<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 333-4226
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
ICG COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 4813, 4899 84-1342022
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Identification Number)
Code Number)
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
(303) 572-5960
(Address, including zip code, and telephone
number, including area code, of Registrant's
Principal Executive Offices)
John D. Field, Executive Vice President
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
(303) 572-5960
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------
with a copy to:
Leonard Gubar, Esq.
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
(212) 603-2000
--------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective and the
consummation of the Plan of Arrangement as described herein.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
INTELCOM GROUP INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
LOCATION IN PROSPECTUS OF ITEMS OF FORM S-4
<TABLE>
<CAPTION>
S-4 ITEM S-K ITEM ITEM LOCATION IN PROSPECTUS
- -------- ---------- ----------------------------------------------- ----------------------------------
<C> <S> <C> <C>
1 Item 501 Forepart of Registration Statement and Facing Page of Registration
Outside Front Cover Page of Prospectus Statement; Cross Reference Sheet,
Outside Front Cover Page of
Proxy Statement - Prospectus
2 Item 502 Inside Front and Outside Back Cover Pages Inside Front Cover Page of Proxy
of Prospectus Statement - Prospectus; Table of
Contents; Available Information
3 Item 503 Risk Factors, Ratio of Earnings to Fixed Summary of Proxy Statement -
Charges and Other Information Prospectus; Risk Factors
4 Item 202 Terms of the Transaction and Description of Summary of Proxy Statement -
Securities to be Registered Prospectus; The Annual And
Special Meeting - General Proxy
Information; The Arrangement;
Comparison of Shareholders'
Rights
5 Pro Forma Financial Information Selected Financial Data
6 Material Contracts with the Company Being The Arrangement
Acquired
7 Item 507 Additional Information Required for *
Reoffering by Persons and Parties Deemed
to Be Underwriters
8 Item 509 Interests of Named Experts and Counsel Experts
9 Item 510 Disclosure of Commission Position on *
Indemnification for Securities Act Liabilities
10 Information with Respect to S-3 Registrants *
11 Incorporation of Certain Information by *
Reference
12 Information with Respect to S-2 or S-3 *
Registrants
13 Incorporation of Certain Information by *
Reference
14 Information with Respect to Registrants Summary of Proxy Statement -
Other Than S-3 or S-2 Registrants Prospectus; The Business of the
Company; Selected Financial
Data; Management's Discussion
and Analysis of Results of
Operation and Financial
Condition; Consolidated Financial
Statements
15 Information with Respect to S-3 Companies *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM S-K ITEM ITEM LOCATION IN PROSPECTUS
- -------- ---------- ----------------------------------------------- ----------------------------------
<C> <S> <C> <C>
16 Information with Respect to S-2 or S-3 *
Companies
17 Information with Respect Companies Other *
than S-3 or S-2 Companies
18 Information if Proxies, Consents or Summary of Proxy Statement -
Authorizations are to be Solicited Prospectus; The Annual and
Special Meeting-General Proxy
Information; The Arrangement;
Management; Principal
Shareholders; Executive
Compensation
19 Information if Proxies, Consents or *
Authorizations are Not to be Solicited or in
an Exchange Offer
</TABLE>
____________________________________
* Omitted because not required, inapplicable or the answer is negative
<PAGE>
INTELCOM GROUP INC.
June ., 1996
Dear Shareholder:
We are pleased to invite you to attend an important Annual and Special
Meeting of Shareholders, to be held July 30, 1996 at 11:00 a.m. (Toronto
time) at the King Edward Hotel, . Room, 37 King Street East, Toronto, Ontario
M5C 1E9 (the "Meeting"). Because of the importance of the business of the
Meeting, we would like as many of you as possible either to attend in person,
or to be represented by sending in your proxies.
The business of the Meeting includes consideration of a plan of
arrangement (the "Arrangement"), the principal effect of which will be to
restructure the Company as a publicly traded U.S. domiciled corporation.
Pursuant to the Arrangement, ICG Communications, Inc., a newly formed Delaware
corporation ("Parent"), will become the holding company for IntelCom Group
Inc., a Canadian corporation ("IntelCom"), IntelCom Group (U.S.A.), Inc., a
Colorado corporation, and its subsidiaries (collectively, the "Company").
Substantially all of the Company's operations are located in the United
States. In addition, the Company views the United States as its primary
source for raising capital and each of the Boards of Directors of IntelCom and
Parent believes that the Arrangement will facilitate access to such markets
and increase the Company's flexibility to meet its future financing needs. As
part of its expected growth strategy for the short and medium term, the
Company will pursue opportunities to invest in other U.S. based companies in
the telecommunications industry, as it has done in the past. The price for
any potential acquisitions may be in shares of common stock of Parent ("Parent
Common Stock") and the Company believes that shares of Parent Common Stock
will be more attractive as consideration for such acquisitions if the issuer
is domiciled in the United States and its shares are publicly traded. Also,
certain aspects of the Company's operations are regulated by the FCC, which
imposes restrictions on the interests a foreign company may hold in
telecommunications businesses in the United States. By replacing IntelCom
with Parent, a U.S. domiciled corporation, as the ultimate parent entity for
the Company, the Arrangement will facilitate the FCC licensing process for the
Company and provide greater flexibility in structuring its investments in
regulated businesses.
The Arrangement has been designed to maintain the Company's results of
operations, existing net operating losses (for United States tax purposes) and
asset values without causing any material United States or Canadian federal
income tax consequences. In addition, the Arrangement has been structured so
that it will be treated as a tax-free transaction for Canadian tax purposes to
Canadian residents electing to remain shareholders of IntelCom (subject to
possible proration) and for United States tax purposes to United States
residents electing to receive shares of Parent Common Stock in exchange for
their Common Shares of IntelCom ("IntelCom Common Shares") on the Effective
Date of the Arrangement.
The details of the Arrangement are included in the attached Management
Proxy Statement - Prospectus (the "Proxy Statement - Prospectus"). Also
included are the form of proxy, Letter of Transmittal and Election Form
printed on . paper and Notice of Guaranteed Delivery printed on . paper.
If the Arrangement is approved, you will have two choices, subject to
possible proration:
(i) to exchange immediately each of your IntelCom Common Shares for one
share of Parent Common Stock or
(ii) to continue to hold your IntelCom Common Shares, the rights of which
will have been amended to, among other things, permit you to
exchange your IntelCom Common Shares (referred to after the
Arrangement as "Class A Shares"), at any time, for an equal number
of shares of Parent Common Stock.
<PAGE>
Approval and adoption of the Arrangement requires the affirmative vote
of 66 2/3% of the votes actually cast thereon at the Meeting. Pursuant to the
Arrangement, at least 85% of the IntelCom Common Shares outstanding
immediately prior to the Effective Date will be immediately exchanged for
shares of Parent Common Stock upon the Arrangement. Accordingly, it is
possible that the Arrangement will be approved by shareholders at the Meeting,
but that the holders of less than 85% of IntelCom Common Shares will have
elected to exchange their IntelCom Common Shares for shares of Parent Common
Stock. In the event that the number of shares of Parent Common Stock
issuable to shareholders who have elected to receive shares of Parent Common
Stock upon the Arrangement is less than 85% of the number of IntelCom Common
Shares outstanding immediately prior to the Arrangement, holders of IntelCom
Common Shares who have elected to receive Class A Shares will be deemed to
have elected, pro rata to the extent of the shortage, to exchange such
IntelCom Common Shares for shares of Parent Common Stock. Consequently, there
can be no assurance that a shareholder who elects to receive Class A Shares in
the Arrangement will have that election granted in its entirety. Shareholders
who wish to receive Class A Shares in the Arrangement, therefore, should not
vote in favor of the Arrangement unless they are willing to receive both
shares of Parent Common Stock and Class A Shares. Holding Class A Shares
rather than shares of Parent Common Stock should only appeal to certain
shareholders for Canadian tax reasons, which are described in the Proxy
Statement - Prospectus.
Please review the Proxy Statement - Prospectus carefully with respect to
your choices and their tax effects.
After considering many different factors (which are reviewed in detail in
the Proxy Statement - Prospectus), your Board has RECOMMENDED that you vote IN
FAVOR of the resolution concerning the Arrangement.
We hope that you will be able to attend the Meeting. WHETHER YOU ARE ABLE
TO ATTEND, IT IS STILL IMPORTANT THAT YOU BE REPRESENTED AT THE MEETING. WE
URGE YOU TO COMPLETE THE ENCLOSED FORM OF PROXY AND RETURN IT NOT LATER THAN
THE TIME SPECIFIED IN THE NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
IN THE POSTAGE-PAID ENVELOPE PROVIDED. Regardless of the number of IntelCom
Common Shares you own, your vote is important.
Yours very truly,
J. Shelby Bryan
President and Chief Executive Officer
<PAGE>
INTELCOM GROUP INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that an Annual and Special Meeting (the "Meeting") of
the shareholders of IntelCom Group Inc., a Canadian corporation ("IntelCom"),
will be held at 11:00 a.m. (Toronto time) on July 30, 1996 at the King
Edward Hotel, . Room, 37 King Street East, Toronto, Ontario M5C 1E9 for the
following purposes:
1. To elect one director to serve for a term of three years and until a
successor shall have been duly elected and qualified;
2. To reappoint KPMG Peat Marwick Thorne, Chartered Accountants, Edmonton,
Alberta, as IntelCom's Canadian auditors, and KPMG Peat Marwick LLP,
Denver, Colorado, as IntelCom's United States auditors;
3. To pass a special resolution to approve an amendment to the Articles
of Continuance of IntelCom changing its name to ICG Communications,
Inc.;
4. To consider, pursuant to an order (the "Interim Order") of the Ontario
Court of Justice (General Division) dated June 26, 1996, and to pass a
special resolution to approve an arrangement (the "Arrangement") under
section 192 of the Canada Business Corporations Act, to approve and adopt
the Arrangement and Support Agreement between IntelCom and ICG
Communications, Inc. (defined as Parent in the accompanying Management
Proxy Statement - Prospectus), all as more particularly described in the
accompanying Management Proxy Statement - Prospectus and, in conjunction
therewith, to further change the name of IntelCom to ICG Holdings
(Canada), Inc.; and
5. To transact such further or other business as may properly come before
the Meeting or any adjournments or postponements thereof.
Under the Interim Order, holders of IntelCom Common Shares have been granted
the right to dissent under section 190 of the Canada Business Corporations Act
in respect of the proposed Arrangement. In order to perfect this right to
dissent, a holder of IntelCom Common Shares must deliver to IntelCom, no later
than the termination of the Meeting (or any adjournment thereof), written
objection to the proposed Arrangement and such holder must not vote in favor
of the proposed Arrangement. The right to dissent is described in greater
detail in the accompanying Management Proxy Statement - Prospectus and the
text of section 190 is set out in Appendix H thereto.
Approval and adoption of the Arrangement requires the affirmative vote of
66 2/3% of the votes actually cast thereon at the Meeting. Pursuant to the
Arrangement, at least 85% of the IntelCom Common Shares outstanding
immediately prior to the Effective Date will be immediately exchanged for
shares of Parent Common Stock upon the Arrangement. Accordingly, it is
possible that the Arrangement will be approved by shareholders at the Meeting,
but that the holders of less than 85% of IntelCom Common Shares will have
elected to exchange their IntelCom Common Shares for shares of Parent Common
Stock. In the event that the number of shares of Parent Common Stock issuable
to shareholders who have elected to receive shares of Parent Common Stock upon
the Arrangement is less than 85% of the number of IntelCom Common Shares
outstanding immediately prior to the Arrangement, holders of IntelCom Common
Shares who have elected to receive Class A Shares will be deemed to have
elected, pro rata to the extent of the shortage, to exchange such IntelCom
Common Shares for shares of Parent Common Stock. Consequently, there can be
no assurance that a shareholder who elects to receive Class A Shares in the
Arrangement will have that election granted in its entirety. Shareholders who
wish to receive Class A Shares in the Arrangement, therefore, should not vote
in favor of the Arrangement unless they are willing to receive both shares of
Parent Common Stock and Class A Shares.
<PAGE>
Only shareholders of record at the close of business on June 27, 1996 are
entitled to notice of and to vote at the Meeting and any adjournments or
postponements thereof, except to the extent that a person has transferred any
IntelCom Common Shares after that date and the new holder of such shares
establishes proper ownership and demands not later than July 19, 1996 to be
included in the list of shareholders eligible to vote at the Meeting.
DATED at Oakville, Ontario this . day of June ., 1996.
By Order of the Board of Directors,
John D. Field
Secretary
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER YOU PLAN ON
ATTENDING THE MEETING, SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. TO BE EFFECTIVE,
THE PROXIES MUST BE RECEIVED BY PACIFIC CORPORATE TRUST COMPANY, 830-625 HOWE
STREET, VANCOUVER, BRITISH COLUMBIA V6C 3B8, NOT LATER THAN 5:00 P.M.
(VANCOUVER TIME) ON JULY 29, 1996, OR, IF THE MEETING IS ADJOURNED OR
POSTPONED, NOT LATER THAN 5:00 P.M. ON THE BUSINESS DAY PRIOR TO THE MEETING.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION. DATED JUNE 18, 1996
INTELCOM GROUP INC. ICG COMMUNICATIONS, INC.
Proxy Statement for Prospectus
Annual and Special Meeting of Shareholders 38,989,856 Shares of
to be held July 30, 1996 ICG Communications, Inc. Common Stock,
$.01 par value per Share
MANAGEMENT PROXY STATEMENT - PROSPECTUS
This Management Proxy Statement - Prospectus (the "Proxy Statement -
Prospectus") is being furnished to holders (the "Shareholders") of common
shares, no par value per share (the "IntelCom Common Shares"), of IntelCom
Group Inc., a Canadian corporation ("IntelCom"), in connection with the
solicitation of proxies by management of IntelCom for use at the Annual and
Special Meeting of Shareholders to be held at 11:00 a.m., Toronto time, on
July 30, 1996, at the King Edward Hotel, . Room, 37 King Street East,
Toronto, Ontario M5C 1E9 and at any adjournments or postponements thereof (the
"Meeting").
At the Meeting, holders of IntelCom Common Shares will be asked:
1. To elect one director to serve for a term of three years and until a
successor shall have been duly elected and qualified;
2. To reappoint KPMG Peat Marwick Thorne, Chartered Accountants, Edmonton,
Alberta, as IntelCom's Canadian auditors, and KPMG Peat Marwick LLP,
Denver, Colorado, as IntelCom's United States auditors;
3. To pass a special resolution to approve an amendment to the Articles of
Continuance of IntelCom ("IntelCom's Articles") changing its name to ICG
Communications, Inc.;
4. To consider, pursuant to the Interim Order of the Ontario Court of
Justice (General Division), and to pass a special resolution to approve
an arrangement (the "Arrangement") under section 192 of the Canada
Business Corporations Act, to approve and adopt the Arrangement and
Support Agreement between IntelCom and ICG Communications, Inc. (defined
as Parent below), all as more particularly described in this Proxy
Statement - Prospectus and, in conjunction therewith, to further change
the name of IntelCom to ICG Holdings (Canada), Inc.; and
5. To transact such further or other business as may properly come before
the Meeting or any adjournments or postponements thereof.
This Proxy Statement - Prospectus and the accompanying form of proxy and
Letter of Transmittal and Election are first being mailed to Shareholders on
or about July 2, 1996. Certain capitalized terms used in this Proxy
Statement - Prospectus without definition have the meanings given in the
Glossary of Terms found at page 1.
This Proxy Statement - Prospectus also serves as a Prospectus of ICG
Communications, Inc., a Delaware corporation ("Parent"), with respect to up to
38,989,856 shares of Common Stock, $.01 par value per share (the "Parent
Common Stock"), which will be issuable to holders of IntelCom Common Shares
upon the consummation of the Arrangement.
AS PART OF THE ARRANGEMENT, HOLDERS OF INTELCOM COMMON SHARES MAY ELECT TO
RECEIVE EITHER SHARES OF PARENT COMMON STOCK OR CLASS A SHARES OF INTELCOM.
MANAGEMENT RECOMMENDS THAT HOLDERS WHO ARE UNITED STATES RESIDENTS ELECT TO
RECEIVE SHARES OF PARENT COMMON STOCK, AND THAT HOLDERS WHO ARE CANADIAN
RESIDENTS ELECT TO RECEIVE CLASS A SHARES. ALL SHAREHOLDERS SHOULD CAREFULLY
READ "INCOME TAX CONSIDERATIONS TO SHAREHOLDERS" AND CONSULT THEIR OWN TAX
ADVISORS.
SHAREHOLDERS WHO ARE CANADIAN RESIDENTS AND WHO HOLD INTELCOM COMMON SHARES IN
THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES ARE URGED TO
CONTACT SUCH BROKERAGE FIRMS, BANKS OR NOMINEES AND INSTRUCT THEM AS TO YOUR
ELECTION TO RECEIVE CLASS A SHARES OR SHARES OF PARENT COMMON STOCK AS A
RESULT OF THE ARRANGEMENT. YOUR FAILURE TO INSTRUCT SUCH BROKERAGE FIRMS,
BANKS OR NOMINEES OF YOUR ELECTION WILL RESULT IN YOUR BEING DEEMED TO HAVE
ELECTED TO RECEIVE SHARES OF PARENT COMMON STOCK, WHICH MAY RESULT IN A
TAXABLE EVENT TO YOU FOR CANADIAN TAX PURPOSES.
<PAGE>
Parent has applied to have the Parent Common Stock authorized for listing on
the American Stock Exchange.
SEE RISK FACTORS, BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS AND RISKS RELEVANT TO THE CHOICES OF SHAREHOLDERS REGARDING THE
ARRANGEMENT AND THEIR INVESTMENT IN THE SECURITIES OF PARENT REFERRED TO
HEREIN.
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement - Prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Proxy Statement - Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, any securities, or the
solicitation of a proxy, by any person in any jurisdiction in which such an
offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such an offer or solicitation of an offer or proxy
solicitation. Neither delivery of this Proxy Statement - Prospectus nor any
distribution of the securities referred to in this Proxy Statement -
Prospectus shall, under any circumstances, create an implication that there
has been no change in the information set forth herein since the date of this
Proxy Statement - Prospectus.
THE SECURITIES OF PARENT COVERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT - PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
IMPORTANT NOTE: SHAREHOLDERS WHO HOLD INTELCOM COMMON SHARES IN THE NAME OF
ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES CAN ONLY VOTE THEIR INTELCOM
SHARES WITH RESPECT TO THE ARRANGEMENT IF SUCH BROKERAGE FIRMS, BANKS OR
NOMINEES GIVE SUCH SHAREHOLDERS A LEGAL PROXY TO VOTE SUCH INTELCOM COMMON
SHARES OR IF SUCH SHAREHOLDERS GIVE SUCH BROKERAGE FIRMS, BANKS OR NOMINEES
SPECIFIC INSTRUCTIONS AS TO HOW TO VOTE SUCH SHAREHOLDERS' INTELCOM COMMON
SHARES. ACCORDINGLY, IT IS CRITICAL THAT SHAREHOLDERS WHO HOLD INTELCOM
COMMON SHARES IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES
PROMPTLY CONTACT THE PERSON RESPONSIBLE FOR SUCH SHAREHOLDERS' ACCOUNTS AND
GIVE SPECIFIC INSTRUCTIONS AS TO HOW SUCH SHAREHOLDERS' INTELCOM COMMON SHARES
SHOULD BE VOTED WITH RESPECT TO THE ARRANGEMENT.
-----------------
The date of this Proxy Statement - Prospectus is June ., 1996.
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
GLOSSARY OF DEFINED TERMS..................................... 1
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES................ 4
CANADIAN/U.S. EXCHANGE RATES.................................. 4
SUMMARY OF PROXY STATEMENT -- PROSPECTUS...................... 5
RISK FACTORS.................................................. 17
MARKET PRICE AND DIVIDEND INFORMATION......................... 23
THE ANNUAL AND SPECIAL MEETING - GENERAL PROXY
INFORMATION.................................................. 24
General...................................................... 24
Solicitation of Proxies...................................... 24
Appointment of Proxies....................................... 24
Signing of Proxies........................................... 24
Revocation of Proxies........................................ 24
Voting of Proxies............................................ 25
Voting Shares................................................ 25
Vote Required to Approve the Business of the Meeting and
Voting Intentions of Certain Shareholders................... 25
MATTER NO. 1 -- ELECTION OF INTELCOM
DIRECTOR................................................... 27
MATTER NO. 2 -- REAPPOINTMENT OF AUDITORS..................... 29
MATTER NO. 3 -- CHANGE OF INTELCOM'S NAME..................... 30
MATTER NO. 4 -- THE ARRANGEMENT............................... 31
Reasons for the Arrangement and Recommendations of the
Board....................................................... 31
Description of the Arrangement and Certain Related
Transactions................................................ 32
Opinion of Financial Advisor................................. 33
Description of Class A Shares................................ 34
Treatment of Stock Options and Stock Option Plans............ 36
Treatment of Warrants........................................ 37
Treatment of Convertible Debentures.......................... 37
Description of Parent Securities............................. 37
Court Approval and Completion of the Arrangement............. 38
Accounting Treatment......................................... 38
Election Procedures.......................................... 38
Procedure for Exchange of Share Certificates by Shareholders. 40
Stock Exchange Listings...................................... 40
Securities Laws Considerations............................... 40
Conditions to the Arrangement................................ 40
Support Agreement............................................ 41
INCOME TAX CONSIDERATIONS TO SHAREHOLDERS..................... 43
Canadian Federal Income Tax Considerations................... 43
United States Federal Income Tax Considerations.............. 48
COMPARISON OF SHAREHOLDERS' RIGHTS............................ 55
Vote Required for Extraordinary Transactions................. 55
Cumulative Voting and Classification of Board of Directors... 56
Amendment to Governing Documents............................. 56
Dissenters' Rights........................................... 56
Oppression Remedy............................................ 57
Derivative Actions........................................... 58
Shareholder Consent in Lieu of Meeting....................... 58
Director Qualifications...................................... 59
Fiduciary Duties of Directors................................ 59
Indemnification of Officers and Directors.................... 59
Director Liability........................................... 60
DISSENTING SHAREHOLDERS' RIGHTS............................... 61
THE BUSINESS OF THE COMPANY................................... 63
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SELECTED FINANCIAL DATA....................................... 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 80
MANAGEMENT.................................................... 99
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................. 107
PRINCIPAL SHAREHOLDERS........................................ 110
DESCRIPTION OF CERTAIN INDEBTEDNESS AND
PREFERRED STOCK.............................................. 113
AVAILABLE INFORMATION......................................... 115
1995 ANNUAL REPORT ON FORM 10-K............................... 115
TRANSFER AGENTS AND REGISTRARS................................ 116
LEGAL MATTERS................................................. 116
EXPERTS....................................................... 116
APPROVAL OF PROXY STATEMENT -
PROSPECTUS BY BOARD OF DIRECTORS............................. 116
INDEX TO FINANCIAL STATEMENTS................................. F-1
APPENDIX A
OPINION OF MORGAN STANLEY & CO.
INCORPORATED............................................... A-1
APPENDIX B
ARRANGEMENT AND SUPPORT AGREEMENT........................... B-1
APPENDIX C
INTERIM ORDER................................................ C-1
APPENDIX D
RESOLUTION WITH RESPECT TO THE
ARRANGEMENT FOR CONSIDERATION AT THE
ANNUAL AND SPECIAL MEETING OF THE
SHAREHOLDERS................................................. D-1
APPENDIX E
PLAN OF ARRANGEMENT UNDER SECTION 192 OF
THE CANADA BUSINESS CORPORATIONS ACT........................ E-1
APPENDIX F
SEE "INDEX TO FINANCIAL STATEMENTS"
APPENDIX G
NOTICE OF APPLICATION TO COURT FOR FINAL
ORDER....................................................... G-1
APPENDIX H
SECTION 190 OF THE CBCA...................................... H-1
APPENDIX I
RESOLUTION WITH RESPECT TO CHANGING THE
NAME OF INTELCOM TO ICG COMMUNICATIONS,
INC. FOR CONSIDERATION AT THE ANNUAL AND
SPECIAL MEETING OF THE SHAREHOLDERS OF
INTELCOM..................................................... I-1
</TABLE>
<PAGE>
GLOSSARY OF DEFINED TERMS
The following terms have the following meanings when used in this Proxy
Statement - Prospectus (including the summary). These defined terms are not
used in the consolidated financial statements contained herein.
"ARRANGEMENT" means the proposed arrangement, pursuant to the terms of the
Plan of Arrangement.
"ARRANGEMENT RESOLUTION" means the resolution concerning the Arrangement in
the form set forth in Appendix D to this Proxy Statement - Prospectus.
"CALL RIGHTS" means the Redemption Call Right and the Retraction Call Right.
"CANADIAN DOLLARS" and "CDN$" mean the lawful currency of Canada.
"CANADIAN GAAP" means accounting principles generally accepted in Canada.
"CANADIAN TAX ACT" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th
Supplement), including all regulations made thereunder, all amendments to such
statute or regulations from time to time, and any statute or regulation that
supplements or supersedes such statute or regulation.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44,
including all regulations made thereunder, all amendments to such statute or
regulations from time to time, and any statute or regulation that supplements
or supersedes such statute or regulation.
"CLASS A SHARES" means the Class A Shares, no par value, of IntelCom, having
the rights, privileges, restrictions and conditions set forth in an appendix
to the Plan of Arrangement.
"COMPANY" means the combined business operations of IntelCom, ICG and its
subsidiaries.
"COURT" means the Ontario Court of Justice (General Division).
"DEPOSITARY" means Pacific Corporate Trust Company, at its offices set out
in the Letter of Transmittal and Election Form.
"DGCL" means the Delaware General Corporation Law, including all regulations
made thereunder, all amendments to such statute or regulations from time to
time, and any statute or regulation that supplements or supersedes such
statute or regulation.
"DISSENTING SHAREHOLDERS" means Shareholders who have exercised a right of
dissent in respect of the Arrangement Resolution in strict compliance with
section 190 of the CBCA and the Interim Order.
"EFFECTIVE DATE" means the date on which the Plan of Arrangement becomes
effective as established by the date of issue of the certificate of
arrangement in respect thereof to be issued pursuant to subsection 192(7) of
the CBCA.
"ELECTION DEADLINE" means 5:00 p.m. (Pacific time) on July 30, 1996.
"EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
1
<PAGE>
"EXCHANGE RIGHT" means the right of holders of Class A Shares, in the event
of and notwithstanding the occurrence of an insolvency event of IntelCom, to
require Parent to purchase their Class A Shares in the circumstances described
in Article 4 of the Support Agreement.
"FCC" means the United States Federal Communications Commission.
"FINAL ORDER" means the final order of the Court approving the Arrangement.
"ICG" means IntelCom Group (U.S.A.), Inc., a corporation existing under the
laws of the State of Colorado and a wholly owned subsidiary of IntelCom.
"ICG COMMON STOCK" means the Common Stock, no par value per share, of ICG.
"INTELCOM" means IntelCom Group Inc., a corporation existing under the CBCA.
"INTELCOM COMMON SHARES" means the Common Shares, no par value per share, of
IntelCom.
"INTERIM ORDER" means the interim order of the Court with respect to the
Arrangement, a copy of which is appended to this Proxy Statement - Prospectus
as Appendix C.
"IRS" means the United States Internal Revenue Service.
"LETTER OF TRANSMITTAL AND ELECTION FORM" means the letter of transmittal
and election form for use by Shareholders. A copy is enclosed with this Proxy
Statement - Prospectus and additional copies are available on request from the
Depositary.
"MEETING" means the Annual and Special Meeting of Shareholders to consider
the Arrangement Resolution and the other matters enumerated in the
accompanying Notice of Annual and Special Meeting of Shareholders, to be held
on July 30, 1996 and any adjournments or postponements thereof.
"MORGAN STANLEY" means Morgan Stanley & Co. Incorporated and its affiliates.
"PARENT" means ICG Communications, Inc., a corporation existing under the
laws of the State of Delaware.
"PARENT COMMON STOCK" means the Common Stock, $.01 par value per share, of
Parent.
"PLAN OF ARRANGEMENT" means the plan of arrangement proposed under Section
192 of the CBCA, substantially in the form attached to this Proxy Statement -
Prospectus as Appendix E, as amended, modified or supplemented from time to
time in accordance with its terms.
"PROXY STATEMENT - PROSPECTUS" means this Management Proxy Statement -
Prospectus, including the Appendices attached hereto and all amendments and
supplements hereto from time to time.
"REDEMPTION CALL RIGHT" means the overriding right of Parent, in the event
of and notwithstanding a proposed redemption of Class A Shares by IntelCom, to
purchase from all but not less than all of the holders of Class A Shares, all
but not less than all of the Class A Shares held by each such holder, other
than Class A Shares held by Parent or any of its affiliates, as more
particularly described in section 5.1 of the Plan of Arrangement.
2
<PAGE>
"RETRACTION CALL RIGHT" means the overriding right of Parent, in the event
of and notwithstanding a request by a holder of Class A Shares for IntelCom to
redeem any or all of the Class A Shares registered in the name of such holder,
to purchase all but not less than all of the Class A Shares which are the
subject of such request directly from such holder, as more particularly
described in section 5.2 of the Plan of Arrangement.
"REVENUE CANADA" means Revenue Canada - Customs, Excise and Taxation.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the United States Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SHAREHOLDER" means a holder of IntelCom Common Shares.
"SHARE OPTION" means an option to purchase IntelCom Common Shares issued
under a Stock Option Plan.
"SUPPORT AGREEMENT" means the agreement dated June 27, 1996 between
IntelCom and Parent in connection with the Arrangement in the form attached as
Appendix B hereto, as amended, modified or supplemented from time to time in
accordance with its terms.
"STOCK OPTION PLANS" means, collectively, IntelCom's Stock Option Plan #2,
Stock Option Plan #3, 1994 Employee Stock Option Plan and 1995 Restated and
Amended Employee Stock Option Plan.
"U.S. GAAP" means accounting principles generally accepted in the United
States.
"$" means the lawful currency of the United States.
3
<PAGE>
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The historical and pro forma financial statements of IntelCom and the
selected historical and pro forma financial data concerning IntelCom contained
in this Proxy Statement - Prospectus are reported in U.S. dollars and have
been prepared in accordance with U.S. GAAP, which, in relation to such
statements and data, does not materially differ from Canadian GAAP.
CANADIAN/U.S. EXCHANGE RATES
IN THIS PROXY STATEMENT - PROSPECTUS, DOLLAR AMOUNTS ARE EXPRESSED EITHER IN
CANADIAN DOLLARS ("CDN$") OR IN "$".
According to Extel Financial, Ltd., for fiscal 1991 to fiscal 1995 and for
the six months ended March 31, 1996, the high and low exchange rates (i.e.,
the rate at which Canadian dollars were sold for U.S. dollars), the average
exchange rate (i.e., the average of the exchange rates on the last day of each
month during the period) and end-of-period exchange rates for one Canadian
dollar expressed in U.S. dollars for the periods indicated are set forth
below:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31, 1996
--------------------------------- --------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
High for period $1.176 $1.253 $1.336 $1.395 $1.425 $1.385
Low for period 1.130 1.119 1.233 1.294 1.337 1.329
End of period 1.130 1.253 1.335 1.340 1.350 1.362
Average for period 1.152 1.177 1.274 1.355 1.376 1.362
</TABLE>
On June ., 1996, the noon buying rate for Cdn$1.00 was $..
4
<PAGE>
SUMMARY OF PROXY STATEMENT -- PROSPECTUS
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Proxy Statement - Prospectus and appendices hereto.
Unless the context otherwise requires, the terms "fiscal" and "fiscal year"
refer to IntelCom's fiscal year ending September 30. Industry figures
throughout this Proxy Statement - Prospectus were obtained from reports
published by the FCC, Connecticut Research (an industry research organization)
and other industry sources, which the Company has not independently verified.
Certain of the information contained in this Summary and elsewhere in this Proxy
Statement - Prospectus, including the information under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and information
with respect to the Company's plans and strategy for its business and related
financing, are forward-looking statements. For a discussion of important
factors that could cause actual results to differ materially from the forward-
looking statements, see "Risk Factors." Shareholders should also carefully
consider the information set forth under the caption "Risk Factors" including
the risks relating to historical and anticipated operating losses and negative
cash flow.
THE COMPANY
The primary purpose of the Meeting is to consider and vote upon the approval of
the Arrangement, the principal effect of which will be to restructure the
Company as a publicly traded U.S. domiciled corporation. Pursuant to the
Arrangement, ICG Communications, Inc. ("Parent"), a newly formed Delaware
corporation, will become the holding company for IntelCom Group Inc.
("IntelCom"), a Canadian corporation, IntelCom Group (U.S.A.), Inc., a Colorado
corporation ("ICG"), and its subsidiaries (collectively, the "Company").
Substantially all of the Company's operations are located in the United States.
In addition, the Company views the United States as its primary source for
raising capital and each of the Boards of Directors of IntelCom and Parent
believes that the Arrangement will facilitate access to such markets and
increase the Company's flexibility to meet its future financing needs. As part
of its expected growth strategy for the short and medium term, the Company will
pursue opportunities to invest in other U.S. based companies in the
telecommunications industry, as it has done in the past. The price for any
potential acquisitions may be in shares of Parent Common Stock and the Company
believes that shares of Parent Common Stock will be more attractive as
consideration for such acquisitions if the issuer is domiciled in the United
States and its shares are publicly traded. Also, certain aspects of the
Company's operations are regulated by the FCC, which imposes restrictions on the
interests a foreign company may hold in telecommunications businesses in the
United States. By replacing IntelCom with Parent, a U.S. domiciled corporation,
as the ultimate parent entity for the Company, the Arrangement will facilitate
the FCC licensing process for the Company and provide greater flexibility in
structuring its investments in regulated businesses.
The Arrangement has been designed to maintain the Company's results of
operations, existing net operating losses (for United States tax purposes) and
asset values of the Company without causing any material United States or
Canadian federal income tax consequences. See "Risk Factors--Holding Company
Reliance on Subsidiaries' Funds; Insolvency." In addition, the Arrangement has
been structured so that it will be treated as a tax-free transaction for
Canadian tax purposes to Canadian residents electing to remain shareholders of
IntelCom and to receive Class A Shares rather than shares of Parent Common Stock
on the Effective Date of the Arrangement (subject to possible proration) and for
United States tax purposes to United States residents electing to receive shares
of Parent Common Stock in exchange for their IntelCom Common Shares on the
Effective Date of the Arrangement.
Parent. Parent is ICG Communications, Inc., a Delaware corporation, which was
formed on April 11, 1996. Parent has been formed for the purpose of becoming the
new U.S. public parent of the Company and exchanging its shares for IntelCom
Common Shares as a result of the consummation of the transactions contemplated
by the Arrangement and the Support Agreement described herein. Parent has not,
and prior to the consummation of the transactions contemplated by the
Arrangement and the Support Agreement will not, engage in any material business
operations. Prior to the consummation of the transactions contemplated by the
Arrangement and the Support Agreement, Parent will not own any material assets.
Parent has incurred minimal expenses to date in connection with its formation
and the preparation of this Proxy Statement - Prospectus. Parent's principal
executive offices are located at 9605 E. Maroon Circle, P.O. Box 6742,
Englewood, Colorado 80155-6742 (telephone number (303) 572-5960).
5
<PAGE>
IntelCom. IntelCom is IntelCom Group Inc., a Canadian federal corporation,
which was formed on June 5, 1981 as a British Columbia corporation and continued
as a Canadian federal corporation on October 30, 1995. The sole asset of
IntelCom consists of, and following consummation of the transactions
contemplated by the Arrangement and the Support Agreement will continue to
consist of, all of the issued and outstanding shares of ICG Common Stock.
IntelCom's registered office is located at Suite 1710, 1177 West Hastings
Street, Vancouver, British Columbia, V6E 2L3 (telephone number (604) 683-9262),
and its principal executive office is located at Unit 11, 1155 North Service
Road, Oakville, Ontario L6M 3E3 (telephone number (905) 469-0686).
THE ARRANGEMENT
The principal effect of the Arrangement will be that Parent, a newly formed
Delaware corporation, will become the public holding company for the Company.
As a result of the Arrangement, holders of IntelCom Common Shares will be
entitled to exchange their IntelCom Common Shares for shares of Parent Common
Stock. Accordingly, after the Effective Date, Parent will own at least 85% of
the issued and outstanding Class A Shares. See "The Arrangement - Description
of the Arrangement and Certain Related Transactions." In addition, IntelCom's
name will be changed to ICG Holdings (Canada), Inc.
Pursuant to the Arrangement, and subject to possible proration as described
under "The Arrangement--Election Procedures", Shareholders will be entitled to
receive, for each IntelCom Common Share held, either one share of Parent Common
Stock or one Class A Share. IN ORDER TO RECEIVE CERTIFICATES REPRESENTING
SHARES OF PARENT COMMON STOCK OR CLASS A SHARES AS A RESULT OF THE ARRANGEMENT,
A SHAREHOLDER MUST SUBMIT TO THE DEPOSITARY PRIOR TO THE ELECTION DEADLINE (I) A
PROPERLY COMPLETED LETTER OF TRANSMITTAL AND ELECTION FORM INDICATING SUCH
SHAREHOLDER'S DECISION WHETHER TO RECEIVE SHARES OF PARENT COMMON STOCK OR CLASS
A SHARES AS A RESULT OF THE ARRANGEMENT AND (II) CERTIFICATES REPRESENTING THE
INTELCOM COMMON SHARES BEING EXCHANGED BY SUCH SHAREHOLDER AS A RESULT OF THE
ARRANGEMENT. A SHAREHOLDER WHO DOES NOT SUBMIT A PROPERLY COMPLETED LETTER OF
TRANSMITTAL AND ELECTION FORM WHICH IS RECEIVED BY THE DEPOSITARY PRIOR TO THE
ELECTION DEADLINE SHALL BE DEEMED TO HAVE MADE AN ELECTION TO RECEIVE SHARES OF
PARENT COMMON STOCK.
SHAREHOLDERS WHO ARE CANADIAN RESIDENTS AND WHO HOLD INTELCOM COMMON SHARES IN
THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES ARE URGED TO CONTACT
SUCH BROKERAGE FIRMS, BANKS OR NOMINEES AND INSTRUCT THEM AS TO YOUR ELECTION TO
RECEIVE CLASS A SHARES OR SHARES OF PARENT COMMON STOCK AS A RESULT OF THE
ARRANGEMENT. YOUR FAILURE TO INSTRUCT SUCH BROKERAGE FIRMS, BANKS OR NOMINEES
OF YOUR ELECTION WILL RESULT IN YOUR BEING DEEMED TO HAVE ELECTED TO RECEIVE
SHARES OF PARENT COMMON STOCK, WHICH MAY RESULT IN A TAXABLE EVENT FOR CANADIAN
TAX PURPOSES.
Approval and adoption of the Arrangement requires the affirmative vote of
66 2/3% of the votes actually cast thereon at the Meeting. Pursuant to the
terms of the Arrangement, at least 85% of IntelCom Common Shares outstanding
immediately prior to the Effective Date will be exchanged for shares of Parent
Common Stock upon the Arrangement. Accordingly, it is possible that the
Arrangement will be approved by Shareholders at the Meeting, but that the
holders of less than 85% of IntelCom Common Shares will have elected to exchange
their IntelCom Common Shares for shares of Parent Common Stock. In the event
that the number of shares of Parent Common Stock issuable to Shareholders who
have elected to receive shares of Parent Common Stock upon the Arrangement is
less than 85% of the number of IntelCom Common Shares outstanding immediately
prior to the Arrangement, holders of IntelCom Common Shares who have elected to
receive Class A Shares will be deemed to have elected, pro rata to the extent of
the shortage, to exchange such IntelCom Common Shares for shares of Parent
Common Stock. The receipt by Shareholders who are Canadian residents of shares
of Parent Common Stock upon the Arrangement may result in a taxable event for
Canadian tax purposes to such Shareholders. All Shareholders should carefully
read "Income Tax Considerations to Shareholders" and consult their own tax
advisors. See "Risk Factors -- Deemed Election to Receive Parent Common
Stock."
Although a tax-free exchange pursuant to section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), would require that Parent acquire
at least 80% of the Class A Shares, the Arrangement has a higher minimum
exchange percentage of 85% in order to avoid reduction of Parent's ownership
below 80% due to the exercise by warrant holders and the conversion by
debenture holders, in order to permit tax-free exchanges of Class A Shares after
the Arrangement.
6
<PAGE>
Pursuant to the Arrangement, Shareholders holding Class A Shares have the right
to exchange such Class A Shares, at any time after the Effective Date, for an
equal number of shares of Parent Common Stock. See "The Arrangement."
RECOMMENDATION. THE BOARD OF DIRECTORS OF INTELCOM RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE ARRANGEMENT RESOLUTION.
THE BOARD OF DIRECTORS OF INTELCOM RECOMMENDS THAT HOLDERS WHO ARE UNITED
STATES RESIDENTS ELECT TO RECEIVE SHARES OF PARENT COMMON STOCK AND THAT HOLDERS
WHO ARE CANADIAN RESIDENTS ELECT TO RECEIVE CLASS A SHARES. ALL SHAREHOLDERS
SHOULD CAREFULLY READ "INCOME TAX CONSIDERATIONS TO SHAREHOLDERS" AND CONSULT
THEIR OWN TAX ADVISORS. See "The Arrangement--Reasons for the Arrangement and
Recommendations of the Board."
OPINION OF FINANCIAL ADVISOR. MORGAN STANLEY HAS DELIVERED TO THE BOARD OF
DIRECTORS OF INTELCOM ITS WRITTEN OPINION DATED AS OF APRIL 25, 1996 TO THE
EFFECT THAT, BASED UPON AND SUBJECT TO THE VARIOUS CONSIDERATIONS SET FORTH IN
SUCH OPINION AND AS OF THAT DATE, THE ARRANGEMENT IS FAIR TO SHAREHOLDERS FROM A
FINANCIAL POINT OF VIEW. SEE "THE ARRANGEMENT - OPINION OF FINANCIAL ADVISOR."
A copy of the opinion of Morgan Stanley, which sets forth the assumptions made,
procedures followed, matters considered and scope of review, is attached to this
Proxy Statement - Prospectus as Appendix A and should be read carefully in its
entirety.
Court Approval and Completion of the Arrangement. The implementation of the
Arrangement is subject to approval of the Court. Prior to the mailing of this
Proxy Statement - Prospectus, IntelCom and Parent obtained the Interim Order
which provides for the calling, holding and conduct of the Meeting and other
procedural matters.
Following the Meeting, IntelCom and Parent intend to apply for the Final Order.
A copy of the Notice of Application for the Final Order is attached as Appendix
G to this Proxy Statement - Prospectus. The hearing in respect of the Final
Order is scheduled to take place on August . , 1996 at the Ontario Court of
Justice (General Division), Osgoode Hall, 145 Queen Street West, Toronto,
Ontario. At that hearing, any Shareholder or other interested party who wishes
to participate or to be represented or to present evidence or argument may do
so, subject to filing with the Court and serving such notice of appearance upon
the Company's solicitors, and upon all other parties who have filed a notice of
appearance as provided in the Interim Order. At the hearing for the Final
Order, the Court will consider, among other things, the fairness of the
Arrangement and the approval of the Arrangement Resolution by Shareholders.
The Arrangement will become effective on the Effective Date. The Effective
Date will occur after the requisite Shareholder and Court approvals have been
obtained, which Court approval is expected to occur shortly after the Meeting.
See "The Arrangement - Description of the Arrangement and Certain Related
Transactions" and "Court Approval and Completion of the Arrangement."
Dissenters' Rights. Shareholders who provide the requisite notice to IntelCom
and who vote against the Arrangement Resolution are entitled to dissent under
section 190 of the CBCA in accordance with the Interim Order. See "Dissenting
Shareholders' Rights."
Conditions to the Arrangement. Consummation of the Arrangement is subject to
the satisfaction of a number of conditions, including the passage of the
Arrangement Resolution by Shareholders, receipt of the Final Order and
authorization of the shares of Parent Common Stock for listing on the American
Stock Exchange (the "AMEX"). In addition, the Arrangement may be abandoned for
any reason prior to the Effective Date, notwithstanding approval by
Shareholders, by mutual agreement of IntelCom and Parent. See "The Arrangement
- - Conditions to the Arrangement."
Regulatory Approvals. Other than the approval by the Court of the Arrangement,
the filing of the Arrangement with the Director appointed under the CBCA and the
declaration of effectiveness by the SEC of the Registration Statement of Parent
on Form S-4, of which this Proxy Statement - Prospectus forms a part, there are
no U.S. or Canadian federal, provincial or state law requirements remaining to
be complied with in order to effectuate the Arrangement and the consummation of
the transactions contemplated thereby.
7
<PAGE>
Accounting Treatment. The Arrangement will be accounted for in a manner
similar to a pooling of interests. The costs associated with the Arrangement,
which are not expected to be significant, will be charged to the results of
operations of Parent upon the consummation of the Arrangement. See "The
Arrangement - Accounting Treatment."
CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
SHAREHOLDERS SHOULD READ CAREFULLY THE INFORMATION UNDER "INCOME TAX
CONSIDERATIONS TO SHAREHOLDERS" WHICH QUALIFIES THE INFORMATION SET FORTH BELOW
BY SETTING FORTH FACTS, ASSUMPTIONS AND RISKS RELATED TO SUCH CONSIDERATIONS.
DIFFERENT INCOME TAX CONSIDERATIONS WILL APPLY TO SHAREHOLDERS WHO ARE RESIDENT
OR NOT RESIDENT IN CANADA AND SHAREHOLDERS WHO ARE RESIDENT OR NOT RESIDENT IN
THE UNITED STATES. ACCORDINGLY, SHAREHOLDERS ARE URGED TO READ "CANADIAN
FEDERAL INCOME TAX CONSIDERATIONS" AND "UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS", AS APPLICABLE. THE FOLLOWING DISCLOSURE OF INCOME TAX
CONSIDERATIONS IS INTENDED AS A GENERAL SUMMARY OF CERTAIN ASPECTS OF THE
ARRANGEMENT AND DOES NOT DISCUSS ALL OF THE FACTS AND CIRCUMSTANCES THAT MAY
AFFECT THE TAX LIABILITY OF PARTICULAR SHAREHOLDERS. THEREFORE, SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Canadian Federal Income Tax Considerations. Provided that a Canadian resident
holder of IntelCom Common Shares elects to receive Class A Shares rather than
shares of Parent Common Stock on the Effective Date of the Arrangement, such
holder generally will not be subject to Canadian income tax as a result of the
transactions effected pursuant to the Arrangement. Such a holder may be subject
to Canadian income tax at a later date upon the sale or exchange of such Class A
Shares. A CANADIAN RESIDENT HOLDER OF INTELCOM COMMON SHARES WHO DOES NOT SO
ELECT TO RECEIVE CLASS A SHARES MAY BE SUBJECT TO CANADIAN INCOME TAX AT THE
TIME OF THE ARRANGEMENT.
A non-Canadian holder of IntelCom Common Shares to whom such shares are not
taxable Canadian property who elects to receive shares of Parent Common Stock on
the Effective Date of the Arrangement generally will not be subject to Canadian
income tax as a result of the transactions effected pursuant to the Arrangement.
United States Federal Income Tax Considerations. A United States holder of
IntelCom Common Shares who exchanges such shares for shares of Parent Common
Stock pursuant to the Arrangement, or who exchanges Class A Shares for shares of
Parent Common Stock from Parent after the Arrangement, will not, as a result
thereof, be subject to United States federal income tax. In order to maintain
favorable tax treatment, all United States holders, regardless of whether they
participate in the Share Exchange, will be required to file a notice with the
IRS and are strongly advised to make certain additional elections on or before
the last date for filing a United States federal income tax return for the
holder's taxable year in which the exchange of IntelCom Common Shares for Class
A Shares, and the exchange of Class A Shares for shares of Parent Common Stock,
occurs. See "Income Tax Considerations to Shareholders -- United States Income
Tax Considerations."
OPERATIONS OF THE COMPANY FOLLOWING THE ARRANGEMENT
As a result of, and following the consummation of the transactions
contemplated by the Arrangement and the Support Agreement, the operations and
business of Parent, on a consolidated basis, will become the combined business
operations of the Company.
8
<PAGE>
THE BUSINESS OF THE COMPANY
The Company is one of the largest providers of competitive local access
services in the United States, based on estimates of the industry's 1995
revenue. Competitive local exchange companies ("CLECs"), formerly known as CAPs
(competitive access providers), seek to provide an alternative to the local
exchange telephone company ("LEC") for a full range of telecommunications
services in the newly opened federal regulatory environment. The Company
operates networks in 37 cities with populations in excess of 100,000, has
recently acquired fiber optic facilities in 22 more cities and has networks
under construction in four additional cities. As a result, the Company now
serves more Tier II and Tier III markets with populations of between 250,000 and
2,000,000 than any other CLEC in the United States, with a significant presence
in regional clusters covering major metropolitan areas in California, Colorado
and the Ohio Valley. The Company also provides a wide range of network systems
integration services and maritime and international satellite transmission
services. As a leading participant in a rapidly growing industry, the Company
has experienced significant growth, with total revenues increasing from $7.6
million for fiscal 1992 to $111.6 million for fiscal 1995 and $132.4 million
for the 12-month period ended March 31, 1996.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act") and
several state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, the Company is now permitted to offer all interstate and
intrastate switched services, including local dial tone (which the Company
intends to begin offering in the second half of 1996). In order to take
advantage of the switched services market, the Company has installed 13 high
capacity digital switches that enable the Company to offer these services in all
of its markets.
In response to these regulatory changes, the Company is accelerating the
development of its telecom services business and, in order to facilitate rapid
and cost-effective expansion, is investing significant resources to expand its
network footprint and service offerings and is entering into agreements with
utility companies and other local strategic partners. The Company has entered
into long-term agreements with three utilities, Southern California Edison
Company ("SCE"), City Public Service of San Antonio ("CPS") and a subsidiary of
The Southern Company ("Southern"). Under these agreements, the Company is
licensing fiber optic facilities in Southern California (1,258 miles), San
Antonio (300 miles, 60 of which currently exist) and Birmingham (144 miles, 22
of which currently exist). The Company also has invested in ICG Telecom of
San Diego, L.P., a California limited partnership (formerly known as Linkatel
California, L.P., a California limited partnership) ("ICG Telecom of San
Diego"), which operates a fiber optic network (50 miles) in metropolitan San
Diego. See "--Recent Developments--Network Expansion." The Company is actively
pursuing licensing arrangements with other utility companies and other strategic
partners.
The Company also has entered into a national contract with AT&T Corp. ("AT&T")
under which the Company will provide special and switched access services to
AT&T on the Company's networks. See "--Recent Developments--Network Expansion."
TELECOM SERVICES
The Company operates networks in the following markets within its three
regional clusters: California (Sacramento, San Diego and 17 cities in the Los
Angeles and San Francisco metropolitan areas); Colorado (Denver, Colorado
Springs and Boulder); and the Ohio Valley (Akron, Cleveland, Columbus, Dayton
and Louisville). The Company also operates networks in Birmingham, Charlotte,
Phoenix, Melbourne (Florida) and Nashville. The Company has recently acquired
fiber optic facilities in 22 additional cities in the Los Angeles metropolitan
area through its agreement with SCE and is developing networks in Cincinnati,
Greensboro/Winston-Salem and San Antonio. The Company intends to sell its
networks in Melbourne and Phoenix. The Company's operating networks have grown
from approximately 12,000 customer voice grade equivalent circuits ("VGEs") at
the end of fiscal 1992 to approximately 430,000 VGEs at the end of fiscal 1995
and 511,000 VGEs as of March 31, 1996. This has driven telecom services
revenue from $1.1 million for fiscal 1992 to $32.3 million for fiscal 1995 and
$50.6 million for the 12-month period ended March 31, 1996.
9
<PAGE>
Strategy
The Company's goal is to become the dominant alternative to the LEC in the
markets it serves. In furtherance of this goal, the Company has developed a
strategy to capitalize on its established customer base of long distance
carriers and to develop its markets within regional clusters. Key elements of
this strategy are:
Market Services Primarily to Long Distance Carriers. The Company believes
there are several advantages to acting as a "carrier's carrier" and marketing
its services primarily to long distance carriers and resellers. Long distance
carriers generally determine who will carry the local segment of a long distance
telephone call, thereby enabling the Company to reduce its marketing costs by
focusing on a few high-volume customers. Also, the continuing deregulation of
local telephone service creates new opportunities for the Company to work with
its long distance carrier customers to develop and deliver local dial tone and
new enhanced products and services. The major long distance carriers served by
the Company operate in all U.S. markets and provide the Company with information
about business opportunities and the carriers' anticipated needs in markets the
Company may enter. The carriers and resellers served by the Company accounted
for approximately 82% of the Company's telecom services revenue for fiscal 1995.
The Company believes that its "carrier's carrier" strategy reduces the risks
associated with significant network investments because the Company works with
long distance carrier customers, such as AT&T, MCI Communications Corp. ("MCI"),
Sprint Corporation ("Sprint") and WorldCom, Inc. ("WorldCom"), to develop new
products and services.
Concentrate Markets in Regional Clusters. The Company's "first to market"
advantage in certain cities has allowed it to concentrate its networks in
regional clusters serving major metropolitan areas in California, Colorado and
the Ohio Valley. The Company believes that by focusing on regional clusters it
will be able to more effectively service its customers' needs and efficiently
develop, operate and control its networks. The Company also is evaluating the
expansion of its existing clusters and the addition of new regional clusters in
which it may seek to acquire, build or license fiber optic facilities.
Expand Alliances with Utilities. The Company has established, and is actively
pursuing, strategic alliances with utility companies to take advantage of their
existing fiber optic infrastructures. This approach affords the Company the
opportunity to license or lease fiber optic facilities on a long-term basis
throughout a utility's service area in a more timely, cost-effective manner than
constructing facilities. In addition, utilities possess conduit and rights of
way that facilitate the installation of fiber to extend the existing network in
a given market.
Aggressively Pursue Local Dial Tone and Switched Services. With the passage of
the Telecommunications Act, LECs will be allowed to offer long distance services
in competition with the Company's current long distance carrier customers. As a
result, the Company's long distance carrier customers are seeking to rapidly
reduce their reliance on LEC networks. By offering an array of
telecommunications products, including local dial tone and enhanced services,
the Company will be providing a high quality, lower cost alternative to the LEC.
As a result, the Company expects switched services to become a primary business
of the Company as it introduces local dial tone in the second half of 1996. The
Company has established a network of 13 switches in its markets to offer these
services. The Company's switched minutes of use have increased from 10 million
minutes in the first quarter of fiscal 1995 to 362 million minutes in the
second quarter of fiscal 1996.
NETWORK SERVICES
Through the Company's wholly owned subsidiary, Fiber Optic Technologies, Inc.
("FOTI"), the Company supplies information technology services, focusing on
client/server technologies, network design, installation, maintenance and
support for a variety of end users, including large businesses and
telecommunications companies. The Company specializes in the installation and
support of network systems for clients that include Amoco Corporation ("Amoco"),
MCI, Intel Corporation ("Intel") and other leading Fortune 1000 firms. Revenue
for Network Services has grown from $13.3 million for the 12-month period ended
September 30, 1992 (including revenue prior to the Company's acquisition of
FOTI) to $58.8 million for fiscal 1995 and $59.7 million for the 12-month
period ended March 31, 1996.
10
<PAGE>
SATELLITE SERVICES
The Company's Satellite Services operations provide satellite-based voice and
data connectivity to domestic and international customers. The Company operates
a maritime telecommunications business providing satellite telephone services to
major cruise ship lines and the U.S. Navy, a VSAT (very small aperture terminal)
data transmission business and a teleport providing international voice and data
services. The Company also recently acquired 90% of the outstanding shares of
Maritime Cellular Tele-Network, Inc. ("MCN"), a Florida-based maritime
telecommunications operator, which provides satellite telephone services to
smaller vessels and will complement the Company's existing cruise ship telephone
services business. The Company recently sold four teleports (Atlanta, Denver,
Los Angeles and New Jersey) to Vyvx, Inc., a subsidiary of The Williams
Companies ("Vyvx"), for a cash purchase price of approximately $21.5 million.
The Company continues to own and operate one teleport and has the right to lease
capacity on the teleports it sold. Revenue for the Satellite Services
operations (adjusted to reflect the sale of the teleports) was $11.4 million for
fiscal 1995 and $13.9 million for the 12-month period ended December 31, 1995.
RECENT DEVELOPMENTS
Network Expansion
In March 1996, the Company and SCE jointly filed an agreement with the
California Public Utilities Commission ("CPUC") under which the Company will
license 1,258 miles of fiber optic cable in Southern California. This network,
which will be operated and maintained by the Company, stretches from suburban
Los Angeles to San Diego. In addition, the agreement allows the Company to
utilize SCE's facilities to install up to 500 additional miles of fiber optic
cable. The Company has identified over 1,300 buildings which, based upon
estimates of building size and telecommunications traffic volumes, will be
targeted by the Company for connection to the network. The Company believes
this agreement is strategically important to enhancing its market position in
California and providing it with a fiber optic infrastructure in a timely, cost-
effective manner.
In March 1996, the Company entered into a national contract with AT&T under
which the Company will provide special and switched access services to AT&T.
The Company and AT&T have initially identified 12 MSAs (metropolitan statistical
areas) in which the Company will provide services and are in discussions with
respect to seven additional MSAs in which the Company may provide services. The
Company believes that this agreement is indicative of a trend by long distance
carriers to shift origination and termination of long distance traffic away from
LEC networks to the facilities of CLECs. Under the agreement, the Company will
work with AT&T to provide special and switched access services in the Company's
other markets and new markets which the Company may enter.
The Company recently invested $10.0 million to acquire a 60% interest in, and
became the general partner of, ICG Telecom of San Diego, whose other partners
are Linkatel Communications, Inc. and The Copley Press, Inc., the publisher of
The San Diego Union Tribune ("Copley Press"). ICG Telecom of San Diego
operates a 50-mile fiber optic network and is constructing an additional 110
miles of fiber in metropolitan San Diego. As a result of the ICG Telecom of
San Diego acquisition, combined with the Company's existing California networks
and the facilities under agreement with SCE, the Company now has a network
presence in all major metropolitan areas of California.
In November 1995, the Company entered into a long-term agreement with CPS to
license half of the capacity on a 300-mile fiber optic network (60 of which
currently exist) in greater San Antonio. CPS will construct the remaining 240-
mile network in conjunction with the Company. Upon completion, the network is
expected to be able to service 120 buildings. During construction, the Company
will be able to provide services to completed segments of the network. See "The
Business of the Company--Legal and Administrative Proceedings."
In March 1996, the Company entered into a long-term license agreement with a
subsidiary of Southern and Alabama Power Company ("Alabama Power"), for the
right to use 22 miles of fiber and 122 miles of additional Alabama Power
facilities to reach the three major business centers in Birmingham.
In February 1996, the Company entered into a long-term agreement with WorldCom
under which the Company will pay approximately $8.8 million for the right to use
fiber along a 330-mile fiber optic network in Ohio. The
11
<PAGE>
network, which is being constructed by WorldCom in conjunction with the Company,
will provide a direct fiber link between the Company's existing networks in
Akron, Cleveland, Columbus and Dayton and its new network under development in
Cincinnati.
For a more detailed description of these agreements, see "The Business of the
Company--Telecom Services--Recent Agreements."
Private Placement
In April 1996, ICG completed a private placement of (i) $550.3 million
principal amount of 12 1/2% Senior Discount Notes due 2006 (the "12 1/2%
Notes"), for gross proceeds of $300.0 million, which are guaranteed on a senior
unsecured basis by IntelCom, and (ii) 150,000 shares of 14 1/4% Exchangeable
Preferred Stock (the "Preferred Stock") for gross proceeds of $150.0 million
(the "Private Placement"). The net proceeds from the Private Placement totaled
$433.0 million after transaction fees and expenses of $17.0 million. Of the net
proceeds, $35.3 million was used to redeem redeemable preferred stock and to
purchase redeemable warrants previously issued by ICG, and approximately $397.7
million will be used for capital expenditures and to fund net operating losses
over the next 21 months. The Company believes that its liquidity has improved
because the 12 1/2% Notes do not require the payment of cash interest prior to
2001 and do not require payment of principal until maturity in 2006 and
dividends on the Preferred Stock are payable in additional Preferred Stock
through May 1, 2001. See "Description of Certain Indebtedness and Preferred
Stock."
Management
The Company named James D. Grenfell as Executive Vice President, Chief
Financial Officer and Treasurer in November 1995. Mr. Grenfell has been a
financial executive in the telecommunications industry for over 15 years, most
recently with BellSouth Corp.
Accounting Changes
Effective January 1, 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. The Company also has shortened the estimated depreciable lives of
substantially all of its fixed assets. The Company believes this revised
accounting method and the changes in estimated depreciable lives are preferable
because they are more consistent with accounting practices within the
telecommunications industry. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Accounting Matters--Accounting
Changes."
MARKET PRICE AND DIVIDENDS
IntelCom. IntelCom Common Shares are listed on the AMEX under the symbol "ICG"
and on the Vancouver Stock Exchange ("VSE") under the symbol "INL". On April
26, 1996, the last full trading day preceding public announcement of the
proposed Arrangement, the closing price per IntelCom Common Share on the AMEX
Composite Tape was $19.88. On June ., 1996, the most recent practicable date
prior to the printing of this Proxy Statement - Prospectus, the closing price
per IntelCom Common Share on the AMEX Composite Tape was $.. IntelCom has not
paid any cash dividends since its inception. See "Market Price and Dividend
Information."
Parent. Parent Common Stock, the sole outstanding share of which is held by
its incorporator, is not listed on any securities exchange.
Listing of Parent Common Stock on the AMEX After the Effective Date. Parent
has applied for listing of the Parent Common Stock under the symbol "ICG" on the
AMEX after the Effective Date.
RISK FACTORS
FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY SHAREHOLDERS
IN CONNECTION WITH THE ARRANGEMENT, SEE "RISK FACTORS" BEGINNING ON PAGE
17.
12
<PAGE>
CERTAIN COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative data related to book value
and loss per IntelCom Common Share on a historical basis and per share of Parent
Common Stock on a pro forma basis, which are the same because pursuant to the
Arrangement each Class A Share will be exchanged for one share of Parent Common
Stock. The comparative data related to book value and loss per share of Parent
Common Stock on a historical basis is not presented as Parent was not formed
until April 11, 1996. The information shown below should be read in conjunction
with the historical financial statements of IntelCom, including the respective
notes thereto, which appear elsewhere in this Proxy Statement - Prospectus, and
the selected historical financial data, including the notes thereto, appearing
elsewhere in this Proxy Statement - Prospectus.
<TABLE>
<CAPTION>
Book Value Per Loss Per
Common Share Common Share
-------------- ---------------
Period Ending or As Of
- ------------------------
<S> <C> <C>
March 31, 1996.......... $1.35 $ 2.42(1)
March 31, 1995.......... 4.39 1.01(1)
September 30, 1995...... 3.30 3 .25(2)
September 30, 1994...... 2.33 1.56(2)
September 30, 1993...... 2.51 0 .39(2)
September 30, 1992...... 2.13 0.42(2)
September 30, 1991...... 1.81 0 .61(2)
</TABLE>
- -------------------
(1) Period of six months.
(2) Period of twelve months.
SELECTED FINANCIAL DATA
The selected historical financial information of IntelCom and its subsidiaries
for each fiscal year in the five-year period ended September 30, 1995 has been
derived from the audited consolidated financial statements of IntelCom.
Consolidated financial statements for IntelCom for the three fiscal years ended
September 30, 1995 are included elsewhere in this Proxy Statement - Prospectus.
The selected financial information as of March 31, 1996 and for the six
months ended March 31, 1995 and 1996 have been derived from the unaudited
Consolidated Financial Statements of IntelCom included elsewhere in this Proxy
Statement - Prospectus and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth therein. The information set forth below
should be read in conjunction with such Consolidated Financial Statements of
IntelCom and the notes thereto included elsewhere in this Proxy Statement -
Prospectus. Results of operations for the six months ended March 31,
1996 are not necessarily indicative of results of operations for a full year or
predictive of future periods. IntelCom's development and expansion activities,
including acquisitions, during the periods shown below materially affect the
comparability of this data from one period to another. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected historical financial information for Parent is not presented as
Parent was not formed until April 11, 1996. Parent has not commenced operations
and has no assets or liabilities, including contingent liabilities and
commitments. Consequently, pro forma financial information for Parent is not
presented since this information would not differ significantly from the
historical financial information of IntelCom presented herein. The costs
associated with the Arrangement, which are not expected to be significant, will
be accounted for as a current period expense by Parent upon consummation of the
Arrangement.
13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
---------------------------------------------------------------- ---------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
1991 1992 1993 1994 1995 1995/(1)/ 1995 1996/(2)/ 1996/(1)/
------- -------- -------- -------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA(3):
Revenue:
Telecom services........ $000428 $001,061 $004,803 $014,854 $032,330 $032,330 $012,833 $ 0 31,148 $ 031,148
Network services........ - 4,955 21,006 36,019 58,778 58,778 28,789 29,691 29,691
Satellite services...... 24 1,468 3,520 8,121 20,502 11,360 8,934 10,504 8,026
Other................... 153 126 147 118 - - - - -
Total revenue......... 605 7,610 29,476 59,112 111,610 102,468 50,556 71,343 68,865
Cost of services.......... 532 5,423 18,961 35,590 76,778 70,974 33,253 49,824 48,128
Selling, general and 3,088 3,921 10,702 30,590 65,022 61,248 27,485 40,239 38,746
administrative expenses..
Depreciation and 1,282 1,602 3,473 8,198 16,624 14,410 7,107 12,361 11,708
amortization.............
Operating expenses........ 4,902 10,946 33,136 74,378 158,424 146,632 67,845 102,424 98,582
Operating loss............ (4,297) (3,336) (3,660) (15,266) (46,814) (44,164) (17,289) (31,081) (29,717)
Interest expense.......... (205) (525) (2,523) (8,481) (24,368) (73,944) (6,197) (29,432) (60,081)
Other income (expense), 7 33 22 (121) (4,999) (39,120) 456 (1,070) (22,970)
net......................
Loss before income taxes
and cumulative effect of
change in (4,495) (3,828) (6,161) (23,868) (76,181) (157,228) (23,030)
accounting..............
Income tax benefit 112 174 1,552 - - - (11) 4,482 4,482
(expense)................
Cumulative effect of - - - - - - - (3,453) (3,453)
change in accounting(2)
Net loss.................. (4,383) (3,654) (4,609) (23,868) (76,181) (157,228) (23,041) (60,554) (111,739)
Preferred stock dividend.. - - - - (467) (467) - (1,027) (1,027)
Net loss attributable to $(4,383) $ (3,654) $ (4,609) $(23,868) $(76,648) $ $ (61,581) $(112,766)
common shareholders......
Loss per common share..... $0(0.61) $0(0.42) $0(0.39) $00(1.56) $00(3.25) $ $00(2.42) $00(4.43)
Weighted average number 7,184 8,737 11,671 15,342 23,604 23,604 22,746 25,471 25,471
of common shares
outstanding..............
OTHER DATA:
EBITDA (4)............... $(3,015) $0(1,734) $ 00(187) $ (7,068) $(30,190) $(29,754) $(10,182) $ (18,720) $ (18,009)
Capital expenditures(5). $(7,608 $(12,599 $ 20,685 $ 54,921 $088,495 $086,197 $ 49,887 $ 102,285 $ 101,859
Ratio of earnings to - - - - - - - - -
combined fixed charges
and preferred
stock dividends(6)....
</TABLE>
(Accompanying notes are on the following page)
14
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31, 1996
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(1)
-------- -------- ------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............. $ (282) $00(392) $07,990 $0(8,563 ) $249,089 $152,936 $527,352
Total assets........................... 34,550 54,417 95,196 201,991 583,553 556,567 964,175
Notes payable and current
portion of long-term debt and
capital lease obligations............. 459 991 7,657 23,118 27,310 9,199 9,199
Long-term debt and capital
lease obligations, less current
portion............................... 7,602 15,565 37,116 104,461 405,535 459,096 759,125
Redeemable preferred stock of
subsidiary ($30.0 million
liquidation value).................... - - - - 14,986 19,571 -
Preferred stock of ICG (redeemable).. - - - - - - 144,380
Shareholders' equity................... 14,733 21,826 34,753 39,782 91,885 35,513 8,283
</TABLE>
- -------------------
(1) Pro Forma Statement of Operations Data reflects (i) the sale of the
Company's teleports in Atlanta, Denver, Los Angeles and New Jersey, (ii)
the receipt of the net proceeds from the Private Placement and interest
expense on $300.0 million gross proceeds of the 12 1/2% Notes and
red stock dividends on $150.0 million liquidation preference of
Preferred Stock, without giving effect to any increased interest income on
available cash or the capitalization of any interest associated with
construction in progress, (iii) the redemption of $30.0 million of
redeemable preferred stock, payment of accrued dividends and the related
$13.1 million charge for the excess of the redemption price as of April
30, 1996 over the carrying amount, (iv) the repurchase of 916,666
redeemable warrants and (v) the payment with respect to consents to
amendments to the 13 1/2% Notes Indenture to permit the Private Placement,
as if such events had occurred at the beginning of the periods presented.
Pro Forma Balance Sheet Data reflects the items in (ii) through (v) above,
as if such events had occurred on the balance sheet date. The sale of the
Company's teleports is reflected in the actual balance sheet data at March
31, 1996. The charges described in items (iii) and (v) will be reflected
in the Company's results for the three months ended June 30, 1996.
(2) Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts to recognize revenue as services
are provided. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Accounting Matters-Accounting Changes."
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 the six
months ended March 31, 1996 reflect a charge of $3.5 million relating to
the cumulative effect of this change in accounting as of October 1, 1995.
The effect of this change in accounting in fiscal year 1996 was to
decrease loss before cumulative effect of change in accounting by
approximately $22,000 for the six months ended March 31, 1996. If the new
revenue recognition method had been applied retroactively, telecom services
revenue would have decreased by $0.0 million, $0.3 million, $2.0 million,
$0.5 million and $0.7 million for fiscal 1991, 1992, 1993, 1994 and 1995,
respectively, and $0.6 million for the six months ended March 31,
1995.
(3) Historical Statement of Operations Data has been restated for all years
presented prior to October 1, 1993, due to the retroactive application of
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") as of October 1, 1993.
(4) EBITDA consists of operating loss plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow
or results of operations in accordance with generally accepted accounting
principles for the periods indicated. See the Company's Consolidated
Financial Statements contained elsewhere in this Proxy Statement --
Prospectus.
(5) Capital expenditures include assets acquired through the issuance of
debt, capital leases or warrants.
(6) For the fiscal years ended September 30, 1991, 1992, 1993, 1994 and 1995
and the six months ended March 31, 1995 and 1996, earnings were
insufficient to cover combined fixed charges and preferred stock dividends
by $4.5 million, $3.8 million, $6.2 million, $24.8 million, $77.3 million,
$23.0 million and $63.0 million, respectively. On a pro forma basis
giving effect to the Private Placement, the redemption of $30.0 million of
redeemable preferred stock and the sale of four of the Company's teleports
as if they occurred on October 1, 1994 and without giving effect to any
increased interest income on additional available cash or the capitalization
of any interest associated with construction in progress, earnings would
have been insufficient to cover fixed charges by $157.9 million and $113.8
million for fiscal 1995 and the six months ended March 31, 1996,
respectively. Combined fixed charges and preferred stock dividends consist
of interest charges and amortization of debt expense and discount or premium
related to indebtedness, whether expensed or capitalized, that portion of
rental expense the Company believes to be representative of interest (i.e.,
one-third of rental expense) and preferred stock dividends.
15
<PAGE>
GENERAL PROXY INFORMATION
Date and Place of the Meeting. The Meeting will be held on July 30, 1996
at 11:00 a.m. (Toronto time) at the King Edward Hotel, . Room, 37 King
Street East, Toronto, Ontario M5C 1E9.
Shareholders Entitled to Vote. The close of business on June 27, 1996 was
the record date for determination of Shareholders entitled to vote at the
Meeting, except to the extent that a person has transferred any IntelCom
Common Shares after that date and the new holder of such shares establishes
proper ownership and demands, not later than July 19, 1996, to be included in
the list of shareholders eligible to vote at the Meeting. At June 27, 1996, .
IntelCom Common Shares were outstanding, held by approximately . holders of
record. See "The Annual and Special Meeting - General Proxy Information -
Voting Shares."
Vote Required. Approval and adoption of the Arrangement Resolution will
require the affirmative vote of 66 2/3% of the votes actually cast thereon
and for this purpose, any spoiled votes (votes contained on a ballot where it
cannot be determined whether the vote is "for" or "against" a particular
proposal, i.e., where both the "for" and "against" boxes are marked or where
something other than a "for" or "against" vote is indicated on the ballot,
illegible votes, defective votes and abstentions shall be considered not to be
votes cast). As of March 31, 1996, directors and executive officers of
IntelCom and their respective affiliates, as a group, may be deemed to be the
beneficial owners of 3,795,894 IntelCom Common Shares, representing
approximately 14.4% of the outstanding voting power of IntelCom. [The
directors and executive officers of IntelCom and their respective affiliates
have indicated that they intend to vote their respective IntelCom Common
Shares in favor of the Arrangement Resolution.] See "The Annual and Special
Meeting - Vote Required to Approve the Business of the Meeting and Voting
Intentions of Certain Shareholders."
The amendment to IntelCom's Articles changing its name to ICG
Communications, Inc. will require the affirmative vote of 66 2/3% of the votes
actually cast thereon, the election of directors will be by plurality of the
votes actually cast thereon and the reappointment of auditors will require the
affirmative vote of a majority of the votes actually cast thereon (and for
these purposes, any spoiled votes, illegible votes, defective votes and
abstentions shall be considered not to be votes cast). Abstentions and broker
"non-votes" will be counted toward determining the presence of a quorum for
the transaction of business at the Meeting. Abstentions may be specified on
all matters except the election of directors. With respect to all matters
other than the election of directors, abstentions and broker "non-votes" will
have no effect on the outcome of such matters. See "The Annual and Special
Meeting -Vote Required to Approve the Business of the Meeting and Voting
Intentions of Certain Shareholders."
IMPORTANT NOTE: SHAREHOLDERS WHO HOLD INTELCOM COMMON SHARES IN THE NAME OF
ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES CAN ONLY VOTE THEIR INTELCOM
SHARES WITH RESPECT TO THE ARRANGEMENT IF SUCH BROKERAGE FIRMS, BANKS OR
NOMINEES GIVE SUCH SHAREHOLDERS A LEGAL PROXY TO VOTE SUCH INTELCOM COMMON
SHARES OR IF SUCH SHAREHOLDERS GIVE SUCH BROKERAGE FIRMS, BANKS OR NOMINEES
SPECIFIC INSTRUCTIONS AS TO HOW TO VOTE SUCH SHAREHOLDERS' INTELCOM COMMON
SHARES. ACCORDINGLY, IT IS CRITICAL THAT SHAREHOLDERS WHO HOLD INTELCOM
COMMON SHARES IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES
PROMPTLY CONTACT THE PERSON RESPONSIBLE FOR SUCH SHAREHOLDERS' ACCOUNTS AND
GIVE SPECIFIC INSTRUCTIONS AS TO HOW SUCH SHAREHOLDERS' INTELCOM COMMON SHARES
SHOULD BE VOTED WITH RESPECT TO THE ARRANGEMENT.
16
<PAGE>
RISK FACTORS
The following risk factors, together with the other information set forth in
this Proxy Statement - Prospectus, should be considered by Shareholders in
evaluating whether to approve the transactions contemplated by the
Arrangement.
DEEMED ELECTION TO RECEIVE PARENT COMMON STOCK
Approval and adoption of the Arrangement requires the affirmative vote of
66 2/3% of the votes actually cast thereon at the Meeting. Pursuant to the
terms of the Arrangement, at least 85% of IntelCom Common Shares outstanding
immediately prior to the Effective Date will be exchanged for shares of Parent
Common Stock upon the Arrangement. Accordingly, it is possible that the
Arrangement will be approved by Shareholders at the Meeting, but that the
holders of less than 85% of IntelCom Common Shares will have elected to
exchange their IntelCom Common Shares for shares of Parent Common Stock. In
the event that the number of shares of Parent Common Stock issuable to
Shareholders who have elected to receive shares of Parent Common Stock upon
the Arrangement is less than 85% of the number of IntelCom Common Shares
outstanding immediately prior to the Arrangement, holders of IntelCom Common
Shares who have elected to receive Class A Shares will be deemed to have
elected, pro rata to the extent of the shortage, to exchange such IntelCom
Common Shares for shares of Parent Common Stock. The receipt by Shareholders
who are Canadian residents of shares of Parent Common Stock upon the
Arrangement may result in a taxable event for Canadian tax purposes. All
Shareholders should carefully read "Income Tax Considerations to Shareholders"
and consult their own tax advisors.
INCOME TAX CONSEQUENCES
Although Canadian and U.S. Counsel (as defined herein) are of the opinion
(with respect to their own jurisdiction) that the Arrangement will be treated
as a tax-free transaction for Canadian tax purposes to Canadian residents
electing to remain shareholders of IntelCom and to receive Class A Shares
rather than shares of Parent Common Stock on the Effective Date of the
Arrangement (subject to possible proration) and for United States tax purposes
to United States residents electing to receive shares of Parent Common Stock
in exchange for their IntelCom Common Shares on the Effective Date of the
Arrangement, no advance income tax ruling to that effect has been or will be
sought or obtained from Revenue Canada or the IRS. Accordingly, there can be
no assurance that Revenue Canada or the IRS would not challenge the tax-free
status of the Arrangement or, if challenged, that a court would not agree with
Revenue Canada or the IRS. See "Income Tax Considerations to Shareholders".
HOLDING COMPANY RELIANCE ON SUBSIDIARIES' FUNDS; INSOLVENCY
IntelCom and ICG each are, and, upon the Arrangement, Parent will be,
holding companies. The sole asset of IntelCom consists of the shares of ICG
Common Stock and the principal asset of ICG consists of shares of common stock
of its subsidiaries. Upon the Arrangement, the sole asset of Parent will be
Class A Shares. Each of these holding companies must rely upon dividends and
other payments from subsidiaries to generate the funds necessary to meet
obligations. As a result of the Arrangement, any dividends from ICG to
IntelCom would be subject to U.S. federal income tax. ICG does not intend to
pay any dividends for so long as it has outstanding trust indentures which
prohibit such dividends. Currently, certain terms governing ICG's
indebtedness prohibit or limit ICG's ability to declare or pay cash dividends
and no such dividends are necessary to service any obligations of IntelCom or
Parent. The subsidiaries are each legally distinct entities and have no
obligation, contingent or otherwise, to make funds available to their
respective parent companies.
In the event of insolvency of Parent, the result may be that the residual
value of a Class A Share will be greater than the residual value of a share of
Parent Common Stock. In such case, a holder of Class A Shares may receive a
greater proportion of the Company's assets per share than a holder of shares
of Parent Common Stock.
17
<PAGE>
The following risk factors relate to the Company and its business generally
and, together with other information set forth in this Proxy Statement -
Prospectus, should be considered when evaluating the business prospects of the
Company.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW
The Company has incurred and expects to continue to incur significant
operating and net losses. The Company expects to continue to generate
negative cash flow from operating activities while it emphasizes development,
construction and expansion of its telecom services business and until the
Company establishes a sufficient revenue generating customer base. Because of
the acceleration of the Company's expansion strategy, the Company's operating
losses are expected to increase over the near term. The Company had net
losses and negative EBITDA of approximately $76.6 million and $30.2 million,
respectively, for fiscal 1995 and approximately $61.6 million and $18.7
million, respectively, for the first six months of fiscal 1996. In
addition, the Company had accumulated deficits of $134.4 million and $196.0
million at September 30, 1995 and March 31, 1996, respectively. There can be
no assurance that the Company will achieve or sustain profitability or
positive EBITDA in the future or at any time have sufficient resources to make
payments on its indebtedness. See "Selected Financial Data," including the
notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's current plans for expansion of existing networks, the
development of new networks, the further development of the Company's products
and services and the continued funding of operating losses may require an
aggregate of approximately $100.0 million of additional cash from outside
sources. The Company's arrangements with utilities require it to make
significant cash payments and the development of these networks requires
significant capital expenditures to add switching facilities and build out
from the utilities' fiber backbone to end user locations. Due to the number
of opportunities arising from changes in the telecommunications regulatory
environment and the cash required to take advantage of these opportunities,
management believes that the net proceeds from the Private Placement, the
funds remaining from the private issuance of 58,430 units (the "Units"), each
consisting of ten $1,000 13 1/2% Notes due 2005 (the "13 1/2% Notes") and
warrants (the "Unit Warrants") to purchase 33 shares of IntelCom Common Shares
(the "Unit Offering"), and amounts expected to be available through vendor
financing arrangements will provide sufficient funds necessary for the
Company to expand its telecom services business as currently planned and to
fund its operating deficits for approximately 21 months. Additional sources
of cash may include public and private equity and debt financings by IntelCom,
ICG or ICG's subsidiaries, sales of non-strategic assets, capital leases and
other financing arrangements. 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. Failure to obtain such financing
could result in the delay or abandonment of some or all of the Company's
acquisition, development and expansion plans and expenditures, which could
have a material adverse effect on its business prospects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
RISKS RELATED TO SWITCHED SERVICES STRATEGY
The Company has installed 13 high capacity digital switches that enable the
Company to offer interstate and intrastate switched and enhanced services,
including local dial tone, in all of its markets. The Company expects to add
three switches in 1996 and additional switches and switching capacity as
demand warrants. The Company began generating switched services revenue in
the fourth quarter of fiscal 1994 and expects revenue from these services to
increase. Currently, the Company is experiencing negative operating margins,
as expected, from the provision of switched services while its networks are in
the development and construction phases and while the Company relies on LEC
networks to terminate and originate a significant portion of its customers'
switched traffic. The Company expects operating margins for switched services
on a given network to improve when (i) sales efforts
18
<PAGE>
result in increased volumes of traffic carried on the Company's own network in
place of LEC facilities, and (ii) higher margin enhanced services are provided
to customers on the Company's network. In addition, the Company believes that
the unbundling of LEC services and the implementation of local telephone
number portability, which are mandated by the Telecommunications Act, will
reduce the Company's costs of providing switched services and facilitate the
marketing of such services. However, the Company's switched services strategy
has not yet been profitable and may not become profitable due to, among other
factors, lack of customer demand, competition from other CLECs and pricing
pressure from the LECs. In addition, to fully implement its switched services
strategy, the Company must make significant capital expenditures to provide
additional switching capacity, network infrastructure and electronic
components. The Company has limited experience providing switched services
and there can be no assurance that the Company's switched services strategy
will be successful. See "--Regulation" and "The Business of the Company--
Telecom Services."
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The terms governing certain of the Company's indebtedness impose significant
operating and financial restrictions on the Company. Such restrictions
affect, and in certain cases significantly limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness or create
liens on its assets, pay dividends, sell assets, engage in mergers or
acquisitions or make investments. Failure to comply with such covenants could
limit the availability of borrowings or result in a default thereunder, in
which case the lenders will be able to accelerate the maturity of the
applicable indebtedness. Moreover, the terms governing the Company's material
indebtedness contain cross-default provisions which are usual and customary
for, and generally found in, indebtedness of a similar nature. There can be
no assurance that the Company will be able to comply with such covenants in
the future.
SUBSTANTIAL INDEBTEDNESS
As of March 31, 1996, an aggregate of approximately $62.0 million of
capitalized lease obligations was due prior to December 31, 2000, an aggregate
principal amount of approximately $68.5 million (including $0.4 million of
accrued interest) was outstanding under the Convertible Subordinated Notes and
Interest Notes (each as defined under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and Capital
Resources") and an aggregate accreted value of approximately $326.5 million
was outstanding under the 13 1/2% Notes. As of March 31, 1996,
approximately $12.0 million of the 8% Convertible Subordinated Notes and
Interest Notes are due September 17, 1998 and are convertible at a price of
$15.60 per IntelCom Common Share. Approximately $56.1 million of the 7%
Convertible Subordinated Notes and Interest Notes are due October 30, 1998 and
are convertible at a price of $18.00 per IntelCom Common Share. The 13 1/2%
Notes require payments of interest to be made in cash commencing on March 15,
2001 and mature on September 15, 2005. As of March 31, 1996, the Company
had $4.1 million of other indebtedness that matures prior to December 31,
2000. The Company may also have additional payment obligations prior to such
time, the amount of which cannot be presently determined. After giving effect
to all of the above, the Company had aggregate indebtedness of approximately
$473.5 million at March 31, 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation--Liquidity and Capital
Resources" and notes 2 and 7 to the Consolidated Financial Statements. The
Company believes that its current funds and amounts expected to be available
through vendor financing arrangements will provide sufficient funds necessary
for the Company to expand its telecom services business as currently planned
and to fund its operating deficits for approximately 21 months. Additional
sources of cash may include public and private equity and debt financings,
sales of non-strategic assets, capital leases and other financing
arrangements. Accordingly, the Company will have to refinance a substantial
amount of indebtedness and obtain substantial additional funds prior to
December 31, 2000. The Company's ability to do so will depend on, among other
things, its financial condition at the time, the 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
capitalized leases, or obtain such additional funds, and if the Company is
unable to effect such refinancings or obtain additional
19
<PAGE>
funds, the Company's ability to make principal and interest payments on its
indebtedness, would be adversely affected.
RISKS RELATED TO RAPID EXPANSION OF BUSINESS
The continued rapid expansion and development of the Company's business will
depend on, among other things, the Company's ability to evaluate markets,
lease fiber from utilities, design fiber backbone routes, secure financing,
install facilities, acquire rights of way and building access, obtain any
required government authorizations and implement expanded interconnection and
collocation with facilities owned by LECs, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. In addition, such
expansion may involve acquisitions which, if made, could divert the resources
and management time of the Company and require integration with the Company's
existing networks and services. The Company's ability to effectively manage
its rapid expansion will require it to continue to implement and
improve its operating, financial and accounting systems and to expand, train
and manage its employee base. The inability to effectively manage its planned
expansion could have a material adverse effect on the Company's business,
growth, financial condition and results of operations.
COMPETITION
The Company operates in a highly competitive environment that historically
was dominated by an entrenched monopolist - the Regional Bell Operating
Companies ("RBOCs") and GTE Corporation ("GTE"). The Company's current
competitors include the RBOCs, GTE, other CLECs, network systems integration
service providers, microwave and satellite service providers, teleport
operators, wireless telecommunications providers and private networks built by
large end users. Potential competitors include cable television companies,
utilities, local telephone companies outside their current local service
areas, as well as the local service operations of long distance carriers.
Consolidation of telecommunications companies 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, in
particular in the local telephone market. Since enactment of the
Telecommunications Act, several telecommunications companies have indicated
their intention to enter many areas of the telecommunications industry,
including areas and markets in which the Company participates and expects to
participate. This may result in more participants than can ultimately be
successful in a given market, subjecting the Company to further competition.
As a recent entrant in the telecom services industry, the Company, like
other CLECs, has not achieved a significant market share. The LECs have long-
standing relationships with their customers, have the potential to subsidize
services with revenue from a variety of businesses and have benefitted from
certain state and federal regulations that, until recently, favored the
entrenched monopolist over potential competitors. Recent legislative and
regulatory initiatives provide increased business opportunities for the
Company, allowing CLECs such as the Company to interconnect with local
telephone company facilities and provide all interstate and intrastate
services. These opportunities are expected to be accompanied by increased
pricing flexibility for, and relaxation of regulatory oversight of, the LECs.
If local telephone companies lower their rates, engage in increased volume and
term discount pricing practices or seek to charge CLECs increased fees for, or
seek to delay implementation of, interconnection to their networks, the
Company's results of operations and financial condition could be adversely
affected. There can be no assurance that the Company will be able to achieve
or maintain adequate market share or revenue, or compete effectively in any of
its markets. In addition, the success of the Company's strategy of leasing or
licensing fiber optic cable from utilities depends upon the ability to connect
end users to the Company's network. Such connections require significant
capital expenditures, time and effort and, in some cases, end users targeted
by the Company may already be connected to another CLEC. There can be no
assurance regarding the number of end users the Company will be able to
connect to its network. See "The Business of the Company--Regulation" and "--
Competition."
REGULATION
20
<PAGE>
The Company operates in an industry that is undergoing substantial
deregulation as a result of the passage of the Telecommunications Act.
However, the Company continues to be subject to significant federal, state and
local regulation. On the federal level, the Company is not subject to price
or rate of return regulation and is not required to obtain FCC authorization
for the installation or operation of fiber optic network facilities. As a
non-dominant carrier, the Company must file tariffs for its interstate
services and its rates must be reasonable. In addition, the FCC may have the
authority, which it is not presently exercising, to impose restrictions on
foreign ownership of communications services providers not utilizing radio
facilities. The Company must obtain and maintain certain FCC authorizations
for its satellite and wireless services. In addition, the Company provides
maritime communication services pursuant to an experimental license that
expires February 1, 1997. There can be no assurance that the Company will be
able to renew this license or that the FCC will not decide to allocate the
radio frequencies currently used by the Company for other purposes. In
addition, the FCC may auction such licenses, requiring the Company to pay
significant amounts to retain its license. State regulatory agencies regulate
competitive access services to the extent that they are used for intrastate
communications. In addition, local authorities control the Company's access
to municipal rights of way.
The Telecommunications Act generally requires LECs to provide
interconnection and nondiscriminatory access to the LEC network on more
favorable terms than have been available in the past. However, such new
agreements are subject to negotiations with each LEC, which may involve
considerable delays, and may not necessarily be obtained on terms and
conditions that are acceptable to the Company. In such instances, the Company
may petition the proper state regulatory agency to arbitrate disputed issues.
There can be no assurance that the Company will be able to negotiate
acceptable new interconnection agreements or that, if state regulatory
authorities impose terms and conditions on the parties in arbitration, such
terms will be acceptable to the Company. See "The Business of the Company--
Regulation."
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest customers accounted for approximately 18% and 22%
of the Company's consolidated revenue in fiscal 1994 and 1995, respectively,
and approximately 25% for the six months ended March 31, 1996. No
single customer accounted for more than 10% of the Company's consolidated
revenue during fiscal 1994 or the six months ended March 31, 1996. For
fiscal 1995, revenue from Intel, a Network Services customer, constituted
approximately 11% of the Company's total consolidated revenue. The Company
anticipates that as switched services revenue represents a larger percentage
of the Company's total revenue, the Company's dependence on its largest
telecom services customers will increase. The loss of, or decrease of
business from, one or more of these customers could have a material adverse
effect on the business, financial condition and results of operations of the
Company. While the Company actively markets its products and services, there
can be no assurance that the Company will be able to attract new customers or
retain its existing customers.
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of fiber optic
cable nor materially hinder its ability to acquire necessary technologies, the
effect of technological changes, including changes relating to emerging
wireline and wireless transmission technologies, on the business of the
Company cannot be predicted.
DEPENDENCE ON RIGHTS OF WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights of way, franchises and licenses
from various private parties, actual and potential competitors, and local
governments in order to construct and maintain fiber optic networks. There
can be no assurance that the Company will obtain rights of way and franchise
agreements to expand its networks or that these agreements will be on terms
acceptable to the Company, or that current or potential competitors will
21
<PAGE>
not obtain similar rights of way and franchise agreements that will allow them
to compete against the Company. Because certain of these agreements are
short-term or are terminable at will, there can be no assurance that the
Company will continue to have access to existing rights of way and franchises
after the expiration of such agreements. An important element of the
Company's strategy is to enter into long-term agreements with utilities to
take advantage of their existing easements and rights of way and to license or
lease their excess fiber capacity. The Company has entered into contracts or
letters of intent with several utilities, however other CLECs are seeking to
enter into similar arrangements and have bid and are expected to continue to
bid against the Company for future licenses or leases. Furthermore, utilities
are required by state or local regulators to retain the right to "reclaim"
fiber licensed or leased to the Company if such fiber is needed for the
utility's core business. There can be no assurance that the Company will be
able to obtain additional licenses or leases on satisfactory terms or that
such arrangements will not be subject to reclamation. See "The Business of
the Company--Telecom Services--Recent Agreements for Network Expansion." If a
franchise, license or lease agreement was terminated and the Company was
forced to remove or abandon a significant portion of its network, such
termination could have a material adverse effect on the Company.
KEY PERSONNEL
The efforts of a small number of key management and operating personnel will
largely determine the Company's success. The success of the Company also
depends in part upon its ability to hire and retain highly skilled and
qualified operating, marketing, financial and technical personnel. The
competition for qualified personnel in the telecommunications industry is
intense and, accordingly, there can be no assurance that the Company will be
able to hire or retain necessary personnel. The loss of certain key personnel
could adversely affect the Company. The Company has employment agreements
with J. Shelby Bryan, President and Chief Executive Officer, James D.
Grenfell, Executive Vice President, Chief Financial Officer, and Treasurer,
and William J. Maxwell, Executive Vice President-Telecom and President of ICG
Telecom Group, Inc. See "Management."
LEGAL AND ADMINISTRATIVE PROCEEDINGS
Shareholders have filed four putative class action lawsuits based on the
timing and content of certain disclosures concerning FOTI's suspension and
debarment, which has since been terminated. See "The Business of the Company--
Legal and Administrative Proceedings."
22
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
INTELCOM
IntelCom Common Shares have been listed on the AMEX since January 14, 1993
and have been traded under the symbol "ICG" since February 29, 1996. Such
shares were traded under the symbol "ITR" through February 28, 1996. IntelCom
Common Shares are listed on the VSE under the symbol "INL."
The following table sets forth, for the fiscal periods indicated, the high
and low sale prices of IntelCom Common Shares as reported on the VSE and as
reported on the AMEX since October 1, 1993. The table also sets forth the
average of the monetary exchange rates on the last day of each month during
such fiscal period.
<TABLE>
<CAPTION>
AMERICAN STOCK Vancouver Stock
EXCHANGE Exchange
-------------- ---------------
EXCHANGE
RATE
HIGH LOW HIGH LOW (Cdn$/$)
------ ------- -------- -------- ---------
FISCAL YEAR ENDED SEPTEMBER 30, 1994
<S> <C> <C> <C> <C> <C>
First Quarter............................ $25 .75 $12.88 Cdn$33.50 Cdn$18.50 1.33
Second Quarter........................... 25.25 15.13 33.38 20 .50 1.38
Third Quarter............................ 17.75 9.50 22.00 14.00 1.38
Fourth Quarter........................... 16 .00 11.20 20.63 15.88 1.37
FISCAL YEAR ENDED SEPTEMBER 30, 1995
First Quarter............................ $ 17.88 $12.38 $22.13 $ 20.25 1.38
Second Quarter........................... 14.13 9 .38 19.75 17.38 1.40
Third Quarter............................ 13.25 6.63 18.00 18.00 1.36
Fourth Quarter........................... 14.00 8.00 18.00 18.00 1.34
FISCAL YEAR ENDING SEPTEMBER 30, 1996
First Quarter............................ $ 12.75 $ 8.63 $18.00 $ 18.00 1.37
Second Quarter........................... 17.88 10.25 18.00 18.00 1.39
Third Quarter (through June 12, 1996).... 27.38 17.13 18.00 18.00 1.37
</TABLE>
As of March 31, 1996, there were 435 holders of record of IntelCom Common
Shares. This figure is not necessarily indicative of the actual number of
beneficial holders given the various depositary and nominee systems in effect
which conceal the names and number of actual stockholders.
IntelCom has never declared or paid any dividends on its IntelCom Common
Shares and Parent does not intend to pay cash dividends on shares of Parent
Common Stock in the foreseeable future. Parent intends to retain future
earnings, if any, to finance the development and expansion of its business.
Parent's ability to declare or pay cash dividends, if any, will be dependent
upon the ability of its subsidiaries to declare and pay dividends or otherwise
transfer funds to Parent, since Parent will conduct its operations through
subsidiaries. Certain terms of the Company's indebtedness prohibit or limit
the ability to declare or pay cash dividends.
PARENT
The Parent Common Stock currently is not listed on any exchange. Parent has
applied to have the Parent Common Stock authorized for listing on the AMEX
under the symbol "ICG" following the Effective Date.
23
<PAGE>
THE ANNUAL AND SPECIAL MEETING - GENERAL PROXY INFORMATION
GENERAL
This Proxy Statement - Prospectus is furnished to Shareholders in connection
with the solicitation of proxies by management of IntelCom to be used at the
Meeting to be held on July 30, 1996 at 11:00 a.m., Toronto time, at the
King Edward Hotel, . Room, 37 King Street East, Toronto, Ontario M5C 1E9, and
at any adjournments or postponements thereof for the purposes set forth in the
accompanying Notice of Annual and Special Meeting of Shareholders. The
information contained herein is given as of the date hereof, except where
otherwise noted.
SOLICITATION OF PROXIES
In addition to solicitation by mail, officers, directors and regular
employees of IntelCom may, without additional compensation, solicit proxies
personally or by telephone or telecopier. This solicitation is made on behalf
of management of IntelCom, and the cost of the solicitation has been or will
be borne by IntelCom.
IntelCom has retained Allen Nelson & Company at an estimated cost of $4,500
plus reimbursement of expenses, to assist in its solicitation of proxies from
brokers, nominees, institutions and individuals. Arrangements will also be
made with custodians, nominees and fiduciaries for forwarding proxy
solicitation materials to beneficial owners of IntelCom Common Shares held of
record by such custodians, nominees and fiduciaries and IntelCom will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
APPOINTMENT OF PROXIES
The persons named in the enclosed proxy are officers of IntelCom. A
SHAREHOLDER WHO WISHES TO APPOINT SOME OTHER PERSON TO REPRESENT HIM OR HER AT
THE MEETING MAY DO SO BY INSERTING SUCH PERSON'S NAME IN THE BLANK SPACE
PROVIDED IN THE FORM OF PROXY OR BY COMPLETING ANOTHER FORM OF PROXY AND, IN
EITHER CASE, DELIVERING IT OR RETURNING IT BY MAIL SO THAT IT IS RECEIVED BY
5:00 P.M. (VANCOUVER TIME) ON THE BUSINESS DAY PRIOR TO THE MEETING. A proxy
nominee need not be a Shareholder.
SIGNING OF PROXIES
The proxy must be signed by the Shareholder, or by his or her attorney
authorized in writing, as his or her name appears on IntelCom's register of
shareholders. If the Shareholder is a corporation, the proxy must be executed
by an officer or attorney thereof duly authorized.
REVOCATION OF PROXIES
In addition to revocation in any other manner permitted by law, a proxy
given pursuant to this solicitation may be revoked by an instrument in writing
executed by the Shareholder or by his or her attorney authorized in writing
or, if the Shareholder is a corporation, by an officer or attorney thereof
duly authorized, and deposited either:
(i) at the registered office of IntelCom at any time up to and including the
last business day preceding the day of the Meeting, or any adjournments
or postponements thereof, at which the proxy is to be used; or
(ii) with the chairman and/or the Scrutineers of the Meeting at any time up
to the commencement of the Meeting on the day of the Meeting, or any
adjournments or postponements thereof.
Upon either of such deposits, the former proxy is revoked.
24
<PAGE>
VOTING OF PROXIES
THE ENCLOSED FORM OF PROXY CONFERS DISCRETIONARY AUTHORITY UPON THE PERSON
DESIGNATED THEREIN WITH RESPECT TO AMENDMENTS TO OR VARIATIONS OF MATTERS
IDENTIFIED IN THE ACCOMPANYING NOTICE OF ANNUAL AND SPECIAL MEETING OF
SHAREHOLDERS AND WITH RESPECT TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE
THE MEETING. IF NO INSTRUCTIONS ARE INDICATED ON A PROPERLY EXECUTED AND
RETURNED PROXY, SUCH PROXY WILL BE VOTED FOR THE ARRANGEMENT RESOLUTION AND
EACH OF THE OTHER MATTERS SET FORTH IN THE ACCOMPANYING NOTICE OF ANNUAL AND
SPECIAL MEETING OF SHAREHOLDERS INCLUDING THE ELECTION OF THE DIRECTOR
NOMINATED HEREIN. AT THE DATE OF THIS PROXY STATEMENT - PROSPECTUS,
MANAGEMENT OF INTELCOM KNOWS OF NO SUCH AMENDMENTS, VARIATIONS OR OTHER
MATTERS. HOWEVER, IF ANY SUCH AMENDMENTS, VARIATIONS OR OTHER MATTERS SHOULD
PROPERLY COME BEFORE THE MEETING, THE SHARES REPRESENTED BY THE PROXIES WILL
BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSON OR PERSONS VOTING
SUCH PROXIES (ABSENT CONTRARY INSTRUCTIONS).
VOTING SHARES
On June 27, 1996, IntelCom had outstanding . IntelCom Common Shares.
Each Shareholder of record at the close of business on June 27, 1996, the
record date established for notice of the Meeting, will be entitled to one
vote for each IntelCom Common Share held by him or her on all matters proposed
to come before the Meeting, except to the extent that he or she has
transferred any IntelCom Common Shares after the record date and the
transferee of such shares produces properly endorsed share certificates or
otherwise establishes ownership thereof and makes a written demand, not later
than the close of business on July 19, 1996, to be included in the list of
shareholders entitled to vote at the Meeting, in which case the transferee
will be entitled to vote such shares.
SHAREHOLDERS WHO HOLD INTELCOM COMMON SHARES IN THE NAME OF ONE OR MORE
BROKERAGE FIRMS, BANKS OR NOMINEES CAN ONLY VOTE THEIR INTELCOM COMMON SHARES
WITH RESPECT TO THE ARRANGEMENT IF SUCH BROKERAGE FIRMS, BANKS OR NOMINEES
GIVE SUCH SHAREHOLDERS A LEGAL PROXY TO VOTE SUCH INTELCOM COMMON SHARES OR IF
SUCH SHAREHOLDERS GIVE SUCH BROKERAGE FIRMS, BANKS OR NOMINEES SPECIFIC
INSTRUCTIONS AS TO HOW TO VOTE SUCH SHAREHOLDERS' INTELCOM COMMON SHARES.
ACCORDINGLY, IT IS CRITICAL THAT SHAREHOLDERS WHO HOLD INTELCOM COMMON SHARES
IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES PROMPTLY CONTACT
THE PERSON RESPONSIBLE FOR SUCH SHAREHOLDERS' ACCOUNTS AND GIVE SPECIFIC
INSTRUCTIONS AS TO HOW SUCH SHAREHOLDERS' INTELCOM COMMON SHARES SHOULD BE
VOTED WITH RESPECT TO THE ARRANGEMENT.
SHAREHOLDERS WHO ARE CANADIAN RESIDENTS AND WHO HOLD INTELCOM COMMON SHARES
IN THE NAME OF ONE OR MORE BROKERAGE FIRMS, BANKS OR NOMINEES ARE URGED TO
CONTACT SUCH BROKERAGE FIRMS, BANKS OR NOMINEES AND INSTRUCT THEM AS TO YOUR
ELECTION TO RECEIVE CLASS A SHARES OR SHARES OF PARENT COMMON STOCK AS A
RESULT OF THE ARRANGEMENT. YOUR FAILURE TO INSTRUCT SUCH BROKERAGE FIRMS,
BANKS OR NOMINEES OF YOUR ELECTION WILL RESULT IN YOUR BEING DEEMED TO HAVE
ELECTED TO RECEIVE SHARES OF PARENT COMMON STOCK, WHICH MAY RESULT IN A
TAXABLE EVENT TO YOU FOR CANADIAN TAX PURPOSES. ALL SHAREHOLDERS SHOULD
CAREFULLY READ "INCOME TAX CONSIDERATIONS TO SHAREHOLDERS" AND CONSULT THEIR
OWN TAX ADVISORS.
VOTE REQUIRED TO APPROVE THE BUSINESS OF THE MEETING AND VOTING INTENTIONS OF
CERTAIN SHAREHOLDERS
The presence, in person or by proxy, of at least two persons, together being
Shareholders owning not less than one-third of the total number of issued and
outstanding IntelCom Common Shares, shall constitute a quorum at the Meeting.
The Arrangement Resolution must be approved by the affirmative vote of
66 2/3% of the votes actually cast thereon (and for this purpose, any spoiled
votes, illegible votes, defective votes and abstentions shall be considered
not to be votes cast).
25
<PAGE>
The amendment to IntelCom's Articles changing its name to ICG Holdings
(Canada), Inc. will require the affirmative vote of 66 2/3% of the votes
actually cast thereon, the election of directors will be by plurality of the
votes actually cast thereon and the reappointment of auditors will require the
affirmative vote of a majority of the votes actually cast (and for these
purposes, any spoiled votes, illegible votes, defective votes and abstentions
shall be considered not to be votes cast).
Abstentions and broker "non-votes" will be counted toward determining the
presence of a quorum for the transaction of business at the Meeting.
Abstentions may be specified on all matters except the election of directors.
With respect to all matters other than the election of directors, abstentions
and broker "non-votes" will have no effect on the outcome of such other
matters.
As of March 31, 1996, the directors and executive officers of IntelCom and
their respective affiliates, as a group, may be deemed to be the beneficial
owners of 4,244,147 IntelCom Common Shares, representing approximately
16.1% of the outstanding IntelCom Common Shares. [The directors and executive
officers of IntelCom have indicated that they intend to vote their respective
IntelCom Common Shares in favor of the Arrangement Resolution.]
26
<PAGE>
MATTER NO. 1 -- ELECTION OF INTELCOM DIRECTOR
NOMINEE FOR ELECTION
IntelCom's Articles authorize up to 11 directors to serve on the Board of
Directors. There are presently seven (7) Directors on the Board of Directors.
The IntelCom Articles provide that the Directors shall each serve for a term
of three years on a staggered basis and until their successors are duly
elected and qualified or until their earlier death, resignation or removal.
The term of office of one Director, Jay E. Ricks, will expire at the
Meeting. Mr. Ricks, a Director since March 1993 and a member of the
Compensation Committee and Executive Committee, will stand for re-election at
the Meeting. IntelCom's Board of Directors recommends the election as
Director of the nominee listed below, to hold office for a term of three years
and until his successor is duly elected and qualified or until his earlier
death, resignation or removal.
The persons named as "proxies" in the enclosed form of Proxy, who have been
designated by management, intend to vote for the nominee for election as
Director unless otherwise instructed in such Proxy.
The person who has been nominated as Director is set out below. The nominee
has agreed to his nomination and has agreed to serve if elected. The
following table sets forth the name and age of the nominee for Director,
indicating all positions and offices with IntelCom presently held by him, the
period during which he has served as a Director, and the term for which he has
been nominated:
<TABLE>
<CAPTION>
DIRECTOR CURRENT POSITION TERM EXPIRING AT
NAME OF NOMINEE AGE SINCE WITH INTELCOM ANNUAL MEETING
--------------- --- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Jay E. Ricks(1)(2) 63 1993 Director 1999
</TABLE>
- ------------------
(1) Member of Compensation Committee
(2) Member of Executive Committee
OTHER DIRECTORS. The following table sets forth the name and age of each of
IntelCom's other Directors, indicating all positions and offices with IntelCom
presently held by him, the period during which he has served as a Director,
and the term for which he serves as a Director:
<TABLE>
<CAPTION>
DIRECTOR CURRENT POSITION TERM EXPIRING AT
NAME OF DIRECTOR AGE SINCE WITH INTELCOM ANNUAL MEETING
- ---------------- --- -------- ---------------- -----------------
<S> <C> <C> <C> <C>
William J. Laggett (1)(2)(3)(4) 66 1995 Chairman of the Board of 1998
Directors
J. Shelby Bryan(1)(3) 50 1995 President, Chief 1997
Executive Officer and
Director
William W. Becker(3)(4) 67 1986 Director 1997
Harry R. Herbst(2)(4) 45 1995 Director 1998
Gregory C.K. Smith(2) 38 1994 Director 1997
Leontis Teryazos(4) 53 1995 Director 1998
</TABLE>
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(Accompanying notes are on the following page)
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Stock Option Committee
RESIGNATION OF DIRECTORS
On November 28, 1995, David N. Matheson and Robert E. Swenarchuk resigned as
Directors of IntelCom. Messrs. Matheson and Swenarchuk cited personal reasons
for their resignations and did not indicate any disagreements with IntelCom on
any matters.
DIRECTORS' AND COMMITTEE MEETINGS
IntelCom's Board of Directors held 17 meetings during the fiscal year ended
September 30, 1995. No incumbent director attended fewer than 75% of said
meetings.
Executive Committee. The Executive Committee was formed in May 1995. The
Executive Committee reviews business and transactions that are material to the
Company. The Executive Committee held two meetings during the fiscal year
ended September 30, 1995. No incumbent director who served on the Executive
Committee attended fewer than 75% of said meetings.
Audit Committee. The Audit Committee was formed in November 1993. The
Audit Committee reviews the services provided by the Company's independent
auditors, consults with the independent auditors on audits and proposed audits
of the Company and reviews certain filings with the Securities and Exchange
Commission (the "Commission"), and the need for internal auditing procedures
and the adequacy of internal controls. The Audit Committee held four meetings
during the fiscal year ended September 30, 1995. No incumbent director who
served on the Audit Committee attended fewer than 75% of said meetings.
Compensation Committee. The Compensation Committee was formed in February
1994. The Compensation Committee determines executive compensation and
reviews transactions between the Company and its affiliates. The Compensation
Committee held three meetings during the fiscal year ended September 30, 1995.
No incumbent director who served on the Compensation Committee attended fewer
than 75% of said meetings.
Stock Option Committee. The Stock Option Committee was formed in October
1995. The Stock Option Committee determines stock option awards for
employees. The Compensation Committee functioned as the Stock Option
Committee during the fiscal year ended September 30, 1995.
For additional information concerning the management of IntelCom, including
the business experience of IntelCom's Directors and executive officers,
compensation paid and options granted to the management of IntelCom, certain
relationships and related transactions involving the management of IntelCom,
IntelCom's shareholder return comparison and compliance with Section 16(a) of
the Exchange Act, see "Management" and "Certain Relationships and Related
Transactions."
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MATTER NO. 2 -- REAPPOINTMENT OF AUDITORS
The Board of Directors of IntelCom will move to reappoint KPMG Peat Marwick
Thorne, Independent Chartered Accountants, Edmonton, Alberta, to serve as
IntelCom's independent auditors in Canada until the next Annual Meeting of
Shareholders and to reappoint KPMG Peat Marwick LLP, Denver, Colorado, to
serve as IntelCom's independent auditors in the United States until the next
Annual Meeting of Shareholders.
Representatives of KPMG Peat Marwick Thorne and KPMG Peat Marwick LLP are
expected to be present at the Meeting and will be available to answer
questions.
THE BOARD OF DIRECTORS OF INTELCOM RECOMMENDS THAT SHAREHOLDERS APPROVE THE
REAPPOINTMENT OF KPMG PEAT MARWICK THORNE AS INTELCOM'S INDEPENDENT AUDITORS
IN CANADA AND KPMG PEAT MARWICK LLP AS INTELCOM'S INDEPENDENT AUDITORS IN THE
UNITED STATES.
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MATTER NO. 3 -- CHANGE OF INTELCOM'S NAME
GENERAL
The Board of Directors of IntelCom has adopted a resolution unanimously
approving and recommending to IntelCom's Shareholders for their approval an
amendment to IntelCom's Articles changing the corporate name from IntelCom
Group Inc. to ICG Communications, Inc. The text of the resolution authorizing
the proposed amendment is annexed to this Proxy Statement - Prospectus as
Appendix I.
The Board of Directors of IntelCom believes that the change in corporate
name to ICG Communications, Inc. would allow IntelCom to become more closely
identified with its AMEX symbol "ICG" and the name by which its operations are
more commonly known. The Board of Directors of IntelCom believes the change
in corporate name at this time would be appropriate, advisable and in the best
interests of IntelCom and its Shareholders. Shareholders should note,
however, that if the Arrangement is approved (Matter No. 4), IntelCom's name
will be changed instead, in accordance with the terms of the Plan of
Arrangement, to ICG Holdings (Canada), Inc. See "Matter No. 4 - The
Arrangement."
THE BOARD OF DIRECTORS OF INTELCOM RECOMMENDS THAT SHAREHOLDERS APPROVE THE
AMENDMENT TO INTELCOM'S ARTICLES TO CHANGE THE CORPORATE NAME FROM INTELCOM
GROUP INC. TO ICG COMMUNICATIONS, INC.
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MATTER NO. 4 -- THE ARRANGEMENT
REASONS FOR THE ARRANGEMENT AND RECOMMENDATIONS OF THE BOARD
The principal effect of the Arrangement will be to restructure the Company
as a publicly traded U.S. domiciled corporation. Pursuant to the Arrangement,
Parent, a newly formed Delaware corporation, will become the holding company
for IntelCom, ICG and its subsidiaries.
Since 1993, the Company has actively expanded its business presence in the
United States. Through its acquisition of other businesses and the expansion
and development of its existing businesses, the Company has grown to become
one of the largest providers of local competitive access services in the
United States. In late 1994 and early 1995, the Board of Directors of the
Company began considering the possibility of restructuring the Company in
order to become a U.S. domicilied corporation. Substantially all of the
Company's operations are located in the United States. In addition, the
Company views the United States as its primary source for raising capital and
each of the Boards of Directors of IntelCom and Parent believes that the
Arrangement will facilitate access to such markets and increase the Company's
flexibility to meet its future financing needs. Also, certain aspects of the
Company's operations are regulated by the FCC, which imposes restrictions on
the interests a foreign company may hold in telecommunications businesses in
the United States. By replacing IntelCom, a Canadian corporation, with
Parent, a U.S. domiciled corporation, as the ultimate parent entity for the
Company, the Arrangement will facilitate the FCC licensing process for the
Company and provide greater flexibility to the Company in structuring its
investments in regulated businesses.
As part of its expected growth strategy for the short and medium term, the
Company will pursue opportunities to invest in other U.S. based companies in
the telecommunications industry, as it has done in the past. The price for
any potential acquisitions may be in shares of Parent Common Stock and the
Company believes that shares of Parent Common Stock will be more attractive as
consideration for such acquisitions if the issuer is domiciled in the United
States and its shares are publicly traded. According to the share register of
IntelCom, as of the record date, approximately 5% of IntelCom's Common Shares
were held by registered holders resident in Canada. Although IntelCom Common
Shares are listed on both the AMEX and the VSE, less than 0.5% of IntelCom
Common Shares traded in the last year were traded on the VSE.
In 1995, senior members of management began meeting with the Company's
legal, tax and financial advisors to discuss a reorganization plan and to
analyze such a transaction from a tax and economic point of view, as well as
from the point of view of fairness to Shareholders. Numerous possible
structures were analyzed and, after several meetings with such advisors over
the course of 1995 and early 1996, the Company, together with its advisors,
determined that, among the options considered, the Arrangement would be fair
to Shareholders and most favorable to the Company from a tax and economic
perspective. The Arrangement has been designed to maintain the Company's
results of operations, existing net operating losses (for United States tax
purposes) and asset values without causing any material United States or
Canadian federal income tax consequences. See "Income Tax Considerations to
Shareholders." In addition, the Arrangement has been structured so that it
will be treated as a tax-free transaction for Canadian tax purposes to
Canadian residents electing to remain shareholders of IntelCom and to receive
Class A Shares of IntelCom, rather than shares of Parent Common Stock on the
Effective Date of the Arrangement and for United States tax purposes to United
States residents electing to receive shares of Parent Common Stock in exchange
for their IntelCom Common Shares on the Effective Date of the
Arrangement.
After the Arrangement is effected, Shareholders who currently hold IntelCom
Common Shares and who, by virtue of the Arrangement, receive shares of Parent
Common Stock, will hold an identical number of shares of Parent Common Stock
which will represent investments in the same proportions in the same
businesses and assets as prior to the Arrangement.
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THE BOARD OF DIRECTORS OF INTELCOM HAS APPROVED THE ARRANGEMENT AND
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ARRANGEMENT RESOLUTION. IN
ADDITION, THE BOARD OF DIRECTORS OF INTELCOM RECOMMENDS THAT HOLDERS WHO ARE
UNITED STATES RESIDENTS ELECT TO RECEIVE SHARES OF PARENT COMMON STOCK, AND
THAT HOLDERS WHO ARE CANADIAN RESIDENTS ELECT TO RECEIVE CLASS A SHARES. ALL
SHAREHOLDERS SHOULD CAREFULLY READ "INCOME TAX CONSIDERATIONS TO SHAREHOLDERS"
AND CONSULT THEIR OWN TAX ADVISORS.
DESCRIPTION OF THE ARRANGEMENT AND CERTAIN RELATED TRANSACTIONS
IntelCom holds 100% of the common stock of ICG. ICG is a Colorado
corporation and, through its subsidiaries, carries on all of the Company's
business operations. Parent is a Delaware corporation which currently has no
assets or operations.
As soon as practicable following approval by Shareholders of the Arrangement
Resolution and receipt of the Final Order and pursuant to the Support
Agreement, IntelCom will file its Articles of Arrangement, including a change
of its name to ICG Holdings (Canada), Inc. The Arrangement will be governed
by the CBCA. Under the Arrangement:
1. The rights, privileges, restrictions and conditions of IntelCom Common
Shares will be amended to provide for, among other things, the right of
the holder to exchange each such share for one share of Parent Common
Stock. Upon the Arrangement, IntelCom Common Shares will be referred to
as Class A Shares.
2. Current holders of IntelCom Common Shares will be entitled to elect to
immediately exchange such shares for shares of Parent Common Stock on a
one-for-one basis. The terms of the Arrangement will provide that, in
the event that the number of shares of Parent Common Stock issuable upon
the election referred to above is less than 85% of the number of IntelCom
Common Shares outstanding immediately prior to the Arrangement, holders
of IntelCom Common Shares who did not elect to receive shares of Parent
Common Stock will be deemed, on a pro rata basis in respect of the
shortage, to have made such an election and will have such Class A Shares
immediately exchanged with Parent for an equal number of shares of Parent
Common Stock.
For details of the procedures that must be followed to make elections to
receive Class A Shares or to receive shares of Parent Common Stock, see "--
Election Procedures."
After the Effective Date, the Class A Shares will be exchangeable at any
time at the option of the holder for shares of Parent Common Stock on a one-
for-one basis, and will be exchangeable or redeemable at the option of
IntelCom upon the occurrence of certain events. Dividends, if any, will be
payable on Class A Shares at the same time and in the economically equivalent
amounts per share as any dividends declared and paid on shares of Parent
Common Stock. See "-- Description of Class A Shares."
Upon completion of the Arrangement, Shareholders (other than Dissenting
Shareholders) will receive, depending upon the election of the Shareholder and
subject to possible proration, for each of their IntelCom Common Shares,
either one share of Parent Common Stock or one Class A Share. IT IS
RECOMMENDED THAT SHAREHOLDERS WHO ARE UNITED STATES RESIDENTS ELECT TO
EXCHANGE IMMEDIATELY THEIR CLASS A SHARES FOR SHARES OF PARENT COMMON STOCK BY
COMPLETING AND PROPERLY SUBMITTING A LETTER OF TRANSMITTAL AND ELECTION FORM
BY THE ELECTION DEADLINE. IT IS ALSO RECOMMENDED THAT SHAREHOLDERS WHO ARE
CANADIAN RESIDENTS ELECT TO RECEIVE CLASS A SHARES BY COMPLETING AND PROPERLY
SUBMITTING A LETTER OF TRANSMITTAL AND ELECTION FORM BY THE ELECTION DEADLINE.
ALL SHAREHOLDERS SHOULD CAREFULLY READ "INCOME TAX CONSIDERATIONS TO
SHAREHOLDERS" AND CONSULT THEIR OWN TAX ADVISORS. See "--Election
Procedures."
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<PAGE>
OPINION OF FINANCIAL ADVISOR
IntelCom retained Morgan Stanley to act as IntelCom's financial advisor in
connection with the Arrangement and related matters based upon Morgan
Stanley's experience and expertise. Morgan Stanley rendered a written opinion
to the Board of Directors of IntelCom that, as of the date of this Proxy
Statement - Prospectus and subject to the considerations set forth in such
opinion, the proposed Arrangement is fair from a financial point of view to
the holders of IntelCom Common Shares.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED APRIL 25, 1996,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT -
PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED
TO, AND SHOULD, READ THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY.
THE MORGAN STANLEY OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF INTELCOM
AND ADDRESSES THE FAIRNESS OF THE PROPOSED ARRANGEMENT FROM A FINANCIAL POINT
OF VIEW TO THE HOLDERS OF INTELCOM COMMON SHARES, AND IT DOES NOT ADDRESS ANY
OTHER ASPECT OF THE ARRANGEMENT NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY
HOLDER OF INTELCOM COMMON SHARES AS TO HOW TO VOTE AT THE MEETING. THIS
SUMMARY OF THE MORGAN STANLEY OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley (i) analyzed certain publicly
available financial statements and other information of IntelCom; (ii)
analyzed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of the
Company; (iii) analyzed certain financial projections prepared by the
management of the Company; (iv) discussed past and current operations and
financial conditions and the prospects of the Company with the management of
the Company; (v) reviewed the reported prices and trading activity for the
IntelCom Common Shares; (vi) compared the financial performance of the Company
and the prices and trading activity of the IntelCom Common Shares with that of
certain other comparable publicly traded companies and their securities; (vii)
reviewed the financial terms, to the extent publicly available, of certain
comparable transactions; (viii) participated in discussions with the
management of the Company and their accountants and legal advisors regarding
certain legal, tax and accounting issues relating to the Arrangement; (ix)
discussed with the management of the Company their view of the strategic and
other benefits expected to result from the Arrangement; (x) reviewed certain
opinions of Reid & Priest LLP and Stikeman, Elliott regarding certain tax and
legal matters in connection with Arrangement (the "Tax Opinions") as described
in the Proxy Statement -Prospectus under the subsections entitled: "United
States Federal Income Tax Considerations" and "Canadian Federal Income Tax
Considerations," respectively; (xi) reviewed the Proxy Statement - Prospectus
and certain related documents; and (xii) performed such other analyses and
considered such other factors as it deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of its opinion. With respect to
the financial projections, Morgan Stanley assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of the Company. Morgan
Stanley did not make any independent valuation or appraisal of the assets or
liabilities of the Company, nor was it furnished with any such appraisals. In
addition, Morgan Stanley relied upon, without independent verification, the
assessment by the management of the Company of the strategic and other
benefits expected to result from the Arrangement. Morgan Stanley assumed that
the Arrangement will be consummated in accordance with the terms set forth in
the Proxy Statement - Prospectus. Morgan Stanley also relied, without
independent verification, upon the representations in the Tax Opinions with
respect to certain tax and legal matters in connection with the Arrangement.
For purposes of its opinion, Morgan Stanley relied on the fact that the
Company is prohibited by restrictions in certain of its outstanding trust
indentures from paying or declaring any dividends prior to the year 2006 and
IntelCom's long term policy not to declare or pay any cash dividends. In
addition, the Company advised Morgan Stanley that it is the Board's and
management's intention not to change such policy over
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<PAGE>
the long term. Morgan Stanley's opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made
available to Morgan Stanley as of, the date of its opinion.
Morgan Stanley further noted that the Arrangement may result in tax
consequences for certain of the holders of IntelCom Common Shares and Morgan
Stanley did not express any opinion or view as to the tax consequences to
Shareholders of the Arrangement. Consequently, Morgan Stanley's opinion as to
fairness from a financial point of view to the holders of IntelCom Common
Shares does not take into account the tax status or position of any holder of
IntelCom Common Shares. In addition, Morgan Stanley did not express any
opinion and made no recommendation as to how the holders of the IntelCom
Common Shares should vote at the Meeting.
Pursuant to a letter agreement dated as of March 5, 1996, Morgan Stanley
has charged IntelCom an opinion fee in the amount of $150,000. In addition,
IntelCom has agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, related to Morgan Stanley's engagement.
In connection with the delivery of its opinion, Morgan Stanley discussed
with members of management and the Board of Directors of IntelCom, among other
things, Morgan Stanley's analysis of the financial implications for IntelCom
and its shareholders of the Arrangement. The analysis generally indicated that
with respect to the Arrangement, all shareholders of IntelCom were able, at
their discretion, to participate in the Arrangement, and receive shares
distributed in the Arrangement (either shares of Parent Common Stock or Class
A Shares). A financial analysis of the post-Arrangement structure on the
Company was also performed, which generally supported the following potential
benefits of the Arrangement, including (i) the ability to reposition the
Company as a U.S. domiciled entity, for strategic and operational reasons, as
substantially all assets and operations reside in the U.S., (ii) the ability
substain timely to eliminate the constraints placed upon the Company's
operation of its radio licenses by the FCC, (iii) the tax-free nature of the
Arrangement, (iv) the ability to characterize the Company as a U.S. domiciled
entity for lobbying and other regulatory purposes at state and federal levels,
and (v) the ability to characterize the Company as a U.S. domiciled entity
with respect to increasing the Company's profile in the U.S. capital
markets.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. In the ordinary
course of its business, Morgan Stanley and its affiliates may actively trade
the debt and equity securities of any company for their own account and for
the accounts of customers and, accordingly, may at any time hold a long or
short position in the IntelCom Common Shares. From time to time, Morgan
Stanley and its affiliates provide financial advisory and financing services
for IntelCom and have or will receive fees for the rendering of these
services, which services have included acting as lead underwriter in
connection with previous financings, including the Company's issuance of
senior discount notes and exchangeable preferred stock in April 1996. Morgan
Stanley together with its affiliate, Princes Gate Investors, L.P. ("PGI") and
related investors, currently own approximately 8.2% of the equity of IntelCom
on a fully diluted basis, in the form of IntelCom Common Shares and certain
warrants of IntelCom.
DESCRIPTION OF CLASS A SHARES
Voting Rights. Holders of Class A Shares will have one vote per Class A
Share at meetings of the shareholders of IntelCom. Holders of Class A Shares
will not be permitted to vote at meetings of the shareholders of Parent.
Immediately following the Arrangement, Parent will hold and be entitled to
vote at least 85% of the Class A Shares.
The share provisions of the Class A Shares set out certain events which
require the approval of a majority of the holders of Class A Shares other than
Parent and its affiliates. These events include making any amendment to the
Support Agreement or any waiver or forgiveness by IntelCom (subject to certain
enumerated exceptions) of rights or obligations under the Support Agreement.
Dividend Rights. Under the share provisions of the Class A Shares, IntelCom
and Parent will be required to use their best efforts to ensure that holders
of Class A Shares receive dividends which are intended, so far as possible, to
be functionally and economically equivalent to those declared, if any, on
shares of Parent Common Stock as follows:
(i) in the case of a cash dividend declared on shares of Parent Common
Stock, holders of each Class A Share will be entitled to receive the
Canadian dollar equivalent of the dividend declared on each share of
Parent Common Stock;
(ii) in the case of a stock dividend declared on Parent Common Stock which
is payable in shares of Parent Common Stock, holders of each Class A
Share will be entitled to receive such number of Class A Shares as is
equal to the number of shares of Parent Common Stock to be paid as a
dividend on each share of Parent Common Stock; and
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(iii) in the case of a dividend declared on Parent Common Stock in property
other than in cash or shares of Parent Common Stock, holders of each
Class A Share will be entitled to receive such type and amount of
property as is the same or economically equivalent to (as determined by
the board of directors of IntelCom) the type and amount of property
declared as a dividend on each share of Parent Common Stock.
The record date for the determination of the holders of Class A Shares
entitled to receive payment of, and the payment date for, any dividend
declared on Class A Shares shall be the same dates as the record date and
payment date, respectively, for the corresponding dividend on shares of Parent
Common Stock.
Retraction Rights of Holder and Parent Retraction Call Rights. Pursuant to
the share provisions of the Class A Shares, subject to applicable law and the
overriding Retraction Call Right of Parent described below, holders of Class A
Shares will be entitled at any time to require IntelCom to retract (i.e.,
redeem at the option of the holder) any or all such Class A Shares and to
receive, for each Class A Share, one share of Parent Common Stock.
Holders of Class A Shares may effect such retraction by presenting a
certificate or certificates to IntelCom or its transfer agent representing the
number of Class A Shares the holder desires to retract, together with a
written request (a "Retraction Request") specifying the number of Class A
Shares the holder wishes to retract and the date upon which the holder desires
to receive shares of Parent Common Stock (which date shall be not less than
five business days nor more than ten business days after the date on which
such Retraction Request is received by IntelCom) (the "Retraction Date") and
acknowledging the overriding Retraction Call Right of Parent described below,
and such other documents as may be required to effect the retraction of the
Class A Shares.
Pursuant to the Plan of Arrangement, upon receipt of a Retraction Request,
IntelCom shall immediately notify Parent of such request. Parent shall
thereafter have two business days in which to notify IntelCom that Parent
intends to exercise its overriding Retraction Call Right to purchase all, but
not less than all, of the Class A Shares submitted by the holder thereof for
retraction. The purchase price for each such Class A Share purchased by
Parent shall be one share of Parent Common Stock. Although Parent has no
obligation to exercise its overriding Retraction Call Rights, Parent has
indicated to IntelCom that it intends to exercise its overriding Retraction
Call Rights following Parent's receipt of any Retraction Request.
IntelCom Redemption Right and Parent Redemption Call Rights. Pursuant to
the share provisions of the Class A Shares, subject to applicable law and the
overriding Redemption Call Right of Parent described below, at any time upon
the public announcement of any bona fide transaction (whether by way of a
merger, consolidation, tender offer, share exchange, reorganization, transfer,
sale, lease or otherwise) which would result in a third party acquiring more
than 50% of the outstanding voting equity securities of Parent or any other
transaction pursuant to which a third party would acquire control of all or
substantially all of the assets of the Company, IntelCom is entitled to
declare a redemption date (the "Automatic Redemption Date") on which it will
redeem all, but not less than all, of the then outstanding Class A Shares held
other than by Parent or any of its affiliates by payment of, for each Class A
Share, one share of Parent Common Stock. The Automatic Redemption Date shall
occur on the earlier of the date of completion of such transaction or prior
thereto if deemed necessary by the Board of Directors of IntelCom in order to
enable holders of Class A Shares to participate in such transaction.
Under the Arrangement, Parent will have the overriding Redemption Call
Right, notwithstanding any proposed redemption of the Class A Shares by
IntelCom as outlined above, to unilaterally purchase on the Automatic
Redemption Date all, but not less than all, of the outstanding Class A Shares
held other than by Parent or any of its affiliates by payment of, for each
Class A Share, one share of Parent Common Stock. Although Parent has no
obligation to exercise its overriding Redemption Call Right, Parent has
indicated to IntelCom that it intends to exercise its overriding Redemption
Call Right in the event of an Automatic Redemption Date.
IntelCom Cash Redemption Right. Pursuant to the share provisions of the
Class A Shares, the Class A Shares will be redeemable for cash, at the option
of IntelCom, at any time after October 1, 2006, in an amount equal to
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the Cash Redemption Price (as defined in the share provisions of the Class A
Shares), provided that at such time the number of Class A Shares registered in
the name of holders other than Parent or any of its affiliates is less than 1%
of the total number of Class A Shares outstanding at such time.
Liquidation Exchange Rights of Holders and Parent Liquidation Call Rights.
Pursuant to the Support Agreement, upon the occurrence and during the
continuance of an "Insolvency Event", a holder of Class A Shares may require
Parent to purchase any or all of the Class A Shares held by such holder.
"Insolvency Event" is defined to include any insolvency or bankruptcy
proceeding instituted by or against IntelCom, including any such proceeding
under the Companies' Creditors Arrangement Act (Canada) and the Bankruptcy and
Insolvency Act (Canada), the admission in writing by IntelCom of its inability
to pay its debts generally as they become due and the inability of IntelCom,
as a result of solvency requirements of applicable law, to redeem any Class A
Shares tendered for retraction. Immediately upon the occurrence of an
Insolvency Event or any event which may, with the passage of time or by giving
of notice, or both, becomes an Insolvency Event, IntelCom and/or Parent, will
give written notice thereof to each holder of Class A Shares. Parent has
agreed not to commence any voluntary liquidation or winding up of IntelCom.
If, as a result of solvency provisions of applicable law, IntelCom is unable
to redeem all Class A Shares tendered for retraction by a holder of Class A
Shares in accordance with the provisions attaching to the Class A Shares and
provided that Parent has not exercised its Retraction Call Right with respect
to such shares and the holder has not revoked the Retraction Request, the
holder will be deemed to have exercised its right to require Parent to
purchase the unredeemed Class A Shares and Parent will be required to purchase
such shares from the holder in the manner set forth above.
In the event of insolvency of Parent, the residual value of a Class A Share
may be greater than the residual value of a share of Parent Common Stock. In
such case, a holder of Class A Shares may receive a greater proportion of the
Company's assets per share than a holder of shares of Parent Common Stock.
Delivery of Parent Common Stock. The Support Agreement requires Parent to
take all actions necessary or desirable to cause all shares of Parent Common
Stock issuable upon exercise of the rights described above to be freely
tradeable by the holders thereof (other than any restrictions on transfer by
reason of a holder being a "control person" of Parent for purposes of Canadian
law or an "affiliate" of Parent for purposes of United States law). In
addition, Parent will take all such actions necessary to cause all such shares
of Parent Common Stock to be listed or quoted for trading on all stock
exchanges or quotation systems on which outstanding shares of Parent Common
Stock are then listed or quoted for trading. Parent has applied to have the
Parent Common Stock authorized for listing on the AMEX under the symbol
"ICG" after the Effective Date. See "- Stock Exchange Listings."
Dissenting Holders. As permitted in the Interim Order, Shareholders may
exercise rights of dissent with respect to their IntelCom Common Shares
pursuant to and in the manner set forth in Section 190 of the CBCA and
pursuant to the Plan of Arrangement. See "Dissenting Shareholders' Rights."
TREATMENT OF STOCK OPTIONS AND STOCK OPTION PLANS
At the Effective Date, the obligations of IntelCom under each outstanding
Stock Option under the Stock Option Plans, whether vested or unvested, will be
assumed by Parent. Each Stock Option assumed by Parent will continue to
have, and be subject to, the same terms and conditions set forth in the Stock
Option Plans and all outstanding stock option agreements in effect immediately
prior to the Effective Date except that each Stock Option will be
exercisable for that number of shares of Parent Common Stock which the holder
of such Stock Option would have been entitled to receive pursuant to the
Arrangement had such holder exercised such Stock Option in full immediately
prior to the Effective Date and elected to receive shares of Parent Common
Stock in exchange for IntelCom Common Stock in the Arrangement. To the extent
permitted under section 424 of the Internal Revenue Code of 1986, as amended
(the "Code"), in the case of Stock Options which are incentive stock
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options described in section 422 of the Code, and with respect to Stock
Options that are not incentive stock options, the per share exercise price for
the shares of Parent Common Stock issuable upon exercise of such Stock
Options will be equal to the per share exercise price at which such options
were exercisable immediately prior to the Effective Date.
TREATMENT OF WARRANTS
All IntelCom warrants outstanding on the Effective Date will remain
obligations of IntelCom. As a result of the Plan of Arrangement, such
warrants will be exercisable for Class A Shares, which will be exchangeable at
the option of the holder at any time into shares of Parent Common Stock.
IntelCom will maintain the effectiveness of any of its registration statements
covering such warrants and underlying Class A Shares until such warrants are
exercised or expire.
TREATMENT OF CONVERTIBLE DEBENTURES
All IntelCom convertible debt outstanding on the Effective Date will remain
primary obligations of IntelCom. As a result of the Plan of Arrangement, such
convertible debentures will be convertible into Class A Shares, which will be
exchangeable at any time into shares of Parent Common Stock. IntelCom will
maintain the effectiveness of any of its registration statements covering such
convertible debentures and underlying Class A Shares until such debentures are
converted or the relevant convertibility feature expires.
DESCRIPTION OF PARENT SECURITIES
The authorized capital stock of Parent consists of 100,000,000 shares of
Common Stock, of which one share has been issued and is outstanding and held
by its incorporator and 1,000,000 shares of preferred stock, par value $.01
per share (the "Parent Preferred Stock"), of which no shares are issued and
outstanding.
Parent Common Stock
Each holder of shares of Parent Common Stock is entitled to cast one vote,
either in person or by proxy, for each share owned of record on all matters
submitted to a vote of shareholders of Parent, including the election of
directors. The Board of Directors of Parent is divided into three classes,
with the classes as nearly equal in number as possible. Initially,
approximately one-third of the directors will serve a one-year term,
approximately one-third of the directors will serve a two-year term and
approximately one-third of the directors will serve a three-year term.
Thereafter, the term of each class of directors will be three years, with the
term of one class expiring each year in rotation. The holders of shares of
Parent Common Stock do not possess cumulative voting rights, which means that
the holders of more than 50% of the outstanding shares of Parent Common Stock
voting for the election of directors can elect all of such directors, and, in
such event, the holders of the remaining shares of Parent Common Stock will be
unable to elect any of Parent's directors.
Holders of the outstanding shares of Parent Common Stock are entitled to
share ratably in such dividends as may be declared by the Board of Directors
of Parent out of funds legally available therefor. Upon the liquidation,
dissolution, or winding up of Parent, each outstanding share of Parent Common
Stock will be entitled to share in the assets of Parent legally available for
distribution to shareholders after the payment of all debts and other
liabilities subject to any superior rights of the holders of any outstanding
shares of Parent Preferred Stock. See "Market Price and Dividend
Information."
Holders of the shares of Parent Common Stock have no preemptive rights.
There are no conversion or subscription rights, and shares are not subject to
redemption. All of the outstanding shares of Parent Common Stock are, and the
shares offered hereby will be, when issued in accordance with the terms
hereof, duly issued, fully paid and nonassessable.
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Parent Preferred Stock
Parent is authorized to issue shares of Parent Preferred Stock, in one or
more series, and to fix for each such series the number of shares thereof and
voting powers and such preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series or the designation of such series, as are permitted by the DGCL.
Parent could authorize the issuance of shares of Parent Preferred Stock with
terms and conditions which could discourage a takeover or other transaction
that holders of some or a majority of shares of Parent Common Stock might
believe to be in their best interests or in which such holders might receive a
premium for their shares of stock over the then market price of such shares.
As of the date hereof, no shares of Parent Preferred Stock are outstanding nor
has Parent authorized the issuance of any shares of Parent Preferred Stock,
nor does Parent have any present plans to issue any shares of Parent Preferred
Stock after the Effective Date.
COURT APPROVAL AND COMPLETION OF THE ARRANGEMENT
An arrangement of a corporation under the CBCA requires Court approval after
the approval thereof by the shareholders of the subject corporation. Prior to
the mailing of this Proxy Statement - Prospectus, IntelCom and Parent obtained
the Interim Order providing for the calling, holding and conduct of the
Meeting and other procedural matters. A copy of the Interim Order is attached
as Appendix C to this Proxy Statement - Prospectus. The Notice of Application
for the Final Order appears as Appendix G to this Proxy Statement -
Prospectus.
Subject to the approval of the Arrangement Resolution by the Shareholders
and the determination of the Court, the hearing in respect of the Final Order
is scheduled to take place on August ., 1996 at 10:00 a.m. (Toronto time) in
the Ontario Court of Justice (General Division), Osgoode Hall, 145 Queen
Street West, Toronto, Ontario. At that hearing, any Shareholder or other
interested party who wishes to participate or to be represented or to present
evidence or arguments may do so, subject to filing a notice of appearance with
the Court and serving such notice of appearance upon the Company's solicitors
and upon all other parties who have filed a notice of appearance as provided
in the Interim Order. The Court will consider, among other things, the
fairness and reasonableness of the Arrangement.
Subject to the foregoing, it is anticipated that the Arrangement will be
completed not later than August 30, 1996.
ACCOUNTING TREATMENT
The Arrangement will be accounted for in a manner similar to a pooling of
interests. In accordance with U.S. GAAP, Parent anticipates its consolidated
financial statements will reflect the assets and liabilities of IntelCom at
their historical cost as presented in IntelCom's historical consolidated
financial statements. Effectively, IntelCom is transferring its assets and
liabilities to Parent in a common control transaction. The costs associated
with the Arrangement, which are not expected to be significant, will be
charged to the results of operations of Parent upon the consummation of the
Arrangement.
ELECTION PROCEDURES
The Letter of Transmittal and Election Form is enclosed with this Proxy
Statement - Prospectus for use by Shareholders (a) who wish to continue to
hold Class A Shares of IntelCom or who wish to elect to receive shares of
Parent Common Stock, and (b) for transmittal of certificates representing
IntelCom Common Shares. Additional copies of the Letter of Transmittal and
Election Form may be obtained from the Depositary. The details of the
procedures for the making of elections, the exchange of certificates
representing IntelCom Common Shares and the deposit of such certificates with
the Depositary and the address of the office of the Depositary are set out in
the
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Letter of Transmittal and Election Form. See "Income Tax Considerations to
Shareholders" for a description of the tax consequences of receiving either
shares of Parent Common Stock or Class A Shares.
Election to Receive Shares of Parent Common Stock. Shareholders who wish to
immediately exchange their Class A Shares for shares of Parent Common Stock
may elect accordingly on the accompanying Letter of Transmittal and Election
Form. In the absence of a duly made election to receive Class A Shares,
Shareholders will be deemed to have elected to immediately exchange their
Class A Shares for shares of Parent Common Stock. In any event, before
Shareholders will receive new share certificates representing their shares of
Parent Common Stock, they will be required to surrender their old share
certificates which formerly represented IntelCom Common Shares to a
Depositary. See "--Procedures for Exchange of Share Certificates of
Shareholders."
Where a Shareholder desires to receive shares of Parent Common Stock in
respect of only a part of IntelCom Common Shares represented by a single share
certificate, he or she must separately elect as to each of Parent Common Stock
and Class A Shares and deposit such certificate with the Depositary. The
Depositary will, after the Effective Date, forward to such Shareholder
certificates representing the appropriate number of shares of Parent Common
Stock and Class A Shares which such Shareholder is entitled to receive by
virtue of such separate elections to receive shares of Parent Common Stock and
Class A Shares for the IntelCom Common Shares represented by the deposited
certificate.
ELECTION TO RECEIVE CLASS A SHARES. SHAREHOLDERS WHO WISH TO CONTINUE TO
HOLD CLASS A SHARES AFTER THE EFFECTIVE DATE MUST COMPLETE THE LETTER OF
TRANSMITTAL AND ELECTION FORM, INDICATE THEIR ELECTION TO RECEIVE CLASS A
SHARES IN PARAGRAPH . THEREOF AND RETURN IT, TOGETHER WITH THE CERTIFICATE(S)
REPRESENTING INTELCOM COMMON SHARES IN RESPECT OF WHICH THE ELECTION IS MADE,
TO THE DEPOSITARY PRIOR TO THE ELECTION DEADLINE. Certificates representing
IntelCom Common Shares in respect of which the holder is to receive Class A
Shares must be surrendered to the Depositary at the time of election in order
to obtain certificates representing the appropriate number of Class A Shares.
The Letter of Transmittal and Election Form specifies the procedure for
surrendering certificates representing IntelCom Common Shares to the
Depositary. Failure by any Shareholder to properly elect to receive Class A
Shares will result in such Shareholder being deemed to have elected to receive
shares of Parent Common Stock. SHAREHOLDERS WHO ARE CANADIAN RESIDENTS AND
WHO HOLD INTELCOM COMMON SHARES IN THE NAME OF ONE OR MORE BROKERAGE FIRMS,
BANKS OR NOMINEES ARE URGED TO CONTACT SUCH BROKERAGE FIRMS, BANKS OR NOMINEES
AND INSTRUCT THEM AS TO YOUR ELECTION TO RECEIVE CLASS A SHARES OR SHARES OF
PARENT COMMON STOCK AS A RESULT OF THE ARRANGEMENT. YOUR FAILURE TO INSTRUCT
SUCH BROKERAGE FIRMS, BANKS OR NOMINEES OF YOUR ELECTION WILL RESULT IN YOUR
BEING DEEMED TO HAVE ELECTED TO RECEIVE SHARES OF PARENT COMMON STOCK, WHICH
MAY RESULT IN A TAXABLE EVENT TO YOU FOR CANADIAN TAX PURPOSES. ALL
SHAREHOLDERS SHOULD CAREFULLY READ "INCOME TAX CONSIDERATIONS TO SHAREHOLDERS"
AND CONSULT THEIR OWN TAX ADVISORS.
Where a Shareholder decides to receive Class A Shares in respect of only a
part of IntelCom Common Shares represented by a single share certificate, he
or she must separately elect as to each of Class A Shares and Parent Common
Stock and deposit such certificate with the Depositary. The Depositary will,
after the Effective Date, forward to such Shareholder certificates
representing the appropriate number of Class A Shares and shares of Parent
Common Stock which such Shareholder is entitled to receive by virtue of such
separate elections to receive Class A Shares and shares of Parent Common Stock
for the IntelCom Common Shares represented by the deposited certificate.
In the event that the number of shares of Parent Common Stock issuable to
Shareholders who have elected to receive shares of Parent Common Stock upon
the Arrangement is less than 85% of the number of IntelCom Common Shares
outstanding immediately prior to the Arrangement, holders of IntelCom Common
Shares who have elected to receive Class A Shares will be deemed to have
elected, pro rata to the extent of the shortage, to exchange such IntelCom
Common Shares for shares of Parent Common Stock. THE RECEIPT BY SHAREHOLDERS
WHO ARE CANADIAN RESIDENTS OF SHARES OF PARENT COMMON STOCK UPON THE
ARRANGEMENT MAY RESULT IN A TAXABLE EVENT FOR CANADIAN TAX PURPOSES TO SUCH
SHAREHOLDERS.
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PROCEDURE FOR EXCHANGE OF SHARE CERTIFICATES BY SHAREHOLDERS
As soon as practicable after the surrender of certificates representing
IntelCom Common Shares, the Depositary will deliver certificates for shares of
Parent Common Stock and Class A Shares in accordance with the instructions set
forth in the Letter of Transmittal and Election Form. Pending the surrender
of certificates formerly representing IntelCom Common Shares and in respect of
which the election to receive shares of Parent Common Stock was not duly made,
such certificates will be deemed to represent shares of Parent Common Stock
and the holder thereof will be treated for all purposes as a holder of the
appropriate number of shares of Parent Common Stock.
STOCK EXCHANGE LISTINGS
Class A Shares. IntelCom Common Shares (which will become Class A Shares
upon the Arrangement) are currently listed on the VSE and the AMEX.
Applications will be made to the AMEX to delist the Class A Shares so that
such shares will cease to be traded thereon on the Effective Date. IntelCom
does not intend to make any application to the VSE to delist the Class A
Shares and expects such shares to remain listed for trading on the VSE.
Parent Common Stock. Parent has applied to have the Parent Common Stock
authorized for listing on the AMEX under the symbol "ICG" following the
Effective Date. Authorization of the Parent Common Stock for listing on the
AMEX is a condition precedent to the consummation of the transactions
contemplated by the Arrangement. Although Parent fully expects the Parent
Common Stock to be authorized for listing on the AMEX, failure to satisfy this
condition must be waived by IntelCom and Parent and would have a material
adverse effect on the liquidity of the Parent Common Stock.
SECURITIES LAWS CONSIDERATIONS
IntelCom. IntelCom is currently, and will continue to be after the
Arrangement, subject to the reporting and information requirements of the
Exchange Act and the Securities Act (British Columbia).
The Arrangement has been structured so as to permit the resale of shares of
Parent Common Stock in the United States and to permit the resale of Class A
Shares in Canada without the requirement of filing a prospectus.
Parent. The shares of Parent Common Stock issuable in connection with the
Arrangement are concurrently being registered under the Securities Act
pursuant to the Registration Statement of Parent on Form S-4 of which this
Proxy Statement - Prospectus forms a part. The Registration Statement of
Parent on Form S-4 is also registering under the Securities Act the shares of
Parent Common Stock issuable upon the exchange of Class A Shares that are
issuable upon the exercise or conversion of outstanding IntelCom options,
warrants and convertible debentures. IntelCom intends to keep effective any
registration statements covering these warrants and convertible debentures and
the Class A Shares underlying the same until such warrants and convertible
debentures have either been exercised or converted, as the case may be, or
expire.
Consequently, all shares of Parent Common Stock received by Shareholders in
the Arrangement will be freely transferable under the United States federal
securities laws, except that such shares of Parent Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of IntelCom may be resold by such affiliates only in
transactions permitted by the resale provisions of Rule 145(d)(1), (2) or (3)
promulgated under the Securities Act (or Rule 145(d)(1) alone in the case of
such persons who become affiliates of Parent upon the completion of the
Arrangement) or as otherwise permitted under the Securities Act.
CONDITIONS TO THE ARRANGEMENT
Consummation of the Arrangement is subject to (i) an order by the Court
approving the Arrangement in form and substance satisfactory to IntelCom and
Parent; (ii) the approval of the Arrangement by the affirmative requisite vote
of the Shareholders; and (iii) the Parent Common Stock being authorized for
listing on the AMEX. In addition
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to these conditions, the Arrangement may be abandoned prior to the Effective
Date notwithstanding approval by the Shareholders, by written agreement of
Parent and IntelCom.
SUPPORT AGREEMENT
On June 27, 1996, IntelCom and Parent executed the Support Agreement. The
following paragraphs summarize the material terms of the Support Agreement
which is included in this Proxy Statement - Prospectus as Appendix A.
Shareholders are urged to read the Support Agreement in its entirety for a
more complete description of the Arrangement and the related
transactions.
After Shareholder approval of the Arrangement Resolution is received at the
Meeting, the Arrangement will be consummated by obtaining the Final Order of
the Court and by filing articles of arrangement with the Director appointed
under the CBCA. Each of the parties to the Support Agreement have agreed to
comply in all respects with the provisions of the Plan of Arrangement.
The Support Agreement provides that IntelCom and Parent will use their best
efforts to ensure that no dividends will be declared or paid on the Parent
Common Stock unless IntelCom simultaneously declares and pays an economically
equivalent dividend (after appropriate adjustments for currency translations)
on the Class A Shares.
The Support Agreement also provides that Parent will do all things necessary
to ensure that IntelCom will be able to make all payments on the Class A
Shares required in the event of (a) the liquidation, dissolution or winding up
of IntelCom, (b) the retraction of Class A Shares by a holder or (c) the
redemption of the Class A Shares by IntelCom.
The Support Agreement also provides that Parent will take all actions
necessary or desirable to cause all shares of Parent Common Stock issued and
delivered thereunder to be freely tradeable by the holders thereof (other than
any restrictions on transfer by reason of a holder being a "control person" of
Parent for purposes of Canadian law or an "affiliate" of Parent for purposes
of United States law). In addition, Parent will take all such actions
necessary to cause all such shares of Parent Common Stock to be listed or
quoted for trading on all stock exchanges or quotation systems on which any
outstanding shares of Parent Common Stock are then listed or quoted for
trading. Parent has applied to have the Parent Common Stock authorized for
listing on the AMEX under the symbol "ICG" following the Effective Date and it
is not anticipated that shares of Parent Common Stock will be listed on any
other stock exchange or trading system.
The Support Agreement also provides that, without the prior approval of
IntelCom and the holders of the Class A Shares, other than Parent or its
affiliates, Parent will not distribute additional shares of Parent Common
Stock or rights to subscribe therefor or other assets or evidences of
indebtedness to all or substantially all holders of shares of Parent Common
Stock nor change the shares of Parent Common Stock nor effect any
reorganization or other transaction affecting the shares of Parent Common
Stock, unless the same or an economically equivalent distribution on, or
change to, the Class A Shares (or in the rights of the holders thereof) is
made simultaneously. The Board of Directors of IntelCom is conclusively
empowered to determine in good faith and in its sole discretion whether any
corresponding distribution on or change to the Class A Shares is the same as
or economically equivalent to any proposed distribution on or change to the
shares of Parent Common Stock.
In the event that any additional classes of shares of IntelCom are created
and so long as there remain outstanding any Class A Shares not owned by Parent
or any of its affiliates, Parent will remain the beneficial owner, directly or
indirectly, of all outstanding shares of capital stock of IntelCom other than
Class A Shares.
The Support Agreement provides for the Exchange Right of holders of Class A
Shares in the event of an insolvency event (as defined in the Support
Agreement) of IntelCom to exchange each of their Class A Shares with Parent
for one share of Parent Common Stock . These rights are described above under
the heading "-- Description
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of Class A Shares." Individual holders of Class A Shares are third party
beneficiaries of the Exchange Right and are entitled to enforce the Exchange
Right pursuant to the terms of the Support Agreement.
With the exception of administrative changes for the purposes of adding
covenants for the protection of the holders of the Class A Shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that the Board of Directors of each of Parent and IntelCom is of
the opinion that such amendments are not prejudicial to the interests of the
holders of the Class A Shares), the Support Agreement may not be amended
without the approval of a majority of the holders of the Class A Shares other
than Parent or any of its affiliates.
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INCOME TAX CONSIDERATIONS TO SHAREHOLDERS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is the opinion of Stikeman, Elliott, special Canadian
counsel to the Company ("Canadian Counsel"), of the principal Canadian
federal income tax considerations generally applicable to Shareholders who,
for the purposes of the Canadian Tax Act, deal at arm's length and are not
affiliated with IntelCom or Parent, hold their IntelCom Common Shares as
capital property and, in the case of holders who have not been and will not be
resident in Canada within the meaning of the Canadian Tax Act at any time
while holding IntelCom Common Shares, do not hold or use their IntelCom Common
Shares in connection with a business carried on in Canada and are persons to
whom the shares are not taxable Canadian property, within the meaning of the
Canadian Tax Act as discussed below in "Shareholders Not Resident in Canada."
IntelCom Common Shares generally will be considered to be capital property to
a holder unless the holder holds the shares in the course of carrying on a
business or acquired them in a transaction or transactions considered to be an
adventure in the nature of trade. Certain holders whose IntelCom Common
Shares might not otherwise qualify as capital property may be able to qualify
them as such by making the irrevocable election permitted by subsection 39(4)
of the Canadian Tax Act.
This opinion is based upon the current provisions of the Canadian Tax Act,
the regulations thereunder and Canadian Counsel's understanding of the current
published administrative practices and policies of Revenue Canada. This
opinion also takes into account all specific proposals to amend the Canadian
Tax Act publicly announced prior to the date hereof (the "Proposed
Amendments"), and assumes that the Proposed Amendments will be enacted
substantially as proposed. This opinion does not otherwise take into
account or anticipate any changes in law, whether by way of legislative,
judicial or governmental action or interpretation, nor does it address any
provincial or foreign income tax considerations.
THIS OPINION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR
SHAREHOLDER. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE INCOME TAX CONSEQUENCES TO THEM OF THE ARRANGEMENT.
TAX CONSEQUENCES TO SHAREHOLDERS RESIDENT IN CANADA
As described more fully herein, a Canadian resident Shareholder who elects
to receive Class A Shares rather than shares of Parent Common Stock on the
Effective Date of the Arrangement generally will not be subject to Canadian
income tax as a result of the implementation of the Arrangement, although
thereafter such a Shareholder may be subject to Canadian income tax as a
consequence of the sale or exchange of, or on the receipt of dividends or
deemed dividends on, such Class A Shares. A Canadian resident Shareholder who
does not so elect to receive Class A Shares may be subject to Canadian income
tax at the time of the Arrangement.
Call Rights
The Company is of the view and has advised Canadian Counsel that no amount
will be allocated to the value of the Call Rights. In particular, the Company
is of the view that the Redemption Call Right and the Retraction Call Right
have nominal value. On this basis, no Shareholder will realize capital gain
at the time that any such rights are granted to Parent. Such determination of
value is not binding on Revenue Canada and Canadian Counsel can express no
opinion on such matters of factual determination.
Receipt of Class A Shares Pursuant to the Recapitalization
Provided the adjusted cost base to a holder exceeds the fair market value of
the Exchange Right and any other rights in respect of the holder's Class A
Shares the holder will not realize capital gain or capital loss for purposes
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of the Canadian Tax Act as a result of the amendments to the rights,
privileges, restrictions and conditions of the IntelCom Common Shares as
described in "The Arrangement - Description of the Arrangement and Certain
Related Transactions" above. Such a holder generally will be deemed to have
disposed of the IntelCom Common Shares for proceeds of disposition equal to
their adjusted cost base to the holder and to have acquired the Class A Shares
for a cost substantially equal to the adjusted cost base to such holder of the
IntelCom Common Shares. If the adjusted cost base to a holder of IntelCom
Common Shares is less than the fair market value of the Exchange Right and any
other rights in respect of the holder's Class A Shares, the holder will
realize capital gain for purposes of the Canadian Tax Act equal to the amount
of that difference.
A Shareholder will be required to determine the fair market value of the
Exchange Right and any other rights on a reasonable basis for purposes of the
Canadian Tax Act. The Company is of the view and has advised Canadian Counsel
that the Exchange Right and any other rights have only nominal value. On this
basis, a holder will not realize capital gain on the conversion of the
holder's IntelCom Common Shares into Class A Shares under the Arrangement.
Such determination of value is not binding on Revenue Canada, and counsel can
express no opinion on such matters of factual determination.
Dividends or Deemed Dividends on Class A Shares
In the case of a holder who is an individual, dividends received or deemed
to be received on the Class A Shares will be included in computing the
holder's income, and will be subject to the gross-up and dividend tax credit
rules normally applicable to taxable dividends received from taxable Canadian
corporations. IntelCom does not intend to pay cash dividends in the
foreseeable future. However, IntelCom may be deemed to have declared
dividends, as described below, upon the redemption (including a retraction) of
the Class A Shares.
The Class A Shares will be "taxable preferred shares" and "short-term
preferred shares" for the purposes of the Canadian Tax Act. Accordingly,
IntelCom will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax
Act on the amount of dividends which are paid or deemed to be paid on the
Class A Shares. Dividends received or deemed to be received on Class A Shares
will not be subject to the 10% tax under Part IV.1 of the Canadian Tax Act
applicable to certain corporations.
In the case of a holder that is a corporation, other than a "specified
financial institution" as defined in the Canadian Tax Act, dividends received
or deemed to be received on the Class A Shares will normally be deductible in
computing the holder's taxable income. A corporation will generally be a
specified financial institution for the purposes of the Canadian Tax Act if it
is a bank, a trust company, a credit union, an insurance corporation or a
corporation whose principal business is the lending of money to persons with
whom the corporation is dealing at arm's length or the purchasing of debt
obligations issued by such persons or a combination thereof, and corporations
controlled by or related to such entities.
If, however, the Support Agreement is considered to be a "guarantee
agreement" for the purposes of subsection 112(2.2) of the Canadian Tax Act and
if Parent or any person with whom Parent does not deal at arm's length is a
specified financial institution under the Canadian Tax Act at a point in time
that a dividend is paid on a Class A Share then, subject to the exemption
described below, dividends received or deemed to be received by a holder that
is a corporation will not be deductible in computing taxable income but will
be fully includable in taxable income under Part I of the Canadian Tax Act.
Parent has informed Canadian Counsel that it is of the view that neither it
nor any person with whom it does not deal at arm's length is a specified
financial institution at the current time but there can be no assurances that
this status will not change prior to any dividend which is received or deemed
to be received by a corporate shareholder.
This denial of the dividend deduction for a corporate shareholder will not
in any event apply if at the time a dividend is received or deemed to be
received the Class A Shares are listed on a prescribed stock exchange (which
includes the VSE), Parent controls IntelCom, and the recipient (together with
persons with whom the recipient does
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not deal at arm's length) does not receive dividends on more than 10% of the
issued and outstanding Class A Shares.
In the case of a holder that is a specified financial institution for the
purposes of the Canadian Tax Act, dividends received or deemed to be received
on the Class A Shares will be deductible in computing the holder's taxable
income only if either:
(a)the holder did not acquire the Class A Shares in the ordinary course of
its business; or
(b)at the time of the receipt of a dividend by the holder, the Class A
Shares are listed on a prescribed stock exchange (which includes the
VSE) in Canada and the holder, either alone or together with persons
with whom it does not deal at arm's length, does not receive (and is
not deemed to receive) dividends in respect of more than 10% of the
issued and outstanding Class A Shares.
Corporations that are registered or licensed under the laws of a province to
trade in securities and corporations that are "restricted financial
institutions" should consult their own advisors with respect to particular
rules that may be relevant to them.
Exchange or Redemption of Class A Shares
On the exchange of a Class A Share by the holder thereof with Parent for a
share of Parent Common Stock as described under either "Election Procedures -
Election to Receive Shares of Parent Common Stock" or "The Arrangement -
Description of Class A Shares," the holder generally will realize a capital
gain (or capital loss) equal to the amount by which the holder's proceeds of
disposition (i.e., the fair market value at the time of the exchange of a
share of Parent Common Stock received by the holder), net of any reasonable
costs of disposition, exceed (or are exceeded by) the adjusted cost base of
the Class A Share to the holder.
On the redemption (including a retraction) of a Class A Share by IntelCom
(as described under "The Arrangement - Description of Class A Shares"), the
holder will be deemed to have received a dividend equal to the amount by which
the redemption proceeds (i.e., the fair market value at the time of the
redemption of the Parent Common Stock received by the holder from IntelCom on
the redemption or the cash in the event of a cash redemption pursuant to
Section 6.4 of the share provisions of the Class A Shares) exceeds the paid-up
capital (for the purposes of the Canadian Tax Act) at that time of the Class A
Share so redeemed. The amount of any such deemed dividend will be subject to
the normal tax treatment accorded to dividends described above under
"Dividends or Deemed Dividends on Class A Shares." In the case of a holder
that is a corporation, the amount of any such deemed dividend may be treated
as proceeds of disposition in computing a capital gain from the disposition of
the Class A Share, and not as a dividend.
On the redemption, the holder will also be considered to have disposed of
the Class A Share for proceeds of disposition equal to the redemption proceeds
less the amount of such deemed dividend, and will realize a capital gain (or
capital loss) equal to the amount by which such proceeds of disposition exceed
(or are exceeded by) the adjusted cost base of such Class A Share to the
holder.
In the case of a holder that is a corporation, or a partnership or trust of
which a corporation is a member or beneficiary, the amount of any capital loss
realized by the holder on the exchange or redemption (including a retraction)
of a Class A Share may be reduced by the amount of dividends previously
received or deemed to have been received by the holder on the Class A Share or
on the IntelCom Common Shares previously owned by such holder, in accordance
with specific rules in the Canadian Tax Act.
Because of the existence of the Retraction Call Right, a holder exercising
the right of retraction in respect of a Class A Share cannot control whether
such holder will receive a share of Parent Common Stock by way of
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redemption of the Class A Share by IntelCom or by way of purchase of the Class
A Share by Parent. As described above, the Canadian federal income tax
consequences of a redemption differ from those of a purchase. A holder who
exercises the right of retraction will be notified if the Retraction Call
Right will not be exercised by Parent, and if such holder does not wish to
proceed, such holder may withdraw the notice of retraction and retain such
holder's Class A Share.
The cost for tax purposes of a share of Parent Common Stock received on the
exchange or redemption (including a retraction) of a Class A Share will be
equal to the fair market value of such a share of Parent Common Stock at the
time of such event.
Dividends on Parent Common Stock
Dividends on Parent Common Stock will be included in the recipient's income
for purposes of the Canadian Tax Act. Such dividends received by an
individual holder will not be subject to the gross-up and dividend tax credit
rules under the Canadian Tax Act. A holder that is a corporation will include
such dividends in computing its income and generally will not be entitled to
deduct the amount of such dividends in computing its taxable income. United
States non-resident withholding tax on such dividends will be eligible for
foreign tax credit or deduction treatment where applicable under the Canadian
Tax Act.
Dissenting Shareholders
Shareholders are permitted to dissent from the Arrangement Resolution in the
manner set out in section 190 of the CBCA. A Dissenting Shareholder may be
entitled, in the event the Arrangement becomes effective, to be paid by
IntelCom the fair value of the IntelCom Common Shares held by such holder
determined as at the appropriate date. See "Dissenting Shareholders' Rights."
A Shareholder who receives a cash payment for his shares from IntelCom
will be deemed to have received a dividend in the same manner as a holder
whose Class A Shares are redeemed by IntelCom, as described above under
"Exchange or Redemption of Class A Shares." Dissenting Shareholders who fail
to perfect or withdraw their claims pursuant to the right of dissent will be
subject to the same Canadian income tax consequences as Shareholders who elect
to receive shares of Parent Common Stock on the Effective Date of the
Arrangement.
Foreign Property
The Class A Shares and the shares of Parent Common Stock will be foreign
property under the Canadian Tax Act for trusts governed by registered pension
plans, registered retirement savings plans, registered retirement income funds
and deferred profit sharing plans or for certain other tax-exempt persons.
The Exchange Rights will also be foreign property under the Canadian Tax Act.
However, as described above, IntelCom is of the view that the fair market
value of those rights is nominal.
Qualified Investments
The Class A Shares and the shares of Parent Common Stock will be qualified
investments under the Canadian Tax Act for trusts governed by registered
retirement savings plans, registered retirement income funds and deferred
profit sharing plans so long as they are listed on a prescribed stock exchange
(which includes the VSE and the AMEX. The Exchange Rights will not be
qualified investments under the Canadian Tax Act. However, as described
above, IntelCom is of the view that the fair market value of those rights is
nominal.
TAX CONSEQUENCES TO SHAREHOLDERS NOT RESIDENT IN CANADA
The following is applicable to Shareholders who, for purposes of the
Canadian Tax Act have not been and will not be resident in Canada at any time
while holding IntelCom Common Shares and who do not hold, and are
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not deemed to hold, their IntelCom Common Shares or Class A Shares in
connection with carrying on a business in Canada.
Such a holder who disposes of, or is deemed to dispose of, IntelCom Common
Shares or Class A Shares (including (i) as a result of the amendments to the
rights, privileges, restrictions and conditions of the IntelCom Common Shares
as described in "The Arrangement - Description of the Arrangement and Certain
Related Transactions" above, or (ii) on an exchange of the Class A Shares for
shares of Parent Common Stock) will not be subject to tax under the Canadian
Tax Act, except to the extent the disposition gives rise to a deemed dividend
(see below), unless such shares represent taxable Canadian property to the
holder. Under the Proposed Amendments to the Canadian Tax Act, the IntelCom
Common Shares and Class A Shares generally will not be taxable Canadian
property to such a holder at any time so long as the respective class of
shares is listed on a prescribed stock exchange (which includes the VSE) and
the holder, persons with whom the holder does not deal at arm's length, or the
holder and such persons, has not owned (or had rights to acquire) 25% or more
of the issued shares of any class or series of the capital stock of IntelCom
at any time within the five years preceding that time. In making such
determination, any rights held by any person or non-arm's length group of
persons to acquire equity securities of IntelCom are treated as having been
exercised without any other such rights having been exercised. It is unclear
whether a partnership would be treated as an entity for purposes of this 25%
ownership test.
Regardless of whether the Class A Shares constitute taxable Canadian
property to such a holder, a holder whose Class A Shares are redeemed by
IntelCom (including pursuant to the exercise by the holder of the right of
retraction) will be deemed to receive a dividend as described above under "Tax
Consequences to Shareholders Resident in Canada-Exchange or Redemption of
Class A Shares," which deemed dividend will be subject to withholding tax as
described in the following paragraph.
Regardless of whether the Class A Shares constitute taxable Canadian
property to such a holder, dividends paid or deemed to be paid on Class A
Shares to the holder will be subject to non-resident withholding tax under the
Canadian Tax Act at a rate of 25%, subject to reduction under the provisions
of an applicable income tax treaty. Under the Canada-United States Income Tax
Convention, the rate is generally reduced to 15% in respect of dividends paid
to a person who is a beneficial owner thereof and who is a resident of the
United States for the purposes of the Convention. Under the current
administrative practice of Revenue Canada, where a dividend is paid to a
partnership, some or all of the members of which are not resident in Canada,
each of the individual partners generally will be considered to receive a
proportionate share of the dividend income. In these circumstances, Revenue
Canada has stated that the reduction in the rate of non-resident withholding
tax, if any, will depend on the residence of each partner for the purposes of
the relevant treaty.
Dissenting Shareholders
Shareholders are permitted to dissent from the Arrangement Resolution in the
manner set out in section 190 of the CBCA. A Dissenting Shareholder may be
entitled, in the event the Arrangement becomes effective, to be paid by
IntelCom the fair value of the IntelCom Common Shares held by such holder
determined as at the appropriate date. See "Dissenting Shareholders' Rights."
A Shareholder who receives a cash payment for his shares from IntelCom
will be deemed to have received a dividend in the same manner as a holder
whose Class A Shares are redeemed by IntelCom, as described above under "Tax
Consequences to Shareholders Resident in Canada--Exchange or Redemption of
Class A Shares," which deemed dividend will be subject to withholding tax as
described above. Dissenting Shareholders who fail to perfect or withdraw
their claims pursuant to the right of dissent will not be subject to tax under
the Canadian Tax Act unless the IntelCom Common Shares, or Class A Shares
which are received pursuant to the Arrangement, represent taxable Canadian
property to the holder as discussed above.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is the opinion of Reid & Priest LLP, United States counsel
to the Company ("U.S. Counsel"), as to the material United States federal
income tax consequences generally applicable to "United States Holders" (as
defined herein) of IntelCom Common Shares, arising from and relating to the
Arrangement, including the receipt and ownership of Class A Shares and the
receipt and ownership of shares of Parent Common Stock. Moreover, this
opinion addresses only United States Holders who hold IntelCom Common Shares,
options, warrants or debentures as capital assets. For purposes of this
opinion, a "United States Holder" is any beneficial owner of IntelCom Common
Shares, options, warrants or debentures that is (i) a United States citizen or
resident, (ii) a corporation, partnership or other entity created or organized
under the laws of the United States or any state thereof, or (iii) any estate
or trust subject to United States federal income tax on its income, regardless
of its source.
This opinion is based on United States federal income tax law in effect as
of the date of this Proxy Statement -Prospectus, which law is comprised of the
current provisions of the Code, existing and proposed treasury regulations
promulgated thereunder ("Treasury Regulations") and current administrative
rulings and court decisions, all of which are subject to change. No advance
income tax ruling has been sought or obtained from the IRS regarding the
United States federal income tax consequences of any of the transactions
described herein. This opinion is also based upon factual representations
made by IntelCom and Parent.
This opinion does not address aspects of United States taxation other than
United States federal income taxation, nor does it address all aspects of
United States federal income taxation that may be applicable to particular
United States Holders, including insurance companies, financial institutions,
broker-dealers, tax exempt organizations and United States Holders who would
be treated as owning 10% or more of the voting power of IntelCom. In
addition, this opinion does not address the United States state or local tax
consequences or the foreign tax consequences of the Arrangement or the receipt
and ownership of the Class A Shares or shares of Parent Common Stock, the
ownership and exercise of IntelCom options and warrants, or the ownership and
conversion of debentures.
UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE UNITED STATES FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES AND THE
FOREIGN TAX CONSEQUENCES TO THEM OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND
OWNERSHIP OF CLASS A SHARES AND SHARES OF PARENT COMMON STOCK. UNITED STATES
HOLDERS WILL BE REQUIRED TO FILE CERTAIN NOTICES AND ARE ADVISED TO MAKE
CERTAIN ELECTIONS IN ORDER TO MAINTAIN THE INCOME TAX TREATMENT DESCRIBED
HEREIN. SEE "--NOTICES AND ELECTIONS."
CHARACTERIZATION OF THE ARRANGEMENT FOR UNITED STATES FEDERAL INCOME TAX
PURPOSES
U.S. Counsel has advised the Company to the effect that (i) the
modification of IntelCom Common Shares pursuant to the Arrangement (the
"Recapitalization") will qualify as a reorganization within the meaning of
section 368(a)(1)(E) of the Code, (ii) on the Effective Date of the
Arrangement, the exchange of Class A Shares for shares of Parent Common Stock
(the "Share Exchange") will qualify as a transfer of property to a controlled
corporation, within the meaning of section 351 of the Code, or as a
reorganization within the meaning of section 368(a)(1)(B) of the Code, and
(iii) after the Arrangement, any exchange of Class A Shares for shares of
Parent Common Stock should, subject to certain assumptions set forth below,
qualify as a reorganization within the meaning of section 368(a)(1)(B) of the
Code. Consequently, there will be no material United States federal income
tax consequences to the Company as a result of the Arrangement.
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TAX CONSEQUENCES TO UNITED STATES HOLDERS OF INTELCOM COMMON SHARES
The following summary of the United States federal income tax consequences
to United States Holders of IntelCom Common Shares who (i) exchange on the
Effective Date, or (ii) exchange Class A Shares for shares of Parent Common
Stock after the Arrangement pursuant to the Call Rights or Exchange Right, or
(iii) only participate in the deemed exchange of IntelCom Common Shares for
Class A shares, or (iv) hold IntelCom warrants or debentures, is predicated in
its entirety upon the assumptions that IntelCom was not a passive foreign
investment company ("PFIC") during the United States Holder's holding period
(including for this purpose the period the holder held a warrant or
convertible debenture prior to exercising or converting such instrument) for
which IntelCom was not a qualified electing fund ("QEF") for such Shareholder
and that certain other filings are made. See "Passive Foreign Investment
Company Considerations" and "Notices and Elections -- Requirement of Notice
Filing". United States Holders are urged to discuss the tax consequences to
them of the Arrangement and the Share Exchange under the PFIC provisions with
their tax advisors.
Exchange of Class A Shares for Shares of Parent Common Stock Pursuant to
the Share Exchange
The exchange of Class A Shares for shares of Parent Common Stock pursuant to
the Share Exchange will qualify as a tax-free transfer of property to a
controlled corporation under section 351 of the Code. Section 351 of the Code
requires that the transferors of property own immediately after the transfer
at least 80% of the voting power of all classes entitled to vote and at
least 80% of the total number of shares of all other classes of stock of the
corporation (excluding for this purpose shares to be disposed of to a
nontransferor pursuant to a binding obligation existing at the time of the
transaction). The former IntelCom Shareholders who participate in the Share
Exchange will own immediately after the Arrangement all of the outstanding
voting and nonvoting stock of Parent. U.S. Counsel's opinion, in this regard,
will be based on the factual correctness of the representations of IntelCom as
to the absence of binding obligations on the part of certain shareholders to
dispose of their shares.
The exchange of Class A Shares for shares of Parent Common Stock pursuant to
the Share Exchange will also qualify as a tax-free reorganization pursuant to
section 368(a)(1)(B) of the Code, because Parent will acquire, in exchange
solely for its voting stock, at least 80% of the voting power of all classes
of the IntelCom stock entitled to vote and at least 80% of the total number
of shares of all other classes of stock of IntelCom. Although a tax-free
exchange pursuant to section 368(a)(1)(B) of the Code would require that
Parent acquire at least 80% of the Class A Shares, the Arrangement has a
higher minimum exchange percentage of 85% in order to avoid reduction of
Parent's ownership below 80% due to the exercise by warrant holders and the
conversion by debenture holders, in order to permit future tax-free exchanges
of Class A Shares after the Arrangement. See "--Exchange of Class A Shares
for Shares of Parent Common Stock After the Share Exchange."
As a result, a United States Holder who exchanges its Class A Shares for
shares of Parent Common Stock generally will not recognize gain or loss on the
receipt of the shares of Parent Common Stock. An exchanging United States
Holder's tax basis in the shares of Parent Common Stock received pursuant to
the Share Exchange generally will be equal to such holder's tax basis in the
Class A Shares exchanged therefor. The holding period of the shares of Parent
Common Stock received will include the holding period of the Class A Shares
exchanged therefor, which should, in turn, include the holding period of
IntelCom Common Shares converted pursuant to the Arrangement, provided that
such IntelCom Common Shares and Class A Shares have been held as capital
assets immediately prior to the Arrangement.
Exchange of Class A Shares for Shares of Parent Common Stock After the
Share Exchange
An exchange of Class A Shares for shares of Parent Common Stock after the
Arrangement pursuant to the Call Rights or Exchange Right will, based on
representations made by IntelCom and Parent, qualify as a tax-free
reorganization under section 368(a)(1)(B) of the Code; provided, (i) Parent
owns at least 80% of the voting power of IntelCom voting shares and at least
80% of all nonvoting shares of IntelCom, if any, at the time of the
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exchange, (ii) the United States Holder exchanges Class A Shares for shares of
Parent Common Stock directly with Parent (not IntelCom), (iii) the United
States Holder does not intend to dispose of more than 50% of the shares of
Parent Common Stock received pursuant to the Share Exchange, and (iv) at the
time of the exchange, Parent intends to continue to maintain control of
IntelCom as a subsidiary. As a result, a United States Holder that exchanges
its Class A Shares for shares of Parent Common Stock should not recognize gain
or loss on the receipt of the shares of Parent Common Stock, except as
discussed below. An exchanging United States Holder's tax basis in the shares
of Parent Common Stock received will generally be equal to such holder's tax
basis in the Class A Shares exchanged therefor. The holding period of the
shares of Parent Common Stock received will include the holding period of the
Class A Common Shares exchanged therefor, which should, in turn, include the
holding period of Intelcom Common Shares converted pursuant to the
Arrangement, provided that such IntelCom Common Shares and Class A Shares have
been held as capital assets immediately prior to the Arrangement and the Share
Exchange, respectively.
The Recapitalization; Receipt of Class A Shares Pursuant to the
Recapitalization
Just prior to the Share Exchange on the Effective Date of the Arrangement,
the IntelCom Articles setting forth the rights of the IntelCom Common Shares
will be modified to add, among other things, retraction rights. For United
States federal income tax purposes, such changes to the IntelCom Articles will
be treated as a taxable exchange of IntelCom Common Shares for Class A Shares,
unless such exchange constitutes a recapitalization within the meaning of
section 368(a)(1)(E) of the Code. Upon receipt of Class A Shares, a United
States Holder will not, as a result, be subject to income tax, except as
discussed below, because a United States Holder should be treated as
exchanging IntelCom Common Shares for Class A Shares pursuant to a
recapitalization under section 368(a)(1)(E) of the Code. The tax basis of the
Class A Shares received by a United States Holder will be equal to the tax
basis of IntelCom Common Shares exchanged pursuant to the Recapitalization
under the Arrangement reduced by the tax basis allocated to the value of
IntelCom Common Shares, if any, considered to have been exchanged for the
Exchange Right (as discussed below). The holding period of Class A Shares in
the hands of the United States Holder will include the holding period of
IntelCom Common Shares converted pursuant to the recapitalization.
The Company believes that the Exchange Right and any other rights received
and any Call Rights considered to be conveyed by Shareholders pursuant to the
Arrangement will have no value. Consequently, their receipt or conveyance, as
the case may be, should not result in any United States federal income tax
consequences. Further, if the modification of the IntelCom Articles were
characterized as an exchange of the Call Rights for the Exchange Right and any
other rights, it also may not be taxable to United States Holders because
United States Holders and Parent may be deemed to have granted purchase
options to each other, which grants generally would not be treated as taxable
events for United States federal income tax purposes. It is possible,
however, that the IRS could challenge either, or both, of these positions. In
such event, the receipt of the Exchange Right and any other rights and
conveyances of the Call Rights could result in adverse tax consequences to
United States Holders. United States Holders should consult their tax
advisors with respect to the potential tax consequences of the receipt of
Class A Shares pursuant to the Arrangement.
Dissenters
A United States Holder who exercises its right to dissent from the
Arrangement will recognize gain or loss on the exchange of such holder's
IntelCom Common Shares for cash in an amount equal to the difference between
the amount of cash received and such holder's tax basis in IntelCom Common
Shares. Such gain or loss will be capital gain or loss if the IntelCom Common
Shares was held as a capital asset at the time of the Effective Date of the
Arrangement and will be long-term capital gain or loss if IntelCom Common
Shares have been held for more than one year at the Effective Date of the Plan
of Arrangement.
United States Holders of IntelCom Options
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United States Holders who own non-qualified stock options (i.e., options
under Stock Option Plan #2, Stock Option Plan #3 and director options) will
recognize no gain or loss upon the conversion of such options into Parent non-
qualified stock options, provided that such Parent stock options do not have a
"readily ascertainable" fair market value at the time of the conversion. The
Parent stock options will not have a "readily ascertainable" fair market value
at the time of the conversion because such options will not be publicly traded
and each of the Parent stock options will not be transferable. However, a
United States Holder will still recognize ordinary income on the date of
exercise of the Parent stock options in the amount that the fair market value
of the shares of Parent Common Stock acquired exceeds the exercise price of
the Parent stock option.
United States Holders who own incentive stock options (i.e. in accordance
with the 1994 Employee Stock Option Plan and the 1995 Restated and Amended
Stock Option Plan) will maintain their incentive stock option status, provided
(i) the excess of the aggregate fair market value of the shares subject to the
Parent incentive stock option immediately after the assumption over the
aggregate option price of such shares (the "spread") is not more than the
spread prior to the assumption and (ii) the Parent options do not give the
United States Holders additional benefits. It is anticipated that both of
these requirements will be satisfied as to each Parent incentive stock option.
United States Holders of IntelCom Warrants
United States Holders who do not exercise their warrants prior to the
Arrangement and therefore own such warrants on the date of the Arrangement
will thereafter own warrants that are exercisable for Class A Shares. The
conversion from warrants exercisable for IntelCom Common Shares into warrants
exercisable for Class A Shares will not be a taxable event to the United
States Holder, except as discussed below. Thus, a holder will recognize no
gain or loss upon such conversion, and should have a tax basis in the warrants
immediately after the Arrangement that is equal to its tax basis in the
warrants immediately prior to the Arrangement.
A United States Holder's exercise of its warrant (that was not acquired as a
result of the performance of services) after the Arrangement and the receipt
of Class A Shares will not be a taxable event. Such holder will not recognize
any gain or loss upon such exercise. United States Holders who received their
warrants as a result of the performance of services will recognize ordinary
income upon their exercise of their warrants in the amount the value of Class
A Shares on such exercise date exceeds their exercise price.
A United States Holder's subsequent exercise of its Exchange Right or
Parent's exercise of its Call Rights and receipt of Parent Common Stock also
will not be a taxable event, provided the assumptions that are noted in the
discussion above are satisfied. See "Exchange of Class A Shares for Parent
Common Stock After the Share Exchange" under the caption "The Share Exchange"
and see "Passive Foreign Investment Company Considerations".
United States Holders of IntelCom Debentures
United States Holders who do not convert their debentures prior to the
Arrangement and therefore own such debentures on the date of the Arrangement
will thereafter own debentures convertible into Class A Shares. The
conversion from debentures convertible into IntelCom Common Shares to
debentures convertible into Class A Shares will not be a taxable event to the
United States Holder.
A United States Holder's conversion of IntelCom debentures into Class A
Shares after the Arrangement will not be taxable event, and the holder should
not recognize any gain or loss upon such conversion. A United States Holder's
subsequent exercise of its Exchange Rights or Parent's exercise of its Call
rights and receipt of Parent Common Stock will also not be a taxable event,
provided the assumptions that are noted in the discussion above are satisfied.
See "Exchange of Class A Shares for Parent Common Stock After the Share
Exchange" under the caption "The Share Exchange", and see "Passive Foreign
Investment Company Considerations".
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Passive Foreign Investment Company Considerations
PFIC Status For Taxable Years Prior to September 30, 1995 and Effect of the
Arrangement. For United States federal income tax purposes, IntelCom
generally will be classified as a passive foreign investment company (a
"PFIC") for any taxable year during which either (i) 75% or more of its
gross income is passive income (as defined for United States federal income
tax purposes) or (ii) on average for such taxable year, 50% or more of the
average value of its assets produce, or are held for the production of,
passive income. For purposes of applying the foregoing tests, the assets and
gross income of IntelCom's significant direct, and indirect, subsidiaries will
be attributed to IntelCom. While there can be no assurance with respect to
the classification of IntelCom as not being a PFIC, IntelCom believes that it
did not constitute a PFIC during its taxable years ending on or prior to
September 30, 1995 and intends to avoid PFIC status prior to the Arrangement,
although there can be no assurance that it will be able to do so.
If IntelCom were at any time a PFIC for a taxable year ending on or prior to
September 30, 1995, during a United States Holder's holding period for such
holder's Class A Shares (which includes the holding period of IntelCom Common
Shares), and the United States Holder did not then make, or have in effect, an
election to treat IntelCom as a qualified electing fund (a "QEF") under
section 1295 of the Code, then (i) the United States Holder would be required
to allocate gain recognized upon the disposition of, such United States
Holder's IntelCom Common Shares (provided IntelCom does not qualify under
section 1296(a) as a PFIC for the taxable year ending September 30, 1996),
Class A Shares, warrants, or debentures (whether as part of the Arrangement or
upon a sale to a third party) ratably over the United States Holder's holding
period for such interest and (ii) the amount allocated to each year other than
(x) the year of such disposition or (y) any year prior to the beginning of the
first taxable year of IntelCom for which it was a PFIC, would be subject to
tax at the highest rate applicable to individuals or corporations, as the case
may be, for the taxable year to which such income is allocated. In addition,
a United States Holder would pay an interest charge imposed upon the resulting
tax attributable to each such year (which charge would accrue from the due
date of the return for the taxable year to which such tax was allocated).
Finally, the amounts allocated to the years referred to in (x) and (y) of the
second previous sentence would be treated as ordinary income. THUS, IF A
UNITED STATES HOLDER'S HOLDING PERIOD WITH RESPECT TO HIS CLASS A SHARES
INCLUDES A TAXABLE YEAR FOR WHICH INTELCOM WAS A PFIC AND THE HOLDER DID NOT
THEN MAKE, OR HAVE IN EFFECT, A QEF ELECTION, THEN THE EXCHANGE OF INTELCOM
COMMON SHARES FOR CLASS A SHARES (PROVIDED INTELCOM DOES NOT QUALIFY UNDER
SECTION 1296(A) AS A PFIC FOR THE TAXABLE YEAR ENDING SEPTEMBER 30, 1996) AND
THE EXCHANGE OF CLASS A SHARES FOR SHARES OF PARENT COMMON STOCK WILL BE A
TAXABLE EVENT HAVING THE ADVERSE TAX CONSEQUENCES NOTED ABOVE.
PFIC Status for Taxable Year Ending September 30, 1996 and Effect of the
Arrangement. In determining PFIC status of a controlled foreign corporation,
assets must be measured by their adjusted tax bases (as calculated in order to
compute earnings and profits for United States federal income tax purposes)
instead of by value, subject to certain adjustments, for purposes of applying
the 50% asset test. Because IntelCom will become a controlled foreign
corporation as a result of the Share Exchange, there is uncertainty as to
whether the calculation of IntelCom's assets for purposes of the PFIC rules
must be their adjusted tax bases (as calculated in order to compute earnings
and profits for United States federal income tax purposes) for IntelCom's
taxable year prior to the Arrangement but includable in IntelCom's September
30, 1996 taxable year. If that were the case, IntelCom may be treated as a
PFIC for the taxable year ending September 30, 1996. Thus, if a United States
Holder's holding period with respect to Class A Shares did not include a
taxable year for which IntelCom was a PFIC, except possibly IntelCom's taxable
year ending September 30, 1996, the U.S. Holder should make a QEF Election so
that its disposition of Class A Shares pursuant to the Arrangement will not be
a taxable event having the adverse tax consequences noted above. The adverse
tax consequence would be avoided because a United States Holder would avoid
holding Class A Shares during a period for which IntelCom is a PFIC and for
which the holder did not make a QEF Election for such period. As discussed
below, the consequence of a QEF Election is that each United States Holder
would have to include its share of IntelCom's earnings for the taxable period.
Since IntelCom believes that it will have no earnings and profits for the
taxable year ending September 30, 1996, there should be no adverse effect to
making
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the QEF Election. AS A RESULT OF THE FOREGOING, INTELCOM ADVISES ALL UNITED
STATES HOLDERS TO MAKE THE QEF ELECTION FOR ITS TAXABLE YEAR THAT INCLUDES
SEPTEMBER 30, 1996. A QEF ELECTION IS MADE BY A HOLDER BY PROPERLY FILING AND
COMPLETING A FORM 8621, WITH ITS TAX RETURN FOR THE TAXABLE YEAR THAT INCLUDES
SEPTEMBER 30, 1996. SEE "--NOTICES AND ELECTIONS--QUALIFIED ELECTING FUND."
SUMMARY. THE FOREGOING SUMMARY OF THE POSSIBLE APPLICATION OF THE PFIC
RULES IS ONLY A SUMMARY OF CERTAIN MATERIAL ASPECTS OF THOSE RULES. BECAUSE
THE UNITED STATES FEDERAL TAX CONSEQUENCES TO A UNITED STATES HOLDER UNDER THE
PFIC PROVISIONS ARE SIGNIFICANT, UNITED STATES HOLDERS OF INTELCOM COMMON
SHARES ARE URGED TO DISCUSS THOSE CONSEQUENCES WITH THEIR TAX ADVISORS.
Notices and Elections
Requirement of Notice Filing Upon The Share Exchange and The
Recapitalization. Any United States Holder who receives a Class A Share in
exchange for an IntelCom Common Share pursuant to the Recapitalization or who
receives shares of Parent Common Stock for Class A Shares pursuant to the
Share Exchange upon the Arrangement or after the Arrangement, will be required
to file a notice with the IRS on or before the last date for filing a United
States federal income tax return for the holder's taxable year in which the
Recapitalization, Share Exchange or later exchange occurs. The notice must
contain certain information specifically enumerated in section 7.367(b)-1(c)
of the Treasury Regulations. United States Holders are advised to consult
their tax advisors for assistance in preparing such notice.
If a United States Holder required to give notice as described above fails
to give such notice, and if the United States Holder further fails to
establish reasonable cause for the failure, then the IRS will be required to
determine, based on all the facts and circumstances, whether the conversion of
IntelCom Common Shares into Class A Shares or the exchange of Class A Shares
for shares of Parent Common Stock is eligible for nonrecognition treatment.
In making this determination, the IRS may conclude that (i) the conversion
and/or exchange are eligible for nonrecognition treatment, despite such
noncompliance, (ii) the conversion and/or exchange are eligible for
nonrecognition treatment, provided that certain other conditions imposed by
the Treasury Regulations are satisfied, or (iii) the conversion and/or
exchange are not eligible for nonrecognition treatment and that any gain
recognized will be taken into account for purposes of increasing the tax basis
of the Class A Share and/or shares of Parent Common Stock received pursuant to
the Arrangement. Nevertheless, the failure of any one United States Holder to
satisfy the foregoing notice requirements should not bar other United States
Holders that do satisfy such requirements from receiving nonrecognition
treatment.
Qualified Electing Fund Election; IRS Form 8621. A United States Holder
makes a QEF Election for a taxable year by properly filing and completing a
Form 8621 with its tax return for such year. The effect of such election is
that the United States Holder generally will be currently taxable on such
holder's pro rata share of IntelCom's ordinary earnings and net capital gains
(at ordinary income and capital gains rates, respectively) for each taxable
year of IntelCom in which IntelCom is classified as a PFIC, even if no
dividend distributions are received by such United States Holder, unless such
United States Holder makes an election to defer such taxes. If IntelCom
believes that it is a PFIC for a taxable year, it will provide United States
Holders of Class A Shares with information sufficient to allow such holders to
make a QEF Election and report and pay any current or deferred taxes due with
respect to their pro rata shares of IntelCom's net ordinary earnings and net
capital gains for such taxable year. United States Holders should consult
their tax advisors concerning the merits and mechanics of making a QEF
Election and other relevant tax considerations if IntelCom is a PFIC for any
taxable year.
Holders of warrants and debentures are not treated as shareholders of
IntelCom for the purpose of making a QEF Election until they exercise their
warrants or convert their debentures. Thus, a holder of warrants and/or
debentures will own Class A Shares when, it is possible, that IntelCom will be
considered a PFIC for a portion of their holding period. As a result, as
explained below, United States Holders of warrants and debentures must
exercise or convert as to all their Class A Shares prior to the end of the
taxable year preceding the taxable year
53
<PAGE>
during which they desire to dispose of the Class A Shares in order that they
actually are shareholders of IntelCom as of the first day of a taxable year in
order to make the "purge election" applicable to controlled foreign
corporations, in addition to the QEF Election.
If a United States Holder does not make a QEF election for the first year
that the IntelCom is a PFIC, then a United States Holder should both elect QEF
status, as described above, and elect to "purge" IntelCom's PFIC taint. A
United States taxpayer's "purge election" must be made as to his PFIC shares
held as of the qualification date by also attaching a Form 8621 to the tax
return for the holder's taxable year that includes the qualification date.
The qualification date is the first day of the shareholder's taxable year for
which a shareholder elects to treat the PFIC as a QEF. The "purge election"
applicable to any United States person that is a shareholder of a controlled
foreign corporation requires the United States person to include as a dividend
the shareholder's pro rata share of the controlled foreign corporation's post-
1986 earnings and profits included in its holding period of such shares during
which the controlled foreign corporation was a PFIC. Thus, as a result of
making the "purge election" applicable to controlled foreign corporations, a
United States Holder must include as a dividend (i.e., an excess distribution
subject to the PFIC rules) its share of IntelCom's accumulated earnings and
profits that was accumulated during the United States Holder's holding of the
Class A Shares (which for this purpose includes the holding period of IntelCom
Common Shares) but only during taxable years of IntelCom during which IntelCom
was a PFIC. IntelCom does not believe that it has any, or will have, any
material amount of accumulated earnings and profits. Thus, a United States
Holder should be able to both make the QEF election and the "purge election"
applicable to controlled foreign corporations without any adverse tax effects.
TAX CONSEQUENCES TO INTELCOM SHAREHOLDERS NOT RESIDENT IN OR CITIZENS OF THE
UNITED STATES
The following is applicable to holders of IntelCom Common Shares that are
not United States Holders ("non-United States Holders"). A non-United States
Holder generally will not be subject to United States federal income tax on
the gain (if any) recognized on the receipt of Class A Shares, on the sale or
exchange of Class A Shares, or on the receipt or sale of shares of Parent
Common Stock unless such gain is effectively connected with a United States
trade or business or, in the case of gains recognized by an individual, such
individual is present for 183 days or more and has a "tax home" in the United
States (as defined in the Code) during the taxable year, or, in the case of
shares of Parent Common Stock, such shares constitute a "United States real
property interest", as defined in section 897 of the Code.
The Company believes that shares of Parent Common Stock are not, and will
not become, United States real property interests. If, contrary to the
Company's belief, such shares did constitute United States real property
interests, because such shares will be regularly traded on an established
securities market they will be treated as United States real property
interests only in the case of a person who, at some time during the lesser of
the period during which the person held the shares or the five-year period
ending on the date of the disposition of the shares, held more than 5 percent
of such class of stock.
54
<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
Former shareholders of IntelCom will, at the Effective Date, own either
shares of Parent Common Stock, or Class A Shares, exchangeable for shares of
Parent Common Stock.
As a result of the Arrangement, Shareholders who receive shares of Parent
Common Stock will have the rights and privileges of such shares governed by
the DGCL. While the rights and privileges of stockholders of a Delaware
corporation such as Parent are, in many instances, comparable to those of
shareholders of a Canadian corporation such as IntelCom, there are certain
differences. The following is a summary of the material differences between
the rights of holders of shares of Parent Common Stock at the date hereof.
These differences arise from differences between United States and Canadian
securities laws, between the DGCL and the CBCA, and between IntelCom's
articles and IntelCom's by-laws (the "IntelCom Articles" and the "IntelCom By-
Laws," respectively), and the Parent's Certificate and Parent's by-laws (the
"Parent Certificate" and the "Parent By-Laws," respectively). For a
description of the respective rights of the holders of shares of Parent Common
Stock and IntelCom Common Shares, see, respectively, "The Arrangement -
Description of Parent Securities" and "The Arrangement -Description of Class A
Shares."
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Under the CBCA, certain The DGCL requires the affirmative
extraordinary corporate actions, vote of a majority of the outstanding
such as certain amalgamations, stock entitled to vote thereon to
continuances, sales, leases or authorize any merger, consolidation,
exchanges of all or substantially dissolution or sale of substantially
all of the property of a all of the assets of a corporation,
corporation other than in the except that, no authorizing
ordinary course of business, and stockholder vote is required of a
other extraordinary corporate corporation surviving a merger if (a)
actions such as liquidations, such corporation's certificate of
dissolutions and (if ordered by a incorporation is not amended in any
court) arrangements, are required respect by the merger, (b) each share
to be approved by special of stock of such corporation
resolution. A special resolution outstanding immediately prior to the
is a resolution passed by not effective date of the merger will be
less than two-thirds of the votes an identical outstanding or treasury
cast by the shareholders entitled share of the surviving corporation
to vote on the resolution. In after the effective date of the
certain cases, a special merger and (c) the number of shares
resolution to approve an to be issued in the merger does not
extraordinary corporate action is exceed 20% of such corporation's
also required to be approved outstanding common stock immediately
separately by the holders of a prior to the effective date of the
class or series of shares. merger. Stockholder approval is also
not required under the DGCL for
mergers or consolidations in which a
parent corporation merges or
consolidates with a subsidiary of
which it owns at least 90% of the
outstanding shares of each class of
stock.
Such matters as take-over bids, Such matters as take-over bids,
issuer bids or self tenders, issuer bids or self-tenders, going
going-private transactions and private transactions and transactions
transactions with directors, with directors, officers, significant
officers, significant shareholders officers, significant
shareholders and other related shareholders and other related
parties to which IntelCom is a parties to which Parent is a party
party will be subject to will be subject to regulation under
regulation by Canadian provincial United States securities laws,
securities legislation and regulations and policies.
administrative policies of
Canadian securities
administrators.
</TABLE>
55
<PAGE>
CUMULATIVE VOTING AND CLASSIFICATION OF BOARD OF DIRECTORS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
IntelCom Articles and IntelCom The Parent Certificate and the Parent
By-Laws do not provide for By-Laws do not provide for cumulative
cumulative voting in director voting in director elections. The
elections. Parent Certificate and the Parent
By-Laws provide for a classified
board of directors.
</TABLE>
AMENDMENT TO GOVERNING DOCUMENTS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Under the CBCA, any amendment to The DGCL requires a vote of the
the articles generally requires corporation's board of directors
the approval by special followed by the affirmative vote of a
resolution, which is a resolution majority of the outstanding stock of
passed by a majority of not less each class entitled to vote for any
than two-thirds of the votes amendment to the certificate of
cast by shareholders entitled to incorporation. If an amendment
vote on the resolution. Under alters the powers, preferences or
the CBCA, unless the articles or special rights of a particular class
by-laws otherwise provide, the or series of stock so as to affect
directors may, by resolution, them adversely, that class or series
make, amend or repeal any by-law shall be given the power to vote as a
that regulates the business or class notwithstanding the absence of
affairs of a corporation. Where any specifically enumerated power in
the directors make, amend or the certificate of incorporation.
repeal a by-law, they are See "The Arrangement - Description of
required under the CBCA to submit Class A Shares - Voting Rights." The
the by-law, amendment or repeal DGCL also states that the power to
to the shareholders at the next adopt, amend or repeal the by-laws of
meeting of shareholders, and the a corporation shall be in the
shareholders may confirm, reject stockholders entitled to vote,
or amend the by-law, amendment or provided that the corporation in its
repeal by an ordinary resolution, certificate of incorporation may
which is a resolution passed by a confer such power on the board of
majority of the votes cast by directors in addition to the
shareholders present and entitled stockholders. The Parent's
to vote on the resolution. Certificate expressly authorizes the
board of directors to adopt, amend or
repeal the Parent By-Laws.
</TABLE>
DISSENTERS' RIGHTS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
The CBCA provides that Under the DGCL, holders of shares of
shareholders of a CBCA any class or series have the right,
corporation entitled to vote on in certain circumstances, to dissent
certain matters are entitled to from a merger or consolidation of the
exercise dissent rights and to be corporation by demanding payment in
paid the fair value of their cash for the shares equal to the fair
shares in connection therewith. value (excluding any appreciation or
The CBCA does not distinguish for depreciation as a consequence, or in
this purpose between listed and expectation, of the transaction) of
unlisted shares. Such matters such shares, as determined by
include (a) any amalgamation with agreement with the corporation or by
corporation (other than an independent appraiser appointed by
with certain affiliated a court in an action timely brought
corporations); (b) an amendment by the corporation or the dissenters.
to the corporation's articles to The DGCL grants dissenters appraisal
add, change or remove any rights only in the case of mergers or
provisions restricting the issue, consolidations and not in the case of
transfer or ownership of shares; a sale or transfer of assets or a
(c) an amendment to the purchase of assets for stock
corporation's articles to add, regardless of the number of shares
change or remove any restriction being issued. Further, no appraisal
upon the business or businesses rights are available for shares of
that the corporation may carry on any class or series listed on a
or upon the powers that the national securities exchange or
corporation may exercise; (d) a designated as a national market
continuance under the laws of system security on an interdealer
another jurisdiction; (e) a sale, quotation system by The
lease or exchange of all or
substantially all of the property
of the corporation other than in
the ordinary course of business;
(f) a court order permitting a
shareholder to dissent in
connection with
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
an application to the court for National Association of Securities
an order approving an arrangement Dealers, Inc. or held of record by
proposed by the corporation; or more than 2,000 stockholders, unless
(g) certain amendments to the the agreement of merger or
articles of a corporation which consolidation converts such shares
require a separate class or into anything other than (a) stock of
series vote, provided that a the surviving corporation, (b) stock
shareholder is not entitled to of another corporation which is
dissent if an amendment to the either listed on a national
articles is effected by a court securities exchange or designated as
order approving a reorganization a national market system security on
or by a court order made in an interdealer quotation system by
connection with an action for an The National Association of
oppression remedy. Under the Securities Dealers, Inc. or held of
CBCA, a shareholder may, in record by more than 2,000
addition to exercising dissent stockholders, (c) cash in lieu of
rights, seek an oppression remedy fractional shares, or (d) some
for any act or omission of a combination of the above. In
corporation which is oppressive, addition, dissenter's rights are not
unfairly prejudicial to or that available for any shares of the
unfairly disregards a surviving corporation if the merger
shareholder's interest. did not require the vote of the
stockholders of the surviving
</TABLE> corporation.
OPPRESSION REMEDY
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
The CBCA provides an oppression The DGCL does not provide for an
remedy that enables the court to oppression remedy.
make any order, both interim and
final, to rectify the matters
complained of, if the Director
appointed under Section 260 of
the CBCA is satisfied upon
application by a complainant (as
defined below) that: (i) any act
or omission of the corporation or
an affiliate effects a result;
(ii) the business or affairs of
the corporation or an affiliate
are or have been carried on or
conducted in a manner; or (iii)
the powers of the directors of
the corporation or an affiliate
are or have been exercised in a
manner; that is oppressive or
unfairly prejudicial to, or that
unfairly disregards the interest
of any security holder, creditor,
director or officer of the
corporation. A complainant
includes: (a) a present or former
registered holder or beneficial
owner of securities of a
corporation or any of its
affiliates; (b) a present or
former officer or director of the
corporation or any of its
affiliates; (c) the Director; and
(d) any other person who in the
discretion of the court is a
proper person to make such
application.
Because of the breadth of the
conduct which can be complained
of and the scope of the court's
remedial powers, the oppression
remedy is very flexible and is
frequently relied upon to
safeguard the interest of
shareholders and other
complainants which have a
substantial interest in the
corporation. Under the CBCA, it
is not necessary to prove that
the directors of a corporation
acted in bad faith in order to
seek an oppression remedy.
Furthermore, the court may order
the corporation to pay the
interim expenses of a complainant
seeking an oppression remedy, but
the complainant may be held
accountable for such interim
costs on final disposition of the
complaint (as in the case of
derivative action).
</TABLE>
57
<PAGE>
DERIVATIVE ACTIONS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Under the CBCA, a complainant may Derivative actions may be brought in
apply to the court for leave to Delaware by a stockholder on behalf
bring an action in the name of of, and for the benefit of, the
and on behalf of a corporation or corporation. The DGCL provides that
any subsidiary, or to intervene a stockholder must aver in the
in an existing action to which complaint that he or she was a
any such body corporate is a stockholder of the corporation at the
party, for the purpose of time of the transaction of which he
prosecuting, defending or or she complains. A stockholder may
discontinuing the action on not sue derivatively unless he or she
behalf of the body corporate. first makes demand on the corporation
Under the CBCA, no action may be that it bring suit and such demand
brought and no intervention in an has been refused, unless it is shown
action may be made unless the that such demand would have been
complainant has given reasonable futile.
notice to the directors of the
corporation or its subsidiary of
the complainant's intention to
apply to the court and the court
is satisfied that (a) the
directors of the corporation or
its subsidiary will not bring,
diligently prosecute or defend or
discontinue the action; (b) the
complainant is acting in good
faith; and (c) it appears to be
in the interests of the
corporation or its subsidiary
that the action be brought,
prosecuted, defended or
discontinued.
Under the CBCA, the court in a
derivative action may make any
order it thinks fit including,
without limitation, (i) an order
authorizing the complainant or
any other person to control the
conduct of the action, (ii) an
order giving directions for the
conduct of the action, (iii) an
order directing that any amount
adjudged payable by a defendant
in the action shall be paid, in
whole or in part, directly to
former and present security
holders of the corporation or its
subsidiary instead of to the
corporation or its subsidiary,
and (iv) an order requiring the
corporation or its subsidiary to
pay reasonable legal fees and any
other costs reasonably incurred
by the complainant in connection
with the action. Additionally,
under the CBCA, a court may order
a corporation or its subsidiary
to pay the complainant's interim
costs, including reasonable legal
fees and disbursements. Although
the complainant may be held
accountable for the interim costs
on final disposition of the
complainant, it is not required
to give security for costs in a
derivative action.
</TABLE>
SHAREHOLDER CONSENT IN LIEU OF MEETING
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Under the CBCA, shareholders Under the DGCL, unless otherwise
action without a meeting may only provided in the certificate of
be taken by written resolution incorporation, any action required to
signed by all shareholders who be taken or which may be taken at an
would be entitled to vote thereon annual or special meeting of
at a meeting. stockholders may be taken without a
meeting if a consent in writing is
signed by all the holders of
outstanding stock having not less
than the minimum number of votes that
would be necessary to authorize such
action at a meeting at which all
shares entitled to vote were present
and voted. The Parent Certificate
does not contain any special
provision relating to
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
action by written consent; the Parent
By-Laws specifically authorize action
by written consent.
</TABLE>
DIRECTOR QUALIFICATIONS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
A majority of the directors of a The DGCL does not have any residency
CBCA corporation generally must requirements.
be resident Canadians but where a
corporation earns in Canada
directly or through its
subsidiaries less than five per
cent of the gross revenues of the
corporation and all of its
subsidiary bodies then not more
than one-third of the directors
of the corporation are required
to be resident Canadians.
Accordingly, IntelCom is
permitted to have one-third of
its directors be resident
Canadians. The CBCA also
requires that a corporation whose
securities are publicly traded
have not fewer than three
directors, at least two of whom
are not officers or employees of
the corporation or any of its
affiliates.
</TABLE>
FIDUCIARY DUTIES OF DIRECTORS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Directors of corporations Under the DGCL, the duty of care
incorporated or organized under requires that the directors act in an
the CBCA and the Colorado Act informed and deliberative manner and
have fiduciary obligations to the to inform themselves, prior to making
corporation and its shareholders. a business decision, of all material
Pursuant to these fiduciary information reasonably available to
obligations, the directors must them. The duty of loyalty may be
act in accordance with the summarized as the duty to act in good
so-called duties of "due care" faith, not out of self-interest, and
and "loyalty." in a manner which the directors
reasonably believe to be in the best
Pursuant to section 122 of the interests of the stockholders.
CBCA, the duty of loyalty
requires directors of a Canadian
corporation to act honestly and
in good faith with a view to the
best interests of the
corporation, and the duty of care
requires that the directors
exercise the care, diligence and
skill that a reasonably prudent
person would exercise in
comparable circumstances.
</TABLE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
Under the CBCA and pursuant to The DGCL provides that a corporation
IntelCom By-Laws, IntelCom may may indemnify its present and former
indemnify a director or officer, directors, officers, employees and
a former director or officer or a agents (each an "indemnitee") against
person who acts or acted at the all reasonable expenses (including
corporation's request as a attorneys' fees) and, except in
director or officer of a body actions initiated by or in the right
corporate of which IntelCom is or of the corporation, against all
was a shareholder or creditor, judgments, fines and amounts paid in
and his or her heirs and legal settlement in actions brought against
representatives (an them, if such indemnitee acted in
"Indemnifiable Person"), against good faith and in a manner which he
all costs, charges and expenses, or she reasonably believed to be in,
including an amount paid to or not opposed to, the best interests
settle an action or satisfy a of the corporation, and in the case
judgment, reasonably incurred by of a criminal proceeding, had no
him or her in respect of any reasonable cause to believe that his
civil, criminal or administrative or her conduct was unlawful. The
action or proceeding to which he corporation shall
or she is made a party by reason
of being or having been a
director or officer of IntelCom
or such body corporation, if:
(a)
</TABLE>
59
<PAGE>
<TABLE>
<S> <C>
he or she acted honestly and in indemnify an indemnitee to the extent
good faith with a view to the that he or she is successful on the
best interests of IntelCom; and merits or otherwise in the defense of
(b) in the case of a criminal or any claim, issue or matter associated
administrative action or with an action. The Parent
proceeding that is enforced by a Certificate provides for
monetary penalty, he or she had indemnification of directors or
reasonable grounds for believing officers to the fullest extent
that his or her conduct was permitted by applicable law.
lawful. An Indemnifiable Person
is entitled to such indemnity The DGCL allows for the advance
from the corporation if he or she payment of an indemnitee's expenses
was substantially successful on prior to the final disposition of an
the merits in his or her defense action, provided that the indemnitee
of the action or proceeding and undertakes to repay any such amount
fulfilled the conditions set out advanced if it is later determined
in (a) and (b), above. A that the indemnitee is not entitled
corporation may, with the to indemnification with regard to the
approval of a court, also action for which such expenses were
indemnify an Indemnifiable Person advanced. The CBCA does not
in respect of an action by or on expressly provide for such advance
behalf of the corporation or such payment.
body corporate to procure a
judgment in its favor, to which
such person is made a party by
reason of being or having been a
director or officer of the
corporation or body corporate, if
he or she fulfills the conditions
set out in (a) and (b), above.
</TABLE>
DIRECTOR LIABILITY
<TABLE>
<CAPTION>
The CBCA The DGCL
- -------------------------------------- --------------------------------------
<S> <C>
The CBCA does not permit any The DGCL provides that the charter of
limitation of a director's the corporation may include a
liability. provision which limits or eliminates
the liability of directors to the
corporation or its stockholders for
monetary damages for breach of
fiduciary duty as a director,
provided such liability does not
arise from certain proscribed
conduct, including acts or omissions
not in good faith or which involve
intentional misconduct or a knowing
violation of law, breach of the duty
of loyalty, the payment of unlawful
dividends or expenditure of funds for
unlawful stock purchases or
redemptions or transactions from
which such director derived an
improper personal benefit. The
Parent Certificate contains a
provision limiting the liability of
its directors to the fullest extent
permitted by the DGCL.
</TABLE>
60
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS
Pursuant to section 190 of the CBCA and the Interim Order, Shareholders have
been provided with the right to dissent from the Arrangement Resolution in
compliance with section 190 of the CBCA, which is reprinted in its entirety as
Appendix H to this Proxy Statement - Prospectus. The following summary is
qualified in its entirety by the provisions of section 190 of the CBCA.
Pursuant to the Interim Order, any Shareholder who dissents from the
Arrangement Resolution in compliance with section 190 of the CBCA (a
"Dissenting Shareholder") will be entitled, in the event the Arrangement
becomes effective, to be paid by IntelCom the fair value of IntelCom Common
Shares held by such Dissenting Shareholder determined as at the close of
business on the day before the Arrangement Resolution is adopted.
A SHAREHOLDER WHO WISHES TO DISSENT MUST DELIVER TO INTELCOM, NO LATER
THAN THE TERMINATION OF THE MEETING (OR ANY ADJOURNMENT THEREOF), WRITTEN
OBJECTION TO THE ARRANGEMENT RESOLUTION (A "DISSENT NOTICE"). The filing of a
Dissent Notice does not deprive a Shareholder of the right to vote; however
the CBCA provides, in effect, that a Shareholder who has submitted a Dissent
Notice and who votes in favor of the Arrangement Resolution will no longer be
considered a Dissenting Shareholder with respect to the class of shares voted
in favor of the Arrangement Resolution. IntelCom will not assume, that a vote
against the Arrangement Resolution or an abstention constitutes a Dissent
Notice but a Shareholder need not vote his or her IntelCom Common Shares
against the Arrangement Resolution in order to dissent. Similarly, the
revocation of a proxy conferring authority on the proxyholder to vote in favor
of the Arrangement Resolution does not constitute a Dissent Notice; however,
any proxy granted by a Shareholder who intends to dissent, other than a proxy
that instructs the proxyholder to vote against the Arrangement Resolution,
should be validly revoked (see "The Annual and Special Meeting - General Proxy
Information - Revocation of Proxy") in order to prevent the proxyholder from
voting such IntelCom Common Shares in favor of the Arrangement Resolution and
thereby disentitling the Shareholder from his or her right to dissent. Under
the CBCA, there is no right of partial dissent and accordingly, a Dissenting
Shareholder may only dissent with respect to all IntelCom Common Shares held
by him or her on behalf of any one beneficial owner and which are registered
in the name of the Dissenting Shareholder.
IntelCom is required, within 10 days after the Shareholders adopt the
Arrangement Resolution, to notify each Shareholder who has filed a Dissent
Notice that the Arrangement Resolution has been adopted, but such notice is
not required to be sent to any Shareholder who voted for the Arrangement
Resolution or who has withdrawn his or her Dissent Notice.
A Dissenting Shareholder who has not withdrawn his or her Dissent Notice
must then, within 20 days after receipt of notice that the Arrangement
Resolution has been adopted or, if he or she does not receive such notice,
within 20 days after he or she learns that the Arrangement Resolution has been
adopted, send to IntelCom a written notice (a "Payment Demand") containing his
or her name and address, the number of IntelCom Common Shares in respect of
which he or she dissents, and a demand for payment of the fair value of such
IntelCom Common Shares. Within 30 days after sending a Payment Demand, the
Dissenting Shareholder must send to IntelCom's transfer agent the certificates
representing the IntelCom Common Shares in respect of which he or she
dissents. A Dissenting Shareholder who fails to send to IntelCom certificates
representing IntelCom Common Shares in respect of which he or she dissents,
within the appropriate time frame, forfeits his or her right to make a claim
under section 190 of the CBCA. IntelCom's transfer agent will endorse on
share certificates received from a Dissenting Shareholder a notice that the
holder is a Dissenting Shareholder and will forthwith return the share
certificates to the Dissenting Shareholder.
On sending a Payment Demand to IntelCom, a Dissenting Shareholder ceases to
have any rights as a Shareholder, other than the right to be paid the fair
value of his or her IntelCom Common Shares as determined under section 190 of
the CBCA, except where:
61
<PAGE>
(a) The Dissenting Shareholder withdraws his or her Payment Demand before
IntelCom makes an offer to him or her pursuant to the CBCA;
(b) IntelCom fails to make an offer as hereinafter described and the
Dissenting Shareholder withdraws his or her Payment Demand; or
(c) the Arrangement does not proceed, for any reason;
in which case his or her rights as a Shareholder are reinstated as of the date
he or she sent the Payment Demand.
IntelCom is required, not later than seven days after the later of the
Effective Date or the date on which IntelCom received the Payment Demand of a
Dissenting Shareholder, to send to each Dissenting Shareholder who has sent a
Payment Demand a written offer to pay ("Offer to Pay") for his or her IntelCom
Common Shares in an amount considered by the board of directors of IntelCom to
be the fair value thereof, accompanied by a statement showing the manner in
which the fair value was determined. Every Offer to Pay must be on the same
terms. IntelCom must pay for IntelCom Common Shares of a Dissenting
Shareholder within 10 days after an offer made as aforesaid has been accepted
by a Dissenting Shareholder, but any such offer lapses if IntelCom does not
receive an acceptance thereof within 30 days after the Offer to Pay has been
made.
If IntelCom fails to make an Offer to Pay for a Dissenting Shareholder's
IntelCom Common Shares or if a Dissenting Shareholder fails to accept an offer
which has been made, IntelCom may, within 50 days after the Effective Date or
within such further period as a court may allow, apply to a court to fix a
fair value for IntelCom Common Shares of Dissenting Shareholders. If IntelCom
fails to apply to a court, a Dissenting Shareholder may apply to a court for
the same purpose within a further period of 20 days or within such further
period as a court may allow. A Dissenting Shareholder is not required to give
security for costs in such an application.
Upon an application to a court, all Dissenting Shareholders whose IntelCom
Common Shares have not been purchased by IntelCom will be joined as parties
and bound by the decision of the court, and IntelCom will be required to
notify each affected Dissenting Shareholder of the date, place and
consequences of the application and of his or her right to appear and be heard
in person or by counsel. Upon any such application to a court, the court may
determine whether any person is a Dissenting Shareholder who should be joined
as a party, and the court will then fix a fair value for IntelCom Common
Shares of all Dissenting Shareholders who have not accepted an Offer to Pay.
The final order of a court will be rendered against IntelCom in favor of each
such Dissenting Shareholder and for the amount of fair value of his or her
IntelCom Common Shares as fixed by the court. The court may, in its
discretion, allow a reasonable rate of interest on the amount payable to each
such Dissenting Shareholder from the Effective Date until the date of payment.
THE ABOVE IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE
CBCA, WHICH ARE TECHNICAL AND COMPLEX. IT IS SUGGESTED THAT ANY SHAREHOLDER
WISHING TO AVAIL HIMSELF OR HERSELF OF HIS OR HER RIGHTS UNDER THOSE
PROVISIONS SEEK HIS OR HER OWN LEGAL ADVICE AS FAILURE TO COMPLY STRICTLY WITH
THE PROVISIONS OF THE CBCA MAY PREJUDICE HIS OR HER RIGHT OF DISSENT. For a
general summary of certain income tax implications to a Dissenting
Shareholder, see "Income Tax Considerations to Shareholders - Canadian Federal
Income Tax Considerations to Shareholders - Dissenting Shareholders" and "-
United States Federal Income Tax Considerations to Shareholders - Dissenting
Shareholders."
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THE BUSINESS OF THE COMPANY
THE COMPANY
The Company is one of the largest providers of competitive local access
services in the United States, based on estimates of the industry's 1995
revenue. CLECs, formerly known as CAPs (competitive access providers), seek
to provide an alternative to the LEC for a full range of telecommunications
services in the newly opened federal regulatory environment. The Company
operates networks in 37 cities with populations in excess of 100,000, has
recently acquired fiber optic facilities in 22 more cities and has networks
under construction in four additional cities. As a result, the Company now
serves more Tier II and Tier III markets with populations between 250,000 and
2,000,000 than any other CLEC in the United States, with a significant
presence in regional clusters covering major metropolitan areas in California,
Colorado and the Ohio Valley. The Company also provides a wide range of
network systems integration services and maritime and international satellite
transmission services. As a leading participant in a rapidly growing
industry, the Company has experienced significant growth, with total revenues
increasing from $7.6 million for fiscal 1992 to $111.6 million for fiscal 1995
and $132.4 million for the 12-month period ended March 31, 1996.
The Telecommunications Act and several state regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. Due to these regulatory changes, the Company is now permitted
to offer all interstate and intrastate switched services, including local dial
tone (which the Company intends to begin offering in the second half of 1996).
In order to take advantage of the switched services market, the Company has
installed 13 high capacity digital switches that enable the Company to offer
these services in all of its markets.
In response to these regulatory changes, the Company is accelerating the
development of its telecom services business and, in order to facilitate rapid
and cost-effective expansion, is investing significant resources to expand its
network footprint and service offerings and is entering into agreements with
utility companies and other local strategic partners. The Company has entered
into long-term agreements with three utilities, SCE, CPS, and Southern. Under
these agreements, the Company is licensing fiber optic facilities in Southern
California (1,258 miles), San Antonio (300 miles, 60 of which currently exist)
and Birmingham (144 miles, 22 of which currently exist). The Company also has
invested in ICG Telecom of San Diego, which operates a fiber optic network
(50 miles) in metropolitan San Diego. See "--Telecom Services--Recent
Agreements." The Company is actively pursuing licensing arrangements with
other utility companies and other strategic partners.
The Company also has entered into a national contract with AT&T under which
the Company will provide special and switched access services to AT&T on the
Company's networks. See "--Telecom Services--Recent Agreements."
TELECOM SERVICES
The Company operates networks in the following markets within its three
regional clusters: California (Sacramento, San Diego and 17 cities in the Los
Angeles and San Francisco metropolitan areas); Colorado (Denver, Colorado
Springs and Boulder); and the Ohio Valley (Akron, Cleveland, Columbus, Dayton
and Louisville). The Company also operates fiber optic facilities in
Birmingham, Charlotte, Phoenix, Melbourne and Nashville. The Company has
recently acquired networks in 22 additional cities in the Los Angeles
metropolitan area through its agreement with SCE and is developing networks in
Cincinnati, Greensboro/Winston-Salem and San Antonio. The Company intends to
sell its networks in Melbourne and Phoenix. The Company's operating networks
have grown from approximately 12,000 customer VGEs at the end of fiscal 1992
to approximately 430,000 VGEs at the end of fiscal 1995 and 511,000 VGEs as
of March 31, 1996. This has driven Telecom Services revenue from $1.1
million for fiscal 1992 to $32.3 million for fiscal 1995 and $50.6 million
for the 12-month period ended March 31, 1996.
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Strategy
The Company's goal is to become the dominant alternative to the LEC in the
markets it serves. In furtherance of this goal, the Company has developed a
strategy to capitalize on its established customer base of long distance
carriers and to develop its markets within regional clusters. Key elements of
this strategy are:
Market Services Primarily to Long Distance Carriers. The Company believes
there are several advantages to acting as a "carrier's carrier" and marketing
its services primarily to long distance carriers and resellers. Long distance
carriers generally determine who will carry the local segment of a long
distance telephone call, thereby enabling the Company to reduce its marketing
costs by focusing on a few high-volume customers. Also, the continuing
deregulation of local telephone service creates new opportunities for the
Company to work with its long distance carrier customers to develop and
deliver local dial tone and new enhanced products and services. The major
long distance carriers served by the Company operate in all U.S. markets and
provide the Company with information about business opportunities and the
carriers' anticipated needs in markets the Company may enter. The carriers
and resellers served by the Company accounted for approximately 82% of the
Company's Telecom Services revenue for fiscal 1995. The Company believes that
its "carrier's carrier" strategy reduces the risks associated with significant
network investments because the Company works with long distance carrier
customers, such as AT&T, MCI, Sprint and WorldCom, to develop new products and
services.
Concentrate Markets in Regional Clusters. The Company's "first to market"
advantage in certain cities has allowed it to concentrate its networks in
regional clusters serving major metropolitan areas in California, Colorado and
the Ohio Valley. The Company believes that by focusing on regional clusters
it will be able to more effectively service its customers' needs and
efficiently develop, operate and control its networks. The Company also is
evaluating the expansion of its existing clusters and the addition of new
regional clusters in which it may seek to acquire, build or license fiber
optic facilities.
Expand Alliances with Utilities. The Company has established, and is
actively pursuing, strategic alliances with utility companies to take
advantage of their existing fiber optic infrastructures. This approach
affords the Company the opportunity to license or lease fiber optic facilities
on a long-term basis throughout a utility's service area in a more timely,
cost-effective manner than constructing facilities. In addition, utilities
possess conduit and rights of way that facilitate the installation of fiber to
extend the existing network in a given market.
Aggressively Pursue Local Dial Tone and Switched Services. With the passage
of the Telecommunications Act, LECs will be allowed to offer long distance
services in competition with the Company's current long distance carrier
customers. As a result, the Company's long distance carrier customers are
seeking to rapidly reduce their reliance on LEC networks. By offering an
array of telecommunications products, including local dial tone and enhanced
services, the Company will be providing a high quality, lower cost alternative
to the LEC. As a result, the Company expects switched services to become a
primary business of the Company as it introduces local dial tone in the second
half of 1996. The Company has established a network of 13 switches in its
markets to offer these services. The Company's switched minutes of use have
increased from 10 million minutes in the first quarter of fiscal 1995 to 362
million minutes in the second quarter of fiscal 1996.
Telecom Services Networks
The Company's networks are comprised of 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
telecommunication intensive businesses in a given market.
The Company's networks are 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. Additionally, much of the
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electronics used by the Company in its networks have redundant components to
limit outages and increase network reliability. The Company generally markets
its services at prices below those charged by the LEC. Management believes
these factors combine to create a more reliable and cost effective alternative
to copper-based networks which are still used, to some extent, by LECs.
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 backbone.
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 for such network. Based upon its experience (since the first
quarter of fiscal 1993) with, and strategy of, using leased telephone company
facilities to provide initial customer service, the Company anticipates
revenue generation within six to nine months after commencing network design.
The Company estimates that a new network will generate positive EBITDA (before
corporate allocations) within six to 12 months after initial revenue
generation. 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 LECs and evaluating development of new networks both inside and outside
its existing regional clusters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Company Overview."
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The Company's network monitoring center in Denver operates and manages all
of the Company's networks from one central location. 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
monitoring capabilities are supplemented through a contract with an AT&T
switch control center in Phoenix for surveillance of all of the Company's
central office switches.
Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end user-specified termination sites (by
manually or electronically dialing a telephone number). By contrast, the
special access services provided by the Company and other CLECs involve a
fixed communications link or "pipe," usually between a specific end user and a
specific long distance carrier's point of presence ("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 connected to the Company's owned or leased network, to
the local telephone company or to other CLEC networks. In addition, a switch
gives the Company the technological capability to provide the full range of
local telephone services, including local dial tone. The Company does not
currently provide local dial tone but anticipates offering such services in
the second half of 1996.
Recent Agreements
SCE. In March 1996, the Company and SCE jointly filed a 25-year agreement
with the CPUC under which the Company will license 1,258 miles of fiber optic
cable in Southern California. This network, which will be maintained and
operated by the Company, stretches from Los Angeles to San Diego. The
agreement also allows the Company to utilize SCE's facilities to install up to
500 additional miles of fiber optic cable. The Company has identified over
1,300 buildings which, based upon estimates of building size and
telecommunications traffic volumes, will be targeted by the Company for
connection to the network. SCE will be entitled to receive an annual fee for
ten years, certain fixed quarterly payments, including a quarterly payment
equal to 1.0% of network revenues, and certain other installation and fiber
connection fees. The amounts payable to SCE are subject to adjustment under
certain specified conditions.
Upon receipt of CPUC authorization, the Company's license under the SCE
agreement will convert to a lease having the same terms and conditions as the
license (except as specifically provided in the agreement). Until such time
as the Company's license is converted into a lease, SCE may cancel the
agreement, in whole or in part, upon 12 months notice to the Company if SCE
determines that the dark fibers or SCE's rights of way or other facilities
being used by the Company are necessary to conduct its utility operations.
Following the conversion, SCE may cancel the agreement, in whole or in part,
during the three-year period following the conversion upon 18 months notice
with respect to the dark fibers and upon 36 months notice with respect to
SCE's rights of way or other facilities if SCE determines that the dark fibers
or SCE's rights of way or other facilities being used by the Company are
necessary to conduct its utility operations. In addition, the agreement may
be terminated by either the Company or SCE upon the occurrence of certain
specified events, and both the Company and SCE have the right, under certain
circumstances, to either discontinue or relocate their respective facilities.
AT&T Contract. In March 1996, the Company entered into a national contract
with AT&T under which the Company will provide special and switched access
services, private line, local calling, intraLATA toll and residential and
business telecommunications services to AT&T on a non-exclusive basis. The
Company and AT&T have initially identified 12 MSAs in which the Company will
provide services and are in discussions with respect to seven additional MSAs
in which the Company may provide services. Under the agreement, the Company
will work with AT&T to provide special and switched access services in the
Company's other markets and new markets which the Company may enter. The
Company expects to deploy network facilities and infrastructure as necessary
to provide such services. The pricing principles established in this
agreement by which the Company will set rates and charges for services offered
to AT&T will vary depending on the services and the particular area in which
such services are provided. AT&T will have the right to resell or repackage
the services provided in each area under its brand name.
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The contract is for an initial five-year term and may be renewed for an
additional three-year term, unless sooner terminated or notice of nonrenewal
is provided by either the Company or AT&T. The Company believes that this
agreement is indicative of a trend by long distance carriers to shift
origination and termination of long distance traffic away from LEC networks to
the facilities of CLECs. The contract does not prevent AT&T from using other
CLECs in any of the markets in which the Company will provide services to
AT&T.
ICG Telecom of San Diego. In February 1996, the Company entered into an
agreement with ICG Telecom of San Diego and its other partners, Linkatel
Communications, Inc. and Copley Press, under which the Company acquired a 60%
interest in ICG Telecom of San Diego for an aggregate purchase price of
$10.0 million and became the general partner of ICG Telecom of San Diego.
ICG Telecom of San Diego operates a 50-mile fiber optic network and is
constructing an additional 110 miles of fiber in metropolitan San Diego. As a
result of the ICG Telecom of San Diego acquisition, combined with the
Company's existing California networks and the facilities under agreement with
SCE, the Company now has a network presence in all major metropolitan areas of
California. ICG Telecom of San Diego has $5.0 million of existing
indebtedness.
CPS. In November 1995, the Company entered into a 25-year agreement with
CPS to license half of the capacity on a 300-mile fiber optic network in
greater San Antonio, 60 miles of which currently exist. CPS will construct
the remaining 240 miles in conjunction with the Company and will license
facilities to the Company on an interim and non-exclusive basis. The Company
will also be able to provide extensions from the network to end users. The
Company may own and construct fiber optic cables on its own easements and
rights of way which may be connected to and extend beyond the network.
The Company will pay CPS license fees such that CPS recovers one-half of the
cost of constructing the network. The Company is required to pay license fees
for the extensions and network usage fees during the first three years based
on percentages of the Company's gross revenue for services provided through
the network facilities. The Company has posted a letter of credit in the
amount of $12.0 million to secure the Company's construction obligations.
Following the initial 25-year term, the agreement may be extended for
subsequent five-year periods.
Upon completion in approximately two years, the network is expected to serve
120 buildings. During construction, the Company will be able to provide
services to completed segments of the network. CPS has the right to reclaim
any or all of the fibers licensed to the Company that, in CPS's sole
discretion, are needed by it in connection with its electric or gas utility
operations at any time following the fifth anniversary of the date the network
is complete and ready for service. In such case, the Company will be entitled
to an equitable pro rata refund, without interest, of the respective license
fee. See "--Legal and Administrative Proceedings."
Southern. In March 1996, the Company entered into a long-term agreement
with a subsidiary of Southern and Alabama Power for the right to use 22 miles
of existing fiber and 122 miles of additional Alabama Power facilities to
reach the three major business centers in Birmingham. Southern will, in
conjunction with the Company, construct the network and provide maintenance
services with respect to the fiber installed. Southern will also provide
consulting services to the Company concerning the buildout of the network and
potential enhancements to the Company's products and services. Under the
agreement, the Company is also required to pay Southern a quarterly fee based
on specified percentages of the Company's revenue for services provided
through this network.
Following the initial 20-year term, the agreement may be extended by the
Company for an additional 10-year term upon written notice to Southern as
provided in the agreement. The agreement may be terminated by mutual written
agreement of the parties, or by either Southern or the Company upon the
occurrence of certain events of default specified in the agreement.
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WorldCom. In February 1996, the Company entered into a 20-year agreement
with WorldCom under which the Company will pay approximately $8.8 million for
the right to use fiber along a 330-mile fiber optic network in Ohio. The
network is being constructed by WorldCom in conjunction with the Company. An
aggregate of approximately $2.6 million has been paid by the Company, with the
balance due upon the completion of specified segments of the network.
Following completion of this network, WorldCom will provide routine route
surveillance and other maintenance services for an annual maintenance fee.
This network will provide a direct fiber link between the Company's existing
networks in Akron, Cleveland, Columbus and Dayton and its new network under
development in Cincinnati.
Following the initial 20-year term, the agreement may be renewed by the
Company for two consecutive terms of ten years each upon written notice to
WorldCom as provided in the agreement. After payment by the Company of the
amounts due under the agreement (other than the annual maintenance fee), the
Company has the right to terminate the agreement upon 180 days' prior written
notice to WorldCom.
The following table describes the Company's fiber optic networks and their
respective stages of development.
<TABLE>
<CAPTION>
TERRITORY POPULATION FIBER FIBER ROUTE FIBER FIBER STRAND
(APPROX.) ROUTE MILES UNDER STRAND MILES UNDER
MILES CONSTRUCTION MILES CONSTRUCTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CALIFORNIA
San Francisco 3,700,000 77 27 1,011 2,305
Los Angeles 3,500,000 15 -- 88 --
SCE Territory 11,200,000 2 1,262 48 19,878
San Diego 2,500,000 49 10 2,190 480
- --------------------------------------------------------------------------------------------
COLORADO
Denver 1,600,000 154 -- 7,336 --
Colorado Springs 400,000 59 -- 4,464 --
Boulder 200,000 76 50 1,866 4,032
- --------------------------------------------------------------------------------------------
OHIO VALLEY
Akron 700,000 23 21 1,455 1,008
Cleveland 1,800,000 99 15 5,682 720
Columbus 1,400,000 4 35 294 3,468
Dayton 1,000,000 59 3 2,225 307
Louisville 1,000,000 8 16 744 1,578
Ohio intercity cable -- -- 330 -- 7,920
- --------------------------------------------------------------------------------------------
OTHERS
Birmingham 900,000 4 11 329 1,429
Charlotte 1,200,000 84 59 4,383 5,180
Greensboro/ 900,000 -- -- -- --
Winston-Salem
Melbourne* 400,000 22 -- 730 --
Nashville 1,000,000 11 20 562 2,260
Phoenix* 2,100,000 9 -- 1,396 --
San Antonio 1,300,000 60 -- 1,560 --
</TABLE>
- -------------
*The Company intends to sell the Melbourne and Phoenix networks.
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Services
The Company's competitive local exchange services include private line,
special access, and interstate and intrastate switched access services and,
beginning in the second half of fiscal 1996, local dial tone. Private line
services are generally used to connect the separate office buildings of a
single business. Special access services connect end user customers to a long
distance telephone carrier's facilities, long distance carrier's facilities to
the local telephone company's central offices, different facilities of the
same long distance carrier or facilities of different long distance carriers.
The Company requires interconnection with the local telephone company's
central office in order to offer this second alternative. As part of its
"carrier's carrier" strategy, the Company targets 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.
The Company's interstate and intrastate switched services include the
transport and switching of calls between the long distance carrier's
facilities and either the local telephone company central offices or end
users. By performing the switching and most of the transport, the Company can
reduce local access costs, which constitute the major operating expense for
long distance carriers. As the Company provides a greater portion of the
local segment of a call, the Company expects to experience improved margins on
what has initially been a negative or low margin revenue stream. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors--Risks Related to Switched Services Strategy."
By offering switched services to its long distance carrier customers, the
Company may be designated by a long distance carrier to deliver incoming long
distance traffic to the Company's markets regardless of whether the
terminating end user is connected to the Company's owned or leased network or
to the LEC. The Company intends to expand the switched services it offers to
its long distance carrier customers to include a broad range of higher profit
margin enhanced services, such as enhanced routing, directory assistance and
information services including 800/888/900 numbers, calling cards and personal
number service, as permitted by regulation. Long distance carriers would
purchase these enhanced services from the Company and then market and resell
them, at a markup, to end users. By offering such services to its long
distance carrier customers, the Company would enable long distance carriers to
sell a broader range of services to their long distance customers and to
generate incremental revenue that previously could only be earned by LECs.
SS7. The Company has also developed a nation wide Signaling System 7
("SS7") service with Southern New England Telephone, the nation's tenth
largest LEC. 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.
SS7 is now the standard method for telecommunications signaling worldwide.
SS7 is also the enabling technology for Advanced Intelligent Network, a set of
services and signaling options that carriers can use to create new services or
customer options.
Industry
Until 1984, AT&T monopolized telephone services in the United States.
Effective in 1984, AT&T was required to divest its local telephone systems
(the "Divestiture"), which created the present structure of the
telecommunications industry. As part of the Divestiture, AT&T's former local
telephone systems were organized into seven regional bell operating companies
while AT&T retained its long distance services and equipment manufacturing
operations. The separation of the RBOCs from AT&T's long distance services
created two distinct telecommunications markets: local exchange and long
distance. The Divestiture decreed direct, open competition in the long
distance segment, but retained regulated monopolies for local exchange
services, provided within geographically defined local access transport areas
("LATAs"). The Telecommunications Act ended the consent decree which
implemented the Divestiture, allowing competition for local exchange service
and permitting the RBOCs to enter the long distance market.
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A long distance telephone call consists of three segments. Starting with
the originating customer, the call travels along a local exchange network to a
long distance carrier's POP. At the POP, the call is combined with other
calls and sent along a long distance network to a POP on the terminating
customer's local network. The call is then sent from this POP along a local
exchange network to the terminating customer. Long distance carriers provide
only the connection between the two local networks, and pay access charges to
the LECs or to CLECs for originating and terminating calls.
Several factors have begun to promote competition in the local exchange
market, including: (i) customer demand for an alternative to the LECs'
monopoly, partly stimulated by the development of competitive activities in
the long distance telephone market; (ii) technological advances in the
transmission of data and video requiring greater capacity and reliability
levels than the LECs' copper wire-based, twisted-pair networks were able to
accommodate; (iii) the development of fiber optics and digital electronic
technology, which reduce network construction costs while increasing
transmission speeds, capacity and reliability; (iv) the significant access
charges that long distance carriers pay for access to the local telephone
networks; and (v) the passage of legislation opening the local market to
competition. Numerous new entrants to the telecommunications services market
now offer customers diverse service options. In the past, LECs generally
reacted by resisting interconnection with their networks by new competitors or
service providers. See "--Regulation."
Competitors in the local exchange market, originally designated as
"competitive access providers" by the FCC, were first established in the mid-
1980s. In New York City, Chicago and Washington, D.C., newly formed companies
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 the CAPs to offer customers less expensive and higher quality special
access and private line services than the LECs.
Signals carried over digital fiber optic networks are superior in many
respects to older analog signals carried over copper wire, which continue to
be used to varying degrees by the LECs. In addition to offering faster and
more accurate transmission of voice and data communications, digital fiber
optic networks generally require less maintenance than comparable copper wire
facilities, thereby decreasing operating costs. Furthermore, the transmission
capacity of digital fiber optic cable is determined by the electronic
equipment used on the network. This allows network capacity to be increased
with a change in electronics, not the actual fiber network, as would be the
case with a copper wire architecture. Lastly, digital fiber optic cable is
largely immune from electromagnetic and radio interference, resulting in
enhanced transmission quality.
The Telecommunications Act and several state regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. As a result of these regulatory changes, CLECs are now
permitted to offer interstate switched services as well as all intrastate
services, including local dial tone, 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 services such as private line and special access to
providing all local exchange services to become true competitors to the RBOCs.
NETWORK SERVICES
Through the Company's wholly owned subsidiary, FOTI, the Company supplies
information technology services, focusing on client/server technologies,
network design, installation, maintenance and support for a variety of end
users, including large businesses and telecommunications companies. The
Company specializes in the installation and support of network systems for
clients that include Amoco, MCI, Intel and other leading Fortune 1000 firms.
The Company provides network infrastructures, systems and support services,
including the design, engineering and installation of local area networks
("LANs") for its customers. These LANs (within end user offices, buildings or
campuses) may include fiber optic, twisted pair, coaxial and other network
technologies. The Company
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specializes in turnkey network installations including cabling and electronics
that address specific environments. The Company also provides professional
network support services. These services include network move, add and change
service, maintenance services and desktop/workstation support services. The
Company believes that this market will continue to grow, although Network
Services revenue is expected to constitute a smaller portion of the Company's
future revenue as Telecom Services revenue increases.
The Company offers these network integration and support services through
offices located within four major regional support organizations. The
regional headquarters are located in Dallas, Denver, Portland (Oregon) and San
Francisco.
SATELLITE SERVICES
The Company's Satellite Services operations provide satellite-based voice
and data connectivity to domestic and international customers. The Company
operates a maritime telecommunications business providing satellite telephone
services to major cruise ship lines and the U.S. Navy, a VSAT (very small
aperture terminal) data transmission business and a teleport providing
international voice and data services. The Company also recently acquired 90%
of the outstanding shares of MCN, which provides satellite telephone services
to smaller vessels and will complement the Company's existing cruise ship
telephone services business. The Company recently sold four teleports
(Atlanta, Denver, Los Angeles and New Jersey) to Vyvx for a cash purchase
price of approximately $21.5 million. The Company continues to own and
operate one teleport and has the right to lease capacity on the teleports it
sold.
MTN. In January 1995, the Company and an unaffiliated entity formed MTN
which purchased the assets of a business providing digital wireless
communications through satellites to the maritime cruise industry and U.S.
Navy vessels utilizing experimental radio frequency licenses issued by the
FCC. These licenses were issued to the predecessors of MTN in 1991, were
renewed by the FCC in 1993 and renewed again in January 1995. The experimental
licenses are valid until February 1, 1997. MTN provides private
communications networks to various cruise lines allowing passengers to make
calls from their cabins to anywhere in the world. MTN additionally provides
its communications services to the U.S. Navy in conjunction with a major long
distance provider, which serves as the long distance carrier, while MTN
provides the communications equipment and network. MTN believes that the
radio frequencies employed under its experimental licenses enable it to
provide a higher quality maritime service than is available through the radio
frequencies currently allocated to other maritime services. See "Risk
Factors--Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in MCN, a
Florida-based provider of cellular and satellite communications for commercial
ships, private vessels, off-shore platforms and land-based mobile units. This
acquisition expands the Company's business from C-band satellite services for
cruise ships and naval vessels to cover land-based units or smaller ships.
MCN has a five-year contract with American Mobile Satellite Corp. ("AMSC")
that provides for a commitment by MCN to purchase 20 million minutes of air
time over a five-year period. MCN currently has in excess of 300 cellular
installations that are scheduled to convert to the AMSC service by the end of
1996.
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 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 and U.S. Navy telephone
services business. In addition, the Company markets the resale of services
from the four teleports it recently sold.
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<PAGE>
CUSTOMERS AND MARKETING
The Company's primary marketing strategy for its Telecom Services is to
offer high quality and low cost diverse alternative communications pathways
and services to long distance carriers at competitive rates. The Company's
service agreements with long distance carriers also provide additional
marketing opportunities as the long distance carriers typically offer their
customers the Company's local telecom services with their long distance
service. Telecom Services revenue from major long distance carriers and
resellers constituted approximately 82% of the Company's Telecom Services
revenue in fiscal 1995. The balance of the Company's Telecom Services revenue
was derived from end users. Telecom service agreements with end users
typically provide for terms of one to five years, fixed prices and early
termination penalties.
The Company's Telecom Services include special access and private lines
services, which are point-to-point high-speed connections between end user
locations and long distance carrier networks and/or between two end user
locations. The Company packages its special access and private line services
specifically to meet the needs of long distance carriers, which remarket these
services to end users and to large end user customers that typically acquire
access networks directly. In addition, the Company offers wholesale switched
services (interstate, intrastate and intraLATA toll) providing long distance
carriers with an alternative to purchasing access directly from LECs. These
services feature discounts and simplified pricing structures, making the
services a cost-effective alternative for long distance carriers.
The Company is in the process of developing a full-range of competitive
local dial tone services, which the Company intends to begin offering in the
second half of 1996. The Company's plan is to market these services to long
distance companies that will brand the Company's products, providing customers
with a complete package of communications services under the carrier's own
brand identity. The Company will also market its telecommunications products
directly to end users. The Company also offers enhanced services, which
include a pay-per-call service bureau for customers that distribute news and
entertainment programming and a mass call platform, which allows significant
numbers of callers to respond to call-ins for polling and related
applications.
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
reseller agreements with manufacturers of network integration products and
services.
The Company has begun offering satellite private line transmission services
from its teleport to business customers that can benefit from the Company's
international and domestic transmission capabilities. With its acquisition of
MTN and MCN, the Company also markets voice and data communications to the
maritime industry, including cruise ships, and U.S. Navy vessels, commercial
vessels, private yachts, offshore platforms and land-based units.
COMPETITION
The Company operates in a highly competitive environment that historically
was dominated by an entrenched monopolist -- the RBOCs and GTE. The Company's
current competitors include the RBOCs, GTE, other CLECs, network systems
integration service providers, microwave and satellite service providers,
teleport operators, wireless telecommunications providers and private networks
built by large end users. Potential competitors include cable television
companies, utilities, local telephone companies outside their current local
service areas, as well as the local service operations of long distance
carriers. Consolidation of telecommunications companies 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, in particular in the local telephone market. Since enactment of
the Telecommunications Act, several telecommunications companies have
indicated their intention to enter many areas of the telecommunications
industry,
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<PAGE>
including areas and markets in which the Company participates and expects to
participate. This may result in more participants than can ultimately be
successful in a given market, subjecting the Company to further competition.
Telecom Services. The bases of competition in telecom services are generally
price, service, reliability, transmission speed and capacity. The Company
believes that its expertise in developing and operating highly reliable,
advanced digital networks which offer substantial transmission capacity at
competitive prices enables it to compete effectively against the LECs and
other CLECs.
In every market in which the Company operates telecom service networks, the
LECs, which historically have been the monopoly providers of local telephone
services, are the primary competitors. The LECs have long-standing
relationships with their customers and provide those customers with various
transmission and switching services. The LECs also have the potential to
subsidize access and switched services with revenue from a variety of
businesses and have benefitted from certain state and federal regulations that
have favored the LECs over the Company. In certain areas where the Company
operates networks, other CLECs also operate or have announced plans to enter
the market. Current competitors also may include wireless telecommunications
providers and private networks built by large end users. Additional
competition may emerge from cable television operators and electric utilities.
Most of the Company's actual and potential competitors have substantially
greater financial, technical and marketing resources than the Company.
The Company believes that its networks compete most directly with the RBOCs
and GTE. Historically, FCC policies have constrained the ability of the RBOCs
and GTE to decrease their prices for interstate access services based on their
status as dominant carriers. Although regulatory approval for price
reductions (beyond certain specific parameters) still must be obtained from
the FCC, the FCC has been regularly granting such approvals in recent years.
The FCC has already granted the RBOCs flexibility in pricing their interstate
access services on a central office by central office basis. In addition, the
FCC has granted waivers of its access charge pricing rules to NYNEX (for New
York City) and Ameritech (for Chicago and Grand Rapids) to allow them to
further reduce certain access prices. Based on the FCC's orders in those
cases, the Company believes that similar waivers may be granted to the RBOCs
and GTE for interstate access services provided in places in which the Company
operates or is constructing networks. In addition, the Telecommunications Act
allows the FCC to decrease regulatory requirements on providers of interstate
services, including the RBOCs and GTE. Any such increased pricing flexibility
for the RBOCs and GTE may adversely affect the Company's ability to compete
for certain services. If the RBOCs and GTE continue to lower rates, there
would be downward pressure on certain special access and switched access rates
charged by CLECs, which pressure may adversely affect the Company. See "--
Regulation." In addition, the Telecommunications Act and its implementation
by the states and the FCC likely will allow the RBOCs and GTE to provide a
broader range of services and likely will enable the RBOCs and GTE to compete
more effectively against long distance carriers, which are the Company's
primary customers for telecom services.
The Company does not believe that it currently competes directly with any
cable television company, except against CLECs owned or controlled by cable
television companies. Time Warner Communications, Inc. ("Time Warner") has
received state regulatory approval to provide local service in 37 of Ohio's 88
counties and has announced that it expects to begin offering service in these
counties in mid-1996. Time Warner currently has networks in Cincinnati,
Columbus and Lima, Ohio. Traditionally, cable company owned or controlled
CLECs possessed certain advantages over other CLECs in the provision of
telecommunications services due to their access to rights of way, poles,
conduit and ducts owned or controlled by utilities or LECs and a preferential
rate for use of those facilities by cable owned or controlled CLECs required
under old federal law. With the enactment of the Telecommunications Act,
however, all providers of telecom services have equal rights of access to
rights of way, poles, conduit and ducts owned or controlled by electric
utilities and LECs. In addition, over a five-year period, the FCC will adopt
and implement new regulations that will require all telecom service providers
to be charged the same rate for use of such rights of way, poles, conduit and
ducts.
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Network Services. The bases of competition in the network services market
are primarily technological capability and experience, service and price. In
this market, the Company competes with a variety of small local network
integrators, and in certain markets, with AT&T and other large system
integrators.
Satellite Services. In the delivery of domestic satellite services, the
Company competes with other full service teleports, microwave carriers and
satellite service brokers. Competition is based on reliability, price and
transmission quality. Most of the Company's domestic satellite competitors
focus on the domestic video market. Competition is expected principally from
a number of domestic and foreign companies, many of which have substantially
greater financial and other resources than the Company. In the maritime
telecommunications market, MTN competes primarily with COMSAT, which provides
maritime telecommunications services by means of exclusive FCC licenses for
current maritime services and by means of two year experimental FCC licenses
employing frequencies similar to those utilized under MTN's experimental FCC
licenses.
REGULATION
The Telecommunications Act opens the local and long distance markets to
additional competition and revises 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 share responsibility for implementing and enforcing the provisions
of the new Telecommunications Act. In exchange for unbundling their network
services and allowing competitors to interconnect at cost-based rates on
nondiscriminatory terms and conditions, the RBOCs are now allowed to seek
authority to provide long distance services.
In order to be granted authority to provide long distance services in its
service territory, the RBOC must be able to demonstrate it is subject to
facilities-based local competition. In addition, the RBOCs must comply with a
14-point "checklist" of regulatory requirements which would result in
competitors having co-carrier status in the RBOC's service territory. Co-
carrier status, as it has become known in state regulatory proceedings,
effectively treats CLECs and other competitors as peers of the LECs insofar as
it relates to the interconnection of networks and the origination and
termination of telecommunications traffic. The states will continue to have
jurisdiction over co-carrier issues under the new law, in particular in
reviewing and approving interconnection agreements.
To date, the Company has sent requests for negotiations of interconnection
agreements, as provided by the Telecommunications Act, to the local operating
affiliates of the RBOCs and GTE in each of the areas in which the Company
operates. In addition, negotiations with Pacific Telesis for interconnection
in California were concluded and resulted in the signing of an interconnection
agreement in March 1996. Negotiations have begun with GTE for California,
BellSouth for Tennessee and Ameritech for Ohio and will begin soon with SBC
Communications, Inc. ("SBC") for Texas.
The FCC recently released its proposed rules and policies regarding the
implementation of the local competition provisions of the Telecommunications
Act. The FCC proposed, among other things, to adopt national guidelines with
respect to the unbundling of LECs' network elements, resale of LEC services,
number portability, the pricing of interconnection services and unbundled
elements, and other local competition issues. The Telecommunications Act
requires the FCC to finalize these rules by August 8, 1996.
Federal. In the current regulatory environment, the Company generally
operates as a regulated carrier with fewer requirements and obligations than
the incumbent LECs. The FCC treats the Company as a non-dominant carrier,
which means that it is not subject to the same level of regulation as the
RBOCs or LECs, which are designated as dominant carriers. At the federal
level, the Company is not required to obtain FCC authorization to install or
operate fiber optic facilities to the extent they are used to provide
interstate services. Currently, the Company is required to file tariffs for
its interstate services and its rates for services must be reasonable and its
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<PAGE>
offerings must be nondiscriminatory. The FCC, however, has proposed to
eliminate the requirement that nondominant long distance carriers file
tariffs. Based on this proposal, and previous FCC decisions, the Company
believes that the FCC also will eliminate the tariff filing requirements on
nondominant local exchange carriers such as the Company.
State. Under the Telecommunications Act, state regulatory agencies cannot
prohibit any entity from providing telecommunications services, but the states
continue to have general authority to set criteria for reviewing applications
to provide intrastate services (including local services). State regulators
will continue to set the requirements for providers of local and intrastate
services, including pricing standards and quality of services issues.
However, state regulators can no longer allow (or require) restrictions on the
resale of telecommunications services. State regulators also can regulate the
rates charged by CLECs for intrastate and local services.
Local Government Authorization. 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 pay license or franchise fees, often based on a
percentage of gross revenue, in order to provide telecommunications services.
In many markets, the LECs are excused from paying such franchise fees or
paying fees that are materially lower than those required to be paid by the
Company. Although municipalities can regulate use of their rights of way,
under the Telecommunications Act they cannot prohibit or effectively prohibit
any entity from providing any telecommunications services. In addition, the
new law requires that local governmental authorities treat telecommunications
carriers in a nondiscriminatory and competitively neutral manner.
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. Thus, the Company is required to obtain
authorization from the FCC for its satellite and wireless services. The
Company provides maritime communications services pursuant to an experimental
license which expires February 1, 1997. The FCC may not renew this license or
it may allocate the radio frequencies currently used by the Company for other
purposes. Moreover, the FCC may decide to auction the use of such
frequencies, which may require the Company to pay significant amounts for its
maritime communications services license.
The Telecommunications Act limits ownership of an entity holding a common
carrier radio license by non-U.S. citizens, foreign corporations and foreign
governments. These ownership restrictions do not apply to private carrier
radio licenses or non-radio facilities such as fiber optic cable used to
provide CLEC services. Moreover, the FCC does not currently regulate private
carriers (other than their use of radio frequencies) and has generally
preempted the states from regulating private carriers. The Company offers
certain services as a private carrier.
As a non-U.S. entity, the Company cannot directly hold common carrier radio
licenses that are used to provide telephone and wireless services. Until
fulfillment of certain FCC conditions, the Company cannot hold the common
carrier radio licenses and, therefore, third parties hold the licenses. As an
interim arrangement, entities owned 33% each by U.S. directors William Laggett
and Jay Ricks and a former director hold the licenses. In 1992, the Company
applied to the FCC for authority to acquire the entities that hold the common
carrier radio licenses used by the Company. Approval of this acquisition was
conditioned on the Company becoming incorporated in the United States, at
least 75% of the Company's directors and officers being U.S. citizens and
foreign ownership of the Company's common stock not exceeding 60%. These
conditions imposed by the FCC have not yet been fulfilled, but upon
consummation of the Arrangement, the Company will be in compliance with FCC
requirements so that it can directly hold FCC licenses.
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<PAGE>
EMPLOYEES
On March 31, 1996, the Company employed a total of 1,061 individuals on a
full time basis. There are 69 employees in the Company's Oregon network
systems services office who are represented by a collective bargaining
agreement which expires on December 31, 1997. The Company believes that its
relations with its employees are good.
PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional
equipment rooms will be leased as networks are expanded. The Company owns an
office building approximately 30 miles from downtown Denver, which houses the
Company's nationwide network monitoring and control facility for its Telecom
Services business. The Company currently also leases office space for its
satellite and network systems integration operations in the Denver
metropolitan area. As a result of its recent and anticipated future growth,
the Company is evaluating alternative facilities to consolidate its operations
in Denver. The Company believes its properties are adequate for the current
operation of its business.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
In July 1994, FOTI was notified that it had been debarred and that, as a
result, the federal government would not solicit, award to, or permit
contracts or subcontracts with FOTI for federal government work through March
1997. Federal government contract work by FOTI accounted for revenue of
approximately $1.8 million, $0.3 million, $1.8 million, $1.5 million and $0.2
million for the fiscal year ended July 31, 1992, the two months ended
September 30, 1992 and the fiscal years ended September 30, 1993, 1994 and
1995, respectively. Therefore, the revenue that has been lost during the
debarment is not material. The debarment proceeding was conducted by the
Department of the Army ("Army") and related to work performed by FOTI as a
subcontractor on a $38,000 government project which was completed in 1992
(prior to the Company's acquisition of its majority equity interest in FOTI).
On June 4, 1996, FOTI entered into a Settlement Agreement with the United
States Department of Justice and an Administrative Settlement Agreement with
the Department of the Army terminating FOTI's debarment. As a result of these
settlements, the debarment from bidding on government contracts has been
lifted effective June 4, 1996. FOTI's cost of the settlements for the
government's investigative and other expenses was $158,324, of which 49% was
paid by the former minority shareholders of FOTI, resulting in a net cost
to FOTI of $80,745.
Four putative class action complaints have been filed in the U.S. District
Court for the District of Colorado by shareholders of the Company naming the
Company, William W. Becker, Larry L. Becker, John R. Evans and William J.
Maxwell as defendants. The complaints allege that the defendants violated the
Exchange Act, with respect to the content and timing of its disclosures
concerning the suspension and debarment of FOTI. The complaints seek damages
for all persons who purchased IntelCom Common Shares between May 16, 1994 and
May 16, 1995. The Company has filed an answer, discovery has commenced and
plaintiffs have recently filed a motion for class certification. The Company
believes that it has meritorious defenses and intends to vigorously defend
these lawsuits. However, there can be no assurance as to the outcome of this
litigation.
SBC has alleged before the San Antonio city council that the Company's
arrangement to license cable being built by CPS in greater San Antonio
violates state law and has sought to have the San Antonio city council
repudiate the Company's contract with CPS. The assertion of SBC is that CPS
would, through its license arrangement with the Company, be providing
telecommunications services in contravention of Texas state law. Following
passage of that state law in 1995, the Telecommunications Act was enacted. In
May 1996 ICG filed a petition with the FCC asking it to declare that the
national pro-competitive policy in the Telecommunications Act does not allow
the application of the Texas law in a way that precludes implementation of the
agreement between ICG and CPS. The FCC has instituted a proceeding to
consider ICG's request and likely will rule on this issue before the end of
the
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year. At the same time, ICG has applied for a franchise from the city of San
Antonio to provide telecommunication services. In addition, ICG has applied
for a license from the city to begin construction of certain parts of the
network contemplated by the agreement.
IntelCom and its subsidiaries are not parties to any other material
litigation. The continuing participation by IntelCom and its subsidiaries in
regulatory proceedings before the FCC and state regulatory agencies concerning
the adoption of new regulations is unlikely to result in a material adverse
effect on the financial condition and results of operations of the Company.
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SELECTED FINANCIAL DATA
The selected historical financial data of IntelCom and its subsidiaries for
each fiscal year in the five-year period ended September 30, 1995 has been
derived from the audited consolidated financial statements of IntelCom. The
selected financial data as of March 31, 1996 and for the six months
ended March 31, 1995 and 1996 have been derived from the unaudited
Consolidated Financial Statements of IntelCom included elsewhere in this Proxy
Statement - Prospectus and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth therein. The information set forth below
should be read in conjunction with such Consolidated Financial Statements of
IntelCom and the notes thereto included elsewhere in this Proxy Statement -
Prospectus. Results of operations for the six months ended March 31,
1996 are not necessarily indicative of results of operations for a full year
or predictive of future periods. IntelCom's development and expansion
activities, including acquisitions, during the periods shown below materially
affect the comparability of this data from one period to another. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The selected historical financial information for Parent is not presented
as Parent was not formed until April 11, 1996. Parent has not commenced
operations and has no assets or liabilities, including contingent liabilities
and commitments. Consequently, pro forma financial information for Parent is
not presented since this information would not differ significantly from the
historical financial information of IntelCom presented herein. The costs
associated with the Arrangement, which are not expected to be significant,
will be accounted for as a current period expense by Parent upon consummation
of the Arrangement.
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<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
====================================================================
ACTUAL PRO FORMA
1991 1992 1993 1994 1995 1995/(1)/
-------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA(3):
Revenue:
Telecom services........ $ 428 $ 1,061 $ 4,803 $ 14,854 $ 32,330 $ 32,330
Network services........ - 4,955 21,006 36,019 58,778 58,778
Satellite services...... 24 1,468 3,520 8,121 20,502 11,360
Other................... 153 126 147 118 - -
------- -------- -------- -------- -------- ----------
Total revenue......... 605 7,610 29,476 59,112 111,610 102,468
Cost of services.......... 532 5,423 18,961 35,590 76,778 70,974
Selling, general and
administrative expenses.. 3,088 3,921 10,702 30,590 65,022 61,248
Depreciation and
amortization............. 1,282 1,602 3,473 8,198 16,624 14,410
------- -------- -------- -------- -------- ----------
Operating expenses........ 4,902 10,946 33,136 74,378 158,424 146,632
Operating loss............ (4,297) (3,336) (3,660) (15,266) (46,814) (44,164)
Interest expense.......... (205) (525) (2,523) (8,481) (24,368) (73,944)
Other income (expense),
net...................... 7 33 22 (121) (4,999) (39,120)
------- -------- -------- -------- -------- ----------
Loss before income taxes
and cumulative effect of
change in accounting..... (4,495) (3,828) (6,161) (23,868) (76,181) (157,228)
Income tax benefit
(expense)................ 112 174 1,552 - - -
Cumulative effect of
change in accounting(2) - - - - - -
Net loss.................. (4,383) (3,654) (4,609) (23,868) (76,181) (157,228)
Preferred stock dividend.. - - - - (467) (467)
------- -------- -------- -------- -------- ----------
Net loss attributable to
common shareholders...... $(4,383) $ (3,654) $ (4,609) $(23,868) $(76,648) $ 157,695)
======= ======== ======== ======== ======== ==========
Loss per common share..... $ (0.61) $ (0.42) $ (0.39) $ (1.56) $ (3.25) $ (6.68)
======= ======== ======== ======== ======== ==========
Weighted average number
of common shares
outstanding.............. 7,184 8,737 11,671 15,342 23,604 $ 23,604
======= ======== ======== ======== ======== ==========
OTHER DATA:
EBITDA (4)................ $(3,015) $ (1,734) $ 00(187) $ (7,068) $(30,190) $(29,754)
Capital expenditures(5) $ 7,608 $ 12,599 $ 20,685 $ 54,921 $ 88,495 $ 86,197
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(6)............. - - - - - -
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------------
ACTUAL PRO FORMA
1995 1996/(2)/ 1996/(1)/
--------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3):
Revenue:
Telecom services........ $ 12,833 $ 31,148 $ 31,148
Network services........ 28,789 29,691 29,691
Satellite services...... 8,934 10,504 8,026
Other................... - - -
-------- ---------- ----------
Total revenue......... 50,556 71,343 68,865
Cost of services.......... 33,253 49,824 48,128
Selling, general and
administrative expenses.. 27,485 40,239 38,746
Depreciation and
amortization............. 7,107 12,361 11,708
-------- ---------- ----------
Operating expenses........ 67,845 102,424 98,582
Operating loss............ (17,289) (31,081) (29,717)
Interest expense.......... (6,197) (29,432) (60,081)
Other income (expense),
net...................... 456 (1,070) (22,970)
-------- ---------- ----------
Loss before income taxes
and cumulative effect of
change in accounting..... (23,030) (61,583) (112,768)
Income tax benefit
(expense)................ (11) 4,482 4,482
Cumulative effect of
change in accounting(2).. - (3,453) (3,453)
-------- ---------- ----------
Net loss.................. (23,041) (60,554) (111,739)
Preferred stock dividend.. - (1,027) (1,027)
-------- ---------- ----------
Net loss attributable to
common shareholders...... $(23,041) $ (61,581) $ (112,766)
======== ========== ==========
Loss per common share..... $(1.01) $(2.42) $(4.43)
======== ========== ==========
Weighted average number
of common shares
outstanding.............. 22,746 25,471 25,471
======== ========== ==========
OTHER DATA:
EBITDA(4)................. $(10,182) $ (18,720) $ (18,009)
======== ========== ==========
Capital expenditures(5)... $ 49,887 $ 102,285 $ 101,859
======== ========== ==========
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(6)............. - - -
======== ========== ==========
</TABLE>
(Accompanying notes are on the following page)
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<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31, 1996
------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(1)
-------- -------- ------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............. $ (282) $ (392) $ 7,990 $ (8,563) $249,089 $152,936 $527,352
Total assets........................... 34,550 54,417 95,196 201,991 583,553 556,567 964,175
Notes payable and current
portion of long-term debt and
capital lease obligations............. 459 991 7,657 23,118 27,310 9,199 9,199
Long-term debt and capital
lease obligations, less current
portion............................... 7,602 15,565 37,116 104,461 405,535 459,096 759,125
Redeemable preferred stock of
subsidiary ($30.0 million
liquidation value).................... - - - - 14,986 19,571 -
Preferred stock of ICG (redeemable)... - - - - - - 144,380
Shareholders' equity................... 14,733 21,826 34,753 39,782 91,885 35,513 8,283
</TABLE>
- ------------------
(1) Pro Forma Statement of Operations Data reflects (i) the sale of the
Company's teleports in Atlanta, Denver, Los Angeles and New Jersey, (ii) the
receipt of the net proceeds from the Private Placement and interest expense
on $300.0 million gross proceeds of the 12 1/2% Notes and preferred stock
dividends on $150.0 million liquidation preference of Preferred Stock,
without giving effect to any increased interest income on available cash or
the capitalization of any interest associated with construction in progress,
(iii) the redemption of $30.0 million of redeemable preferred stock, payment
of accrued dividends and the related $13.1 million charge for the excess of
the redemption price as of April 30, 1996 over the carrying amount, (iv) the
repurchase of 916,666 redeemable warrants and (v) the payment with respect
to consents to amendments to the 13 1/2% Notes Indenture to permit the
Private Placement, as if such events had occurred at the beginning of the
periods presented. Pro Forma Balance Sheet Data reflects the items in (ii)
through (v) above, as if such events had occurred on the balance sheet date.
The sale of the Company's teleports is reflected in the actual balance sheet
data at March 31, 1996. The charges described in items (iii) and (v) will be
reflected in the Company's results for the three months ended June 30,
1996.
(2) Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts to recognize revenue as services
are provided. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Accounting Matters-Accounting Changes."
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 the six
months ended March 31, 1996 reflect a change of $3.5 million relating to
the cumulative effect of this change in accounting as of October 1, 1995.
The effect of this change in accounting in fiscal year 1996 was to
decrease loss before cumulative effect of change in accounting by
approximately $22,000 for the six months ended March 31, 1996. If the new
revenue recognition method had been applied retroactively, telecom services
revenue would have decreased by $0.0 million, $0.3 million, $2.0 million,
$0.5 million and $0.7 million for fiscal 1991, 1992, 1993, 1994 and 1995,
respectively, and $0.6 million for the six months ended March 31,
1995.
(3) Historical Statement of Operations Data has been restated for all years
presented prior to October 1, 1993, due to the retroactive application of
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") as of October 1, 1993.
(4) consists of operating loss plus depreciation and amortization. is provided
because it is a measure commonly used in the telecommunications industry.
It is presented to enhance an understanding of the Company's operating
results and is not intended to represent cash flow or results of operations
in accordance with generally accepted accounting principles for the periods
indicated. See the Company's Consolidated Financial Statements contained
elsewhere in this Proxy Statement -- Prospectus.
(5) Capital expenditures include assets acquired through the issuance of debt,
capital leases or warrants.
(6) For the fiscal years ended September 30, 1991, 1992, 1993, 1994 and 1995
and the six months ended March 31, 1995 and 1996, earnings were
insufficient to cover combined fixed charges and preferred stock dividends
by $4.5 million, $3.8 million, $6.2 million, $24.8 million, $77.3 million,
$23.0 million and $63.0 million, respectively. On a pro forma basis giving
effect to the Private Placement, the redemption of $30.0 million of
redeemable preferred stock and the sale of four of the Company's teleports
as if they occurred on October 1, 1994 and without giving effect to any
increased interest income on additional available cash or the
capitalization of any interest associated with construction in progress,
earnings would have been insufficient to cover fixed charges by $157.9
million and $113.8 million for fiscal 1995 and the six months ended March
31, 1996, respectively. Combined fixed charges and preferred stock
dividends consist of interest charges and amortization of debt expense and
discount or premium related to indebtedness, whether expensed or
capitalized, that portion of rental expense the Company believes to be
representative of interest (i.e., one-third of rental expense) and
preferred stock dividends.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements. For a
discussion of important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, increased Satellite Services
revenue from the cruise ship and U.S. Navy telephone services business and
actions of competitors and regulatory authorities, that could cause actual
results to differ materially from the forward-looking statements, see "Risk
Factors."
COMPANY OVERVIEW
The Company provides Telecom Services, Network Services and Satellite
Services. Telecom Services consist of the Company's CLEC operations. Network
Services consist of information technology services, network design and
installation and support of network systems. Satellite Services consist of
domestic and international satellite transmission services. The Company
commenced the design and construction of its first fiber optic network in
Denver in 1990, which became operational to a limited extent in May 1991. The
Company's rapid growth since 1990 is the result of the initial installation,
acquisition and subsequent expansion of its networks, the acquisition and
growth of its network systems integration business and growth in satellite
services. During 1992 and 1993, the Company continued to build out its Denver
network. The Company began construction of its fiber optic network in Phoenix
during 1993 and expanded this network throughout 1994. During 1994, the
Company commenced construction of networks in Akron, Boulder, Colorado
Springs, Columbus and Nashville. The Company also acquired operating networks
serving Charlotte, Cleveland, Dayton, Louisville, Melbourne, Sacramento and 17
cities with populations in excess of 100,000 in the Los Angeles and San
Francisco metropolitan areas. In addition, in 1995 the Company commenced
development of fiber optic networks in Birmingham and Greensboro/Winston-
Salem. The Company intends to sell its networks in Melbourne and Phoenix.
Since initiation of competitive access services, the Company has experienced
declining access rates and increasing price competition which have been more
than offset by increasing network usage. The Company expects to continue to
experience declining access rates for the foreseeable future.
The Company first began providing Satellite Services in 1990 when it
acquired its Denver teleport facility, which has since been sold. Growth in
Satellite Services revenue has resulted principally from increased
transmissions of video programming, the acquisitions of satellite teleports in
the Los Angeles, Atlanta and New York metropolitan areas in 1994 (three of
which have been sold), the acquisition of Nova-Net Communications, Inc.
("Nova-Net") in 1994 and the acquisition of a 64% interest in Maritime
Telecommunication Network, Inc. ("MTN") in January 1995. The Company
acquired a 51% interest in FOTI, which accounts for most of the Company's
Network Services, in May 1992 and the remaining 49% in January 1996. As a
result of the significant lag time between commencement of network development
and generation of appreciable related Telecom Services revenue, the majority
of the Company's revenue historically has been derived from Network Services.
However, the Company's Network Services revenue (as well as Satellite Services
revenue) will continue to represent a diminishing percentage of the Company's
consolidated revenue as the Company continues to emphasize its Telecom
Services.
In the third and fourth quarters of fiscal 1994 and throughout fiscal 1995,
the Company launched its switched services strategy by acquiring 13 high
capacity digital switches. The Company has installed switches in Birmingham,
Charlotte, Cleveland, Columbus, Denver, Irvine, Los Angeles, Louisville,
Melbourne, Nashville, Oakland, Phoenix and Sacramento. The Company financed
the acquisition of 12 of the switches pursuant to capital leases totaling
$24.5 million. The Company began generating switched services revenue in the
fourth quarter of fiscal 1994 and expects revenue from switched services to
increase. The Company's switched minutes of use have increased from 10
million minutes in the first quarter of fiscal 1995 to 362 million in the
second quarter of fiscal 1996.
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In November 1995, the Company entered into a long-term agreement with CPS to
license half of the capacity on a 300-mile fiber optic network (60 of which
currently exist) in greater San Antonio. It is anticipated that the network
will be able to service 120 buildings when completed in approximately two
years. During construction, the Company will be able to provide services to
completed segments of the network.
The Company recently invested $10.0 million to acquire a 60% interest in,
and became the general partner of, ICG Telecom of San Diego, a partnership
whose other partners are Linkatel Communications, Inc. and Copley Press, the
publisher of The San Diego Union Tribune. ICG Telecom of San Diego operates
a 50-mile fiber optic network and is constructing an additional 110 miles of
fiber in metropolitan San Diego. In February 1996, the Company entered into a
long-term agreement with WorldCom under which the Company will pay
approximately $8.8 million for the right to use fiber along a 330-mile fiber
optic network in Ohio. The network, which is being constructed by WorldCom in
conjunction with the Company, will provide a direct fiber link between the
Company's existing networks in Akron, Cleveland, Columbus and Dayton and its
new network under development in Cincinnati.
In March 1996, the Company and SCE jointly filed an agreement with the CPUC
under which the Company will license 1,258 miles of fiber optic cable in
Southern California. The agreement allows the Company to utilize SCE's
facilities to install up to 500 additional miles of fiber optic cable. The
Company has identified over 1,300 buildings which will be targeted by the
Company for connection to the network. Also, in March 1996, the Company
entered into a national contract with AT&T under which the Company will
provide special and switched access services to AT&T on a non-exclusive basis.
The Company and AT&T initially have identified 12 MSAs in which the Company
will provide services to AT&T and are in discussions with respect to seven
additional MSAs in which the Company may provide services. Under the
agreement, the Company will work with AT&T to provide special and switched
access services in the Company's other markets and new markets which the
Company may enter. In March 1996, the Company entered into a long-term
license agreement with a subsidiary of Southern and Alabama Power, for the
right to use 22 miles of fiber and 122 miles of additional Alabama Power
rights of way and facilities to reach the three major business centers in
Birmingham. See "Risk Factors--Competition."
The Company expects to continue to experience negative operating margins
from the provision of switched services while its networks are in the
development and construction phases, during which the Company relies on LEC
networks to carry a significant portion of its customers' traffic. The
Company expects to realize improved operating margins for switched services on
a given network when (i) sales efforts result in increased volumes of traffic
carried on the Company's own network instead of LEC facilities, and (ii)
higher margin enhanced services are provided to customers on the network. In
addition, the Company believes that the unbundling of LEC services and the
implementation of local telephone number portability, which are mandated by
the Telecommunications Act, will reduce the Company's costs of providing
switched services and facilitate the marketing of such services. However, the
Company's switched services strategy has not yet been profitable and may not
become profitable due to, among other factors, lack of customer demand,
competition from other CLECs and pricing pressure from the LECs. In addition,
in order to fully implement its switched services strategy, the Company must
make significant capital expenditures to provide additional switching
capacity, network infrastructure and electronic components. The Company has
limited experience providing switched services and there can be no assurance
that the Company will be able to successfully implement its switched services
strategy. See "Risk Factors--Risks Related to Switched Services Strategy" and
"--Competition" and "Business--Telecom Services."
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before any revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flow and significant losses while it
implements its switched services strategy, expands its operations and
establishes a sufficient revenue-generating customer base. There can be no
assurance that the Company will be able to establish such a customer base.
When constructing and relying principally on its own facilities, the Company
has experienced a period of up to 18 months from initial design of a network
to revenue generation for that network. However, based upon its experience
with using leased LEC facilities to provide initial customer service and the
Company's new agreements to use utilities' existing fiber, the
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Company anticipates accelerating initial revenue generation to within six to
nine months after commencing network design.
The Company estimates that a new network will generate positive EBITDA
(before corporate allocations) within 6 to 12 months after initial revenue
generation. There can be no assurance that this estimate will be realized in
any particular market. When describing a particular business operation,
certain corporate expenses not attributable to the business operation (e.g.,
corporate overhead and related expenses) are not directly allocated to the
specific business operation, and therefore EBITDA for a particular business
operation is referred to as "EBITDA (before corporate allocations)." The
Company allocated corporate overhead and related expenses of approximately
$25.3 million to its Telecom Services in fiscal 1995 compared to $8.5 million
in fiscal 1994, and $16.0 million for the six months ended March 31, 1996
compared to $9.6 million for the six months ended March 31, 1995.
The Company has expanded the number of Telecom Services markets it serves
from six markets at the end of fiscal 1993 to 37 markets at March 31, 1996.
The Company's Los Angeles and San Francisco metropolitan area networks,
acquired in April 1994 and serving 17 cities with populations in excess of
100,000, accounted for approximately 38% and 44% of the Company's Telecom
Services revenue for fiscal 1995 and the six months ended March 31, 1996,
respectively. The Company's Denver network accounted for approximately 30% and
22% of the Company's Telecom Services revenue for fiscal 1995 and the six
months ended March 31, 1996, respectively. The Company's Denver network
generated initial revenue in the fourth quarter of fiscal 1991 and generated
positive EBITDA (before corporate allocations) in the fourth quarter of fiscal
1992. The Company's networks in Cleveland and Colorado Springs generated
positive EBITDA (before corporate allocations) in fiscal 1994. The Boulder
network, which the Company began to construct in 1994, generated positive
EBITDA (before corporate allocations) in the first fiscal quarter of 1995. The
Phoenix network, which the Company intends to sell, generated initial revenue
in the first quarter of fiscal 1994 and has not generated positive EBITDA. The
Company's Louisville and Melbourne networks, acquired in April and July of
1994, respectively, the Nashville network, which the Company began to
construct in 1994, and the Company's Akron and Columbus networks, which became
operational in fiscal 1995, have not generated positive EBITDA. The Company
intends to sell its Melbourne network. The Company has commenced operation of
a fiber optic network in Birmingham and is developing fiber optic networks in
Greensboro and Winston-Salem. The Los Angeles metropolitan area network
generated positive EBITDA (before corporate allocations) prior to its
acquisition in fiscal 1994. The network reported negative EBITDA for fiscal
1995 and for the first two quarters of fiscal 1996 as a result of expenses
associated with the introduction of switched services. The San Francisco
metropolitan area network first generated positive EBITDA (before corporate
allocations) in the fourth quarter of fiscal 1993, which was prior to its
acquisition by the Company. The Charlotte network generated positive EBITDA
(before corporate allocations) in fiscal 1994. The Charlotte network reported
negative EBITDA in the second and third quarters of fiscal 1995 as a result of
expenses incurred in connection with the introduction of switched services.
The Charlotte network again generated positive EBITDA (before corporate
allocations) in the fourth quarter of fiscal 1995 and first two quarters of
fiscal 1996. The Company's network in Dayton generated positive EBITDA (before
corporate allocations) in the first quarter of fiscal 1995.
The Board of Directors of IntelCom has adopted a plan under which IntelCom
will become a subsidiary of a new publicly traded United States corporation.
Substantially all of the Company's operations (which are conducted by ICG's
subsidiaries) are located in the United States. In addition, the Company
views the United States as its primary source for raising capital in the
future and the Company believes that the United States incorporation will
facilitate access to such markets and increase its flexibility to meet its
future financing needs. Also, certain aspects of the Company's operations are
regulated by the FCC, which imposes restrictions on the interests a foreign
company may hold in telecommunications businesses in the United States.
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RESULTS OF OPERATIONS
The following table provides a breakdown of revenue and cost of services for
Telecom Services, Network Services and Satellite Services and certain other
financial data for the Company for the periods indicated. Revenue and cost of
services for Satellite Services will decrease substantially as a result of the
sale of four of the Company's teleports in March 1996. See "Business--
Satellite Services." The table also shows certain revenue, expenses,
operating loss and EBITDA as a percentage of the Company's total revenue.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30 SIX MONTHS ENDED MARCH 31,
---------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996(1)
------------- -------------- ---------------- ------------ ---------------
$ % $ % $ % $ % $ %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services...... $04,803 17 $014,854 25 $0 32,330 29 $12,833 25 $031,148 44
Network services...... 21,006 71 36,019 61 58,778 53 28,789 57 29,691 42
Satellite services.... 3,520 12 8,121 14 20,502 18 8,934 18 10,504 15
Other................. 147 * 118 * -- -- -- -- -- --
------- --- -------- --- --------- --- ------- --- -------- ---
Total revenue........... 29,476 100 59,112 100 111,610 100 50,556 100 71,343 100
Cost of services
Telecom services...... 1,089 4,475 19,757 5,715 21,619
Network services...... 16,150 26,334 45,928 23,199 23,056
Satellite services.... 1,607 4,697 11,093 4,339 5,149
Other................ 115 000 84 000 -- 000 -- 000 -- 000
------- --- -------- --- --------- --- ------- --- -------- ---
Total cost of services.. 18,961 64 35,590 60 76,778 69 33,253 66 49,824 70
Selling, general &
administrative......... 10,702 36 30,590 52 65,022 58 27,485 54 40,239 56
Depreciation and
amortization.......... 3,473 12 8,198 14 16,624 15 7,107 14 12,361 17
------- --- -------- --- --------- --- ------- --- -------- ---
Operating loss.......... (3,660) (12) (15,266) (26) (46,814) (42) (17,289) (34) (31,081) (43)
EBITDA(2)............... (187) (1) (7,068) (12) (30,190) (27) (10,182) (20) (18,720) (26)
Supplemental Pro
Forma Data (1):
Telecom services
revenue............... 2,819 10 14,395 25 31,617 29 12,193 24 31,148 44
Total revenue......... 27,492 100 58,653 100 110,897 100 49,916 100 71,343 100
Operating loss........ (5,644) (21) (15,725) (27) (47,527) (43) (17,929) (36) (31,081) (43)
EBITDA(2)............. (2,171) (8) (7,527) (13) (30,903) (28) (10,822) (22) (18,720) (26)
</TABLE>
* Less than 0.5%
(1)Effective January 1, 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "--Accounting Matters--Accounting Changes." 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 is presenting the pro forma effects on prior periods
assuming the change had been applied retroactively. See "Selected Financial
Data."
(2) See note 4 under Selected Financial Data for the definition of EBITDA.
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SIX MONTHS ENDED MARCH 31, 1996, COMPARED TO SIX MONTHS ENDED MARCH 31,
1995
The following information reflects the results of operations for the six
months ended March 31, 1996, compared to the pro forma results of operations
for the six months ended March 31, 1995, assuming the change in accounting for
long-term telecom services contracts described in "-- Accounting Matters --
Accounting Changes" had been applied retroactively.
Revenue. Revenue for the six months ended March 31, 1996 increased
$21.4 million, or 42.9%, from the six months ended March 31, 1995.
The increase in total revenue reflects continued growth in Telecom Services,
Network Services and Satellite Services operations. Telecom Services revenue
increased 155.4% to $31.1 million due to an increase in network usage for
both special and switched access services, offset in part by a decline in
average access rates. The number of operational switches increased from six
as of March 31, 1995, to 13 as of March 31, 1996. Switched minutes
of use increased from 42 million during the six months ended March 31,
1995, to 597 million for the six months ended March 31, 1996. Network
usage as reflected in VGEs increased 77.9% from 287,167 VGEs on March 31,
1995 to 510,755 VGEs on March 31, 1996. On March 31, 1995, the Company had
251 on-net buildings connected to its networks compared to 327 on-net
buildings connected on March 31, 1996. Network Services revenue increased
3.1% to $29.7 million primarily due to additional projects from existing
customers and increased business networking requirements. Satellite Services
revenue increased 17.6% to $10.5 million for the six months ended
March 31, 1996. The increase resulted principally from the acquisition of
MTN in January 1995 and the increased volume of uplink hours for the
three months ended December 31, 1995, offset by the decrease resulting from
the sale of four of the Company's teleports.
Cost of Services. Total cost of services for the six months ended March
31, 1996, increased $16.6 million, or 49.8%, from the six months ended
March 31, 1995. Telecom cost of services increased from $5.7 million,
or 46.9%, of Telecom Services revenue for the six months ended March 31,
1995, to $21.6 million, or 69.4%, of Telecom Services revenue for the
six months ended March 31, 1996. Telecom cost of services consists of
payments to LECs for the use of network facilities to support off-net and
switched services, right of way fees and other costs. The increase in
absolute dollars is attributable to the increase in switched services and the
expansion in off-net special access service offerings. The increase in the
cost of services as a percentage of total revenue is due primarily to the
increase in switched services revenues, which currently generate lower
margins than special access services. The Company expects that the Telecom
Services ratio of cost of services to revenue will improve. The
expectation described in the foregoing forward-looking statement is dependent
upon, among other things, the Company carrying a greater proportion of traffic
on its facilities, providing a sufficient volume of higher margin enhanced
services, including local dial tone and obtaining the right to use unbundled
LEC facilities on satisfactory terms, any or all of which may not occur.
Network cost of services decreased 0.6% to $23.1 million and also
decreased as a percentage of Network Services revenue from 80.6% for the six
months ended March 31, 1995, to 77.7% for the six months ended March 31, 1996,
due to an improved job bidding process and a more selective job acceptance
process, whereby more acceptable gross margins have been obtained. Network
cost of services includes the cost of equipment sold, direct hourly labor
and other direct project costs. Satellite cost of services increased to
$5.1 million for the six months ended March 31, 1996, from $4.3
million for the six months ended March 31, 1995. Satellite cost of
services as a percentage of revenue remained relatively constant at 49.0% at
March 31, 1996, compared to 48.6% at March 31, 1995. The increase in absolute
dollars was attributable to an increased volume of Satellite Services business
primarily due to the increase in maritime services revenue. Satellite cost
of services consists of satellite transponder lease costs (for the prior
period and for the three months ended December 31, 1995), MTN transponder
costs, VSAT network costs and costs of VSAT equipment sold. Revenue from
teleport operations historically have yielded lower gross margins than revenue
from the cruise ship and U.S. Navy telephone services business of MTN. Gross
margins for Satellite Services should improve as a result of the sale of the
teleports. The expectation described in the foregoing forward-looking
statement is dependent upon, among other things, increased Satellite Services
revenue from the cruise ship and U.S. Navy telephone services business, a lack
of increased
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competition in this market, the renewal of the Company's experimental license
in February 1997 and a lack of new technology which potentially could render
the Company's leased satellite facilities obsolete.
Selling, General and Administrative Expense. SG&A expense for the six
months ended March 31, 1996, increased $12.8 million, or 46.4%,
compared to the six months ended March 31, 1995. 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
engineering, operations, management information systems, marketing and sales
staff dedicated to the expansion of the networks and implementation of the
Company's switched services strategy. SG&A expense as a percentage of total
revenue was 56.4% for the six months ended March 31, 1996, compared
to 55.1% for the comparable period in 1995. There is typically a period
of higher administrative and marketing expense prior to the generation of
appreciable revenue from newly acquired or developed networks. SG&A expense
for Network Services increased due to expansion into new markets and increased
engineering, marketing and sales staff to support increased growth in network
systems installation contracts. Satellite Services SG&A expense increased
primarily due to the acquisition of MTN.
Depreciation and Amortization. Depreciation and amortization increased
$5.3 million, or 73.9%, for the six months ended March 31, 1996, compared to
the six months ended March 31, 1995. Depreciation of fixed assets increased
by $2.3 million as a result of the shortening of estimated depreciable lives
discussed in "-- Accounting Matters," and also increased as a result of the
increase in depreciable fixed assets as a result of the continued expansion of
competitive access networks. The increase in depreciation expense was offset
slightly by the decrease in depreciable assets resulting from the sale of four
of the Company's teleports. The Company reports high levels of depreciation
relative to revenues 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.
Interest Expense. Interest expense increased by $23.2 million, from
$6.2 million for the six months ended March 31, 1995, to $29.4 million
for the six months ended March 31, 1996. The $29.4 million of
interest expense included $24.6 million of non-cash interest. This
increase was attributable to an increase in long-term debt, primarily the 13
1/2% Notes issued in the fourth quarter of fiscal 1995 and an increase in
capitalized lease obligations to finance Telecom Services and Satellite
Services equipment and the expansion of the Company's competitive access
networks.
Interest Income. Interest income increased $5.3 million, from $1.2
million for the six months ended March 31, 1995, to $6.5 million for
the six months ended March 31, 1996. The increase is attributable to
the increase in cash from the proceeds of the issuance of 13 1/2% Notes in
August 1995.
Share of losses in joint venture. Share of losses in joint venture
increased $0.5 million or 127.5% from the six months ended March 31, 1995, to
$0.8 million for the six months ended March 31, 1996. This increase is due to
increased losses of the Phoenix network joint venture in which the Company
holds a 50% equity interest. The losses of the joint venture increased due to
continued expansion and implementation of switched services.
Other, net. Other, net increased $1.7 million or 185.7% for the six months
ended March 31, 1996, from $0.9 million for the six months ended March 31,
1995. The majority of the increase is due to a $0.9 million loss on the sale
of four of the Company's teleports and certain other satellite assets and a
$0.5 million write-off of certain assets.
Minority interest in share of losses, accretion and preferred dividends.
Minority interest in share of losses, accretion and preferred dividends
increased $4.7 million from a benefit of $0.5 million for the six months ended
March 31, 1995, to an expense of approximately $4.2 million for the six months
ended March 31, 1996. The increase is due to the accretion of warrants and
issue costs associated with the issuance of the Redeemable Preferred Stock and
accrual of the preferred stock dividend which, together, accounted for $4.6
million.
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Income Tax Benefit. Income tax benefit for the six months ended March 31,
1996 was $4.5 million compared to an $11,000 income tax expense for the six
months ended March 31, 1995. The income tax benefit is due to an adjustment
to the deferred tax liability as a result of the change in estimated
depreciable lives.
Cumulative effect of change in accounting for revenue from long-term telecom
services contracts. The increase in cumulative effect of change in accounting
for revenue from long-term telecom services contracts is due to the change in
accounting as described in "-- Accounting Matters -- Accounting Changes."
Preferred stock dividend. The $1.0 million preferred stock dividend for the
six months ended March 31, 1996 represents the excess redemption price over
the stated value of Convertible Series B Preferred Stock (the "Series B
Preferred Stock"). There was no Series B Preferred Stock outstanding during
the six months ended March 31, 1995.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
Revenue. Revenue for the year ended September 30, 1995 increased $52.5
million, or 89%, from the year ended September 30, 1994. The increase in
total revenue reflects continued growth in Telecom Services, Network Services
and Satellite Services operations. Telecom Services revenue increased 118% to
$32.3 million. The increase in Telecom Services revenue reflects an increase
in network usage which was partially offset by a decline in average access
rates and the acquisition in April 1994 of networks in the Los Angeles and San
Francisco metropolitan areas which were included for the full year in fiscal
1995. Network usage as reflected in VGEs increased 92% from 224,072 VGEs on
September 30, 1994 to 430,535 VGEs on September 30, 1995. On September 30,
1995, the Company had 280 on-net buildings connected to its networks compared
to 226 on-net buildings connected on September 30, 1994. Network Services
revenue increased 63% to $58.8 million. The increase in Network Services
revenue resulted primarily from the acquisition of DataCom Integrated Systems
Corporation ("DISC"), which was included for the full year in fiscal 1995 and
which subsequently merged into Network Services, as well as from new network
system installations. The increase in network system installations resulted
from additional projects from existing customers and an increase in general
demand for local area networks due to increased business networking
requirements. Satellite Services revenue increased 152% to $20.5 million for
the year ended September 30, 1995. The increase resulted principally from the
acquisitions of Nova-Net, MTN and teleports located in the metropolitan
Atlanta and New York areas which generated $3.9 million, $7.5 million and $4.4
million in revenue, respectively, for the year ended September 30, 1995.
Satellite Services revenue for the fiscal year ended September 30, 1995, as
adjusted to reflect the sale of four satellite teleports of the Company, was
$11.4 million. Satellite Services increased uplink hours by 188% from
approximately 49,166 hours for the year ended September 30, 1994, to
approximately 141,736 hours for the year ended September 30, 1995, primarily
due to acquisitions and growth in transmission of video programming. These
uplink hours related solely to the four teleports that were recently sold.
Cost of Services. Total cost of services for the year ended September 30,
1995 increased $41.2 million, or 116%, from the year ended September 30, 1994.
Telecom Services cost of services increased from $4.5 million, or 30% of
Telecom Services revenue for the year ended September 30, 1994, to $19.8
million, or 61% of Telecom Services revenue for the year ended September 30,
1995. Telecom Services cost of services increased in absolute terms as well
as a percentage of revenue due to an expansion in off-net service offerings,
for which the Company leases network facilities from local telephone
companies, and the implementation of switched services, which generated
negative margins. Network Services cost of services increased 74% to $45.9
million primarily due to an increased volume of Network Services business.
Network Services cost of services as a percentage of revenue increased from
73% for the year ended September 30, 1994 to 78% for the year ended September
30, 1995 due to rapid expansion and the inclusion in Network Services cost of
services of project managers and operations personnel directly associated with
network systems projects in fiscal 1995, which were treated as SG&A expenses
in 1994. Network Services cost of services includes the cost of equipment
sold, direct hourly labor and other direct project costs. Satellite Services
cost of services increased to $11.1 million, or 54% of Satellite Services
revenue,
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for the year ended September 30, 1995, from $4.7 million, or 58% of Satellite
Services revenue, for the year ended September 30, 1994. This increase in
absolute terms was attributable to an increased volume of Satellite Services
business primarily due to the acquisition of Nova-Net and MTN, and increased
usage of leased satellite transponders. The decrease in cost of services as a
percentage of revenue is attributable to the higher margins associated with
MTN, which represented a larger portion of Satellite Services revenue in
fiscal 1995, as opposed to video and data transmission services.
Selling, General and Administrative Expense. SG&A expense for the year
ended September 30, 1995 increased $34 million, or 113%, compared to the year
ended September 30, 1994. This increase was principally due to the continued
rapid expansion of the Company's networks, including the acquisition of
networks in the Los Angeles and San Francisco metropolitan areas during the
third quarter of fiscal 1994 and related significant additions to the
Company's engineering, operations, management information systems, marketing
and sales staff dedicated to the expansion of the networks and implementation
of the Company's switched services strategy. SG&A expense as a percentage of
total revenue was 58% for the year ended September 30, 1995 compared to 52%
for the comparable period in 1994. There is typically a period of higher
administrative and marketing expense prior to the generation of appreciable
revenue from newly acquired or developed networks. SG&A expense for Network
Services increased due to increased engineering, marketing and sales staff to
support increased growth in network systems installations. Satellite Services
SG&A increased due to the acquisitions of teleports in metropolitan Atlanta
and New York and the acquisition of the Company's VSAT operations during the
third quarter of fiscal 1994. In addition, the Company acquired MTN at the
beginning of the second quarter of fiscal 1995.
Depreciation and Amortization. Depreciation and amortization increased $8.4
million, or 103%, for the year ended September 30, 1995 compared to the year
ended September 30, 1994. This increase resulted from an increased investment
in depreciable fixed assets as a result of the acquisition of networks in new
cities and the expansion of existing networks and Satellite Services
facilities.
Interest Expense. Interest expense increased $15.9 million from $8.5
million for the year ended September 30, 1994, to $24.4 million for the year
ended September 30, 1995. The $24.4 million of interest expense included
$15.1 million of non-cash interest. This increase was attributable to an
increase in capitalized lease obligations to finance Telecom Services and
Satellite Services equipment and an increase in long-term debt, primarily the
13 1/2% Notes issued in the fourth quarter of fiscal 1995, to finance the
expansion of the Company's networks.
Interest Income. Interest income increased $2.4 million, or approximately
133%, from the year ended September 30, 1994. The increase is attributable to
the increase in cash from the proceeds of the issuance of the 13 1/2% Notes in
August 1995.
Provisions for Impairment of Goodwill and Investment. The $7.0 million in
provisions for impairment of goodwill and investment for the year ended
September 30, 1995 is a result of a $5.0 million write-down in the goodwill
associated with the acquisition of Nova-Net and a $2.0 million allowance for
an investment. The write-downs and allowance were a result of management's
estimate of the realizable value of the assets as of September 30, 1995.
Share of Losses in Joint Venture. The Company has a 50% equity interest in
a joint venture operating the Phoenix network. Using the equity accounting
method, the Company's share of losses in the Phoenix network joint venture was
approximately $0.7 million for the year ended September 30, 1995. The Company
began recording losses from the joint venture in the second quarter of fiscal
1994. The loss from joint venture recorded in fiscal 1994 includes $0.4
million for losses incurred prior to fiscal 1994.
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FISCAL YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1993
Revenue. Revenue for the year ended September 30, 1994 increased
approximately $29.6 million, or approximately 101%, from the year ended
September 30, 1993. The increase in total revenue reflects continued growth
in the Telecom Services, Network Services and Satellite Services operations.
Telecom Services revenue increased 209% to $14.9 million. The increase in
Telecom Services revenue reflects an increase in network usage, which was
partially offset by a decline in average access rates, and acquisitions.
Network usage as reflected in VGEs increased 348%, from 50,044 VGEs on
September 30, 1993, to 224,072 VGEs on September 30, 1994. On September 30,
1994, the Company had 226 on-net buildings connected to its networks compared
to 97 on-net buildings connected as of September 30, 1993. Network Services
revenue increased 71% to $36.0 million. The increase in Network Services
revenue resulted from new network systems installations, the acquisition of
DISC and the expansion into two new markets. The increase in network systems
builds resulted from additional projects from existing and new customers and
an increase in general demand for local area networks due to increased
business networking requirements. Satellite Services revenue increased 131%
to $8.1 million, principally as a result of the acquisition of Nova-Net, which
generated $2.2 million in revenue, and a 146% increase in uplink hours from
approximately 19,900 hours for fiscal 1993 to approximately 49,200 hours for
fiscal 1994, primarily due to growth in transmission of video programming and
the addition and acquisition of satellite teleports.
Cost of Services. Total cost of services in fiscal 1994 increased $16.6
million, or 88%, compared to fiscal 1993. Cost of Telecom Services increased
from $1.1 million, or 23% of Telecom Services revenue in fiscal 1993, to $4.5
million, or 30% of Telecom Services revenue in fiscal 1994. Most of the
increase in cost of Telecom Services was attributable to increased volume of
business and expansion in off-net service offerings, for which the Company
leases network facilities from local telephone companies. Network Services
cost of services increased 63% to $26.3 million primarily due to increased
volume of network systems integration business. Network Services cost of
service as a percentage of Network Services revenue decreased from 77% in
fiscal 1993 to 73% in fiscal 1994 due to a greater proportion of higher margin
business. Satellite Services cost of services increased to $4.7 million, or
58% of Satellite Services revenue in fiscal 1994, from $1.6 million, or 46% of
Satellite Services revenue in fiscal 1993. This increase was primarily due to
the acquisition of Nova-Net, which experiences lower margins than other
Satellite Services, and increased usage of leased satellite transponders.
Selling, General and Administrative Expense. SG&A expense for fiscal 1994
increased $19.9 million, or 186%, compared to fiscal 1993. SG&A expense as a
percentage of total revenue was 52% for fiscal 1994, compared to 36% for
fiscal 1993. These increases were principally due to the continued rapid
expansion of the Company's networks, including the acquisition of three
operating networks during fiscal 1994, and related significant additions to
the Company's engineering, operations, management information systems,
marketing and sales staff dedicated to the expansion of these networks and
implementation of the Company's switched services strategy.
Depreciation and Amortization. Depreciation and amortization increased $4.7
million in fiscal 1994, or 136%, compared to fiscal 1993. This increase
resulted from an increased investment in depreciable fixed assets as a result
of the buildout of the expansion of the Company's Denver network, the
acquisition of networks in new cities, the expansion of networks in Colorado
Springs, Charlotte, Cleveland, Dayton, Louisville and Nashville, and the
expansion of the Company's Satellite Services facilities.
Interest Expense. Interest expense increased $6.0 million to $8.5 million
for fiscal 1994, of which $5.5 million represented non-cash interest. This
increase was directly attributable to an increase in the Company's outstanding
long-term debt that was issued primarily to finance the expansion of the
Company's networks. The Company also incurred interest expense on capitalized
lease obligations that finance Telecom and Satellite Services equipment.
Share of Losses in Joint Venture. Using the equity accounting method, the
Company's share of losses for the Phoenix network joint venture was
approximately $1.5 million for fiscal 1994. At September 30, 1994, the joint
venture had cumulative net losses of approximately $3.0 million.
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91
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QUARTERLY RESULTS
The following table presents selected unaudited quarterly operating results
for the first quarter of fiscal 1994 through the second quarter of fiscal
1996. 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 Proxy Statement - Prospectus. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods. IntelCom's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another.
<TABLE>
<CAPTION>
FISCAL 1994
----------------------------------------
1ST 2ND 3RD 4TH
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Telecom services....... $ 1,973 $ 2,970 $ 4,780 $ 5,131
Network services....... 6,730 7,543 8,616 13,130
Satellite services..... 1,054 1,095 2,549 3,423
Other................. 45 46 41 (14)
Total revenue........ 9,802 11,654 15,986 21,670
Operating loss........... (2,417) (2,186) (4,388) (6,275)
EBITDA................... (1,079) (546) (1,710) (3,733)
Net loss attributable to
common shareholders
before cumulative effect
of change in accounting. (4,058) (4,848) (6,497) (8,465)
Cumulative effect of
change in accounting(1). -- -- -- --
Net loss attributable to
common shareholders..... $(4,058) $ (4,848) $ (6,497) $ (8,465)
SUPPLEMENTAL PRO FORMA
DATA(1):
Telecom services revenue. $ 1,981 $ 3,072 $ 4,048 $ 5,294
Total revenue............ 9,810 11,756 15,254 21,833
EBITDA................... (1,071) (444) (2,442) (3,570)
Net loss attributable to
common shareholders..... (4,050) (4,746) (7,229) (8,302)
STATISTICAL DATA(2):
Telecom networks:
Cities served.......... 6 7 28 30
Buildings connected:
On-net............... 98 102 211 226
Off-net.............. -- -- 398 540
Total buildings
connected......... 98 102 609 766
Customer circuits in
service (VGEs)..... 68,859 87,589 182,120 224,072
Switches operational... -- -- -- 1
Switched minutes of use
(millions)........... -- -- -- 2
Fiber route miles(3)
Operational.......... 178 205 268 323
Under construction... -- -- -- --
Fiber strand miles(4)
Operational.......... 8,316 11,039 13,680 14,959
Under construction... -- -- -- --
Wireless miles(5)...... -- -- 606 606
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
------------------------------------------- -----------------
1ST 2ND 3RD 4TH 1ST(1) 2ND
--------- --------- --------- ---------- ----------- =========
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Revenue:
Telecom services....... $ 5,795 $ 7,039 $ 9,173 $ 10,323 $ 13,513 $ 17,635
Network services....... 15,293 13,496 14,061 15,928 15,718 13,973
Satellite services..... 3,546 5,387 5,825 5,744 6,168 4,336
Other................. -- -- -- -- -- --
Total revenue........ 24,634 25,922 29,059 31,995 35,399 35,944
Operating loss........... (6,664) (10,625) (12,443) (17,082 ) (15,258) (15,823)
EBITDA................... (3,333) (6,849) (7,846) (12,162) (10,339) (8,381)
Net loss attributable to
common shareholders
before cumulative effect
of change in accounting. (9,533) (13,508) (15,916) (37,691) (31,189) (26,939)
Cumulative effect of
change in accounting(1). -- -- -- -- (3,453) --
Net loss attributable to
common shareholders..... $ (9,533) $(13,508) $(15,916) $ (37,691) $(34,642) $(26,939)
SUPPLEMENTAL PRO FORMA
DATA(1):
Telecom services revenue. $ 5,525 $ 6,669 $ 8,835 $ 10,588 $ 13,513 $ 17,635
Total revenue............ 24,364 25,552 28,721 32,260 35,399 35,944
EBITDA................... (3,603) (7,219) (8,184) (11,897) (10,339) (8,381)
Net loss attributable to
common shareholders..... (9,803) (13,878) (16,254) (37,426) (34,642) (26,939)
STATISTICAL DATA(2):
Telecom networks:
Cities served.......... 30 32 32 32 32 37
Buildings connected:
On-net............... 244 251 273 280 304 327
Off-net.............. 628 777 978 1,095 1,235 1,401
Total buildings
connected......... 872 1,028 1,251 1,375 1,539 1,728
Customer circuits in
service (VGEs)..... 259,219 287,167 389,928 430,535 488,403 510,755
Switches operational... 2 6 12 13 13 13
Switched minutes of use
(millions)........... 10 32 97 144 235 362
Fiber route miles(3)
Operational.......... 424 466 579 627 637 780
Under construction... -- -- -- -- -- 1,921
Fiber strand miles(4)
Operational.......... 19,049 21,811 25,264 27,150 28,779 36,310
Under construction... -- -- -- -- -- 52,351
Wireless miles(5)...... 606 606 606 568 545 582
</TABLE>
(Accompanying notes are on the following page)
92
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<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1995 Fiscal 1996
----------------------------- --------------------------- -------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st(1) 2nd
--- --- --- --- --- --- --- --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Satellite Services:
Teleports................ 2 2 4 4 4 5 5 5 5 1
Teleport antennas........ 19 19 48 48 50 58 59 59 59 7
Uplink hours(6).......... 4,702 6,053 16,359 22,052 32,688 33,158 38,963 36,927 47,794 --
VSATs.................... -- -- 817 810 682 694 687 626 633 658
Maritime installations... -- -- -- -- -- 17 24 27 31 33
Maritime minutes of use
(thousands)............. -- -- -- -- -- 251 479 694 747 1,337
</TABLE>
______________________
(1) Effective January 1, 1996, the Company changed its method of accounting
for long-term telecom services contracts to recognize revenue as services
are provided. See "--Accounting Matters--Accounting Changes." As
required by generally accepted accounting principles, the Company has
restated its results for the three months ended December 31, 1995 to
reflect the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and is presenting the pro forma effects
on prior periods assuming the change had been applied retroactively.
(2) Amounts presented are for 12-month and three-month periods ended, or as
of, September 30 and December 31. The Company sold four teleports in the
quarter ended March 31, 1996.
(3) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. Fiber route miles as of December 31, 1993 are
based upon management estimates. As of March 31, 1996, the Company
had 780 fiber route miles, of which 178 fiber route miles were leased.
Fiber route miles under construction represents fiber under construction
and fiber which is expected to be operational within six months.
(4) 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. Fiber strand miles as of December 31, 1993
are based upon management estimates. As of March 31, 1996, the
Company had 36,310 fiber strand miles, of which 1,847 fiber strand miles
were leased. Fiber strand miles under construction represents fiber under
construction and fiber which is expected to be operational within six
months.
(5) Wireless miles represents the total distance of the digital microwave
paths between Company transmitters which are used in the Company's
networks.
(6) Uplink hours represents the number of hours of video, data and voice
communications transmitted by the Company's earth stations.
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 as well as the acquisition in May
1992 of FOTI and the subsequent growth of network systems integration
installations. From the third quarter of fiscal 1993 until the recent sale of
four teleports, Satellite Services also contributed to the quarterly revenue
growth.
Operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network acquisition and expansion activity.
The increased quarterly losses from the first quarter of fiscal 1994 through
the second quarter of fiscal 1996 resulted primarily from increases in
personnel and other selling, general and administrative expenses to support
the acquisition and expansion of Telecom Services networks and, since the
fourth quarter of fiscal 1994, the implementation of the Company's switched
services strategy.
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Individual operating units may experience variability in quarter to quarter
revenue due to (i) the timing and size of contract orders, (ii) the timing of
price changes and associated impact on volume and (iii) customer usage
patterns.
NET OPERATING LOSS CARRYFORWARDS AND SECTION 382 LIMITATIONS
As of September 30, 1995, the Company had net operating loss carryforwards
("NOLs") of approximately $92.0 million which expire at various times in
varying amounts through 2010. However, due to the provisions of Section 382
of the Code, the utilization of the NOLs will be limited. In addition, the
Company is also subject to certain state income tax laws, which also may limit
the utilization of NOLs for state income tax purposes.
Section 382 of the Code provides annual restrictions on 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. Investors are cautioned that
future events beyond the control of the Company could reduce or eliminate the
Company's ability to utilize the tax benefits of 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. The Company does not anticipate that the
benefits of its NOLs will expire as a result of Section 382 of the Code.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required significant capital expenditures for
development, construction, expansion and acquisitions. Significant amounts
of capital are required to be invested before revenue is generated, which
results in initial negative cash flow. See "Risk Factors--Historical and
Anticipated Future Operating Losses and Negative Cash Flow."
Cash Used By Operating Activities
The Company's operating activities used $2.8 million, $10.2 million and
$56.2 million in fiscal 1993, 1994 and 1995, respectively, and $20.2 million
and $21.6 million for the six months ended March 31, 1995 and 1996,
respectively. Cash used by operations is primarily due to net losses, which
are partially offset by non-cash expenses, such as depreciation and deferred
interest expense, and changes in working capital items.
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and
expansion of its Telecom Services business. Consequently, it does not
anticipate that cash provided by operations will be sufficient to fund future
expansion of existing networks or the construction and acquisition of new
networks in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $13.4 million, $51.5 million and $71.3
million in fiscal 1993, 1994 and 1995, respectively, and $37.6 million and
$74.9 million (net of $21.6 million received in connection with the
sale of certain satellite equipment including four teleports) for the six
months ended March 31, 1995 and 1996, respectively. Cash used by
investing activities includes cash expended for the acquisition of property,
equipment and other assets of $12.2 million, $43.2 million and $49.8 million
for the fiscal years 1993, 1994 and 1995, respectively, and $18.5 million
and $54.9 million for the six months ended March 31, 1995 and 1996.
The Company will continue to use cash in fiscal 1996 for the construction of
new networks and the expansion of existing networks. The Company acquired
assets under capital leases and through the issuance of debt or warrants of
$8.4 million, $11.7 million and $38.7 million in fiscal years 1993, 1994 and
1995, respectively, and $31.4 million and $47.4 million for the six months
ended March 31, 1995 and 1996, respectively. The majority
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<PAGE>
of assets acquired under capital leases and through the issuance of debt
during the six months ended March 31, 1995 was for the purchase and
installation of 12 of the Company's 13 high capacity digital switches to
provide switched services in Birmingham, Charlotte, Cleveland, Columbus,
Denver, Irvine, Los Angeles, Louisville, Melbourne, Nashville, Oakland,
Phoenix and Sacramento. Assets purchased during the six months ended March
31, 1996 under capital leases primarily consisted of fiber optic networks
included in the SCE Agreement.
In January 1994, the Company committed to provide $10.0 million in financing
to its Telecom joint venture in Phoenix, of which $6.9 million and $8.8
million had been provided through September 30, 1995 and March 31, 1996,
respectively. The acquisition in January 1995 of a 64% interest in MTN, $4.4
million convertible promissory notes of MTN and consulting and non-compete
agreements valued at an aggregate of $250,000, required cash payments of $9.0
million, the surrender and cancellation of a $0.6 million note and the
issuance of approximately $5.1 million in IntelCom Common Shares and funding
of $2.7 million in MTN working capital requirements. The Company has also
agreed that, if MTN has not completed an initial public offering of its common
stock by January 3, 1998, the Company will, at the option of the minority
shareholders, buy the minority shares of MTN at the then fair market value.
The Company owns approximately 70.0% of the issued and outstanding common
stock of Zycom Corporation (Alberta, Canada), Zycom Corporation (Texas) and
Zycom Network Services, Inc. (collectively, "Zycom"). In March 1995, the
Company acquired a 56.0% equity interest in Zycom for approximately $3.2
million, consisting of $0.6 million in cash, the conversion of a $2.0 million
note receivable to equity of Zycom and the assumption of $0.6 million in debt.
In July 1995, the Company purchased an additional 2.0% of Zycom common stock
held by Zycom's former president and chief executive officer for approximately
$0.2 million. In March 1996, the Company acquired an additional approximate
12.0% equity interest in Zycom by converting a $3.2 million receivable due
from Zycom.
In March 1996, the Company sold four teleports and related assets for
approximately $21.5 million in cash of which $21.1 million had been
received from the purchaser as of December 31, 1995.
In November 1995, the Company entered into a long-term agreement with CPS, a
municipally owned electric and gas utility, to license half of the capacity on
a 300-mile fiber optic network (60 of which currently exist) in greater San
Antonio. Pursuant to this agreement the Company has provided a $12.0
million irrevocable letter of credit to finance the Company's portion of the
construction costs. The letter of credit is secured by cash collateral of
$13.3 million.
On January 3, 1996, the Company acquired the remaining 49% minority interest
in FOTI, resulting in FOTI becoming a wholly owned subsidiary. Consideration
for the acquisition was $2.0 million in cash and 66,236 IntelCom Common Shares
valued at $0.8 million for total consideration of $2.8 million.
In February 1996, the Company invested $4.0 million and in April 1996
invested $6.0 million to acquire a 60% interest in, and become the general
partner of ICG Telecom of San Diego.
In February 1996, the Company entered into a long-term agreement with
WorldCom under which the Company will pay approximately $8.8 million for the
right to use fiber along a 330-mile fiber optic network in Ohio. An
aggregate of approximately $2.6 million has been paid by the Company through
March 31, 1996.
In March 1996, the Company and SCE jointly filed an agreement with the CPUC
under which the Company will license 1,258 miles of fiber optic cable in
Southern California. An aggregate of approximately $3.4 million has been paid
by the Company through March 31, 1996.
Cash Provided (Used) By Financing Activities
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<PAGE>
Financing activities provided $30.4 million, $52.1 million, $390.9 million
and $60.7 million in each of fiscal 1993, 1994 and 1995, and the six
months ended March 31, 1995, respectively, and used $33.4 million in the
six months ended March 31, 1996. The significant change in cash
provided in the first two quarters of fiscal 1995 to cash used in the first
two quarters of fiscal 1996 is due to the completion of a public equity
offering during the first quarter of fiscal 1995. The funds to finance the
Company's past business acquisitions, capital expenditures, working capital
requirements and operating losses were from public and private offerings of
IntelCom Common Shares, units (the "Units") consisting of the 13 1/2% Notes
and warrants (the "Unit Warrants") to purchase IntelCom Common Shares (the
"Unit Offering"), 12% Redeemable Preferred Stock of ICG (the "Redeemable
Preferred Stock"), 8% Convertible Subordinated Notes and 7% Convertible
Subordinated Notes (together the "Convertible Subordinated Notes") and
Convertible Preferred Shares of IntelCom, capital lease financings and various
working capital sources, including credit facilities. Such funds were
obtained from the following sources:
(i) In the fourth quarter of fiscal 1995, the Company completed the
Unit Offering consisting of the 13 1/2% Notes and the Unit Warrants, and
sold the Redeemable Preferred Stock of ICG and the Redeemable Warrants (as
defined below) to improve its operating and financial flexibility over the
near term. The Company believes its liquidity improved because the 13 1/2%
Notes do not require the payment of cash interest until 2001 and do not
require payment of principal until maturity in 2005. The foregoing
consisted of:
(a) Unit Offering: In August 1995, IntelCom and ICG issued and sold
Units comprised of the 13 1/2% Notes and the Unit Warrants for net
proceeds of $286.4 million. The 13 1/2% Notes are unsecured senior
obligations of ICG (guaranteed by IntelCom) that mature on September 15,
2005. Interest is payable each March 15 and September 15 commencing
March 15, 2001. ICG completed an offer to exchange the 13 1/2% Notes
for 13 1/2% Notes registered under the Securities Act in January 1996.
(b) Preferred Stock Placement: Simultaneously with the closing of the
Unit Offering, ICG issued the Redeemable Preferred Stock to Princes Gate
Investors, L.P., an affiliate of Morgan Stanley & Co. Incorporated
("Morgan Stanley"), and related investors (collectively, "PGI"), together
with 916,666 redeemable warrants (the "Redeemable Warrants") and warrants
to purchase 2,353,334 IntelCom Common Shares (the "PGI Warrants") (the
"Preferred Stock Placement"). The Redeemable Preferred Stock accrues
dividends quarterly at an annual rate of 12% per annum. On April 30, 1996
the Redeemable Preferred Stock and the Redeemable Warrants were redeemed
with a portion of the proceeds from the private placement offering
described below.
(ii) As an interim financing arrangement, in July 1995, IntelCom, ICG
and certain subsidiaries of ICG entered into a Note Purchase Agreement with
Morgan Stanley Group Inc. ("Morgan Stanley Group") and PGI for up to $35.0
million of Senior Secured Notes and issued warrants to Morgan Stanley to
purchase 800,000 IntelCom Common Shares and warrants to PGI to purchase
600,000 IntelCom Common Shares. Proceeds from the Unit Offering and the
Preferred Stock Placement were used to repay principal and interest
(approximately $6.0 million) on all Senior Secured Notes purchased by Morgan
Stanley Group. In connection with such repayment, warrants to purchase
280,000 IntelCom Common Shares issued to Morgan Stanley Group were returned
to IntelCom and canceled.
(iii) Public Offering of IntelCom Common Shares: On October 24, 1994,
IntelCom and an unaffiliated shareholder completed the sale of 6,900,000
IntelCom Common Shares at a price of $14.00 per share in a public offering,
of which 5,716,853 IntelCom Common Shares were sold by IntelCom for net
proceeds of approximately $74.3 million. The Company used $6.9 million of
such proceeds to repay a note issued in April 1994 in connection with its
purchase of the telecom network assets of Mtel Digital Services, Inc. in Los
Angeles.
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(iv) Convertible Subordinated Long-Term Debt Financing: IntelCom
issued and sold $18.0 million principal amount of 8% Convertible
Subordinated Notes in September 1993. As of March 31, 1996, $8.0 million of
the 8% Convertible Subordinated Notes and $1.2 million of the interest on
such notes had been converted to 589,742 IntelCom Common Shares. An
additional $47.8 million principal amount of 7% Convertible Subordinated
Notes (together with the 8% Convertible Subordinated Notes, the "Convertible
Subordinated Notes") were issued and sold in October 1993. Interest on
these notes is payable in cash or in kind, at the option of IntelCom.
IntelCom has paid the first five interest installments of interest by
issuing additional interest notes (the "Interest Notes").
(v) Private Equity Financing: IntelCom raised $13.2 million in 1993
through private placements of IntelCom Common Shares. In settlement of
certain short-term obligations to vendors, IntelCom issued $0.3 million in
IntelCom Common Shares in 1993. In February 1994, William W. Becker, a
Director of IntelCom, purchased 600,000 IntelCom Common Shares for $3.8
million pursuant to an outstanding warrant obtained in February 1992. In
May and June 1995, IntelCom raised $4.0 million in a private placement of
595,000 IntelCom Common Shares and $16.0 million ($15.2 million net
proceeds) in private placements of Convertible Preferred Shares. A portion
of the proceeds from the Unit Offering and the Preferred Stock Placement has
been used to repurchase $10.0 million of the Convertible Preferred Shares
and the remaining $6.0 million of the Convertible Preferred Shares have been
converted to 783,657 IntelCom Common Shares.
(vi) Lease Financing: The Company used lease financing of $24.5
million for the acquisition of 12 digital switches. A capital lease
agreement with AT&T Capital Corporation provides $18.2 million for the
acquisition of 9 digital switches from Lucent Technologies, Inc. (formerly
AT&T Network Systems). After six and one-half years, the Company may
purchase these switches for 30% of the original price. At March 31,
1996, the interest rate on the leases was approximately 7.6%. Additional
capital lease obligations (including a lease obligation for three other
switches) totaled $6.3 million, bearing interest at rates ranging from 11.8%
to 13.0% as of March 31, 1996.
In March 1996, the Company entered into a 25-year agreement with SCE
under which the Company will license 1,258 miles of fiber optic cable in
Southern California. The agreement also allows the Company to utilize SCE's
facilities to install up to 500 additional miles of fiber optic cable.
Under the terms of the agreement the Company will pay SCE an annual fee for
ten years, certain fixed quarterly payments, including a quarterly payment
equal to a percentage of network revenue, and certain other installation and
fiber connection fees. The aggregate fixed payments remaining under this
25-year agreement (consisting of the annual fee and fixed quarterly
payments) totaled approximately $146.0 million at March 31, 1996.
(vii) Working Capital Sources: FOTI and its subsidiaries had a $4.0
million working capital line of credit (the "FOTI Line of Credit") with
Norwest Business Credit, Inc., which was guaranteed by IntelCom. The FOTI
Line of Credit bore interest at the prime rate plus 5.0% per annum, which
was 13.75% at September 30, 1995, and was due on demand. At September 30,
1995, the outstanding borrowings under the FOTI Line of Credit totaled
approximately $3.7 million. In December 1995, the Company refinanced the
FOTI Line of Credit as part of a short-term facility with Norwest Bank
Colorado, N.A. ("Norwest") (see (viii) below). FOTI also has a $4.5 million
working capital line of credit, of which $1.0 million was outstanding as
of March 31, 1996, with a supplier that provides goods and services that
are used on network system integration installations.
(viii) Short-Term Credit Facility: In December 1995, ICG obtained a
short-term credit facility with Norwest to refinance certain of the
Company's debt. The credit facility provides for $17.5 million in short-
term financing with interest at 2.5% above the Money Market Account yield
(3.3% at December 31, 1995, for a rate of 5.8%). The Company paid off this
debt and accrued interest in March 1996.
97
<PAGE>
On April 30, 1996, ICG completed the Private Placement of the 12 1/2% Notes
and 150,000 shares of 14 1/4% Exchangeable Preferred Stock (the "Preferred
Stock") for aggregate net proceeds of approximately $433.0 million. The net
proceeds of the Private Placement, along with the balance of the net proceeds
of the Unit Offering, will improve the Company's operating and financial
flexibility over the near term. The Company believes its liquidity has
improved because (a) the 12 1/2% Notes do not require the payment of cash
interest until 2001 and (b) ICG has the option to pay dividends on the
Preferred Stock in additional shares of Preferred Stock through May 1, 2001
and the Preferred Stock is not mandatorily redeemable until 2007.
Approximately $35.3 million of the proceeds from the Private Placement were
used to redeem the Redeemable Preferred Stock issued in August 1995, pay
accrued preferred dividends and repurchase 916,666 IntelCom warrants issued in
connection with the Redeemable Preferred Stock. The Company recognized a
charge of approximately $13.1 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 of approximately $11.5 million for the payment with
respect to consents to amendments to the 13 1/2% Notes Indenture to permit the
Private Placement, which together will be reflected in the Company's results
for the quarter ended June 30, 1996.
The 12 1/2% Notes are unsecured senior obligations of ICG (guaranteed by
IntelCom) that mature on May 1, 2006. 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. Dividends on the Preferred Stock are cumulative
at a rate of 14 1/4% per annum and are payable quarterly each February 1, May
1, August 1 and November 1, commencing August 1, 1996. The Preferred Stock
has a liquidation preference of $1,000 per share, plus accrued and unpaid
dividends, and is mandatorily redeemable in 2007. The Preferred Stock is
exchangeable, at the option of ICG, into 14 1/4% senior subordinated exchange
debentures of ICG due 2007, at any time after the exchange is permitted under
certain indenture restrictions.
Capital Expenditures
The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development, construction and
expansion of its business and until the Company establishes a sufficient
revenue-generating customer base. The Company's capital expenditures were
$20.7 million, $54.9 million and $88.5 million in fiscal 1993, 1994 and 1995,
respectively and $49.9 million and $102.3 million (including assets acquired
under capital leases and through the issuance of debt) for the six months
ended March 31, 1995 and 1996, 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 up to $165.0 million for fiscal 1996, $300.0 million for
fiscal 1997 and continued significant capital expenditures thereafter. Actual
capital expenditures will depend on numerous factors beyond the Company's
control or ability to predict. These factors include the nature of future
expansion and acquisition opportunities, economic conditions, competition,
regulatory developments and the availability of capital.
General
In view of the anticipated negative cash flow from operating activities, the
continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing or licensing of new
networks, the Company will require additional amounts of cash in the
future from outside sources. Management believes that the Company's funds on
hand, the funds from the Private Placement, the funds from the Unit Offering
and amounts expected to be available through vendor financing arrangements
will provide sufficient funds necessary for the Company to expand its telecom
services business as currently planned and to fund its operating deficits for
approximately 21 months. Additional sources of cash may include public and
private equity and debt financings by IntelCom, ICG or ICG's subsidiaries,
sales of non-strategic assets, capital leases and other financing
arrangements. The Company will require additional amounts of equity capital
in the near term. In the past, the Company has been able to secure sufficient
amounts of financing to meet its capital expenditure
98
<PAGE>
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. See "Risk Factors--Significant Capital Requirements."
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 until the Company establishes a sufficient revenue generating
customer base could have a material adverse effect on the Company's liquidity.
As of March 31, 1996, an aggregate of approximately $62.0 million of
capitalized lease obligations was due prior to December 31, 2000, an aggregate
principal amount of approximately $68.5 million (including $0.4 million of
accrued interest) was outstanding under the Convertible Subordinated Notes and
Interest Notes and an aggregate accreted value of approximately $326.5
million was outstanding under the 13 1/2% Notes. As of March 31, 1996,
approximately $12.0 million of the 8% Convertible Subordinated Notes and
Interest Notes are due September 17, 1998 and are convertible at a price of
$15.60 per IntelCom Common Share. Approximately $56.1 million of the 7%
Convertible Subordinated Notes and Interest Notes are due October 30, 1998 and
are convertible at a price of $18.00 per IntelCom Common Share. The 13 1/2%
Notes require payments of interest to be made in cash commencing on March 15,
2001 and mature on September 15, 2005. As of March 31, 1996, the Company
had $4.1 million of other indebtedness that matures prior to December 31,
2000. The Company may also have additional payment obligations prior to such
time, the amount of which cannot presently be determined. After giving effect
to all of the above, the Company had aggregate indebtedness of approximately
$473.5 million at March 31, 1996. See notes 2 and 7 to the Consolidated
Financial Statements. The Company believes that its funds on hand, the funds
remaining from the Unit Offering and amounts expected to be available through
vendor financing arrangements, will provide sufficient funds necessary for the
Company to expand its Telecom Services business as currently planned and to
fund its operating deficits for approximately 21 months. Additional sources
of cash may include public and private equity and debt financings by IntelCom,
ICG or ICG's subsidiaries, sales of non-strategic assets, capital leases and
other financing arrangements. Accordingly, the Company will have to refinance
a substantial amount of indebtedness and obtain substantial additional funds
prior to December 31, 2000. The Company's ability to do so will depend on,
among other things, its financial condition at the time, the restrictions in
the instruments governing its indebtedness, including the 13 1/2% Notes
Indenture, 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 capitalized 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 would be adversely affected.
ACCOUNTING MATTERS
Accounting Changes
Effective January 1, 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company will
recognize revenue as services are provided and will continue 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.
99
<PAGE>
As required by generally accepted accounting principles, the Company has
restated its results for the three months ended December 31, 1995 to reflect
the effects of the change in accounting as if such change had been adopted as
of October 1, 1995. The Company's results for the six months ended March
31, 1996 include a charge of $3.5 million ($0.14 per common share) relating to
the cumulative effect of this change in accounting as of October 1, 1995. The
effect of this change in accounting in fiscal year 1996 was to decrease loss
before cumulative effect of change in accounting by approximately $196,000
($0.01 per common share) in the first quarter and to increase loss before
cumulative effect of change in accounting by approximately $174,000 ($0.01 per
common share) in the second quarter, for a net decrease in loss before
cumulative effect of change in accounting of approximately $22,000 (less than
$0.01 per common share) for the six months ended March 31, 1996. If the new
revenue recognition method had been applied retroactively, Telecom Services
revenue would have decreased by $2.0 million, $0.5 million, and $0.7 million
for fiscal 1993, 1994, and 1995, respectively, and $0.6 million for the six
months ended March 31, 1995. See the Company's Consolidated Financial
Statements and the notes thereto contained elsewhere in this Proxy Statement -
Prospectus.
In addition, the Company has shortened the estimated depreciable lives for
substantially all of its fixed assets. These estimates were changed to better
reflect the estimated periods during which these assets will remain in service
and result in useful lives which are more consistent with industry practice.
The changes in estimates of depreciable lives are being made on a prospective
basis, beginning January 1, 1996. The effect of this change in estimate was
to increase depreciation expense and net loss attributable to common
shareholders for the three months ended March 31, 1996 by $2.3 million ($0.92
per common share). This change in estimate is expected to increase
depreciation expense during fiscal year 1996 by approximately $7.0 million.
The change would have had an estimated annual effect of approximately $9.0
million had the change been in effect for the entire year. Deferred tax
liability has been adjusted for the effect of this change in estimated
depreciable lives, which resulted in an income tax benefit of $4.5 million.
New Accounting Standards
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), was issued in March 1995 by the Financial Accounting Standards
Board. It 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 amount of an
asset may not be recoverable. SFAS 121 is required to be adopted for fiscal
years beginning after December 15, 1995 and will be adopted by the Company
as of October 1, 1996. Adopting this statement is not expected to have a
significant effect on the consolidated financial statements of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. This statement defines a fair value based
method of accounting for employee stock options or similar equity instruments,
and encourages all entities to adopt this method of accounting for all
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing
to remain with the accounting method prescribed in Opinion 25 must make pro
forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined by SFAS 123 had been
applied. SFAS 123 is applicable to fiscal years beginning after December 15,
1995. The Company currently accounts for its equity instruments using the
accounting method prescribed by Opinion 25. The Company does not currently
expect to adopt the accounting method prescribed by SFAS 123; however, the
Company will include the pro forma disclosures required by SFAS 123 when
required.
100
<PAGE>
MANAGEMENT
Under the Canada Business Corporations Act, one-third of IntelCom's
directors must be Canadian residents. IntelCom's corporate charter provides
that directors serve staggered three-year terms. The directors of IntelCom
will hold office until the designated annual meeting of shareholders and until
their successors have been elected and qualified or until their death,
resignation or removal. There are currently four committees of the Board of
Directors of IntelCom: Executive Committee, Audit Committee, Compensation
Committee and Stock Option Committee. The officers of IntelCom and ICG are
elected at the annual meetings of the respective Boards of Directors and hold
office until their successors are chosen and qualified or until their death,
resignation or removal.
Set forth below are the names, ages and positions of directors and executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
William J. Laggett(3)(4)(5)(6)(7)...................... 66 Chairman of the Board of Directors of IntelCom
J. Shelby Bryan(2)(4)(6)............................... 50 President, Chief Executive Officer and Director of
IntelCom and ICG and Chairman of the Board of
Directors of ICG
John D. Field.......................................... 47 Executive Vice President and Secretary of IntelCom and
ICG and Director of ICG
James D. Grenfell...................................... 44 Executive Vice President, Chief Financial Officer and
Treasurer of IntelCom and ICG and Director of ICG
William J. Maxwell..................................... 54 Executive Vice President - Telecom of IntelCom,
President of ICG Telecom Group, Inc. and Director of
ICG
Marc E. Maassen........................................ 45 Executive Vice President - Network of IntelCom,
President of FOTI and Director of ICG
Robert W. Andrews...................................... 42 President of ICG Satellite Services, Inc.
William W. Becker(2)(6)(7)............................. 67 Director of IntelCom
Harry R. Herbst(3)(5)(7)............................... 44 Director of IntelCom
Jay E. Ricks(1)(4)(6).................................. 63 Director of IntelCom
Gregory C.K. Smith(3)(5)............................... 37 Director of IntelCom
Leontis Teryazos(3)(7)................................. 53 Director of IntelCom
</TABLE>
- -------------------
(1) Term expires at annual meeting of Shareholders in 1996
(2) Term expires at annual meeting of Shareholders in 1997
(3) Term expires at annual meeting of Shareholders in 1998
(4) Member of Executive Committee
(5) Member of Audit Committee
(6) Member of Compensation Committee
(7) Member of Stock Option Committee
101
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
William J. Laggett has been Chairman of the Board of Directors of IntelCom
since June 1995 and a Director since January 1995. Mr. Laggett was the
President of Centel Cellular Company from 1988 until his retirement in 1993.
From 1970 to 1988, Mr. Laggett held a variety of management positions with
Centel Corporation, including Group Vice President-Products Group, President-
Centel Services, and Senior Vice President-Centel Corporation. Prior to
joining Centel, Mr. Laggett worked for New York Telephone Company.
J. Shelby Bryan was appointed President, Chief Executive Officer and a
Director of IntelCom in May 1995. Mr. Bryan has been President, Chief
Executive Officer and Chairman of the Board of Directors of ICG since May
1995. He has 16 years of experience in the telecommunications industry,
primarily in the cellular business. He co-founded Millicom International
Cellular S.A. ("Millicom"), a publicly owned corporation providing
international cellular service, served as its President and Chief Executive
Officer between 1985 and 1994 and has served as a director through the
present. Mr. Bryan has also served as a director of Miltope Group Inc.
("Miltope") since its founding in 1984. Miltope is a publicly owned
manufacturer of computer peripheral products primarily for the defense
industry.
John D. Field has been Executive Vice President and Secretary of IntelCom
since May 1995. Mr. Field has been a Director of ICG since June 1995 and
President and a Director of Zycom since September 1995. He had been
consulting for the Company since October 1994. Mr. Field, who has over 25
years experience in media and telecommunications, was an investment banker and
telecommunications analyst with Hanifen, Imhoff Inc. from 1991 to 1994, a
Senior Vice President of United Artists Entertainment Co. (now Tele-
Communications, Inc.) responsible for mergers, acquisitions and new business
development from 1988 to 1991, and Vice President-Investments of American
Television and Communications Corp. (now Time Warner Cable) from 1982 to 1988.
Mr. Field is an attorney and formerly was National News Editor of The
Washington Post.
James D. Grenfell joined the Company as Executive Vice President, Chief
Financial Officer and Treasurer in November 1995. Mr. Grenfell has been a
Director of both ICG and Zycom since November 1995. Previously, Mr. Grenfell
served as Director of Financial Planning for BellSouth Corporation and Vice
President and Assistant Treasurer of BellSouth Capital Funding. A Chartered
Financial Analyst, Mr. Grenfell has been a financial executive in the
telecommunications industry for over 15 years. He had been with BellSouth
since 1985, serving previously as Finance Manager of Mergers and Acquisitions.
He handled BellSouth's financing strategies, including capital market
financings as well as public debt and banking relationships. Prior to
BellSouth, Mr. Grenfell spent two years as a project manager with Utility
Financial Services and six years with GTE of the South, a subsidiary of GTE,
including four years as Assistant Treasurer.
William J. Maxwell has been Executive Vice President - Telecom of IntelCom
since October 1995, and President of ICG Telecom Group, Inc. since December
1992. Mr. Maxwell has been a Director of ICG since July 1995. Prior to
joining the Company, Mr. Maxwell was the senior marketing executive of WilTel
Inc., a full service telecommunications company. Mr. Maxwell, who has over 30
years of general management experience, also served as President and Chief
Executive Officer of MidAmerican Communications Corporation in Omaha, Nebraska
from 1987 to 1991.
Marc E. Maassen became Executive Vice President - Network of IntelCom in
October 1995 and President of FOTI in April 1995. Mr. Maassen has been a
Director of ICG since July 1995. Mr. Maassen joined the Company in 1991 as
Vice President of Sales and Marketing. Prior to joining the Company, Mr.
Maassen held senior sales management positions at TelWatch, Inc., an
integrated network management software company. From 1985 to 1987, Mr.
Maassen was employed by the First Interstate Banking System ("First
Interstate") as Director of Telecommunications. Prior to his work at First
Interstate, his operational management experience included a position as
Telecom Support Manager with StorageTek, Inc. Mr. Maassen previously worked
for AT&T Information Systems as an account executive and U S West as a major
accounts manager.
102
<PAGE>
Robert W. Andrews has been President of ICG Satellite Services, Inc. since
November 1995. Mr. Andrews joined IntelCom in July 1993 as Director of
Finance. In April 1994, he was named Vice President of Finance for the
Satellite division. Prior to joining the Company, from August 1992 to July
1993, Mr. Andrews started and owned Genesse Software, Inc., a developer of
enhanced connectivity and communication software. From 1987 to 1992, Mr.
Andrews served as a Regional Sales Manager for Dynamic Information Systems,
Corp. ("Dynamic") located in Boulder, Colorado. Prior to Dynamic, Mr. Andrews
spent two years at Smith Barney.
William W. Becker has been a Director of IntelCom since 1986 and was
Chairman and Chief Executive Officer of IntelCom from 1986 to 1995 and
President from 1987 to 1995, and Chairman of ICG from 1987 to 1995. Mr.
Becker founded the Becker Group of Companies (the "Becker Group"), which
controls and manages a number of companies in various industries including
communications and oil and gas.
Harry R. Herbst has been a Director of IntelCom since October 1995. Mr.
Herbst, a Canadian resident, has been Vice President of Finance and Strategic
Planning of Gulf Canada Resources Ltd. since November 1995 and Vice President
and Treasurer from January 1995. In addition, Mr. Herbst is Vice President of
Finance of Athabasca Oil Sands Trust. 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, and was formerly employed by Coopers & Lybrand.
Jay E. Ricks has been a Director of IntelCom since 1993. Mr. Ricks is
Chairman of Douglas Communications Corp. ("DCC"), a privately held cable
television company. Mr. Ricks is a director of Data Transmission Network
Corporation, a publicly traded electronic information company, a director of
KWTX Broadcasting Corp. and a director and shareholder of SkyConnect, Inc.
Mr. Ricks specialized in communications law with the Washington, D.C. law firm
of Hogan & Hartson from 1962 to 1990.
Gregory C. K. Smith has been a Director of IntelCom since 1994. Mr. Smith,
a lawyer, is a partner of Tupper Jonsson & Yeadon, in Vancouver, British
Columbia, the Canadian corporate solicitors for the Company. Mr. Smith was an
associate employed by Tupper Jonsson & Yeadon from 1986 until he became a
partner in 1991.
Leontis Teryazos has been a Director of IntelCom since June 1995. Mr.
Teryazos has been a Director of Zycom since September 1995. Mr. Teryazos, a
Canadian resident, has headed Letmic Management Inc., a financial consulting
firm, since 1993, and Letmic Management Reg'd., a real estate development and
management company, since 1985.
Director Compensation. IntelCom compensates its non-employee directors
$2,500 for each directors meeting attended, $2,500 for each committee meeting
attended (or $500 for each committee meeting that is held on the same date as
a directors meeting) and $250 for each telephonic directors or committee
meeting, plus reimbursement of expenses. Directors may elect to receive stock
options in lieu of cash compensation. In 1993, 1994 and 1995, non-officer
directors were each granted options, which are exercisable at the market price
on the date of grant, to purchase 20,000 IntelCom Common Shares under the
Company's Stock Option Plans. Under the Restated and Amended 1995 Stock
Option Plan, each director annually will receive options, which are
exercisable at the market price on the date of grant, to purchase 20,000
IntelCom Common Shares. In addition, the Chairman of the Board of Directors
of IntelCom is compensated $80,000 per year, payable in $20,000 quarterly
installments, for which he may elect to receive stock options in lieu of cash
compensation. ICG does not otherwise compensate its directors.
Executive Compensation. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive
Officer, and the four other most highly compensated executive officers of the
Company for the fiscal years ended September 30, 1993, 1994, and 1995 and two
additional officers for whom disclosure would have been provided but for the
fact that the individuals were not serving as executive officers at September
30, 1995 (the "Named
103
<PAGE>
Officers"). The Company does not maintain any long-term incentive plans and
the Company does not grant stock appreciation rights.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------- -------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Shelby Bryan 1995 $030,728 $ -- $ -- 1,550,000
President and Chief Executive Officer(1)
John D. Field 1995 66,667 110,000 3,000(2) --
Executive Vice President and
Secretary(1)
William J. Maxwell 1995 205,475 75,000 6,090(2) 75,000
Executive Vice President - Telecom of 1994 179,850 100,000 9,950(2) --
IntelCom and President of ICG Telecom 1993 106,425 67,500 65,434(3) 200,000
Group, Inc.
Marc E. Maassen 1995 131,933 60,000 7,093(2) 15,000
Executive Vice President - Network of 1994(4) 105,100(4) 23,375 6,290(2) --
IntelCom and President of FOTI 1993A(6) 134,636(5) 16,978 4,848(2) 30,000
William W. Becker 1995 -- -- 1,328,412(8) 105,000
Former Chairman, President and Chief 1994 -- -- -- --
Executive Officer(7) 1993 -- -- -- 308,120
John R. Evans 1995 169,850 43,750 10,773(2) 40,000
Former Executive Vice President 1994 121,600 70,000 9,240(2) --
and Chief Financial Officer(9) 1993 94,802 48,000 8,728(10) 75,000
Larry L. Becker 1995 158,968 -- 209,134(11) 29,000
Former Executive Vice President(7) 1994 -- -- 137,580(12) --
1993 -- -- -- 261,928
</TABLE>
- ------------------
(1) Employment commenced in May 1995.
(2) Consists of ICG's contributions to 401(k) Defined Contribution Plan.
(3) Consists of relocation expenses of $59,814 and ICG contributions to
401(k) Defined Contribution Plan of $5,620.
(4) Compensation earned as former Vice President - Mergers and Acquisitions
of ICG.
(5) Includes $50,936 in sales commissions.
(6) Compensation earned as former Vice President - Sales and Marketing.
(7) William W. Becker and Larry L. Becker served as officers of the Company
until June 1995.
(8) Consists of consulting fees.
(9) Mr. Evans served as an officer of the Company until November 1995.
(10) Company contribution to an individual life insurance plan.
(11) Consists of $200,000 severance compensation and $9,134 vacation
compensation.
(12) Consists of management services fees of $110,709 and relocation
expenses of $26,871.
104
<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides information on option grants during fiscal 1995
to the Named Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------------------------------------------------------ -------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ------------ ----------- ------------ ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan 1,550,000 66.0 $07.94 5/29/2000 $3,399,150 $7,511,145
John D. Field - - - - - -
William J. Maxwell 75,000 3.2 13.25 10/7/2004 624,968 1,583,783
Marc E. Maassen 15,000 0.6 13.25 10/7/2004 124,994 316,757
William W. Becker 105,000 4.5 13.25 10/7/2004 874,955 2,217,296
John R. Evans 40,000 1.7 13.25 10/7/2004 333,316 844,684
Larry L. Becker 29,000(1) 1.2 13.25 10/7/2004 241,654 612,396
</TABLE>
- -------------------------
(1) Expired October 11, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table provides information on options exercised during fiscal
1995 by the Named Officers and the value of such officers' unexercised options
at the end of the last fiscal year.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
NUMBER OF FISCAL YEAR END FISCAL YEAR END (1)
SHARES ACQUIRED ---------------------------------- ---------------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- --------------- -------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan - $ - - 1,550,000 $ - $7,459,375
John D. Field - - - - - -
William J. Maxwell - - 96,000 179,000 487,843 340,769
Marc E. Maassen 7,000 71,652 16,600 29,400 78,805 28,122
William W. Becker - - 308,120 105,000 2,073,202 -
John R. Evans - - 48,000 82,000 218,819 72,635
Larry L. Becker 133,428 1,165,979 29,000(2) - 0 -
</TABLE>
(1) Based on the closing sale price on the AMEX of $12.75 per IntelCom Common
Share on September 29, 1995.
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<PAGE>
(2) Expired October 11, 1995.
EXECUTIVE EMPLOYMENT CONTRACTS
The Company has employment agreements with J. Shelby Bryan, James D.
Grenfell and William J. Maxwell.
The Company's employment agreement with Mr. Bryan provides for an initial
term of two years, which commenced May 30, 1995, and which may be continued
for one year at the option of Mr. Bryan. As compensation, the Company will
pay Mr. Bryan a salary equal to the sum of one percent of the monthly increase
in the Company's revenue and three percent of the monthly increase in EBITDA,
offset to not less than zero in any month where one component is a negative
amount. If Mr. Bryan's salary under such formula exceeds $1,500,000 in any
fiscal year, the Company may elect to pay the excess in unregistered IntelCom
Common Shares. Mr. Bryan is entitled to benefits as are generally provided to
executive officers of the Company, including options under stock option plans,
a leased automobile, private club membership fees and reimbursement of
reasonable out-of-pocket expenses incurred on behalf of the Company. The
employment agreement may be terminated by the Company with or without cause or
after a disability continuing for a consecutive six-month period, or by Mr.
Bryan for cause, including breach of the agreement or reduction in status or
responsibilities, or upon a change of control of the Company. If the
employment agreement is terminated by the Company for any reason other than
for cause, the Company is obligated to pay Mr. Bryan a lump sum of $2.5
million and to continue benefits for a period equal to the greater of the
remainder of the employment term or 18 months. After termination of the
employment agreement, Mr. Bryan is subject to a confidentiality covenant and a
one-year noncompetition commitment. Mr. Bryan also has been granted an option
for five years to purchase up to 1,220,000 IntelCom Common Shares commencing
November 30, 1995, and up to an additional 330,000 IntelCom Common Shares
commencing November 30, 1996, all at a price of $7.9375 per share, the closing
price of the IntelCom Common Shares as reported on the American Stock Exchange
on May 25, 1995, the date preceding the date of the grant. The option is
adjustable for corporate reorganizations, stock dividends, stock splits and
similar transactions, and expires upon termination of employment for cause.
The option is exercisable for a period of one year upon death or cessation of
employment for disability and for the full term upon termination of employment
for any reason other than for cause. The option also provides for piggyback
and one-time demand registration rights for the IntelCom Common Shares
underlying the option.
The Company's employment agreement with Mr. Grenfell provides for an initial
two-year term which commenced November 1, 1995. Upon completion of the first
12 months of the initial term, the agreement automatically renews from month
to month such that 12 months always remain in the term. The agreement may be
terminated upon 30 days written notice from either party or by the Company if
Mr. Grenfell is unable to perform his duties for 140 days in any 180-day
period due to illness or incapacity. The agreement provides for an annual
base salary of $175,000, a signing bonus of $48,700 and an incentive bonus
determined by the Board of Directors. Mr. Grenfell is entitled to such other
benefits as are generally provided to executive officers of the Company,
including options under the Company's stock option plans, a leased automobile
and reimbursement or direct payment of reasonable out-of-pocket expenses
incurred on behalf of the Company. If the employment agreement is terminated
without cause by the Company or by either party upon a change of control of
the Company, Mr. Grenfell will receive a termination fee equal to his
currently monthly salary times the number of months remaining in the term.
Mr. Grenfell is also subject to a confidentiality covenant and a one-year
noncompetition commitment.
ICG's employment agreement with Mr. Maxwell, dated December 1, 1992, has an
initial five-year term and thereafter one-year terms until either party
provides 30 days' written notice of termination prior to the end of a term.
The agreement provides for initial an annual base salary of $110,000 and
salary increases and incentive bonuses as determined by the Board of
Directors. Mr. Maxwell also receives stock options under the stock option
plans. The Company may terminate the employment agreement without cause, or
if the Company or Mr. Maxwell terminates the employment agreement upon the
occurrence of a major transaction involving the Company, then
106
<PAGE>
Mr. Maxwell shall receive his then-current salary for the lesser of one year
or until the expiration of the employment term. Mr. Maxwell is subject to a
confidentiality covenant and a one-year noncompetition commitment.
107
<PAGE>
REPORT OF COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE FOR FISCAL YEAR
ENDED SEPTEMBER 30, 1995.
The Compensation Committee evaluates compensation levels of senior
management and evaluates the various factors affecting compensation of the
Company's highest paid officers. The Compensation Committee believes that
compensation to the Company's executive officers should be designed to
encourage and reward management's efforts to further strengthen the Company's
business and to create added value for shareholders. Such a compensation
program helps to achieve the Company's business and financial objectives and
also provides incentives needed to attract and retain well-qualified
executives. The Company operates in a competitive marketplace and needs to
attract and retain highly qualified senior management and executive personnel
in order to assist the Company in its goals of developing new services and
expansion into new businesses and markets where the Company provides services.
The Compensation Committee also attributes a substantial portion of each
executive officer's compensation to the performance of IntelCom and the
particular contribution of that executive officer.
Among the Company's executive officers in fiscal 1995, only J. Shelby Bryan,
President and Chief Executive Officer, and William J. Maxwell, Executive Vice
President - Telecom of IntelCom and President of ICG Telecom Group, Inc., have
employment agreements with the Company. See "Executive Employment Contracts"
for descriptions of these agreements. All senior management except for Mr.
Bryan (whose contract controls his compensation) are compensated with a base
salary and an incentive bonus. The base salaries are intended to compensate
these executives for their ongoing leadership skills and management
responsibility. The incentive bonuses are dependent upon individual
performance. For purposes of determining the bonuses, the Compensation
Committee evaluates the completion of goals set at the start of each fiscal
year and compares the Company's performance in each year to the prior year.
Based on the progress of the Company during fiscal 1995, Chairman William J.
Laggett recommended and the Compensation Committee approved bonuses for John
D. Field, Executive Vice President and Secretary, William J. Maxwell, Marc E.
Maassen, Executive Vice President - Network of IntelCom and President of FOTI,
and John R. Evans, former Executive Vice President and Chief Financial
Officer, of $110,000, $75,000, $60,000 and $43,750, respectively.
On October 7, 1994, the Compensation Committee awarded stock options under
the 1994 Employee Stock Option Plan to key employees of the Company, including
executive officers, related to their performance in fiscal 1994 and as
incentives for continued efforts and success. William W. Becker, William J.
Maxwell, Larry L. Becker and John R. Evans received options to purchase
105,000, 75,000, 29,000, and 40,000 IntelCom Common Shares, respectively. The
Compensation Committee believes that stock options serve as important long-
term incentives for executive officers by encouraging their continued
employment and commitment to the Company's performance. Furthermore, the
Compensation Committee believes that stock options are an excellent means to
align the interests of the Company's executive officers with those of its
shareholders. The number of options that the Compensation Committee grants to
executive officers is based on individual performance and responsibility. In
addition, the Compensation Committee strives to grant options at a level
sufficient to provide a strong incentive for executive officers to work for
the long-term success of the business. The Compensation Committee does not
consider the number of options currently held by all executive officers in
determining individual grants because such consideration could create an
incentive to exercise options and sell the underlying IntelCom Common Shares.
The Compensation Committee has reviewed the compensation of the Company's
executive officers and has concluded that their compensation was reasonable in
view of the Company's performance and the contribution of those officers to
that performance. The Compensation Committee observed that revenue increased
$52.5 million, approximately 89%, in fiscal 1995 compared to fiscal 1994. At
the end of fiscal 1995, the Company's competitive access networks served 34
cities, compared to 32 cities at the end of fiscal 1994. Moreover, in fiscal
1995 management identified the opportunity for the switched services strategy
and successfully installed switches in 12 cities. The Company also raised
$390.3 million in public and private offerings during fiscal 1995. These
108
<PAGE>
accomplishments exceeded the Company's objectives for fiscal 1995. The
Compensation Committee believes that the Company appropriately awarded its
executive officers for their short- and long-term efforts.
The Compensation Committee is continually evaluating compensation of the
Company's executive officers. For example, broader-based compensation
packages may be appropriate now that the Company has completed its initial
development stage. To develop suitable compensation packages for its
executive officers, the Compensation Committee will assess compensation
reports for comparable companies and for the telecommunications industry. The
Compensation Committee believes that maintaining suitable executive
compensation programs is necessary to support the future development of the
Company and growth in shareholder value.
William J. Laggett
J. Shelby Bryan
William W. Becker
Jay E. Ricks
(Members of the Compensation Committee during the fiscal year ended
September 30, 1995)
FIVE-YEAR SHAREHOLDER RETURN COMPARISON
The Company is required to include in this Proxy Statement - Prospectus a
line-graph presentation comparing cumulative five-year shareholder returns on
an indexed basis with the AMEX Market Index and an index of peer companies
selected by the Company ("Peer Group"). The graph below sets forth
information on shareholder return for the period since IntelCom Common Shares
securities became registered under the Exchange Act (April 1991) through
September 30, 1995. The Company has selected the Russell 2000 index, an index
of 7,000 smaller sized public corporations, for purposes of the performance
comparison which appears below.
109
<PAGE>
(Accompanying notes are on the following page)
(1) IntelCom became a reporting company under the Exchange Act on April 6,
1991 and IntelCom Common Shares were traded on the VSE exclusively until
March 16, 1992, when IntelCom Common Shares also became listed on the AMEX
Emerging Company Marketplace. On January 4, 1993, the IntelCom Common
Shares became listed on AMEX. IntelCom data is from April 1, 1991, as
reported by VSE and after March 12, 1992, as reported by AMEX and reflects
a (i) one-for-five reverse stock split effected January 13, 1993, and (ii)
conversion of VSE prices from Canadian dollars (Cdn$) to U.S. dollars at
the following rates: 4/1/91 $1.1885 per Cdn$; 9/30/91 $1.1318 per Cdn$.
The AMEX Market Index was used for the entire period shown.
(2) The Peer Group consists of MFS Communications Company, Inc., ("MFS"),
Intermedia Communications of Florida, Inc. ("Intermedia"), GST Telecom,
Inc. ("GST"), and American Communications Services, Inc. ("ACSI"). MFS
completed an initial public offering of its common shares on May 20, 1993
at $24.625 per share. MFS' market capitalization on September 30, 1995
was $2,839,554,463. Intermedia completed an initial public offering of
its common shares on April 30, 1992 at $8.00 per share. Intermedia's
market capitalization was $158,293,551 on September 30, 1995. GST's
common shares were traded exclusively on the VSE until March 11, 1994,
when common shares of the company began trading on the AMEX. Its market
capitalization on September 30, 1995 was $121,551,885. ACSI's common
stock has been quoted on the NASDAQ Small-Cap Market since March 3, 1995.
Its market capitalization on September 30, 1995 was $40,971,350.
110
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires IntelCom's directors, executives
officers and holders of more than 10% of IntelCom's Common Shares ("Reporting
Persons") to file initial reports of ownership and reports of changes in
ownership with the SEC. The following table lists the Reporting Persons and
the number of late reports filed by each Reporting Person for the fiscal year
ended September 30, 1995:
Reporting Person Late Reports
---------------- ------------
Larry L. Becker(1) 1 (Form 3)
Gary Bryson(2) 1 (Form 4)
John R. Evans(3) 1 (Form 3)
Michael E. Hankerd 1 (Form 4)
William J. Maxwell 1 (Form 4)
Gregory C.K. Smith 1 (Form 4)
Leontis Teryazos 1 (Form 4)
- ----------
(1) Former Executive Vice President and Director of IntelCom.
(2) Former Director of Intelcom.
(3) Former Executive Vice President and Chief Financial Officer of IntelCom.
Except as set forth above, IntelCom believes that during the fiscal year
ended September 30, 1995, its executive officers, directors and holders of
more than 10% of IntelCom's Common Shares complied with all Section 16(a)
filing requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William W. Becker, a Director and former Chairman, President and Chief
Executive Officer of IntelCom, and Worldwide Condominium Developments, Inc.
("WWCDI"), which is controlled by William W. Becker, together control certain
otherwise nonaffiliated entities, including SkyConnect, Inc., of which Mr.
Ricks is also a director and shareholder, and Northern Cablevision, Ltd.
("Northern Cablevision"). Satellite Services revenue from entities controlled
by the Becker Interests (as defined under "Principal Shareholders") accounted
for none of the Company's Satellite Services revenue in fiscal 1995 compared
to $1.2 million (15%) of the Company's Satellite Services revenue (2% of total
revenue) in fiscal 1994 and compared to $1.5 million (42%) of the Company's
Satellite Services revenue (5% of total revenue) in fiscal 1993. The Company
believes these services were provided at rates comparable to rates charged to
third parties. Effective July 12, 1995, $0.7 million owed to the Company by
the Becker Interests was satisfied.
During fiscal 1994 the Company repaid advances and made advances to the
Becker Interests totaling approximately $7.7 million. These payments and
advances were offset by advances received, payments made on behalf of the
Company by the Becker Interests, and interest accrued on amounts owed to the
Becker Interests aggregating $7.7 million. The maximum amount at any one time
owed to the Company by the Becker Interests during fiscal 1994 and fiscal 1995
was $4.2 million, including accrued interest of $0.1 million and $0.7 million,
respectively. William W. Becker executed two demand promissory notes, due on
or before May 1, 1995 bearing interest at 7% per annum, with a combined
principal amount of $3.9 million. IntelCom's shareholders ratified the
exchange of these notes as part of the consideration to be delivered by the
Company for the acquisition of the 4% interest in ICG owned by WWCDI described
in the next paragraph.
111
<PAGE>
WWCDI previously owned approximately 4% of the outstanding shares of ICG
Common Stock. In order to consolidate all of the ownership of ICG in the
Company and avoid potential conflicts of interest with WWCDI, in 1994 the
Company's disinterested shareholders ratified the acquisition of this 4%
interest in exchange for (i) the transfer of the oil and gas operations of the
Company (at a value of approximately $0.9 million, which was determined by an
independent geologist), (ii) the surrender and cancellation of two demand
promissory notes to the Company from William W. Becker in the principal amount
of approximately $3.9 million, and (iii) 373,663 IntelCom Common Shares. The
4% minority interest in ICG was valued at approximately $12.2 million by the
disinterested members of the Board of Directors. This valuation resulted from
negotiations with WWCDI and was based on the estimated market capitalization
of IntelCom, adjusted to deduct the approximate estimated value of the oil and
gas operations and the other assets of the Company that were not held through
ICG at the time. The number of IntelCom Common Shares issued to WWCDI equated
to a value of approximately $19.48 per share, which exceeded the market price
of the IntelCom Common Shares on the date of the valuation.
As part of the resolution and settlement of certain transactions in 1995
between the Company and the Becker Group, the Company was assigned a note
receivable in the amount of $200,000, which had previously been advanced to
John D. Field. The note receivable has been restructured and is now evidenced
by a promissory note from Mr. Field to the Company payable on July 12, 2000,
which bears interest at a rate of 7% per annum. Interest is payable annually.
In May 1995, in anticipation of a bridge loan, William W. Becker advanced
$2.5 million to the Company, which was returned without interest.
In a February 1992 private placement, William W. Becker purchased 600,000
IntelCom Common Shares for $3.8 million and received a warrant to purchase an
additional 600,000 IntelCom Common Shares. In February 1994, William W.
Becker exercised that warrant and purchased 600,000 IntelCom Common Shares for
$3.8 million.
Due to Canadian regulatory restrictions, during fiscal 1993, WWCDI
transferred 66,800 IntelCom Common Shares to satisfy the initial payment for
the acquisition of FOTI. In exchange, the Company issued a like number of
IntelCom Common Shares to WWCDI on February 1, 1993, and, as an accommodation
fee, a warrant to purchase an additional 6,680 IntelCom Common Shares. During
fiscal 1994, WWCDI exercised that warrant and purchased 6,680 IntelCom Common
Shares for $50,100.
To facilitate the acquisition of certain competitive access networks and
satellite services businesses which held common carrier radio licenses subject
to foreign ownership restrictions, the common carrier licenses used by the
Company are held by TTH, a corporation which is owned 33% each by U.S.
directors William J. Laggett and Jay E. Ricks and a former director. TTH's
subsidiaries have given 15-year promissory notes to the Company to acquire the
FCC licenses. In fiscal 1995, the Company paid or accrued $3.9 million to
TTH's subsidiaries for common carrier services, and the Company received from
TTH's subsidiaries $3.3 million as payments on the promissory notes,
management services, equipment leases and technical support. Any excess
accruals due to TTH are applied to prepayment of the notes. No compensation
inures to the benefit of the owners of TTH. During March 1996, certain of the
FCC licenses held by TTH were sold in connection with the sale of four of the
Company's teleports. The related promissory notes have been canceled. See
"Business-Regulation."
In order to facilitate the relocation of William J. Maxwell, the Company
advanced $200,000 to Mr. Maxwell in April 1994 pursuant to a promissory note
payable on demand, which bears interest at a rate of 7% per annum.
In order to facilitate the relocation of John R. Evans, in November 1994 the
Company advanced $35,000 to Mr. Evans. The loan was increased to $200,000 on
February 1, 1995 under a loan agreement and promissory note which requires
repayment in five equal annual installments ending February 1, 2000 and which
bears interest at a rate of 7% per annum. The first of the five annual
installments has been paid.
112
<PAGE>
The Company entered into an arrangement in March 1995 with DCC pursuant
to which the Company agreed to pay DCC a fee, in addition to expenses, with
respect to agreements that the Company enters into with certain utilities.
This arrangement was terminated in December 1995. Jay E. Ricks, Chairman of
DCC, is a member of IntelCom's Board of Directors.
Tupper Jonsson & Yeadon, a law firm in Vancouver, B.C. in which Gregory C.K.
Smith, a director of the Company, is a partner, furnished legal services to
the Company in 1995. Total payments to Tupper Jonsson & Yeadon during fiscal
1995 were approximately $146,550.
J. Shelby Bryan also serves as a director of a subsidiary of Millicom which
is a customer of the Company's Satellite Services business.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 31, 1996, the number of IntelCom
Common Shares owned by (i) each executive officer and director of IntelCom and
ICG, (ii) executive officers and directors of IntelCom and ICG as a group, and
(iii) each person who owned of record, or was known to own beneficially, more
than 5% of the outstanding IntelCom Common Shares. The persons named in the
table below have sole voting and investment power with respect to all of the
IntelCom Common Shares owned by them, unless otherwise noted. IntelCom owns
all of the issued and outstanding shares of Common Stock of ICG.
<TABLE>
<CAPTION>
AMOUNT/NATURE OF
BENEFICIAL OWNERSHIP
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT(1)
- ------------------------------------ ------------- ----------
<S> <C> <C>
Becker Interests.................................................... 4,571,185(2) 17.1%
Suite 200,4245-97 Street
Edmonton, Alberta, Canada T6E 5Y7
William W. Becker................................................... 4,122,932(3) 15.5%
Director of IntelCom
Box 143, Cayman Islands
British West Indies
Morgan Stanley Group Inc............................................ 2,363,934(4) 8.2%
1585 Broadway
New York, NY 10036
Worldwide Condominium Developments, Inc............................. 2,137,934(5) 8.1%
Box 143, Cayman Islands
British West Indies
Montgomery Asset Management, L.P.................................... 1,790,000 6.8%
600 Montgomery Street
San Francisco, CA 94111
PG Investors, Inc................................................... 1,833,334(6) 6.5%
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
LGT Asset Management, Inc........................................... 1,687,700 6.4%
80 California Street
San Francisco, CA 94111
Peter Wightman...................................................... 1,592,200(7) 6.1%
19 Vectis Court
Southampton, U.K. SO1 7LY
William J. Laggett.................................................. 30,000(8) *
Chairman of the Board of Directors of IntelCom
J. Shelby Bryan..................................................... 1,222,000(9) 4 .4%
President, Chief Executive Officer and Director of IntelCom and
ICG and Chairman of the Board of Directors of ICG
John D. Field....................................................... 1,000 *
Executive Vice President and Secretary of IntelCom and
ICG and Director of ICG
James D. Grenfell................................................... 0 *
Executive Vice President, Chief Financial Officer and Treasurer of
IntelCom and ICG and Director of ICG
William J. Maxwell.................................................. 172,726(10) *
Executive Vice President - Telecom of IntelCom, President of
ICG Telecom Group, Inc. and Director of ICG
</TABLE>
(Accompanying notes are on the following page)
114
<PAGE>
<TABLE>
<CAPTION>
AMOUNT/NATURE OF
BENEFICIAL OWNERSHIP
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT(1)
- ------------------------------------ ------------- ----------
<S> <C> <C>
Marc E. Maassen..................................................... 25,124(11) *
Executive Vice President - Network of IntelCom, President of FOTI
and Director of ICG
Robert W. Andrews................................................... 5,982(12) *
President of ICG Satellite Services, Inc.
Harry R. Herbst..................................................... 10,000(13) *
Director of IntelCom
Jay E. Ricks........................................................ 70,180(14) *
Director of IntelCom
Gregory C.K. Smith.................................................. 50,000(15) *
Director of IntelCom
Leontis Teryazos.................................................... 30,000(16) *
Director of IntelCom
All executive officers and directors as a group (12 persons)........ 6,188,197(17) 21.9%
</TABLE>
- ----------------
*Less than 1% of the outstanding IntelCom Common Shares.
(1) Based on 26,301,926 issued and outstanding IntelCom Common Shares on March
31, 1996, plus IntelCom Common Shares which may be acquired by the person
or group indicated pursuant to any options and warrants exercisable, and
Convertible Subordinated Notes convertible, within 60 days of the date as
of which beneficial ownership is determined, pursuant to Rule 13d-3 under
the Exchange Act.
(2) The "Becker Interests" refers to and includes William W. Becker, a
Director, Larry L. Becker, a former Director and Executive Vice President
of the Company until June 1995, WWCDI and Northern Cablevision who filed
a Joint Schedule 13G which designates them as members of a group within
the meaning of Rule 13d-5 under the Exchange Act. Includes 448,253
IntelCom Common Shares held by Northern Cablevision and IntelCom Common
Shares and options to purchase IntelCom Common Shares held by William W.
Becker and WWCDI (see notes 3 and 5).
(3) Includes 1,624,878 IntelCom Common Shares and options to purchase 360,120
IntelCom Common Shares held directly by William W. Becker and IntelCom
Common Shares held by WWCDI (see notes 2 and 5).
(4) Includes 10,600 IntelCom Common Shares and 520,000 IntelCom Common Shares
which may be acquired by Morgan Stanley Group Inc. upon the exercise of
outstanding warrants. Also includes 1,833,334 IntelCom Common Shares
which may be acquired by PGI pursuant to the PGI Warrants and excludes
916,666 Redeemable Warrants which the Company is redeeming (see note 6).
(5) WWCDI is included with the Becker Interests (see note 2), and William W.
Becker is empowered to exercise sole voting and investment control over
IntelCom Common Shares held by WWCDI (see note 3).
(6) Represents 1,833,334 IntelCom Common Shares which may be acquired by PGI,
an affiliate of Morgan Stanley, pursuant to the exercise of outstanding
PGI Warrants and excludes 916,666 Redeemable Warrants which the Company is
redeeming (see note 4).
(7) Includes 1,300,000 IntelCom Common Shares held by Martin Holdings Ltd. of
which Peter Wightman is chairman and sole shareholder, and 292,200
IntelCom Common Shares held by Hartford Holdings, Inc. Ltd., of which Mr.
Wightman is also chairman and sole shareholder.
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<PAGE>
(8) Represents 30,000 IntelCom Common Shares which may be acquired by Mr.
Laggett pursuant to the exercise of outstanding stock options.
(notes continue on the following page)
(9) Includes 1,220,000 IntelCom Common Shares which may be acquired by Mr.
Bryan pursuant to the exercise of outstanding options and 2,000 IntelCom
Common Shares held in Mr. Bryan's wife's name as to which Mr. Bryan
disclaims beneficial ownership.
(10) Includes 17,000 IntelCom Common Shares held jointly with Mr. Maxwell's
wife, 1,846 IntelCom Common Shares held by a 401(k) plan, 150,000
IntelCom Common Shares which may be acquired pursuant to the exercise of
outstanding stock options and 3,880 IntelCom Common Shares held in Mr.
Maxwell's wife's name as to which Mr. Maxwell disclaims beneficial
ownership.
(11) Represents 23,500 IntelCom Common Shares which may be acquired by Mr.
Maassen pursuant to the exercise of outstanding stock options and 1,624
IntelCom Common Shares held by a 401(k) plan.
(12) Represents 5,250 IntelCom Common Shares which may be acquired by Mr.
Andrews pursuant to the exercise of outstanding stock options and 732
IntelCom Common Shares held by a 401(k) plan.
(13) Represents 10,000 IntelCom Common Shares which may be acquired by Mr.
Herbst pursuant to the exercise of outstanding stock options.
(14) Represents 5,000 IntelCom Common Shares held directly by Mr. Ricks and
65,180 IntelCom Common Shares which may be acquired pursuant to the
exercise of outstanding stock options.
(15) Represents 50,000 IntelCom Common Shares which may be acquired by Mr.
Smith pursuant to the exercise of outstanding stock options.
(16) Represents 30,000 IntelCom Common Shares which may be acquired by Mr.
Teryazos pursuant to the exercise of outstanding stock options.
(17) As a group, executive officers and directors of the Company beneficially
own 1,944,050 IntelCom Common Shares through stock options that are
presently exercisable or that will become exercisable within 60 days of
the date as of which beneficial ownership is determined pursuant to Rule
13d-3 under the Exchange Act.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK
The following is a summary of certain of the indebtedness and preferred
stock of the Company. See also notes 7 and 8 to the Company's Consolidated
Financial Statements contained elsewhere in this Proxy Statement -Prospectus.
12 1/2% NOTES
In April 1996, ICG issued the 12 1/2% Notes, resulting in gross proceeds of
$300.0 million. The 12 1/2% Notes were sold at a discount of approximately 55%
of the stated principal amount of $550.3 million and will mature on May 1,
2006. Cash interest accrues at a rate of 12 1/2% per annum beginning May 1,
2001 and is payable in cash each May 1 and November 1, commencing November 1,
2001.
ICG may redeem the 12 1/2% Notes on or after May 1, 2001, in whole or in
part, at redemption prices declining to 100% on May 1, 2003, plus accrued and
unpaid interest, if any, to the date of redemption. The 12 1/2% Notes are
guaranteed, on a senior, unsecured basis by IntelCom. The 12 1/2% Notes
Indenture contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions.
EXCHANGEABLE PREFERRED STOCK
Concurrently with the issuance of the 12 1/2% Notes in April 1996, ICG
issued 150,000 shares of Exchangeable Preferred Stock, resulting in gross
proceeds of $150.0 million. The Exchangeable Preferred Stock bears a
cumulative dividend of 14 1/4% per annum. All dividends are payable quarterly
in cash or, on or prior to May 1, 2001, at the sole option of ICG, in
additional shares of Exchangeable Preferred Stock, commencing August 1, 1996.
ICG is required to redeem the Exchangeable Preferred Stock on May 1, 2007
at a redemption price equal to the liquidation preference of $1,000 per share,
plus accrued and unpaid dividends to the date of redemption. ICG has the
option to redeem the Exchangeable Preferred Stock on or after May 1, 2001, in
whole or in part, at redemption prices declining to 100% on May 1, 2004.
The Exchangeable Preferred Stock is exchangeable, at the option of ICG,
into Subordinated Exchange Debentures due May 1, 2007 and bearing an interest
rate of 14 1/4% per annum, subject to (i) such exchange being permitted by the
terms of the 13 1/2% Notes Indenture and the 12 1/2% Notes Indenture, and (ii)
the conditions set forth in the Amended Articles of Incorporation of ICG being
satisfied. If issued, IntelCom will guarantee the Subordinated Exchange
Debentures on a senior subordinated unsecured basis.
13 1/2% NOTES
In August 1995, the Company issued 58,340 Units, each consisting of ten
13 1/2% Notes and warrants to purchase 33 shares of IntelCom Common Shares,
resulting in net proceeds of approximately $286.0 million, net of
approximately $14.0 million in costs. The 13 1/2% Notes were sold at a
discount of approximately 51% of the stated maturity of $584,300,000 and will
mature on September 15, 2005. Cash interest accrues at a 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.
ICG may redeem the 13 1/2% Notes on or after September 15, 2000, in whole
or in part, at redemption prices declining to 100% on September 15, 2002, plus
interest and unpaid interest, if any, to the date of redemption. The 13 1/2%
Notes are guaranteed on an unsecured unsubordinated basis by IntelCom. The 13
1/2% Notes Indenture contains certain covenants which provide for limitations
on indebtedness, dividends, asset sales and certain other transactions.
117
<PAGE>
CONVERTIBLE SUBORDINATED NOTES
In September 1993, IntelCom issued $18.0 million of 8% Convertible
Subordinated Notes and in October 1993, IntelCom issued an additional $47.8
million of 7% Convertible Subordinated Notes. Interest on the Convertible
Subordinated Notes is payable in cash or additional Convertible Subordinated
Notes ("Interest Notes") at the option of IntelCom. The Convertible
Subordinated Notes are subordinated to all present and future senior debt of
IntelCom. The 8% Convertible Subordinated Notes, excluding unpaid
interest, are convertible, at the option of the holder, at any time into
IntelCom Common Shares at a conversion price of $15.60 for each IntelCom
Common Share, subject to adjustment. As of March 31, 1996, $8.0 million of
the 8% Convertible Subordinated Notes and $1.2 million of Interest Notes had
been converted into 589,742 IntelCom Common Shares. The Company, on June 7,
1996, notified the holders of the 8% Convertible Subordinated Notes of its
intent to redeem the 8% Convertible Subordinated Notes, together with accrued
interest. The holders have 30 days to convert the 8% Convertible
Subordinated Notes to IntelCom Common Shares prior to the Company redeeming
the 8% Convertible Subordinated Notes. All or any portion of the outstanding
principal amount of any 7% Convertible Subordinated Notes (including issued
Interest Notes but excluding unpaid interest) may be converted, at the option
of the holder, into IntelCom Common Shares at a conversion price of $18.00 for
each IntelCom Common Share. Subject to compliance with the terms of the
Company's debt agreements and other relevant instruments, IntelCom may redeem
the 7% Convertible Subordinated Notes, in whole or in part, together with
accrued interest, if the trading price of the IntelCom Common Shares exceeds
$21.60 per share, subject to adjustment for a period of 30 consecutive days.
As of March 31, 1996, $10.8 million of interest had accrued on the
Convertible Subordinated Notes of which $10.4 million in Interest Notes had
been issued as payment of interest on the Convertible Subordinated Notes. The
remaining accrued Interest Notes were issued on April 30, 1996.
OHIO LINX CREDIT AGREEMENT
ICG Ohio LINX, Inc. ("Ohio LINX"), the subsidiary of ICG that operates the
Company's Cleveland and Dayton networks, is a party to a loan and security
agreement with AT&T Capital Corporation (the "Ohio LINX Credit Agreement").
The Ohio LINX Credit Agreement provided financing for the purchase of
equipment and services related to the initial Cleveland build. All borrowings
are payable in monthly installments through 1999 and bear interest at 11% per
annum. The Ohio LINX Credit Agreement is secured by substantially all of the
assets of Ohio LINX. The Ohio LINX Credit Agreement also contains restrictive
covenants that, among other things, prohibit the payment of dividends and the
incurrence of additional indebtedness by Ohio LINX. As of December 31, 1995,
the outstanding borrowings under the Ohio LINX Credit Facility totaled
approximately $3.3 million.
CAPITAL LEASES
As of March 31, 1996, the Company was obligated for $73.4 million
of capital leases to finance the acquisition of certain equipment. Included in
this amount is a capital lease agreement between ICG Access Services, Inc.
("ICG Access") and AT&T Capital Corporation, with an aggregate principal
balance of $16.9 million at March 31, 1996, which provides for the
leasing of digital switches from AT&T at an interest rate of approximately
8.0%. After six and one-half years, ICG Access may purchase the switches for
30% of the original price. ICG Access' obligations under this lease are
guaranteed by IntelCom and ICG. Also included in the total amount of capital
lease obligations are capital leases aggregating $8.2 million with Applied
Telecommunications Technologies Inc. and Forsythe McArthur Inc. for digital
switches and other network and Satellite Services equipment, bearing interest
at rates of up to 14.0% as of March 31, 1996.
118
<PAGE>
AVAILABLE INFORMATION
Parent is not currently subject to the reporting and informational
requirements of Sections 13 and 15(d) of the Exchange Act and, therefore, does
not file reports, proxy statements and other information required thereby.
Parent has filed the S-4 Registration Statement, of which this Proxy Statement
- Prospectus forms a part, with the SEC under the Securities Act with respect
to the shares of Parent Common Stock issuable in connection with the
Arrangement. Parent has filed a Registration Statement on Form 8-A under the
Exchange Act (the "Form 8-A") with respect to the shares of Parent Common
Stock and it is intended that the Form 8-A will be declared effective
concurrently with the S-4 Registration Statement. Upon the effectiveness of
the Form 8-A, Parent will be subject to the reporting and informational
requirements of the Exchange Act and will file reports and other information
in connection therewith.
IntelCom is, and has been, subject to the informational requirements of the
Exchange Act. The reports and other information filed and to be filed by
IntelCom and Parent with the SEC, as well as the S-4 Registration Statement
(and the exhibits and schedules thereto) may be inspected and copied at the
Public Reference Section maintained by the SEC at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and the SEC Regional Offices:
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661-2511. Copies of such
materials may also be obtained at prescribed rates from the Public Reference
Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and its public reference facilities in New York, New
York and Chicago, Illinois. In addition, certain material to be filed by
Parent may be inspected at the National Association of Securities Dealers,
Inc. ("NASD"), Public Reference Room, 1735 K Street, N.W., Washington, D.C.
20006-1506 and certain material filed by IntelCom may be inspected at the
AMEX, 86 Trinity Place, New York, New York, and at the VSE, 609 Granville
Street, Vancouver, British Columbia V7Y 1H1.
This Proxy Statement - Prospectus constitutes (i) the Prospectus of Parent
relating to the shares of Parent Common Stock issuable as a result of the
Arrangement and (ii) the Proxy Statement of IntelCom relating to the
solicitation of proxies for use at the Meeting. All information in this Proxy
Statement - Prospectus with respect to Parent has been supplied by Parent, and
all information with respect to IntelCom has been supplied by IntelCom. This
Proxy Statement - Prospectus does not contain all the information set forth in
the S-4 Registration Statement and the exhibits thereto which have been filed
with the SEC under the Securities Act and to which reference is hereby made.
Parent hereby undertakes to provide without charge to each person to whom
this Proxy Statement - Prospectus is delivered, upon oral or written request
of such person, a copy of any and all schedules and exhibits contained in the
S-4 Registration Statement. Requests for information should be addressed to:
ICG Communications, Inc., 9605 E. Maroon Circle, P.O. Box 6742, Englewood,
Colorado 80155-6742, Attn: Corporate Communications (telephone number (303)
572-5960).
1995 ANNUAL REPORT ON FORM 10-K
PERSONS WHO BENEFICIALLY OWN INTELCOM COMMON SHARES WHO WISH TO OBTAIN,
WITHOUT CHARGE, A COPY OF INTELCOM'S 1995 ANNUAL REPORT ON FORM 10-K AS FILED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION, SHOULD ADDRESS A WRITTEN
REQUEST TO THE ATTENTION OF CORPORATE COMMUNICATIONS, C/O INTELCOM GROUP
(U.S.A.), INC., 9605 EAST MAROON CIRCLE, P.O. BOX 6742, ENGLEWOOD, COLORADO
80155-6742.
119
<PAGE>
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for shares of Parent Common Stock is
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York,
New York 10005.
The transfer agents and registrars of the IntelCom Common Shares are:
Pacific Corporate Trust Company, Suite 830-625 Howe Street, Vancouver, British
Columbia V6C 3B8 in Canada, and Registrar & Transfer Company, 10 Commerce
Drive, Cranford, N.J. 07016, in the United States.
LEGAL MATTERS
The legality of the transactions contemplated by the consummation of the
Arrangement and certain tax matters are being passed upon for the Company by
Reid & Priest LLP, New York, New York and Stikeman, Elliott, Toronto, Ontario.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of September 30, 1994 and 1995, and for each of the years in
the three-year period ended September 30, 1995, have been included herein and
in the Registration Statement in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
APPROVAL OF PROXY STATEMENT -
PROSPECTUS BY BOARD OF DIRECTORS
The contents of this Proxy Statement - Prospectus and the sending thereof
to Shareholders have been approved by the Board of Directors of IntelCom.
By Order of the Board of Directors of IntelCom Group Inc.
/s/ John D. Field
----------------------------------------
June ., 1996 John D. Field
Oakville, Ontario Secretary
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTELCOM GROUP INC.
Independent Auditors' Report............................................ F- 2
Consolidated Balance Sheets, September 30, 1994 and 1995 and March 31,
1996 (unaudited)....................................................... F- 3
Consolidated Statements of Operations, Years Ended September 30, 1993,
1994 and 1995, and the Six Months Ended March 31, 1995 and 1996
(unaudited)............................................................ F- 4
Consolidated Statements of Shareholders' Equity, Years Ended September
30, 1993, 1994 and 1995 and the Six Months Ended March 31, 1996
(unaudited)............................................................ F- 5
Consolidated Statements of Cash Flows, Years Ended September 30, 1993,
1994 and 1995 and the Six Months Ended March 31, 1995 and 1996
(unaudited)............................................................ F- 6
Notes to Consolidated Financial Statements.............................. F- 7
Pro Forma Condensed Consolidated Financial Statements (unaudited)....... F-32
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996
(unaudited)............................................................ F-33
Pro Forma Condensed Consolidated Statement of Operations for the year
ended September 30, 1995 (unaudited)................................... F-34
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended March 31, 1996 (unaudited)................................ F-35
Notes to Pro Forma Condensed Consolidated Financial Statements
(unaudited)............................................................ F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
IntelCom Group Inc.:
We have audited the accompanying consolidated balance sheets of IntelCom
Group Inc. and subsidiaries as of September 30, 1994 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the years in the three-year period ended September 30, 1995. 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 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 financial position of IntelCom
Group Inc. and subsidiaries as of September 30, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended September 30, 1995, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
December 8, 1995
F-2
<PAGE>
INTELCOM GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ MARCH 31,
ASSETS 1994 1995 1996
------ -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (notes 1 and 7)..... $ 6,025 269,416 139,485
Short-term investments at cost, approximating
market value (note 1)........................ -- -- 19,552
Receivables:
Trade, net of allowance of $1,061, $2,217
and $2,859 at September 30, 1994 and
1995, and March 31, 1996, respectively..... 18,400 23,483 29,221
Revenue earned, but unbilled (note 1)....... 4,829 7,046 2,358
Joint venture and affiliate (note 2)........ 1,876 732 730
Related party (note 6)...................... 375 -- --
Other (note 6).............................. 589 1,430 1,517
-------- -------- --------
26,069 32,691 33,826
-------- -------- --------
Inventory..................................... 1,718 2,165 2,368
Prepaid expenses and deposits................. 878 3,424 2,136
Notes receivable (note 3)..................... 8,439 1,761 1,650
-------- -------- --------
Total current assets...................... 43,129 309,457 199,017
-------- -------- --------
Property and equipment (notes 4, 7 and 8)...... 131,984 228,609 307,382
Less accumulated depreciation (note 1)........ (13,109) (26,605) (31,440)
-------- -------- --------
Net property and equipment................ 118,875 202,004 275,942
-------- -------- --------
Investments (note 2)........................... 275 5,209 9,169
Long-term notes receivable (note 2)............ 960 7,599 9,683
Restricted cash (note 11)...................... -- -- 13,333
Other assets, net of accumulated amortization
(notes 2 and 5):..............................
Transmission and other licenses............... 8,391 10,792 8,910
Goodwill...................................... 21,055 29,199 30,487
Other......................................... 9,306 19,293 20,026
-------- -------- --------
38,752 59,284 59,423
-------- -------- --------
$201,991 583,553 566,567
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.............................. $ 19,693 14,712 13,459
Accrued liabilities........................... 8,881 18,346 23,423
Line-of-credit payable (note 7)............... 3,412 3,692 --
Current portion of long-term debt (note 7).... 16,171 14,454 1,185
Current portion of capital lease obligations
(note 8)..................................... 3,535 9,164 8,014
-------- -------- --------
Total current liabilities................. 51,692 60,368 46,081
-------- -------- --------
Long-term debt, net of discount, less current
portion (note 7).............................. 88,492 379,100 393,704
Capital lease obligations, less current portion
(note 8)...................................... 9,319 26,435 65,392
Liability related to business acquisition (note
2)............................................ 6,650 -- --
Deferred income taxes (note 13)................ 5,702 5,702 847
Share of losses of joint venture in excess of
investment (note 2)........................... 295 1,037 1,847
-------- -------- --------
Total liabilities......................... 162,150 472,642 507,871
-------- -------- --------
Minority interests............................. 59 4,040 3,612
Redeemable preferred stock of subsidiary
($30,000,000 liquidation value) (note 10)..... -- 14,986 19,571
Shareholders' equity (note 11):
Convertible Series B Preferred Stock, no par
value. 2,000,000 shares authorized;
990,000 shares issued and outstanding........ -- 9,350 --
Common stock, no par value. 100,000,000
shares authorized; 17,047,358, 24,990,839,
and 26,301,926 shares issued and outstanding
at September 30, 1994 and 1995, and
March 31, 1996, respectively................. 95,606 190,753 205,284
Additional paid-in capital.................... 2,200 26,492 26,520
Foreign currency translation adjustment....... (292) (330) (330)
Accumulated deficit (note 1).................. (57,732) (134,380) (195,961)
-------- -------- --------
Total shareholders' equity................ 39,782 91,885 35,513
-------- -------- --------
Commitments and contingencies (notes 2, 6, 7,
8, 9, 10, 11, 12 and 13) .....................
$201,991 583,553 566,567
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTELCOM GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecom services (note 1). $ 4,803 14,854 32,330 12,833 31,148
Network services (note
15)...................... 21,006 36,019 58,778 28,789 29,691
Satellite services........ 3,520 8,121 20,502 8,934 10,504
Other..................... 147 118 -- -- --
-------- -------- -------- -------- --------
Total revenue........... 29,476 59,112 111,610 50,556 71,343
-------- -------- -------- -------- --------
Cost of services............ 18,961 35,590 76,778 33,253 49,824
Selling, general and admin-
istrative expenses......... 10,702 30,590 65,022 27,485 40,239
Depreciation and amortiza-
tion (note 1).............. 3,473 8,198 16,624 7,107 12,361
-------- -------- -------- -------- --------
Operating expenses...... 33,136 74,378 158,424 67,845 102,424
-------- -------- -------- -------- --------
Operating loss.......... (3,660) (15,266) (46,814) (17,289) (31,081)
Other income (expense):
Interest expense.......... (2,523) (8,481) (24,368) (6,197) (29,432)
Interest income........... 24 1,788 4,162 1,203 6,475
Share of losses of joint
venture.................. -- (1,481) (741) (356) (810)
Provisions for impairment
of goodwill and
investment (note 2)...... -- -- (7,000) -- --
Other, net................ 301 (863) (764) (902) (2,577)
-------- -------- -------- -------- --------
(2,198) (9,037) (28,711) (6,252) (26,344)
-------- -------- -------- -------- --------
Loss before minority
interest, income taxes
and cumulative effect
of change in
accounting............. (5,858) (24,303) (75,525) (23,541) (57,425)
Minority interest in share
of losses (earnings),
accretion and preferred
dividends (note 10)........ (303) 435 (656) 511 (4,158)
-------- -------- -------- -------- --------
Loss before income taxes
and cumulative effect
of change in account-
ing.................... (6,161) (23,868) (76,181) (23,030) (61,583)
Income tax benefit (expense)
(note 13).................. 1,552 -- -- (11) 4,482
-------- -------- -------- -------- --------
Loss before cumulative
effect of change in
accounting............. (4,609) (23,868) (76,181) (23,041) (57,101)
Cumulative effect of change
in accounting for revenue
from
long-term telecom services
contracts (note 1)......... -- -- -- -- (3,453)
-------- -------- -------- -------- --------
Net loss................ (4,609) (23,868) (76,181) (23,041) (60,554)
Preferred stock dividend
(note 11).................. -- -- (467) -- (1,027)
-------- -------- -------- -------- --------
Net loss attributable to
common shareholders.... $ (4,609) (23,868) (76,648) (23,041) (61,581)
======== ======== ======== ======== ========
Loss per common share:
Loss before cumulative ef-
fect of change in ac-
counting................. $ (0.39) (1.56) (3.23) (1.01) (2.24)
Cumulative effect of
change in accounting..... -- -- -- -- (0.14)
Preferred stock dividend.. -- -- (0.02) -- (0.04)
-------- -------- -------- -------- --------
Loss per common share..... $ (0.39) (1.56) (3.25) (1.01) (2.42)
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 11,671 15,342 23,604 22,746 25,471
======== ======== ======== ======== ========
Pro forma amounts before
cumulative effects of
change in accounting
assuming the new method of
accounting for revenue from
long-term telecom services
contracts is applied
retroactively:
Net loss.................. $ (6,593) (24,327) (76,894) (23,681) (57,101)
======== ======== ======== ======== ========
Net loss attributable to
common shareholders...... $ (6,593) (24,327) (77,361) (23,681) (58,128)
======== ======== ======== ======== ========
Loss per common share..... $ (0.56) (1.59) (3.28) (1.04) (2.28)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTELCOM GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON FOREIGN TOTAL
SHARES SHARES ADDITIONAL CURRENCY ACCUMU- SHARE-
-------------- --------------- PAID-IN TRANSLATION LATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
------ ------ ------ -------- ---------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1,
1992................... -- $ -- 10,229 $ 38,972 5 (48) (17,103) 21,826
Shares issued for cash
(note 10):
Private placements..... -- -- 2,820 13,238 -- -- -- 13,238
Options and warrants... -- -- 454 2,119 -- -- -- 2,119
Share exchange ........ -- -- 78 197 -- -- -- 197
Shares issued as repay-
ment of debt and other
liabilities (note 11)
Related parties........ -- -- 35 223 -- -- -- 223
Others................. -- -- 189 1,077 -- -- -- 1,077
Shares issued in
connection with
business combination
(note 2).............. -- -- 63 375 -- -- -- 375
Change in foreign
currency translation
adjustment............ -- -- -- -- -- 112 -- 112
Compensation expense
related to issuance of
common stock options.. -- -- -- -- 195 -- -- 195
Net loss............... -- -- -- -- -- -- (4,609) (4,609)
----- ------ ------ -------- ------ ---- -------- -------
BALANCES AT SEPTEMBER
30, 1993............... -- -- 13,868 56,201 200 64 (21,712) 34,753
Private placement
offering costs........ -- -- -- (89) -- -- -- (89)
Shares issued for cash-
options and warrants
(note 11)............. -- -- 737 4,539 -- -- -- 4,539
Shares issued as
repayment of debt and
related accrued
interest (note 7)..... -- -- 110 883 -- -- -- 883
Shares issued in
connection with
business combinations
(note 2).............. -- -- 1,485 23,537 -- -- -- 23,537
Shares issued in
exchange for notes
receivable (note 2)... -- -- 256 3,050 -- -- -- 3,050
Shares issued as
contribution to 401(k)
plan (note 14)........ -- -- 20 257 -- -- -- 257
Warrants issued in
connection with
acquisition of
equipment............. -- -- -- -- 982 -- -- 982
Issuance of bonus and
penalty shares (note
11)................... -- -- 197 -- -- -- -- --
Acquisition of minority
interest of ICG (note
6).................... -- -- 374 7,228 107 (297) (12,152) (5,114)
Change in foreign
currency translation
adjustment............ -- -- -- -- -- (59) -- (59)
Compensation expense
related to issuance of
common stock options.. -- -- -- -- 911 -- -- 911
Net loss............... -- -- -- -- -- -- (23,868) (23,868)
----- ------ ------ -------- ------ ---- -------- -------
BALANCES AT SEPTEMBER
30, 1994............... -- -- 17,047 95,606 2,200 (292) (57,732) 39,782
Shares issued for cash
(note 11):
Public offering and
private placements.... 1,600 16,000 6,312 84,498 -- -- -- 100,498
Public offering and
private placement
costs................. -- (850) -- (6,162) -- -- -- (7,012)
Exercise of options and
warrants.............. -- -- 338 1,471 -- -- -- 1,471
Shares issued as
repayment of debt and
related accrued
interest (note 6)..... -- -- 683 9,482 -- -- -- 9,482
Shares issued in
connection with
business combinations
(note 2).............. -- -- 130 1,737 -- -- -- 1,737
Conversion of preferred
shares (note 11)...... (200) (2,000) 302 2,000 -- -- -- --
Shares issued as
contribution to 401(k)
plan (note 14)........ -- -- 38 490 -- -- -- 490
Warrants issued in
connection with
offerings (notes 7,
10, and 11)........... -- -- -- -- 24,134 -- -- 24,134
Redemption of preferred
shares (note 11)...... (410) (3,800) -- -- -- -- -- (3,800)
Dividend on preferred
shares................ -- -- -- -- -- -- (467) (467)
Change in foreign
currency translation
adjustment............ -- -- -- -- -- (38) -- (38)
Compensation expense
related to issuance of
common stock options.. -- -- -- -- 158 -- -- 158
Shares issued in
exchange for
investments and other
assets................ -- -- 123 1,398 -- -- -- 1,398
Shares issued as
payment of trade
payables.............. -- -- 18 233 -- -- -- 233
Net loss............... -- -- -- -- -- -- (76,181) (76,181)
----- ------ ------ -------- ------ ---- -------- -------
BALANCES AT SEPTEMBER
30, 1995............... 990 9,350 24,991 190,753 26,492 (330) (134,380) 91,885
Shares issued for cash-
options and warrants.. -- -- 103 766 -- -- -- 766
Shares issued as
contribution to 401(k)
plan (note 13)........ -- -- 54 576 -- -- -- 576
Conversion of preferred
shares to common
shares (note 11)...... (400) (3,780) 496 3,780 -- -- -- --
Shares issued upon
conversion of
subordinated notes
(note 7).............. -- -- 520 8,120 -- -- -- 8,120
Redemption of preferred
shares (note 11)...... (590) (5,570) -- -- -- -- -- (5,570)
Dividend on preferred
shares (note 11)...... -- -- -- -- -- -- (1,027) (1,027)
Shares issued as
repayment of debt and
related accrued
interest.............. -- -- 78 589 -- -- -- 589
Shares issued in
connection with
business combinations
(note 2).............. -- -- 60 700 -- -- -- 700
Compensation expense
related to issuance of
common stock options.. -- -- -- -- 28 -- -- 28
Net loss............... -- -- -- -- -- -- (60,554) (60,554)
----- ------ ------ -------- ------ ---- -------- -------
BALANCES AT MARCH 31,
1996 (UNAUDITED)....... -- $ -- 26,302 $205,284 26,520 (330) (195,961) 35,513
===== ====== ====== ======== ====== ==== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTELCOM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------------- -----------------
1993 1994 1995 1995 1996
-------- ------- ------- ------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activ-
ities:
Net loss....................... $ (4,609) (23,868) (76,181) (23,041) (60,554)
Adjustments to reconcile net
loss to net cash used by op-
erating activities:
Cumulative effect of change
in accounting............... -- -- -- -- 3,453
Share of losses of joint ven-
ture........................ -- 1,481 741 356 810
Share of equity in income of
affiliate................... (62) -- -- -- --
Minority interest in share of
earnings (losses), accretion
and preferred dividend...... 303 (435) 656 (511) 4,158
Depreciation and amortiza-
tion........................ 3,473 8,198 16,624 7,107 12,361
Compensation expense related
to issuance of common stock
options..................... 195 911 158 79 28
Interest expense deferred and
included in long-term debt
and non-cash interest ex-
pense....................... 224 4,885 14,068 2,432 23,915
Amortization of deferred fi-
nancing costs included in
interest expense............ 21 615 989 360 689
Deferred debt issuance costs. (910) (2,633) (13,641) (118) --
Contribution to 401(k) plan
through issuance of common
shares...................... -- 257 490 348 576
Deferred income tax benefit.. (1,924) -- -- -- (4,482)
Provisions for impairment of
goodwill and investment..... -- -- 7,000 -- --
Loss on sale of certain Sat-
ellite Services assets...... -- -- -- -- 891
Other, net................... 311 -- -- -- --
Decrease (increase) in operat-
ing assets, excluding the ef-
fects of business acquisi-
tions and non-cash transac-
tions:
Accounts receivable.......... (4,735) (13,208) (6,092) (1,831) (5,717)
Inventory.................... (118) (84) (447) (24) (362)
Prepaid expenses and depos-
its......................... (438) 317 (2,482) (5,076) (1,065)
Increase (decrease) in operat-
ing liabilities, excluding
the effects of business ac-
quisitions and non-cash
transactions:
Accounts payable and accrued
liabilities................. 5,430 13,810 1,904 (268) 3,676
Income taxes payable......... -- (411) -- -- --
-------- ------- ------- ------- --------
Net cash used by operating
activities................ $ (2,839) (10,165) (56,213) (20,187) (21,623)
-------- ------- ------- ------- --------
Cash flows from investing activ-
ities:
Notes receivable............... -- (5,249) 348 (4,955) 261
Advances to affiliates......... -- -- (2,184) (292) (373)
Advances to joint venture...... -- -- -- (3,629) (1,951)
Purchase of short-term invest-
ments......................... -- -- -- -- (19,552)
Restricted cash................ -- -- -- -- (13,333)
Payments for business acquisi-
tions, net of cash acquired... (1,094) (1,811) (8,168) (8,229) (2,680)
Long-term investment........... -- -- -- (2,000) (3,960)
Acquisition of property,
equipment and other assets,
net........................... (12,242) (43,207) (49,825) (18,536) (54,917)
Investment in joint venture.... -- (1,185) (5,452) -- --
Acquisition of minority inter-
est in affiliate.............. (65) -- -- -- --
Proceeds from the sale of cer-
tain Satellite Services as-
sets.......................... -- -- -- -- 21,593
Other investments.............. -- -- (6,061) -- --
-------- ------- ------- ------- --------
Net cash used by investing
activities................ $(13,401) (51,452) (71,342) (37,641) (74,912)
-------- ------- ------- ------- --------
Cash flows from financing activ-
ities:
Issuance of common shares for
cash.......................... 2,005 -- 84,498 74,314 --
Issuance of preferred shares
for cash...................... -- -- 16,000 -- --
Issuance of redeemable pre-
ferred stock of subsidiary.... -- -- 28,800 -- --
Offering costs related to com-
mon and preferred stock of-
ferings....................... -- -- (5,565) -- --
Redemption of preferred
shares........................ -- -- (3,800) -- (5,570)
Dividend on preferred shares... -- -- (467) -- (1,027)
Proceeds from exercise of
stock options and warrants.... 13,238 4,539 1,471 691 766
Proceeds from advances from
related parties............... 7,479 3,334 -- -- --
Payments on advances from re-
lated parties................. (12,166) (7,744) -- -- --
Principal payments on capital
lease obligations............. (507) (1,264) (6,271) (2,504) (9,561)
Proceeds from issuance of
short-term debt............... -- -- -- -- 17,500
Principal payments on short-
term debt..................... -- -- -- -- (21,192)
Proceeds from issuance of
long-term debt................ 20,672 57,340 305,613 -- --
Principal payments on long-
term debt..................... (339) (4,144) (29,333) (11,836) (14,312)
-------- ------- ------- ------- --------
Net cash provided (used) by
financing activities...... $ 30,382 52,061 390,946 60,665 (33,396)
-------- ------- ------- ------- --------
Net increase (decrease) in
cash and cash equivalents. 14,142 (9,556) 263,391 2,837 (129,931)
Cash and cash equivalents, be-
ginning of period.............. 1,439 15,581 6,025 6,025 269,416
-------- ------- ------- ------- --------
Cash and cash equivalents, end
of period...................... $ 15,581 6,025 269,416 8,862 139,485
======== ======= ======= ======= ========
Supplemental disclosure of cash
flow information:
Cash paid for interest......... $ 1,765 2,625 9,338 3,405 4,828
======== ======= ======= ======= ========
Supplemental schedule of noncash
financing and investing activi-
ties:
Common shares issued in con-
nection with business combi-
nations, repayment of debt or
conversion of liabilities to
equity ....................... $ 1,675 24,419 11,452 12,097 9,409
======== ======= ======= ======= ========
Common shares issued to ac-
quire minority interest in
subsidiary.................... $ -- 7,228 -- -- --
======== ======= ======= ======= ========
Common shares issued in ex-
change for notes receivable,
investments and other assets.. $ -- 3,050 1,398 -- --
======== ======= ======= ======= ========
Assets acquired under capital
leases and through the issu-
ance of debt or warrants...... $ 8,443 11,714 38,670 31,351 47,368
======== ======= ======= ======= ========
Liability related to business
combination................... $ -- 8,746 -- -- --
======== ======= ======= ======= ========
Reclassification of investment
in joint venture to long-term
notes receivable.............. $ -- -- 6,882 -- --
======== ======= ======= ======= ========
Conversion of notes receivable
related to business combina-
tions......................... $ -- -- 6,330 -- --
======== ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995. INFORMATION AS OF MARCH 31,
1996
AND FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
As of September 30, 1995, IntelCom Group Inc. ("IntelCom" or the "Company")
was incorporated under the Company Act of the Province of British Columbia. On
October 30, 1995, the Company was continued as a Canadian federal corporation
and ceased to be a British Columbia corporation. The Company's principal
business activity is telecommunications services including telecom services,
network services and satellite services.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
and include the accounts of the Company and its 100% owned subsidiary IntelCom
Group (U.S.A.), Inc. ("ICG") and its subsidiaries.
In addition, the accompanying consolidated financial statements include the
accounts of Teleport Transmission Holdings, Inc. ("TTH") which holds certain
transmission licenses acquired in connection with certain of the Company's
business combinations in 1994. At September 30, 1995, TTH was owned by the
Company's former chairman and another third party. As of March 1, 1996, TTH is
owned one-third each by two U.S. directors and one former director. TTH's
financial statements have been consolidated with the financial statements of
the Company due to common ownership and control.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of operations and cash flows for the six months ended March 31,
1995 and 1996 and the consolidated statement of shareholders' equity for the
six months ended March 31, 1996 have been prepared by the Company without
audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows as of March 31, 1996 and for
the six months ended March 31, 1995 and 1996 have been included.
The results of operations for the interim periods presented are not
necessarily indicative of the operating results for an entire year.
(b) Cash Equivalents and Short-Term Investments
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. The Company's investment objectives are safety, liquidity
and yield, in that order.
The Company carries all cash equivalents and short-term investments at cost,
which approximates fair value. Gains and losses are included in investment
income in the period they are realized. The cost of all securities sold is
based on the specific identification method.
(c) Inventory
Inventory, consisting of equipment to be utilized in the installation of
fiber optic communications systems and networks for customers, is recorded at
the lower of cost or market using the first-in, first-out method.
F-7
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Investments
Investments in joint ventures are accounted for using the equity method,
under which the Company's share of earnings or losses of the joint ventures is
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 accompanying consolidated financial statements. Other
investments representing an interest of 20% or more are accounted for using
the equity method of accounting. Investments of less than 20% are accounted
for using the cost method, unless the Company exercises significant influence
and/or control over the operations of the investee Company, in which case the
equity method is used.
(e) 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 market value of the
asset or the net present value of the minimum lease payments at the inception
of the lease. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets owned and the related lease term for
equipment held under capital leases.
Effective January 1, 1996, the Company has shortened the estimated
depreciable lives for substantially all of its fixed assets. These estimates
were changed to better reflect the estimated periods during which these assets
will remain in service and result in useful lives which are more consistent
with industry practice. The changes in estimates of depreciable lives are
being made on a prospective basis, beginning January 1, 1996. The effect of
this change was to increase depreciation expense and net loss attributable to
common shareholders for the six months ended March 31, 1996, by $2,334,000
($0.92 per common share). The deferred tax liability has been adjusted for the
effect of this change in estimated depreciable lives, which resulted in an
income tax benefit of $4,482,000 for the three months ended March 31, 1996.
Major categories of estimated useful lives before and after January 1, 1996
are as follows:
<TABLE>
<CAPTION>
BEFORE AFTER
JANUARY 1, JANUARY 1,
1996 1996
------------- ------------
<S> <C> <C>
Office furniture and equipment ................ 5 to 7 years 3 to 7 years
Buildings and improvements .................... 31.5 years 31.5 years
Machinery and equipment ....................... 7 to 15 years 3 to 8 years
Switch equipment .............................. 15 years 10 years
Fiber optic transmission system ............... 30 years 20 years
</TABLE>
(f) Other Assets
Amounts related to the acquisition of transmission and other licenses are
recorded at cost. Amortization is provided using the straight-line method over
20 years.
Goodwill results from the application of the purchase method of accounting
for business combinations. Amortization is provided using the straight-line
method over 20 years.
Rights of way and noncompete agreements are recorded at cost, and amortized
using the straight-line method over the terms of the agreements, currently
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.
F-8
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company periodically evaluates the carrying value of intangible assets
using a discounted cash flow methodology and provides a provision for
impairment, if necessary, in the year the impairment is identified.
(g) Foreign Currency Translation
The accounts of Canadian entities are measured using the Canadian dollar as
the functional currency. Assets and liabilities are translated into U.S.
dollars using current exchange rates in effect at the balance sheet date and
revenue and expense accounts are translated using a weighted average exchange
rate during the period. Net exchange gains and losses resulting from such
translation are included as a separate component of shareholders' equity.
Gains and losses on foreign currency transactions, when applicable, are
included in other income. There were no significant gains or losses on foreign
currency transactions for the years ended September 30, 1993, 1994 and 1995
and for the six months ended March 31, 1995 and 1996. All other operations are
measured using the U.S. dollar as the functional currency.
(h) Revenue Recognition
Effective January 1, 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company will
recognize revenue as services are provided and will continue 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 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 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, and has presented the pro forma effects on
prior periods assuming the change had been applied retroactively. The
Company's results for the six months ended March 31, 1996 reflect a charge of
$3,453,000 relating to the cumulative effect of this change in accounting as
of October 1, 1995. The effect of this change in accounting for the six months
ended March 31, 1996 was not significant and the effect of the change is not
expected to be significant for the year ended September 30, 1996.
Revenue from the construction of telecom private networks which is
anticipated to have a duration in excess of one year is recognized using the
percentage of completion method of accounting for long-term contracts in
proportion to the direct operating costs incurred. Losses, if any, are
recorded in the period when identified.
Revenue from satellite services is recognized as the service is rendered.
Revenue from network services contracts for the design and installation of
fiber optic communication systems and networks, which are generally short term
in duration, is also recognized using the percentage of completion method of
accounting. Maintenance revenue is recognized as the services are provided.
Uncollectible trade receivables are accounted for using the allowance
method.
(i) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement
109). Under the asset and liability method of
F-9
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement 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
Statement 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.
(j) Loss Per Common Share
Loss per common share is calculated by dividing the loss attributable to
common shares by the weighted average number of shares outstanding.
Common stock equivalents, which include options, warrants and convertible
subordinated notes and preferred stock, are not included in the loss per
common share calculation as their effect is anti-dilutive.
(k) Reclassifications
Certain 1993, 1994 and 1995 amounts have been reclassified for comparative
purposes.
(2) BUSINESS COMBINATIONS AND INVESTMENTS
(a) Acquisitions and Investments Subsequent to September 30, 1995
On January 3, 1996, the Company purchased the 49% minority interest of Fiber
Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned subsidiary.
Consideration for the purchase was $1,924,000 in cash and 66,236 common shares
of the Company valued at $748,000, for total consideration of $2,672,000.
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., publisher of The San Diego Union Tribune,
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 of
Linkatel. At March 31, 1996, the Company had invested $4.0 million in cash.
The remaining $6.0 million was paid in April 1996, at which time the
partnership was renamed ICG Telecom of San Diego, L.P. ("ICG Telecom of San
Diego").
On March 29, 1996, the Company acquired a 90% equity interest in Maritime
Cellular Tele-Network, Inc. ("MCN"), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels, off-shore
platforms and land-based mobile units, for $685,000 in cash and $412,000 of
assumed debt, for total consideration of $1,097,000.
(b) Acquisitions and Investments During the Year Ended September 30, 1995
On January 3, 1995, the Company and an unaffiliated entity formed Maritime
Telecommunications Network, Inc.("MTN") to provide wireless communications
through satellites to the maritime cruise industry and U.S. Navy vessels. The
Company acquired an approximate 64% interest in MTN, $4,403,000 in convertible
promissory notes payable by MTN and consulting and non-compete agreements
valued at an aggregate of $250,000 in exchange for $9,021,000 cash, the
surrender and cancellation of a note to the Company from the other entity for
$600,000 plus interest, 408,347 Company Common Shares valued at $5,075,000 (of
which 256,303 Common Shares were issued in the fourth quarter of fiscal year
1994) and the Company's commitment to provide up to $2,700,000 in additional
convertible working capital advances to MTN as required by MTN. The other
shareholder of MTN contributed the assets of a predecessor business to MTN,
which also assumed
F-10
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$2,058,000 of obligations of the predecessor business. The Company agreed to
pay a $500,000 finder's fee obligation of the predecessor to a third party.
The Company has also agreed that the Company will purchase the MTN shares
owned by the other shareholder of MTN at fair market value, as defined, if MTN
has not completed a public offering of common stock by January 3, 1998.
On March 9, 1995, the Company purchased a 56% interest and an additional 2%
interest on July 21, 1995 in Zycom Corporation, an Alberta, Canada corporation
whose shares are traded on the Alberta Stock Exchange. Consideration for the
purchase was $830,000 in cash, the conversion of $2,000,000 in notes
receivable, and the assumption of $641,000 in debt for total consideration of
$3,471,000. In March 1996, the Company acquired an additional approximate 12%
equity interest in Zycom by converting a $3.2 million receivable due from
Zycom.
The above acquisitions were accounted for using the purchase method of
accounting. The aggregate purchase price of the 1995 acquisitions, in which
the Company obtained a controlling interest, was allocated based on fair
values as follows (in thousands):
<TABLE>
<S> <C>
Current assets.................................................. $ 1,835
Property and equipment.......................................... 9,086
Other assets, including goodwill................................ 16,986
Current liabilities............................................. (2,764)
Long-term liabilities........................................... (6,779)
Minority interest............................................... (4,850)
--------
$ 13,514
========
</TABLE>
Revenue, net loss and loss per share on a pro forma basis including the
operations of the businesses acquired in 1995, are not significantly different
from the Company's historical 1994 and 1995 results included in the
accompanying consolidated financial statements.
On November 16, 1994 and January 3, 1995, the Company purchased, for total
cash consideration of $2,000,000, an aggregate of 571,428 shares of
InterAmericas Communications Corporation ("InterAmCom") which represented an
approximate 6% interest. During the fourth quarter of fiscal 1995, the Company
recorded an allowance of $2,000,000 for the impairment of the investment due
to management's estimate of the net realizable value of the investment.
During fiscal 1995, the Company invested $5,209,000 ($3,900,000 in cash,
$1,100,000 in common shares, and the conversion of $209,000 in notes
receivable) in StarCom International Optics Corporation ("StarCom"), for which
the Company received a 25% equity interest in each of Starcom's wholly owned
operating subsidiaries. The total acquisition price is included in investments
in the accompanying consolidated financial statements. The 25% equity interest
has been pledged as collateral for StarCom borrowings.
(c) Acquisitions During the Year Ended September 30, 1994
On August 19, 1994, the Company acquired DataCom Integrated Systems
Corporation. The Company issued 141,654 common shares (14,854 of which were
issued in fiscal 1995) valued at $2,043,994 as consideration for the purchase.
In addition, the Company may be required to make an additional payment,
payable in common shares of the Company, up to a maximum of $3,500,000, based
on future performance of that business.
On July 22, 1994, the Company completed the acquisition of 100% of FiberCap,
Inc. ("FiberCap"). Consideration for the purchase was $250,000 in cash, 57,250
common shares of the Company valued at $750,000 and a note payable of $100,000
for total consideration of $1,100,000.
F-11
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 29, 1994, the Company acquired 100% of the shares of Mid-American
Cable Inc., a Kentucky corporation, for an aggregate price of $1,600,000.
Consideration for the purchase was $200,000 in cash and 84,401 common shares
of the Company valued at $1,400,000.
Effective April 29, 1994, the Company acquired a 100% interest in PTI Harbor
Bay, Inc./UpSouth Corporation ("Bay Area Teleport"). Total consideration paid
for the purchase was $285,000 in cash and 1,183,147 common shares of the
Company valued at $19,037,000 for total consideration of $19,322,000.
Effective April 11, 1994, the Company acquired substantially all the
business assets of Mtel Digital System, Inc. ("Mtel DS"). Consideration for
the purchase was $699,000 in cash and a note payable for $6,883,000, bearing
interest at 7.5% per annum, for total consideration of $7,582,000.
In connection with the Bay Area Teleport and Mtel DS acquisitions, the
Company paid approximately $450,000 to an unaffiliated third party as finders
fees which are included in the cost of the acquisitions. The fees were
satisfied through the issuance of 31,513 of the Company's common shares.
On February 24, 1994, the Company, by letter of agreement and by amendment
dated March 10, 1994, agreed to enter into a stock purchase agreement to
acquire 100% of the shares of Nova-Net Communications, Inc. ("Nova-Net"), a
Delaware corporation. The Company assumed management control of Nova-Net
effective May 1, 1994 and completed the acquisition on November 2, 1994.
Consideration for the purchase was $700,000 in cash, assumption of $1,396,000
in outstanding debt, after payments subsequent to September 30, 1994 (see note
7), and $6,650,000 in common stock of the Company for an aggregate price of
$8,746,000. Based on the assumption of control, as described above, the
acquisition of Nova-Net including the purchase obligation of $8,746,000 was
recorded as of May 1, 1994, and the results of operations of Nova-Net are
included in the Company's financial statements since May 1, 1994. During the
fourth quarter of fiscal year 1995, the Company recorded a provision for
impairment of the goodwill recorded in connection with the Nova-Net
acquisition of $5,000,000.
On October 14, 1993, the Company purchased all the real and personal
property and licenses of Steele Valley earth station for consideration of
$875,000, which was satisfied through the issuance of 2,253 common shares of
the Company valued at $50,000 and $825,000 in cash.
All of the above acquisitions were accounted for using the purchase method
of accounting. The aggregate purchase price of the 1994 acquisitions was
allocated based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Current assets................................................... $ 4,848
Property and equipment........................................... 23,278
Other assets, including goodwill................................. 19,181
Current liabilities.............................................. (5,588)
-------
$41,719
=======
</TABLE>
(d) Acquisitions During the Year Ended September 30, 1993
Effective August 17, 1993, the Company, through its subsidiary ICG, acquired
an 80% interest in Ohio Local Interconnection Network Exchange Co. ("Ohio
Linx"). Consideration for the acquisition was $1,000,000 in cash and 129,032
common shares of the Company with a value of $1,000,000. Pursuant to the
acquisition agreement, the shareholders of the 20% minority interest in Ohio
Linx have an option that requires the Company to purchase their 20% ownership
interest, if and when exercised, and the Company, at any time after the fifth
anniversary of the closing, has the option to acquire the 20% minority
interest at a price to be determined by a formula defined in the agreement.
F-12
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective June 24, 1993, the Company, through its subsidiary ICG, acquired a
100% ownership interest in PrivaCom, Inc. ("PrivaCom") for cash consideration
of $1,200,000 and a long-term note payable of $987,644. Concurrently, the
Company settled $2,307,434 in obligations of PrivaCom for cash.
During the year ended September 30, 1993, the Company acquired a 100%
interest in Teleport Transmission Company ("TTC"). The acquisition was
completed through the issuance of 63,416 common shares of the Company with a
value of $375,307.
The above acquisitions have been accounted for using the purchase method of
accounting. The aggregate purchase price of the 1993 acquisitions was
allocated based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Current assets................................................... $ 78
Property and equipment........................................... 10,693
Other assets, including goodwill................................. 669
Current liabilities.............................................. (4,569)
-------
$ 6,871
=======
</TABLE>
(e) Investments in Joint Venture and Affiliate
On September 29, 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc. (now GST Communications Inc. ("GST")) in
which each participant has a 50% interest. The purpose of the joint venture is
to design, construct and operate a competitive access network in Phoenix. In
return for its 50% interest, the Company was required to commit to provide
equity or debt financing of $10,000,000 on or before January 24, 1994, which
commitment was provided on January 21, 1994. Of the $10,000,000 of financing
required to be provided by the Company, $8,833,106 has been provided as of
March 31, 1996 and is included in long-term notes receivable. An additional
$446,000 in working capital advances has been included in Receivables--Joint
venture and affiliate as of September 30, 1995 and March 31, 1996 ($1,876,000
at September 30, 1994). The Company began to record losses for its 50% share
in the joint venture in the second quarter of fiscal 1994, and as of March 31,
1996 had recorded a total loss of $3,032,000, including a loss of $810,000 for
the six months ended March 31, 1996. The Company's equity contribution to the
joint venture through March 31, 1996 totaled $1,185,000.
Also included in Receivables--Joint venture and affiliate at September 30,
1995 and March 31, 1996 is $302,000 and $301,000, respectively, due from an
affiliate of the Company's Mexican subsidiary.
The Company intends to sell its investments in Phoenix and Mexico.
(3) NOTES RECEIVABLE
Notes receivable due within one year are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------- MARCH 31,
1994 1995 1996
------- ------ ---------
<S> <C> <C> <C>
Due from Crescomm Telecommunications Services,
Inc., with interest at approximately 8%....... $ 3,300 250 --
Due from Zycom Corporation, with interest at
10%........................................... 3,100 -- --
Due from NovoComm, Inc., with interest at 8%... 1,500 1,500 1,500
Due from StarCom International Optics Corpora-
tion, with interest at 10% per year........... 381 -- --
Other.......................................... 158 11 150
------- ------ -----
$ 8,439 1,761 1,650
======= ====== =====
</TABLE>
F-13
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment, including assets owned under capital leases, is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1994 1995 1996
-------- ------- ---------
<S> <C> <C> <C>
Land............................................ $ 1,519 1,519 --
Buildings and improvements...................... 3,516 3,676 2,382
Furniture, machinery and equipment.............. 55,910 93,009 104,980
Switch equipment................................ -- 20,302 49,129
Fiber-optic transmission system................. 57,788 74,251 86,621
Construction in process......................... 13,251 35,852 64,270
-------- ------- -------
131,984 228,609 307,382
Less accumulated depreciation................... (13,109) (26,605) (31,440)
-------- ------- -------
$118,875 202,004 275,942
======== ======= =======
</TABLE>
Property and equipment includes approximately $33,352,000, and $64,270,000
of equipment which has not been placed in service at September 30, 1995 and
March 31, 1996, respectively, and accordingly, is not being depreciated.
Certain of the above assets have been pledged as security for long-term debt
and capital lease obligations.
(5) OTHER ASSETS
Other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------- MARCH 31,
1994 1995 1996
------- ------ ---------
<S> <C> <C> <C>
Transmission and other licenses...................... $ 9,776 12,480 10,255
Less accumulated amortization........................ (1,385) (1,688) (1,345)
------- ------ ------
Transmission and other licenses.................... $ 8,391 10,792 8,910
======= ====== ======
Goodwill............................................. 22,835 32,315 35,814
Less accumulated amortization........................ (1,780) (3,116) (5,327)
------- ------ ------
Goodwill.......................................... $21,055 29,199 30,487
======= ====== ======
Deferred financing costs............................. $ 4,766 17,930 18,219
Risk premium......................................... 2,336 2,004 --
Deferred Common Stock offering costs................. 1,165 -- --
Rights of way........................................ 999 1,091 1,518
Deposits............................................. 994 811 1,188
Noncompete agreements................................ 352 602 602
Minutes of use agreement............................. -- -- 1,421
Other................................................ 937 552 792
------- ------ ------
11,549 22,990 23,740
Less accumulated amortization........................ (2,243) (3,697) (3,714)
------- ------ ------
Other.............................................. $ 9,306 19,293 20,026
======= ====== ======
</TABLE>
F-14
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) RELATED PARTY TRANSACTIONS
Effective May 31, 1994, the Company acquired the remaining 4% minority
interest in ICG from Worldwide Condominium Developments, Inc. ("WWCDI"), a
related entity. The 4% interest was exchanged for (i) the transfer of the
Company's oil and gas properties (at an estimated value of approximately $0.9
million), (ii) the surrender and cancellation of two demand promissory notes
receivable from William W. Becker, the Company's former chairman, president
and CEO and owner of WWCDI (the "Becker Interests"), in the total principal
amount of approximately $3,985,000 and (iii) 373,663 of the Company's common
shares. The 4% minority interest in ICG was valued at approximately
$12,200,000 by the disinterested members of the Company's Board of Directors.
The transaction was approved unanimously by the Company's disinterested
directors, and ratified by the Company's non-related shareholders.
Due to the related party nature of the purchase, the investment has been
recorded at the historical basis of WWCDI. As a result, consideration in
excess of the historical basis has been recorded in a manner similar to a
dividend.
Activity in related party receivable and (payable) balances (in thousands)
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
--------------
1994 1995
------- -----
<S> <C> <C>
Balance, beginning of year.................................. $ (79) 375
Payments or advances received............................... (3,166) (666)
Cash advances or common shares provided on behalf of the
Company to satisfy business acquisitions or related party
balances................................................... (4,363) --
Payments made............................................... 7,744 --
Interest expense............................................ (168) --
Services provided to affiliates of the Becker Interests..... 375 --
Expenses paid on behalf of the Becker Interests............. -- 291
Foreign exchange translation adjustment..................... 32 --
------- -----
$ 375 --
======= =====
</TABLE>
At September 30, 1994 and 1995 and March 31, 1996, receivables from officers
and employees in the amounts of $207,000, $619,000 and $995,000, respectively,
are primarily comprised of notes bearing interest at 7% and are included in
receivables--other in the accompanying consolidated financial statements. The
notes receivable relate to relocation expenses of officers.
The Company recognized telecommunications revenue of approximately
$2,207,000 and $1,312,500 for the years ended September 30, 1993 and 1994 from
companies beneficially owned by the Becker Interests. No such revenue was
recognized for the year ended September 30, 1995 or the six months ended March
31, 1996.
F-15
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) LONG-TERM DEBT AND SHORT-TERM NOTES PAYABLE
Long-term debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Senior discount notes,
net of discount (a)..... $ -- 299,934 321,255
Convertible subordinated
notes (b)............... 70,401 74,434 68,534
Credit facility, paid
subsequent to September
30, 1995 (c)............ 17,109 13,515 --
Note payable with
interest at 11%, due
monthly through fiscal
1999, secured by
equipment .............. 3,809 3,493 3,172
Mortgage payable with
interest at 8.5%, due
monthly through 2009,
secured by building .... 1,300 1,242 1,218
Notes payable to sellers
of FOTI and FOTDS (d)... 900 600 --
Notes payable to sellers
of PrivaCom (note 2)
(e)..................... 496 99 99
Non-interest-bearing note
payable to seller of
Ohio Linx, paid in 1995
(note 2)................ 961 -- --
Note payable to seller of
Mtel DS, paid in 1995
(note 2)................ 6,883 -- --
Note payable to seller of
Nova-Net, paid in 1995
(note 2)................ 700 -- --
Notes payable assumed in
acquisition of Nova-Net,
with interest ranging
from 0% to 17.25%, paid
in 1995 (note 2).......... 1,511 -- --
Other.................... 593 237 611
------- ------- -------
104,663 393,554 394,889
Less current portion..... (16,171) (14,454) (1,185)
------- ------- -------
$88,492 379,100 393,704
======= ======= =======
</TABLE>
(a) Senior Discount Notes
Effective August 8, 1995, ICG completed a high yield debt offering through
the issuance of 58,340 Units, each Unit consisting of ten $1,000, 13 1/2%
Senior Discount Notes ("the 13 1/2% Notes") due September 15, 2005 and
warrants to purchase 33 common shares of the Company, resulting in net
proceeds of approximately $286 million, net of approximately $14 million in
costs. The 13 1/2% Notes were sold at approximately 51% of the stated maturity
of $584,300,000, and will mature on September 15, 2005. Interest accrues at
the rate of 13.5% per annum beginning September 15, 2000 and is payable in
cash each March 15 and September 15 commencing March 15, 2001.
The 13 1/2% Notes were originally recorded at approximately $294 million,
which represents the $300 million in proceeds less the approximate $6 million
value assigned to the warrants, which is included in additional paid-in
capital. The discount on the 13 1/2% Notes is being accreted using the
interest method over five years until September 15, 2000, the date at which
the notes can first be redeemed. The value assigned to the warrants,
representing additional debt discount, is also being accreted to the debt over
the five year period. The accretion of the total discount is included in
interest expense in the accompanying consolidated financial statements.
ICG 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 13 1/2% Notes are guaranteed
on a senior, unsecured basis by the Company. The 13 1/2% Note agreement
contains certain covenants which provide for limitations on indebtedness,
dividends, asset sales, and certain other transactions.
The warrants entitle the holder to purchase one common share of the Company
at the exercise price of $12.51 per share and are exercisable at any time
between August 8, 1996 and August 8, 2005 (see note 11 (d)).
F-16
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The $14 million in deferred financing costs consists primarily of a 4% fee
paid to the underwriters, and is amortized to interest expense over the ten-
year term of the notes, using the interest method.
In connection with the issuance of the 13 1/2% Notes, the Company obtained
$6,000,000 of interim financing from the placement agent and certain private
investors in exchange for the issuance of an aggregate of 520,000 Series A
Warrants (see note 11 (d)). The $6,000,000 was repaid with proceeds from the
13 1/2% Note offering. As a result of the repayment of the interim financing,
the value assigned to these warrants totaling $3,026,000, representing debt
discount, was charged to interest expense during the year ended September 30,
1995.
(b) Convertible Subordinated Notes
Effective September 17, 1993, the Company issued $18,000,000 in convertible
subordinated notes with interest at 8% (8% Notes). The 8% Notes are due
September 17, 1998, unless earlier converted or redeemed. Interest is payable,
at the option of the Company, in cash or through the issuance of additional 8%
notes. The 8% Notes are subordinated to all present and future senior debt.
The 8% notes, excluding unpaid interest, are convertible, at the option of
the holder, at any time into common shares of the Company at a conversion
price of $15.60 for each common share. During fiscal 1995, approximately
$1,080,000 of the subordinated notes, including $80,000 of interest notes,
were converted to 69,230 common shares of the Company. Through March 31, 1996,
an additional $7,000,000 of the subordinated notes and $1,100,000 of interest
notes were converted into 520,512 shares of the Company.
On June 6, 1996, the Company notified the holders of the 8% Notes of its
intent to redeem the 8% Notes, together with accrued interest. The holders
have 30 days to convert the 8% Notes to common shares prior to the Company
redeeming the 8% Notes.
The Company, in conjunction with the issuance of the 8% Notes, paid to its
placement agent a private placement fee of $900,000. The private placement
fee, included in deferred financing costs, is being amortized over the term of
the 8% Notes.
Effective October 28, 1993, the Company issued $47,750,000 in convertible
subordinated notes with interest at 7% (7% Notes). The 7% Notes are due
October 30, 1998, unless earlier converted or redeemed. Interest is payable,
at the option of the Company, in cash or through the issuance of additional 7%
notes. The 7% Notes are subordinated to all present and future senior debt.
All or any portion of the outstanding principal amount of any note (but no
part of the unpaid interest) may, at the option of the holder, be converted
into common shares of the Company at a conversion price of $18.00 for each
common share.
The Company may redeem the 7% Notes, in whole or in part, together with
accrued interest, if the trading price of the Company's common shares exceeds
$21.60 for a period of 30 consecutive days.
The Company, in conjunction with the issuance of the 7% Notes, paid to the
placement agent a private placement fee of $2,387,500. The private placement
fee, included in deferred financing costs, is being amortized over the term of
the 7% Notes.
As of September 30, 1994, 1995 and March 31, 1996, $4,651,270, $9,684,429
and $10,784,356, respectively, in accrued interest and secondary notes have
been included in the subordinated notes.
F-17
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Credit Facility
Effective November 16, 1990, the Company, through Teleport Denver Ltd.
("TDL"), a subsidiary of ICG, entered into an $18,000,000 financing
arrangement with Communications Credit Corp. ("CCC"), a subsidiary of Northern
Telecom Finance Corporation, to provide for the acquisition, construction,
installation, operation, maintenance and expansion of a fiber optic
transmission system.
Through September 30, 1995, the Company had contributed approximately
$14,264,000 to TDL in capital contributions which entitled the Company to
obtain all amounts to be borrowed under the agreement. The promissory notes
accrued interest at 5.5% over the 90-day high grade commercial paper rate with
a maximum rate of 14.5% (11.32% at September 30, 1995).
In December 1995, the Company refinanced this credit facility as part of a
short-term financing agreement with Norwest Bank Colorado, N.A. ("Norwest")
described below, which was repaid in March 1996.
(d) Notes Payable to Sellers of FOTI and FOTDS
In conjunction with the 1992 acquisitions of FOTI and Fiber Optic
Technologies Data Systems, Inc. (FOTDS), the Company issued notes payable of
$2,001,044 bearing interest at 7% per annum payable annually in cash or common
shares at the option of the Company. Principal is payable through the issuance
of 266,800 common shares of the Company, at a deemed value of $7.50 per common
share. As of December 31, 1995, 186,800 common shares of the Company had been
issued. On January 3, 1996, the final payment was satisfied at a discount,
with the Company issuing 76,027 common shares pursuant to an agreement to
purchase the remaining 49% of FOTI.
(e) Notes Payable to Sellers of PrivaCom
During the year ended September 30, 1993, in conjunction with the
acquisition of PrivaCom, the Company issued notes payable for a discounted
amount of $987,644 with an effective interest rate of 14% over the term of the
note. Principal and interest are payable through the issuance of 209,832
common shares of the Company. During the years ended September 30, 1993, 1994
and 1995, 52,720, 52,720 and 52,458 common shares were issued, respectively.
An additional 52,196 shares are deliverable on June 24, 1996. As the notes are
to be satisfied through the issuance of common shares, the amounts have been
classified as long-term.
Short-term note payable and line-of-credit
At September 30, 1995, FOTI maintained a $4,000,000 line of credit with a
financial institution. The line of credit bears interest at the prime rate
plus 5% (13.75% at September 30, 1995) and was due on demand. The line of
credit agreement included certain covenants, related to transactions affecting
collateral, positive cash flows and restrictions on other borrowings of FOTI,
and was secured by all of the assets of FOTI. In December 1995, the Company
refinanced the line of credit as part of a short-term facility with Norwest
described below, which was repaid in March 1996.
In December 1995, ICG obtained short-term financing with Norwest to
refinance certain of the Company's debt. The financing agreement provided for
$17,500,000 in short-term financing and bears interest at 2.5% above the Money
Market Account yield (3.3% at December 31, 1995), for a rate of 5.8%. The
Company paid off this debt and accrued interest in March 1996.
F-18
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Scheduled principal maturities of long-term debt as of September 30, 1995
and March 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- ---------
<S> <C> <C>
Due Within
One year............................................. $ 14,454 1,185
Two years............................................ 790 818
Three years.......................................... 20,789 69,394
Four years........................................... 55,310 658
Five years........................................... 578 349
Thereafter(a)........................................ 585,999 585,530
--------- --------
677,920 657,934
Less unaccreted discount on Senior Notes........... (284,366) (263,045)
--------- --------
$ 393,554 394,889
========= ========
</TABLE>
- --------
(a) Includes $584,300 of Senior Notes due at maturity.
(8) CAPITAL LEASE OBLIGATIONS
The Company is obligated under various capital lease agreements for
equipment at September 30, 1995 and March 31, 1996. The following is a summary
of property and equipment owned under capital leases at September 30 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- ------
<S> <C> <C>
Machinery and equipment........................................ $ 6,437 11,012
Switch equipment............................................... -- 17,529
Construction in progress....................................... 7,238 13,935
------- ------
13,675 42,476
Less accumulated depreciation.................................. (901) (2,117)
------- ------
$12,774 40,359
======= ======
</TABLE>
The future required payments under these capital lease obligations
subsequent to September 30, 1995 and March 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- ---------
<S> <C> <C>
DUE WITHIN:
One year............................................. $12,958 11,811
Two years............................................ 11,941 13,693
Three years.......................................... 8,137 15,240
Four years........................................... 3,940 13,943
Five years........................................... 3,414 14,532
Thereafter........................................... 4,247 115,954
------- --------
Total minimum lease payments....................... 44,637 185,173
Less amounts representing interest................... (9,038) (111,767)
------- --------
Present value of net minimum lease payments.......... 35,599 73,406
Less current portion................................. (9,164) (8,014)
------- --------
$26,435 65,392
======= ========
</TABLE>
F-19
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) PRIVATE PLACEMENT
On April 30, 1996, ICG completed a private placement (the "Private
Placement") of 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and of 14
1/4% Exchangeable Preferred Stock for gross proceeds of $300.0 million and
$150.0 million, respectively. Net proceeds from the Private Placement after
costs of approximately $17.0 million were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of ICG (guaranteed by the
Company) that mature on May 1, 2006, at 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 Preferred Stock consists of 150,000 shares 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 commencing August
1, 1996. Through May 1, 2001, the dividend is payable at the option of ICG in
cash or additional shares of Preferred Stock. ICG may exchange the Preferred
Stock into 14 1/4% Senior Subordinated Exchange Debentures at any time after
the exchange is permitted by certain indenture restrictions. The Preferred
Stock is subject to mandatory redemption on May 1, 2007.
Approximately $35.3 million of the proceeds from the Private Placement were
used to redeem the 12 1/2% Redeemable Preferred Stock of ICG (the "Redeemable
Preferred Stock") issued in August 1995 ($30.0 million), pay accrued preferred
dividends ($2.6 million) and to repurchase 916,666 IntelCom warrants ($2.7
million) issued in connection with the Redeemable Preferred Stock. The Company
recognized a charge 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 a charge of approximately $11.5 million for the payment
with respect to consents to amendments to the 13 1/2% Notes Indenture to
permit the Private Placement, which, together, will be reflected in the
Company's results of operations for the three months ended June 30, 1996.
(10) REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
In August 1995, ICG completed a preferred stock placement in connection with
the Senior Notes offering discussed in note 7. The preferred stock placement
consisted of 300,000 shares of Redeemable Preferred Stock and warrants to
purchase 2,750,000 common shares of the Company (see note 11(d)) for net
proceeds of $28,800,000, after payment of a $1,200,000 placement fee. The
Redeemable Preferred Stock accrues dividends quarterly at an annual rate of
12% per annum.
The Redeemable Preferred Stock was originally recorded at approximately
$13,700,000 which represents the $28,800,000 in net proceeds, less the
approximate $15,100,000 value assigned to the warrants, which is included in
additional paid-in-capital of the Company. The value assigned to the warrants,
representing discount on the preferred shares, was being accreted through the
time the Redeemable Preferred Stock was redeemed on April 30, 1996, with a
portion of the proceeds from the Private Placement. As of March 31, 1996,
redeemable preferred stock of subsidiary included approximately $2,317,000 of
accrued preferred stock dividends.
Included in minority interest in share of losses (earnings), accretion and
preferred dividend for the six months ended March 31, 1996 is approximately
$4,586,000 associated with the Redeemable Preferred Stock, including the
accretion of warrants issued in connection with the Redeemable Preferred
Stock, accretion of issuance costs and a 12% preferred dividend accrual. These
costs are offset by the minority interest share of losses in subsidiaries of
approximately $428,000.
F-20
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) SHAREHOLDERS' EQUITY
Preferred Stock
In May and June 1995, the Company sold an aggregate of 1,600,000 convertible
preferred shares, having an aggregate stated value of $16,000,000. Net
proceeds to the Company, after offering costs of approximately $850,000, were
approximately $15,150,000. The convertible preferred shares were convertible
at the holders' election into common shares of the Company commencing in July
1995, at a discount from the market price at the time of conversion equal to
18.5% for $6,000,000 of the convertible preferred shares ("Series A Preferred
Stock") and 17.5% for $10,000,000 of the convertible preferred shares ("Series
B Preferred Stock").
During July 1995, 10,000 shares of the Series B Preferred Stock were
repurchased for cash of $100,000. During August and September 1995, 200,000
shares of the Series A Preferred Stock were converted to 302,029 common shares
valued at $2,000,000 and 400,000 shares of the Series A Preferred Stock were
repurchased for cash of $4,167,260. The excess of the repurchase price over
the stated value of the preferred shares purchased of $467,260 was recorded as
a preferred stock dividend in the accompanying consolidated financial
statements.
During the six months ended March 31, 1996, the Company repurchased
$5,570,000 of Series B Preferred Stock and $3,780,000 of the Series B
Preferred Stock was converted to common shares. The excess of the repurchase
and conversion price over the stated value of the preferred shares purchased
of $1,027,000 has been recorded as a preferred stock dividend in the
accompanying consolidated financial statements. No convertible preferred
shares remain outstanding.
Common Stock
(a) Public Offering
On October 24, 1994, the Company completed a public offering of its common
stock, whereby 6,900,000 shares, including 1,183,147 shares sold by selling
shareholders (the sellers of Bay Area Teleport), were sold at $14 per share.
Net proceeds to the Company, net of offering costs of approximately
$5,720,000, was approximately $74,320,000.
(b) Private Placements
In May and June 1995, the Company sold 595,000 common shares for $7.50 per
share in a private placement. Net proceeds to the Company, after offering
costs of approximately $440,000, were approximately $4,000,000.
Pursuant to a private placement memorandum dated June 1993, for the issue of
1,500,000 common shares for $8,250,000, the Company agreed to file a
registration document with the Securities and Exchange Commission of the
United States that was to become effective on or before October 11, 1993. The
registration document did not become effective on or before that date. As a
result, the Company issued, for no additional consideration, an additional
197,250 shares to the investors. The issuance of these additional bonus and
penalty shares has been recorded as a capital transaction during the year
ended September 30, 1994.
(c) Stock Option Plans
In 1991, 1992 and 1993 the Company's Board of Directors approved incentive
stock option plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase 285,000,
446,000 and 546,000 common shares of the Company, respectively, at 80% and
100% of the fair market value of the common shares at the date of grant.
Compensation expense has been recorded for options granted at an exercise
price below the fair market value of the Company's common shares at the date
of grant. The options
F-21
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
granted under these plans are subject to various vesting requirements. During
the year ended September 30, 1993, the Company's directors approved the
replenishment of 549,500 options available to be granted under the 1993 plan.
The options available under the 1991 plan have been fully granted and
exercised. At September 30, 1995, 4,000 options are available to be allocated
under the 1992 and 1993 option plans. During the year ended September 30,
1994, the Company granted options to certain directors, officers and employees
to purchase 516,000 common shares at exercise prices ranging from $4.52 to
$14.39 per share for a period of 10 years. During the year ended September 30,
1995, 900 of these options were exercised and 117,000 were canceled.
During the year ended September 30, 1995, the Company granted options to
certain directors, officers, and employees to purchase 1,550,000, 800,000 and
170,000 common shares at exercise prices of $7.94, $13.25 and $8.50 per share,
respectively. None of these options had been exercised, and 61,000 of the
800,000 options had been canceled as of September 30, 1995. As of March 31,
1996, 136,000 of the 800,000 shares have been canceled and 40,900 have been
exercised.
The following table summarizes stock option activity for the three years
ended September 30, 1995 and six months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
OUTSTANDING PRICE
OPTIONS RANGE
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Outstanding, October 1, 1992................. 365 $ 2.65- 7.85
Granted...................................... 905 2.99- 6.92
Exercised.................................... (343) 2.65- 7.85
Canceled..................................... (62) 2.99- 4.68
-----
Outstanding, September 30, 1993.............. 865
Granted...................................... 516 4.52-14.39
Exercised.................................... (62) 2.99- 5.43
-----
Outstanding, September 30, 1994.............. 1,319
Granted...................................... 2,520 7.94-13.25
Exercised.................................... (264) 2.88- 6.68
Canceled..................................... (201) 2.88-14.39
-----
Outstanding, September 30, 1995.............. 3,374
Granted...................................... 1,104 10.00-12.25
Exercised.................................... (100) 2.93-13.25
Canceled..................................... (145) 2.93-13.25
-----
Outstanding, March 31, 1996.................. 4,233
=====
</TABLE>
F-22
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The stock options outstanding (in thousands) are exercisable on the
following basis (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 MARCH 31, 1996
-------------------- --------------------
OUTSTANDING EXERCISE OUTSTANDING EXERCISE
EXPIRATION DATE OPTIONS PRICE OPTIONS PRICE
- --------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
May 29, 2000.......................... 1,550 $ 7.94 1,550 $ 7.94
December 4, 2001...................... 30 4.65 13 4.58
January 13, 2002...................... 2 5.39 2 5.32
March 12, 2002........................ 2 7.29 2 7.19
December 9, 2002...................... 399 2.98 349 2.93
December 10, 2002..................... 33 3.27 25 3.23
March 1, 2003......................... 12 4.40 13 4.34
May 10, 2003.......................... 18 5.47 18 5.39
July 12, 2003......................... 5 6.87 5 6.78
July 19, 2003......................... 2 6.79 2 6.70
July 26, 2003......................... 15 6.75 15 6.65
July 15, 2003......................... 2 5.76 2 5.68
September 12, 2003.................... 395 12.36 335 12.19
October 7, 2004....................... 739 13.25 623 13.25
July 1, 2005.......................... -- -- 5 8.50
July 6, 2005.......................... 170 8.50 170 8.50
November 13, 2005..................... -- -- 974 10.00
December 29, 2005..................... -- -- 40 12.25
January 1, 2006....................... -- -- 90 12.25
----- -----
3,374 4,233
===== =====
</TABLE>
Certain of the option plans specify the exercise prices in Canadian dollars.
The above exercise prices have been presented in U.S. dollars using the
September 30, 1995 and March 31, 1996 exchange rates.
(d) Warrants
During the years ended September 30, 1993, 1994 and 1995 the Company's
warrant activity was as follows:
(i) During the year ended September 30, 1993, the Company granted to
WWCDI bonus warrants to purchase 6,680 common shares at an exercise price
of $7.50. At September 30, 1994, all of these warrants had been exercised
for $50,100.
(ii) During the year ended September 30, 1993, the Company granted to
WWCDI bonus warrants to purchase 6,342 common shares at an exercise price
of $2.17, which were exercised for $13,762 during the year ended September
30, 1993.
(iii) During the year ended September 30, 1993, the Company granted to a
debt holder warrants to purchase 17,067, 3,255 and 11,039 common shares at
exercise prices of $6.56, $7.38 and $7.88, respectively. During the year
ended September 30, 1994, 17,067 warrants were exercised for proceeds of
$111,960.
(iv) In addition, the Company committed to grant to the same debt holder
additional warrants to purchase 28,639 common shares of the Company. These
warrants will have an exercise price equal to the market price at the time
the warrant is granted and will be exercisable for a period of five years.
During the year ended September 30, 1994, the Company granted 1,989, 15,260
and 3,665 warrants at $21.51, $20.01 and $11.80 per share, exercisable on
or before November 10, 1998, March 24, 1999, and July 8, 1999,
respectively, pursuant to this commitment. The remaining 7,725 warrants to
fulfill the commitment were
F-23
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
granted July 10, 1995 at an exercise price of $14.50 and expire on July 9,
2000. Also granted on July 10, 1995 were 60,000 additional warrants to the
same debt holder at an exercise price of $14.50 which expire on July 9,
2000. Total warrants outstanding held by the debt holder were 102,933 at
September 30, 1995 and March 31, 1996.
(v) During the year ended September 30, 1994, the Company granted to two
financial advisors warrants to purchase 75,000 and 200,000 common shares.
These warrants have an exercise price of $7.94 and $18.00 per share and are
exercisable for two- and five-year periods, respectively. During the year
ended September 30, 1995, and six months ended March 31, 1996, 74,335 and
665 of these warrants were exercised for proceeds of $590,035 and $5,278,
respectively. At March 31, 1996, the remaining 200,000 warrants are
outstanding.
(vi) Pursuant to a private placement during the year ended September 30,
1992, the Company granted to William W. Becker, a director of the Company,
warrants to purchase 600,000 common shares at exercise prices of $5.65 and
$6.51 on or before February 11, 1993 and February 11, 1994, respectively.
During the year ended September 30, 1994, these warrants were exercised for
proceeds of $3,840,201.
(vii) Pursuant to a private placement during the year ended September 30,
1992, the Company granted warrants to purchase 41,000 and 105,000 common
shares at exercise prices of $5.65 and $6.51 for each share on or before
July 17, 1993 and July 17, 1994, respectively. During the year ended
September 30, 1993, 105,000 warrants were exercised for proceeds of
$683,550. During the year ended September 30, 1994, 41,000 warrants were
exercised for proceeds of $216,582 and no warrants remain outstanding at
September 30, 1995.
(viii) The Company granted to a consultant of the Company warrants to
purchase 10,000 common shares at an exercise price of $6.40 for each share
on or before May 1, 1994. During the year ended September 30, 1994, these
warrants were exercised for $59,600.
(ix) During the year ended September 30, 1995, pursuant to the private
placement of ICG Preferred Stock and the interim financing arrangement, the
Company granted 1,895,000 Series A warrants and 1,375,000 Series B warrants
to purchase an equal number of common shares of the Company. The exercise
prices are $7.94 and $8.73, respectively, and the warrants expire on July
14, 2000. None of the warrants had been exercised as of March 31, 1996.
Subsequent to March 31, 1996, the Company repurchased 458,333 each of these
warrants for $3.21 and $2.52, respectively (see Note 9).
(x) During the year ended September 30, 1995, in connection with the
offering of Senior Notes, the Company granted 1,928,190 warrants to
purchase an equal number of common shares. The warrants are exercisable
beginning August 8, 1996 at $12.51 per share and expire on August 6, 2005.
The following table summarizes warrant activity for the three years ended
September 30, 1995 and six months ended March 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING
WARRANTS PRICE RANGE
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Outstanding, October 1, 1992 .............. 756
Granted.................................... 44 $2.17- 7.88
Exercised.................................. (111) 2.17- 6.51
-----
Outstanding, September 30, 1993............ 689
Granted.................................... 296 7.94-18.00
Exercised.................................. (675) 5.96- 7.50
-----
Outstanding, September 30, 1994............ 310
Granted.................................... 5,266 7.94-14.50
Exercised.................................. (74) 7.94
-----
Outstanding, September 30, 1995............ 5,502
Exercised.................................. (1) 7.94
-----
Outstanding, March 31, 1996................ 5,501
=====
</TABLE>
F-24
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The warrants outstanding (in thousands) are exercisable on the following
basis as of September 30, 1995 and March 31, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 MARCH 31, 1996
-------------------- --------------------
OUTSTANDING EXERCISE OUTSTANDING EXERCISE
EXPIRATION DATE WARRANTS PRICE WARRANTS PRICE
--------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
January 21, 1996................ .7 $ 7.94 -- --
June 18, 1998................... 3.3 7.38 3.3 $ 7.38
July 16, 1998................... 11.0 7.88 11.0 7.88
November 10, 1998............... 2.0 21.51 2.0 21.51
December 17, 1998............... 200.0 18.00 200.0 18.00
March 24, 1999.................. 15.3 20.01 15.3 20.01
July 8, 1999.................... 3.7 11.80 3.7 11.80
July 14, 2000................... 1,895.0 7.94 1,895.0 7.94
July 14, 2000................... 1,375.0 8.73 1,375.0 8.73
August 6, 2005.................. 1,928.2 12.51 1,928.2 12.51
------- -------
5,434.2 5,433.5
======= =======
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
(a) Sale of Teleports
In December 1995, the Company received approximately $21,100,000 from the
purchaser of four of its teleports in partial payment for the assets and
entered into a management agreement with the purchaser whereby the purchaser
assumed control over the teleport operations. Upon FCC approval of the
transaction the Company completed the sale in March 1996 and received an
additional $400,000 due to certain closing adjustments. Total proceeds were
$21,500,000 and the Company recognized a loss of approximately $800,000 on the
sale. Revenue associated with these operations was approximately $3,500,000,
$5,900,000, $9,100,000, $4,500,000 and $2,500,000 for the fiscal years ended
September 30, 1993, 1994, 1995 and the six months ended March 31, 1995 and
1996, respectively. The Company has reported results of operations from these
assets through December 31, 1995.
(b) Network construction
In November 1995, the Company signed an agreement with City Public Service
of San Antonio to license excess fiber optic facilities on a new 300-mile
fiber network being built by the municipally owned electric and gas utility to
provide for its communications needs in the greater metropolitan area.
Pursuant to this agreement the Company has provided a $12,000,000 irrevocable
letter of credit to secure payment of the Company's portion of the
construction costs. The letter of credit is secured by cash collateral of
$13,300,000.
In February 1996, the Company entered into a 20-year agreement with
WorldCom, Inc. ("WorldCom") under which the Company will pay approximately
$8.8 million for the right to use fiber along a 330-mile fiber optic network
in Ohio. The network is being constructed by WorldCom in conjunction with the
Company. An aggregate of approximately $2.6 million has been paid by the
Company through March 31, 1996, with the balance due upon the completion of
specified segments of the network.
In March 1996, the Company and Southern California Edison Company ("SCE")
jointly filed a 25-year agreement with the California Public Utilities
Commission ("CPUC") under which the Company will license 1,258 miles of fiber
optic cable in Southern California. The agreement also allows the Company to
utilize SCE's facilities to install up to 500 additional miles of fiber optic
cable. Under the terms of this agreement, SCE will be entitled to receive an
annual fee for ten years, certain fixed quarterly payments, including a
quarterly payment
F-25
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
equal to a percentage of certain network revenue, and certain other
installation and fiber connection fees. The aggregate fixed payments remaining
under this 25-year agreement totaled approximately $146.0 million at March 31,
1996. The agreement has been accounted for as a capital lease in the
accompanying consolidated balance sheets at March 31, 1996.
In March 1996, the Company entered into a long-term agreement with a
subsidiary of The Southern Company ("Southern") and Alabama Power Company
("Alabama Power") for the right to use 22 miles of existing fiber and 122
miles of additional Alabama Power rights of way and facilities to reach the
three major business centers in Birmingham. Southern will, in conjunction with
the Company, construct the network and provide maintenance services with
respect to the fiber installed. Southern also will provide consulting services
to the Company relating to the buildout of the network and potential
enhancements to the Company's products and services. Under the agreement, the
Company also is required to pay Southern a quarterly fee based on specified
percentages of the Company's revenue for services provided through this
network.
(c) Purchase Commitments
In addition to the above, the Company has entered into certain commitments
to purchase assets with an aggregate purchase price of approximately
$12,000,000 at March 31, 1996.
(d) Leases
The Company leases office space and equipment under non-cancelable operating
leases. Lease expense for the years ended September 30, 1993, 1994 and 1995
was approximately $480,000, $1,251,000 and $2,819,000, respectively. Estimated
future minimum lease payments for the years ending September 30 are (in
thousands):
<TABLE>
<S> <C>
1996.............................................................. $ 4,361
1997.............................................................. 3,146
1998.............................................................. 2,396
1999.............................................................. 1,964
2000.............................................................. 1,157
Thereafter........................................................ 4,079
-------
$17,103
=======
</TABLE>
(e) Litigation
In July 1994, FOTI was notified that it had been debarred and that, as a
result, the federal government would not solicit, award to, or permit
contracts or subcontracts with FOTI for federal government work through March
1997. Federal government contract work by FOTI accounted for revenue of
approximately $1,800,000, $1,500,000 and $200,000 for the fiscal years ended
September 30, 1993, 1994 and 1995, respectively. Therefore, the revenue that
has been lost during the debarment is not material. The debarment proceeding
was conducted by the Department of the Army ("Army") and related to work
performed by FOTI as a subcontractor on a $38,000 government project which was
completed in 1992 (prior to the Company's acquisition of its majority equity
interest in FOTI). Employees of FOTI allegedly falsified test results when
conducting final testing of the FOTI work on the project. Although FOTI had
been debarred, it continued to bid and accept work on federal government
contracts. Certain of these actions may not have complied with the terms of
the suspension and debarment or with applicable federal regulations. The
Company's senior management did not learn of FOTI's suspension, debarment or
post-debarment conduct until late March 1995. On May 5, 1995, FOTI filed a
request with the Army for reconsideration of the debarment order. On July 21,
1995, the Inspector General informed the Company that it had been accepted to
the Department of Defense's Voluntary Disclosure Program. In June 1996,
F-26
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOTI entered into a Settlement Agreement with the United States Department of
Justice and an Administrative Settlement Agreement with the Department of the
Army terminating FOTI's debarment. As a result of these settlements, the
debarment from bidding on certain government contracts has been lifted
effective June 4, 1996. FOTI's cost of the settlements for investigative and
other expenses was $158,324, of which 49% was paid by the former minority
shareholders of FOTI, resulting in a net cost to FOTI of $80,745.
Four putative class action complaints have been filed in the U.S. District
Court for the District of Colorado by shareholders of the Company naming the
Company, William W. Becker, Larry L. Becker, John R. Evans and William J.
Maxwell as defendants. The complaints allege that the defendants violated the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the content and timing of its disclosures concerning the suspension and
debarment of FOTI. The complaints seek damages for all persons who purchased
common shares of the Company between May 16, 1994 and May 16, 1995. The
Company has filed an answer, discovery has commenced and plaintiffs have
recently filed a motion for class certification. After consultation with legal
counsel, the Company believes that it has meritorious defenses and intends to
vigorously defend these lawsuits.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management and legal counsel,
the ultimate resolution of these matters will not have a significant effect on
the financial condition of the Company.
(13) INCOME TAXES
(a) Canadian Operations
The Company has non-capital losses for Canadian tax purposes of
approximately $17,490,000 available to reduce future years' income for tax
purposes, the tax effect of which has not been recorded in the financial
statements. If unused, the losses will expire as follows (in thousands):
<TABLE>
<S> <C>
Year ending September 30:
1996........................................................... $ 657
1997........................................................... 436
1998........................................................... 416
1999........................................................... 1,026
2000........................................................... 1,234
2001........................................................... 6,300
2002........................................................... 7,421
-------
$17,490
=======
</TABLE>
(b) Income Taxes
As discussed in note 1, the Company accounts for income taxes under the
provisions of Statement 109.
Income tax expense (benefit) for the year ended September 30, 1993 was as
follows (in thousands):
<TABLE>
<S> <C>
1993
-------
Current income tax expense (benefit)............................. $ 373
Deferred income tax benefit...................................... (1,924)
-------
Total.......................................................... $(1,551)
=======
</TABLE>
F-27
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Current income tax expense for the year ended September 30, 1993 relates to
the operations of FOTI whose operations were not included in the consolidated
income tax returns of ICG. Accordingly, these entities' taxable income cannot
be offset by ICG's net operating loss carryforwards.
Income tax expense (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 due to the uncertainty of realization. No tax
expense or benefit was recorded in fiscal 1994 or 1995. During the six months
ended March 31, 1996 the deferred tax liability was adjusted for the effects
of certain changes in estimated lives of property and equipment as discussed
in Note 1(e). As a result, the Company recognized an income tax benefit of
$4.5 million.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment:
Excess purchase price of tangible assets............... $ 8,433 8,873
Differences in depreciation for book and tax purposes.. 6,502 199
-------- --------
Total gross deferred tax liabilities................. 14,935 9,072
Deferred income tax asset--net operating loss
carryforwards............................................. (37,695) (16,903)
Less valuation allowance............................... 28,462 13,533
-------- --------
Net deferred tax income tax asset.................... (9,233) (3,370)
-------- --------
Net deferred income tax liability.................... $ 5,702 5,702
======== ========
</TABLE>
The net deferred tax asset related to the Company's net operating loss
carryforwards ("NOLs") represents the portion of the NOLs that the Company
estimates will be utilized to reduce future taxable income resulting from the
reversal of temporary differences. A valuation allowance has been provided for
the remainder of the deferred tax asset relating to the NOLs, as management
can not determine when the Company will generate future taxable income.
As of September 30, 1995, ICG has NOLs of approximately $92,000,000 for
United States tax purposes which expire in varying amounts through 2010.
However, due to the provisions of Section 382 and certain other provisions of
the Internal Revenue Code (the "Code"), the utilization of these NOLs will be
limited. ICG is also subject to certain state income tax laws, which will also
limit the utilization of NOLs. In addition, the Company has acquired NOLs
relating to certain business combinations totaling $9,200,000 after the effect
of the Section 382 limitations, which expire through 2009. Utilization of the
acquired NOLs will also be restricted by Section 382 and certain other
provisions of the Code and will result in a reduction of intangible assets in
future years. In addition, the acquired NOLs can only be used to offset
taxable income generated by the acquired businesses.
Section 382 of the Code provides annual restrictions on 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. Future ownership changes under
Section 382 will require a new Section 382 computation which could further
restrict the use of the NOLs. In addition to Section 382, certain other
provisions of the Code may restrict the Company's ability to utilize the NOLs
acquired in connection with certain business combinations.
F-28
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) EMPLOYEE BENEFIT PLAN
ICG has established a salary reduction savings plan under Section 401(k) of
the Internal Revenue Code which the Company administers for participating
employees. All full-time employees are covered under the plan after meeting
minimum service and age requirements. The Company contributes a matching
contribution of its common stock (up to 6% of annual salary) which totaled
approximately $82,000, $257,000, $490,000 and $576,000 during the years ended
September 30, 1993, 1994 and 1995 and six months ended March 31, 1996,
respectively.
(15) SIGNIFICANT CUSTOMER
During the year ended September 30, 1995, the Company had revenue from a
single customer which comprised 11% of total revenue and accounts receivable
which comprised 8% of the total accounts receivable balance at September 30,
1995. There were no customers which accounted for greater than 10% of revenue
or accounts receivable for the years ended September 30, 1993 and 1994, or for
the six months ended March 31, 1995 and 1996.
(16) SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
As discussed in note 7(a), the 13 1/2% Notes issued by ICG during 1995 are
guaranteed by the Company. The separate complete financial statements of ICG
have not been included herein because such disclosure is not considered to be
material to the holders of the 13 1/2% Notes. However, summarized combined
financial information for ICG and subsidiaries and affiliates as of September
30, 1994 and 1995 and for the years ended September 30, 1993, 1994 and 1995
and for the six months ended March 31, 1996 is as follows (in thousands):
SUMMARIZED CONSOLIDATED AND COMBINED BALANCE SHEET INFORMATION (A)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Currents assets.................................... 38,426 309,208 198,865
Property and equipment, net........................ 118,862 201,983 275,942
Other noncurrent assets, net....................... 30,923 66,737 86,736
Current liabilities................................ 51,219 60,036 45,894
Long-term debt, net of discount, less current por-
tion.............................................. 23,841 304,666 325,170
Due to parent...................................... 107,678 238,282 108,233
Other noncurrent liabilities....................... 15,080 37,214 71,698
Preferred stock.................................... -- 14,986 19,572
Shareholders' deficit.............................. (9,607) (77,256) (9,024)
</TABLE>
SUMMARIZED CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED SEPTEMBER 30, ENDED
---------------------------- MARCH 31,
1993 1994 1995 1996
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Total revenue.......................... $ 30,819 58,995 111,610 71,343
Total operating costs and expenses..... 33,139 72,509 157,384 101,709
Operating loss......................... (2,320) (13,514) (45,774) (30,366)
Net loss............................... (2,877) (15,194) (68,760) (56,786)
</TABLE>
(a) The 1993 and 1994 amounts include FOTI and its subsidiaries which was 51%
owned by the Company. During fiscal 1995, the Company's 51% interest in
FOTI was contributed to ICG effective February 28, 1995 and, accordingly,
FOTI's operations have been included in the consolidated 1995 amounts.
F-29
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) CONDENSED FINANCIAL INFORMATION OF INTELCOM GROUP INC. (PARENT ONLY)
Condensed financial information of IntelCom Group Inc. as of September 30,
1994 and 1995 and March 31, 1996 and for the years ended September 30, 1993,
1994 and 1995 and for the six months ended March 31, 1996 is as follows (in
thousands):
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH
------------------- 31,
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Assets:
Cash.......................................... $ 4,308 229 111
Account receivable............................ 393 18 2
Prepaid expenses.............................. 2 2 40
Advances to subsidiaries...................... 107,678 238,282 108,233
Property and equipment, net................... 13 21 --
Investments in subsidiaries................... 1,265 -- --
Other assets, net:
Debt issuance costs......................... 4,350 2,323 1,936
Transportation licenses..................... 3,079 3,032 2,936
--------- -------- --------
$ 121,088 243,907 113,258
========= ======== ========
Liabilities and shareholders' equity:
Accounts payable.............................. $ 473 332 187
Long-term notes payable....................... 71,301 74,434 68,534
Losses of subsidiaries in excess of invest-
ments........................................ 9,532 77,256 9,024
Shareholders' equity:
Common shares............................... 95,606 190,753 205,284
Additional paid-in capital.................. 2,200 26,492 26,520
Preferred shares............................ -- 9,350 --
Foreign currency translation adjustment..... (292) (330) (330)
Accumulated deficit......................... (57,732) (134,380) (195,961)
--------- -------- --------
Total shareholders' equity................ 39,782 91,885 35,513
--------- -------- --------
$ 121,088 243,907 113,258
========= ======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED SEPTEMBER 30, ENDED
----------------------------- MARCH 31,
1993 1994 1995 1996
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
General and administrative expenses.. $ (852) (943) (1,262) (612)
Depreciation and amortization........ (74) (81) (47) (103)
Loss in subsidiaries and joint ven-
ture, net........................... (3,318) (17,340) (68,760) (56,786)
Interest expense..................... (433) (5,565) (5,971) (3,040)
Other income (expense), net.......... 68 61 (141) (13)
--------- -------- -------- -------
Net loss......................... (4,609) (23,868) (76,181) (60,554)
Preferred stock dividend............. -- -- (467) (1,027)
--------- -------- -------- -------
Net loss attributable to common
shareholders.................... $ (4,609) (23,868) (76,648) (61,581)
========= ======== ======== =======
</TABLE>
F-30
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED SEPTEMBER 30, ENDED
----------------------------- MARCH 31,
1993 1994 1995 1996
--------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss............................ $ (4,609) (23,868) (76,181) (60,554)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Share of losses of subsidiaries
and joint venture................ 3,318 17,340 68,760 56,786
Depreciation and amortization..... 74 58 48 103
Amortization of deferred financing
costs included in interest
expense.......................... 22 638 719 387
Compensation expense related to
issuance of common stock options. 195 911 158 28
Interest expense deferred and in-
cluded in long-term debt......... 55 4,595 5,113 2,595
Deferred debt issuance costs...... (903) (2,632) -- --
Loss on disposal of property and
equipment........................ -- -- -- 14
Decrease (increase) in operating as-
sets and liabilities:
Accounts receivable and prepaid
expenses......................... -- (13) (6) (22)
Accounts payable and accrued lia-
bilities......................... 269 118 (141) (145)
--------- -------- -------- -------
Net cash used by operating ac-
tivities....................... (1,579) (2,853) (1,530) (808)
--------- -------- -------- -------
Cash flows from investing activi-
ties:
Advances to subsidiaries.......... $ (32,416) (41,622) (94,501) 6,896
Acquisitions of property and
equipment........................ (50) (12) (7) --
Change in intangible and other as-
sets............................. -- (1,298) (179) --
Long-term investment.............. (93) (1,185) -- --
--------- -------- -------- -------
Net cash provided (used) by in-
vesting activities............. (32,559) (44,117) (94,687) 6,896
--------- -------- -------- -------
Cash flows from financing activi-
ties:
Issuance of common shares for
cash............................. 15,243 4,539 81,255 766
Issuance of preferred shares for
cash, net........................ -- -- 15,150 --
Redemption of preferred shares.... -- -- (3,800) (5,570)
Preferred dividend paid........... -- -- (467) (1,027)
Advances from related parties..... 1,088 -- -- --
Payments on related party advanc-
es............................... -- (1,607) -- --
Principal payments on long-term
debt............................. -- -- -- (375)
Proceeds from issuance of long-
term debt........................ 18,000 47,750 -- --
--------- -------- -------- -------
Net cash provided (used) by fi-
nancing activities............. 34,331 50,682 92,138 (6,206)
--------- -------- -------- -------
Net increase (decrease) in cash and
cash equivalents................... 193 3,712 (4,079) (118)
Cash and cash equivalents, beginning
of period.......................... 403 596 4,308 229
--------- -------- -------- -------
Cash and cash equivalents, end of
period............................. $ 596 4,308 229 111
========= ======== ======== =======
Supplemental schedule of noncash
financing and investing activities:
Conversion of advances to invest-
ment in subsidiary............... $ -- -- -- 125,018
========= ======== ======== =======
</TABLE>
F-31
<PAGE>
INTELCOM GROUP INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 1995, the Company received approximately $21.1 million from the
purchaser of four of its teleports in partial payment for the assets and
entered into a management agreement with the purchaser whereby the purchaser
assumed control over the teleport operations. Upon FCC approval of the
transaction the Company completed the sale in March 1996 and received an
additional $.4 million due to certain closing adjustments. Total proceeds
received were $21.5 million and the Company recognized a loss of approximately
$.8 million on the sale. Revenue associated with these operations was
approximately $3.5 million, $5.9 million, $9.1 million, $4.5 million and $2.5
million for the fiscal years ended September 30, 1993, 1994, 1995 and the six
months ended March 31, 1995 and 1996, respectively. The Company has reported
results of operations from these assets through December 31, 1995.
On April 30, 1996, ICG completed a private placement (the "Private
Placement") of 12 1/2% Senior Discount Notes (the "12 1/2% Notes") and of 14
1/4% Exchangeable Preferred Stock (the "Preferred Stock") for gross proceeds
of $300.0 million and $150.0 million, respectively. Net proceeds from the
Private Placement after costs of approximately $17.0 million were
approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of ICG (guaranteed by
IntelCom) that mature on May 1, 2006, at 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 Preferred Stock consists of 150,000 shares 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 commencing August
1, 1996. Through May 1, 2001, the dividend is payable at the option of ICG in
cash or additional shares of Preferred Stock. ICG may exchange the Preferred
Stock into 14 1/4% Senior Subordinated Exchange Debentures at any time after
the exchange is permitted by certain indenture restrictions. The Preferred
Stock is subject to mandatory redemption on May 1, 2007.
Approximately $35.3 million of the proceeds from the Private Placement were
used to redeem the 12 1/2% Redeemable Preferred Stock of ICG (the "Redeemable
Preferred Stock") issued in August 1995 ($30.0 million), pay accrued preferred
dividend ($2.6 million) and to repurchase 916,666 IntelCom warrants ($2.7
million) issued in connection with the Redeemable Preferred Stock. The Company
recognized a charge 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 a charge of approximately $11.5 million for the payment
with respect to consents to amendments to the 13 1/2% Notes indenture to
permit the Private Placement, which, together, will be reflected in the
Company's results of operations for the three months ended June 30, 1996.
The accompanying unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1996, includes the historical balance sheet of the Company and
the Pro Forma effect of the Private Placement. The unaudited Pro Forma
Condensed Consolidated Statements of Operations for the year ended September
30, 1995 and the six months ended March 31, 1996 include the historical
results of operations for the Company and the Pro Forma effects of the sale of
the teleports and the Private Placement as if they occurred at the beginning
of the periods presented.
The unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the historical audited financial statements and
related notes thereto of the Company included elsewhere herein. The unaudited
Condensed Consolidated Pro Forma Financial Statements are not necessarily
indicative of the results that actually would have occurred had the Pro Forma
transactions been consummated at the dates indicated, nor are they necessarily
indicative of future operating results or financial position of the Company.
F-32
<PAGE>
INTELCOM GROUP INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTELCOM PRIVATE PRO FORMA
HISTORICAL PLACEMENT INTELCOM
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 139,485 $387,867 (c) $ 527,352
Other current assets..................... 59,532 -- 59,532
--------- -------- ---------
Total current assets................. 199,017 387,867 586,884
Property and equipment, net.............. 275,942 -- 275,942
Other non-current assets................. 91,608 9,741 (d) 101,349
--------- -------- ---------
$ 566,567 $397,608 $ 964,175
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities...................... $ 46,081 $ -- $ 46,081
Long-term debt, net of discount, less
current portion......................... 393,704 300,029 (a) 693,733
Deferred credits and other liabilities... 68,086 -- 68,086
--------- -------- ---------
Total liabilities.................... 507,871 300,029 807,900
Minority interest........................ 3,612 -- 3,612
Redeemable preferred stock of subsidiary
($30,000 liquidation value)............. 19,571 (19,571) (b) --
Preferred stock of ICG (redeemable)
($150,000 liquidation value)............ -- 144,380 (e) 144,380
Shareholders' equity:
Common shares.......................... 205,284 -- 205,284
Additional paid-in capital............. 26,520 (2,673)(f) 23,847
Foreign currency translation
adjustment............................ (330) -- (330)
Accumulated deficit.................... (195,961) (24,557)(a)(b) (220,518)
--------- -------- ---------
Total shareholders' equity........... 35,513 (27,230) 8,283
--------- -------- ---------
$ 566,567 $397,608 $ 964,175
========= ======== =========
</TABLE>
F-33
<PAGE>
INTELCOM GROUP INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1995
------------------------------------------------
INTELCOM SALE OF PRIVATE PRO FORMA
HISTORICAL TELEPORTS (2) PLACEMENT INTELCOM
---------- ------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Telecom services........ $ 32,330 $ -- $ -- $ 32,330
Network services........ 58,778 -- -- 58,778
Satellite services...... 20,502 (9,142) -- 11,360
-------- ------- -------- ---------
Total revenue......... 111,610 (9,142) -- 102,468
-------- ------- -------- ---------
Cost of services.......... 76,778 (5,804) -- 70,974
Selling, general and
administrative expenses.. 65,022 (3,774) -- 61,248
Depreciation and
amortization............. 16,624 (2,214) -- 14,410
-------- ------- -------- ---------
Operating expenses.... 158,424 (11,792) -- 146,632
-------- ------- -------- ---------
Operating loss........ (46,814) 2,650 -- (44,164)
Other income (expense):
Interest expense........ (24,368) 402 (49,978)(a) (73,944)
Other, net.............. (4,999) 5 (34,126)(b) (39,120)
-------- ------- -------- ---------
Net loss.............. (76,181) 3,057 (84,104) (157,228)
Preferred stock dividend.. (467) -- -- (467)
-------- ------- -------- ---------
Net loss attributable
to common sharehold-
ers.................. $(76,648) $ 3,057 $(84,104) $(157,695)
======== ======= ======== =========
Income (loss) per com-
mon share............ $ (3.25) $ 0.13 $ (3.56) $ (6.68)
======== ======= ======== =========
Weighted average number of
common shares
outstanding.............. 23,604 23,604 23,604 23,604
</TABLE>
F-34
<PAGE>
INTELCOM GROUP INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1996
-----------------------------------------------
INTELCOM SALE OF PRIVATE PRO FORMA
HISTORICAL TELEPORTS(2) PLACEMENT INTELCOM
---------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Telecom services............. $ 31,148 $ -- $ -- $ 31,148
Network services............. 29,691 -- -- 29,691
Satellite services........... 10,504 (2,478) -- 8,026
-------- ------ -------- ---------
Total revenue.............. 71,343 (2,478) -- 68,865
-------- ------ -------- ---------
Cost of services............... 49,824 (1,696) -- 48,128
Selling, general and
administrative expenses....... 40,239 (1,493) -- 38,746
Depreciation and amortization.. 12,361 (653) -- 11,708
-------- ------ -------- ---------
Operating expenses......... 102,424 (3,842) -- 98,582
-------- ------ -------- ---------
Operating loss............. (31,081) 1,364 -- (29,717)
Other income (expense):
Interest expense............. (29,432) 90 (30,739)(a) (60,081)
Other, net................... (1,070) -- (21,900)(b) (22,970)
-------- ------ -------- ---------
Loss before income taxes
and cumulative effect of
change in accounting...... (61,583) 1,454 (52,639) (112,768)
Income tax benefit/(expense)... 4,482 -- -- 4,482
-------- ------ -------- ---------
Net loss before cumulative
effect of change in
accounting................ (57,101) 1,454 (52,639) (108,286)
Cumulative effect of change of
accounting.................... (3,453) -- -- (3,453)
-------- ------ -------- ---------
Net loss................... (60,554) 1,454 (52,639) (111,739)
Preferred dividend............. (1,027) -- -- (1,027)
-------- ------ -------- ---------
Net loss attributable to
common shareholders....... $(61,581) $1,454 $(52,639) $(112,766)
======== ====== ======== =========
Income (loss) per common
share..................... $ (2.42) $ 0.06 $ (2.07) $ (4.43)
======== ====== ======== =========
Weighted average number of
common shares outstanding..... 25,471 25,471 25,471 25,471
</TABLE>
F-35
<PAGE>
INTELCOM GROUP INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION:
Pro Forma information reflects the sale of the teleports and the completion
of the Private Placement. The Company's historical balance sheet as March 31,
1996 reflects the sale of the teleports.
The accompanying unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1996 includes the historical balance sheet of the Company and the
Pro Forma effect of the Private Placement. The unaudited Pro Forma Condensed
Consolidated Statements of Operations for the year ended September 30, 1995
and the six months ended March 31, 1996 include the historical results of
operations for the Company and the Pro Forma effects of the sale of the
teleports and the Private Placement as if they occurred at the beginning of
the periods presented.
(2) SALE OF TELEPORTS
The adjustments for the sale of the teleports eliminates the revenue,
operating expenses and other income (expense) for the periods indicated. The
sale of the Company's teleports is reflected in the actual balance sheet as of
March 31, 1996.
(3) PRIVATE PLACEMENT
The adjustments for the Private Placement reflect (i) the receipt of the net
proceeds from the Private Placement and interest on the $300.0 million gross
proceeds of the 12 1/2% notes and preferred stock dividends on $150.0 million
liquidation preference of Preferred Stock, without giving effect to any
interest income on available cash or the capitalization of any interest
associated with construction in progress, (ii) amortization of debt issuance
costs and accretion of preferred stock issuance costs associated with the
Private Placement over ten and eleven years, respectively, (iii) the
redemption of $30.0 million of Redeemable Preferred Stock, payment of accrued
dividends and the related $13.1 million charge for the excess of the
redemption price as of April 30, 1996 over the carrying amount, (iv) the
repurchase of 916,666 redeemable warrants presented, and (v) the payment with
respect to consents to amendments to the 13 1/2% Notes Indenture to permit the
Private Placement, as if such events had occurred at the beginning of the
periods presented or for balance sheet purposes, on the balance sheet date.
(a) The note discount on the 12 1/2% Notes will be accreted using the
interest method on the $300.0 million gross proceeds; debt issuance
costs are amortized over the ten year period to maturity of the notes
as a charge to interest expense. In addition, the payment with respect
to consents to amendments to the 13 1/2% Notes Indenture to permit the
Private Placement is recorded as a charge to interest expense.
(b) Upon the redemption of the $30,000,000 of Redeemable Preferred Stock,
the Company paid accrued dividends of approximately $2.6 million and
recognized a charge of approximately $12.3 million for the excess of
the redemption price over the carrying amount as of April 30, 1996. In
addition, the adjustment reflects the accrual of a cumulative 14 1/4%
dividend on the Preferred Stock reduced by the 12% dividend that had
been incurred on the Redeemable Preferred Stock. Costs associated with
the issuance of the Preferred Stock will be accreted over the eleven
years from date issued until mandatorily redeemable.
(c) To reflect the net proceeds of the Private Placement, the repurchase of
the Redeemable Preferred Stock, the payment of accrued preferred
dividends, the repurchase of 916,666 redeemable warrants and the
payment with respect to consents to amendments to the 13 1/2% Notes
Indenture to permit the Private Placement.
(d) Debt issuance costs are capitalized in other non-current assets and
amortized over the ten year period to maturity of the notes as a charge
to interest expense.
F-36
<PAGE>
INTELCOM GROUP INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(e) The Preferred Stock is net of costs associated with the issuance of the
Preferred Stock. Such costs will be accreted over the eleven years from
date issued until mandatorily redeemable.
(f) The cost of the repurchase of 916,666 redeemable warrants of
approximately $2.7 million is reflected as an adjustment to additional
paid-in capital as the repurchase price is less than the value
allocated to the warrants at the date issued.
F-37
<PAGE>
APPENDIX A
OPINION OF MORGAN STANLEY & CO. INCORPORATED
April 25, 1996
Board of Directors
IntelCom Group Inc.
c/o IntelCom Group (U.S.A.), Inc.
9605 East Maroon Circle
Englewood, Colorado 80112
Dear Members of the Board:
We understand that IntelCom Group Inc. ("IntelCom") is proposing to implement a
plan of arrangement (the "Arrangement") under the Canada Business Corporations
Act, substantially in the form attached to and described in the Proxy Statement
- - Prospectus to be filed with the Securities and Exchange Commission on April
29, 1996 (the "Proxy Statement - Prospectus"), which will result in the
restructuring of IntelCom as a publicly traded United States domiciled
corporation. Pursuant to the Arrangement, holders of common shares, no par
value, of IntelCom (the "IntelCom Shares"), other than shares as to which
dissenters' rights have been perfected, will each have the right to (i) exchange
each IntelCom Share for one share of common stock, par value $.01 per share, of
ICG Communications, Inc. ("Parent" or "Parent Common Stock") or (ii) continue to
hold such IntelCom Shares, the rights of which will be amended such that each
share (referred to after the Arrangement as a "Class A Share") will be
exchangeable at any time at the option of the holder for one share of Parent
Common Stock, and may be automatically exchanged upon the occurrence of certain
events. After the effective date of the Arrangement, Parent will own at least
85% of the issued and outstanding Class A Shares, and IntelCom will own 100% of
the issued and outstanding shares of common stock, no par value, of IntelCom
Group (U.S.A.), Inc. ("ICG"). The terms and conditions of the Arrangement are
more fully set forth in the Proxy Statement - Prospectus.
You have asked our opinion as to the fairness of the Arrangement from a
financial point of view to the holders of IntelCom Shares.
For purposes of the opinion set forth herein, we have, among other things:
(i) analyzed certain publicly available financial statements and
other information of IntelCom;
(ii) analyzed certain internal financial statements and other
financial and operating data concerning IntelCom prepared by
the management of IntelCom;
(iii) analyzed certain financial projections prepared by the
management of IntelCom;
(iv) discussed the past and current operations and financial
conditions and the prospects of IntelCom with the management of
IntelCom;
(v) reviewed the reported prices and trading activity for the
IntelCom Shares;
A-1
<PAGE>
IntelCom Group Inc.
April 25, 1996
Page 2
(vi) compared the financial performance of IntelCom and the prices
and trading activity of the IntelCom Shares with that of
certain other comparable publicly traded companies and their
securities;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(viii) participated in discussions with the management of IntelCom and
their accountants and legal advisors regarding certain legal,
tax and accounting issues relating to the Arrangement;
(ix) discussed with the management of IntelCom their view of the
strategic and other benefits expected to result from the
Arrangement;
(x) reviewed certain opinions of Reid & Priest LLP and Stikeman,
Elliott regarding certain tax and legal matters in connection
with the Arrangement (the "Tax Opinions") as described in the
Proxy Statement - Prospectus under the subsections entitled:
"United States Federal Income Tax Considerations" and "Canadian
Federal Income Tax Considerations," respectively;
(xi) reviewed the Proxy Statement - Prospectus and certain related
documents; and
(xii) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of IntelCom. We
have not made any independent valuation or appraisal of the assets or
liabilities of IntelCom, nor have we been furnished with any such appraisals.
In addition, we have relied upon, without independent verification, the
assessment by the management of IntelCom of the strategic and other benefits
expected to result from the Arrangement. We have assumed that the Arrangement
will be consummated in accordance with the terms set forth in the Proxy
Statement - Prospectus. We also have relied, without independent verification,
upon the representations in the Tax Opinions with respect to certain tax and
legal matters in connection with the Arrangement. For purposes of this opinion,
we have relied on the fact that the Company is prohibited by restrictions in
certain of its outstanding trust indentures from paying or declaring any
dividends prior to the year 2006 and IntelCom's long term policy not to declare
or pay any cash dividends. In addition, you have advised us that it is the
Board's and management's intention not to change such policy over the long term.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
We understand that the proposed Arrangement may result in tax consequences for
certain of the holders of IntelCom Shares and do not express any opinion or view
as to the tax consequences to shareholders of the Arrangement. Consequently,
our opinion as to fairness from a financial point of view to the holders of
IntelCom Shares does not take into account the tax status or position of any
holder of IntelCom Shares. In addition, we express no opinion
A-2
<PAGE>
IntelCom Group Inc.
April 25, 1996
Page 3
and make no recommendation as to how the holders of IntelCom Shares should vote
at the shareholders' meeting held in connection with the proposed Arrangement.
We have acted as financial advisor to the Board of Directors of IntelCom in
connection with this transaction and will receive compensation for our services.
From time to time, Morgan Stanley & Co. Incorporated and its affiliates ("Morgan
Stanley") provide financial advisory and financing services for IntelCom and
have or will receive fees for the rendering of these services, which services
have included acting as lead underwriter in connection with ICG's issuance
of senior discount notes and exchangeable preferred stock in April 1996. Morgan
Stanley together with its affiliate, Princes Gate Investors, L.P. and related
investors, currently own approximately 8.2% of the equity of IntelCom on a fully
diluted basis, in the form of IntelCom Shares and certain warrants of
IntelCom.
It is understood that this letter is for the information of the Board of
Directors of IntelCom and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by IntelCom with the U.S. Securities and Exchange Commission
or the Canadian courts or securities regulatory authorities with respect to the
proposed Arrangement.
Based on and subject to the foregoing, we are of the opinion that, on the date
hereof, the Arrangement is fair from a financial point of view to the holders of
IntelCom Shares.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:
---------------------------------
A-3
<PAGE>
APPENDIX B
ARRANGEMENT AND SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 27th day of June, 1996.
B E T W E E N:
ICG COMMUNICATIONS, INC.,
a corporation existing under the laws of the State of Delaware
(hereinafter referred to as "Parent"),
OF THE FIRST PART,
- and -
INTELCOM GROUP INC.
a corporation existing under the federal laws of Canada
(hereinafter referred to as "IntelCom"),
OF THE SECOND PART.
WHEREAS pursuant to an arrangement (the "Arrangement") which will be
effected by articles of arrangement filed pursuant to the Canada Business
Corporations Act, the rights, privileges, restrictions and conditions attached
to the common shares of IntelCom (the "IntelCom Common Shares") will be changed
(thereafter defined as the "Class A Shares") and certain holders of Class A
Shares will exchange their shares for shares of Parent Common Stock;
AND WHEREAS the above-mentioned articles of arrangement will set forth
the rights, privileges, restrictions and conditions (collectively the "Share
Provisions") attaching to the Class A Shares;
AND WHEREAS the parties hereto desire to make appropriate provision
and to establish a procedure whereby Parent will take certain actions and make
certain payments and deliveries necessary to ensure that IntelCom will be able
to make certain payments and to deliver or cause to be delivered shares of
Parent Common Stock in satisfaction of the obligations of IntelCom under the
Share Provisions, with respect to the payment and satisfaction of dividends,
Retraction Prices and Redemption Prices, all in accordance with the Share
Provisions;
NOW THEREFORE in consideration of the respective covenants and
agreements provided in this agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties agree as follows:
B-1
<PAGE>
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Defined Terms. Each term denoted herein by initial capital
letters and not otherwise defined herein shall have the meaning ascribed thereto
in the Share Provisions, unless the context requires otherwise.
1.2 Interpretation not Affected by Headings, etc. The division of
this agreement into articles, sections and paragraphs and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this agreement.
1.3 Number, Gender, etc. Words importing the singular number only
shall include the plural and vice versa. Words importing the use of any gender
shall include all genders.
1.4 Date for any Action. In the event that any date on or by which
any action is required or permitted to be taken under this agreement is not a
Business Day, such action shall be required or permitted to be taken on or by
the next succeeding Business Day. For the purposes of this agreement, a
"Business Day" means any day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of Denver, Colorado or New York, New
York.
ARTICLE 2
THE ARRANGEMENT
2.1 Shareholders' Meeting. IntelCom shall call and hold a meeting of
its shareholders as promptly as practical for the purpose of voting upon the
approval of the Arrangement. IntelCom shall pay to its shareholders any amounts
which are payable pursuant to any right of shareholders of IntelCom to dissent
at such meeting and to be paid the fair value of their IntelCom Common Shares.
2.2 Effective Date. The parties hereto shall cause the Arrangement
to be consummated by obtaining final court approval of the Plan of Arrangement
and by filing articles of arrangement as contemplated by section 192 of the
CBCA, together with any required related certificates, with the Director
appointed under the CBCA in such form as required by, and executed in accordance
with the relevant provisions of, the CBCA (the day of such filing being the
"Effective Date").
2.3 The Arrangement. On the Effective Date and subject to and upon
the terms and conditions of the Arrangement, this Agreement and the CBCA, the
parties hereto agree to comply in all respects with the provisions of the Plan
of Arrangement.
2.4 Warrants and Convertible Debentures. All warrants and
convertible debentures of IntelCom will remain securities of IntelCom (except
that, as a result of the Arrangement, all such securities will be convertible
into Class A Shares).
2.5 Stock Options. At the Effective Date, the obligations of
IntelCom under each outstanding share option under IntelCom's Stock Option Plan
#2, Stock Option Plan #3, 1994 Employee Stock Option Plan and 1995 Restated and
Amended Employee Stock Option Plan (collectively, the "Stock Option Plans"),
whether vested or unvested, will be assumed by Parent. Each share option
assumed by Parent will continue to have, and be subject to, the same terms and
conditions set forth in the Stock Option Plans and all outstanding stock option
agreements in effect immediately prior to the Effective Date except
B-2
<PAGE>
that each share option will be exercisable for that number of shares of Parent
Common Stock which the holder of such share option would have been entitled to
receive pursuant to the Arrangement had such holder exercised such share option
in full immediately prior to the Effective Date and elected to receive shares of
Parent Common Stock in exchange for IntelCom Common Stock in the Arrangement.
This assumption will be effected in a manner that complies with the requirements
of the regulations set forth under Section 424 of the Internal Revenue Code of
1986, as amended (the "Code"), so that the options replacing options intended to
qualify as incentive stock options under Code Section 422 will also qualify
under such Code Section.
2.6 Listing of Parent Common Stock. On the Effective Date, the
Parent Common Stock shall be authorized for listing on the American Stock
Exchange.
ARTICLE 3
COVENANTS OF PARENT AND INTELCOM
3.1 Funding of IntelCom. So long as any Class A Shares which are
registered in the name of holders other than Parent or any of its Affiliates are
outstanding, Parent will:
(a) not declare or pay any dividend on the Parent Common Stock unless
(i) IntelCom will have sufficient assets, funds and other
property available to enable the due declaration and the due and
punctual payment in accordance with applicable law of an
equivalent dividend on the Class A Shares and (ii) IntelCom shall
simultaneously declare or pay, as the case may be, an equivalent
dividend on the Class A Shares, in each case in accordance with
the Share Provisions;
(b) use its best efforts to cause IntelCom to declare simultaneously
with the declaration of any dividend on the Parent Common Stock
an equivalent dividend on the Class A Shares and, when such
dividend is paid on the Parent Common Stock, cause IntelCom to
pay simultaneously therewith such equivalent dividend on the
Class A Shares, in each case in accordance with the Share
Provisions;
(c) advise IntelCom sufficiently in advance of the declaration by
Parent of any dividend on the Parent Common Stock and take all
such other actions as are necessary, in cooperation with
IntelCom, to ensure that the respective declaration date, record
date and payment date for a dividend on the Class A Shares shall
be the same as the declaration date, record date and payment date
for the corresponding dividend on the Parent Common Stock;
(d) ensure that the record date for any dividend declared on the
Parent Common Stock is not less than 10 Business Days after the
declaration date for such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit IntelCom, in accordance with
applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Retraction Price and the
Redemption Price, including without limitation all such actions
and all such things as are necessary or desirable to enable and
permit IntelCom to cause to be delivered shares of Parent Common
Stock to the holders of Class A Shares, upon the redemption of
the Class A Shares in accordance
B-3
<PAGE>
with the provisions of Article 5 or Article 6 of the Share
Provisions, as the case may be; and
(f) not exercise its vote as a shareholder to initiate the voluntary
liquidation, dissolution or winding-up of IntelCom nor take any
action or omit to take any action which is designed to result in
the liquidation, dissolution or winding-up of IntelCom.
3.2 Segregation of Funds. Parent will cause IntelCom, from time to
time, to deposit a sufficient amount of funds in a separate account and
segregate a sufficient amount of such assets and other property as is necessary
to enable IntelCom to pay or otherwise satisfy the applicable dividends for the
benefit of holders from time to time of the Class A Shares, and will use such
funds, assets and other property so segregated exclusively for the payment of
dividends.
3.3 Reservation of Shares of Parent Common Stock. Parent hereby
represents, warrants and covenants that it has irrevocably reserved for issuance
and will at all times keep available, free from preemptive and other rights, out
of its authorized and unissued capital stock such number of shares of Parent
Common Stock (or other shares or securities into which the Parent Common Stock
may be reclassified or changed as contemplated by section 3.7 hereof) (a) as is
equal to the sum of (i) the number of Class A Shares issued and outstanding from
time to time which are registered in the name of holders other than Parent and
(ii) the number of Class A Shares issuable upon the exercise of all rights to
acquire Class A Shares outstanding from time to time and (b) as are now and may
hereafter be required to enable and permit IntelCom to meet its obligations
hereunder, under the Share Provisions and under any other security or commitment
pursuant to which Parent may now or hereafter be required to issue shares of
Parent Common Stock.
3.4 Notification of Certain Events. In order to assist Parent to
comply with its obligations hereunder, IntelCom will give Parent notice of each
of the following events at the time set forth below:
(a) in the event of any determination by the Board of Directors of
IntelCom to institute voluntary liquidation, dissolution or
winding up proceedings with respect to IntelCom or to effect any
other distribution of the assets of IntelCom among its
shareholders for the purpose of winding up its affairs, at least
30 days prior to the proposed effective date of such liquidation,
dissolution, winding up or other distribution;
(b) immediately, upon the earlier of receipt by IntelCom of notice of
and IntelCom otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or winding up
of IntelCom or to effect any other distribution of the assets of
IntelCom among its shareholders for the purpose of winding up its
affairs;
(c) immediately, upon receipt by IntelCom of a Retraction Request (as
defined in the Share Provisions);
(d) immediately following the determination by the Board of Directors
of IntelCom to exercise its Redemption Call Right; and
(e) as soon as practicable upon the issuance by IntelCom of any Class
A Shares or rights to acquire Class A Shares.
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3.5 Delivery of Shares of Parent Common Stock. In furtherance of its
obligations under subsections 3.1(e) hereof, upon notice from IntelCom of any
event which requires IntelCom to cause to be delivered shares of Parent Common
Stock to any holder of Class A Shares, Parent shall forthwith deliver the
requisite shares of Parent Common Stock to or to the order of the former holder
of the surrendered Class A Shares, as IntelCom shall direct. All such shares of
Parent Common Stock shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim, encumbrance, security interest or
adverse claim. In consideration of the delivery of each such share of Parent
Common Stock by Parent, IntelCom shall deliver to Parent, or as Parent shall
direct, one Class A Share.
3.6 Qualification of Shares of Parent Common Stock. Parent
represents and warrants that it has taken all actions and done all things as are
necessary or desirable to cause the shares of Parent Common Stock to be issued
and delivered pursuant to the Share Provisions to be freely tradeable thereafter
(other than any restrictions on transfer by reason of a holder being a "control
person" of Parent for purposes of Canadian federal or provincial securities law
or an "affiliate" of Parent or, prior to the Effective Date, IntelCom for
purposes of United States federal or state securities law). Parent will in good
faith expeditiously take all such actions and do all such things as are
necessary or desirable to cause all shares of Parent Common Stock to be
delivered pursuant to the Share Provisions to be listed, quoted or posted for
trading on all stock exchanges and quotation systems on which outstanding Parent
Common Shares are listed, quoted or posted for trading at such time.
3.7 Economic Equivalence.
(a) Parent will not, without the prior approval of IntelCom and the
prior approval of the holders of the Class A Shares given in
accordance with section 8.3 of the Share Provisions:
(i) issue or distribute shares of Parent Common Stock (or
securities exchangeable for or convertible into or carrying
rights to acquire shares of Parent Common Stock) to the
holders of all or substantially all of the then outstanding
Parent Common Stock by way of stock dividend or other
distribution, other than an issue of shares of Parent Common
Stock (or securities exchangeable for or convertible into or
carrying rights to acquire shares of Parent Common Stock) to
holders of shares of Parent Common Stock who exercise an
option to receive dividends in Parent Common Stock (or
securities exchangeable for or convertible into or carrying
rights to acquire shares of Parent Common Stock) in lieu of
receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the
holders of all or substantially all of the then outstanding
shares of Parent Common Stock entitling them to subscribe
for or to purchase shares of Parent Common Stock (or
securities exchangeable for or convertible into or carrying
rights to acquire shares of Parent Common Stock); or
(iii) issue or distribute to the holders of all or substantially
all of the then outstanding shares of Parent Common Stock
(A) shares or securities of Parent of any class other than
Parent Common Stock (other than shares convertible into or
exchangeable for or carrying rights to acquire shares of
Parent Common Stock), (B) rights, options or warrants other
than those referred to in subsection 3.7(a)(ii) above, (C)
evidences of indebtedness of Parent or (D) assets of Parent;
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unless (i) IntelCom is permitted under applicable law to issue or distribute the
economic equivalent on a per share basis of such rights, options, securities,
shares, evidences of indebtedness or other assets to holders of the Class A
Shares, and (ii) IntelCom shall issue or distribute such rights, options,
securities, shares, evidences of indebtedness or other assets simultaneously to
holders of the Class A Shares.
(b) Parent will not, without the prior approval of IntelCom and the
prior approval of the holders of the Class A Shares given in
accordance with section 8.3 of the Share Provisions:
(i) subdivide, redivide or change the then outstanding shares of
Parent Common Stock into a greater number of shares of
Parent Common Stock; or
(ii) reduce, combine or consolidate or change the then
outstanding shares of Parent Common Stock into a lesser
number of shares of Parent Common Stock; or
(iii) reclassify or otherwise change the shares of Parent Common
Stock or effect an amalgamation, merger, reorganization or
other transaction affecting the shares of Parent Common
Stock;
unless (i) IntelCom is able under applicable law to simultaneously make the same
or an economically equivalent change to, or in the rights of the holders of, the
Class A Shares, and (ii) IntelCom simultaneously does make the same or an
economically equivalent change to, or in the rights of the holders of, the Class
A Shares.
(c) Parent will ensure that the record date for any event referred to
in subsection 3.7(a) or 3.7(b) above, or (if no record date is
applicable for such event) the effective date for any such event,
is not less than 10 Business Days after the date on which such
event is declared or announced by Parent (with simultaneous
notice thereof to be given by Parent to IntelCom).
(d) The Board of Directors of IntelCom shall determine, in good faith
and in its sole discretion (with the assistance of such reputable
and qualified independent financial advisors and/or other experts
as the board may require), economic equivalence for the purposes
of any event referred to in subsection 3.7(a) or 3.7(b) above and
each such determination shall be conclusive and binding on
Parent. In making each such determination, the following factors
shall, without excluding other factors determined by the board to
be relevant, be considered by the Board of Directors of IntelCom:
(i) in the case of any stock dividend or other distribution
payable in shares of Parent Common Stock, the number of such
shares issued in proportion to the number of shares of
Parent Common Stock previously outstanding;
(ii) in the case of the issuance or distribution of any rights,
options or warrants to subscribe for or purchase shares of
Parent Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of
Parent Common Stock), the relationship between the exercise
price of each such right, option or warrant and the current
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market value (as determined by the Board of Directors of
IntelCom in the manner above contemplated) of a share of
Parent Common Stock;
(iii) in the case of the issuance or distribution of any other
form of property (including without limitation any shares or
securities of Parent of any class other than Parent Common
Stock, any rights, options or warrants other than those
referred to in subsection 3.7(d)(ii) above, any evidences of
indebtedness of Parent or any assets of Parent), the
relationship between the fair market value (as determined by
the Board of Directors of IntelCom in the manner above
contemplated) of such property to be issued or distributed
with respect to each outstanding share of Parent Common
Stock and the current market value (as determined by the
Board of Directors of IntelCom in the manner above
contemplated) of a share of Parent Common Stock; and
(iv) in the case of any subdivision, redivision or change of the
then outstanding shares of Parent Common Stock into a
greater number of shares of Parent Common Stock or the
reduction, combination or consolidation or change of the
then outstanding shares of Parent Common Stock into a lesser
number of shares of Parent Common Stock or any amalgamation,
merger, reorganization or other transaction affecting the
Parent Common Stock, the effect thereof upon the then
outstanding shares of Parent Common Stock.
For purposes of the foregoing determinations, the current market value
of any security listed and traded or quoted on a securities exchange shall be
the weighted average of the daily trading prices of such security during a
period of not less than 30 consecutive trading days ending not more than five
trading days before the date of determination on the principal securities
exchange on which such securities are listed and traded or quoted; provided,
however, that if in the opinion of the Board of Directors of IntelCom the public
distribution or trading activity of such securities does not create a market
which reflects the fair market value of such securities, then the current market
value thereof shall be determined by the Board of Directors of IntelCom, in good
faith and in its sole discretion (with the assistance of such reputable and
qualified independent financial advisors and/or other experts as the board may
require), and provided further that any such determination by the board shall be
conclusive and binding on Parent.
3.8 Ownership of Outstanding Class A Shares. Without the prior
approval of IntelCom and the prior approval of the holders of the Class A Shares
given in accordance with section 8.3 of the Share Provisions, Parent covenants
and agrees in favor of IntelCom that, as long as any outstanding Class A Shares
are owned by any person or entity other than Parent or any of its Affiliates,
Parent will not transfer any Class A Shares held by it to any other person
except that it is permitted to transfer any such Class A Shares to any wholly
owned subsidiary of Parent (a "Permitted Transferee") provided that such
Permitted Transferee agrees to execute this Agreement or a supplemental
agreement and thereupon any act or proceeding by any provision of this Agreement
required to be done or performed by Parent or any covenants required to be
abided by Parent shall, in addition, be required to be done and performed or
abided by with like force and effect by such Permitted Transferee. In addition,
neither Parent nor its Permitted Transferees shall at any time reduce their
aggregate ownership interest in Class A Shares.
3.9 Ownership of Outstanding Shares (Other than Class A Shares).
Without the prior approval of IntelCom and the prior approval of the holders of
the Class A Shares given in accordance with section 8.3 of the Share Provisions,
Parent covenants and agrees in favor of IntelCom that, as long as any
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outstanding Class A Shares are owned by any person or entity other than Parent
or any of its Affiliates, Parent or its Affiliates will be and remain the direct
or indirect beneficial owner of all issued and outstanding shares in the capital
of IntelCom and all outstanding securities of IntelCom carrying or otherwise
entitled to voting rights in any circumstances, in each case other than the
Class A Shares.
3.10 Tender Offers, Etc. In the event that a merger, consolidation,
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to Parent Common Stock (an "Offer") is proposed by
Parent or is proposed to Parent or its shareholders, Parent will use its best
efforts expeditiously and in good faith to take all such actions and do all such
things (including, for example, exercising the Parent Redemption Call Right) as
are necessary or desirable to enable and permit holders of Class A Shares to
participate in such Offer to the same extent and on an economically equivalent
basis as the holders of shares of Parent Common Stock, without discrimination.
3.11 Copies of Shareholder Information. Parent will deliver to the
holders of outstanding Class A Shares (or cause IntelCom to deliver to such
shareholders) copies of all proxy materials (including notices of meetings of
shareholders of Parent in which holders of shares of Parent Common Stock are
entitled to vote but excluding proxies to vote shares of Parent Common Stock),
information statements, reports (including without limitation all interim and
annual financial statements) and other written communications which are to be
distributed from time to time to holders of shares of Parent Common Stock at the
same time as such materials are first sent to holders of shares of Parent Common
Stock. All such deliveries, whether made by Parent or by IntelCom, will be made
at the expense of Parent.
3.12 Other Materials. Immediately after receipt by Parent or any
shareholder of Parent of any material sent or given to the holders of shares of
Parent Common Stock by or on behalf of a third party, including without
limitation dissident proxy and information circulars (and related information
and material) and tender and exchange offer circulars (and related information
and material), Parent shall use its best efforts to obtain and deliver to the
holders of Class A Shares (or cause IntelCom to deliver to such shareholders)
copies thereof (unless the same has been provided directly to holders of Class A
Shares by such third party) as soon as possible thereafter.
3.13 Distribution of Written Materials. Any written materials
distributed by Parent or IntelCom pursuant to this Agreement shall be delivered
or sent by mail (or otherwise communicated in the same manner as Parent utilizes
in communications to holders of shares of Parent Common Stock) to each holder of
Class A Shares at its address as shown on the books of IntelCom. IntelCom shall
provide or cause to be provided to Parent for this purpose, on a timely basis
and without charge or other expense, current lists of the registered holders of
Class A Shares.
3.14 Certain Requirements in Respect of Combination, etc. Without the
prior approval of the holders of the Class A Shares given in accordance with
section 8.3 of the Share Provisions, Parent shall not enter into any transaction
(whether by way of reorganization, consolidation, merger, transfer, sale, lease
or otherwise) whereby all or substantially all of its undertaking, property and
assets would become the property of any other person or, in the case of a
merger, of the continuing corporation resulting therefrom, but may do so if:
(a) such other person or continuing corporation is a corporation
(herein called the "Parent Successor") incorporated under the
laws of any state of the United States or the laws of Canada or
any province thereof;
(b) the Parent Successor, by operation of law, becomes bound by the
terms and provisions of this Agreement or, if not so bound,
executes, prior to or
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contemporaneously with the consummation of such transaction an
Agreement supplemental hereto and such other instruments (if any)
as are satisfactory to the Board of Directors of IntelCom (which
may rely on legal or financial advisors for direction) are
necessary or advisable to evidence the assumption by the Parent
Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor
to pay and deliver or cause to be delivered the same and its
agreement to observe and perform all the covenants and
obligations of Parent under this Agreement; and
(c) such transaction shall, to the satisfaction of the Board of
Directors of IntelCom (which may rely on legal or financial
advisors for direction), be upon such terms as substantially to
preserve and not to impair in any material respect any of the
rights, duties, powers and authorities of the holders of Class A
Shares hereunder.
3.15 Vesting of Powers in Successor. Whenever the conditions of
section 3.14 hereof have been duly observed and performed, the Parent Successor
and IntelCom shall execute and deliver a supplemental agreement and thereupon
the Parent Successor shall possess and from time to time may exercise each and
every right and power of Parent under this Agreement in the name of Parent or
otherwise and any act or proceeding by any provision of this Agreement required
to be done or performed by the Board of Directors of Parent or any officers of
Parent may be done and performed with like force and effect by the Board of
Directors or officers of such Parent Successor.
3.16 Wholly Owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly owned subsidiary of Parent
with or into Parent or the winding up, liquidation or dissolution of any wholly
owned subsidiary of Parent provided that all of the assets of such subsidiary
are transferred to Parent or another wholly owned subsidiary of Parent and any
such transactions are expressly permitted by this Article 3.
3.17 Due Performance. On and after the Effective Date, Parent shall
duly and timely perform all of its respective obligations expressed in the Plan
of Arrangement.
3.18 Payments to Dissenters. Notwithstanding any other provision of
this Agreement, IntelCom acknowledges that Parent will not contribute to
IntelCom any amounts which IntelCom may be obligated to pay to any dissenting
shareholder upon the perfection of the right of such dissenting shareholder to
dissent from the Arrangement.
ARTICLE 4
EXCHANGE RIGHT
4.1 Insolvency Event. For the purpose of this Article, "Insolvency
Event" means the institution by IntelCom of any proceeding to be adjudicated a
bankrupt or insolvent or to be dissolved or wound up, or the consent of IntelCom
to the institution of bankruptcy, insolvency, dissolution or winding up
proceedings against it, or the filing of a petition, answer or consent seeking
dissolution or winding up under any bankruptcy, insolvency or analogous laws,
including without limitation the Companies Creditors' Arrangement Act (Canada)
and the Bankruptcy and Insolvency Act (Canada) and the failure by IntelCom to
contest in good faith any such proceedings commenced in respect of IntelCom
within 15 days of becoming aware thereof, or the consent by IntelCom to the
filing of any such petition or the appointment of a receiver, or the making by
IntelCom of a general assignment for the benefit of creditors, or the
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admission in writing by IntelCom of its inability to pay its debts generally as
they become due, or IntelCom not being permitted, pursuant to solvency
requirements of applicable law, to redeem any Retracted Shares pursuant to
section 5.6 of the Share Provisions.
4.2 Grant Ownership of the Exchange Right. Parent hereby grants to
the holders of Class A Shares other than Parent or any of its Affiliates the
right (the "Exchange Right"), upon the occurrence and during the continuance of
an Insolvency Event, to require Parent to purchase from each or any holder of a
Class A Share all or any part of the Class A Shares held by such holder, all in
accordance with the provisions of this agreement.
4.3 Purchase Price. The purchase price payable by Parent for each
Class A Share to be purchased by Parent under the Exchange Right shall be one
share of Parent Common Stock, the value of such share being equal to the Current
Market Price of a share of Parent Common Stock on the last Business Day prior to
the day of closing of the purchase and sale of such Class A Share under the
Exchange Right.
4.4 Exercise Instructions. Subject to the terms and conditions
herein set forth, a holder of a Class A Share shall be entitled, upon the
occurrence and during the continuance of an Insolvency Event, to exercise the
Exchange Right with respect to all or any part of the Class A Shares registered
in the name of such holder on the books of IntelCom. To exercise the Exchange
Right, the holder of a Class A Share shall deliver to Parent, in person or by
certified or registered mail, at its principal office in Denver, Colorado or at
such other places as Parent may from time to time designate by written notice to
the holders of Class A Shares, the certificates representing the Class A Shares
which such holder desires Parent to purchase, duly endorsed in blank, and
accompanied by such other documents and instruments as may be required to effect
a transfer of Class A Shares under the CBCA and such additional documents and
instruments as Parent may reasonably require together with (a) a duly completed
form of notice of exercise of the Exchange Right, contained on the reverse of or
attached to the Class A Share certificates, stating (i) that the holder of a
Class A Share thereby exercises the Exchange Right so as to require Parent to
purchase from such holder the number of Class A Shares specified therein, (ii)
that such holder has good title to and owns all such Class A Shares to be
acquired by Parent free and clear of all liens, claims, encumbrances, security
interests and adverse claims, (iii) the names in which the certificates
representing the shares of Parent Common Stock deliverable in connection with
the exercise of the Exchange Right are to be issued and (iv) the names and
addresses of the persons to whom such new certificates should be delivered and
(b) payment (or evidence satisfactory to IntelCom and Parent of payment) of the
taxes (if any) payable as contemplated by section 4.7 of this Agreement. If
only a part of the Class A Shares represented by any certificate or certificates
delivered to Parent are to be purchased by Parent under the Exchange Right, a
new certificate for the balance of such Class A Shares shall be issued to the
holder at the expense of IntelCom.
4.5 Delivery of Shares of Parent Common Stock; Effect of Exercise.
Receipt of the certificates representing the Class A Shares which the holder of
a Class A Share desires Parent to purchase under the Exchange Right together
with such documents and instruments of transfer and a duly completed form of
notice of exercise of the Exchange Right (and payment of taxes, if any, or
evidence thereof), duly endorsed for transfer to Parent, shall constitute
exercise of the Exchange Right by the holder of such Class A Shares, and Parent
shall immediately thereafter deliver or cause to be delivered by IntelCom, for
delivery to such holder (or to such other persons, if any, properly designated
by such holder of a Class A Share), the certificates for the number of shares of
Parent Common Stock deliverable in connection with the exercise of the Exchange
Right, which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim, encumbrance, security interest or
adverse claim, and checks for the balance, if any, of the total purchase price
therefor. Immediately upon the exercise of the Exchange Right, as provided in
this section 4.5, the closing of the transaction of purchase and sale
contemplated by
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the Exchange Right shall be deemed to have occurred, and the holder of such
Class A Shares shall be deemed to have transferred to Parent all of its right,
title and interest in and to such Class A Shares and shall cease to be a holder
of such Class A Shares and shall not be entitled to exercise any of the rights
of a holder in respect thereof, other than the right to receive his
proportionate part of the total purchase price therefor, unless the requisite
number of shares of Parent Common Stock is not allotted, issued and delivered by
Parent to the holder of a Class A Share (or to such other persons, if any,
properly designated by such holder of a Class A Share), within five Business
Days of the date of the exercise of the Exchange Right by the holder of the
Class A Shares, in which case the rights of the holder of a Class A Share shall
remain unaffected until such shares of Parent Common Stock are so allotted,
issued and delivered by Parent. Concurrently with such holder of a Class A
Share ceasing to be a holder of Class A Shares, such holder shall be considered
and deemed for all purposes to be the holder of the shares of Parent Common
Stock delivered to it pursuant to the Exchange Right.
4.6 Exercise of Exchange Right Subsequent to Retraction. In the
event that a holder of a Class A Share has exercised its right under Article 5
of the Share Provisions to require IntelCom to redeem any or all of the Class A
Shares held by such holder (the "Retracted Shares") and is notified by IntelCom
pursuant to section 5.6 of the Share Provisions that IntelCom will not be
permitted as a result of solvency requirements of applicable law to redeem all
such Retracted Shares, and provided that Parent shall not have exercised the
Retraction Call Right with respect to the Retracted Shares, and that the holder
of a Class A Share has not revoked the retraction request delivered by the
holder of a Class A Share to IntelCom pursuant to section 5.7 of the Share
Provisions, the retraction request will constitute and will be deemed to
constitute notice from the holder of a Class A Share to Parent of the exercise
of the Exchange Right with respect to those Retracted Shares which IntelCom is
unable to redeem. In any such event, IntelCom hereby agrees with the holder of
a Class A Share immediately to notify such holder of such prohibition against
IntelCom redeeming all of the Retracted Shares and such holder of Class A Shares
will thereupon exercise the Exchange Right with respect to the Retracted Shares
that IntelCom is not permitted to redeem and will require Parent to purchase
such shares in accordance with the provisions of this Article 4.
4.7 Stamp or Other Transfer Taxes. Upon any sale of Class A Shares
to Parent pursuant to the Exchange Right, the share certificate or certificates
representing the shares of Parent Common Stock to be delivered in connection
with the payment of the total purchase price therefor shall be issued in the
name of the holder of the Class A Shares so sold or in such names as such holder
of a Class A Share may otherwise direct in writing without charge to the holder
of the Class A Shares so sold; provided, however, that such holder of a Class A
Share (a) shall pay (and neither Parent nor IntelCom shall be required to pay)
any documentary, stamp, transfer or other taxes that may be payable in respect
of any transfer involved in the issuance or delivery of such shares to a person
other than such holder of a Class A Share or (b) shall have established to the
satisfaction of Parent and IntelCom that such taxes, if any, have been paid.
4.8 Notice of Insolvency Event. Immediately upon the occurrence of
an Insolvency Event or any event which with the giving of notice or the passage
of time or both would be an Insolvency Event, IntelCom or Parent shall mail to
each holder of a Class A Share, at its expense, a notice of such Insolvency
Event, which notice shall contain a brief statement of the right of the holders
of Class A Shares with respect to the Exchange Right.
4.9 Withholding Rights. Parent shall be entitled to withhold the
consideration otherwise payable pursuant to this Agreement from any holder of
Class A Shares until such holder has paid to Parent an amount equal to such
amounts as Parent is required or permitted to deduct and withhold with respect
to such payment under the United States Internal Revenue Code of 1986, as
amended, the Income Tax Act (Canada) or any provision of state, local,
provincial or foreign tax law.
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ARTICLE 5
GENERAL
5.1 Term. This agreement shall come into force and be effective as
of the date hereof and shall terminate and be of no further force and effect at
such time as no Class A Shares (or securities or rights convertible into or
exchangeable for or carrying rights to acquire Class A Shares) are held by any
party other than Parent or any of its Affiliates.
5.2 Changes in Capital of Parent and IntelCom. Notwithstanding the
provisions of section 5.4, at all times after the occurrence of any event
effected pursuant to section 3.5 or 3.6 hereof, as a result of which either the
Parent Common Stock or the Class A Shares or both are in any way changed, this
agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which the Parent Common Stock or Class A Shares or both are so changed and
the parties hereto shall execute and deliver an agreement in writing giving
effect to and evidencing such necessary amendments and modifications.
5.3 Severability. If any provision of this agreement is held to be
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of this agreement shall not in any way be affected or impaired
thereby and this agreement shall be carried out as nearly as possible in
accordance with its original terms and conditions.
5.4 Amendments, Modifications, etc.. This agreement may not be
amended or modified except by an agreement in writing executed by IntelCom and
Parent and, if the amendment occurs on or after the Effective Date, approved by
the holders of the Class A Shares given in accordance with section 8.3 of the
Share Provisions.
5.5 Ministerial Amendments. Notwithstanding the provisions of
section 5.4, the parties to this agreement may in writing, at any time and from
time to time, without the approval of the holders of the Class A Shares, amend
or modify this agreement for the purposes of:
(a) adding to the covenants of any of the parties for the protection
of the holders of the Class A Shares other than Parent or any of
its Affiliates;
(b) making such amendments or modifications not inconsistent with
this agreement as may be necessary or desirable with respect to
matters or questions which, in the opinion of the Boards of
Directors of each of IntelCom and Parent, it may be expedient to
make, provided that each such board of directors shall be of the
opinion that such amendments or modifications will not be
prejudicial to the interests of the holders of the Class A Shares
other than Parent or any of its Affiliates; or
(c) making such changes or corrections which, on the advice of
counsel to IntelCom and Parent, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error,
provided that the boards of directors of each of IntelCom and
Parent shall be of the opinion that such changes or corrections
will not be prejudicial to the interests of the holders of the
Class A Shares other than Parent or any of its Affiliates.
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5.6 Meeting to Consider Amendments. IntelCom, at the request of
Parent, shall call a meeting or meetings of the holders of the Class A Shares
for the purpose of considering any proposed amendment or modification requiring
approval pursuant to section 3.4 hereof. Any such meeting or meetings shall be
called and held in accordance with the by-laws of IntelCom, the Share Provisions
and all applicable laws.
5.7 Amendments only in Writing. No amendment to or modification or
waiver of any of the provisions of this agreement otherwise permitted hereunder
shall be effective unless made in writing and signed by all of the parties
hereto.
5.8 Enurement. This agreement shall be binding upon and enure to the
benefit of the parties hereto and their respective successors and assigns.
5.9 Third Party Beneficiaries. Apart from the parties hereto, this
agreement (other than Article 2 and sections 3.1 to 3.9 hereto) is entered into
for the benefit and interest of the holders of Class A Shares from time to time,
individually and as a class, and no other person shall be deemed to benefit from
this agreement.
5.10 Notices to Parties. All notices and other communications between
the parties shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for either such party as shall be specified
in like notice):
(a) if to Parent at:
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
Fax: (303) 799-6985
(b) if to IntelCom at:
c/o IntelCom Group (U.S.A.), Inc.
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80155-6742
Fax: (303) 799-6985
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof
unless such day is not a Business Day in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
5.11 Counterparts. This agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
5.12 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the State of New York.
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5.13 Attornment. Parent agrees that any action or proceeding arising
out of or relating to this agreement may be instituted in the courts of the
State of New York, waives any objection which it may have now or hereafter to
the venue of any such action or proceeding, irrevocably submits to the
jurisdiction of the said courts in any such action or proceeding, agrees to be
bound by any judgment of the said courts and not to seek, and hereby waives, any
review of the merits of any such judgment by the courts of any other
jurisdiction and hereby appoints IntelCom at its registered office in the
Province of British Columbia as Parent's attorney for service of process.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
ICG COMMUNICATIONS, INC.
Per:
------------------------------
Per:
------------------------------
INTELCOM GROUP INC.
Per:
------------------------------
Per:
------------------------------
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APPENDIX C
Court File No.
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE DAY, THE DAY OF
JUNE , 1996
IN THE MATTER OF the Canada Business Corporations Act, R.S.C. 1985, c. C-44,
as amended
AND IN THE MATTER OF a plan of arrangement of INTELCOM GROUP INC., an Order,
INTERIM ORDER
THIS MOTION made by the Applicants INTELCOM GROUP INC. and ICG
COMMUNICATIONS, INC. for an INTERIM ORDER pursuant to subsection 192(4) of the
Canada Business Corporations Act was heard this day at 130 Queen Street West,
Toronto, Ontario.
UPON READING the Notice of Motion dated June ., 1996, the affidavit of John
D. Field and the exhibits thereto, the application and in the presence of
counsel for the applicants:
THE MEETING
1. THIS COURT ORDERS THAT IntelCom is authorized and directed to call, hold
and conduct the Meeting, in accordance with the Notice, the CBCA, the by-laws
of IntelCom, this Order, and the rulings and directions of the Chairman of the
Meeting, and in that connection to submit the Plan to the Meeting for the
consideration of the Shareholders.
AMENDMENTS
2. THIS COURT ORDERS THAT IntelCom is authorized to make such amendments,
revisions and/or supplements to the Plan as it may determine, and the Plan as
so amended, revised and/or supplemented shall be the Plan submitted to the
Meeting and the subject of the Arrangement Resolution.
ADJOURNMENTS AND POSTPONEMENTS
3. THIS COURT ORDERS THAT IntelCom, if it deems it advisable, is
specifically authorized to adjourn or postpone the Meeting on one or more
occasions, without the necessity of first convening the Meeting or first
obtaining any vote of Shareholders respecting the adjournment or postponement.
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RECORD DATES FOR NOTICE AND VOTING
4. THIS COURT ORDERS THAT the record date for notice of Shareholders
entitled to receive the Notice and the Circular shall be June 27, 1996, as
previously approved by the Board of Directors of IntelCom and published by
IntelCom.
5. THIS COURT ORDERS THAT the record date for Shareholders entitled to vote
on the special resolution respecting the Plan shall be June 27, 1996,
subject to the provisions of subsection 138(2) of the CBCA.
NOTICE OF MEETING
6. THIS COURT ORDERS THAT IntelCom shall give notice of the Meeting in the
form of the Notice, subject to IntelCom's ability to insert the dates and
other relevant information in the final form of Notice. The Notice shall be
given, by one of the methods set out in paragraph 10 of this Order, not later
than 21 days prior to the date established for the Meeting in the Notice.
Accidental failure of or omission by IntelCom to give notice to any one or
more Shareholders, or to any series of Shareholders, or events beyond the
reasonable control of IntelCom (including without limitation inability to
utilize postal services, transmission interruptions, and/or inability to
secure publication in the newspapers) shall not constitute a breach of this
Order or a defect in the calling of the Meeting, but if any such failure or
omission is brought to the attention of IntelCom it shall be rectified by
IntelCom by the method and in the time most reasonably practicable in the
circumstances. The Notice shall be deemed to have been received, mutatis
mutandis, in accordance with paragraph 10 of this Order.
THE CIRCULAR
7. THIS COURT ORDERS THAT IntelCom is hereby authorized and directed to
send to Shareholders the Circular substantially in the form annexed as Exhibit
"A" to the Affidavit of John D. Field. The Circular shall be distributed or
made available in accordance with paragraph 9 of this Order and shall be
deemed to have been received, mutatis mutandis, in accordance with paragraph
10 of this Order.
SOLICITATION OF PROXIES
8. THIS COURT ORDERS THAT IntelCom is authorized to use the Proxy, subject
to IntelCom's ability to insert dates and other relevant information in the
final form of Proxy. IntelCom is authorized, at its expense, to solicit
Proxies, directly and through its officers, directors and employees, and
through such agents or representatives as it may retain for that purpose, and
by mail or such other forms of personal or electronic communication as it may
determine.
METHOD OF DISSEMINATION
9. THIS COURT ORDERS THAT the Notice, Circular, Proxy, Letter of
Transmittal and any other communication(s) and/or documents (e.g., the Notice
of Guaranteed Delivery) determined by IntelCom shall be disseminated,
distributed, sent and given to Shareholders in one or more of the following
methods:
(i) by first class prepaid mail, addressed to each Shareholder at his/her
or its address registered on the registers of IntelCom (and
IntelCom's registrar and transfer agent is hereby ordered to provide
to IntelCom copies of the registers for such purpose, or
alternatively to ensure such mailing upon delivery to it of the
number of Notices, Circulars, Proxies and Letters of Transmittal
specified by it in writing to IntelCom at least two days in advance
of the mailing);
(ii) by delivery, in person or by recognized courier service, to the
addresses specified in (i) above; or
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(iii) by facsimile transmission to any Shareholder who identifies itself
to the satisfaction of IntelCom and the Scrutineers, who requests
such transmission and if required by IntelCom is prepared to pay the
charges for such transmission.
DEEMED RECEIPT OF NOTICE
10. THIS COURT ORDERS THAT the Notice, Circular and Proxy and Letter of
Transmittal shall be deemed, for the purposes of this Order, to have been
received by Shareholders:
(i) in the case of mailing, 5 days after delivery thereof to the Post
Office;
(ii) in the case of delivery, upon receipt thereof by the intended addressee
or by the courier;
(iii) in the case of facsimile transmission, upon the transmission thereof.
CHAIRMAN
11. THIS COURT ORDERS THAT the Chairman of the Meeting shall be J. Shelby
Bryan, or in his absence one of the members of the Board of Directors of
IntelCom present at the Meeting and selected for that purpose by the Board of
Directors. The duties and authorities of the Chairman shall extend in every
respect to the conduct of the Meeting.
The Chairman shall have the authority to determine whether any Proxy and/or
revocation and/or reasonable facsimile thereof
(i) has been properly executed;
(ii) has been properly delivered;
(iii) is genuine and bona fide; and/or
(iv) indicates the intention of the Shareholder submitting the same.
Any ruling of the Chairman shall be final and determinative, provided (i)
that the Chairman shall be required to report to IntelCom the ruling thereon,
and (ii) that any person properly appearing before this Court who wishes to
contest any such ruling may do so in proceedings in this Court.
SCRUTINEERS
12. THIS COURT ORDERS THAT the Scrutineers for the Meeting shall be
Pacific Corporate Trust Company (acting through their officers and employees).
The duties of the Scrutineers shall be, inter alia, to monitor and report on
attendance and to monitor and report on all ballots and motions taken at the
Meeting. The duties of the Scrutineers shall extend to:
(i) invigilating and reporting to the Chairman on the deposit and validity
of Proxies;
(ii) reporting to the Chairman on the quorum of the Meeting;
(iii) reporting to the Chairman on any polls taken or ballots cast at the
Meeting;
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(iv) providing to IntelCom and to the Chairman and to the Secretary written
reports for submission to this Court or further implementation of the
Plan; and
(v) invigilating and reporting to IntelCom on the elections made (and the
validity of the elections made) in the Letters of Transmittal.
SECRETARY
13. THIS COURT ORDERS THAT the Secretary of the Meeting shall be John D.
Field, or in his absence, a person (who need not be an officer or employee of
IntelCom) selected for that purpose by the Chairman of the Meeting with the
consent of the Board of Directors, provided that the Secretary shall be
entitled to retain others to assist in the performance of his duties. The
Secretary shall be responsible for maintaining, or causing to be maintained,
the records and proceedings of the Meeting.
QUORUM
14. THIS COURT ORDERS THAT the quorum for the conduct of business at the
Meeting shall be at least two (2) Shareholders (present in person or by Proxy)
representing not less than one-third of the number of common shares of
IntelCom outstanding at the record date for Notice of the Meeting established
under paragraph 5 of this Order.
DEPOSIT OF PROXIES
15. THIS COURT ORDERS THAT Proxies must be deposited with the Scrutineers
at one of the offices of the Scrutineers designated in the Notice or with
persons appointed by the Scrutineers, including a Depository, for that purpose
and named in the Notice at one of their respective offices designated in the
Notice not later than the close of business of the business day prior to the
Meeting (or any adjournment(s) or postponement(s) thereof).
Proxies must be completed and executed in accordance with the instructions
contained thereon. Proxies must be actually delivered to the Scrutineers
prior to or by the times prescribed above in this paragraph, provided that, in
the discretion of the Scrutineers, Proxies which are not physically deposited
may be accepted by the Scrutineers if transmitted to the Scrutineers in a form
and/or by a person, prior to or by the above times, reasonably believed by the
Scrutineers to be genuine and bona fide.
The Chairman, on report from the Scrutineers, is authorized to, but need
not, accept any form of proxy other than the form(s) prescribed herein which
is reasonably believed by the Chairman to be in a lawful form, genuine and
bona fide, and to indicate the voting intention of the Shareholder or its
proxy and provided the same is in the English language.
REVOCATIONS
16. THIS COURT ORDERS THAT revocations of any previously deposited Proxies
may be deposited at the registered office of IntelCom at any time up to and
including the last business day preceding the day of the Meeting, or any
adjournments or postponements thereof, at which the proxy is to be used or
with the Chairman and/or the Scrutineers of the Meeting at any time up to the
commencement of the Meeting on the day of the Meeting, or any adjournments or
postponements thereof.
LETTERS OF TRANSMITTAL
17. THIS COURT ORDERS THAT the Letters of Transmittal and any accompanying
Notices of Guaranteed Delivery must be deposited with the Depositary no later
than the times prescribed therein.
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WAIVER
18. THIS COURT ORDERS THAT the right is reserved to the Chairman to waive
any timing or deposit requirement (individually in any particular case or
collectively in any series of cases) prescribed above, provided that he
instructs the Scrutineers prior to the last time at which any Proxy or
revocation is to be used.
GENERAL PROCEDURE
19. THIS COURT ORDERS THAT a poll, and a ballot, shall be taken on the
Arrangement Resolution presented to the Meeting, and on any other matters
properly coming before the Meeting as ruled upon by the Chairman. The result
of any ballot taken shall be final and determinative of the question or
resolution on which the ballot is taken (subject to any contest thereon
brought in any proceedings before this Court).
VOTING
20. THIS COURT ORDERS THAT votes shall be taken at the Meeting on the
basis of one (1) vote per common share of IntelCom. Subject to further Order
of this Court, the Arrangement Resolution shall require, for passage, the
affirmative vote of 66 2/3% of the votes actually cast thereon (for this
purpose any spoiled votes, illegible votes, defective votes and abstentions
shall be deemed not to be votes cast).
PERMITTED ATTENDEES
21. THIS COURT ORDERS THAT the persons entitled to be present at the
Meeting are:
. The Chairman
. The Shareholders
. The Directors and Officers of IntelCom
. The Scrutineers (and their officers and employees)
. The Secretary (and his assistants)
. The Auditors of IntelCom
. IntelCom's legal and financial advisors; and
. other persons with the permission of the Chairman.
Except for Shareholders, who may address the Meeting as of right, the
Chairman shall be entitled to determine which other persons may address the
Meeting.
DISSENT AND APPRAISAL RIGHTS
22. THIS COURT ORDERS THAT all Shareholders shall be entitled to exercise
rights of dissent and appraisal, in accordance with and in compliance with
Section 190 of the CBCA.
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SERVICE AND NOTICE OF SANCTION HEARING
23. THIS COURT ORDERS THAT the persons entitled to be served with or given
notice of any further proceedings herein, including any hearing to sanction
and approve the Plan, and to appear and to be heard thereon, shall be only:
(i) the Applicants; and
(ii) persons who have filed an appearance herein in accordance with the
Rules of Civil Procedure.
Delivery of a copy of this Order, in the Circular, in the manner prescribed
above, shall constitute good and sufficient service and notice of the
provisions of this paragraph.
SANCTION HEARING
24. THIS COURT ORDERS THAT the hearing for any sanction or approval of the
Plan may be brought, on notice to the persons listed in paragraph 23 of this
Order in accordance with the notice provisions to be included in the Circular,
and no further or other notice shall be required.
PRECEDENCE
25. THIS COURT ORDERS THAT to the extent of any inconsistency or
discrepancy with respect to the matters determined in this Order, between this
Order and the terms of any instrument creating or governing or collateral to
the common shares of IntelCom or to which the common shares of IntelCom are
collateral, or to the Articles and/or by laws of IntelCom, this Order shall
govern.
DEFINITIONS
26. THIS COURT ORDERS that as used in this Order the terms hereinafter set
forth have the following definitions:
"APPLICANTS" means IntelCom Group Inc. and ICG Communications, Inc.;
"ARRANGEMENT RESOLUTION" means the special resolution to be voted upon by
Shareholders at the Meeting, substantially in the form filed in these
proceedings, respecting the Plan and associated matters;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1984, c. C.-44,
and the relevant regulations thereunder, all as in effect from time to time;
"CIRCULAR" means the Management Proxy Statement--Prospectus to be
distributed by IntelCom to Shareholders in conjunction with the Notice and the
Meeting, substantially in the form filed in these proceedings subject to
completion or amendment by IntelCom, the completed version of which shall be
filed with this Court coincident with the initial distribution thereof;
"INTELCOM" means IntelCom Group Inc., one of the Applicants;
"DEPOSITARY" means Pacific Corporate Trust Company or, in the alternative,
such suitable trust or trusts to be selected by the Applicant IntelCom;
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"LETTER OF TRANSMITTAL" means the Letter of Transmittal and Election,
substantially in the form filed in these proceedings, to be sent to
Shareholders coincident with the Notice and Circular, permitting certain
elections under the Plan, the completed version of which shall be filed with
this Court coincident with the initial distribution thereof,
"MEETING" means the annual and special meeting of Shareholders of IntelCom
to be called, held and conducted in accordance with this Order for the
purpose, inter alia, of considering the Plan;
"NOTICE" means the Notice of Meeting, substantially in the form filed in
these proceedings, subject to completion or amendment by IntelCom, the
completed version of which shall be filed with this Court coincident with the
initial distribution thereof;
"PLAN" means the Plan of Arrangement proposed by the Applicants under
section 192 of the CBCA, as amended, supplemented and/or revised from time to
time;
"PROXY" means, collectively, (i) the form of management solicited proxy and
other form(s) of voting instrument(s) to be utilized by management of IntelCom
in conjunction with the Meeting, the completed version of which shall be filed
with this Court coincident with the initial distribution thereof, and (ii)
such other form of proxy or voting instrument determined by the Chairman on
the advice of the Scrutineers, to be lawful and to represent the choice of the
person submitting the same;
"SCRUTINEERS" means Pacific Corporate Trust Company; and
"SHAREHOLDERS" means the several persons entered on the registers of
IntelCom as holders of common shares of IntelCom and such other persons who,
in accordance with subsection 138(2) of the CBCA, establish a right to vote at
the Meeting.
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APPENDIX D
RESOLUTION WITH RESPECT TO THE ARRANGEMENT FOR CONSIDERATION AT THE ANNUAL AND
SPECIAL MEETING OF THE SHAREHOLDERS
OF
INTELCOM GROUP INC.
("INTELCOM")
BE IT RESOLVED THAT:
1. The arrangement (the "Arrangement") under section 192 of the Canada
Business Corporations Act (the "CBCA"), involving IntelCom and ICG
Communications, Inc. which has been presented to this meeting (as the same
may be modified or amended) is hereby authorized, approved and adopted;
2. The Arrangement and Support Agreement involving IntelCom and ICG
Communications, Inc. dated June 27, 1996, the full text of which is set
out as Appendix B to the Management Proxy Statement - Prospectus dated .,
1996 (as the same may have been amended and presented to this meeting), and
the transactions contemplated thereby are hereby approved and adopted.
3. Notwithstanding the passing of this resolution by the Shareholders (as
defined in the Management Proxy Statement - Prospectus) or the approval of
the Ontario Court of Justice (General Division), the Board of Directors of
IntelCom, without further notice to or approval of the Shareholders, may
decide not to proceed with the Arrangement or may revoke this resolution at
any time prior to the Arrangement becoming effective pursuant to the
provisions of the CBCA; and
4. Any two directors or officers of IntelCom are hereby authorized and
directed for and on behalf of IntelCom to execute or cause to be executed,
under corporate seal or otherwise, and to deliver or cause to be delivered
all such documents, agreements and instruments and to do or cause to be
done all such other acts and things as such directors or officers of
IntelCom shall determine to be necessary or desirable in order to carry out
the intent of the foregoing paragraphs of this resolution and the matters
authorized thereby, such determination to be conclusively evidenced by the
execution and delivery of such document, agreement or instrument or the
doing of any such act or thing.
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APPENDIX E
PLAN OF ARRANGEMENT
UNDER SECTION 192
OF THE CANADA BUSINESS CORPORATIONS ACT
ARTICLE 1
INTERPRETATION
1.1 Definitions. In this Plan of Arrangement, unless there is something
in the subject matter or context inconsistent therewith, the following terms
shall have the respective meanings set out below and grammatical variations of
such terms shall have corresponding meanings:
(a) "ARRANGEMENT" means the arrangement under section 192 of the CBCA on
the terms and subject to the conditions set out in this Plan of Arrangement,
subject to any amendments thereto made in accordance with section 6.1 hereof or
made at the direction of the Court in the Final Order;
(b) "ARRANGEMENT RESOLUTION" means the special resolution in respect of the
Arrangement passed by the holders of IntelCom Common Shares at the Meeting;
(c) "AUTOMATIC REDEMPTION DATE" has the meaning ascribed thereto in the
Share Provisions;
(d) "BUSINESS DAY" means any day other than a Saturday, Sunday or a day
when banks are not open for business in either or both of Denver, Colorado and
New York, New York;
(e) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44
as amended;
(f) "CLASS A SHARES" has the meaning ascribed thereto in the Share
Provisions;
(g) "COURT" means the Ontario Court of Justice (General Division);
(h) "DEPOSITARY" means Pacific Corporate Trust Company at its principal
office in Vancouver, British Columbia;
(i) "DISSENT PROCEDURES" has the meaning set out in section 3.1;
(j) "EFFECTIVE DATE" means the date shown on the certificate of arrangement
issued by the Director under the CBCA giving effect to the Arrangement;
(k) "EFFECTIVE TIME" means 12:01 a.m. on the Effective Date;
(l) "ELECTED INTELCOM COMMON SHARE" means any IntelCom Common Share which
the holder shall have indicated pursuant to the terms of section 4.4 is to be
exchanged on the Arrangement into shares of Parent Common Stock;
(m) "FINAL ORDER" means the final order of the Court approving the
Arrangement as such order may be amended by the Court at any time prior to the
Effective Time;
(n) "INTELCOM" means IntelCom Group Inc., a corporation existing under the
CBCA;
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(o) "INTELCOM COMMON SHARES" means the Common Shares, no par value, of
IntelCom;
(p) "LETTER OF TRANSMITTAL AND ELECTION FORM" means the Letter of
Transmittal and Election Form in the form accompanying the Management Proxy
Statement - Prospectus;
(q) "MEETING" means the Annual and Special Meeting of the shareholders of
IntelCom to be held to consider the Arrangement;
(r) "MINIMUM NUMBER" means the number that is equal to 85% of the number of
IntelCom Common Shares outstanding immediately prior to the Arrangement;
(s) "PARENT" means ICG Communications, Inc., a corporation existing under
the laws of the State of Delaware;
(t) "PARENT CALL NOTICE" has the meaning ascribed thereto in section 5.2;
(u) "PARENT COMMON STOCK" means the Common Stock, par value US$.01 per
share, of Parent, and any other securities into which such shares may be
changed;
(v) "REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section
5.1;
(w) "RETRACTED SHARES" has the meaning ascribed thereto in the Share
Provisions;
(x) "RETRACTION CALL RIGHT" has the meaning ascribed thereto in section
5.2;
(y) "RETRACTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.2;
(z) "RETRACTION DATE" has the meaning ascribed thereto in the Share
Provisions;
(aa) "RETRACTION REQUEST" has the meaning ascribed thereto in the Share
Provisions; and
(ab) "SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Class A Shares which are set forth in Exhibit A
hereto.
1.2 Sections and Headings. The division of this Plan of Arrangement into
sections and the insertion of headings are for reference purposes only and shall
not affect the interpretation of this Plan of Arrangement. Unless otherwise
indicated, any reference in this Plan of Arrangement to a section or an Appendix
refers to the specified section of or Appendix to this Plan of Arrangement.
1.3 Number, Gender and Persons. In this Plan of Arrangement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, corporations, partnerships, associations,
trusts, unincorporated organizations, governmental bodies and other legal or
business entities of any kind.
1.4 Interpretation Not Affected by Headings. The division of this Plan of
Arrangement into Articles, sections and other parts and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Plan of Arrangement.
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1.5 Date of any Action. In the event that any date on or by which any
action is required or permitted to be taken hereunder is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding day which is a Business Day.
1.6 Time. All times expressed herein or in any Letters of Transmittal and
Election Forms or Notices of Guaranteed Delivery are local time Vancouver,
British Columbia, unless otherwise stipulated herein or therein.
1.7 Statutory References. Any reference in this Plan of Arrangement to a
statute includes all regulations made thereunder, all amendments to such statute
or regulations in force from time to time, and any statute or regulation that
supplements or supersedes such statute or regulations.
ARTICLE 2
ARRANGEMENT
2.1 Arrangement. At the Effective Time on the Effective Date, the
following reorganization of capital shall occur and shall be deemed to occur in
the following order without any further act or formality:
(a) The articles of incorporation of IntelCom shall be amended to replace
the rights, privileges, restrictions and conditions attaching to IntelCom Common
Shares with the Share Provisions (such shares being thereafter referred to as
"Class A Shares").
(b) Each Elected IntelCom Common Share outstanding immediately prior to the
Arrangement and which has been amended in accordance with subsection 2.1(a)
above (other than shares held by holders who have exercised their rights of
dissent in accordance with section 3.1 hereof and who are ultimately entitled to
be paid the fair value for such shares) shall be exchanged by the holder thereof
with Parent for one share of Parent Common Stock.
(c) Notwithstanding Article 5 of the Share Provisions, in connection with
the exchange referred to in subsection 2.1(b), each holder of Elected IntelCom
Common Shares shall be deemed to have simultaneously transferred each issued and
outstanding Elected IntelCom Common Share, as amended by subsection 2.1(a)
above, held by him to Parent and Parent shall deliver or cause to be delivered
to each such holder one fully paid and non-assessable share of Parent Common
Stock in exchange for each Elected IntelCom Common Share so transferred.
(d) Upon the exchange referred to in subsection 2.1(b), each holder of
Elected IntelCom Common Shares, shall cease to be such a holder, shall have his
name removed from the register of holders of IntelCom Common Shares and shall
become a holder of the number of shares of Parent Common Stock to which he is
entitled as a result of the exchange referred to in subsection 2.1(b) and such
holder's name shall be added to the register of holders of Parent Common Stock
accordingly.
(e) Upon the exchange referred to in subsection 2.1(b), Parent shall become
the holder of all the issued and outstanding Elected IntelCom Common Shares, and
Parent's name shall be added to the register of holders of IntelCom Common
Shares accordingly.
(f) In the event the number of shares of Parent Common Stock issuable
pursuant to subsection 2.1(b) is less than the Minimum Number, holders of
IntelCom Common Shares which are not Elected IntelCom Common Shares shall be
deemed to have elected, on a pro rata basis, pursuant to the
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terms of section 4.4 hereof to exchange such IntelCom Common Shares for shares
of Parent Common Stock in respect of that number of IntelCom Common Shares so as
to cause the total number of shares of Parent Common Stock issuable under
subsection 2.1(b) to be equal to 85% of the issued and outstanding IntelCom
Common Shares immediately prior to the Effective Time and such IntelCom Common
Shares shall be treated for the purposes of this Plan of Arrangement as Elected
IntelCom Common Shares.
(g) The share of Parent Common Stock held by the sole incorporator of
Parent shall be retired into the treasury of Parent.
2.2 Corporate Name Following the Effective Time. At the Effective Time on
the Effective Date, the corporate name of IntelCom shall become ICG Holdings
(Canada), Inc.
ARTICLE 3
RIGHTS OF DISSENT
3.1 Rights of Dissent. Holders of IntelCom Common Shares may exercise
rights of dissent with respect to such shares pursuant to and in the manner set
forth in section 190 of the CBCA and this section 3.1 (the "Dissent Procedures")
in connection with the Arrangement and holders who duly exercise such rights of
dissent and who:
(a) are ultimately entitled to be paid fair value for their IntelCom Common
Shares shall be deemed to have transferred such IntelCom Common Shares to
IntelCom for cancellation on the Effective Date; or
(b) are ultimately not entitled, for any reason, to be paid fair value for
their IntelCom Common Shares shall be deemed to have participated in the
Arrangement on the same basis as any non-dissenting holder of Elected IntelCom
Common Shares, and shall receive shares of Parent Common Stock on the basis
determined in accordance with subsection 2.1(b) of this Plan of Arrangement,
but in no case shall IntelCom be required to recognize such holders as holders
of IntelCom Common Shares or Class A Shares on and after the Effective Date, and
the names of such holders of IntelCom Common Shares shall be deleted from the
register of holders of IntelCom Common Shares on the Effective Date.
ARTICLE 4
CERTIFICATES
4.1 Issuance of Certificates Representing Class A Shares. On or promptly
after the Effective Time, IntelCom shall deposit with the Depositary, for the
benefit of the holders of Class A Shares, certificates representing the Class A
Shares. Upon surrender to the Depositary for cancellation of a certificate
which immediately prior to the Effective Time represented outstanding IntelCom
Common Shares, together with such other documents and instruments as would have
been required to effect the transfer of the shares formerly represented by such
certificate under the CBCA and the by-laws of IntelCom and such additional
documents and instruments as the Depositary may reasonably require, the holder
of such surrendered certificate shall be entitled to receive in exchange
therefor, and the Depositary shall deliver to such holder, a certificate
representing that number of Class A Shares which such holder has the right to
receive and the certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of IntelCom Common Shares which is not
registered in the transfer records of
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IntelCom, a certificate representing the proper number of Class A Shares may be
issued to a transferee if the certificate representing such IntelCom Common
Shares is presented to the Depositary, accompanied by all documents required to
evidence and effect such transfer. Until surrendered as contemplated by this
section 4.1, each certificate which immediately prior to the Effective Time
represented outstanding IntelCom Common Shares shall be deemed at any time after
the Effective Time to represent only the right to receive upon such surrender
the certificate representing Class A Shares as contemplated by this section 4.1.
4.2 Exchange of Certificates by Holders of Elected IntelCom Common Shares.
On or promptly after the Effective Time, Parent shall deposit with the
Depositary, for the benefit of the holders of Elected IntelCom Common Shares
exchanged for shares of Parent Common Stock pursuant to subsection 2.1(b),
certificates representing the shares of Parent Common Stock issued pursuant to
subsection 2.1(b) in exchange for outstanding Elected IntelCom Common Shares.
Upon surrender to the Depositary for cancellation of a certificate which
immediately prior to the Effective Time represented outstanding IntelCom Common
Shares which were exchanged for shares of Parent Common Stock, together with
such other documents and instruments as would have been required to effect the
transfer of the shares formerly represented by such certificate under the CBCA
and the by-laws of IntelCom and such additional documents and instruments as the
Depositary may reasonably require, the holder of such surrendered certificate
shall be entitled to receive in exchange therefor, and the Depositary shall
deliver to such holder, a certificate representing that number of shares of
Parent Common Stock which such holder has the right to receive and the
certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of IntelCom Common Shares which is not registered in the
transfer records of IntelCom, a certificate representing the proper number of
shares of Parent Common Stock may be issued to a transferee if the certificate
representing such IntelCom Common Shares is presented to the Depositary,
accompanied by all documents required to evidence and effect such transfer.
Until surrendered as contemplated by this section 4.2, each certificate which
immediately prior to the Effective Date represented outstanding IntelCom Common
Shares which were exchanged for shares of Parent Common Stock shall be deemed at
any time after the Effective Date to represent only the right to receive upon
such surrender the certificate representing shares of Parent Common Stock as
contemplated by this section 4.2.
4.3 Lost Certificates. In the event any certificate which immediately
prior to the Effective Time represented outstanding IntelCom Common Shares 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,
the Depositary will issue in exchange for such lost, stolen or destroyed
certificate, certificates representing Class A Shares or shares of Parent Common
Stock (and any dividends or distributions with respect thereto) deliverable in
respect thereof as determined in accordance with section 2.1. When authorizing
such payment in exchange for any lost, stolen or destroyed certificate, the
person to whom certificates representing Class A Shares or shares of Parent
Common Stock are to be issued shall, at the discretion of Parent, as a condition
precedent to the issuance thereof, give a bond satisfactory to IntelCom or
Parent, as the case may be, in such sum as IntelCom or Parent may direct or
otherwise indemnify IntelCom or Parent in a manner satisfactory to IntelCom or
Parent against any claim that may be made against IntelCom or Parent with
respect to the certificate alleged to have been lost, stolen or destroyed.
4.4 Elections. (a) Each record holder immediately prior to the Effective
Time of IntelCom Common Shares will be entitled to elect to receive shares of
Parent Common Stock or Class A Shares for all of such shares (an "Election").
All Elections shall be made on a Letter of Transmittal and Election Form.
Record holders of IntelCom Common Shares who hold IntelCom Common Shares as
nominees, trustees or in other representative capacities (a "Representative")
may submit multiple Letters of Transmittal and Election Forms; provided, that,
such Representative certifies that each such Letter of Transmittal and Election
Form covers all IntelCom Common Shares held by each Representative for a
particular beneficial owner.
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(b) Timely Elections, Etc. Elections shall be made by holders of IntelCom
Common Shares by depositing with the Depositary a Letter of Transmittal and
Election Form. To be effective, a Letter of Transmittal and Election Form must
be properly completed, signed and submitted to the Depositary. Parent will have
the discretion to determine whether Letters of Transmittal and Election Forms
have been properly completed, signed and submitted or revoked and to disregard
immaterial defects in Letters of Transmittal and Election Forms. The decision
of Parent (or the Depositary) in such matters shall be conclusive and binding.
Neither the Parent nor the Depositary will be under any obligation to notify any
person of any defect in a Letter of Transmittal and Election Form submitted to
the Depositary.
(c) Deemed Election. For the purposes hereof, a holder of IntelCom Common
Shares who does not submit a Letter of Transmittal and Election Form which is
received by the Depositary prior to the Election Deadline (as hereinafter
defined) shall be deemed to have made an election to receive shares of Parent
Common Stock for all such shares. If Parent or the Depositary shall determine
that any purported election was not properly made, such purported election shall
be deemed to be of no force and effect.
(d) Mailing. Parent and IntelCom shall each use their best efforts to mail
the Letter of Transmittal and Election Form to all persons who become holders of
IntelCom Common Shares during the period between the record date for the Meeting
and the close of business Toronto time, on the date seven calendar days prior to
the anticipated Effective Date and to make the Letter of Transmittal and
Election Form available to all persons who become holders of IntelCom Common
Shares subsequent to such day and no later than the close of business on the
business day prior to the Effective Date. A Letter of Transmittal and Election
Form must be received by the Depositary by 5:00 p.m. (Pacific time) on July
30, 1996 (the "Election Deadline") in order to be effective. A Letter of
Transmittal and Election Form may not be revoked after receipt thereof by the
Depositary.
ARTICLE 5
CERTAIN RIGHTS OF
PARENT TO ACQUIRE CLASS A SHARES
5.1 Parent Redemption Call Right. (a) In the event of the application of
Article 6 of the Share Provisions and notwithstanding the proposed redemption of
Class A Shares by IntelCom pursuant to Article 6 of the Share Provisions, Parent
shall have the overriding right (the "Redemption Call Right") to purchase from
all but not less than all of the holders of Class A Shares to be redeemed on the
Automatic Redemption Date all but not less than all of the Class A Shares held
by each such holder on payment by Parent to the holder of a share of Parent
Common Stock for each Class A Share redeemed, the value of such share of Parent
Common Stock being equal to the Current Market Price (as defined in the Share
Provisions) of a share of Parent Common Stock on the last Business Day prior to
the Automatic Redemption Date (the "Redemption Call Purchase Price"). In the
event of the exercise of the Redemption Call Right by Parent, each holder shall
be obligated to sell all the Class A Shares held by the holder and otherwise to
be redeemed to Parent on the Automatic Redemption Date on payment by Parent to
the holder of the Redemption Call Purchase Price for each such share.
(b) To exercise the Redemption Call Right, Parent must notify the Transfer
Agent in writing, as agent for the holders of Class A Shares, and IntelCom of
Parent's intention to exercise such right within two Business Days of the
declaration by IntelCom of an Automatic Redemption Date. The Transfer Agent
will notify the holders of the Class A Shares as to whether or not Parent has
exercised the Redemption Call Right forthwith after the expiry of the period
during which the same may be exercised by Parent. If Parent exercises the
Redemption Call Right, on the Automatic Redemption Date Parent will purchase and
the
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holders will sell all of the Class A Shares to be redeemed for a price per share
equal to the Redemption Call Purchase Price.
(c) For the purposes of completing the purchase of Class A Shares pursuant
to the Redemption Call Right, Parent shall deposit with the Transfer Agent, on
or before the Automatic Redemption Date, certificates representing the aggregate
number of shares of Parent Common Stock deliverable by Parent (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any lien, claim, encumbrance, security interest or adverse claim) in
payment of the total Redemption Call Purchase Price. Provided that the total
Redemption Call Purchase Price has been so deposited with the Transfer Agent, on
and after the Automatic Redemption Date, the rights of each holder of Class A
Shares so purchased will be limited to receiving such holder's proportionate
part of the total Redemption Call Purchase Price payable by Parent upon
presentation and surrender by the holder of certificates representing the Class
A Shares purchased by Parent from such holder and the holder shall on and after
the Automatic Redemption Date be considered and deemed for all purposes to be
the holder of the shares of Parent Common Stock delivered to such holder. Upon
surrender to the Transfer Agent of a certificate or certificates representing
Class A Shares, together with such other documents and instruments as may be
required to effect a transfer of Class A Shares under the CBCA and the by-laws
of IntelCom and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of Parent shall deliver to such holder, certificates
representing the shares of Parent Common Stock to which the holder is entitled.
If Parent does not exercise the Redemption Call Right in the manner described
above, on the Automatic Redemption Date the holders of the Class A Shares will
be entitled to receive in exchange therefor the redemption price otherwise
payable by IntelCom in connection with the redemption of Class A Shares pursuant
to Article 6 of the Share Provisions.
5.2 Parent Retraction Call Right. (a) In the event of the application of
Article 5 of the Share Provisions and notwithstanding the proposed redemption of
Class A Shares by a holder of Class A Shares pursuant to Article 5 of the Share
Provisions, Parent shall have the overriding right (the "Retraction Call Right")
to purchase from any holder of Class A Shares who has delivered a Retraction
Request all but not less than all of the Retracted Shares to be redeemed on the
Retraction Date on payment by Parent to the holder of a share of Parent Common
Stock for each Class A Share redeemed, such share of Parent Common Stock having
a value equal to the Current Market Price (as defined in the Share Provisions)
of a share of Parent Common Stock on the Retraction Date (the "Retraction Call
Purchase Price"). In the event of the exercise of the Retraction Call Right by
Parent, and provided that the Retraction Request is not revoked by the holder in
the manner specified in section 5.7 of the Share Provisions, the holder shall be
obligated to sell all the Retracted Shares to Parent on the Retraction Date on
payment by Parent to the holder of the Retraction Call Purchase Price for each
such share.
(b) To exercise the Retraction Call Right, Parent must notify IntelCom in
writing of its determination to do so (the "Parent Call Notice") within two
Business Days of notification to Parent by IntelCom of receipt by IntelCom of
the Retraction Request. If Parent delivers the Parent Call Notice within such
two Business Day time period, and provided that the Retraction Request is not
revoked by the holder in the manner specified in section 5.7 of the Share
Provisions, the Retraction Request shall thereupon be considered only to be an
offer by the holder to sell the Retracted Shares to Parent in accordance with
the Retraction Call Right. In such event, IntelCom shall not redeem the
Retracted Shares and Parent shall purchase from such holder and such holder
shall sell to Parent on the Retraction Date the Retracted Shares for a price per
share equal to the Retraction Call Purchase Price.
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(c) For the purposes of completing the purchase of Class A Shares pursuant
to the Retraction Call Right, Parent shall deposit with the Transfer Agent, on
or before the Retraction Date, certificates representing the aggregate number of
shares of Parent Common Stock deliverable by Parent (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim, encumbrance, security interest or adverse claim) in payment of the total
Retraction Call Purchase Price. Provided that the total Retraction Call
Purchase Price has been so deposited with the Transfer Agent, on and after the
Retraction Date, the rights of the holder of Class A Shares so purchased will be
limited to receiving such holder's proportionate part of the total Retraction
Call Purchase Price payable by Parent upon presentation and surrender by the
holder of certificates representing the Class A Shares purchased by Parent from
such holder and the holder shall on and after the Retraction Date be considered
and deemed for all purposes to be the holder of the shares of Parent Common
Stock delivered to such holder. Upon surrender to the Transfer Agent of a
certificate or certificates representing Class A Shares, together with such
other documents and instruments as may be required to effect a transfer of Class
A Shares under the CBCA and the by-laws of IntelCom and such additional
documents and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of Parent shall
deliver to such holder, certificates representing the shares of Parent Common
Stock to which the holder is entitled. If Parent does not exercise the
Retraction Call Right in the manner described above, on the Retraction Date the
holders of the Class A Shares will be entitled to receive in exchange therefor
the redemption price otherwise payable by IntelCom in connection with the
redemption of Class A Shares pursuant to Article 5 of the Share Provisions.
5.3 Notice upon Liquidation of Parent. (a) Parent will give each holder
of Class A Shares notice of each of the following events at the time set forth
below:
(i) in the event of any determination by the Board of Directors of Parent
to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Parent or to effect any other distribution
of assets of Parent among its shareholders for the purpose of winding
up its affairs, at least 30 days prior to the proposed effective date
of such liquidation, dissolution, winding-up or other distribution;
and
(ii) immediately, upon the earlier of receipt by Parent of notice of or
Parent otherwise becoming aware of any bona fide threatened instituted
claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of Parent or to
effect any other distribution of assets of Parent among its
shareholders for the purpose of winding up its affairs.
(b) Notice by Parent of any event contemplated by subsection 5.3(a), shall
include a brief description of the rights of holders of Class A Shares to
retract such shares in accordance with section 5.1 of the Share Provisions.
5.4 Withholding Rights. Parent shall be entitled to withhold the
consideration otherwise payable pursuant to this Plan of Arrangement from any
holder of IntelCom Common Shares or Class A Shares until such holder has paid to
Parent an amount equal to such amounts as Parent is required or permitted to
deduct and withhold with respect to such payment under the United States
Internal Revenue Code of 1986, as amended, the Income Tax Act (Canada) or any
provision of state, local, provincial or foreign tax law.
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ARTICLE 6
AMENDMENT
6.1 Plan of Arrangement Amendment. IntelCom reserves the right to amend,
modify and/or supplement this Plan of Arrangement at any time and from time to
time provided that any such amendment, modification, or supplement must be
contained in a written document which is (i) agreed to by Parent and (ii) filed
with the Court and approved by the Court.
Any amendment, modification or supplement to this Plan of Arrangement
which is approved by the Court following the Meeting shall be effective only (i)
if it is consented to by IntelCom and (ii) if it is agreed to by Parent.
Any amendment, modification or supplement to this Plan of Arrangement
may be made following the Effective Date unilaterally by IntelCom, provided that
(i) it is agreed to by Parent and (ii) it concerns a matter which, in the
reasonable opinion of IntelCom, is of an administrative nature required to
better give effect to the implementation of this Plan of Arrangement and is not
adverse to the financial or economic interests of the holders of Class A Shares.
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EXHIBIT A TO PLAN OF ARRANGEMENT OF INTELCOM GROUP INC.
PROVISIONS ATTACHING TO CLASS A SHARES
The Class A Shares in the capital of IntelCom shall have the following
rights, privileges, restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"AFFILIATE" of any person means any other person directly or
indirectly controlled by, or under common control of, that person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control of"), as applied to any
person, means the possession by another person, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
first mentioned person, whether through the ownership of voting securities, by
contract or otherwise.
"ARRANGEMENT AND SUPPORT AGREEMENT" means the Arrangement and Support
Agreement between Parent and IntelCom, made as of June 27, 1996.
"AUTOMATIC REDEMPTION DATE" if declared by the Board of Directors,
means the date for the automatic redemption by IntelCom of Class A Shares
pursuant to section 6.2 of these share provisions.
"BOARD OF DIRECTORS" means the Board of Directors of IntelCom.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in either or both of Denver, Colorado and
New York, New York.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed
in a foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign currency
expressed in Canadian dollars as may be deemed by the Board of Directors to be
appropriate for such purpose.
"CASH REDEMPTION DATE" if declared by the Board of Directors, means
the date for the redemption by IntelCom of Class A Shares pursuant to section
6.3 of these share provisions.
"CASH REDEMPTION PRICE" has the meaning ascribed thereto in section
6.4 of these share provisions.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-
44 as amended.
"CLASS A SHARES" mean the Class A Shares of IntelCom having the
rights, privileges, restrictions and conditions set forth herein.
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"CURRENT MARKET PRICE" means, in respect of a share of Parent Common
Stock on any date, the Canadian Dollar Equivalent of the average of the closing
prices of a share of Parent Common Stock on the Nasdaq National Market on each
of the thirty (30) consecutive trading days ending not more than five trading
days before such date, or, if the Parent Common Stock is not then listed, on
such other stock exchange or automated quotation system on which the Parent
Common Stock is listed or quoted, as the case may be, as may be selected by the
Board of Directors for such purpose; provided, however, that if there is no
public distribution or trading activity of Parent Common Stock during such
period, then the Current Market Price of a share of Parent Common Stock shall be
determined by the Board of Directors based upon the advice of such qualified
independent financial advisors as the Board of Directors may deem to be
appropriate, and provided, further, that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"INTELCOM" means IntelCom Group Inc., a corporation existing under the
federal laws of Canada.
"PARENT" means ICG Communications, Inc., a corporation existing under
the laws of the State of Delaware.
"PARENT CALL NOTICE" has the meaning ascribed thereto in section 5.3
of these share provisions.
"PARENT COMMON STOCK" mean the Common Stock, par value US$.01 per
share, of Parent, and any other securities into which such shares may be
changed.
"PARENT DIVIDEND DECLARATION DATE" means the date on which the Board
of Directors of Parent declares any dividend on the Parent Common Stock.
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of IntelCom under section 192 of the Canada Business Corporations
Act, to which plan these share provisions are attached.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"REDEMPTION PRICE" has the meaning ascribed thereto in section 6.2 of
these share provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.1 of
these share provisions.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in section
5.1 of these share provisions.
"RETRACTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
the Plan of Arrangement.
"RETRACTION DATE" has the meaning ascribed thereto in section 5.1(b)
of these share provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in section 5.1 of
these share provisions.
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"RETRACTION REQUEST" has the meaning ascribed thereto in section 5.1
of these share provisions.
"THIRD PARTY TRANSACTION" means any bona fide transaction (whether by
way of merger, consolidation, tender offer, share exchange offer,
reorganization, transfer, sale, lease or otherwise) which would result in: (i)
any person or group of persons (a "Third Party") acquiring more than 50 percent
of the outstanding Voting Equity Securities of Parent or the entity, if any,
surviving any merger or business combination; or (ii) any other transaction
pursuant to which any Third Party would acquire control of all or substantially
all of the assets of Parent and its subsidiaries.
"TRANSFER AGENT" means such suitable trust company or similar
financial institution to be selected by IntelCom from time to time to be the
registrar and transfer agent for the Class A Shares.
"VOTING EQUITY SECURITIES" means any voting securities of a company
which carry a residual right to participate in the earnings of the Company and,
upon the liquidation or winding up of the Company, in its assets.
ARTICLE 2
LIQUIDATION, DISSOLUTION AND WINDING UP
2.1 Subject to the prior rights of the holders of any class of shares
ranking senior to the Class A Shares with respect to priority in the
distribution of assets or return of capital upon the liquidation, dissolution or
winding-up of IntelCom, the holders of Class A Shares shall be entitled to
receive equally the remaining property of IntelCom in the event of the
liquidation, dissolution or winding up of IntelCom, whether voluntary or
involuntary, or upon any other return of capital or distribution of assets of
IntelCom among its shareholders for the purpose of winding up its affairs.
ARTICLE 3
DIVIDENDS
3.1 Subject to section 3.2 hereof and subject to the prior rights of the
holders of any class of shares ranking senior to the Class A Shares with respect
to priority of dividends, the holders of Class A Shares shall be entitled to
receive, and IntelCom shall pay in equal amounts per share on all Class A Shares
outstanding, such non-cumulative dividends as the directors may from time to
time declare in their absolute discretion.
3.2 A holder of a Class A Share shall be entitled to receive, and the
Board of Directors shall use its best efforts, subject to applicable law, on
each Parent Dividend Declaration Date, to declare a dividend on each Class A
Share (a) in the case of a cash dividend declared on the Parent Common Shares,
in an amount in cash for each Class A Share equal to the Canadian Dollar
Equivalent on the Parent Dividend Declaration Date of the cash dividend declared
on each share of Parent Common Stock or (b) in the case of a stock dividend
declared on the Parent Common Stock to be paid in shares of Parent Common Stock,
in such number of Class A Shares for each Class A Share as is equal to the
number of shares of Parent Common Stock to be paid on each share of Parent
Common Stock or (c) in the case of a dividend declared on the Parent Common
Stock in property other than cash or shares of Parent Common Stock, in such type
and amount of property for each Class A Share as is the same as or economically
equivalent to (to be determined by the Board of Directors as contemplated by
section 2.7 of the
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Arrangement and Support Agreement) the type and amount of property declared as a
dividend on each share of Parent Common Stock. Such dividends shall be paid out
of money, assets or property of IntelCom properly applicable to the payment of
dividends, or out of authorized but unissued shares of IntelCom. Any dividend
which should have been declared on the Class A Shares pursuant to this section
3.2 but was not so declared due to the provisions of applicable law shall be
declared and paid by IntelCom on a subsequent date or dates determined by the
Board of Directors.
3.3 Checks of IntelCom payable at any branch of the bankers of IntelCom
shall be issued in respect of any cash dividends contemplated by section 3.1 or
subsection 3.2(a) hereof and the sending of such a cheque to each holder of a
Class A Share shall satisfy the cash dividend represented thereby unless the
cheque is not paid on presentation. Certificates registered in the name of the
registered holder of Class A Shares shall be issued or transferred in respect of
any stock dividends contemplated by subsection 3.2(b) hereof and the sending of
such a certificate to each holder of a Class A Share shall satisfy the stock
dividend represented thereby. Such other type and amount of property in respect
of any dividends contemplated by subsection 3.2(c) hereof shall be issued,
distributed or transferred by IntelCom in such manner as it shall determine and
the issuance, distribution or transfer thereof by IntelCom to each holder of a
Class A Share shall satisfy the dividend represented thereby. No holder of a
Class A Share shall be entitled to recover by action or other legal process
against IntelCom any dividend that is represented by a cheque that has not been
duly presented to IntelCom's bankers for payment or that otherwise remains
unclaimed for a period of six years from the date on which such dividend was
payable.
3.4 The record date for the determination of the holders of Class A
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Class A Shares under section 3.2 hereof shall be the same dates
as the record date and payment date, respectively, for the corresponding
dividend declared on the Parent Common Stock.
3.5 If, on any payment date for any dividends declared on the Class A
Shares under section 3.2 hereof, the dividends are not paid in full on all of
the Class A Shares then outstanding, any such dividends that remain unpaid shall
be paid on a subsequent date or dates determined by the Board of Directors on
which IntelCom shall have sufficient moneys, assets or property properly
applicable to the payment of such dividends.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Class A Shares are outstanding and held by
holders other than Parent or any of its Affiliates, IntelCom shall not at any
time without, but may at any time with, the approval of the holders of the Class
A Shares given as specified in section 8.3 of these share provisions:
(a) pay any dividends on any other shares ranking junior to the Class A
Shares, other than stock dividends payable in any such other shares ranking
junior to the Class A Shares, as the case may be;
(b) redeem, retract or purchase or make any capital distribution in respect
of any shares ranking junior to the Class A Shares; or
(c) redeem or purchase any other shares of IntelCom ranking equally with
the Class A Shares with respect to the payment of dividends or on any
liquidation distribution.
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The restrictions in sections 4.1(a), 4.1(b) and 4.1(c) above shall not
apply if all dividends on the outstanding Class A Shares corresponding to
dividends declared to date on the Parent Common Stock shall have been declared
on the Class A Shares and paid in full.
ARTICLE 5
RETRACTION OF CLASS A SHARES BY HOLDER
5.1 Any holder of Class A Shares, other than Parent or any Affiliate of
Parent, shall be entitled at any time, subject to applicable law and the
exercise by Parent of the Retraction Call Right and otherwise upon compliance
with the provisions of this Article 5, to require IntelCom to redeem any or all
of the Class A Shares registered in the name of such holder for one share of
Parent Common Stock, the value of such share being equal to the Current Market
Price of a Parent Common Stock on the last Business Day prior to the Retraction
Date (the "Retraction Price"). To effect such redemption, the holder shall
present and surrender at the registered office of IntelCom or at any office of
the Transfer Agent as may be specified by IntelCom by notice to the holders of
Class A Shares the certificate or certificates representing the Class A Shares
which the holder desires to have IntelCom redeem, together with such other
documents and instruments as may be required to effect a transfer of Class A
Shares under the CBCA and the by-laws of IntelCom and such additional documents
and instruments as the Transfer Agent may reasonably require, and together with
a duly executed statement (the "Retraction Request") in such form as may be
acceptable to IntelCom:
(a) specifying that the holder desires to have all or any number specified
therein of the Class A Shares represented by such certificate or certificates
(the "Retracted Shares") redeemed by IntelCom;
(b) stating the Business Day on which the holder desires to have IntelCom
redeem the Retracted Shares (the "Retraction Date"), provided that the
Retraction Date shall be not less than five Business Days nor more than 10
Business Days after the date on which the Retraction Request is received by
IntelCom and further provided that, in the event that no such Business Day is
specified by the holder in the Retraction Request, the Retraction Date shall be
deemed to be the tenth Business Day after the date on which the Retraction
Request is received by IntelCom; and
(c) acknowledging the overriding right (the "Retraction Call Right") of
Parent to purchase all but not less than all the Retracted Shares directly from
the holder and that the Retraction Request shall be deemed to be a revocable
offer by the holder to sell the Retracted Shares to Parent in accordance with
the Retraction Call Right on the terms and conditions set out in section 5.3
below.
5.2 Subject to the exercise by Parent of the Retraction Call Right, upon
receipt by IntelCom or the Transfer Agent in the manner specified in section 5.1
hereof of a certificate or certificates representing the number of Class A
Shares which the holder desires to have IntelCom redeem, together with a
Retraction Request, and provided that the Retraction Request is not revoked by
the holder in the manner specified in section 5.7, IntelCom shall redeem the
Retracted Shares effective at the close of business on the Retraction Date and
shall cause to be delivered to such holder the total Retraction Price with
respect to such shares. If only a part of the Class A Shares represented by any
certificate are redeemed (or purchased by Parent pursuant to the Retraction Call
Right), a new certificate for the balance of such Class A Shares shall be issued
to the holder at the expense of IntelCom.
5.3 Upon receipt by IntelCom of a Retraction Request, IntelCom shall
immediately notify Parent thereof. In order to exercise the Retraction Call
Right, Parent must notify IntelCom in writing of its determination to do so (the
"Parent Call Notice") within two Business Days of notification to Parent by
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IntelCom of the receipt by IntelCom of the Retraction Request. If Parent does
not so notify IntelCom within such two Business Day period, IntelCom will notify
the holder as soon as possible thereafter that Parent will not exercise the
Retraction Call Right. In the event that Parent does not deliver a Parent Call
Notice within such two Business Day period, and provided that Retraction Request
is not revoked by the holder in the manner specified in section 5.7, IntelCom
shall redeem the Retracted Shares on the Retraction Date and in the manner
otherwise contemplated in this Article 5.
5.4 IntelCom shall deliver or cause the Transfer Agent to deliver to the
relevant holder, at the address of the holder recorded in the securities
register of IntelCom for the Class A Shares or at the address specified in the
holder's Retraction Request or by holding for pick up by the holder at the
registered office of IntelCom or at any office of the Transfer Agent as may be
specified by IntelCom by notice to the holders of Class A Shares, certificates
representing the shares of Parent Common Stock (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim, encumbrance, security interest or adverse claim) registered in the name
of the holder or in such other name as the holder may request in payment of the
Retraction Price, and such delivery of such certificates on behalf of IntelCom
or by the Transfer Agent shall be deemed to be payment of and shall satisfy and
discharge all liability for the Retraction Price. In the event that there is
tax required to be deducted or withheld from any payment to a holder of Class A
Shares, IntelCom is hereby authorized to withhold payment of the Retraction
Price to any holder of Class A Shares until such holder has paid to IntelCom an
amount equal to such amounts as IntelCom is required or permitted to deduct or
withhold with respect to such Retraction Price under the United States Internal
Revenue Code of 1986, as amended, the Income Tax Act (Canada) or any provision
of state, local or provincial or foreign tax law.
5.5 On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the
Retraction Price or Retraction Call Purchase Price, as the case may be, unless
upon presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the Retraction Price or the Retraction Call Purchase
Price, as the case may be, shall not be made, in which case the rights of such
holder shall remain unaffected until the Retraction Price or the Retraction Call
Purchase Price, as the case may be, has been paid in the manner hereinbefore
provided. On and after the close of business on the Retraction Date, provided
that presentation and surrender of certificates and payment of the Retraction
Price or the Retraction Call Purchase Price, as the case may be, has been made
in accordance with the foregoing provisions, the holder of the Retracted Shares
so redeemed by IntelCom or purchased by Parent shall thereafter be considered
and deemed for all purposes to be a holder of the shares of Parent Common Stock
delivered to it.
5.6 Notwithstanding any other provision of this Article 5, IntelCom shall
not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to solvency requirements or other provisions of applicable law. If
IntelCom believes that on any Retraction Date it would not be permitted by any
of such provisions to redeem the Retracted Shares tendered for redemption on
such date, and provided that Parent shall not have exercised the Retraction Call
Right with respect to the Retracted Shares, IntelCom shall only be obligated to
redeem Retracted Shares specified by a holder in a Retraction Request to the
extent of the maximum number that may be so redeemed as would not be contrary to
such provisions and shall notify the holder at least two Business Days prior to
the Retraction Date as to the number of Retracted Shares which will not be
redeemed by IntelCom. In any case in which the redemption by IntelCom of
Retracted Shares would be contrary to solvency requirements or other provisions
of applicable law, IntelCom shall redeem Retracted Shares in accordance with
section 5.2 of these share provisions on a pro rata basis and shall issue to
each holder of Retracted Shares a new certificate, at the expense of IntelCom,
representing the Retracted Shares not redeemed by IntelCom pursuant to section
5.2 hereof. Provided that the Retraction Request is
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not revoked by the holder in the manner specified in section 5.7, the holder of
any such Retracted Shares not redeemed by IntelCom pursuant to section 5.2 of
these share provisions as a result of solvency requirements of applicable law
shall be deemed by giving the Retraction Request to require Parent to purchase
such Retracted Shares from such holder on the Retraction Date or as soon as
practicable thereafter on payment by Parent to such holder of the Retraction
Call Purchase Price for each such Retracted Share, all as more specifically
provided in the Arrangement and Support Agreement.
5.7 A holder of Retracted Shares may, by notice in writing given by the
holder to IntelCom before the close of business on the Business Day immediately
preceding the Retraction Date, withdraw its Retraction Request in which event
such Retraction Request shall be null and void and, for greater certainty, the
revocable offer constituted by the Retraction Request to sell the Retracted
Shares to Parent shall be deemed to have been revoked.
5.8 For greater certainty, this Article 5 remains applicable after the
public announcement of a Third Party Transaction.
ARTICLE 6
REDEMPTION OF CLASS A SHARES BY INTELCOM
6.1 Upon the public announcement of a Third Party Transaction, the Board
of Directors may declare an Automatic Redemption Date to occur on a date which
shall be the earlier of: (i) the date of completion of the Third Party
Transaction; or (ii) if, in the discretion of the Board of Directors, the
Automatic Redemption Date must occur on a date prior to the completion of the
Third Party Transaction in order to ensure that holders of Class A Shares are
able participate in the Third Party Transaction, then on such date determined by
the Board of Directors. Without limiting the generality of the foregoing, to
the extent possible, IntelCom will use its best efforts expeditiously and in
good faith to ensure that holders of Class A Shares may participate in all such
Third Party Transactions without being required to retract their Class A Shares
as against IntelCom (or, if so required, to ensure that any such retraction
shall be effective only upon, and shall be conditional upon, the closing of the
Third Party Transaction and only to the extent necessary to tender or deposit to
the Third Party Offer).
6.2 Subject to applicable law, and subject to the exercise by Parent of
the Redemption Call Right, IntelCom shall on the Automatic Redemption Date
redeem each of the then outstanding Class A Shares, other than Class A Shares
held by Parent or any Affiliate of Parent, for one share of Parent Common Stock,
such share having a value equal to the Current Market Price of a share of Parent
Common Stock on the last Business Day prior to the Automatic Redemption Date
(the "Redemption Price").
6.3 At any time after October 1, 2006, provided that the number of Class A
Shares registered in the name of holders other than Parent or any of its
Affiliates is less than one percent (1%) of the total number of Class A Shares
outstanding at such time, the Board of Directors may declare a Cash Redemption
Date.
6.4 Subject to applicable law, and the legal availability of funds
therefor, IntelCom shall on the Cash Redemption Date redeem each of the then
outstanding Class A Shares, other than Class A Shares held by Parent or any
Affiliate of Parent for an amount equal to the Current Market Price of one share
of Parent Common Stock on the last Business Day prior to the Cash Redemption
Date (the "Cash Redemption Price").
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6.5 In the case of any redemption of Class A Shares under this Article 6,
IntelCom shall, no longer than 5 Business Days after the declaration of an
Automatic Redemption Date or Cash Redemption Date, as the case may be, send or
cause to be sent to each holder of Class A Shares to be redeemed a notice in
writing of the redemption by IntelCom or the purchase by Parent under the
Redemption Call Right, as the case may be, of the Class A Shares held by such
holder. Such notice shall set out the Redemption Price, the Redemption Call
Purchase Price or the Cash Redemption Price, as the case may be, the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, and, if
applicable, particulars of the Redemption Call Right. On or after the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, and subject to
the exercise by Parent of the Redemption Call Right, if applicable, IntelCom
shall cause to be delivered to the holders of the Class A Shares to be redeemed
the Redemption Price or the Cash Redemption Price, as the case may be, for each
such Class A Share upon presentation and surrender at the registered office of
IntelCom or at any office of the Transfer Agent as may be specified by IntelCom
in such notice of the certificates representing such Class A Shares, together
with such other documents and instruments as may be required to effect a
transfer of Class A Shares under the CBCA and the by-laws of IntelCom and such
additional documents and instruments as the Transfer Agent may reasonably
require. Payment of the total Redemption Price or the Cash Redemption Price, as
the case may be, for such Class A Shares shall be made by delivery to each
holder, at the address of the holder recorded in the securities register of
IntelCom or by holding for pick up by the holder at the registered office of
IntelCom or at any office of the Transfer Agent as may be specified by IntelCom
in such notice, on behalf of IntelCom of certificates representing shares of
Parent Common Stock (which shares shall be duly issued as fully paid and non-
assessable and shall be free and clear of any lien, claim, encumbrance, security
interest or adverse claim), or, as applicable, of a check representing the Cash
Redemption Price. On and after the Automatic Redemption Date or the Cash
Redemption Date, as the case may be, the holders of the Class A Shares called
for redemption shall cease to be holders of such Class A Shares and shall not be
entitled to exercise any of the rights of holders in respect thereof, other than
the right to receive their proportionate part of the total Redemption Price or
the Cash Redemption Price, as the case may be, unless payment of the total
Redemption Price or the Cash Redemption Price, as the case may be, for such
Class A Shares shall not be made upon presentation and surrender of certificates
in accordance with the foregoing provisions, in which case the rights of the
holders shall remain unaffected until the total Redemption Price or the Cash
Redemption Price, as the case may be, has been paid in the manner hereinbefore
provided. IntelCom shall have the right at any time after the sending of notice
of its intention to redeem Class A Shares as aforesaid to deposit or cause to be
deposited the total Redemption Price or Cash Redemption Price, as the case may
be, of the Class A Shares so called for redemption, or of such of the said Class
A Shares represented by certificates that have not at the date of such deposit
been surrendered by the holders thereof in connection with such redemption, in a
custodial account with any chartered bank or trust company in Canada named in
such notice. Upon the later of such deposit being made and the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, the Class A
Shares in respect whereof such deposit shall have been made shall be redeemed
and the rights of the holders thereof after such deposit, or Automatic
Redemption Date or Cash Redemption Date, as the case may be, shall be limited to
receiving their proportionate part of the total Redemption Price or the Cash
Redemption Price, as the case may be, without interest for such Class A Shares
so deposited, against presentation and surrender of the said certificates held
by them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Redemption Price, the holders of the Class A
Shares shall thereafter be considered and deemed for all purposes to be holders
of the shares of Parent Common Stock delivered to them. In the event that there
is tax required to be deducted or withheld from any payment to a holder of Class
A Shares, IntelCom is hereby authorized to withhold payment of the Redemption
Price or the Cash Redemption Price, as the case may be, to any holder of Class A
Shares until such holder has paid to IntelCom an amount equal
to such amounts as IntelCom is required or permitted to deduct or withhold with
respect to such Redemption Price under the United States Internal Revenue Code
of 1986, as amended, the Income Tax Act (Canada) or any provision of state,
local or provincial or foreign tax law.
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ARTICLE 7
VOTING RIGHTS
7.1 The holders of Class A Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of IntelCom and shall have one
vote for each share held at all meetings of the shareholders of IntelCom except
for meetings at which only holders of another specified class or series of
shares of IntelCom are entitled to vote separately as a class or series.
ARTICLE 8
AMENDMENT AND APPROVAL
8.1 The rights, privileges, restrictions and conditions attaching to
the Class A Shares may be added to, changed or removed but only with the
approval of the holders of the Class A Shares given as hereinafter specified.
8.2 Any approval given by the holders of the Class A Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Class A Shares or any other matter requiring the approval or consent of the
holders of the Class A Shares shall be deemed to have been sufficiently given if
it shall have been given in accordance with applicable law subject to a minimum
requirement that such approval be evidenced by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders of
Class A Shares duly called and held at which the holders of at least 50% of the
outstanding Class A Shares at that time are present or represented by proxy;
provided that if at any such meeting the holders of at least 50% of the
outstanding Class A Shares at that time are not present or represented by proxy
within one-half hour after the time appointed for such meeting, then the meeting
shall be adjourned to such date not less than 10 days thereafter and to such
time and place as may be designated by the Chairman of such meeting. At such
adjourned meeting the holders of Class A Shares present or represented by proxy
thereat may transact the business for which the meeting was originally called
and a resolution passed thereat by the affirmative vote of not less than two-
thirds of the votes cast on such resolution at such meeting shall constitute the
approval or consent of the holders of the Class A Shares.
8.3 Any approval or consent required to be given by the holders of the
Class A Shares pursuant to this section 8.3 shall be deemed to have been
sufficiently given if such approval is evidenced by resolution passed by not
less than one-half of the votes cast (excluding any votes attached to shares
owned by Parent or any of its Affiliates) on such resolution at a meeting of
holders of Class A Shares duly called and held at which the holders of at least
25% of the outstanding Class A Shares other than Class A Shares held by Parent
or any of its Affiliates at that time are present or represented by proxy;
provided that if at any such meeting the holders of at least 25% of the
outstanding Class A Shares other than Class A Shares held by Parent or any of
its Affiliates at that time are not present or represented by proxy within one-
half hour after the time appointed for such meeting, then the meeting shall be
adjourned to such date not less than 10 days thereafter and to such time and
place as may be designated by the Chairman of such meeting. At such adjourned
meeting the holders of Class A Shares present or represented by proxy thereat
may transact the business for which the meeting was originally called and a
resolution passed thereat by the affirmative vote of not less than one-half of
the votes (excluding any votes attached to shares owned by Parent or any of its
Affiliates) cast on such resolution at such meeting shall constitute the
approval or consent of the holders of the Class A Shares.
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ARTICLE 9
RECIPROCAL CHANGES, ETC. IN RESPECT OF SHARES OF
PARENT COMMON STOCK
9.1 (a) Pursuant to the Arrangement and Support Agreement, Parent will not
without the prior approval of IntelCom and the prior approval of the holders of
the Class A Shares given as specified in section 8.3 of these share provisions:
(i) issue or distribute shares of Parent Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of Parent Common Stock) to the holders of all or substantially
all of the then outstanding shares of Parent Common Stock by way of
stock dividend or other distribution, other than an issue of shares of
Parent Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire shares of Parent Common Stock) to
holders of shares of Parent Common Stock who exercise an option to
receive dividends in shares of Parent Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of Parent Common Stock) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding shares of Parent Common
Stock entitling them to subscribe for or to purchase shares of Parent
Common Stock (or securities exchangeable for or convertible into or
carrying rights to acquire shares of Parent Common Stock); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding shares of Parent Common Stock (A) shares or
securities of Parent of any class other than Parent Common Stock
(other than shares convertible into or exchangeable for or carrying
rights to acquire shares of Parent Common Stock), (B) rights, options
or warrants other than those referred to in section 9.1(a)(ii) above,
(C) evidences of indebtedness of Parent or (D) assets of Parent;
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Class A Shares.
(b) Pursuant to the Arrangement and Support Agreement, Parent will not
without the prior approval of IntelCom and the prior approval of the holders of
the Class A Shares given as specified in section 8.3 of these share provisions:
(i) subdivide, redivide or change the then outstanding shares of Parent
Common Stock into a greater number of shares of Parent Common Stock;
or
(ii) reduce, combine or consolidate or change the then outstanding shares
of Parent Common Stock into a lesser number of shares of Parent Common
Stock; or
(iii) reclassify or otherwise change the shares of Parent Common Stock or
effect an amalgamation, merger, reorganization or other transaction
affecting the shares of Parent Common Stock;
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Class A Shares.
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The Arrangement and Support Agreement shall not be changed without the
approval of the holders of the Class A Shares given as specified in section 8.3
of these share provisions.
9.2 Pursuant to the Arrangement and Support Agreement, the holders of
Class A Shares (other than Parent, its subsidiaries and Affiliates) are given
certain rights to exchange their Class A Shares for shares of Parent Common
Stock.
ARTICLE 10
ACTIONS BY INTELCOM UNDER ARRANGEMENT AND SUPPORT AGREEMENT
10.1 IntelCom will take all such actions and do all such things as shall be
necessary or advisable to perform and comply with and to ensure performance and
compliance by Parent with all provisions of the Arrangement and Support
Agreement applicable to IntelCom and Parent, respectively, in accordance with
the respective terms thereof including, without limitation, taking all such
actions and doing all such things as shall be necessary or advisable to enforce
to the fullest extent possible for the direct benefit of IntelCom and the
holders of Class A Shares all rights and benefits in favor of IntelCom and such
holders under or pursuant to such agreements.
10.2 IntelCom shall not propose, agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Arrangement and Support Agreement without the approval of the holders of the
Class A Shares given as specified in section 8.3 of these share provisions,
other than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such agreement
for the protection of IntelCom or the holders of Class A Shares thereunder or
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or questions
arising thereunder which, in the opinion of the Board of Directors, it may be
expedient to make, provided that the Board of Directors shall be of the opinion,
after consultation with counsel, that such provisions and modifications will not
be prejudicial to the interests of the holders of the Class A Shares other than
Parent or any of its Affiliates; or
(c) making such changes in or corrections to such agreement which, on the
advice of counsel to IntelCom, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error contained therein, provided that the Board
of Directors shall be of the opinion, after consultation with counsel, that such
changes or corrections will not be prejudicial to the interests of the holders
of the Class A Shares other than Parent or any of its Affiliates.
ARTICLE 11
LEGEND
11.1 The certificates evidencing the Class A Shares shall contain or have
affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the provisions of the Arrangement and Support
Agreement relating to the "Exchange Right" (as such term is defined in the
Arrangement and Support Agreement) and the provisions of the Plan of Arrangement
and these share provisions relating to the Automatic Redemption Date and the
Redemption Call Right.
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ARTICLE 12
NOTICES
12.1 Any notice, request or other communication to be given to IntelCom by
a holder of Class A Shares shall be in writing and shall be valid and effective
if given by mail (postage prepaid) or by telecopy or by delivery to the
registered office of IntelCom and addressed to the attention of the President.
Any such notice, request or other communication, if given by mail, telecopy or
delivery, shall only be deemed to have been given and received upon actual
receipt thereof by IntelCom.
12.2 Any presentation and surrender by a holder of Class A Shares to
IntelCom or the Transfer Agent of certificates representing Class A Shares in
connection with the liquidation, dissolution or winding up of IntelCom or the
retraction or redemption of Class A Shares shall be made by registered mail
(postage prepaid) or by delivery to the registered office of IntelCom or to such
office of the Transfer Agent as may be specified by IntelCom, in each case
addressed to the attention of the President of IntelCom. Any such presentation
and surrender of certificates shall only be deemed to have been made and to be
effective upon actual receipt thereof by IntelCom or the Transfer Agent, as the
case may be. Any such presentation and surrender of certificates made by
registered mail shall be at the sole risk of the holder mailing the same.
12.3 Any notice, request or other communication to be given to a holder of
Class A Shares by or on behalf of IntelCom shall be in writing and shall be
valid and effective if given by mail (postage prepaid) or by delivery to the
address of the holder recorded in the securities register of IntelCom or, in the
event of the address of any such holder not being so recorded, then at the last
known address of such holder. Any such notice, request or other communication,
if given by mail, shall be deemed to have been given and received on the third
Business Day following the date of mailing and, if given by delivery, shall be
deemed to have been given and received on the date of delivery. Accidental
failure or omission to give any notice, request or other communication to one or
more holders of Class A Shares shall not invalidate or otherwise alter or affect
any action or proceeding to be taken by IntelCom pursuant thereto.
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APPENDIX F
SEE "INDEX TO FINANCIAL STATEMENTS"
<PAGE>
APPENDIX G
NOTICE OF APPLICATION TO COURT FOR FINAL ORDER
Court file no. .
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
IN THE MATTER OF THE CANADA BUSINESS CORPORATIONS ACT, R.S.C. 1985,
CHAPTER-37, AS AMENDED, SECTION 192
and
IN THE MATTER OF A PROPOSED ARRANGEMENT INVOLVING
INTELCOM GROUP INC. AND ITS SHAREHOLDERS AND
ICG COMMUNICATIONS, INC.
NOTICE OF APPLICATION
TO: ALL HOLDERS OF COMMON SHARES OF INTELCOM GROUP INC.
THIS APPLICATION will come on for a hearing before a judge presiding over
the Commercial List on August ., 1996 at 10:00 a.m. or as soon after that time
as the Application may be heard at 145 Queen Street West, Toronto,
Ontario.
IF YOU WISH TO OPPOSE THIS APPLICATION, you or an Ontario lawyer acting for
you must forthwith prepare a notice of appearance in Form 38A prescribed by
the Rules of Civil Procedure, serve it on the applicants' lawyers and file it,
with proof of service, in this court office, and you and your lawyers must
appear at the hearing.
IF YOU WISH TO PRESENT AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE COURT
OR TO EXAMINE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your
lawyer(s) must, in addition to serving your notice of appearance, serve a copy
of the evidence on the applicants' lawyer and file it, with proof of service,
in the court office where the application is to be heard as soon as possible,
but not later than 2:00 p.m. on the day before the hearing.
IF YOU FAIL TO APPEAR AT THIS HEARING, JUDGMENT MAY BE GIVEN IN YOUR ABSENCE
AND WITHOUT FURTHER NOTICE TO YOU.
If you wish to oppose this Application but are unable to pay legal fees,
legal aid may be available to you by contacting a local Legal Aid Office.
Date: June ., 1996 Issued by ______________________
.
Local registrar
Address of court office:
145 Queen Street West
Toronto, Ontario M5H 2N9
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<PAGE>
APPLICATION
1. THE APPLICANTS INTELCOM GROUP INC. AND ICG COMMUNICATIONS, INC. SEEK:
(a) an interim order for directions pursuant to s. 192(4) of the Canada
Business Corporations Act, as amended, in the terms of the draft interim
order attached hereto as Schedule "A"; and
(b) an order approving the Plan of Arrangement ("Arrangement") involving
IntelCom Group Inc. and ICG Communications, Inc.
2. THE GROUNDS FOR THE APPLICATION ARE:
(a) all statutory requirements under the Canada Business Corporations Act
have been fulfilled;
(b) the Arrangement is fair and reasonable and put forth in good faith;
(c) the provisions of s. 192 of the Canada Business Corporations Act, as
amended;
(d) Rule 14.05(2) of the Rules of Procedure; and
(e) if made, the order will constitute the basis for an exemption under the
United States Securities Act of 1933, as amended, with respect to
securities to be issued under the Arrangement by IntelCom Group Inc.
3. THE FOLLOWING DOCUMENTARY EVIDENCE WILL BE USED AT THE HEARING OF THE
APPLICATION:
(a) the Affidavit of John D. Field, sworn June ., 1996, the exhibits
thereto, and other materials referred to therein; and
(b) such further and other material as counsel may advise and this
Honourable Court may permit.
Date of issue: June ., 1996 STIKEMAN, ELLIOTT
Barristers and Solicitors
P.O. Box 85, Suite 5400
Commerce Court West
Toronto, Ontario M5L 1B9
Sean F. Dunphy
Phone: (416) 869-5662
Fax: (416) 947-0866
Solicitors for the Applicants
IntelCom Group Inc. and ICG
Communications, Inc.
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<PAGE>
APPENDIX H
SECTION 190 OF THE CBCA
190. (1) RIGHT TO DISSENT. Subject to sections 191 and 241, a holder of
shares of any class of a corporation may dissent if the corporation is subject
to an order under paragraph 192(4)(d) that affects the holder or if the
corporation resolves to
(a) amend its articles under section 173 or 174 to add, change or remove any
provisions restricting or constraining the issue, transfer or ownership
of shares of that class;
(b) amend its articles under section 173 to add, change or remove any
restriction on the business or businesses that the corporation may carry
on;
(c) amalgamate otherwise than under section 184;
(d) be continued under section 188; or
(e) sell, lease or exchange all or substantially all its property under
subsection 189(3).
(2) FURTHER RIGHT. A holder of shares of any class or series of shares
entitled to vote under section 176 may dissent if the corporation resolves to
amend its articles in a manner described in that section.
(3) PAYMENT FOR SHARES. In addition to any other right he may have, but
subject to subsection (26), a shareholder who complies with this section is
entitled, when the action approved by the resolution from which he dissents or
an order made under subsection 192(4) becomes effective, to be paid by the
corporation the fair value of the shares held by him in respect of which he
dissents, determined as of the close of business on the day before the
resolution was adopted or the order was made.
(4) NO PARTIAL DISSENT. A dissenting shareholder may only claim under
this section with respect to all the shares of a class held by him on behalf
of any one beneficial owner and registered in the name of the dissenting
shareholder.
(5) OBJECTION. A dissenting shareholder shall send to the corporation,
at or before any meeting of shareholders at which a resolution referred to in
subsection (1) or (2) is to be voted on, a written objection to the
resolution, unless the corporation did not give notice to the shareholder of
the purpose of the meeting and of his right to dissent.
(6) NOTICE OF RESOLUTION. The corporation shall, within ten days after
the shareholders adopt the resolution, send to each shareholder who has filed
the objection referred to in subsection (5) notice that the resolution has
been adopted, but such notice is not required to be sent to any shareholder
who voted for the resolution or who has withdrawn his objection.
(7) DEMAND FOR PAYMENT. A dissenting shareholder shall, within twenty
days after he receives a notice under subsection (6) or, if he does not
receive such notice, within twenty days after he learns that the resolution
has been adopted, send to the corporation a written notice containing
(a) his name and address;
(b) the number and class of shares in respect of which he dissents; and
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(c) a demand for payment of the fair value of such shares.
(8) SHARE CERTIFICATE. A dissenting shareholder shall, within thirty
days after sending a notice under subsection (7), send the certificates
representing the shares in respect of which he dissents to the corporation or
its transfer agent.
(9) FORFEITURE. A dissenting shareholder who fails to comply with
subsection (8) has no right to make a claim under this section.
(10) ENDORSING CERTIFICATE. A corporation or its transfer agent shall
endorse on any share certificate received under subsection (8) a notice that
the holder is a dissenting shareholder under this section and shall forthwith
return the share certificates to the dissenting shareholder.
(11) SUSPENSION OF RIGHTS. On sending a notice under subsection (7), a
dissenting shareholder ceases to have any rights as a shareholder other than
the right to be paid the fair value of his shares as determined under this
section except where
(a) the dissenting shareholder withdraws his notice before the
corporation makes an offer under subsection (12);
(b) the corporation fails to make an offer in accordance with subsection
(12) and the dissenting shareholder withdraws his notice, or
(c) the directors revoke a resolution to amend the articles under
subsection 173(2) or 174(5), terminate an amalgamation agreement
under subsection 183(6) or an application for continuance under
subsection 188(6), or abandon a sale, lease or exchange under
subsection 189(9),
in which case his rights as a shareholder are reinstated as of the date he
sent the notice referred to in subsection (7).
(12) OFFER TO PAY. A corporation shall, not later than seven days after
the later of the day on which the action approved by the resolution is
effective or the day the corporation received the notice referred to in
subsection (7), send to each dissenting shareholder who has sent such notice
(a) a written offer to pay for his shares in an amount considered by the
directors of the corporation to be the fair value thereof, accompanied
by a statement showing how the fair value was determined; or
(b) if subsection (26) applies, a notification that it is unable lawfully
to pay dissenting shareholders for their shares.
(13) SAME TERMS. Every offer made under subsection (12) for shares of
the same class or series shall be on the same terms.
(14) PAYMENT. Subject to subsection (26), a corporation shall pay for
the shares of a dissenting shareholder within ten days after an offer made
under subsection (12) has been accepted, but any such offer lapses if the
corporation does not receive an acceptance thereof within thirty days after
the offer has been made.
(15) CORPORATION MAY APPLY TO COURT. Where a corporation fails to make
an offer under subsection (12), or if a dissenting shareholder fails to accept
an offer, the corporation may, within fifty days after the action approved by
the resolution is effective or within such further period as a court may
allow, apply to a court to fix a fair value for the shares of any dissenting
shareholder.
H-2
<PAGE>
(16) SHAREHOLDER APPLICATION TO COURT. If a corporation fails to apply
to a court under subsection (15), a dissenting shareholder may apply to a
court for the same purpose within a further period of twenty days or within
such further period as a court may allow.
(17) VENUE. An application under subsection (15) or (16) shall be made
to a court having jurisdiction in the place where the corporation has its
registered office or in the province where the dissenting shareholder resides
if the corporation carries on business in that province.
(18) NO SECURITY FOR COSTS. A dissenting shareholder is not required to
give security for costs in an application made under subsection (15) or (16).
(19) PARTIES. On an application to a court under subsection (15) or
(16),
(a) all dissenting shareholders whose shares have not been purchased by
the corporation shall be joined as parties and are bound by the
decision of the court; and
(b) the corporation shall notify each affected dissenting shareholder of
the date, place and consequences of the application and of his right
to appear and be heard in person or by counsel.
(20) POWERS OF COURT. On an application to a court under subsection (15)
or (16), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall then fix a
fair value for the shares of all dissenting shareholders.
(21) APPRAISERS. A court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(22) FINAL ORDER. The final order of a court shall be rendered against
the corporation in favor of each dissenting shareholder and for the amount of
his shares as fixed by the court.
(23) INTEREST. A court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder from the date
the action approved by the resolution is effective until the date of payment.
(24) NOTICE THAT SUBSECTION (26) APPLIES. If subsection (26) applies,
the corporation shall, within ten days after the pronouncement of an order
under subsection (22), notify each dissenting shareholder that it is unable
lawfully to pay dissenting shareholders for their shares.
(25) EFFECT WHERE SUBSECTION (26) APPLIES. If subsection (26) applies, a
dissenting shareholder, by written notice delivered to the corporation within
thirty days after receiving a notice under subsection (24), may
(a) withdraw his notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder is reinstated
to his full rights as a shareholder; or
(b) retain a status as a claimant against the corporation, to be paid as
soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors of
the corporation but in priority to its shareholders.
H-3
<PAGE>
(26) LIMITATION. A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
H-4
<PAGE>
APPENDIX I
RESOLUTION WITH RESPECT TO CHANGING THE NAME OF
INTELCOM TO ICG COMMUNICATIONS, INC. FOR CONSIDERATION
AT THE ANNUAL AND SPECIAL MEETING OF THE SHAREHOLDERS OF INTELCOM
BE IT RESOLVED THAT:
The Articles of Continuance of the Corporation be amended to change
the name of the Corporation to:
ICG COMMUNICATIONS, INC.
THAT any one of the directors or officers of the Corporation be and is
hereby authorized to execute articles of amendment and to do all acts and
things and to execute such other deeds, instruments and documents,
whether under the corporate seal of the Corporation or otherwise, that
may be necessary or desirable to give effect to this special
resolution.
I-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 7-3-101.5 of the Colorado Corporation Code, ICG's
Articles of Incorporation provide that ICG shall indemnify any and all
officers, directors, or employees against expenses incurred by them, in
connection with the defense of any legal proceedings or threatened legal
proceedings to which such persons are made a party because of such positions
if:
(I) He conducted himself in good faith;
(II) He reasonably believed:
(A) In the case of conduct in his official capacity with the
corporation, that his conduct was in the corporation's best interest; or
(B) In all other cases, that his conduct was at least not opposed to the
corporation's best interests; and
(III) In the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
See Item 22 of this Registration Statement regarding the position of the
Securities and Exchange Commission on indemnification for liabilities arising
under the Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 2.1 Form of Plan of Arrangement of IntelCom Group Inc. under Section
192 of the Canada Business Corporations Act.
3.1 Certificate of Incorporation of ICG Communications, Inc.*
3.2 By-Laws of ICG Communications, Inc.*
=
4.1 Articles of Continuance of IntelCom Group Inc.*
4.2 Note Purchase Agreement dated September 16, 1993 [Incorporated by
reference to the Annual Report on Form 20-F of IntelCom Group Inc.
for the fiscal year ended September 30, 1993].
4.3 Note Purchase Agreement dated October 27, 1993 [Incorporated by
reference to the Annual Report on Form 20-F of IntelCom Group Inc.
for the fiscal year ended September 30, 1993].
4.4 Form of Indenture between IntelCom Group Inc. and Bankers Trust
Company for 7% Convertible Subordinated Redeemable Notes due 1998
[Incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].
4.5 Form of Indenture between IntelCom Group Inc. and Bankers Trust
Company for 7% Simple Interest Convertible Subordinated Redeemable
Notes due 1998 [Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1 of IntelCom Group Inc., File
No. 33-75636].
II-1
<PAGE>
4.6 Warrant Agreement dated July 14, 1995 among IntelCom Group Inc.,
the Committed Purchasers, and IntelCom Group (U.S.A.), Inc., as
Warrant Agent [Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K of IntelCom Group Inc. dated July 18,
1995].
5 Opinion of Reid & Priest LLP.
8.1 Tax Opinion of Stikeman, Elliott.
8.2 Tax Opinion of Reid & Priest LLP.
10.1 Employment Agreement between Teleport Denver, Inc. and William J.
Maxwell [Incorporated by reference to Exhibit 3.38 to the Annual
Report on Form 20-F of IntelCom Group Inc. for the fiscal year
ended September 30, 1993].
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].
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].
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].
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].
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].
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].
10.8 PEDTS Acquisition Note 1991 dated April 29, 1994 by Pacific &
Eastern Digital Transmission Services, Inc. ("PEDTS") to IntelCom
Group (U.S.A.), Inc., in the amount of $2,928,591 [Incorporated by
reference to Exhibit 10.27 to the Annual Report on Form 10-K of
IntelCom Group Inc. for the fiscal year ended September 30, 1994].
10.9 PEDTS Acquisition Note 1994-2 dated April 29, 1994 by PEDTS to
[IntelCom Group (U.S.A.), Inc.], in the amount of $1,230,475
[Incorporated by reference to Exhibit 10.28 to the Annual Report on
Form 10-K of IntelCom Group Inc. for the fiscal year ended
September 30,1994].
10.10 Agreement and Assignment dated July 24, 1995 by Teleport
Transmission Holdings, Inc., IntelCom Group (U.S.A.), Inc., William
W. Becker, Michael L. Glaser, William J. Laggett, Jay E. Ricks and
Gary Bryson [Incorporated by reference to Exhibit 10.26 to the
Annual Report on Form 10-K, as amended, of IntelCom Group Inc. for
the fiscal year ended September 30, 1995].
10.11 Employment Agreement dated as of May 30, 1995 between IntelCom
Group Inc. and J. Shelby Bryan [Incorporated by reference to
Exhibit 10.5 to the Current Report on Form 8-K of IntelCom Group
Inc. as filed on August 2, 1995].
II-2
<PAGE>
10.12 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 the Current Report on Form 8-K of IntelCom Group
Inc. as filed on August 2, 1995].
10.13 Indemnification Agreement dated as of May 30, 1995 between IntelCom
Group Inc. and J. Shelby Bryan [Incorporated by reference to
Exhibit 10.7 to the Current Report on Form 8-K of IntelCom Group
Inc. as filed on August 2, 1995].
10.14 Employment Agreement dated November 1, 1995 between IntelCom Group
Inc. and James D. Grenfell [Incorporated by reference to Exhibit
10.38 to the Annual Report on Form 10-K, as amended, of IntelCom
Group Inc. for the fiscal year ended September 30, 1995].
10.15 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 the Annual Report on Form 10-K, as amended, of
IntelCom Group Inc. for the fiscal year ended September 30, 1995].
10.16 Restated and Amended 1995 Stock Option Plan [Incorporated by
reference to Exhibit 4 to the Quarterly Report on Form 10-Q, as
amended, of IntelCom Group Inc. for the quarter ended December 31,
1995].
10.17 Form of Employee Incentive Stock Option Agreement [Incorporated by
reference to Exhibit 4 to the Quarterly Report on Form 10-Q, as
amended, of IntelCom Group Inc. for the quarter ended December 31,
1995].
10.18 Form of Non-Qualified Director Option Agreement for the first
quarter of fiscal year 1996 [Incorporated by reference to Exhibit 4
to the Quarterly Report on Form 10-Q, as amended, of IntelCom Group
Inc. for the quarter ended December 31, 1995].
10.19 Form of Non-Qualified Director Option Agreement for the second,
third and fourth quarter of fiscal year 1996 [Incorporated by
reference to Exhibit 4 to the Quarterly Report on Form 10-Q, as
amended, of IntelCom Group Inc. for the quarter ended December 31,
1995].
10.20 Form of Non-Qualified Director Option Agreement for fiscal year
1997 [Incorporated by reference to Exhibit 4 to the Quarterly
Report on Form 10-Q, as amended, of IntelCom Group Inc. for the
quarter ended December 31, 1995].
10.21 Form of Arrangement and Support Agreement by and between ICG
Communications, Inc. and IntelCom Group Inc.*
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney.*
(b) Schedule II - Valuation and Qualifying Accounts.*
(c) Fairness Opinion of Morgan Stanley & Co. Incorporated dated April 25,
1996.
- ---------------------------------
* Previously filed.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Parent of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
their respective counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent
to the effective date of the Registration Statement through the date of
responding to the request;
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective;
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(6) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on June 17, 1996.
ICG COMMUNICATIONS, INC.
By: /s/ *
------------------------------------------
J. Shelby Bryan
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------ --------------------------------------- ---------------
<S> <C> <C>
President, Chief Executive Officer and
/s/ * Director (Principal Executive Officer) June 17, 1996
- ------------------------
J. Shelby Bryan
Executive Vice President,
/s/ John D. Field Secretary and Director June 17, 1996
- ------------------------
John D. Field
Executive Vice President,
Chief Financial Officer, Treasurer and
/s/ * Director (Principal Financial Officer) June 17, 1996
- ------------------------
James D. Grenfell
Vice President - Corporate Controller
/s/ * (Principal Accounting Officer) June 17, 1996
- ------------------------
Richard Bambach
/*/By:/s/John D. Field
- -------------------------
John D. Field
as Attorney-in-Fact
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
Item 21(a)
----------
<C> <S> <C>
2.1 Form of Plan of Arrangement of IntelCom Group Inc. under Section 192
of the Canada Business Corporations Act.
5 Opinion of Reid & Priest LLP.
8.1 Tax Opinion of Stikeman, Elliott.
8.2 Tax Opinion of Reid & Priest LLP.
23 Consent of KPMG Peat Marwick LLP.
<CAPTION>
Item 21(c)
----------
<C> <S> <C>
A Fairness Opinion of Morgan Stanley & Co. Incorporated
dated April 25, 1996.
</TABLE>
<PAGE>
EXHIBIT 2.1
<PAGE>
PLAN OF ARRANGEMENT
UNDER SECTION 192
OF THE CANADA BUSINESS CORPORATIONS ACT
ARTICLE 1
INTERPRETATION
1.1 Definitions. In this Plan of Arrangement, unless there is something
in the subject matter or context inconsistent therewith, the following terms
shall have the respective meanings set out below and grammatical variations of
such terms shall have corresponding meanings:
(a) "ARRANGEMENT" means the arrangement under section 192 of the CBCA on
the terms and subject to the conditions set out in this Plan of Arrangement,
subject to any amendments thereto made in accordance with section 6.1 hereof or
made at the direction of the Court in the Final Order;
(b) "ARRANGEMENT RESOLUTION" means the special resolution in respect of the
Arrangement passed by the holders of IntelCom Common Shares at the Meeting;
(c) "AUTOMATIC REDEMPTION DATE" has the meaning ascribed thereto in the
Share Provisions;
(d) "BUSINESS DAY" means any day other than a Saturday, Sunday or a day
when banks are not open for business in either or both of Denver, Colorado and
New York, New York;
(e) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44
as amended;
(f) "CLASS A SHARES" has the meaning ascribed thereto in the Share
Provisions;
(g) "COURT" means the Ontario Court of Justice (General Division);
(h) "DEPOSITARY" means Pacific Corporate Trust Company at its principal
office in Vancouver, British Columbia;
(i) "DISSENT PROCEDURES" has the meaning set out in section 3.1;
(j) "EFFECTIVE DATE" means the date shown on the certificate of arrangement
issued by the Director under the CBCA giving effect to the Arrangement;
(k) "EFFECTIVE TIME" means 12:01 a.m. on the Effective Date;
(l) "ELECTED INTELCOM COMMON SHARE" means any IntelCom Common Share which
the holder shall have indicated pursuant to the terms of section 4.4 is to be
exchanged on the Arrangement into shares of Parent Common Stock;
(m) "FINAL ORDER" means the final order of the Court approving the
Arrangement as such order may be amended by the Court at any time prior to the
Effective Time;
(n) "INTELCOM" means IntelCom Group Inc., a corporation existing under the
CBCA;
1
<PAGE>
(o) "INTELCOM COMMON SHARES" means the Common Shares, no par value, of
IntelCom;
(p) "LETTER OF TRANSMITTAL AND ELECTION FORM" means the Letter of
Transmittal and Election Form in the form accompanying the Management Proxy
Statement - Prospectus;
(q) "MEETING" means the Annual and Special Meeting of the shareholders of
IntelCom to be held to consider the Arrangement;
(r) "MINIMUM NUMBER" means the number that is equal to 85% of the number of
IntelCom Common Shares outstanding immediately prior to the Arrangement;
(s) "PARENT" means ICG Communications, Inc., a corporation existing under
the laws of the State of Delaware;
(t) "PARENT CALL NOTICE" has the meaning ascribed thereto in section 5.2;
(u) "PARENT COMMON STOCK" means the Common Stock, par value US$.01 per
share, of Parent, and any other securities into which such shares may be
changed;
(v) "REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section
5.1;
(w) "RETRACTED SHARES" has the meaning ascribed thereto in the Share
Provisions;
(x) "RETRACTION CALL RIGHT" has the meaning ascribed thereto in section
5.2;
(y) "RETRACTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
section 5.2;
(z) "RETRACTION DATE" has the meaning ascribed thereto in the Share
Provisions;
(aa) "RETRACTION REQUEST" has the meaning ascribed thereto in the Share
Provisions; and
(ab) "SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Class A Shares which are set forth in Exhibit A
hereto.
1.2 Sections and Headings. The division of this Plan of Arrangement into
sections and the insertion of headings are for reference purposes only and shall
not affect the interpretation of this Plan of Arrangement. Unless otherwise
indicated, any reference in this Plan of Arrangement to a section or an Appendix
refers to the specified section of or Appendix to this Plan of Arrangement.
1.3 Number, Gender and Persons. In this Plan of Arrangement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, corporations, partnerships, associations,
trusts, unincorporated organizations, governmental bodies and other legal or
business entities of any kind.
1.4 Interpretation Not Affected by Headings. The division of this Plan of
Arrangement into Articles, sections and other parts and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Plan of Arrangement.
2
<PAGE>
1.5 Date of any Action. In the event that any date on or by which any
action is required or permitted to be taken hereunder is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding day which is a Business Day.
1.6 Time. All times expressed herein or in any Letters of Transmittal and
Election Forms or Notices of Guaranteed Delivery are local time Vancouver,
British Columbia, unless otherwise stipulated herein or therein.
1.7 Statutory References. Any reference in this Plan of Arrangement to a
statute includes all regulations made thereunder, all amendments to such statute
or regulations in force from time to time, and any statute or regulation that
supplements or supersedes such statute or regulations.
ARTICLE 2
ARRANGEMENT
2.1 Arrangement. At the Effective Time on the Effective Date, the
following reorganization of capital shall occur and shall be deemed to occur in
the following order without any further act or formality:
(a) The articles of incorporation of IntelCom shall be amended to replace
the rights, privileges, restrictions and conditions attaching to IntelCom Common
Shares with the Share Provisions (such shares being thereafter referred to as
"Class A Shares").
(b) Each Elected IntelCom Common Share outstanding immediately prior to the
Arrangement and which has been amended in accordance with subsection 2.1(a)
above (other than shares held by holders who have exercised their rights of
dissent in accordance with section 3.1 hereof and who are ultimately entitled to
be paid the fair value for such shares) shall be exchanged by the holder thereof
with Parent for one share of Parent Common Stock.
(c) Notwithstanding Article 5 of the Share Provisions, in connection with
the exchange referred to in subsection 2.1(b), each holder of Elected IntelCom
Common Shares shall be deemed to have simultaneously transferred each issued and
outstanding Elected IntelCom Common Share, as amended by subsection 2.1(a)
above, held by him to Parent and Parent shall deliver or cause to be delivered
to each such holder one fully paid and non-assessable share of Parent Common
Stock in exchange for each Elected IntelCom Common Share so transferred.
(d) Upon the exchange referred to in subsection 2.1(b), each holder of
Elected IntelCom Common Shares, shall cease to be such a holder, shall have his
name removed from the register of holders of IntelCom Common Shares and shall
become a holder of the number of shares of Parent Common Stock to which he is
entitled as a result of the exchange referred to in subsection 2.1(b) and such
holder's name shall be added to the register of holders of Parent Common Stock
accordingly.
(e) Upon the exchange referred to in subsection 2.1(b), Parent shall become
the holder of all the issued and outstanding Elected IntelCom Common Shares, and
Parent's name shall be added to the register of holders of IntelCom Common
Shares accordingly.
(f) In the event the number of shares of Parent Common Stock issuable
pursuant to subsection 2.1(b) is less than the Minimum Number, holders of
IntelCom Common Shares which are not Elected IntelCom Common Shares shall be
deemed to have elected, on a pro rata basis, pursuant to the
3
<PAGE>
terms of section 4.4 hereof to exchange such IntelCom Common Shares for shares
of Parent Common Stock in respect of that number of IntelCom Common Shares so as
to cause the total number of shares of Parent Common Stock issuable under
subsection 2.1(b) to be equal to 85% of the issued and outstanding IntelCom
Common Shares immediately prior to the Effective Time and such IntelCom Common
Shares shall be treated for the purposes of this Plan of Arrangement as Elected
IntelCom Common Shares.
(g) The share of Parent Common Stock held by the sole incorporator of
Parent shall be retired into the treasury of Parent.
2.2 Corporate Name Following the Effective Time. At the Effective Time on
the Effective Date, the corporate name of IntelCom shall become ICG Holdings
(Canada), Inc.
ARTICLE 3
RIGHTS OF DISSENT
3.1 Rights of Dissent. Holders of IntelCom Common Shares may exercise
rights of dissent with respect to such shares pursuant to and in the manner set
forth in section 190 of the CBCA and this section 3.1 (the "Dissent Procedures")
in connection with the Arrangement and holders who duly exercise such rights of
dissent and who:
(a) are ultimately entitled to be paid fair value for their IntelCom Common
Shares shall be deemed to have transferred such IntelCom Common Shares to
IntelCom for cancellation on the Effective Date; or
(b) are ultimately not entitled, for any reason, to be paid fair value for
their IntelCom Common Shares shall be deemed to have participated in the
Arrangement on the same basis as any non-dissenting holder of Elected IntelCom
Common Shares, and shall receive shares of Parent Common Stock on the basis
determined in accordance with subsection 2.1(b) of this Plan of Arrangement,
but in no case shall IntelCom be required to recognize such holders as holders
of IntelCom Common Shares or Class A Shares on and after the Effective Date, and
the names of such holders of IntelCom Common Shares shall be deleted from the
register of holders of IntelCom Common Shares on the Effective Date.
ARTICLE 4
CERTIFICATES
4.1 Issuance of Certificates Representing Class A Shares. On or promptly
after the Effective Time, IntelCom shall deposit with the Depositary, for the
benefit of the holders of Class A Shares, certificates representing the Class A
Shares. Upon surrender to the Depositary for cancellation of a certificate
which immediately prior to the Effective Time represented outstanding IntelCom
Common Shares, together with such other documents and instruments as would have
been required to effect the transfer of the shares formerly represented by such
certificate under the CBCA and the by-laws of IntelCom and such additional
documents and instruments as the Depositary may reasonably require, the holder
of such surrendered certificate shall be entitled to receive in exchange
therefor, and the Depositary shall deliver to such holder, a certificate
representing that number of Class A Shares which such holder has the right to
receive and the certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of IntelCom Common Shares which is not
registered in the transfer records of
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IntelCom, a certificate representing the proper number of Class A Shares may be
issued to a transferee if the certificate representing such IntelCom Common
Shares is presented to the Depositary, accompanied by all documents required to
evidence and effect such transfer. Until surrendered as contemplated by this
section 4.1, each certificate which immediately prior to the Effective Time
represented outstanding IntelCom Common Shares shall be deemed at any time after
the Effective Time to represent only the right to receive upon such surrender
the certificate representing Class A Shares as contemplated by this section 4.1.
4.2 Exchange of Certificates by Holders of Elected IntelCom Common Shares.
On or promptly after the Effective Time, Parent shall deposit with the
Depositary, for the benefit of the holders of Elected IntelCom Common Shares
exchanged for shares of Parent Common Stock pursuant to subsection 2.1(b),
certificates representing the shares of Parent Common Stock issued pursuant to
subsection 2.1(b) in exchange for outstanding Elected IntelCom Common Shares.
Upon surrender to the Depositary for cancellation of a certificate which
immediately prior to the Effective Time represented outstanding IntelCom Common
Shares which were exchanged for shares of Parent Common Stock, together with
such other documents and instruments as would have been required to effect the
transfer of the shares formerly represented by such certificate under the CBCA
and the by-laws of IntelCom and such additional documents and instruments as the
Depositary may reasonably require, the holder of such surrendered certificate
shall be entitled to receive in exchange therefor, and the Depositary shall
deliver to such holder, a certificate representing that number of shares of
Parent Common Stock which such holder has the right to receive and the
certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of IntelCom Common Shares which is not registered in the
transfer records of IntelCom, a certificate representing the proper number of
shares of Parent Common Stock may be issued to a transferee if the certificate
representing such IntelCom Common Shares is presented to the Depositary,
accompanied by all documents required to evidence and effect such transfer.
Until surrendered as contemplated by this section 4.2, each certificate which
immediately prior to the Effective Date represented outstanding IntelCom Common
Shares which were exchanged for shares of Parent Common Stock shall be deemed at
any time after the Effective Date to represent only the right to receive upon
such surrender the certificate representing shares of Parent Common Stock as
contemplated by this section 4.2.
4.3 Lost Certificates. In the event any certificate which immediately
prior to the Effective Time represented outstanding IntelCom Common Shares 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,
the Depositary will issue in exchange for such lost, stolen or destroyed
certificate, certificates representing Class A Shares or shares of Parent Common
Stock (and any dividends or distributions with respect thereto) deliverable in
respect thereof as determined in accordance with section 2.1. When authorizing
such payment in exchange for any lost, stolen or destroyed certificate, the
person to whom certificates representing Class A Shares or shares of Parent
Common Stock are to be issued shall, at the discretion of Parent, as a condition
precedent to the issuance thereof, give a bond satisfactory to IntelCom or
Parent, as the case may be, in such sum as IntelCom or Parent may direct or
otherwise indemnify IntelCom or Parent in a manner satisfactory to IntelCom or
Parent against any claim that may be made against IntelCom or Parent with
respect to the certificate alleged to have been lost, stolen or destroyed.
4.4 Elections. (a) Each record holder immediately prior to the Effective
Time of IntelCom Common Shares will be entitled to elect to receive shares of
Parent Common Stock or Class A Shares for all of such shares (an "Election").
All Elections shall be made on a Letter of Transmittal and Election Form.
Record holders of IntelCom Common Shares who hold IntelCom Common Shares as
nominees, trustees or in other representative capacities (a "Representative")
may submit multiple Letters of Transmittal and Election Forms; provided, that,
such Representative certifies that each such Letter of Transmittal and Election
Form covers all IntelCom Common Shares held by each Representative for a
particular beneficial owner.
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(b) Timely Elections, Etc. Elections shall be made by holders of IntelCom
Common Shares by depositing with the Depositary a Letter of Transmittal and
Election Form. To be effective, a Letter of Transmittal and Election Form must
be properly completed, signed and submitted to the Depositary. Parent will have
the discretion to determine whether Letters of Transmittal and Election Forms
have been properly completed, signed and submitted or revoked and to disregard
immaterial defects in Letters of Transmittal and Election Forms. The decision
of Parent (or the Depositary) in such matters shall be conclusive and binding.
Neither the Parent nor the Depositary will be under any obligation to notify any
person of any defect in a Letter of Transmittal and Election Form submitted to
the Depositary.
(c) Deemed Election. For the purposes hereof, a holder of IntelCom Common
Shares who does not submit a Letter of Transmittal and Election Form which is
received by the Depositary prior to the Election Deadline (as hereinafter
defined) shall be deemed to have made an election to receive shares of Parent
Common Stock for all such shares. If Parent or the Depositary shall determine
that any purported election was not properly made, such purported election shall
be deemed to be of no force and effect.
(d) Mailing. Parent and IntelCom shall each use their best efforts to mail
the Letter of Transmittal and Election Form to all persons who become holders of
IntelCom Common Shares during the period between the record date for the Meeting
and the close of business Toronto time, on the date seven calendar days prior to
the anticipated Effective Date and to make the Letter of Transmittal and
Election Form available to all persons who become holders of IntelCom Common
Shares subsequent to such day and no later than the close of business on the
business day prior to the Effective Date. A Letter of Transmittal and Election
Form must be received by the Depositary by 5:00 p.m. (Pacific time) on July 30,
1996 (the "Election Deadline") in order to be effective. A Letter of
Transmittal and Election Form may not be revoked after receipt thereof by the
Depositary.
ARTICLE 5
CERTAIN RIGHTS OF
PARENT TO ACQUIRE CLASS A SHARES
5.1 Parent Redemption Call Right. (a) In the event of the application of
Article 6 of the Share Provisions and notwithstanding the proposed redemption of
Class A Shares by IntelCom pursuant to Article 6 of the Share Provisions, Parent
shall have the overriding right (the "Redemption Call Right") to purchase from
all but not less than all of the holders of Class A Shares to be redeemed on the
Automatic Redemption Date all but not less than all of the Class A Shares held
by each such holder on payment by Parent to the holder of a share of Parent
Common Stock for each Class A Share redeemed, the value of such share of Parent
Common Stock being equal to the Current Market Price (as defined in the Share
Provisions) of a share of Parent Common Stock on the last Business Day prior to
the Automatic Redemption Date (the "Redemption Call Purchase Price"). In the
event of the exercise of the Redemption Call Right by Parent, each holder shall
be obligated to sell all the Class A Shares held by the holder and otherwise to
be redeemed to Parent on the Automatic Redemption Date on payment by Parent to
the holder of the Redemption Call Purchase Price for each such share.
(b) To exercise the Redemption Call Right, Parent must notify the Transfer
Agent in writing, as agent for the holders of Class A Shares, and IntelCom of
Parent's intention to exercise such right within two Business Days of the
declaration by IntelCom of an Automatic Redemption Date. The Transfer Agent
will notify the holders of the Class A Shares as to whether or not Parent has
exercised the Redemption Call Right forthwith after the expiry of the period
during which the same may be exercised by Parent. If Parent exercises the
Redemption Call Right, on the Automatic Redemption Date Parent will purchase and
the
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holders will sell all of the Class A Shares to be redeemed for a price per share
equal to the Redemption Call Purchase Price.
(c) For the purposes of completing the purchase of Class A Shares pursuant
to the Redemption Call Right, Parent shall deposit with the Transfer Agent, on
or before the Automatic Redemption Date, certificates representing the aggregate
number of shares of Parent Common Stock deliverable by Parent (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any lien, claim, encumbrance, security interest or adverse claim) in
payment of the total Redemption Call Purchase Price. Provided that the total
Redemption Call Purchase Price has been so deposited with the Transfer Agent, on
and after the Automatic Redemption Date, the rights of each holder of Class A
Shares so purchased will be limited to receiving such holder's proportionate
part of the total Redemption Call Purchase Price payable by Parent upon
presentation and surrender by the holder of certificates representing the Class
A Shares purchased by Parent from such holder and the holder shall on and after
the Automatic Redemption Date be considered and deemed for all purposes to be
the holder of the shares of Parent Common Stock delivered to such holder. Upon
surrender to the Transfer Agent of a certificate or certificates representing
Class A Shares, together with such other documents and instruments as may be
required to effect a transfer of Class A Shares under the CBCA and the by-laws
of IntelCom and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of Parent shall deliver to such holder, certificates
representing the shares of Parent Common Stock to which the holder is entitled.
If Parent does not exercise the Redemption Call Right in the manner described
above, on the Automatic Redemption Date the holders of the Class A Shares will
be entitled to receive in exchange therefor the redemption price otherwise
payable by IntelCom in connection with the redemption of Class A Shares pursuant
to Article 6 of the Share Provisions.
5.2 Parent Retraction Call Right. (a) In the event of the application of
Article 5 of the Share Provisions and notwithstanding the proposed redemption of
Class A Shares by a holder of Class A Shares pursuant to Article 5 of the Share
Provisions, Parent shall have the overriding right (the "Retraction Call Right")
to purchase from any holder of Class A Shares who has delivered a Retraction
Request all but not less than all of the Retracted Shares to be redeemed on the
Retraction Date on payment by Parent to the holder of a share of Parent Common
Stock for each Class A Share redeemed, such share of Parent Common Stock having
a value equal to the Current Market Price (as defined in the Share Provisions)
of a share of Parent Common Stock on the Retraction Date (the "Retraction Call
Purchase Price"). In the event of the exercise of the Retraction Call Right by
Parent, and provided that the Retraction Request is not revoked by the holder in
the manner specified in section 5.7 of the Share Provisions, the holder shall be
obligated to sell all the Retracted Shares to Parent on the Retraction Date on
payment by Parent to the holder of the Retraction Call Purchase Price for each
such share.
(b) To exercise the Retraction Call Right, Parent must notify IntelCom in
writing of its determination to do so (the "Parent Call Notice") within two
Business Days of notification to Parent by IntelCom of receipt by IntelCom of
the Retraction Request. If Parent delivers the Parent Call Notice within such
two Business Day time period, and provided that the Retraction Request is not
revoked by the holder in the manner specified in section 5.7 of the Share
Provisions, the Retraction Request shall thereupon be considered only to be an
offer by the holder to sell the Retracted Shares to Parent in accordance with
the Retraction Call Right. In such event, IntelCom shall not redeem the
Retracted Shares and Parent shall purchase from such holder and such holder
shall sell to Parent on the Retraction Date the Retracted Shares for a price per
share equal to the Retraction Call Purchase Price.
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(c) For the purposes of completing the purchase of Class A Shares pursuant
to the Retraction Call Right, Parent shall deposit with the Transfer Agent, on
or before the Retraction Date, certificates representing the aggregate number of
shares of Parent Common Stock deliverable by Parent (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim, encumbrance, security interest or adverse claim) in payment of the total
Retraction Call Purchase Price. Provided that the total Retraction Call
Purchase Price has been so deposited with the Transfer Agent, on and after the
Retraction Date, the rights of the holder of Class A Shares so purchased will be
limited to receiving such holder's proportionate part of the total Retraction
Call Purchase Price payable by Parent upon presentation and surrender by the
holder of certificates representing the Class A Shares purchased by Parent from
such holder and the holder shall on and after the Retraction Date be considered
and deemed for all purposes to be the holder of the shares of Parent Common
Stock delivered to such holder. Upon surrender to the Transfer Agent of a
certificate or certificates representing Class A Shares, together with such
other documents and instruments as may be required to effect a transfer of Class
A Shares under the CBCA and the by-laws of IntelCom and such additional
documents and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of Parent shall
deliver to such holder, certificates representing the shares of Parent Common
Stock to which the holder is entitled. If Parent does not exercise the
Retraction Call Right in the manner described above, on the Retraction Date the
holders of the Class A Shares will be entitled to receive in exchange therefor
the redemption price otherwise payable by IntelCom in connection with the
redemption of Class A Shares pursuant to Article 5 of the Share Provisions.
5.3 Notice upon Liquidation of Parent. (a) Parent will give each holder
of Class A Shares notice of each of the following events at the time set forth
below:
(i) in the event of any determination by the Board of Directors of Parent
to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Parent or to effect any other distribution
of assets of Parent among its shareholders for the purpose of winding
up its affairs, at least 30 days prior to the proposed effective date
of such liquidation, dissolution, winding-up or other distribution;
and
(ii) immediately, upon the earlier of receipt by Parent of notice of or
Parent otherwise becoming aware of any bona fide threatened instituted
claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of Parent or to
effect any other distribution of assets of Parent among its
shareholders for the purpose of winding up its affairs.
(b) Notice by Parent of any event contemplated by subsection 5.3(a), shall
include a brief description of the rights of holders of Class A Shares to
retract such shares in accordance with section 5.1 of the Share Provisions.
5.4 Withholding Rights. Parent shall be entitled to withhold the
consideration otherwise payable pursuant to this Plan of Arrangement from any
holder of IntelCom Common Shares or Class A Shares until such holder has paid to
Parent an amount equal to such amounts as Parent is required or permitted to
deduct and withhold with respect to such payment under the United States
Internal Revenue Code of 1986, as amended, the Income Tax Act (Canada) or any
provision of state, local, provincial or foreign tax law.
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ARTICLE 6
AMENDMENT
6.1 Plan of Arrangement Amendment. IntelCom reserves the right to amend,
modify and/or supplement this Plan of Arrangement at any time and from time to
time provided that any such amendment, modification, or supplement must be
contained in a written document which is (i) agreed to by Parent and (ii) filed
with the Court and approved by the Court.
Any amendment, modification or supplement to this Plan of Arrangement
which is approved by the Court following the Meeting shall be effective only (i)
if it is consented to by IntelCom and (ii) if it is agreed to by Parent.
Any amendment, modification or supplement to this Plan of Arrangement
may be made following the Effective Date unilaterally by IntelCom, provided that
(i) it is agreed to by Parent and (ii) it concerns a matter which, in the
reasonable opinion of IntelCom, is of an administrative nature required to
better give effect to the implementation of this Plan of Arrangement and is not
adverse to the financial or economic interests of the holders of Class A Shares.
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EXHIBIT A TO PLAN OF ARRANGEMENT OF INTELCOM GROUP INC.
PROVISIONS ATTACHING TO CLASS A SHARES
The Class A Shares in the capital of IntelCom shall have the following
rights, privileges, restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 For the purposes of these share provisions:
"AFFILIATE" of any person means any other person directly or
indirectly controlled by, or under common control of, that person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control of"), as applied to any
person, means the possession by another person, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
first mentioned person, whether through the ownership of voting securities, by
contract or otherwise.
"ARRANGEMENT AND SUPPORT AGREEMENT" means the Arrangement and Support
Agreement between Parent and IntelCom, made as of June 27, 1996.
"AUTOMATIC REDEMPTION DATE" if declared by the Board of Directors,
means the date for the automatic redemption by IntelCom of Class A Shares
pursuant to section 6.2 of these share provisions.
"BOARD OF DIRECTORS" means the Board of Directors of IntelCom.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in either or both of Denver, Colorado and
New York, New York.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed
in a foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign currency
expressed in Canadian dollars as may be deemed by the Board of Directors to be
appropriate for such purpose.
"CASH REDEMPTION DATE" if declared by the Board of Directors, means
the date for the redemption by IntelCom of Class A Shares pursuant to section
6.3 of these share provisions.
"CASH REDEMPTION PRICE" has the meaning ascribed thereto in section
6.4 of these share provisions.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-
44 as amended.
"CLASS A SHARES" mean the Class A Shares of IntelCom having the
rights, privileges, restrictions and conditions set forth herein.
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"CURRENT MARKET PRICE" means, in respect of a share of Parent Common
Stock on any date, the Canadian Dollar Equivalent of the average of the closing
prices of a share of Parent Common Stock on the Nasdaq National Market on each
of the thirty (30) consecutive trading days ending not more than five trading
days before such date, or, if the Parent Common Stock is not then listed, on
such other stock exchange or automated quotation system on which the Parent
Common Stock is listed or quoted, as the case may be, as may be selected by the
Board of Directors for such purpose; provided, however, that if there is no
public distribution or trading activity of Parent Common Stock during such
period, then the Current Market Price of a share of Parent Common Stock shall be
determined by the Board of Directors based upon the advice of such qualified
independent financial advisors as the Board of Directors may deem to be
appropriate, and provided, further, that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"INTELCOM" means IntelCom Group Inc., a corporation existing under the
federal laws of Canada.
"PARENT" means ICG Communications, Inc., a corporation existing under
the laws of the State of Delaware.
"PARENT CALL NOTICE" has the meaning ascribed thereto in section 5.3
of these share provisions.
"PARENT COMMON STOCK" mean the Common Stock, par value US$.01 per
share, of Parent, and any other securities into which such shares may be
changed.
"PARENT DIVIDEND DECLARATION DATE" means the date on which the Board
of Directors of Parent declares any dividend on the Parent Common Stock.
"PLAN OF ARRANGEMENT" means the plan of arrangement relating to the
arrangement of IntelCom under section 192 of the Canada Business Corporations
Act, to which plan these share provisions are attached.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Plan
of Arrangement.
"REDEMPTION PRICE" has the meaning ascribed thereto in section 6.2 of
these share provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.1 of
these share provisions.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in section
5.1 of these share provisions.
"RETRACTION CALL PURCHASE PRICE" has the meaning ascribed thereto in
the Plan of Arrangement.
"RETRACTION DATE" has the meaning ascribed thereto in section 5.1(b)
of these share provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in section 5.1 of
these share provisions.
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"RETRACTION REQUEST" has the meaning ascribed thereto in section 5.1
of these share provisions.
"THIRD PARTY TRANSACTION" means any bona fide transaction (whether by
way of merger, consolidation, tender offer, share exchange offer,
reorganization, transfer, sale, lease or otherwise) which would result in: (i)
any person or group of persons (a "Third Party") acquiring more than 50 percent
of the outstanding Voting Equity Securities of Parent or the entity, if any,
surviving any merger or business combination; or (ii) any other transaction
pursuant to which any Third Party would acquire control of all or substantially
all of the assets of Parent and its subsidiaries.
"TRANSFER AGENT" means such suitable trust company or similar
financial institution to be selected by IntelCom from time to time to be the
registrar and transfer agent for the Class A Shares.
"VOTING EQUITY SECURITIES" means any voting securities of a company
which carry a residual right to participate in the earnings of the Company and,
upon the liquidation or winding up of the Company, in its assets.
ARTICLE 2
LIQUIDATION, DISSOLUTION AND WINDING UP
2.1 Subject to the prior rights of the holders of any class of shares
ranking senior to the Class A Shares with respect to priority in the
distribution of assets or return of capital upon the liquidation, dissolution or
winding-up of IntelCom, the holders of Class A Shares shall be entitled to
receive equally the remaining property of IntelCom in the event of the
liquidation, dissolution or winding up of IntelCom, whether voluntary or
involuntary, or upon any other return of capital or distribution of assets of
IntelCom among its shareholders for the purpose of winding up its affairs.
ARTICLE 3
DIVIDENDS
3.1 Subject to section 3.2 hereof and subject to the prior rights of the
holders of any class of shares ranking senior to the Class A Shares with respect
to priority of dividends, the holders of Class A Shares shall be entitled to
receive, and IntelCom shall pay in equal amounts per share on all Class A Shares
outstanding, such non-cumulative dividends as the directors may from time to
time declare in their absolute discretion.
3.2 A holder of a Class A Share shall be entitled to receive, and the
Board of Directors shall use its best efforts, subject to applicable law, on
each Parent Dividend Declaration Date, to declare a dividend on each Class A
Share (a) in the case of a cash dividend declared on the Parent Common Shares,
in an amount in cash for each Class A Share equal to the Canadian Dollar
Equivalent on the Parent Dividend Declaration Date of the cash dividend declared
on each share of Parent Common Stock or (b) in the case of a stock dividend
declared on the Parent Common Stock to be paid in shares of Parent Common Stock,
in such number of Class A Shares for each Class A Share as is equal to the
number of shares of Parent Common Stock to be paid on each share of Parent
Common Stock or (c) in the case of a dividend declared on the Parent Common
Stock in property other than cash or shares of Parent Common Stock, in such type
and amount of property for each Class A Share as is the same as or economically
equivalent to (to be determined by the Board of Directors as contemplated by
section 2.7 of the
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Arrangement and Support Agreement) the type and amount of property declared as a
dividend on each share of Parent Common Stock. Such dividends shall be paid out
of money, assets or property of IntelCom properly applicable to the payment of
dividends, or out of authorized but unissued shares of IntelCom. Any dividend
which should have been declared on the Class A Shares pursuant to this section
3.2 but was not so declared due to the provisions of applicable law shall be
declared and paid by IntelCom on a subsequent date or dates determined by the
Board of Directors.
3.3 Checks of IntelCom payable at any branch of the bankers of IntelCom
shall be issued in respect of any cash dividends contemplated by section 3.1 or
subsection 3.2(a) hereof and the sending of such a cheque to each holder of a
Class A Share shall satisfy the cash dividend represented thereby unless the
cheque is not paid on presentation. Certificates registered in the name of the
registered holder of Class A Shares shall be issued or transferred in respect of
any stock dividends contemplated by subsection 3.2(b) hereof and the sending of
such a certificate to each holder of a Class A Share shall satisfy the stock
dividend represented thereby. Such other type and amount of property in respect
of any dividends contemplated by subsection 3.2(c) hereof shall be issued,
distributed or transferred by IntelCom in such manner as it shall determine and
the issuance, distribution or transfer thereof by IntelCom to each holder of a
Class A Share shall satisfy the dividend represented thereby. No holder of a
Class A Share shall be entitled to recover by action or other legal process
against IntelCom any dividend that is represented by a cheque that has not been
duly presented to IntelCom's bankers for payment or that otherwise remains
unclaimed for a period of six years from the date on which such dividend was
payable.
3.4 The record date for the determination of the holders of Class A
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Class A Shares under section 3.2 hereof shall be the same dates
as the record date and payment date, respectively, for the corresponding
dividend declared on the Parent Common Stock.
3.5 If, on any payment date for any dividends declared on the Class A
Shares under section 3.2 hereof, the dividends are not paid in full on all of
the Class A Shares then outstanding, any such dividends that remain unpaid shall
be paid on a subsequent date or dates determined by the Board of Directors on
which IntelCom shall have sufficient moneys, assets or property properly
applicable to the payment of such dividends.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Class A Shares are outstanding and held by
holders other than Parent or any of its Affiliates, IntelCom shall not at any
time without, but may at any time with, the approval of the holders of the Class
A Shares given as specified in section 8.3 of these share provisions:
(a) pay any dividends on any other shares ranking junior to the Class A
Shares, other than stock dividends payable in any such other shares ranking
junior to the Class A Shares, as the case may be;
(b) redeem, retract or purchase or make any capital distribution in respect
of any shares ranking junior to the Class A Shares; or
(c) redeem or purchase any other shares of IntelCom ranking equally with
the Class A Shares with respect to the payment of dividends or on any
liquidation distribution.
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The restrictions in sections 4.1(a), 4.1(b) and 4.1(c) above shall not
apply if all dividends on the outstanding Class A Shares corresponding to
dividends declared to date on the Parent Common Stock shall have been declared
on the Class A Shares and paid in full.
ARTICLE 5
RETRACTION OF CLASS A SHARES BY HOLDER
5.1 Any holder of Class A Shares, other than Parent or any Affiliate of
Parent, shall be entitled at any time, subject to applicable law and the
exercise by Parent of the Retraction Call Right and otherwise upon compliance
with the provisions of this Article 5, to require IntelCom to redeem any or all
of the Class A Shares registered in the name of such holder for one share of
Parent Common Stock, the value of such share being equal to the Current Market
Price of a Parent Common Stock on the last Business Day prior to the Retraction
Date (the "Retraction Price"). To effect such redemption, the holder shall
present and surrender at the registered office of IntelCom or at any office of
the Transfer Agent as may be specified by IntelCom by notice to the holders of
Class A Shares the certificate or certificates representing the Class A Shares
which the holder desires to have IntelCom redeem, together with such other
documents and instruments as may be required to effect a transfer of Class A
Shares under the CBCA and the by-laws of IntelCom and such additional documents
and instruments as the Transfer Agent may reasonably require, and together with
a duly executed statement (the "Retraction Request") in such form as may be
acceptable to IntelCom:
(a) specifying that the holder desires to have all or any number specified
therein of the Class A Shares represented by such certificate or certificates
(the "Retracted Shares") redeemed by IntelCom;
(b) stating the Business Day on which the holder desires to have IntelCom
redeem the Retracted Shares (the "Retraction Date"), provided that the
Retraction Date shall be not less than five Business Days nor more than 10
Business Days after the date on which the Retraction Request is received by
IntelCom and further provided that, in the event that no such Business Day is
specified by the holder in the Retraction Request, the Retraction Date shall be
deemed to be the tenth Business Day after the date on which the Retraction
Request is received by IntelCom; and
(c) acknowledging the overriding right (the "Retraction Call Right") of
Parent to purchase all but not less than all the Retracted Shares directly from
the holder and that the Retraction Request shall be deemed to be a revocable
offer by the holder to sell the Retracted Shares to Parent in accordance with
the Retraction Call Right on the terms and conditions set out in section 5.3
below.
5.2 Subject to the exercise by Parent of the Retraction Call Right, upon
receipt by IntelCom or the Transfer Agent in the manner specified in section 5.1
hereof of a certificate or certificates representing the number of Class A
Shares which the holder desires to have IntelCom redeem, together with a
Retraction Request, and provided that the Retraction Request is not revoked by
the holder in the manner specified in section 5.7, IntelCom shall redeem the
Retracted Shares effective at the close of business on the Retraction Date and
shall cause to be delivered to such holder the total Retraction Price with
respect to such shares. If only a part of the Class A Shares represented by any
certificate are redeemed (or purchased by Parent pursuant to the Retraction Call
Right), a new certificate for the balance of such Class A Shares shall be issued
to the holder at the expense of IntelCom.
5.3 Upon receipt by IntelCom of a Retraction Request, IntelCom shall
immediately notify Parent thereof. In order to exercise the Retraction Call
Right, Parent must notify IntelCom in writing of its determination to do so (the
"Parent Call Notice") within two Business Days of notification to Parent by
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IntelCom of the receipt by IntelCom of the Retraction Request. If Parent does
not so notify IntelCom within such two Business Day period, IntelCom will notify
the holder as soon as possible thereafter that Parent will not exercise the
Retraction Call Right. In the event that Parent does not deliver a Parent Call
Notice within such two Business Day period, and provided that Retraction Request
is not revoked by the holder in the manner specified in section 5.7, IntelCom
shall redeem the Retracted Shares on the Retraction Date and in the manner
otherwise contemplated in this Article 5.
5.4 IntelCom shall deliver or cause the Transfer Agent to deliver to the
relevant holder, at the address of the holder recorded in the securities
register of IntelCom for the Class A Shares or at the address specified in the
holder's Retraction Request or by holding for pick up by the holder at the
registered office of IntelCom or at any office of the Transfer Agent as may be
specified by IntelCom by notice to the holders of Class A Shares, certificates
representing the shares of Parent Common Stock (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim, encumbrance, security interest or adverse claim) registered in the name
of the holder or in such other name as the holder may request in payment of the
Retraction Price, and such delivery of such certificates on behalf of IntelCom
or by the Transfer Agent shall be deemed to be payment of and shall satisfy and
discharge all liability for the Retraction Price. In the event that there is
tax required to be deducted or withheld from any payment to a holder of Class A
Shares, IntelCom is hereby authorized to withhold payment of the Retraction
Price to any holder of Class A Shares until such holder has paid to IntelCom an
amount equal to such amounts as IntelCom is required or permitted to deduct or
withhold with respect to such Retraction Price under the United States Internal
Revenue Code of 1986, as amended, the Income Tax Act (Canada) or any provision
of state, local or provincial or foreign tax law.
5.5 On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the
Retraction Price or Retraction Call Purchase Price, as the case may be, unless
upon presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the Retraction Price or the Retraction Call Purchase
Price, as the case may be, shall not be made, in which case the rights of such
holder shall remain unaffected until the Retraction Price or the Retraction Call
Purchase Price, as the case may be, has been paid in the manner hereinbefore
provided. On and after the close of business on the Retraction Date, provided
that presentation and surrender of certificates and payment of the Retraction
Price or the Retraction Call Purchase Price, as the case may be, has been made
in accordance with the foregoing provisions, the holder of the Retracted Shares
so redeemed by IntelCom or purchased by Parent shall thereafter be considered
and deemed for all purposes to be a holder of the shares of Parent Common Stock
delivered to it.
5.6 Notwithstanding any other provision of this Article 5, IntelCom shall
not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to solvency requirements or other provisions of applicable law. If
IntelCom believes that on any Retraction Date it would not be permitted by any
of such provisions to redeem the Retracted Shares tendered for redemption on
such date, and provided that Parent shall not have exercised the Retraction Call
Right with respect to the Retracted Shares, IntelCom shall only be obligated to
redeem Retracted Shares specified by a holder in a Retraction Request to the
extent of the maximum number that may be so redeemed as would not be contrary to
such provisions and shall notify the holder at least two Business Days prior to
the Retraction Date as to the number of Retracted Shares which will not be
redeemed by IntelCom. In any case in which the redemption by IntelCom of
Retracted Shares would be contrary to solvency requirements or other provisions
of applicable law, IntelCom shall redeem Retracted Shares in accordance with
section 5.2 of these share provisions on a pro rata basis and shall issue to
each holder of Retracted Shares a new certificate, at the expense of IntelCom,
representing the Retracted Shares not redeemed by IntelCom pursuant to section
5.2 hereof. Provided that the Retraction Request is
15
<PAGE>
not revoked by the holder in the manner specified in section 5.7, the holder of
any such Retracted Shares not redeemed by IntelCom pursuant to section 5.2 of
these share provisions as a result of solvency requirements of applicable law
shall be deemed by giving the Retraction Request to require Parent to purchase
such Retracted Shares from such holder on the Retraction Date or as soon as
practicable thereafter on payment by Parent to such holder of the Retraction
Call Purchase Price for each such Retracted Share, all as more specifically
provided in the Arrangement and Support Agreement.
5.7 A holder of Retracted Shares may, by notice in writing given by the
holder to IntelCom before the close of business on the Business Day immediately
preceding the Retraction Date, withdraw its Retraction Request in which event
such Retraction Request shall be null and void and, for greater certainty, the
revocable offer constituted by the Retraction Request to sell the Retracted
Shares to Parent shall be deemed to have been revoked.
5.8 For greater certainty, this Article 5 remains applicable after the
public announcement of a Third Party Transaction.
ARTICLE 6
REDEMPTION OF CLASS A SHARES BY INTELCOM
6.1 Upon the public announcement of a Third Party Transaction, the Board
of Directors may declare an Automatic Redemption Date to occur on a date which
shall be the earlier of: (i) the date of completion of the Third Party
Transaction; or (ii) if, in the discretion of the Board of Directors, the
Automatic Redemption Date must occur on a date prior to the completion of the
Third Party Transaction in order to ensure that holders of Class A Shares are
able participate in the Third Party Transaction, then on such date determined by
the Board of Directors. Without limiting the generality of the foregoing, to
the extent possible, IntelCom will use its best efforts expeditiously and in
good faith to ensure that holders of Class A Shares may participate in all such
Third Party Transactions without being required to retract their Class A Shares
as against IntelCom (or, if so required, to ensure that any such retraction
shall be effective only upon, and shall be conditional upon, the closing of the
Third Party Transaction and only to the extent necessary to tender or deposit to
the Third Party Offer).
6.2 Subject to applicable law, and subject to the exercise by Parent of
the Redemption Call Right, IntelCom shall on the Automatic Redemption Date
redeem each of the then outstanding Class A Shares, other than Class A Shares
held by Parent or any Affiliate of Parent, for one share of Parent Common Stock,
such share having a value equal to the Current Market Price of a share of Parent
Common Stock on the last Business Day prior to the Automatic Redemption Date
(the "Redemption Price").
6.3 At any time after October 1, 2006, provided that the number of Class A
Shares registered in the name of holders other than Parent or any of its
Affiliates is less than one percent (1%) of the total number of Class A Shares
outstanding at such time, the Board of Directors may declare a Cash Redemption
Date.
6.4 Subject to applicable law, and the legal availability of funds
therefor, IntelCom shall on the Cash Redemption Date redeem each of the then
outstanding Class A Shares, other than Class A Shares held by Parent or any
Affiliate of Parent for an amount equal to the Current Market Price of one share
of Parent Common Stock on the last Business Day prior to the Cash Redemption
Date (the "Cash Redemption Price").
16
<PAGE>
6.5 In the case of any redemption of Class A Shares under this Article 6,
IntelCom shall, no longer than 5 Business Days after the declaration of an
Automatic Redemption Date or Cash Redemption Date, as the case may be, send or
cause to be sent to each holder of Class A Shares to be redeemed a notice in
writing of the redemption by IntelCom or the purchase by Parent under the
Redemption Call Right, as the case may be, of the Class A Shares held by such
holder. Such notice shall set out the Redemption Price, the Redemption Call
Purchase Price or the Cash Redemption Price, as the case may be, the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, and, if
applicable, particulars of the Redemption Call Right. On or after the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, and subject to
the exercise by Parent of the Redemption Call Right, if applicable, IntelCom
shall cause to be delivered to the holders of the Class A Shares to be redeemed
the Redemption Price or the Cash Redemption Price, as the case may be, for each
such Class A Share upon presentation and surrender at the registered office of
IntelCom or at any office of the Transfer Agent as may be specified by IntelCom
in such notice of the certificates representing such Class A Shares, together
with such other documents and instruments as may be required to effect a
transfer of Class A Shares under the CBCA and the by-laws of IntelCom and such
additional documents and instruments as the Transfer Agent may reasonably
require. Payment of the total Redemption Price or the Cash Redemption Price, as
the case may be, for such Class A Shares shall be made by delivery to each
holder, at the address of the holder recorded in the securities register of
IntelCom or by holding for pick up by the holder at the registered office of
IntelCom or at any office of the Transfer Agent as may be specified by IntelCom
in such notice, on behalf of IntelCom of certificates representing shares of
Parent Common Stock (which shares shall be duly issued as fully paid and non-
assessable and shall be free and clear of any lien, claim, encumbrance, security
interest or adverse claim), or, as applicable, of a check representing the Cash
Redemption Price. On and after the Automatic Redemption Date or the Cash
Redemption Date, as the case may be, the holders of the Class A Shares called
for redemption shall cease to be holders of such Class A Shares and shall not be
entitled to exercise any of the rights of holders in respect thereof, other than
the right to receive their proportionate part of the total Redemption Price or
the Cash Redemption Price, as the case may be, unless payment of the total
Redemption Price or the Cash Redemption Price, as the case may be, for such
Class A Shares shall not be made upon presentation and surrender of certificates
in accordance with the foregoing provisions, in which case the rights of the
holders shall remain unaffected until the total Redemption Price or the Cash
Redemption Price, as the case may be, has been paid in the manner hereinbefore
provided. IntelCom shall have the right at any time after the sending of notice
of its intention to redeem Class A Shares as aforesaid to deposit or cause to be
deposited the total Redemption Price or Cash Redemption Price, as the case may
be, of the Class A Shares so called for redemption, or of such of the said Class
A Shares represented by certificates that have not at the date of such deposit
been surrendered by the holders thereof in connection with such redemption, in a
custodial account with any chartered bank or trust company in Canada named in
such notice. Upon the later of such deposit being made and the Automatic
Redemption Date or the Cash Redemption Date, as the case may be, the Class A
Shares in respect whereof such deposit shall have been made shall be redeemed
and the rights of the holders thereof after such deposit, or Automatic
Redemption Date or Cash Redemption Date, as the case may be, shall be limited to
receiving their proportionate part of the total Redemption Price or the Cash
Redemption Price, as the case may be, without interest for such Class A Shares
so deposited, against presentation and surrender of the said certificates held
by them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Redemption Price, the holders of the Class A
Shares shall thereafter be considered and deemed for all purposes to be holders
of the shares of Parent Common Stock delivered to them. In the event that there
is tax required to be deducted or withheld from any payment to a holder of Class
A Shares, IntelCom is hereby authorized to withhold payment of the Redemption
Price or the Cash Redemption Price, as the case may be, to any holder of Class A
Shares until such holder has paid to IntelCom an amount equal
to such amounts as IntelCom is required or permitted to deduct or withhold with
respect to such Redemption Price under the United States Internal Revenue Code
of 1986, as amended, the Income Tax Act (Canada) or any provision of state,
local or provincial or foreign tax law.
17
<PAGE>
ARTICLE 7
VOTING RIGHTS
7.1 The holders of Class A Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of IntelCom and shall have one
vote for each share held at all meetings of the shareholders of IntelCom except
for meetings at which only holders of another specified class or series of
shares of IntelCom are entitled to vote separately as a class or series.
ARTICLE 8
AMENDMENT AND APPROVAL
8.1 The rights, privileges, restrictions and conditions attaching to
the Class A Shares may be added to, changed or removed but only with the
approval of the holders of the Class A Shares given as hereinafter specified.
8.2 Any approval given by the holders of the Class A Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Class A Shares or any other matter requiring the approval or consent of the
holders of the Class A Shares shall be deemed to have been sufficiently given if
it shall have been given in accordance with applicable law subject to a minimum
requirement that such approval be evidenced by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders of
Class A Shares duly called and held at which the holders of at least 50% of the
outstanding Class A Shares at that time are present or represented by proxy;
provided that if at any such meeting the holders of at least 50% of the
outstanding Class A Shares at that time are not present or represented by proxy
within one-half hour after the time appointed for such meeting, then the meeting
shall be adjourned to such date not less than 10 days thereafter and to such
time and place as may be designated by the Chairman of such meeting. At such
adjourned meeting the holders of Class A Shares present or represented by proxy
thereat may transact the business for which the meeting was originally called
and a resolution passed thereat by the affirmative vote of not less than two-
thirds of the votes cast on such resolution at such meeting shall constitute the
approval or consent of the holders of the Class A Shares.
8.3 Any approval or consent required to be given by the holders of the
Class A Shares pursuant to this section 8.3 shall be deemed to have been
sufficiently given if such approval is evidenced by resolution passed by not
less than one-half of the votes cast (excluding any votes attached to shares
owned by Parent or any of its Affiliates) on such resolution at a meeting of
holders of Class A Shares duly called and held at which the holders of at least
25% of the outstanding Class A Shares other than Class A Shares held by Parent
or any of its Affiliates at that time are present or represented by proxy;
provided that if at any such meeting the holders of at least 25% of the
outstanding Class A Shares other than Class A Shares held by Parent or any of
its Affiliates at that time are not present or represented by proxy within one-
half hour after the time appointed for such meeting, then the meeting shall be
adjourned to such date not less than 10 days thereafter and to such time and
place as may be designated by the Chairman of such meeting. At such adjourned
meeting the holders of Class A Shares present or represented by proxy thereat
may transact the business for which the meeting was originally called and a
resolution passed thereat by the affirmative vote of not less than one-half of
the votes (excluding any votes attached to shares owned by Parent or any of its
Affiliates) cast on such resolution at such meeting shall constitute the
approval or consent of the holders of the Class A Shares.
18
<PAGE>
ARTICLE 9
RECIPROCAL CHANGES, ETC. IN RESPECT OF SHARES OF
PARENT COMMON STOCK
9.1 (a) Pursuant to the Arrangement and Support Agreement, Parent will not
without the prior approval of IntelCom and the prior approval of the holders of
the Class A Shares given as specified in section 8.3 of these share provisions:
(i) issue or distribute shares of Parent Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of Parent Common Stock) to the holders of all or substantially
all of the then outstanding shares of Parent Common Stock by way of
stock dividend or other distribution, other than an issue of shares of
Parent Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire shares of Parent Common Stock) to
holders of shares of Parent Common Stock who exercise an option to
receive dividends in shares of Parent Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of Parent Common Stock) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding shares of Parent Common
Stock entitling them to subscribe for or to purchase shares of Parent
Common Stock (or securities exchangeable for or convertible into or
carrying rights to acquire shares of Parent Common Stock); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding shares of Parent Common Stock (A) shares or
securities of Parent of any class other than Parent Common Stock
(other than shares convertible into or exchangeable for or carrying
rights to acquire shares of Parent Common Stock), (B) rights, options
or warrants other than those referred to in section 9.1(a)(ii) above,
(C) evidences of indebtedness of Parent or (D) assets of Parent;
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Class A Shares.
(b) Pursuant to the Arrangement and Support Agreement, Parent will not
without the prior approval of IntelCom and the prior approval of the holders of
the Class A Shares given as specified in section 8.3 of these share provisions:
(i) subdivide, redivide or change the then outstanding shares of Parent
Common Stock into a greater number of shares of Parent Common Stock;
or
(ii) reduce, combine or consolidate or change the then outstanding shares
of Parent Common Stock into a lesser number of shares of Parent Common
Stock; or
(iii) reclassify or otherwise change the shares of Parent Common Stock or
effect an amalgamation, merger, reorganization or other transaction
affecting the shares of Parent Common Stock;
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Class A Shares.
19
<PAGE>
The Arrangement and Support Agreement shall not be changed without the
approval of the holders of the Class A Shares given as specified in section 8.3
of these share provisions.
9.2 Pursuant to the Arrangement and Support Agreement, the holders of
Class A Shares (other than Parent, its subsidiaries and Affiliates) are given
certain rights to exchange their Class A Shares for shares of Parent Common
Stock.
ARTICLE 10
ACTIONS BY INTELCOM UNDER ARRANGEMENT AND SUPPORT AGREEMENT
10.1 IntelCom will take all such actions and do all such things as shall be
necessary or advisable to perform and comply with and to ensure performance and
compliance by Parent with all provisions of the Arrangement and Support
Agreement applicable to IntelCom and Parent, respectively, in accordance with
the respective terms thereof including, without limitation, taking all such
actions and doing all such things as shall be necessary or advisable to enforce
to the fullest extent possible for the direct benefit of IntelCom and the
holders of Class A Shares all rights and benefits in favor of IntelCom and such
holders under or pursuant to such agreements.
10.2 IntelCom shall not propose, agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Arrangement and Support Agreement without the approval of the holders of the
Class A Shares given as specified in section 8.3 of these share provisions,
other than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such agreement
for the protection of IntelCom or the holders of Class A Shares thereunder or
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or questions
arising thereunder which, in the opinion of the Board of Directors, it may be
expedient to make, provided that the Board of Directors shall be of the opinion,
after consultation with counsel, that such provisions and modifications will not
be prejudicial to the interests of the holders of the Class A Shares other than
Parent or any of its Affiliates; or
(c) making such changes in or corrections to such agreement which, on the
advice of counsel to IntelCom, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error contained therein, provided that the Board
of Directors shall be of the opinion, after consultation with counsel, that such
changes or corrections will not be prejudicial to the interests of the holders
of the Class A Shares other than Parent or any of its Affiliates.
ARTICLE 11
LEGEND
11.1 The certificates evidencing the Class A Shares shall contain or have
affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the provisions of the Arrangement and Support
Agreement relating to the "Exchange Right" (as such term is defined in the
Arrangement and Support Agreement) and the provisions of the Plan of Arrangement
and these share provisions relating to the Automatic Redemption Date and the
Redemption Call Right.
20
<PAGE>
ARTICLE 12
NOTICES
12.1 Any notice, request or other communication to be given to IntelCom by
a holder of Class A Shares shall be in writing and shall be valid and effective
if given by mail (postage prepaid) or by telecopy or by delivery to the
registered office of IntelCom and addressed to the attention of the President.
Any such notice, request or other communication, if given by mail, telecopy or
delivery, shall only be deemed to have been given and received upon actual
receipt thereof by IntelCom.
12.2 Any presentation and surrender by a holder of Class A Shares to
IntelCom or the Transfer Agent of certificates representing Class A Shares in
connection with the liquidation, dissolution or winding up of IntelCom or the
retraction or redemption of Class A Shares shall be made by registered mail
(postage prepaid) or by delivery to the registered office of IntelCom or to such
office of the Transfer Agent as may be specified by IntelCom, in each case
addressed to the attention of the President of IntelCom. Any such presentation
and surrender of certificates shall only be deemed to have been made and to be
effective upon actual receipt thereof by IntelCom or the Transfer Agent, as the
case may be. Any such presentation and surrender of certificates made by
registered mail shall be at the sole risk of the holder mailing the same.
12.3 Any notice, request or other communication to be given to a holder of
Class A Shares by or on behalf of IntelCom shall be in writing and shall be
valid and effective if given by mail (postage prepaid) or by delivery to the
address of the holder recorded in the securities register of IntelCom or, in the
event of the address of any such holder not being so recorded, then at the last
known address of such holder. Any such notice, request or other communication,
if given by mail, shall be deemed to have been given and received on the third
Business Day following the date of mailing and, if given by delivery, shall be
deemed to have been given and received on the date of delivery. Accidental
failure or omission to give any notice, request or other communication to one or
more holders of Class A Shares shall not invalidate or otherwise alter or affect
any action or proceeding to be taken by IntelCom pursuant thereto.
21
<PAGE>
EXHIBIT 5.1
<PAGE>
New York, New York
June 17, 1996
ICG Communications, Inc.
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80112-6742
Re: ICG Communications, Inc.;
Registration Statement on Form S-4 (File No. 333-4226)
Ladies and Gentlemen:
We have acted as counsel to ICG Communications, Inc., a Delaware
corporation (the "Registrant"), in connection with the preparation and filing
with the Securities and Exchange Commission (the "Commission") of a
Registration Statement on Form S-4, File No. 333-4226 (the Registration
Statement"), with respect to the registration under the Securities Act of
1933, as amended (the "Act"), of up to 38,989,856 shares of Common Stock,
$.01 par value per share (the "Shares"), of the Registrant issuable in
connection with the proposed Arrangement to be effected by the Registrant
with IntelCom Group Inc., a Canadian federal corporation ("IntelCom"), and
IntelCom's shareholders (the "Arrangement").
In connection with the proposed offering and the Arrangement, we
have examined the Certificate of Incorporation and the By-Laws of the
Registrant, resolutions of the Board of Directors of the Registrant, and the
Registration Statement. We have also made such inquiries and have examined
originals, certified copies or copies of other instruments as we have deemed
necessary or appropriate for the purpose of this opinion. For purposes of
such examination, we have assumed the genuineness of all signatures on and
the authenticity of all documents submitted to us as originals, and the
conformity to the originals of all documents submitted to us as certified or
photostatic copies.
Based upon the foregoing, we are of the opinion that the Shares
covered by the Registration Statement, when issued pursuant to the
Arrangement as provided for in the Registration Statement, will be duly
authorized, validly issued, fully paid and non-assessable shares of Common
Stock of the Registrant.
<PAGE>
2
We hereby consent to the filing of this opinion as Exhibit 5.1 to
the Registration Statement and to the reference therein to our firm under the
caption "Legal Matters." In giving the foregoing consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
REID & PRIEST LLP
<PAGE>
EXHIBIT 8.1
<PAGE>
[LETTERHEAD OF STIKEMAN ELLIOTT APPEARS HERE]
(416) 869-5542
June 17, 1996
VIA MAIL
- --------
IntelCom Group Inc.
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado
80112-6742
Ladies and Gentlemen:
You have requested our opinion with respect to the Canadian federal
income tax considerations described in the section entitled "Income Tax
Considerations to Shareholders - Canadian Federal Income Tax Considerations" of
the Registration Statement on Form S-4, as amended (File No. 333-4226) (the
"Registration Statement"), of ICG Communications, Inc., a Delaware corporation
("ICG"), as filed with the Securities and Exchange Commission (the "Commission")
in connection with the proposed Arrangement involving ICG, IntelCom Group Inc.,
a Canadian federal corporation ("IntelCom"), and IntelCom's shareholders (the
"Arrangement") and the issuance by ICG of shares of its Common Stock pursuant to
the Arrangement.
In connection with the rendering of this opinion, we have reviewed the
Registration Statement and other materials we have considered to be relevant.
In addition, we have assumed that all documents we have reviewed are true copies
of the originals, are accurate and have been or will be properly executed, and
that actions in connection with the transactions contemplated in the
Registration Statement have been and will be conducted in the manner provided in
the Registration Statement.
Based on and subject to the foregoing, it is our opinion that the
statements set forth under the caption "Income Tax Considerations to
Shareholders - Canadian Federal Income Tax Considerations" in the Registration
Statement, in so far as they purport to describe the provisions of the laws
referred to therein as they apply to the persons described therein and based on
the assumptions stated therein, are fair summaries of the matters discussed.
<PAGE>
-2-
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference therein to our firm under the titles
"Legal Matters" and "Income Tax Considerations to Shareholders - Canadian
Federal Income Tax Considerations." In giving the foregoing consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Commission promulgated thereunder. This opinion is as of the
date hereof. We disclaim any responsibility to update or supplement this
opinion to reflect any events or state of facts which may hereafter come to our
attention, or any changes in statutes or regulations or any court decisions
which may hereafter occur.
Yours very truly,
Stikeman, Elliott
/am
<PAGE>
EXHIBIT 8.2
<PAGE>
(212) 603-2275
New York, New York
June 17, 1996
IntelCom Group Inc.
9605 E. Maroon Circle
P.O. Box 6742
Englewood, Colorado 80112-6742
Ladies and Gentlemen:
You have requested our opinion that the United States federal
income tax considerations described in the section captioned "Income Tax
Considerations to Shareholders - United States Federal Income Tax
Considerations" to the Registration Statement on Form S-4, as amended (File
No. 333-4226) (the "Registration Statement"), of ICG Communications, Inc., a
Delaware corporation ("ICG"), as the same has been filed with the Securities
and Exchange Commission (the "Commission") in connection with the proposed
Arrangement involving ICG, IntelCom Group Inc., a Canadian federal
corporation ("IntelCom"), and IntelCom's shareholders (the "Arrangement") and
the issuance by ICG of shares of its Common Stock pursuant to the
Arrangement, correctly sets forth the material United States federal income
tax considerations generally applicable to United States Holders of shares of
common stock, no par value per share, of IntelCom (the "Holders"), arising
from and relating to the Arrangement. Unless otherwise defined herein,
capitalized terms shall have the meanings ascribed to them in the
Registration Statement.
This opinion is based on United States federal income tax law in
effect as of the date hereof, which law is comprised of the current
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed treasury regulations promulgated thereunder and current
administrative rulings and court decisions, all of which are subject to
change. No advance income tax ruling has been sought or obtained from the
Internal Revenue Service regarding the United States federal income tax
consequences of any of the transactions described in the Registration
Statement. This opinion is also based upon factual representations made by
IntelCom and ICG.
This opinion does not address aspects of United States taxation
other than United States federal income taxation, nor does it address all
aspects of United States federal income taxation that may be applicable to
particular United States Holders, including insurance companies, financial
institutions, broker dealers, tax
<PAGE>
2
exempt organizations and United States Holders who would be treated as owning
10% or more of the voting power of IntelCom. In addition, this opinion does
not address the United States state or local tax consequences or the foreign
tax consequences of the Arrangement or the receipt and ownership of the Class
A Shares or shares of Parent Common Stock, the ownership and exercise of
IntelCom options and warrants, or the ownership and conversion of debentures.
In connection with the rendering of this opinion, we have reviewed
the Registration Statement and other materials we have deemed to be relevant.
In addition, we have relied upon the assumption that all documents we have
reviewed are true and accurate, accurately reflect the originals and have
been or will be properly executed, and that actions in connection with the
transactions contemplated in the Registration Statement have been and will be
conducted in the manner provided in the Registration Statement.
We are members of the bar of the State of New York and are not
admitted to practice law in any other jurisdiction. Accordingly, we express
no opinion with respect to the laws of any other jurisdiction other than the
federal laws of the United States of America in respect of the opinions set
forth herein.
Based on and subject to the foregoing, it is our opinion that the
United States federal income tax considerations described in the section
captioned "Income Tax Considerations to Shareholders - United States Federal
Income Tax Considerations" to the Registration Statement correctly sets forth
the material United States federal income tax considerations generally
applicable to the United States Holders of Shares, arising from and relating
to the Arrangement.
We hereby consent to the filing of this opinion as Exhibit 8.2 to
the Registration Statement and to the reference therein to our firm under the
captions "Legal Matters" and "Income Tax Considerations to Shareholders -
United States Federal Income Tax Considerations." In giving the foregoing
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Commission promulgated
thereunder. This opinion is as of the date hereof. We disclaim any
responsibility to update or supplement this opinion to reflect any events or
state of facts which may hereafter come to our attention, or any changes in
statutes or regulations or any court decisions which may hereafter occur.
Very truly yours,
REID & PRIEST LLP
<PAGE>
EXHIBIT 23
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CONSENT OF INDEPENDENT AUDITORS
-------------------------------
THE BOARD OF DIRECTORS
INTELCOM GROUP INC.:
We consent to the use of our reports included in the registration statement (No.
333-4226) on Form S-4 of ICG Communications, Inc. dated December 8, 1995,
relating to the consolidated balance sheets of IntelCom Group Inc. and
subsidiaries as of September 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1995, and related schedule,
and to the reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Denver, Colorado
June 14, 1996
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EXHIBIT A
<PAGE>
OPINION OF MORGAN STANLEY & CO. INCORPORATED
April 25, 1996
Board of Directors
IntelCom Group Inc.
c/o IntelCom Group (U.S.A.), Inc.
9605 East Maroon Circle
Englewood, Colorado 80112
Dear Members of the Board:
We understand that IntelCom Group Inc. ("IntelCom") is proposing to implement a
plan of arrangement (the "Arrangement") under the Canada Business Corporations
Act, substantially in the form attached to and described in the Proxy
Statement - Prospectus to be filed with the Securities and Exchange Commission
on April 29, 1996 (the "Proxy Statement - Prospectus"), which will result in the
restructuring of IntelCom as a publicly traded United States domiciled
corporation. Pursuant to the Arrangement, holders of common shares, no par
value, of IntelCom (the "IntelCom Shares"), other than shares as to which
dissenters' rights have been perfected, will each have the right to (i) exchange
each IntelCom Share for one share of common stock, par value $.01 per share, of
ICG Communications, Inc. ("Parent" or "Parent Common Stock") or (ii) continue to
hold such IntelCom Shares, the rights of which will be amended such that each
share (referred to after the Arrangement as a "Class A Share") will be
exchangeable at any time at the option of the holder for one share of Parent
Common Stock, and may be automatically exchanged upon the occurrence of certain
events. After the effective date of the Arrangement, Parent will own at least
85% of the issued and outstanding Class A Shares, and IntelCom will own 100% of
the issued and outstanding shares of common stock, no par value, of IntelCom
Group (U.S.A.), Inc. ("ICG"). The terms and conditions of the Arrangement are
more fully set forth in the Proxy Statement - Prospectus.
You have asked our opinion as to the fairness of the Arrangement from a
financial point of view to the holders of IntelCom Shares.
For purposes of the opinion set forth herein, we have, among other things:
(i) analyzed certain publicly available financial statements and
other information of IntelCom;
(ii) analyzed certain internal financial statements and other
financial and operating data concerning IntelCom prepared by
the management of IntelCom;
(iii) analyzed certain financial projections prepared by the
management of IntelCom;
(iv) discussed the past and current operations and financial
conditions and the prospects of IntelCom with the management of
IntelCom;
(v) reviewed the reported prices and trading activity for the
IntelCom Shares;
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IntelCom Group Inc.
April 25, 1996
Page 2
(vi) compared the financial performance of IntelCom and the prices
and trading activity of the IntelCom Shares with that of
certain other comparable publicly traded companies and their
securities;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(viii) participated in discussions with the management of IntelCom and
their accountants and legal advisors regarding certain legal,
tax and accounting issues relating to the Arrangement;
(ix) discussed with the management of IntelCom their view of the
strategic and other benefits expected to result from the
Arrangement;
(x) reviewed certain opinions of Reid & Priest LLP and Stikeman,
Elliott regarding certain tax and legal matters in connection
with the Arrangement (the "Tax Opinions") as described in the
Proxy Statement - Prospectus under the subsections entitled:
"United States Federal Income Tax Considerations" and "Canadian
Federal Income Tax Considerations," respectively;
(xi) reviewed the Proxy Statement - Prospectus and certain related
documents; and
(xii) performed such other analyses and considered such other factors
as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of IntelCom. We
have not made any independent valuation or appraisal of the assets or
liabilities of IntelCom, nor have we been furnished with any such appraisals.
In addition, we have relied upon, without independent verification, the
assessment by the management of IntelCom of the strategic and other benefits
expected to result from the Arrangement. We have assumed that the Arrangement
will be consummated in accordance with the terms set forth in the Proxy
Statement - Prospectus. We also have relied, without independent verification,
upon the representations in the Tax Opinions with respect to certain tax and
legal matters in connection with the Arrangement. For purposes of this opinion,
we have relied on the fact that the Company is prohibited by restrictions in
certain of its outstanding trust indentures from paying or declaring any
dividends prior to the year 2006 and IntelCom's long term policy not to declare
or pay any cash dividends. In addition, you have advised us that it is the
Board's and management's intention not to change such policy over the long term.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
We understand that the proposed Arrangement may result in tax consequences for
certain of the holders of IntelCom Shares and do not express any opinion or view
as to the tax consequences to shareholders of the Arrangement. Consequently,
our opinion as to fairness from a financial point of view to the holders of
IntelCom Shares does not take into account the tax status or position of any
holder of IntelCom Shares. In addition, we express no opinion
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IntelCom Group Inc.
April 25, 1996
Page 3
and make no recommendation as to how the holders of IntelCom Shares should vote
at the shareholders' meeting held in connection with the proposed Arrangement.
We have acted as financial advisor to the Board of Directors of IntelCom in
connection with this transaction and will receive compensation for our services.
From time to time, Morgan Stanley & Co. Incorporated and its affiliates ("Morgan
Stanley") provide financial advisory and financing services for IntelCom and
have or will receive fees for the rendering of these services, which services
have included acting as lead underwriter in connection with ICG's issuance
of senior discount notes and exchangeable preferred stock in April 1996. Morgan
Stanley together with its affiliate, Princes Gate Investors, L.P. and related
investors, currently own approximately 8.2% of the equity of IntelCom on a fully
diluted basis, in the form of IntelCom Shares and certain warrants of IntelCom.
It is understood that this letter is for the information of the Board of
Directors of IntelCom and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by IntelCom with the U.S. Securities and Exchange Commission
or the Canadian courts or securities regulatory authorities with respect to the
proposed Arrangement.
Based on and subject to the foregoing, we are of the opinion that, on the date
hereof, the Arrangement is fair from a financial point of view to the holders of
IntelCom Shares.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:_______________________________
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