<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996
REGISTRATION NO. 333-4226
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 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. [ ]
<TABLE>
<CAPTION>
CalCULATION OF REGISTRATION FEE
==============================================================================================================================
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Share(1) Aggregate Offering Price(1) Registration Fee(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par 980,376 $23.75 per Share $23,283,930 $8,029.00
value Shares(2)
==============================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(f)(1) of the Securities Act of 1933, as
amended (the "Securities Act"), based on the market value of the Common
Shares, no par value per share, of IntelCom Group Inc. (the "IntelCom
Common Shares"), to be exchanged as a result of the Arrangement ($23.75
per Share, which is the average of the high and low prices of the IntelCom
Common Shares reported on the American Stock Exchange on June 21, 1996)
multiplied by an additional number of shares of the Common Stock of ICG
Communications, Inc. (980,376) which may be issued pursuant to the
Arrangement.
(2) Pursuant to Rule 416 of the Securities Act, this Registration Statement
covers such indeterminable number of additional shares of Common Stock as
may become issuable as a result of any future anti-dilution adjustment in
accordance with the terms of outstanding options, warrants and convertible
debentures.
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 Management 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 Management 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>
[ART]
June 28, 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, Belgravia 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 proxy printed on green paper, Letter of Transmittal and Election Form
printed on blue paper and Notice of Guaranteed Delivery printed on yellow
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.
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 PROXY AND RETURN IT NOT LATER THAN THE TIME
SPECIFIED IN THE NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS IN THE
ENVELOPE PROVIDED. Regardless of the number of IntelCom Common Shares you own,
your vote is important.
Yours very truly,
/s/ J. Shelby Bryan
J. Shelby Bryan
President and Chief Executive
Officer
2
<PAGE>
INTELCOM GROUP INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 30, 1996
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, Belgravia 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 to change IntelCom's 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 other business as may properly come before the
Meeting or any adjournment or postponement 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, not 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.
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
<PAGE>
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.
By Order of the Board of Directors
of IntelCom Group Inc.
LOGO
John D. Field Secretary
June 28, 1996
Oakville, Ontario
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 ANY OFFER TO BUY NOR SHALL THERE BE 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 26, 1996
INTELCOM GROUP INC. ICG COMMUNICATIONS, INC.
PROXY STATEMENT FOR PROSPECTUS
ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS 39,970,232 SHARES OF ICG COMMUNICATIONS, INC.
TO BE HELD JULY 30, 1996 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, Belgravia Room, 37 King Street East,
Toronto, Ontario M5C 1E9 and at any adjournment or postponement 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") to change IntelCom's 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 other business as may properly come before the Meeting
or any adjournment or postponement thereof.
This Proxy Statement--Prospectus and the accompanying proxy and Letter of
Transmittal and Election are first being mailed to Shareholders on or about
June 28, 1996. Certain capitalized terms used in this Proxy Statement--
Prospectus without definition have the meanings given in the Glossary of
Defined 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
39,970,232 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.
-----------
THE DATE OF THIS PROXY STATEMENT--PROSPECTUS IS JUNE , 1996.
<PAGE>
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.
Parent has applied to have the Parent Common Stock authorized for listing on
the American Stock Exchange.
SEE RISK FACTORS, BEGINNING ON PAGE 18, 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY OF DEFINED TERMS................................................. 4
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES............................ 6
CANADIAN/U.S. EXCHANGE RATES.............................................. 6
SUMMARY OF PROXY STATEMENT--PROSPECTUS.................................... 7
RISK FACTORS.............................................................. 21
MARKET PRICE AND DIVIDEND INFORMATION..................................... 27
THE ANNUAL AND SPECIAL MEETING--GENERAL PROXY INFORMATION................. 27
General.................................................................. 27
Solicitation of Proxies.................................................. 28
Appointment of Proxies................................................... 28
Signing of Proxies....................................................... 28
Revocation of Proxies.................................................... 28
Voting of Proxies........................................................ 28
Voting Shares............................................................ 29
Vote Required to Approve the Business of the Meeting and Voting
Intentions of Certain Shareholders...................................... 29
MATTER NO. 1--ELECTION OF DIRECTOR........................................ 30
MATTER NO. 2--REAPPOINTMENT OF AUDITORS................................... 31
MATTER NO. 3--CHANGE OF INTELCOM'S NAME................................... 32
MATTER NO. 4--THE ARRANGEMENT............................................. 32
Reasons for the Arrangement and Recommendations of the Board............. 32
Description of the Arrangement and Certain Related Transactions.......... 33
Opinion of Financial Advisor............................................. 34
Description of Class A Shares............................................ 36
Treatment of Stock Options and Stock Option Plans........................ 38
Treatment of Warrants.................................................... 38
Treatment of Convertible Debentures...................................... 38
Description of Parent Securities......................................... 38
Court Approval and Completion of the Arrangement......................... 39
Accounting Treatment..................................................... 40
Election Procedures...................................................... 40
Procedure for Exchange of Share Certificates by Shareholders............. 41
Stock Exchange Listings.................................................. 41
Securities Laws Considerations........................................... 41
Conditions to the Arrangement............................................ 42
Support Agreement........................................................ 42
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................................... 59
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Director Qualifications.................................................. 59
Fiduciary Duties of Directors............................................ 59
Indemnification of Officers and Directors................................ 60
Director Liability....................................................... 60
DISSENTING SHAREHOLDERS' RIGHTS........................................... 61
THE BUSINESS OF THE COMPANY............................................... 63
SELECTED FINANCIAL DATA................................................... 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 80
MANAGEMENT................................................................ 98
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 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 SHAREHOLDERS.......................................................... I-1
</TABLE>
3
<PAGE>
1 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.
"CODE" means the United States Internal Revenue Code of 1986, as amended.
"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. (Vancouver 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.
"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.
4
<PAGE>
"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 and thereto 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.
"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.
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<PAGE>
"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.
"STOCK OPTION" means an option to purchase IntelCom Common Shares issued
under a Stock Option Plan.
"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.
"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.
"U.S. GAAP" means accounting principles generally accepted in the United
States.
"$" means the lawful currency of the United States.
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
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, 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 25, 1996, the noon buying rate for Cdn$1.00 was $1.351.
6
<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
7
<PAGE>
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).
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.
8
<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 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.
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.
9
<PAGE>
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 2, 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 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.
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 ADVISERS.
10
<PAGE>
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.
11
<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 is in the process of
selling 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
12
<PAGE>
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.
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
13
<PAGE>
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.
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 $14.9 million for the 12-month period ended March
31, 1996.
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.
14
<PAGE>
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 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."
15
<PAGE>
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 25, 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 $ 25.00. 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 18.
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
-------------- ------------
<S> <C> <C>
Period Ending or As Of
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.
16
<PAGE>
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.
<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)
------- ------- ------- -------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3):
Revenue:
Telecom services....... $ 428 $ 1,061 $ 4,803 $ 14,854 $ 32,330 $ 32,330 $ 12,833 $ 31,148 $ 31,148
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
administrative
expenses............... 3,088 3,921 10,702 30,590 65,022 61,248 27,485 40,239 38,746
Depreciation and
amortization........... 1,282 1,602 3,473 8,198 16,624 14,410 7,107 12,361 11,708
------- ------- ------- -------- -------- --------- -------- -------- ---------
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),
net.................... 7 33 22 (121) (4,999) (39,120) 456 (1,070) (22,970)
------- ------- ------- -------- -------- --------- -------- -------- ---------
Loss before income taxes
and cumulative effect
of change in
accounting............. (4,495) (3,828) (6,161) (23,868) (76,181) (157,228) (23,030) (61,583) (112,768)
Income tax benefit
(expense).............. 112 174 1,552 -- -- -- (11) 4,482 4,482
Cumulative effect of
change in
accounting(2).......... -- -- -- -- -- -- -- (3,453) (3,453)
------- ------- ------- -------- -------- --------- -------- -------- ---------
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
common shareholders.... $(4,383) $(3,654) $(4,609) $(23,868) $(76,648) $(157,695) $(23,041) $(61,581) $(112,766)
======= ======= ======= ======== ======== ========= ======== ======== =========
Loss per common share... $ (0.61) $ (0.42) $ (0.39) $ (1.56) $ (3.25) $ (6.68) $ (1.01) $ (2.42) $ (4.43)
======= ======= ======= ======== ======== ========= ======== ======== =========
Weighted average number
of common shares
outstanding............ 7,184 8,737 11,671 15,342 23,604 23,604 22,746 25,471 25,471
======= ======= ======= ======== ======== ========= ======== ======== =========
OTHER DATA:
EBITDA(4)............... $(3,015) $(1,734) $ (187) $ (7,068) $(30,190) $ (29,754) $(10,182) $(18,720) $ (18,009)
Capital expenditures(5). $ 7,608 $12,599 $20,685 $ 54,921 $ 88,495 $ 86,197 $ 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)
17
<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) $ (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 $12.3 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. See "Pro Forma Condensed
Consolidated Financial Statements."
(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 under capital leases and
through the issuance of debt 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
18
<PAGE>
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 $158.3 million and $114.2 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.
19
<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, Belgravia 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, 28,383,130
IntelCom Common Shares were outstanding, held by approximately 435 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 June 27, 1996, directors and executive officers of IntelCom
and their respective affiliates, as a group, may be deemed to be the beneficial
owners of 4,244,629 IntelCom Common Shares, representing approximately 15.0% 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 director 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 director. With respect to all matters other than the election of
director, 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.
20
<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.
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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 result in increased
volumes of traffic carried on the Company's own network in place of
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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 instruments governing the Company's material indebtedness contain cross-
default provisions which provide that a default under other indebtedness will
be considered a default under the indebtedness in question. In the event that a
cross-default were triggered, the maturity of substantially all of the
Company's approximately $792.0 million of indebtedness (at May 31, 1996) would
be accelerated and become immediately due and payable. As a result, the Company
would not be able to satisfy all of its debt obligations. 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 Company has notified the holders of the
Notes of its intent to redeem the 8% Convertible Subordinated Notes by July 8,
1996 and the 7% Convertible Subordinated Notes by July 26, 1996. 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 net proceeds
from the Private Placement, 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, 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
23
<PAGE>
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 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."
24
<PAGE>
REGULATION
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
25
<PAGE>
networks or that these agreements will be on terms acceptable to the Company,
or that current or potential competitors will 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 from the performance of federal government contracts. FOTI's
debarment has since been terminated. See "The Business of the Company--Legal
and Administrative Proceedings."
26
<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$/$)
------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30,
1994
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 Cdn$22.13 Cdn$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 Cdn$18.00 Cdn$18.00 1.37
Second Quarter.................. 17.88 10.25 18.00 18.00 1.39
Third Quarter (through June 25,
1996).......................... 27.38 17.13 18.00 18.00 1.37
</TABLE>
As of June 27, 1996, there were approximately 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.
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, Belgravia 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.
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<PAGE>
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.
VOTING OF PROXIES
THE ENCLOSED 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).
28
<PAGE>
VOTING SHARES
On June 27, 1996, IntelCom had outstanding 28,383,130 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).
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 director 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 director.
With respect to all matters other than the election of director, abstentions
and broker "non-votes" will have no effect on the outcome of such other
matters.
As of June 27, 1996, the directors and executive officers of IntelCom and
their respective affiliates, as a group, may be deemed to be the beneficial
owners of 4,244,629 IntelCom Common Shares, representing approximately 15.0% 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.
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MATTER NO. 1--ELECTION OF 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 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)............... 63 1993 Director 1999
</TABLE>
- --------
(1) Member of Executive Committee and Compensation 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. 66 1995 Chairman of the Board 1998
Laggett(1)(2)(3)(4).... of Directors
J. Shelby Bryan(1)(3)... 50 1995 President, Chief Executive Officer 1997
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>
- --------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Stock Option Committee
RESIGNATIONS 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.
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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."
MATTER NO. 2--REAPPOINTMENT OF AUDITORS
The Board of Directors of IntelCom will move to reappoint KPMG Peat Marwick
Thorne, 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." In that case, the name of the new parent will be
"ICG Communications, 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."
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
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<PAGE>
view, as well as from the point of view of fairness to Shareholders. After
several meetings with such advisors over the course of 1995 and early 1996, the
Company and its advisors concluded that due to the Canadian and United States
tax and accounting issues applicable to the Company and Shareholders, the
Arrangement was the only structure that would accomplish the goal of
structuring a tax-free reorganization in Canada and in the United States for
the Company and Shareholders which would be fair to Shareholders from an
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.
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
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<PAGE>
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."
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 JUNE 28, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE
REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX A TO THE 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 ENTIRELY 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
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<PAGE>
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 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 review of the post-Arrangement structure of the Company
was also performed, which generally supported the following potential benefits
of the Arrangement: (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 United States, (ii) the ability to
eliminate the foreign-ownership 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 local, 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.
The general review by Morgan Stanley of the Company and the impact of the
Arrangement on the Company indicated (i) in analyzing the financial statements
and other operating data, that substantially all of the Company's operations,
earnings and assets were based in the United States and that the Company's
securities were principally traded in the United States securities markets and
(ii) based upon a review of the Company's existing and projected radio licenses
and the FCC's regulation of such licenses, that the Company becoming a U.S.
domiciled entity would result in the elimination of certain regulatory
constraints.
The preparation of a fairness opinion is a complex process and is not readily
susceptible to summary description. Selecting portions of the analyses or of
the summaries set forth above, without considering the analyses and other
factors considered as a whole, could create an incomplete view of the process
underlying Morgan Stanley's opinion. In arriving at its opinion, Morgan Stanley
considered the results of all such analyses
35
<PAGE>
and factors, taken as a whole. Furthermore, in arriving at its fairness
opinion, Morgan Stanley did not attribute any particular weight to any analysis
or factor considered by it.
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
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 6.2%
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
(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.
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<PAGE>
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 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.
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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 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
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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.
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.
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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 2, 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 5, 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 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 2 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
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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.
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. If such listing on
the AMEX is not authorized, management does not intend to proceed with the
Arrangement.
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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) the approval of the
Arrangement by the affirmative requisite vote of the Shareholders; (ii) a Final
Order by the Court approving the Arrangement in form and substance satisfactory
to IntelCom and Parent; and (iii) the Parent Common Stock being authorized for
listing on the AMEX. In addition 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 B.
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.
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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 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.
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 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.
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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
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
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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 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 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 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)
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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 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
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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 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
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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 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 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.
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.
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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.
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 assumption 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."
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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 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 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
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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 were 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
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."
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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."
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
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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 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.
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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 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.
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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 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
CBCA DGCL
Under the CBCA, certain The DGCL requires the affirmative
extraordinary corporate actions, vote of a majority of the
such as certain amalgamations, outstanding stock entitled to vote
continuances, sales, leases or thereon to authorize any merger,
exchanges of all or substantially consolidation, dissolution or sale
all of the property of a corporation of substantially all of the assets
other than in the ordinary course of of a corporation, except that, no
business, and other extraordinary authorizing stockholder vote is
corporate actions such as required of a corporation surviving
liquidations, dissolutions and (if a merger if (a) such corporation's
ordered by a court) arrangements, certificate of incorporation is not
are required to be approved by amended in any respect by the
special resolution. A special merger, (b) each share of stock of
resolution is a resolution passed by such corporation outstanding
not less than two-thirds of the immediately prior to the effective
votes cast by the shareholders date of the merger will be an
entitled to vote on the resolution. identical outstanding or treasury
In certain cases, a special share of the surviving corporation
resolution to approve an after the effective date of the
extraordinary corporate action is merger and (c) the number of shares
also required to be approved to be issued in the merger does not
separately by the holders of a class exceed 20% of such corporation's
or series of shares. outstanding common stock immediately
prior to the effective date of the
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, going- issuer bids or self-tenders, going
private transactions and private transactions and
transactions with directors, transactions with directors,
officers, significant shareholders officers, significant shareholders
and other related parties to which officers, significant shareholders
IntelCom is a party will be subject and other related parties to which
to regulation by Canadian provincial Parent is a party will be subject to
securities legislation and regulation under United States
administrative policies of Canadian securities laws, regulations and
securities administrators. policies.
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CUMULATIVE VOTING AND CLASSIFICATION OF BOARD OF DIRECTORS
CBCA DGCL
IntelCom Articles and IntelCom By- The Parent Certificate and the
Laws do not provide for cumulative Parent By-Laws do not provide for
voting in director elections. cumulative voting in director
elections. The Parent Certificate
and the Parent By-Laws provide for a
classified board of directors.
AMENDMENT TO GOVERNING DOCUMENTS
CBCA DGCL
Under the CBCA, any amendment to the The DGCL requires a vote of the
articles generally requires the corporation's board of directors
approval by special resolution, followed by the affirmative vote of
which is a resolution passed by a a majority of the outstanding stock
majority of not less than two-thirds of each class entitled to vote for
of the votes cast by shareholders any amendment to the certificate of
entitled to vote on the resolution. incorporation. If an amendment
Under the CBCA, unless the articles alters the powers, preferences or
or by-laws otherwise provide, the special rights of a particular class
directors may, by resolution, make, or series of stock so as to affect
amend or repeal any by-law that them adversely, that class or series
regulates the business or affairs of shall be given the power to vote as
a corporation. Where the directors a class notwithstanding the absence
make, amend or repeal a by-law, they of any specifically enumerated power
are required under the CBCA to in the certificate of incorporation.
submit the by-law, amendment or See "The Arrangement--Description of
repeal to the shareholders at the Class A Shares--Voting Rights." The
next meeting of shareholders, and DGCL also states that the power to
the shareholders may confirm, reject adopt, amend or repeal the by-laws
or amend the by-law amendment or of a corporation shall be in the
repeal by an ordinary resolution, stockholders entitled to vote,
which is a resolution passed by a provided that the corporation in its
majority of the votes cast by certificate of incorporation may
shareholders present and entitled to confer such power on the board of
vote on the resolution. directors in addition to the
stockholders. The Parent Certificate
expressly authorizes the board of
directors to adopt, amend or repeal
the Parent By-Laws.
DISSENTERS' RIGHTS
CBCA DGCL
The CBCA provides that shareholders Under the DGCL, holders of shares of
of a CBCA corporation entitled to any class or series have the right,
vote on certain matters are entitled in certain circumstances, to dissent
to exercise dissent rights and to be from a merger or consolidation of
paid the fair value of their shares the corporation by demanding payment
in connection therewith. The CBCA in cash for the shares equal to the
does not distinguish for this fair value (excluding any
purpose between listed and unlisted appreciation or depreciation as a
shares. Such matters include (a) any consequence, or in expectation, of
amalgamation with corporation (other the transaction) of such shares, as
than with certain affiliated determined by agreement with the
corporations); (b) an amendment to corporation or by an independent
the corporation's articles to add, appraiser appointed by a court in an
change or remove any provisions action timely brought by the
restricting the issue, transfer or corporation or the dissenters. The
ownership of shares; (c) an DGCL grants dissenters appraisal
amendment to the corporation's rights only in the case of mergers
articles to add, change or remove or consolidations and not in the
any restriction upon the business or case of a sale or transfer of assets
businesses that the corporation may or a purchase of assets for stock
carry on or upon the powers that regardless of the number
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the corporation may exercise; (d) a of shares being issued. Further, no
continuance under the laws of appraisal rights are available for
another jurisdiction; (e) a sale, shares of any class or series listed
lease or exchange of all or on a national securities exchange or
substantially all of the property of designated as a national market
the corporation other than in the system security on an interdealer
ordinary course of business; (f) a quotation system by The National
court order permitting a shareholder Association of Securities Dealers,
to dissent in connection with an Inc. or held of record by more than
application to the court for an 2,000 stockholders, unless the
order approving an arrangement agreement of merger or consolidation
proposed by the corporation; or (g) converts such shares into anything
certain amendments to the articles other than (a) stock of the
of a corporation which require a surviving corporation, (b) stock of
separate class or series vote, another corporation which is either
provided that a shareholder is not listed on a national securities
entitled to dissent if an amendment exchange or designated as a national
to the articles is effected by a market system security on an
court order approving a interdealer quotation system by The
reorganization or by a court order National Association of Securities
made in connection with an action Dealers, Inc. or held of record by
for an oppression remedy. Under the more than 2,000 stockholders, (c)
CBCA, a shareholder may, in addition cash in lieu of fractional shares,
to exercising dissent rights, seek or (d) some combination of the
an oppression remedy for any act or above. In addition, dissenter's
omission of a corporation which is rights are not available for any
oppressive, unfairly prejudicial to shares of the surviving corporation
or that unfairly disregards a if the merger did not require the
shareholder's interest. vote of the stockholders of the
surviving corporation.
OPPRESSION REMEDY
CBCA DGCL
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
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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).
DERIVATIVE ACTIONS
CBCA DGCL
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 and of, and for the benefit of, the
on behalf of a corporation or any corporation. The DGCL provides that
subsidiary, or to intervene in an a stockholder must aver in the
existing action to which any such complaint that he or she was a
body corporate is a party, for the stockholder of the corporation at
purpose of prosecuting, defending or the time of the transaction of which
discontinuing the action on behalf he or she complains. A stockholder
of the body corporate. Under the may not sue derivatively unless he
CBCA, no action may be brought and or she first makes demand on the
no intervention in an action may be corporation that it bring suit and
made unless the complainant has such demand has been refused, unless
given reasonable notice to the it is shown that such demand would
directors of the corporation or its have been futile.
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.
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SHAREHOLDER CONSENT IN LIEU OF MEETING
CBCA DGCL
Under the CBCA, shareholders action Under the DGCL, unless otherwise
without a meeting may only be taken provided in the certificate of
by written resolution signed by all incorporation, any action required
shareholders who would be entitled to be taken or which may be taken at
to vote thereon at a meeting. an annual or special meeting of
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 action
by written consent; the Parent By-
Laws specifically authorize action
by written consent.
DIRECTOR QUALIFICATIONS
CBCA DGCL
A majority of the directors of a The DGCL does not have any residency
CBCA corporation generally must be requirements.
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.
FIDUCIARY DUTIES OF DIRECTORS
CBCA DGCL
Directors of corporations Under the DGCL, the duty of care
incorporated or organized under the requires that the directors act in
CBCA and the Colorado Act have an informed and deliberative manner
fiduciary obligations to the and to inform themselves, prior to
corporation and its shareholders. making a business decision, of all
Pursuant to these fiduciary material information reasonably
obligations, the directors must act available to them. The duty of
in accordance with the so-called loyalty may be summarized as the
duties of "due care" and "loyalty." duty to act in good faith, not out
of self-interest, and in a manner
which the directors reasonably
believe to be in the best interests
of the stockholders.
Pursuant to section 122 of the 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.
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
CBCA DGCL
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, a directors, officers, employees and
former director or officer or a agents (each an "indemnitee")
person who acts or acted at the against all reasonable expenses
corporation's request as a director (including attorneys' fees) and,
or officer of a body corporate of except in actions initiated by or in
which IntelCom is or was a the right of the corporation,
shareholder or creditor, and his or against all judgments, fines and
her heirs and legal representatives amounts paid in settlement in
(an "Indemnifiable Person"), against actions brought against them, if
all costs, charges and expenses, such indemnitee acted in good faith
including an amount paid to settle and in a manner which he or she
an action or satisfy a judgment, reasonably believed to be in, or not
reasonably incurred by him or her in opposed to, the best interests of
respect of any civil, criminal or the corporation, and in the case of
administrative action or proceeding a criminal proceeding, had no
to which he or she is made a party reasonable cause to believe that his
by reason of being or having been a or her conduct was unlawful. The
director or officer of IntelCom or corporation shall indemnify an
such body corporation, if: (a) he or indemnitee to the extent that he or
she acted honestly and in good faith she is successful on the merits or
with a view to the best interests of otherwise in the defense of any
IntelCom; and (b) in the case of a claim, issue or matter associated
criminal or 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 lawful. permitted by applicable law.
An Indemnifiable Person is entitled
to such indemnity from the The DGCL allows for the advance
corporation if he or she was payment of an indemnitee's expenses
substantially successful on the prior to the final disposition of an
merits in his or her defense of the action, provided that the indemnitee
action or proceeding and fulfilled undertakes to repay any such amount
the conditions set out in (a) and advanced if it is later determined
(b), above. A corporation may, with that the indemnitee is not entitled
the approval of a court, also to indemnification with regard to
indemnify an Indemnifiable Person in the action for which such expenses
respect of an action by or on behalf were advanced. The CBCA does not
of the corporation or such body expressly provide for such advance
corporate to procure a judgment in payment.
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.
DIRECTOR LIABILITY
CBCA DGCL
The CBCA does not permit any The DGCL provides that the charter
limitation of a director's of 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.
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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:
(a) The Dissenting Shareholder withdraws his or her Payment Demand before
IntelCom makes an offer to him or her pursuant to the CBCA;
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(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
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.
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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."
(ART)
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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 (formerly known as Linkatel California,
L.P., a California limited partnership) 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>
FIBER FIBER ROUTE FIBER FIBER STRAND
POPULATION ROUTE MILES UNDER STRAND MILES UNDER
TERRITORY (APPROX.) MILES CONSTRUCTION MILES CONSTRUCTION
--------- ---------- ----- ------------ ------ ------------
<S> <C> <C> <C> <C> <C>
CALIFORNIA
San Francisco............... 3,700,000 77 39 1,011 2,579
Los Angeles................. 3,500,000 30 116 1,101 231
SCE Territory............... 11,200,000 2 1,262 48 19,878
San Diego................... 2,500,000 55 4 2,478 192
COLORADO
Denver...................... 1,600,000 154 1 7,673 48
Colorado Springs............ 400,000 60 -- 4,485 --
Boulder..................... 200,000 83 50 1,967 4,032
OHIO VALLEY
Akron....................... 700,000 32 14 2,249 1,296
Cleveland................... 1,800,000 103 13 5,877 564
Columbus.................... 1,400,000 4 37 294 3,653
Dayton...................... 1,000,000 67 3 2,281 307
Louisville.................. 1,000,000 8 16 752 1,578
Ohio intercity cable........ -- -- 330 -- 7,920
OTHERS
Birmingham.................. 900,000 26 122 1,783 10,896
Charlotte................... 1,200,000 87 57 4,633 4,944
Greensboro/Winston-Salem.... 900,000 -- -- -- --
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 65 -- 1,560 --
</TABLE>
- --------
* The Company is in the process of selling the Melbourne and Phoenix networks.
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
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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 nationwide 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.
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.
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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 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.
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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.
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.
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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,
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
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<PAGE>
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.
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.
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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. An interconnection agreement with Pacific Telesis was signed in March
1996 and with Ameritech in June 1996. Negotiations have begun with GTE for
California and with BellSouth for Tennessee 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 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
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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 recently issued a waiver to the Company
which will allow it to continue to provide these services pending the grant of
a permanent license, for which the Company has applied.
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.
EMPLOYEES
On May 31, 1996, the Company had a total of 1,152 full time employees. There
are 64 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
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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. As part of these settlements, FOTI paid the government's investigative
and other expenses of $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 is
expected to rule on this issue before the end of the 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.
<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)
------- ------- ------- -------- -------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3):
Revenue:
Telecom services....... $ 428 $ 1,061 $ 4,803 $ 14,854 $ 32,330 $ 32,330 $ 12,833 $ 31,148 $ 31,148
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
administrative
expenses............... 3,088 3,921 10,702 30,590 65,022 61,248 27,485 40,239 38,746
Depreciation and
amortization........... 1,282 1,602 3,473 8,198 16,624 14,410 7,107 12,361 11,708
------- ------- ------- -------- -------- --------- -------- -------- ---------
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),
net.................... 7 33 22 (121) (4,999) (39,120) 456 (1,070) (22,970)
------- ------- ------- -------- -------- --------- -------- -------- ---------
Loss before income taxes
and cumulative effect
of change in
accounting............. (4,495) (3,828) (6,161) (23,868) (76,181) (157,228) (23,030) (61,583) (112,768)
Income tax benefit
(expense).............. 112 174 1,552 -- -- -- (11) 4,482 4,482
Cumulative effect of
change in
accounting(2).......... -- -- -- -- -- -- -- (3,453) (3,453)
------- ------- ------- -------- -------- --------- -------- -------- ---------
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
common shareholders.... $(4,383) $(3,654) $(4,609) $(23,868) $(76,648) $(157,695) $(23,041) $(61,581) $(112,766)
======= ======= ======= ======== ======== ========= ======== ======== =========
Loss per common share... $ (0.61) $ (0.42) $ (0.39) $ (1.56) $ (3.25) $ (6.68) $ (1.01) $ (2.42) $ (4.43)
======= ======= ======= ======== ======== ========= ======== ======== =========
Weighted average number
of common shares
outstanding............ 7,184 8,737 11,671 15,342 23,604 $ 23,604 22,746 25,471 25,471
======= ======= ======= ======== ======== ========= ======== ======== =========
OTHER DATA:
EBITDA(4)............... $(3,015) $(1,734) $ (187) $ (7,068) $(30,190) $ (29,754) $(10,182) $(18,720) $ (18,009)
Capital expenditures(5). $ 7,608 $12,599 $20,685 $ 54,921 $ 88,495 $ 86,197 $ 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)
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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 $12.3 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. See "Pro Forma Condensed
Consolidated Financial Statements."
(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. EBITDA 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 under capital leases and
through the issuance of debt 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
(Footnote continues on the following page)
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$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 $158.3 million and $114.2 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 is
in the process of selling 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.
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
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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,
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the 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 is in the process of selling, 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 is
in the process of selling 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>
SIX MONTHS ENDED MARCH
YEARS ENDED SEPTEMBER 30, 31,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996(1)
------------ ------------- ------------- ------------- -------------
$ % $ % $ % $ % $ %
------- --- -------- --- -------- --- -------- --- -------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services....... $ 4,803 17 $ 14,854 25 $ 32,330 29 $ 12,833 25 $ 31,148 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 84 -- -- --
------- --- -------- --- -------- --- -------- --- -------- ---
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 reve-
nue................... 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 competition in this
market and a lack of new technology which potentially could render the
Company's leased satellite facilities obsolete.
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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 of joint venture. Share of losses of 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.
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.
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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, 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.
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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 of 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.
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
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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 of joint venture. Using the equity accounting method, the
Company's share of losses in 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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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 FISCAL 1995 FISCAL 1996
---------------------------------- ------------------------------------- ------------------
1ST 2ND 3RD 4TH LST 2ND 3RD 4TH 1ST(1) 2ND
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Telecom services...... $ 1,973 $ 2,970 $ 4,780 $ 5,131 $ 5,795 $ 7,039 $ 9,173 $ 10,323 $ 13,513 $ 17,635
Network services...... 6,730 7,543 8,616 13,130 15,293 13,496 14,061 15,928 15,718 13,973
Satellite services.... 1,054 1,095 2,549 3,423 3,546 5,387 5,825 5,744 6,168 4,336
Other................. 45 46 41 (14) -- -- -- -- -- --
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total revenue......... 9,802 11,654 15,986 21,670 24,634 25,922 29,059 31,995 35,399 35,944
Operating loss......... (2,417) (2,186) (4,388) (6,275) (6,664) (10,625) (12,443) (17,082) (15,258) (15,823)
EBITDA................. (1,079) (546) (1,710) (3,733) (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............ (4,058) (4,848) (6,497) (8,465) (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.......... $(4,058) $(4,848) $(6,497) $(8,465) $(9,533) $(13,508) $(15,916) $(37,691) $(34,642) $(26,939)
======= ======= ======= ======= ======= ======== ======== ======== ======== ========
SUPPLEMENTAL PRO FORMA DATA(1):
Telecom services
revenue............... $ 1,981 $ 3,072 $ 4,048 $ 5,294 $ 5,525 $ 6,669 $ 8,835 $ 10,588 $ 13,513 $ 17,635
Total revenue.......... 9,810 11,756 15,254 21,833 24,364 25,552 28,721 32,260 35,399 35,944
EBITDA................. (1,071) (444) (2,442) (3,570) (3,603) (7,219) (8,184) (11,897) (10,339) (8,381)
Net loss attributable
to common
shareholders.......... (4,050) (4,746) (7,229) (8,302) (9,803) (13,878) (16,254) (37,426) (34,642) (26,939)
STATISTICAL DATA(2):
Telecom networks:
Cities served......... 6 7 28 30 30 32 32 32 32 37
Buildings connected:
On-net................ 98 102 211 226 244 251 273 280 304 327
Off-net............... -- -- 398 540 628 777 978 1,095 1,235 1,401
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Total buildings
connected.......... 98 102 609 766 872 1,028 1,251 1,375 1,539 1,728
Customer circuits in
service (VGEs)....... 68,859 87,589 182,120 224,072 259,219 287,167 389,928 430,535 488,403 510,755
Switches operational.. -- -- -- 1 2 6 12 13 13 13
Switched minutes of
use (millions)....... -- -- -- 2 10 32 97 144 235 362
Fiber route miles(3)
Operational........... 178 205 268 323 424 466 579 627 637 780
Under construction.... -- -- -- -- -- -- -- -- -- 1,921
Fiber strand miles(4)
Operational........... 8,316 11,039 13,680 14,959 19,049 21,811 25,264 27,150 28,779 36,310
Under construction.... -- -- -- -- -- -- -- -- -- 52,351
Wireless miles(5)..... -- -- 606 606 606 606 606 568 545 582
</TABLE>
(Accompanying notes are on the following page)
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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 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.
(2) Amounts presented are for three-month periods ended, or as of, the end of
the period presented. 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.
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.
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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 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
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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
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
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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 1,833,334 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. In June 1996, 1,333,334 PGI
warrants were exercised through a cashless exercise in which 909,190
IntelCom common shares were issued.
(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. In June 1996, 520,000 warrants were
exercised through a cashless exercise in which 362,461 IntelCom common
shares were issued.
(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.
(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"). The Company has
notified the holders of the Notes of its intent to redeem the 8%
Convertible Subordinated Notes by July 8, 1996 and the 7% Convertible
Subordinated Notes by July 26, 1996.
(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.
93
<PAGE>
(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.
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 $12.3 million for the excess of the redemption price
of the Redeemable Preferred Stock over the carrying amount at April 30, 1996
and recognized a charge 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 three months 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.
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<PAGE>
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 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 Company has notified the holders
of the Notes of its intent to redeem the 8% Convertible Subordinated Notes by
July 8, 1996 and the 7% Convertible Subordinated Notes by July 26, 1996. 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 net proceeds from
the Private Placement, the funds remaining from the Unit Offering and amounts
expected to be available through vendor financing arrangements will provide
sufficient funds necessary
95
<PAGE>
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.
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 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.
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<PAGE>
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.
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<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
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
98
<PAGE>
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.
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.
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<PAGE>
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 Officers"). The Company does not maintain any long-term
incentive plans and the Company does not grant stock appreciation rights.
100
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
------------------ ------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Shelby Bryan 1995 $30,728 $ -- $ -- 1,550,000
President and Chief
Executive Officer(1)
John D. Field 1995 66,667 110,000 3,000(2) --
Executive Vice Presi-
dent and Secretary(1)
William J. Maxwell 1995 205,475 75,000 6,090(2) 75,000
Executive Vice Presi-
dent--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 Presi-
dent--Network of 1994(4) 105,100 23,375 6,290(2) --
IntelCom and President
of FOTI 1993(5) 134,636(6) 16,978 4,848(2) 30,000
William W. Becker 1995 -- -- 1,328,412(8) 105,000
Former Chairman, Pres-
ident 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 and 1994 121,600 70,000 9,240(2) --
Chief Financial Offi-
cer(9) 1993 94,802 48,000 8,728(10) 75,000
Larry L. Becker 1995 168,102 -- 200,000(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 Company contributions to 401(k) Defined Contribution Plan.
(3) Consists of relocation expenses of $59,814 and Company contributions to
401(k) Defined Contribution Plan of $5,620.
(4)Compensation earned as former Vice President--Mergers and Acquisitions of
ICG.
(5)Compensation earned as former Vice President--Sales and Marketing.
(6)Includes $50,936 in sales commissions.
(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)Consists of Company contribution to an individual life insurance plan.
(11)Consists of severance compensation.
(12)Consists of management services fees of $110,709 and relocation expenses of
$26,871.
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<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides information on option grants during fiscal 1995
to the Named Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
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 $ 7.94 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......... -- $ -- 1,220,000 330,000 $5,871,250 $1,588,125
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.
(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
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<PAGE>
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 an initial 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 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.
103
<PAGE>
REPORT OF COMPENSATION 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
104
<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)
105
<PAGE>
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.
LOGO
(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 effective January 13, 1993, and (ii)
conversion of VSE prices from Canadian dollars to U.S. dollars at the
following rates: April 1, 1991: $1.1885 per Cdn$; and September 30, 1991:
$1.1318 per Cdn$. 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's 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 on September 30, 1995 was $158,293,551. GST's common shares
were traded exclusively on the VSE until March 11, 1994, when its common
shares began trading on the AMEX. GST's 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. ACSI's market capitalization
on September 30, 1995 was $40,971,350.
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<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:
<TABLE>
<CAPTION>
REPORTING PERSON LATE REPORTS
---------------- ------------
<S> <C>
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)
</TABLE>
- --------
(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 $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.
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
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<PAGE>
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 between the
Company and the Becker Interests in 1995 and 1996, International Communications
Inc., an affiliate of William W. Becker, entered into an agreement with the
Company for up to an aggregate of approximately $4.2 million in consulting fees
through December 1999.
As part of the resolution and settlement between the Company and the Becker
Interests, 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.
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.
108
<PAGE>
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.
109
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of June 27, 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.
<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) 15.9%
Suite 200, 4245-97 Street
Edmonton, Alberta, Canada T6E 5Y7
William W. Becker...................................... 4,122,932(3) 14.3%
Director of IntelCom
Box 143, Cayman Islands
British West Indies
Morgan Stanley Group Inc. ............................. 1,782,251(4) 6.2%
1585 Broadway
New York, NY 10036
Worldwide Condominium Developments, Inc. .............. 2,137,934(5) 7.5%
Box 143, Cayman Islands
British West Indies
Montgomery Asset Management, L.P. ..................... 1,790,000 6.3%
600 Montgomery Street
San Francisco, CA 94111
LGT Asset Management, Inc. ............................ 1,687,700 5.9%
80 California Street
San Francisco, CA 94111
Peter Wightman......................................... 1,592,200(6) 5.6%
19 Vectis Court
Southampton, U.K. SO1 7LY
William J. Laggett..................................... 30,000(7) *
Chairman of the Board of Directors of IntelCom
J. Shelby Bryan........................................ 1,222,000(8) 4.1%
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
</TABLE>
(Accompanying notes are on the following page)
<PAGE>
<TABLE>
<CAPTION>
AMOUNT/NATURE OF
BENEFICIAL OWNERSHIP
------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT(1)
------------------------------------ --------- ----------
<S> <C> <C>
William J. Maxwell................................. 173,377(9) *
Executive Vice President--Telecom of IntelCom,
President of ICG Telecom Group, Inc. and
Director of ICG
Marc E. Maassen.................................... 9,624(10) *
Executive Vice President--Network of IntelCom,
President of FOTI and Director of ICG
Robert W. Andrews.................................. 6,313(11) *
President of ICG Satellite Services, Inc.
Harry R. Herbst.................................... 10,000(12) *
Director of IntelCom
Jay E. Ricks....................................... 70,180(13) *
Director of IntelCom
Gregory C.K. Smith................................. 50,000(14) *
Director of IntelCom
Leontis Teryazos................................... 30,000(15) *
Director of IntelCom
All executive officers and directors as a group (12 6,173,679(16) 20.4%
persons)..........................................
</TABLE>
- --------
* Less than 1% of the outstanding IntelCom Common Shares.
(1) Based on 28,383,130 issued and outstanding IntelCom Common Shares on June
27, 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 373,061 IntelCom Common Shares held by Morgan Stanley Group Inc.,
909,190 IntelCom Common Shares held by PGI, an affiliate of Morgan
Stanley, and 500,000 IntelCom Common Shares which may be acquired by PGI
pursuant to the exercise of outstanding PGI Warrants.
(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) 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.
(7) Represents 30,000 IntelCom Common Shares which may be acquired by Mr.
Laggett pursuant to the exercise of outstanding stock options.
(8) 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.
(9) Includes 17,000 IntelCom Common Shares held jointly with Mr. Maxwell's
wife, 1,997 IntelCom Common Shares held by a 401(k) plan, 150,500 IntelCom
Common Shares which may be acquired
(Footnotes continue on the following page)
111
<PAGE>
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.
(10) Represents 8,000 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.
(11) Represents 5,250 IntelCom Common Shares which may be acquired by Mr.
Andrews pursuant to the exercise of outstanding stock options and 1,063
IntelCom Common Shares held by a 401(k) plan.
(12) Represents 10,000 IntelCom Common Shares which may be acquired by Mr.
Herbst pursuant to the exercise of outstanding stock options.
(13) 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.
(14) Represents 50,000 IntelCom Common Shares which may be acquired by Mr.
Smith pursuant to the exercise of outstanding stock options.
(15) Represents 30,000 IntelCom Common Shares which may be acquired by Mr.
Teryazos pursuant to the exercise of outstanding stock options.
(16) As a group, executive officers and directors of the Company beneficially
own 1,929,050 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.
113
<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 has 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 until July
8, 1996 to convert the 8% Convertible Subordinated Notes to IntelCom Common
Shares prior to the Company redeeming the 8% Convertible Subordinated Notes.
Through June 25, 1996, an additional $7,890,000 of the Convertible Subordinated
Notes and $1,578,000 of Interest Notes were converted into 606,919 IntelCom
Common Shares. 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.
The Company has notified the holders of the 7% Convertible Subordinated Notes
of its intent to redeem the 7% Convertible Subordinated Notes, together with
accrued interest. The holders have until July 26, 1996 to convert the 7%
Convertible Subordinated Notes to IntelCom Common Shares prior to the Company
redeeming the 7% Convertible Subordinated Notes.
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.
114
<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.
115
<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, New Jersey 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.
LOGO
John D. Field Secretary
June 28, 1996
Oakville, Ontario
116
<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
connection with business
combinations, 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 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 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 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 acquire 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
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 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 non-related members of the Company's Board of Directors.
The transaction was approved unanimously by the Company's non-related
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 $445,000, 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.
The Company has notified the holders of the 8% Notes of its intent to redeem
the 8% Notes, together with accrued interest. The holders have until July 8,
1996 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. Through June 25, 1996, an additional $7,890,000 of the
subordinated notes and $1,578,000 of interest notes were converted into
606,919 shares of the Company.
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, 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 interest notes have
been included in the subordinated notes.
The Company has notified the holders of the 7% Notes of its intent to redeem
the 7% Notes, together with accrued interest. The holders have until July 26,
1996 to convert the 7% Notes to common shares prior to the Company redeeming
the 7% 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 in conjunction with 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 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.
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 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 are
vested. 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, 130,953 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 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) During the year ended September 30, 1994, the Company granted to the
same debt holder additional warrants to purchase 1,989, 15,260 and 3,665
common shares of the Company 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. An additional 7,725 warrants were 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 an affiliate of the
F-23
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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). In addition,
1,853,334 warrants were exercised in June 1996 through a cashless exercise
in which 1,271,651 IntelCom common shares were issued.
(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 9, 2000.................... 67.7 14.50 67.7 14.50
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
------- -------
5,501.9 5,501.2
======= =======
</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
F-25
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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). In June 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 certain government
contracts has been lifted effective June 4, 1996. As part of these
settlements, FOTI paid the government's investigative and other expenses of
$158,324, of which 49% was paid by the former minority shareholders of FOTI,
resulting in a net cost to FOTI of $80,745.
F-26
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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
F-27
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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.
F-28
<PAGE>
INTELCOM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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
the 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>
PRIVATE
HISTORICAL PLACEMENT PRO FORMA
---------- --------- ---------
(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
-----------------------------------------------------
SALE OF PRIVATE
HISTORICAL TELEPORTS (2) PLACEMENT PRO FORMA
---------- ------------- --------- ---------
(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)
======== ======= ======== =========
Loss per common 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
-----------------------------------------------
SALE OF PRIVATE
HISTORICAL TELEPORTS(2) PLACEMENT PRO FORMA
---------- ------------ --------- ---------
(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)
======== ====== ======== =========
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 includes the effects of 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 Pro Forma adjustments for the sale of the teleports eliminates the
revenue, operating expenses and other income (expense) relating to the
teleport operations 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 AND PRO FORMA ADJUSTMENTS
The Pro Forma 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 $12.3 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.
Pro Forma adjustments for the Private Placement are as follows:
(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 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 historical 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.
F-36
<PAGE>
INTELCOM GROUP INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(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.
(e) The Preferred Stock is net of costs associated with the issuance of the
Preferred Stock which 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
June 28, 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 filed with the Securities and Exchange Commission
on June 26, 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;
(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;
A-1
<PAGE>
(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
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 6.2% 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
A-2
<PAGE>
APPENDIX B
ARRANGEMENT AND SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 27th day of June, 1996.
BETWEEN:
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:
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.
B-1
<PAGE>
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 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 Shares 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;
B-2
<PAGE>
(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 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;
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
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(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 of Directors of IntelCom 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 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 of Directors of IntelCom shall be conclusive and
binding on Parent.
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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 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
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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
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 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.
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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 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.
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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.
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
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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.
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
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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.
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.
/s/ John D. Field
Per: ________________________________
John D. Field
/s/ James D. Grenfell
Per: ________________________________
James D. Grenfell
INTELCOM GROUP INC.
/s/ John D. Field
Per: ________________________________
John D. Field
/s/ James D. Grenfell
Per: ___________________________
James D. Grenfell
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APPENDIX C
Court File No.
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE WEDNESDAY, THE 26TH 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 19, 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.
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
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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
(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, five 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;
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(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;
(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.
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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.
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;
"DEPOSITARY" means Pacific Corporate Trust Company or, in the alternative,
such suitable trust or trusts to be selected by the Applicant IntelCom;
"INTELCOM" means IntelCom Group Inc., one of the Applicants;
"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;
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"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 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 June 28, 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;
(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;
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(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.
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.
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(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 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
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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 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
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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.
(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 holders will sell all of the Class A Shares to be redeemed for a price
per share equal to the Redemption Call Purchase Price.
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(c) For the purpose 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.
(c) For the purpose 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
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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.
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.
"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
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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.
"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
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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 Stock, 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 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.
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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.
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 share of 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
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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 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
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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 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").
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
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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.
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.
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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.
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
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(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.
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:
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(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.
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"
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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 2, 1996 at 10:00 a.m. (Toronto time) 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 on 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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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 19, 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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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 Digest. 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
(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.
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(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.
(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).
H-2
<PAGE>
(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.
(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-3
<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 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 June 28,
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 26, 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 26, 1996
- ------------------------
J. Shelby Bryan
Executive Vice President,
/s/ John D. Field Secretary and Director June 26, 1996
- ------------------------
John D. Field
Executive Vice President,
Chief Financial Officer, Treasurer and
/s/ * Director (Principal Financial Officer) June 26, 1996
- ------------------------
James D. Grenfell
Vice President - Corporate Controller
/s/ * (Principal Accounting Officer) June 26, 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>
8.1 Tax Opinion of Stikeman, Elliott.
23 Consent of KPMG Peat Marwick LLP.
<CAPTION>
Item 21(c)
----------
<C> <S> <C>
A Fairness Opinion of Morgan Stanley & Co. Incorporated
dated June 28, 1996.
</TABLE>
<PAGE>
EXHIBIT 8.1
<PAGE>
[LETTERHEAD OF STIKEMAN ELLIOTT APPEARS HERE]
(416) 869-5542
June 28, 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.
This opinion is based upon the current provisions of the Income Tax
Act (Canada) (the "Canadian Tax Act"), the regulations thereunder and our
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.
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
Canadian federal income tax considerations described under the caption
"Income Tax Considerations to Shareholders-Canadian Federal Income Tax
Considerations" to the Registration Statement correctly set forth
the material Canadian income tax considerations relevant to the persons referred
to therein, and based on the assumptions stated therein, arising from and
related to the Arrangement.
<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 23
<PAGE>
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 24, 1996
<PAGE>
OPINION OF MORGAN STANLEY & CO. INCORPORATED
June 28, 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 filed with the Securities and Exchange Commission
on June 26, 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;
1
<PAGE>
IntelCom Group Inc.
June 28, 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
2
<PAGE>
IntelCom Group Inc.
June 28, 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 6.2% 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:_______________________________
3
