards of Options shall be counted against the limitation set forth
in the immediately preceding sentence and may be reused to the extent that (i)
an Option expires, is terminated unexercised, or is forfeited or (ii) shares of
Common Stock are returned to the Corporation's treasury as a result of any form
of "cashless" exercise of Options or tax withholding of shares permitted by the
Committee under Section IV hereof. Incentive and Non-Qualified Stock Options
awarded under the Plan may be fulfilled in accordance with the terms of the Plan
with either authorized and unissued shares of the Common Stock, issued shares of
such Common Stock held in the Corporation's treasury or shares of Common Stock
acquired on the open market.
SECTION III.
ELIGIBILITY
Officers and employees (including officers or employees who are also
directors) of the Corporation, or of any Parent or Subsidiary, who are regularly
employed on a salaried basis as common law employees shall be eligible to
participate in the Plan. Directors of the Corporation, or of any Parent or
Subsidiary, who are not common law employees of the Corporation or of any Parent
or Subsidiary shall also be eligible to participate in the Plan, but only to the
extent provided under Section V(B) hereof and, where appropriate under this
Plan, shall be referred to as "employees" and their service as directors as
"employment".
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SECTION IV.
AUTHORITY OF COMMITTEE
The Plan shall be administered by, or under the direction of, the
Committee, which shall administer the Plan so as to comply at all times with
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder, to the extent such compliance is required, and shall otherwise have
plenary authority to interpret the Plan and to make all determinations specified
in or permitted by the Plan or deemed necessary or desirable for its
administration or for the conduct of the Committee's business. Subject to the
provisions of Section X hereof, all interpretations and determinations of the
Committee may be made on an individual or group basis and shall be final,
conclusive and binding on all interested parties. Subject to the express
provisions of the Plan, the Committee shall have authority, in its discretion,
to determine the persons to whom Plan Awards shall be granted, the times when
such Plan Awards shall be granted, the number of Plan Awards, the exercise price
of each Plan Award, the period(s) during which such Plan Award shall be
exercisable (whether in whole or in part), the restrictions to be applicable to
Plan Awards and the other terms and provisions thereof (which need not be
identical). In addition, the authority of the Committee shall include, without
limitation, the following:
A. Financing. The arrangement of temporary financing for an Optionee by
registered broker-dealers, under the rules and regulations of the Federal
Reserve Board, for the purpose of assisting the Optionee in the exercise of an
Option, such authority to include the payment by the Corporation of the
commissions of the broker-dealer;
B. Procedures for Exercise of Option. The establishment of procedures for
an Optionee (i) to exercise an Option by payment of cash or any other property
acceptable to the Committee, (ii) to have withheld from the total number of
shares of Common Stock to be acquired upon the exercise of an Option that number
of shares having a Fair Market Value, which, together with such cash as shall be
paid in respect of fractional shares, shall equal the option exercise price of
the total number of shares of Common Stock to be acquired, (iii) to exercise all
or a portion of an Option by delivering that number of shares of Common Stock
already owned by him having a Fair Market Value which shall equal the Option
exercise price for the portion exercised and, in cases where an Option is not
exercised in its entirety, to permit the Optionee to deliver the shares of
Common Stock thus acquired by him in payment of shares of Common Stock to be
received pursuant to the exercise of additional portions of such Option, the
effect of which shall be that an Optionee can in sequence utilize such newly
acquired shares of Common Stock in payment of the exercise price of the entire
Option, together with such cash as shall be paid in respect of fractional shares
and (iv) to engage in any form of "cashless" exercise.
C. Withholding. The establishment of a procedure whereby a number of shares
of Common Stock or other securities may be withheld from the total number of
shares of Common Stock or other securities to be issued upon exercise of an
Option, or for the tender of cash or shares of Common Stock owned by any
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<PAGE>
Participant to meet any obligation of withholding for taxes incurred by the
Optionee upon such exercise.
D. Types of Plan Awards. The Committee may grant awards in the form of
Incentive Stock Options and Non-Qualified Stock Options.
SECTION V.
STOCK OPTIONS
A. For Employees.
The Committee shall have the authority, in its discretion, to grant
Incentive Stock Options or to grant Non-Qualified Stock Options or to grant both
types of Options. No Option shall be granted for a term of more than ten (10)
years. Notwithstanding anything contained herein to the contrary, an Incentive
Stock Option may be granted only to common law employees of the Corporation or
of any Parent or Subsidiary now existing or hereafter formed or acquired, and
not to any director or officer who is not also such a common law employee. In
order to satisfy the "performance-based" exception to the deduction limitation
under Code Section 162(m), the maximum number of shares of Common Stock subject
to Options which may be granted to any single Executive during any one calendar
year is 300,000. The terms and conditions of the Options shall be determined
from time to time by the Committee; provided, however, that the Options granted
under the Plan shall be subject to the following:
I. Exercise Price. The Committee shall establish the exercise price at
the time any Option is granted at such amount as the Committee shall
determine; provided, however, that the exercise price for each share of
Common Stock purchasable under any Option which is intended to satisfy the
performance-based exception to the deduction limitation under Section
162(m) of the Code or any Incentive Stock Option granted hereunder shall be
such amount as the Committee shall, in its best judgment, determine to be
not less than one hundred percent (100%) of the Fair Market Value per share
of Common Stock at the date the Option is granted; and provided, further,
that in the case of an Incentive Stock Option granted to a person who, at
the time such Incentive Stock Option is granted, owns shares of stock of
the Corporation or of any Parent or Subsidiary which possess more than ten
percent (10%) of the total combined voting power of all classes of shares
of stock of the Corporation or of any Parent or Subsidiary, the exercise
price for each share of Common Stock shall be such amount as the Committee,
in its best judgment, shall determine to be not less than one hundred ten
percent (110%) of the Fair Market Value per share of Common Stock at the
date the Option is granted. The exercise price will be subject to
adjustment in accordance with the provisions of Section VI of the Plan.
(ii) Payment of Exercise Price. The price per share of Common Stock
with respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash or pursuant to any of the
methods set forth in Sections IV(A) or (B) hereof. Shares of Common Stock
delivered to the Corporation in payment of the exercise price shall be
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valued at the Fair Market Value of the Common Stock on the date preceding
the date of the exercise of the Option.
(iii) Employment Requirement. Notwithstanding anything else contained
herein, each Option by its terms shall require the Optionee to remain in
the continuous full-time employ of the Corporation, or of any Parent or
Subsidiary, for at least six (6) months from the date of grant of the
Option before the right to exercise any part of the Option (by him or any
other person) will accrue.
(iv) Exercisability of Options. Each Option shall be exercisable in
whole or in installments, and at such time(s), and subject to the
fulfillment of any conditions on exercisability as may be determined by the
Committee at the time of the grant of such Options. The right to purchase
shares of Common Stock shall be cumulative so that when the right to
purchase any shares of Common Stock has accrued such shares of Common Stock
or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. Unless otherwise determined by the
Committee in its sole discretion, each Option granted hereunder shall be
exercisable, on a cumulative basis, as to twenty-five percent (25%) of the
shares of Common Stock set forth thereunder on each of the first, second,
third and fourth anniversaries of the date such Option is granted.
(v) Expiration of Options. No Option by its terms shall be exercisable
after the expiration of ten (10) years from the date of grant of the
Option; provided, however, in the case of an Incentive Stock Option granted
to a person who, at the time such Option is granted, owns shares of stock
of the Corporation or of any Parent or Subsidiary possessing more than ten
percent (10%) of the total combined voting power of all classes of shares
of stock of the Corporation or of any Parent or Subsidiary, such Option
shall not be exercisable after the expiration of five (5) years from the
date such Option is granted.
(vi) Exercise Upon Death of Optionee. Subject to the provisions of
Sections V(A)(iii) and V(A)(ix) hereof, in the event of the death of the
Optionee prior to his termination of employment with the Corporation or
with any Parent or Subsidiary, or within 3 (three) months following his
Retirement, his estate (or other beneficiary, if so designated in writing
by the Participant) shall have the right, within one (1) year after the
date of death (but in no case after the expiration date of the Option(s)),
to exercise his Option(s) with respect to all or any part of the shares of
Common Stock as to which the deceased Optionee had not exercised his Option
at the time of his death, but only to the extent the Option or Options were
exercisable as of the earlier of the date of his Retirement or the date of
his death.
(vii) Exercise Upon Disability of Optionee. Subject to the provisions
of Sections V(A)(iii) and V(A)(ix) hereof, if the employment by the
Corporation or by any Parent or Subsidiary of an Optionee is terminated
because of Disability, he shall have the right, within one (1) year after
the date of such termination (but in no case after the expiration of the
Option(s)), to exercise his Option(s) with respect to all or any part of
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the shares of Common Stock as to which he had not exercised his Option at
the time of such termination, but only to the extent such Option or Options
were exercisable as of the date of his termination of employment due to
Disability.
(viii) Exercise Upon Optionee's Termination of Employment. Except as
provided in the following sentence, if the employment of an Optionee by the
Corporation or by any Parent or Subsidiary is terminated for any reason
other than those specified in Sections V(A)(vi) and V(A)(vii) above, he
shall have the right, within three (3) months after the date of such
termination (but in no case after the expiration date of the Option(s)), to
exercise his Option(s) only with respect to that number of shares of Common
Stock that he was entitled to purchase pursuant to Options that were
exercisable immediately prior to such termination. Notwithstanding the
provisions of the immediately preceding sentence, if an Optionee's
employment is terminated by the Corporation or by any Parent or Subsidiary
for Good Cause, the Optionee shall, at the time of such termination of
employment, forfeit his rights to exercise all of such Option(s).
(ix) Maximum Amount of Incentive Stock Options. Each Plan Award under
which Incentive Stock Options are granted shall provide that to the extent
the aggregate of the (a) Fair Market Value of the shares of Common Stock
(determined as of the time of the grant of the Option) subject to such
Incentive Stock Option and (b) the Fair Market Values (determined as of the
date(s) of grant of the options) of all other shares of Common Stock
subject to incentive stock options granted to an Optionee by the
Corporation or any Parent or Subsidiary, which are exercisable for the
first time by any person during any calendar year, exceed(s) one hundred
thousand dollars ($100,000), such excess shares of Common Stock shall not
be deemed to be purchased pursuant to Incentive Stock Options. The terms of
the immediately preceding sentence shall be applied by taking options into
account in the order in which they are granted.
B. For Director Participants.
(i) General Provisions - Formula Grant Options. Subject to the terms
and conditions of this Section V(B), as of January 1, 1998, and as of
January 1 of each succeeding calendar year through and including January 1,
2007, each individual who is serving as a Director on such date shall
automatically be granted Options to purchase twenty thousand (20,000)
shares of Common Stock, subject to availability under the Plan.
Notwithstanding the foregoing, each individual who is serving as a Director
and receives formula grant options under Section V(B)(i) of the
Corporation's 1996 Stock Option Plan, as amended, shall not be eligible to
receive grants of Options under Section V(B)(i) of this Plan covering the
same periods. In the event that an individual becomes a Director during any
Plan Quarter, but did not serve as a Director on January 1, such individual
shall automatically be granted, as of the date of election of such
individual as a Director, Options to purchase that pro rata number of
shares of Common Stock for such calendar year as a Director would otherwise
be entitled to receive under this Section V(B)(i) (at the rate of 5,000
shares per Plan Quarter, subject to the last sentence of this Section
V(B)(i)). Subject to the provisions of Section VI hereunder, the option
9
<PAGE>
price of the shares of Common Stock covered by each Option shall be the
Fair Market Value of such shares on the date of the grant. Each Option
granted under this Section V(B)(i) by its terms shall expire ten (10) years
from the date of its grant. Furthermore, an Option granted pursuant to this
Section V(B)(i) shall become exercisable as to 5,000 shares of Common Stock
covered thereby on the last day of the Plan Quarter during which the date
of grant occurs and as to 5,000 shares on the last day of each of the next
succeeding Plan Quarters during such year, respectively, but only if, with
regard to the shares of Common Stock with respect to which the Option
becomes exercisable at the end of any Plan Quarter, the Director has served
in such capacity on an uninterrupted basis for more than fifty percent
(50%) of the business days contained in such Plan Quarter.
(ii) General Provisions - Discretionary Option Grants. The Committee
shall have the authority, in its discretion, to grant to one or more
Directors from time to time Non-Qualified Stock Options. No Option shall be
granted for a term of more than ten (10) years. The Committee shall
establish the exercise price at the time any Option is granted at such
amount as the Committee shall determine. The exercise price will be subject
to adjustment in accordance with the provisions of Section VI of the Plan.
Except as otherwise expressly provided in this Section V, the terms and
conditions of the Options shall be determined by the Committee.
(iii)Payment of Exercise Price. The price per share of Common Stock
with respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash or pursuant to any of the
methods set forth in Sections IV(A) or (B) hereof. Shares of Common Stock
delivered to the Corporation in payment of the exercise price shall be
valued at the Fair Market Value of the Common Stock on the date preceding
the date of the exercise of the Option.
(iv) Exercisability of Options. Each Option shall be exercisable in
whole or in installments, and at such time(s), and subject to the
fulfillment of any conditions on exercisability as may be determined by the
Committee at the time of the grant of such Options. The right to purchase
shares of Common Stock shall be cumulative so that when the right to
purchase any shares of Common Stock has accrued such shares of Common Stock
or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option.
(v) Director's Termination. If a Director's service as a director of
the Corporation is terminated by reason of (1) his Disability, (2) the
failure of the Corporation to retain, or nominate for re-election, such
Director (who is otherwise eligible) other than for Good Cause, (3) his
ineligibility for re-election pursuant to the Corporation's By-laws, or (4)
his voluntary termination of such directorship, such termination shall be
considered a "Qualifying Termination" and each Option granted to such
Director, to the extent exercisable (and not exercised) on the date of such
Qualifying Termination, shall remain so exercisable by him until the end of
the exercise period under such Option. If a Director's service as a
director of the Corporation or of any Parent or Subsidiary is terminated
for Good Cause, such termination shall be considered a "Non-Qualifying
Termination." In the event of a Non-Qualifying Termination, all outstanding
unexercised stock options granted pursuant to this Section V(B) shall be
forfeited or canceled, as the case may be.
10
<PAGE>
(vi) Director's Death. If a Director dies while holding an
outstanding Option, such Option, to the extent exercisable (and not exercised)
on the date of his death, shall remain so exercisable by his estate (or other
beneficiaries, as designated in writing by such Director) until the end of the
exercise period under the Option.
SECTION VI.
ADJUSTMENT OF SHARES; MERGER OR
CONSOLIDATION, ETC. OF THE CORPORATION
A. Recapitalization, Etc. In the event there is any change in the Common
Stock of the Corporation by reason of any reorganization, recapitalization,
stock split, stock dividend or otherwise, there shall be substituted for or
added to each share of Common Stock theretofore appropriated or thereafter
subject, or which may become subject, to any Option, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock shall be so changed or for which each such share shall be exchanged, or to
which each such share be entitled, as the case may be, and the per share price
thereof also shall be appropriately adjusted. Notwithstanding the foregoing, (i)
each such adjustment with respect to an Incentive Stock Option shall comply with
the rules of Section 424(a) of the Code and (ii) in no event shall any
adjustment be made which would render any Incentive Stock Option granted
hereunder to be other than an incentive stock option for purposes of Section 422
of the Code.
B. Merger, Consolidation or Change in Control of Corporation. Upon (i) the
merger or consolidation of the Corporation with or into another corporation
(pursuant to which the stockholders of the Corporation immediately prior to such
merger or consolidation will not, as of the date of such merger or
consolidation, own a beneficial interest in shares of voting securities of the
corporation surviving such merger or consolidation having at least a majority of
the combined voting power of such corporation's then outstanding securities), if
the agreement of merger or consolidation does not provide for (1) the
continuance of the Options granted hereunder or (2) the substitution of new
options for Options granted hereunder, or for the assumption of such Options by
the surviving corporation, (ii) the dissolution, liquidation or sale of
substantially all the assets of the Corporation or (iii) the Change in Control
of the Corporation, the holder of any such Option theretofore granted and still
outstanding (and not otherwise expired) shall have the right immediately prior
to the effective date of such merger, consolidation, dissolution, liquidation,
sale of assets or Change in Control of the Corporation to exercise such
Option(s) in whole or in part without regard to any installment provision that
may have been made part of the terms and conditions of such Option(s). The
Corporation, to the extent practicable, shall give advance notice to affected
Optionees of any such merger, consolidation, dissolution, liquidation, sale of
11
<PAGE>
assets or Change in Control of the Corporation. All such Options which vest on
an accelerated basis in accordance with this Section VI(B) and are not so
exercised shall be forfeited as of the effective time of any merger,
consolidation, dissolution, liquidation or sale of assets (but not in the case
of a Change in Control of the Corporation).
C. Definition of Change in Control of the Corporation. As used herein, a
"Change in Control of the Corporation" shall be deemed to have occurred if any
person (including any individual, firm, partnership or other entity) together
with all Affiliates and Associates (as defined under Rule 12b-2 of the General
Rules and Regulations promulgated under the Exchange Act) of such person, but
excluding (i) a trustee or other fiduciary holding securities under an employee
benefit plan of the Corporation or any subsidiary of the Corporation, (ii) a
corporation owned, directly or indirectly, by the stockholders of the
Corporation in substantially the same proportions as their ownership of the
Corporation, (iii) the Corporation or any subsidiary of the Corporation or (iv)
only as provided in the immediately following sentence, a Participant together
with all Affiliates and Associates of a Participant, is or becomes the
Beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Corporation representing 40% of
more of the combined voting power of the Corporation's then outstanding
securities, such person being hereinafter referred to as an Acquiring Person.
The provisions of clause (iv) of the immediately preceding sentence shall apply
only with respect to the Option(s) held by the Participant who, together with
his Affiliates or Associates, if any, is or becomes the direct or indirect
Beneficial Owner of the percentage of securities set forth in such clause.
SECTION VII.
MISCELLANEOUS PROVISIONS
A. Administrative Procedures. The Committee may establish any procedures
determined by it to be appropriate in discharging its responsibilities under the
Plan. Subject to the provisions of Section X hereof, all actions and decisions
of the Committee shall be final.
B. Assignment or Transfer. No grant or award of any Incentive Stock Option
or any other "derivative security" (as defined by Rule 16a-l(c) promulgated
under the Exchange Act) made under the Plan or any rights or interests therein
shall be assignable or transferable by a Participant except by will or the laws
of descent and distribution or pursuant to a domestic relations order. During
the lifetime of a Participant, Options granted hereunder shall be exercisable
only by the Participant.
C. Investment Representation. Upon the exercise of an Option, the Committee
may require, as a condition of receiving such securities, that the Participant
furnish to the Corporation such written representations and information as the
Committee deems appropriate to permit the Corporation, in light of the existence
or nonexistence of an effective registration statement under the Securities Act
to deliver such securities in compliance with the provisions of the Securities
Act.
D. Withholding Taxes. The Corporation shall have the right to deduct from
12
<PAGE>
all cash payments hereunder any federal, state, local or foreign taxes required
by law to be withheld with respect to such payments. In the case of the issuance
or distribution of Common Stock or other securities hereunder, the Corporation,
as a condition of such issuance or distribution, may require the payment
(through withholding from the Participant's salary, reduction of the number of
shares of Common Stock or other securities to be issued, or otherwise) of any
such taxes. The Participant may satisfy the withholding obligations by paying to
the Corporation a cash amount equal to the amount required to be withheld or by
tendering to the Corporation a number of shares of Common Stock having a value
equivalent to such cash amount, or by use of any available procedure as
described under Section IV(C) hereof.
E. Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Corporation and shall not be charged against any award nor
to any employee receiving a Plan Award.
F. Funding of Plan. The Plan shall be unfunded. The Corporation shall not
be required to segregate any of its assets to assure the payment of any Plan
Award under the Plan. Neither the Participants nor any other persons shall have
any interest in any fund or in any specific asset or assets of the Corporation
or any other entity by reason of any Plan Award, except to the extent expressly
provided hereunder. The interests of each Participant and former Participant
hereunder are unsecured and shall be subject to the general creditors of the
Corporation.
G. Other Incentive Plans. The adoption of the Plan does not preclude the
adoption by appropriate means of any other incentive plan for employees.
H. Plurals and Gender. Where appearing in the Plan, masculine gender shall
include the feminine and neuter genders, and the singular shall include the
plural, and vice versa, unless the context clearly indicates a different
meaning.
I. Headings. The headings and sub-headings in this Plan are inserted for
the convenience of reference only and are to be ignored in any construction of
the provisions hereof.
J. Severability. In case any provision of this Plan shall be held illegal
or void, such illegality or invalidity shall not affect the remaining provisions
of this Plan, but shall be fully severable, and the Plan shall be construed and
enforced as if said illegal or invalid provisions had never been inserted
herein.
K. Payments Due Missing Persons. The Corporation shall make a reasonable
effort to locate all persons entitled to benefits under the Plan; however,
notwithstanding any provisions of this Plan to the contrary, if, after a period
of one (1) year from the date such benefits shall be due, any such persons
entitled to benefits have not been located, their rights under the Plan shall
stand suspended. Before this provision becomes operative, the Corporation shall
send a certified letter to all such persons at their last known addresses
13
<PAGE>
advising them that their rights under the Plan shall be suspended. Subject to
all applicable state laws, any such suspended amounts shall be held by the
Corporation for a period of one (1) additional year and thereafter such amounts
shall be forfeited and thereafter remain the property of the Corporation.
L. Liability and Indemnification. (i) Neither the Corporation nor any
Parent or Subsidiary shall be responsible in any way for any action or omission
of the Committee, or any other fiduciaries in the performance of their duties
and obligations as set forth in this Plan. Furthermore, neither the Corporation
nor any Parent or Subsidiary shall be responsible for any act or omission of any
of their agents, or with respect to reliance upon advice of their counsel
provided that the Corporation and/or the appropriate Parent or Subsidiary relied
in good faith upon the action of such agent or the advice of such counsel.
(ii) Except for their own gross negligence or willful misconduct regarding
the performance of the duties specifically assigned to them under, or their
willful breach of the terms of, this Plan, the Corporation, each Parent and
Subsidiary and the Committee shall be held harmless by the Participants, former
Participants, beneficiaries and their representatives against liability or
losses occurring by reason of any act or omission. Neither the Corporation, any
Parent or Subsidiary, the Committee, nor any agents, employees, officers,
directors or shareholders of any of them, nor any other person shall have any
liability or responsibility with respect to this Plan, except as expressly
provided herein.
M. Incapacity. If the Committee shall receive evidence satisfactory to it
that a person entitled to receive payment of any Plan Award is, at the time when
such benefit becomes payable, a minor, or is physically or mentally incompetent
to receive such Plan Award and to give a valid release thereof, and that another
person or an institution is then maintaining or has custody of such person and
that no guardian, committee or other representative of the estate of such person
shall have been duly appointed, the Committee may make payment of such Plan
Award otherwise payable to such person to such other person or institution,
including a custodian under a Uniform Gifts to Minors Act, or corresponding
legislation (who shall be an adult, a guardian of the minor or a trust company),
and the release by such other person or institution shall be a valid and
complete discharge for the payment of such Plan Award.
N. Cooperation of Parties. All parties to this Plan and any person claiming
any interest hereunder agree to perform any and all acts and execute any and all
documents and papers which are necessary or desirable for carrying out this Plan
or any of its provisions.
O. Governing Law. All questions pertaining to the validity, construction
and administration of the Plan shall be determined in accordance with the laws
of the State of Delaware.
P. Nonguarantee of Employment. Nothing contained in this Plan shall be
construed as a contract of employment between the Corporation (or any Parent or
Subsidiary), and any employee or Participant, as a right of any employee or
Participant to be continued in the employment of the Corporation (or any Parent
14
<PAGE>
or Subsidiary), or as a limitation on the right of the Corporation or any Parent
or Subsidiary to discharge any of its employees, with or without cause.
Q. Notices. Each notice relating to this Plan shall be in writing and
delivered in person or by certified mail to the proper address. All notices to
the Corporation or the Committee shall be addressed to it at ICG Communications,
Inc., 161 Inverness Drive West, Englewood, Colorado 80112, Attn: Secretary. All
notices to Participants, former Participants, beneficiaries or other persons
acting for or on behalf of such persons shall be addressed to such person at the
last address for such person maintained in the Committee's records.
R. Written Agreements. Each Plan Award shall be evidenced by a signed
written agreement between the Corporation and the Participant containing the
terms and conditions of the award.
SECTION VIII.
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Corporation shall have the right to amend,
suspend or terminate the Plan and the Options granted hereunder at any time and
for any purpose (including, without limitation, an amendment necessary for an
Option to maintain its qualification as an "incentive stock option" within the
meaning of Section 422 of the Code, if applicable, or to comply with Rule 16b-3
(or any successor rule) promulgated under the Exchange Act); provided, however,
that no amendment shall be made which shall increase the total number of shares
of the Common Stock of the Corporation which may be issued and sold pursuant to
Options or reduce the minimum exercise price in the case of an Incentive Stock
Option, unless such amendment is made by or with the approval of the
stockholders (such approval being granted within 12 months of the effective date
of such amendment), but only if such approval is required by any applicable
provisions of the Code. Such stockholder approval shall be effected by the
affirmative vote of a majority of the votes cast by the holders of the
outstanding shares of Common Stock present, by person or proxy, and voting on
such amendment. Except as otherwise provided herein, no amendment, suspension or
termination of the Plan shall alter or impair any Plan Awards previously granted
under the Plan, without the consent of the holder thereof.
SECTION IX.
TERM OF PLAN
The Plan shall remain in effect until December 31, 2007, which is the day
prior to the tenth anniversary of the effective date of the Plan, unless sooner
terminated by the Board of Directors of the Corporation. No Plan Awards may be
granted under the Plan subsequent to the termination of the Plan.
15
<PAGE>
SECTION X.
CLAIMS PROCEDURES
A. Denial. If any Participant, former Participant or beneficiary is denied
any vested benefit to which he is, or reasonably believes he is, entitled under
this Plan, either in total or in an amount less than the full vested benefit to
which he would normally be entitled, the Committee shall advise such person in
writing the specific reasons for the denial. The Committee shall also furnish
such person at the time with a written notice containing (i) a specific
reference to pertinent Plan provisions, (ii) a description of any additional
material or information necessary for such person to perfect his claim, if
possible, and an explanation of why such material or information is needed and
(iii) an explanation of the Plan's claim review procedure.
B. Written Request for Review. Within 60 days of receipt of the information
stated in subsection (a) above, such person shall, if he desires further review,
file a written request for reconsideration with the Committee.
C. Review of Document. So long as such person's request for review is
pending (including the 60 day period in subsection (b) above), such person or
his duly authorized representative may review pertinent Plan documents and may
submit issues and comments in writing to the Committee.
D. Committee's Final and Binding Decision. A final and binding decision
shall be made by the Committee within 60 days of the filing by such person of
this request for reconsideration; provided, however, that if the Committee, in
its discretion, feels that a hearing with such person or his representative is
necessary or desirable, this period shall be extended for an additional 60 days.
E. Transmittal of Decision. The Committee's decision shall be conveyed to
such person in writing and shall (i) include specific reasons for the decision,
(ii) be written in a manner calculated to be understood by such person and (iii)
set forth the specific references to the pertinent Plan provisions on which the
decision is based.
F. Limitation on Claims. Notwithstanding any provisions of this Plan to the
contrary, no Participant (nor the estate or other beneficiary of a Participant)
shall be entitled to assert a claim against the Corporation (or against any
Parent or Subsidiary) more than three years after the date the Participant (or
his estate or other beneficiary) initially is entitled to receive benefits
hereunder.
16
Please sign and return within 30 days to: ICG Netcom, Attn: T. Corral, 161
Inverness Drive West, Englewood CO 80112
- -------------------------------------------------------------------------------
ICG Communications, Inc.
161 Inverness Drive West Stock Option Agreement
Englewood, Colorado 80112
- -------------------------------------------------------------------------------
(Name) Option Number: 0000XXX
(Address) Plan: 98A
Reports to: ________________
ID: XXXXXXXXX
- -------------------------------------------------------------------------------
Effective 6/3/98, the Date of Grant, you have been granted an Incentive Stock
Option to buy XXX shares of ICG Communications, Inc. (the Company) stock an
exercise price of $30.0000 per share, subject to vesting.
Subject to your continued employment, the Incentive Stock Option will become
vested as to the shares on the dates shown.
Shares Vest Type Full Vest Expiration
-------- --------- --------- ----------
XXX Annually 6/3/99 6/3/08
XXX Annually 6/3/00 6/3/08
- -------------------------------------------------------------------------------
By your signature and the Company's signature below, you and the Company agree
that this Incentive Stock Option is granted under and governed by the terms and
conditions of the Company's 1998 Stock Option Plan, as amended, and the Terms of
Incentive Stock Option, all of which are made a part of this document and are
available from the ICG Intranet or the Treasury Department.
- -------------------------------------------------------------------------------
ICG Communications, Inc.
/s/ Harry R. Herbst -----------------------------
By: Harry R. Herbst, Executive Vice President Date
------------------------------------------ -----------------------------
(Name) Date
AMENDMENT NO. 1
TO THE
ICG COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
Effective as of December 15, 1998, the ICG Communications, Inc. 1998 Stock
Option Plan (the "Plan") is hereby amended as follows (all capitalized terms
used herein shall have the meanings given to them in the Plan):
Section V(B)(i) of the Plan is hereby amended by replacing such subsection
in its entirety by the following Section V(B)(i):
B. For Director Participants.
I. General Provisions - Formula Grant Options. (a) Subject to the
terms and conditions of this Section V(B), as of January 1, 1998 each
individual who is serving as a Director Participant on such date shall
automatically be granted Options to purchase twenty thousand (20,000)
shares of Common Stock, subject to availability under the Plan.
Notwithstanding the foregoing, each individual who is serving as a Director
Participant and receives formula grant options under Section V(B)(i) of the
Corporation's 1996 Stock Option Plan, as amended, shall not be eligible to
receive grants of Options under Section V(B)(i) of this Plan covering the
same periods. In the event that an individual becomes a Director
Participant during any Plan Quarter during the 1998 calendar year, but did
not serve as a Director Participant on January 1, 1998, such individual
shall automatically be granted, as of the date of election of such
individual as a Director Participant, Options to purchase that pro rata
number of shares of Common Stock for such calendar year as a Director
Participant would otherwise be entitled to receive under this Section
V(B)(i) (at the rate of 5,000 shares per Plan Quarter, subject to the last
sentence of subparagraph (c) below).
(b) Subject to the terms and conditions of this Section V(B), as of
December 15, 1998, and as of December 15 of each succeeding calendar year
through and including December 15, 2006, each individual who is serving as a
Director Participant on such date shall automatically be granted Options to
purchase twenty thousand (20,000) shares of Common Stock, subject to
availability under the Plan. Except as set forth in the following sentence, in
the event that an individual becomes a Director Participant during any Plan
Quarter subsequent to January 1, 1999, such individual shall automatically be
granted, as of the date of election of such individual as a Director
Participant, Options to purchase that pro rata number of shares of Common Stock
for such calendar year as a Director Participant would otherwise be entitled to
<PAGE>
receive under this Section V(B)(i) (at the rate of 5,000 per Plan Quarter,
subject to the following sentence and to the last sentence of subparagraph (c)
below). In the event that an individual becomes a Director Participant during
the period from December 16 through December 31 of any calendar year subsequent
to January 1, 1999, the Director Participant shall automatically be granted
Options to purchase the same number of shares as the other Director Participants
were granted on the immediately preceding December 15, which Options shall vest
over the course of the following calendar year as set forth in subparagraph (c)
herein.
(c) Subject to the provisions of Section VI hereunder, the option price of
the shares of Common Stock covered by each Option shall be the Fair Market Value
of such shares on the date of the grant. Each Option granted under this Section
V(B)(i) by its terms shall expire ten (10) years from the date of its grant.
Furthermore, an Option granted pursuant to this Section V(B)(i) shall become
exercisable as to 5,000 shares of Common Stock covered thereby on the last day
of the Plan Quarter during which the date of grant occurs (except with respect
to Options granted on December 15 pursuant to subparagraph (b) above, which
shall vest on March 31 of the following year) and, thereafter, as to 5,000
shares on the last day of each of the next succeeding Plan Quarters during such
year, respectively, but only if, with regard to the shares of Common Stock with
respect to which the Option becomes exercisable at the end of any Plan Quarter,
the Director Participant has served in such capacity on an uninterrupted basis
for more than fifty percent (50%) of the business days contained in such Plan
Quarter.
December 16, 1998
(Name)
ICG Communications, Inc.
161 Inverness Drive West
Englewood, Colorado 80112
Dear (Name):
ICG Communications, Inc. (the "Company") recognizes that your contribution
to the growth and success of the Company as an executive officer of the Company
has been and continues to be significant. Accordingly, the Company is entering
into this Agreement (the "Agreement") with you in recognition of your past and
continuing efforts as a valuable executive employee of the Company.
1. Effective Date of Agreement
This Agreement shall become effective as of the date indicated above.
2. "Gross-Up Payment"
(a) In the event any payments paid or payable to you by the Company
or any benefits received or receivable by you from the Company
are the type encompassed within Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") (collectively, the
"Executive Payments") and are subject to the tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter
be imposed by the Internal Revenue Service), and/or any
comparable or similar tax imposed by any state or local taxing
authority, including, without limitation, any interest or
penalties due thereon (collectively, the "Excise Tax"), the
Company shall pay to you in cash an additional amount (the
"Gross-Up Payment") such that the net amount retained by you
after deduction of the Excise Tax on the Gross-Up Payment, as
well as any other taxes (including without limitation Federal,
state and local income taxes) due solely as a result of payment
of the Gross-Up Payment, shall be equal to the full amount of the
Executive Payments.
(b) Nothing in this Section 2 shall be construed to require the
Company to pay any amounts due by you in respect of Federal,
state and local income taxes on the Executive Payments (other
<PAGE>
than the Excise Tax and the other taxes, interest and penalties,
if any, referred to in Section 2(a)).
(c) The Gross-Up Payment shall be made promptly upon the Company's
receipt of notice from you and/or your tax advisor, which advisor
shall be selected by you and reasonably satisfactory to the
Company, of the reasonable determination that the Excise Tax is
due and payable as a result of the Executive Payments. The
Company shall make the Gross-Up Payment at the time such
determination has been made that the Excise Tax is due and
payable, whether or not you are still employed by the Company at
such time.
3. Successors
This Agreement will inure to the benefit of and be enforceable by your
personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
4. Governing Law
This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of
Colorado.
5. Additional Compensation
This Agreement and the payments provided for herein are in addition
to, and not in lieu of, any and all compensation arrangements,
including without limitation, existing employment, stock option and
other benefit plans and agreements, as applicable, now existing or
hereinafter entered into, between you and the Company and its
subsidiaries.
6. Survival
This Agreement and the rights and obligations hereunder shall survive
the termination of your employment with the Company and shall continue
to be binding on the Company and its successors and assigns until all
obligations hereunder have been satisfied in full.
<PAGE>
Kindly indicate your agreement with, and acknowledgement of, the terms
of this Agreement by signing this letter where indicated below.
Sincerely,
ICG COMMUNICATIONS, INC.
By:________________________
Name: (Name)
Title: (Title)
Acknowledged and agreed to as of the 16th day of December, 1998.
- ------------------------
(Name)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 210,831
<SECURITIES> 52,000
<RECEIVABLES> 160,612
<ALLOWANCES> 15,473
<INVENTORY> 2,821
<CURRENT-ASSETS> 422,827
<PP&E> 1,112,067
<DEPRECIATION> 177,933
<TOTAL-ASSETS> 1,625,425
<CURRENT-LIABILITIES> 127,893
<BONDS> 1,662,357
466,352
0
<COMMON> 584
<OTHER-SE> (631,761)
<TOTAL-LIABILITY-AND-EQUITY> 1,625,425
<SALES> 0
<TOTAL-REVENUES> 397,619
<CGS> 0
<TOTAL-COSTS> 254,689
<OTHER-EXPENSES> 291,622
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</TABLE>
