FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Commission file Number 1-11965) ICG
COMMUNICATIONS, INC.
(Commission file Number 333-40495)
ICG FUNDING, LLC
(Commission file Number 1-11052) ICG
HOLDINGS (CANADA), INC.
(Commission file Number 33-96540) ICG
HOLDINGS, INC.
(Exact names of Registrants as specified in their charters)
- ---------------------------------------- ---------------------------------------
Delaware 84-1342022
Delaware 84-1434980
Canada Not applicable
Colorado 84-1158866
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
- ---------------------------------------- ---------------------------------------
161 Inverness Drive West,
Englewood, Colorado 80112 Not applicable
161 Inverness Drive West,
Englewood, Colorado 80112 Not applicable
1710-1177 West Hastings Street c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742
161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- --------------------------------------------------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000
Securities registered pursuant to Section 12(b) of the Act:
- --------------------------------------------------------------------------------
Name of each exchange
Title of each class on which registered
- ---------------------------------------- ---------------------------------------
Common Stock, $.01 par value Nasdaq National Market
(44,621,254 shares outstanding on
March 26, 1998)
Not applicable Not applicable
Class A Common Shares, no par value Not applicable
(31,822,756 shares outstanding on
March 26, 1998)
Not applicable Not applicable
- ---------------------------------------- ---------------------------------------
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
Title of class
- --------------------------------------------------------------------------------
Not applicable
Not applicable
Not applicable
Not applicable
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 26, 1998 the aggregate market value of ICG Communications, Inc. Common
Stock held by non-affiliates (using the closing price of $41.75 on March 26,
1998) was approximately $1,862,937,355.
ICG Communications, Inc. owns all of the issued and outstanding common
securities of ICG Funding, LLC.
On March 26, 1998, the aggregate market value of ICG Holdings (Canada), Inc.
Class A Common Shares held by non-affiliates (using the closing price of ICG
Communications, Inc. Common Stock of $41.75 on March 26, 1998), was
approximately $991,145.
ICG Holdings (Canada), Inc. owns all of the issued and outstanding shares of
Common Stock of ICG Holdings, Inc.
<PAGE>
3
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recent Developments . . . . . . . . . . . . . . . . . . . . . . 6
Telecom Services . . . . . . . . . . . . . . . . . . . . . . . 8
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Telecom Services Networks . . . . . . . . . . . . . . . . . . 10
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Network Services . . . . . . . . . . . . . . . . . . . . . . . 16
Satellite Services . . . . . . . . . . . . . . . . . . . . . . 17
Customers And Marketing . . . . . . . . . . . . . . . . . . . . 18
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 27
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 28
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . 54
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . . 55
Executive Officers of ICG . . . . . . . . . . . . . . . . . . . 56
Directors of ICG . . . . . . . . . . . . . . . . . . . . . . . 57
Directors and Executive Officers of ICG Funding,
Holdings-Canada and Holdings. . . . . . . . . . . . . . . . . . 58
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 60
Director Compensation . . . . . . . . . . . . . . . . . . . . . 60
Compensation Committee Interlocks and Insider Participation . . 60
Board Compensation Committee Report on Executive Compensation . 60
Executive Compensation . . . . . . . . . . . . . . . . . . . . 62
Summary Compensation Table. . . . . . . . . . . . . . . . . . 63
Option/SAR Grants in Last Fiscal Year . . . . . . . . . . . . 65
Aggregated Option Exercises in Last Fiscal Year End
Option Values . . . . . . . . . . . . . . . . . . . . . . . . 66
Ten-Year Option/SAR Repricings. . . . . . . . . . . . . . . . 66
Executive Employment Contracts . . . . . . . . . . . . . . . . 68
<PAGE>
4
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 72
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 74
Financial Statements. . . . . . . . . . . . . . . . . . . . . . 74
Report on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 83
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Financial Statement Schedule . . . . . . . . . . . . . . . . . 83
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . S-1
<PAGE>
5
PART I
Unless the context otherwise requires, the term "Company" or"ICG" means the
combined business operations of ICG Communications, Inc. ("ICG") and its
subsidiaries, including ICG Funding, LLC ("ICG Funding"), ICG Holdings (Canada),
Inc. ("Holdings-Canada") and ICG Holdings, Inc. ("Holdings"); the terms "fiscal"
and "fiscal year" refer to ICG's fiscal year ending December 31 for 1997 and
September 30 for years prior to 1997. The Company changed its fiscal year end to
December 31 from September 30, effective January 1, 1997. All dollar amounts are
in U.S. dollars.
ITEM 1. BUSINESS
Overview
The Company is one of the nation's leading integrated communications
providers ("ICPs") of competitive communications services, based on estimates of
the industry's 1997 revenue. ICPs seek to provide an alternative to incumbent
local exchange carriers ("ILECs"), long distance carriers, Internet service
providers ("ISPs") and other communications service providers for a full range
of communications services in the increasingly deregulated telecommunications
industry. Through its competitive local exchange carrier ("CLEC") operations,
the Company operates networks in four regional clusters covering major
metropolitan statistical areas in California, Colorado, Ohio and the Southeast.
The Company also provides a wide range of network systems integration services,
maritime and international satellite transmission services, and subsequent to
January 21, 1998, a variety of Internet connectivity and other value-added
Internet services. As a leading participant in the rapidly growing competitive
local telecommunications industry, the Company has experienced significant
growth, with total revenue increasing from approximately $111.6 million for
fiscal 1995 to approximately $273.4 million for fiscal 1997.
The Federal Telecommunications Act of 1996 (the "Telecommunications Act")
and pro-competitive state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, the Company is now permitted to offer all interstate and
intrastate telephone services, including competitive local dial tone. The
Company is marketing and selling local dial tone services in major metropolitan
areas in the following regions: California, which began service in late January
1997, followed by Ohio in February 1997, Colorado in March 1997 and the
Southeast in May 1997. During fiscal 1997, the Company sold approximately
178,000 local access lines, of which approximately 141,000 were in service as of
December 31, 1997. As a complement to its local exchange service, the Company
has begun marketing bundled service offerings which include long distance,
enhanced telecommunications services and data services. The Company has 19
operating high capacity digital voice switches and 15 data communications
switches, and plans to install additional switches as demand warrants.
In developing its telecommunications service offerings, the Company
continues to invest significant resources to expand its network. This expansion
is being undertaken through a combination of constructing owned facilities,
entering into long-term agreements with other telecommunications carriers,
establishing strategic alliances with utility companies and through mergers and
acquisitions. See "-Recent Developments."
<PAGE>
6
Recent Developments
Merger with NETCOM On-Line Communication Services, Inc. On January 21,
1998, the Company completed a merger with NETCOM On-Line Communication Services,
Inc. ("NETCOM") ("NETCOM Merger"). Located in San Jose, California, NETCOM is a
provider of Internet connectivity and World Wide Web ("Web") site hosting
services and other value-added services. For calendar years 1995, 1996 and 1997,
NETCOM reported revenue of approximately $52.4 million, $120.5 million and
$160.7 million, respectively, and EBITDA losses of approximately $(6.3) million,
$(20.3) million and $(1.7) million, respectively. The Company will account for
the business combination under the pooling of interests method of accounting.
At the effective time of the NETCOM Merger, each outstanding share of
NETCOM common stock, $.01 par value, became automatically convertible into
shares of ICG common stock at an exchange ratio of 0.8628 shares of ICG common
stock per NETCOM common share. As a result of this transaction, the Company
expects to issue an estimated 10.2 million shares of ICG common stock for the
NETCOM common shares outstanding on January 21, 1998. Cash will be paid in lieu
of any fractional shares.
The Company believes that the NETCOM Merger will create a full-service
business communications company providing a single source for a complete range
of voice, data, Internet, Web site hosting and other communications services
over an extensive fiber optic network. Currently, approximately one-half of
NETCOM's customers are located in the Company's existing network territory. It
is anticipated that the NETCOM Merger will enable the combined entity to better
utilize ICG's fiber and frame relay networks by providing NETCOM with extensive
network infrastructure for the on-net transportation of its Internet traffic.
Announcement of New Service Offerings. In March 1998, the Company announced
its plans to offer long distance service via Internet protocol ("IP") technology
at rates as low as 5.9 cents per minute. This service will be offered in 166
cities across the nation, covering 90% of the U.S. long distance market, by the
end of fiscal 1998. ICG and NETCOM will begin to market this service over the
Internet and through its inbound telemarketing center in the second quarter of
1998. The Company also plans to offer by the end of fiscal 1998 competitively
priced high-speed data transmission services via digital subscriber line ("DSL")
technology to all business and end user customers within its existing regional
clusters. DSL technology utilizes the existing twisted copper pair connection to
the business or end user, giving the customer significantly greater bandwidth
when connecting to the Internet.
Acquisition of Communications Buying Group, Inc. On October 17, 1997, the
Company purchased approximately 91% of the outstanding capital stock of
Communications Buying Group, Inc. ("CBG"), an Ohio based local exchange and
centrex reseller (the "CBG Acquisition"). The Company paid total consideration
of approximately $46.5 million, plus the assumption of certain liabilities.
Separately, on October 17, 1997, the Company sold approximately $16.0 million of
common stock, $.01 par value ("Common Stock"), to certain shareholders of CBG.
The Company purchased the remaining approximately 9% interest of CBG on March
24, 1998 for approximately $2.9 million in cash.
<PAGE>
7
CBG focuses its sales and marketing efforts on small to medium-sized
businesses in certain cities in Ohio and provides a one-stop solution for the
local and long distance needs of its customers. For calendar years 1996 and
1997, CBG's revenue was approximately $21.4 million and $33.8 million,
respectively, and EBITDA losses were approximately $(1.0) million and $(3.2)
million, respectively.
The Company believes that the business strategy of CBG is closely aligned
with the Company's business strategy and that it can successfully leverage the
services offered by CBG to enhance the Company's offering of similar services in
its existing Ohio markets, including all those currently served by CBG. As of
December 31, 1997, the acquisition of CBG has more than doubled the Company's
sales presence in Ohio to approximately 91 people. In addition, the Company
believes that its ability to migrate, over time, a portion of CBG's existing
customer base to its fiber optic facilities offers significant cost savings. The
Company believes that the transaction has significantly furthered its goal of
becoming the dominant alternative to the ILEC in Ohio.
Network Expansion. The Company continues to expand its network footprint
through several strategic initiatives with utility companies and other
telecommunication carriers. In January 1997, the Company announced an agreement
with a subsidiary of The Southern Company ("Southern") that will permit the
Company to construct a 100-mile fiber optic network in the Atlanta metropolitan
area. In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation for approximately 1,800
miles of fiber optic network and additional broadband capacity in California,
Colorado, Ohio and the Southeast. The Company expects this new capacity will be
used for the transmission of local, long distance and data communications
services in and between the Company's markets.
CSW Strategic Alliance. In January 1997, the Company announced a strategic
alliance with Central and South West Corporation ("CSW") which was formed for
the purpose of developing and marketing telecommunications services in Austin,
Corpus Christi, Dallas, Houston and San Antonio, Texas. The venture entity, a
limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based in
Austin, Texas. CSW holds 100% of the interest in ChoiceCom and the Company has
an option to purchase a 50% interest at any time prior to July 1, 2003.
Subsequent to July 1, 1999, if the Company has not exercised its purchase
option, CSW will have the right to sell, at a price pursuant to the terms of the
limited partnership agreement, either 51% or 100% of the partnership interest in
ChoiceCom to the Company. CSW and the Company each have two representatives on
the Management Committee of the general partner of ChoiceCom. ChoiceCom is
currently offering local exchange, long distance and long haul services in
Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and other
selected areas of Texas and may offer these services as well as data
communications and other services in Arkansas, Louisiana and Oklahoma.
Financings. In March 1997, the Company raised net proceeds of $192.4
million from the sale of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8%
Notes") of Holdings and 14% Exchangeable Preferred Stock Mandatorily Redeemable
2008 (the "14% Preferred Stock") of Holdings. Cash interest on the 11 5/8% Notes
accrues at 11 5/8% per annum beginning March 15, 2002 and is payable each March
15 and September 15, commencing September 15, 2002. The 14% Preferred Stock
accrues dividends quarterly at a rate of 14% per annum. Dividends are payable
quarterly in cash or, on or prior to March 15, 2002, at the sole option of
Holdings, in additional shares of 14% Preferred Stock. The 11 5/8% Notes and the
14% Preferred Stock have been registered under the Securities Act.
<PAGE>
8
In September and October 1997, the Company's new wholly owned subsidiary,
ICG Funding, LLC, a Delaware limited liability company, completed a private
placement of $132.25 million of Exchangeable Limited Liability Company Preferred
Securities (the "6 3/4% Preferred Securities"). The 6 3/4% Preferred Securities
are mandatorily redeemable November 15, 2009 at the liquidation preference of
$50.00 per security, plus accrued and unpaid dividends. Dividends on the 6 3/4%
Preferred Securities are cumulative at the rate of 6 3/4% per annum and are
payable in cash through November 15, 2000 and, thereafter, in cash or shares of
Common Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of Common Stock equals or exceeds the
exchange price, for at least 20 days of any consecutive 30-day trading period,
by 170% prior to November 16, 1998; by 160% from November 16, 1998 through
November 15, 1999; and by 150% from November 16, 1999 through November 15, 2000.
The 6 3/4% Preferred Securities and the Common Stock issuable upon exchange of
such securities have been registered under the Securities Act.
In February 1998, the Company raised proceeds, net of underwriting costs,
of approximately $291.6 million from the sale of 10% Senior Discount Notes due
2008 (the "10% Notes") of ICG Services, Inc., a Delaware corporation and newly
formed, wholly owned, unrestricted subsidiary of ICG ("ICG Services"). Cash
interest on the 10% Notes accrues at 10% per annum beginning February 15, 2003
and is payable each February 15 and August 15, commencing August 15, 2003. The
10% Notes will be redeemable at the option of ICG Services, in whole or in part,
on or after February 15, 2003. ICG Services is obligated to register the 10%
Notes under the Securities Act.
ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment,
Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG
Equipment"). Holdings' subsidiaries intend to enter into arrangements with ICG
Equipment to purchase or lease telecommunications equipment, software and
capacity and related services. The equipment and services provided to Holdings'
subsidiaries will be utilized to upgrade and expand its network infrastructure
to take full advantage of the opportunities and cost savings available as a
result of the acquisitions made by ICG Services. Any such arrangements will be
on an arm's length basis and on comparable terms that Holdings' subsidiaries
would be able to obtain from a third party.
Telecom Services
The Company operates local exchange networks in the following markets
within its four regional clusters: California (Sacramento, San Diego and
portions of the Los Angeles and San Francisco metropolitan areas); Colorado
(Denver, Colorado Springs and Boulder); Ohio (Akron, Cleveland, Columbus, and
Dayton) and the Southeast (Birmingham, Charlotte, Louisville, and Nashville).
The Company plans to build a network in Atlanta, Georgia in conjunction with
Southern. Through its strategic alliance with CSW, the Company is offering
services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas and
other selected areas of Texas, and may offer services in Arkansas, Louisiana and
Oklahoma in the future. See "-Recent Developments." The Company will continue to
expand its network through construction, leased facilities and strategic
alliances and through acquisitions. The Company's operating networks have grown
from 627 fiber route miles at the end of fiscal 1995 to 3,043 fiber route miles
as of December 31, 1997. Telecom Services revenue has increased from
approximately $32.3 million for fiscal 1995 to approximately $177.7 million for
fiscal 1997.
<PAGE>
9
The Company's new subsidiary, NETCOM, is a leading provider of high quality
Internet solutions to individuals and small and medium-sized businesses in the
United States and also provides the same high quality Internet solutions in
Canada and the United Kingdom. NETCOM offers a broad spectrum of Internet
solutions designed to enhance customer productivity through the integration and
application of technologies by providing a comprehensive software platform to
interface with the Web, premium quality Internet access and support services and
on-line tools to automate Web site creation and development. These offerings
have led to significant growth, with revenue increasing from approximately $2.4
million for 1993 to approximately $160.7 million for the calendar year ended
December 31, 1997. In January 1997, NETCOM announced plans to migrate its
customer focus away from high volume, low margin consumer customers to higher
margin products for small and medium-sized business customers.
Strategy
The Company's objective is to be a premier provider of high quality
communications services to its targeted business, carrier and end user
customers. The key elements of this strategy are:
Increase Revenue and Margins through Bundled Services to Business End
Users. The Company believes that customers are increasingly demanding a broad,
full service approach to providing telecommunications services. By offering
integrated technology-based communications solutions, management believes the
Company will be better able to capture business from
telecommunications-intensive commercial accounts. To this end, the Company plans
to complement its competitive local and long distance telecommunications
offerings with its recently announced IP telephony service and the Internet
products developed by NETCOM, and cross-market these combined products through
ICG's direct sales force. Additionally, NETCOM intends to market ICG's
telecommunications products to its small and medium-sized business customer base
over the Internet. Management believes a targeted business end user strategy can
better leverage ICG's network footprint and telecommunications investment.
<PAGE>
10
Concentrate Networks in Regional Clusters. The Company believes that by
focusing on regional clusters it will be able to more effectively service its
customers' needs and efficiently market, operate and control its networks and
expanded service offerings. As a result, the Company has concentrated its
networks in regional clusters serving major metropolitan areas in California,
Colorado, Ohio and the Southeast. The Company is expanding its network footprint
to include certain cities in Texas through a strategic alliance with CSW and
intends to further expand its network footprint to include Atlanta, Georgia
through its agreement with Southern. In addition, NETCOM may be able to realize
extensive cost synergies by focusing future growth within ICG's existing
footprint. For example, a significant portion of NETCOM's customer base is
located in California. To the extent feasible, NETCOM will route its Internet
traffic over ICG's California network. NETCOM plans to continue to operate and
grow its business in the United States outside of ICG's network footprint and in
Canada and the United Kingdom. See "-Recent Developments."
Network Connectivity. Significant amounts of telecommunications traffic are
carried within the Company's regional clusters. Management believes that
integrating these clusters through the connection of individual networks will
provide significant benefits, including cost advantages. These cost advantages
would result from the Company's ability to carry regional traffic on-net,
thereby improving operating margins by reducing payments to other carriers for
the use of their facilities. Accordingly, the Company is in the process of
connecting networks within each of its California, Colorado and Ohio clusters
with intrastate fiber optic cable.
Alliances with Utilities. The Company has established strategic alliances
with utility companies to take advantage of their existing fiber optic
infrastructures and customer relationships. This approach affords the Company
the opportunity to license or lease fiber optic facilities on a long-term basis,
which is more timely and cost effective than constructing facilities. In
addition, utilities possess conduit and other facilities that enable the Company
to more easily install additional fiber to extend existing networks in a given
market. Finally, management expects these strategic alliances to combine the
Company's expertise in providing high quality telecommunications services with
the utility's name recognition and customer relationships in marketing
telecommunications products and services to the utility's customer base.
Integrate Investments and Expand. The Company expects to acquire
telecommunications, Internet and related businesses that complement ICG's
business strategy to offer a wide array of telecommunications, Internet and
related services, primarily to business customers. Acquisition targets could
include U.S. and foreign CLECs, ISPs and long distance companies, among others.
The Company intends to make future acquisitions primarily through the use of
Common Stock, cash on hand and the proceeds from securities offerings.
Telecom Services Networks
The Company's networks are generally 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.
<PAGE>
11
The Company's networks are generally configured in redundant synchronous
optical network ("SONET") rings that offer the advantage of uninterrupted
service in the event of a fiber cut or equipment failure, resulting in limited
outages and increased network reliability. The Company generally markets its
services at prices below those charged by the ILEC. Management believes these
factors combine to create a more reliable and cost effective alternative to ILEC
networks and services.
The Company's networks are constructed to access long distance carriers as
well as areas of significant end user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network infrastructure.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation for such
network. Based upon its experience of using ILEC facilities to provide initial
customer service and the Company's agreements to use utilities' existing fiber,
the Company has experienced revenue generation within nine months after
commencing network design. After installing the initial network backbone,
extensions to additional buildings and expansions to other regions of a
metropolitan area are evaluated, based on detailed assessments of market
potential. The Company is currently expanding all of its existing networks to
reduce its reliance on the ILECs and evaluating development of new networks both
inside and outside its existing regional clusters.
The Company's network monitoring center in Denver monitors and manages the
Company's transport networks and provides high-level monitoring of the Company's
local exchange switches. Additionally, the Company contracts with Lucent
Technologies, Inc. for detailed performance monitoring of its local exchange
switches. Centralized electronic monitoring and control of the Company's
networks allows the Company to avoid duplication of this function in each city,
thereby reducing costs.
Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end user-specified termination sites. By contrast,
the special access services provided by the Company and other CLECs involve a
fixed communications link or "pipe," usually between an 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 physically connected to the Company's owned or leased network.
In addition, a switch is required in order for the Company to provide the full
range of local telephone services. The Company is marketing and selling
competitive local dial tone services in California, Colorado, Ohio and the
Southeast. See "-Regulation-State Regulation."
NETCOM owns and operates a data communications network consisting of 17
hubs containing frame relay switches and high-performance routers connecting a
backbone of leased Asynchronous Transfer Mode ("ATM") switches and leased
high-speed dedicated data lines in the United States, Canada and the United
Kingdom. NETCOM maintains 247 POPs in the United States and Canada and also
offers virtual local access numbers in Canada and the United Kingdom. The design
and architecture of the physical network permits NETCOM to offer highly
flexible, reliable high-speed services to its customers and support significant
subscriber growth. The NETCOM infrastructure is monitored by network operations
centers ("NOCs") in San Jose, California, Dallas, Texas, Toronto, Canada and
London, England.
<PAGE>
12
Services
The Company's competitive local exchange services include local dial tone,
long distance, data services, special access and interstate and intrastate
switched access services. Competitive local dial tone services consist of basic
local exchange lines and trunks for business, related line features (such as
voice mail, Direct Inward Dialing (DID), hunting and custom calling features),
local calling, and intraLATA, also called local toll, calling. The Company
believes that having a full complement of communications services, including
local and long distance services, will strengthen its overall market position
and help the Company to better penetrate the local exchange marketplace. The
Company has also developed long distance services, including calling and debit
cards, to complement its local exchange services family of products. The Company
recently announced plans to offer a bundled service of local, long distance and
data services, including Internet services, delivered over a T-1 connection.
This service will be offered primarily to ICG's larger business customers.
The Company announced its initial offering of long distance services in May
1997. The target customers for such services are the Company's existing and end
user customers. The Company's existing switches have facilitated the entry into
this business and reduced its cost of obtaining long distance transmission
capacity. However, the Company has been reliant on other carriers to provide
transmission and termination of long distance traffic. Therefore, the Company
has entered into transmission agreements, which typically provide for
transmission on a per minute basis, with long distance carriers to fulfill such
needs. To reduce its cost of services, the Company may lease point-to-point
circuits on a monthly or longer term fixed cost basis where it anticipates high
traffic volume.
The Company recently announced its plans to offer IP long distance services
priced as low as 5.9 cents per minute in 166 markets by the end of 1998. The
Company plans to carry the IP traffic over NETCOM's data backbone network and
terminate a large portion of the traffic via NETCOM's 238 POPs in the United
States, thereby eliminating terminating access charges. If a call cannot be
terminated over ICG's facilities, it will be billed at a rate of 7.6 cents per
minute. The Company expects to begin offering this service during the second
quarter of 1998, initially targeting NETCOM's existing customer base of over
500,000 customers. The Company plans to market this product via the Internet and
through the Company's inbound telemarketing center.
The Company also announced that it will offer DSL services with speeds
ranging from 144kbps to 9mbps to offer its customers high-speed Internet access.
The Company plans to lease unbundled local loops from the ILEC in the respective
market and install its DSL equipment in the ILEC central office and the
customer's premises. This service will be offered primarily to the small
business and work-at-home markets, which historically have been a large
percentage of NETCOM's customer base.
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13
To complement its telecommunications services offerings, the Company
announced its initial offering of data communications services in California,
Colorado and Ohio during the first quarter of 1997. These services targeted the
Company's existing customers and other businesses with substantial data
communications requirements. Although to date, the Company has not generated
substantial revenue from such services, the Company expects that its new service
offerings, including its IP telephony strategy and DSL technology, and NETCOM's
extensive experience providing data transmission services, will allow the
Company to significantly enhance its presence within the data communications
market during fiscal 1998.
Private line services are generally used to connect the separate locations
of a single business outside of local access and transport area ("LATA").
Special access services are generally used to connect end user customers to a
long distance telephone carrier's facilities, to connect long distance carrier's
facilities to the local telephone company's central offices, and to connect
different facilities of the same long distance carrier or facilities of
different long distance carriers all within the same local calling area or LATA.
As part of its initial "carrier's carrier" strategy, the Company targeted the
transport between long distance company facilities and the local telephone
company central offices, and, for high volume customers, between the long
distance company and the end user customer's office. In order to leverage its
significant network investment, the Company has markets its services directly to
end user business customers.
The Company's interstate and intrastate switched access services include
the transport and switching of calls between the long distance carrier's
facilities and either the local telephone company central offices or end users.
By performing the switching services, the Company can reduce the long distance
carriers' local access costs, which constitute their major operating expense.
The Company has experienced negative operating margins from the provision of
wholesale switched services because it relies on ILEC networks to terminate and
originate customers' switched traffic. The Company has recently raised prices on
its wholesale switched services product in order to improve margins and is
de-emphasizing its wholesale switched services to free up switch port capacity
for its higher margin dial tone product. In addition, as the Company provides a
greater portion of the local segment of a call, the Company expects to
experience improved operating margins.
The Company's Signaling System 7 ("SS7") services provide signaling
connections between long distance and local exchange carriers, and between long
distance carriers' networks. SS7, known as look-ahead routing, is used by local
exchange companies, long distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up, resulting in a
more efficient use of network resources. SS7 is now the standard method for
telecommunications signaling worldwide. The Company has deployed signal transfer
points ("STPs") throughout its networks to efficiently route SS7 data across the
United States. SS7 is also the enabling technology for advanced intelligence
network platforms, a set of services and signaling options that carriers can use
to create new services or customer options. Carriers purchase connections into
the Company's SS7 network, and also purchase connections to other carriers
(local and long distance) on a monthly recurring basis.
<PAGE>
14
In August 1996, the Company acquired the SS7 business of Pace Network
Services, Inc., a division of Pace Alternative Communications, Inc. The Company
has also developed a nationwide SS7 service with Southern New England Telephone
("SNET"), one of the nation's ten largest local exchange carriers. The Company
believes that, together with SNET, it is one of the largest independent
suppliers of SS7 services. The Company's STPs are integrated with two SNET
"gateway" STPs in Connecticut.
NETCOM. Through its merger with NETCOM, the Company currently provides
Internet solutions principally through dial-up, direct access and Web site
hosting services. Direct access and Web site hosting services provide higher
revenue per customer and higher margins than dial-up services. NETCOM also
receives revenue from value-added services such as security, anti-virus and data
storage.
Dial-Up Services. NETCOM's dial-up customers receive an integrated Internet
solution consisting of high quality access, software and 24 hours a day, seven
days a week, automated customer support. NETCOM dial-up customers connect
directly to the Internet via NETCOM's network which provides high speed,
reliable access. All NETCOM dial-up accounts allow access to the Internet's
resources, including E-mail, the Web and USENET newsgroups. In addition, NETCOM
dial-up customers can receive a one megabyte ("Mb") personal Web page, access to
a daily customized newspage via E-mail, and access to on-line financial,
corporate and market information and analytical tools. Enhanced services
available to dial-up customers include features such as additional E-mail
addresses, enhanced support offerings, software and virus updates, access to
research libraries, domain name service, monthly back-up, 10 Mb data storage,
750 Mb per month data transfer capability and premium service and technology
support.
NETCOM customers can quickly register using NETCOMplete software, available
for both Windows and Macintosh platforms via compact disk, and set up a NETCOM
account by following a sequence of simple, on-screen steps. All of the software
needed to connect and access the Internet is automatically installed and
configured, eliminating the need for complex set up procedures. NETCOMplete also
provides an easy-to-use interface as well as software from leading industry
participants, bookmark managers, off-line browsers and additional software that
enhances a customer's Internet experience. Revenue from dial-up services
increased from $102.9 million for the calendar year ended December 31, 1996 to
$133.7 million for the calendar year ended December 31, 1997, representing
approximately 85% and 83%, respectively, of total NETCOM revenue for such
periods.
Direct Access Services. NETCOM offers a full suite of high-speed dedicated
Internet connection and service products which provide its small and
medium-sized business customers with direct access to the full range of Internet
applications. These Internet services are offered to businesses over leased
lines at various speeds, including 56 Kbps, T-1 and T-3 levels, depending upon
the customer's needs. Through its direct access product line, NETCOM offers
Internet access services including domain name and Internet protocol address,
router configurations, on-line usage statistics and security consultation. There
are generally no usage charges for any of NETCOM's dedicated customers, and
E-mail service and USENET news feed are provided at no additional charge. Direct
network connection requires the customer to obtain a leased line from ICG or
another local telephone company. NETCOM provides an Internet connection based on
frame relay technology provided by local telephone carriers. Revenue from direct
access services increased from $16.3 million for the calendar year ended
December 31, 1996 to $19.5 million for the calendar year ended December 31,
1997, representing approximately 14% and 12%, respectively, of total NETCOM
revenue for such periods.
<PAGE>
15
Web Site Hosting Services. NETCOM offers Web site hosting services to its
small and medium-sized business customers as well as to individuals. Web site
hosting services include client domain name registration, hosting and site
maintenance. Services provided are fully scalable but would, in a typical
package, include domain name registration, 10 E-mail addresses, access to
NETCOM's on-line business center, CGI scripting (which enables visitors to the
Web site to leave their names and addresses), weekly back-up service, 50 Mb of
data storage, 1,000 Mb per month of data transfers, traffic logs and Web
statistics and premium service and technology support. Revenue from Web site
hosting services increased from $1.3 million for the calendar year ended
December 31, 1996 to $6.3 million for the calendar year ended December 31, 1997,
representing approximately 1% and 4%, respectively, of total NETCOM revenue for
such periods.
Value-Added Services. As part of its dial-up, direct access and Web site
hosting services, NETCOM offers its small and medium-sized business customers
value-added business connectivity solutions package designed to address their
needs of increased security, reliability, access speed and customer service. The
Company believes that businesses are willing to pay premium prices for these
premium services. One such feature is Automatic Reconnect which automatically
re-routes customers' traffic to an alternate Integrated Services Digital Network
("ISDN") line so that in the event of certain kinds of service interruptions
customers may remain connected. In order to provide a secure, private connection
among multiple specific locations, NETCOM's SecureConnect product performs a
security assessment and then implements, monitors and troubleshoots a flexible
security solution to provide secure communication between central offices,
branch offices and off-site employees without jeopardizing the integrity of the
internal network. Another value-added service NETCOM offers is 24 hours a day,
seven days a week support. For larger customers, NETCOM offers flexible,
high-speed dedicated line service that is scalable to grow as traffic increases.
Other value-added services offered include password protected Web sites, usage
statistics, anti-virus software and additional domain names.
Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom") which
operates an 800/888/900 number service bureau and a switch platform in the
United States supplying information providers and commercial accounts with
audiotext and customer support services.
Industry
The Company operates in the local telephone services market as an ICP. The
Company is competing in the local, long distance and data communications
markets, and subsequent to January 21, 1998, the Internet services market, to
provide "full service" to its end user and carrier customers. The Company
believes it can maximize revenue and profit opportunities by leveraging its
extensive network facilities in providing multiple communications services to
its customers.
<PAGE>
16
Local telephone service competition was made possible by the
Telecommunications Act and by deregulatory actions at the state level. Prior to
passage of the Telecommunications Act, firms like the Company were generally
confined to providing private line and special access services. These firms,
including the Company, installed fiber optic cable connecting long distance
telephone carriers' POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government entities) with
long distance carrier POPs. The greater capacity and economies of scale inherent
in fiber optic cable enabled competitive access providers to offer customers
less expensive and higher quality special access and private line services than
the ILECs.
The Telecommunications Act, subsequent FCC decisions and many state
legislative and regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Due to these
regulatory changes, CLECs are now legally able to offer all communications
services, including local dial tone and all interstate and intrastate switched
services, effectively opening up the local telephone market to full competition.
Because of these changes in state and federal regulations, CLECs have expanded
their services from providing competitive access and private line services to
providing all local exchange services to become true competitors to the ILECs.
See "-Regulation."
The Internet access services market is one of the fastest growing segments
of the telecommunications services market. According to industry research
analysts, the market for consumer and business Internet connectivity and
enhanced services exceeded $3 billion in 1996, and is estimated to reach $18
billion in revenue by the year 2000, reflecting a compounded annual growth rate
of approximately 50%. Business connectivity and value-added services are
estimated to represent in excess of 50% of the overall market. The use of the
Internet by small and medium-sized businesses in particular is expected to grow
substantially from its current low levels of market penetration.
ISPs provide customers with a variety of services to meet their
Internet-related needs. Internet services include the following categories: (i)
access services (dial-up, direct access and Web site hosting); (ii) value-added
services (security services, anti-virus and data storage); and (iii) content
services (information creation, aggregation and delivery). Some ISPs offer all
of these services while others specialize in only one or two. As the market
continues to segment in these three areas, there are opportunities for both the
specialists who can provide superior service in one area, as well as
full-service providers who can bundle services and offer discounts. There were
over 4,300 ISPs in the United States and Canada as of October 31, 1997 compared
to just over 3,000 as of October 31, 1996. There have been some large
acquisitions of ISPs as CLECs and others attempt to enter the industry. Because
of low barriers to entry, there are local and regional ISPs entering the market,
which has caused the level of competition to intensify.
The availability of an expansive variety of compelling business and
consumer applications over the Internet has attracted a large number of consumer
and business users. The total number of connections to ISP networks, according
to International Data Corporation, was 17 million as of November 1997, and is
predicted to reach over 30 million by the year 2000. Market trends contributing
to the overall growth in connectivity include advancements in technologies
required to navigate the Internet, the availability of Internet connectivity,
and the rich consumer and business content available. The Company believes that
ongoing development of access to and applications of the Internet will continue
to attract a valuable consumer audience for businesses.
Network Services
Through the Company's wholly owned subsidiary, ICG Fiber Optic
Technologies, Inc. ("FOTI"), the Company supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users, including
Fortune 1000 firms and other large businesses and telecommunications companies.
Revenue from Network Services was approximately $65.6 million for fiscal 1997.
<PAGE>
17
The Company provides network infrastructures, systems and support services,
including the design, engineering and installation of local and wide area
networks, ("LANs/WANs") for its customers. These networks (within end user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
environments. The Company also provides professional network support services.
These services include network move, add and change services and ongoing
maintenance and support services. Network Services revenue is expected to
constitute a smaller portion of the Company's future revenue as Telecom Services
revenue increases.
The Company offers these network integration and support services through
offices located within four regions. The regional headquarters are located in
Dallas, Denver, Portland (Oregon) and San Francisco.
Satellite Services
The Company's Satellite Services operations provide satellite voice and
data services to major cruise lines, commercial shipping vessels, yachts, the
U.S. Navy and offshore oil platforms. The Company also owns a teleport facility
which provides international voice and data transmission services. Revenue for
Satellite Services operations was approximately $30.0 million for fiscal 1997.
The Company intends to dispose of its Satellite Services operations to better
focus its efforts on its core Telecom services unit, although it has not entered
into a formal arrangement for such disposition.
MTN. In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") which purchased the assets of
a business providing digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing
an experimental radio frequency license issued by the FCC. MTN provides private
communications networks to various cruise lines allowing for the transmission of
data communications and allowing passengers to make calls from their cabins to
anywhere in the world. MTN additionally provides its communications services to
seismic vessels, to commercial shipping vessels and to the U.S. Navy in
conjunction with a major long distance provider, which serves as the long
distance carrier, while MTN provides the shipboard communications equipment. The
Company believes that the radio spectrum employed under its experimental license
and a recent grant of Special Temporary Authority ("STA"), which uses C-band
radio frequencies, enables it to provide a higher quality maritime service than
is available through the radio frequencies currently allocated to other maritime
service providers.
<PAGE>
18
In April 1996, the FCC issued a waiver allowing MTN to apply for a
permanent FCC license to utilize the same C-band frequencies as are being used
under the experimental license. MTN's application is pending. The Company's
experimental license was renewed for an additional two-year period on November
21, 1997. Additionally, in January 1997, the FCC granted an STA which enables
MTN to conduct operations as proposed in the pending application for a permanent
license, for six-month periods. MTN filed for six-month renewals for the STA on
July 25, 1997 and January 27, 1998 and the Company has received verbal grants of
the six-month extensions. There can be no assurance that the Company will be
granted a permanent license, that the experimental license and STA currently
being used will continue to be renewed for future terms or that any license
granted by the FCC will not require substantial payments from the Company. See
"-Regulation."
MCN. In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN") (formally Maritime Cellular TeleNetwork,
Inc.), a Florida-based provider of cellular and satellite communications for
commercial ships, private vessels 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 and smaller ships. In April 1997,
the Company received the remaining 10% equity interest in MCN as a partial
consideration for the sale of another of its subsidiaries.
Nova-Net. In May 1994, the Company acquired Nova-Net Communications, Inc.
("Nova-Net"), which provides private data networks utilizing very small aperture
terminals ("VSATs") and specializes in data collection and in monitoring and
control of customer production and transmission facilities in various
industries, including oil and gas, electric and water utilities and
environmental monitoring industries. Nova-Net designs, builds and manages
private data networks that enable a variety of companies to transmit critical
sensor and flow readings to key monitoring points from multiple locations.
Nova-Net manages networks 24 hours a day, seven days a week through its network
control center in Englewood, Colorado.
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, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in 1996.
Customers And Marketing
The Company's primary marketing strategies for Telecom Services are to
offer a broad range of local and long distance communications services,
including data communications, to the Company's business customers at
cost-effective rates. Wholesale customers typically re-market the Company's
services to the retailer's end user, under the retailer's brand name. The
Company markets its services in regional clusters, which it believes is the most
effective and efficient way to penetrate its markets.
<PAGE>
19
The Company markets its Telecom Services products through direct sales to
end users and wholesale accounts, and direct mail, to a limited extent. Telecom
Services revenue from major long distance carriers and resellers constituted
approximately 78%, 71%, 69% and 64% of the Company's Telecom Services revenue in
fiscal 1995 and 1996, the three-month period ended December 31, 1996 and fiscal
1997, respectively. The balance of the Company's Telecom Services revenue was
derived from end users. The Company anticipates revenue from end users will
increase in the future as it continues to expand its bundled service offerings,
increases its sales and marketing teams and focuses more on the end user segment
of the market. In support of this strategy, the Company has substantially
increased its direct sales and marketing staff. The Company's sales force has
grown from 143 people at December 31, 1996 to approximately 356 people
(including sales management, technical sales support and administrative support)
at December 31, 1997. Telecom service agreements with its customers typically
provide for terms of one to five years, fixed prices and early termination
penalties.
The Company has telecommunications sales offices in: Irvine, Los Angeles,
Oakland, Sacramento and San Diego, California; Denver and Colorado Springs,
Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama; Louisville,
Kentucky; Charlotte, North Carolina; and Nashville, Tennessee. The Company's
marketing staff is located in Denver, Colorado.
NETCOM's primary focus is on providing high quality Internet solutions to
individuals and to small and medium-sized businesses. In order to achieve this
objective, NETCOM engages in marketing and advertising activities, alliances
with key strategic partners, seminars in targeted regional markets, and
distribution via both direct and indirect channels. NETCOM's current marketing
efforts emphasize its strategy of focusing on providing premium services to
businesses and individuals through integrated product offerings. The campaign
incorporates the theme of productivity and efficiency and includes an emphasis
on the full range of NETCOM solutions. NETCOM's current marketing and
distribution channels include original equipment manufacturer arrangements,
agreements with value-added resellers, retail distribution, direct marketing
efforts, including trade shows and telesales, and the Web.
The Company markets its network systems integration products and services
through a direct sales force located in the Rocky Mountains, Pacific Northwest,
Texas and California regions. The Company also has entered into resale
agreements with manufacturers of network integration products and services.
The Company offers satellite private line transmission services from its
teleport to business customers that can benefit from the Company's international
and domestic transmission capabilities. The Company also markets voice and data
communications to the maritime industry, including cruise ships, U.S. Navy
vessels, commercial vessels, private yachts, offshore oil platforms and mobile
land-based units.
Competition
The Company operates in an increasingly competitive environment dominated
by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE
which are among the Company's current competitors. Also included among the
Company's current competitors are other ILECs, other CLECs, 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 (using similar or different
technologies) include cable television companies, utilities, ILECs outside their
current local service areas, and the local access operations of long distance
carriers. Consolidation of telecommunications companies, including mergers
<PAGE>
20
between certain of the RBOCs, and the formation of strategic alliances within
the telecommunications industry, as well as the development of new technologies,
could give rise to increased competition. One of the primary purposes of the
Telecommunications Act is to promote competition, particularly in the local
telephone market. Since enactment of the Telecommunications Act, several
telecommunications companies have indicated their intention to aggressively
expand their ability to address many segments of the telecommunications
industry, including segments in which the Company participates and expects to
participate. For example, AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI"),
Time Warner Communications, Inc., Texas Utilities Company and other large
companies are entering the local markets, as competitors of the Company. This
may result in more participants than can ultimately be successful in a given
market.
Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed and availability. The Company believes that its expertise in
developing and operating highly reliable, advanced digital networks which offer
substantial transmission capacity at competitive prices enables the Company to
compete effectively against the ILECs and other CLECs.
In every market in which the Company operates telecom service networks, the
ILECs (which are the historical monopoly providers of local telephone services)
are the primary competitors. The ILECs have long-standing relationships with
their customers and provide those customers with various transmission and
switching services. The ILECs also have the potential to subsidize access and
switched services with revenue from a variety of businesses and historically
have benefited from certain state and federal regulations that have favored the
ILECs over the Company. In certain markets where the Company operates, other
CLECs also operate or have announced plans to enter the market. Some of those
CLECs are affiliated with major long distance companies. Current competitors
also include network systems integration services providers, wireless
telecommunications providers and private networks built by large end users.
Additional competition may emerge from cable television operators and electric
utilities. Many of the Company's actual and potential competitors have greater
financial, technical and marketing resources than the Company.
<PAGE>
21
The Company's networks compete most directly with the RBOCs and GTE. In
general, the provision of interstate access services by the RBOCs and GTE,
including the rates charged for such services, is regulated by the FCC, and the
provision of intrastate access and local services, including the rates charged
for such services, is regulated by the individual state regulatory commissions.
See "-Regulation." In the past, 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 FCC regulatory approval for price
reductions (beyond certain parameters) still must be obtained, the FCC has
allowed all recently proposed access reductions to become effective and has
granted the RBOCs flexibility in pricing their interstate access services on a
central office by central office basis. This pricing flexibility resulted in
certain RBOCs lowering their prices in high density zones, the probable arena of
competition with the Company. In addition, the FCC has granted waivers of its
access charge pricing rules to the RBOCs to allow them to further reduce certain
access prices. In May 1997, the FCC released a decision amending and reforming
many of its access charge rules and sought further comment on additional issues.
In addition, the FCC released a separate decision in May 1997 reforming its
rules on universal service subsidies pursuant to the requirements of the
Telecommunications Act. As a whole, the FCC's decision reforming the access
charge rules is not likely to have a material adverse impact on the Company's
access services offerings, because the decision required relatively small
decreases in total access prices charged by the ILECs. The major impact of the
FCC's decision was to shift access cost recovery by the ILECs to flat-based
charges from usage-sensitive (minute-of-use) charges. The continued lowering of
access rates and 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 access rates, there would be downward pressure
on certain special access and switched access rates charged by CLECs, which
pressure may adversely affect the Company's profitability. See "-Regulation." In
addition, the Telecommunications Act and its implementation by the states and
the FCC allows the RBOCs to seek permission to provide a broader range of
services and likely will enable the RBOCs and GTE to more effectively compete
against long distance carriers, which are the Company's primary customers for
telecom services.
In addition, the long distance and data transmission businesses are
extremely competitive and prices have declined substantially in recent years and
are expected to continue to decline.
Network Services. The bases of competition in the network services market
are primarily technological capability and experience, value-added services and
price. In this market, the Company competes with a variety of local and regional
system integrators.
Satellite Services. In the delivery of domestic and international satellite
services, the Company competes with other full service teleports in the
northeast region of the United States. The bases of competition are primarily
reliability, price and transmission quality. Most of the Company's satellite
competitors focus on the domestic video market. Competition is expected
principally from a number of domestic and foreign telecommunications carriers,
many of which have substantially greater financial and other resources than the
Company. In the maritime telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications services.
COMSAT has FCC licenses that are similar to MTN's, it owns its own satellites
and it is the sole U.S. point of control for access to Intelsat satellites.
<PAGE>
22
Internet Services. Beginning January 21, 1998, the Company also faces
competition within the Internet services market. The market for Internet access
and related services is highly competitive. There are no substantial barriers to
entry and the Company anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television,
direct broadcast satellite, wireless communications providers, and on-line
service providers.
Regulation
The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act.
The Telecommunications Act opened the local and long distance markets to
additional competition and changed the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility to some extent for implementing and
enforcing the pro-competitive policies and the provisions for the
Telecommunications Act.
The Telecommunications Act generally requires ILECs to negotiate agreements
to provide interconnection and nondiscriminatory access to their networks on
more favorable terms than were previously available in the past. However, such
new agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the federal courts.
There can be no assurance that the Company will be able to negotiate acceptable
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.
On August 8, 1996, in two separate decisions (the "First Report and Order"
and the "Second Report and Order"), the FCC adopted rules and policies
implementing the local competition provisions of the Telecommunications Act. The
FCC, among other things, adopted national guidelines with respect to the
unbundling of ILECs' network elements, resale of ILEC services, the pricing of
interconnection services and unbundled elements, and other local competition
issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit
Court, and in October 1996 the Eighth Circuit Court stayed the implementation of
many of the rules in the First Report and Order. On July 18, 1997, the Eighth
Circuit Court issued a decision on the First Report and Order which upheld
certain of the FCC's rules and reversed the FCC's rules on other issues,
including the pricing rules. On August 22, 1997, the Eighth Circuit Court issued
its decision on the Second Report and Order, which concluded that the FCC had
exceeded its jurisdiction in issuing certain rules on dialing parity.
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23
Separate petitions for rehearing of the July 18 decision were filed with
the Eighth Circuit Court by a group of interexchange carriers, two groups of
ILECs and a group of CLECs. On October 14, 1997, the Eighth Circuit Court
granted the ILEC petitions for rehearing, and denied the CLEC and IXC petitions.
The Court's decision on rehearing vacated an additional FCC rule that addressed
the ability of new entrants to purchase ILEC network elements at cost-based
rates on a bundled rather than an unbundled basis.
The FCC and other parties filed petitions for certiorari seeking review by
the U.S. Supreme Court of the Eighth Circuit Court's decision, and the U.S.
Supreme Court has granted the petitions for certiorari and agreed to review the
case. It is anticipated that the case will be argued before the U.S. Supreme
Court in the fall of 1998, with a final decision issued in 1999. The Eighth
Circuit Court's ruling remains in effect pending final action by the U.S.
Supreme Court.
On December 31, 1997, the United States District Court for the Northern
District of Texas, in a case brought by SBC Communications, Inc., issued a
decision holding that Sections 271 through 275 of the Telecommunications Act are
unconstitutional. The decision addresses the restrictions contained in Sections
271 through 275 of the Telecommunications Act on the lines of businesses in
which the RBOCs may engage, including establishing the conditions that the RBOCs
must satisfy before they may provide interLATA long distance telecommunications
services in their local telephone service areas. On February 11, 1998, a stay of
the decision was issued by the United States District Court for the Northern
District of Texas, which stay will remain in effect pending appeal of the
decision by the Fifth Circuit Court of Appeals.
Federal Regulation. The Company generally operates as a regulated carrier
with fewer regulatory obligations than the ILECs. The Company must comply with
the requirements of the Telecommunications Act, such as offering service on a
non-discriminatory basis at just and reasonable rates. The FCC treats the
Company as a non-dominant carrier. The FCC has established different levels of
regulation for dominant and non-dominant carriers. Of domestic common carriers,
only GTE and the RBOCs are classified as dominant carriers for the provision of
access services, and all other providers of domestic common carrier services are
classified as non-dominant. Under the FCC's streamlined regulation of
non-dominant carriers, the Company must file tariffs with the FCC for
international services on an ongoing basis. The Company's provision of
international long distance services requires prior authorization by the FCC
pursuant to Section 214 of the Telecommunications Act, which the Company has
obtained. The FCC recently eliminated the requirement that non-dominant
interstate access carriers must file tariffs. The Company is not subject to
price cap or rate of return regulation, nor is it currently required to obtain
FCC authorization for the installation or operation of its fiber optic network
facilities used for services in the United States. The Company may install and
operate non-radio facilities for the transmission of domestic interstate
communications without prior FCC authorization. The Company's use of digital
microwave radio frequencies and satellite earth stations in connection with
certain of its telecommunications services is subject to FCC radio frequency
licensing regulation. See "-Federal Regulation of Microwave and Satellite Radio
Frequencies."
<PAGE>
24
State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide local and other intrastate services. Under the Telecommunications Act,
states cannot effectively 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 quality of services criteria.
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 and can set prices for
interconnection by CLECs with the ILEC networks. The Company's provision of
local dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state regulation. The Company expects that
it will offer more intrastate services as its business and product lines expand.
To provide intrastate service (particularly local dial tone service), the
Company generally must obtain a Certificate of Public Convenience and Necessity
("CPCN") from the state regulatory agency prior to offering service. In most
states, the Company also is required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate, and to
update or amend its tariffs as rates change or new products are added. The
Company may also be subject to various reporting and record-keeping
requirements.
The Company currently holds CPCNs (or their equivalents) from the states of
Alabama, California, Colorado, Florida, Georgia, Indiana, Kentucky, North
Carolina, Ohio, Oklahoma, Tennessee and Texas. The Company has authority to
provide local and intrastate long distance services in each of these states.
Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, often based on a percentage of
gross revenue, in order to provide telecommunications services, although in
certain states including California and Colorado, such fees may be imposed under
current state law. Certain municipalities in Colorado, however, are continuing
to charge franchise fees pending enforcement by the Colorado courts. There is no
assurance that certain cities that do not impose fees will not seek to impose
fees, nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, the ILECs
have been excused from paying such franchise fees or pay fees that are
materially lower than those required to be paid by the Company for access to
public rights of way. However, under the Telecommunications Act, while
municipalities may still regulate use of their streets and rights of way,
municipalities may not prohibit or effectively prohibit any entity from
providing any telecommunications services. In addition, the Telecommunications
Act requires that local governmental authorities treat telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements are terminated prior to their
expiration dates or not renewed, and the Company is forced to remove its fiber
from the streets or abandon its network in place, such termination could have a
material adverse effect on the Company.
<PAGE>
25
Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC
continues to regulate radio frequency use by both private and common carriers
under the Telecommunications Act. Unlike common carriers, private carriers
contract with select customers to provide services tailored to the customer's
specific needs. The FCC does not currently regulate private carriers (other than
their use of radio frequencies) and has preempted the states from regulating
private carriers. The Company offers certain services as a private carrier.
The Company is required to obtain authorization from the FCC for its use of
radio frequencies to provide satellite and wireless services. The Company holds
a number of point-to-point microwave radio licenses that are used to provide
telecommunications services in California. Additionally, the Company holds a
number of satellite earth station licenses in connection with its operation of
satellite-based networks. The Company also provides maritime communications
services pursuant to an experimental license and a grant of a STA. In April
1996, the FCC issued a waiver to the Company which may allow it to obtain a
permanent FCC license to provide these services using the same radio frequencies
currently being used under the experimental license and STA. The Company has
filed an application for a permanent license under the terms of the FCC's waiver
decision, and the application is pending. The STA was granted on January 30,
1997 and enables the Company to conduct operations pursuant to such application
during the FCC's review. Applications for six-month extensions of the STA were
filed on July 25, 1997 and on January 27, 1998 and verbal grants of the
extensions have been issued by the FCC. There can be no assurance that the
Company will be granted a permanent license, that the experimental license and
STA currently being used will continue to be renewed for future terms or that
any license granted by the FCC will not require substantial payments from the
Company.
Regulation of Internet Services. The Company is currently providing
Internet access services through its recently acquired subsidiary, NETCOM, in
part through data transmissions over public telephone lines. These transmissions
are governed by regulatory policies establishing charges and terms for wire-line
communications. Although the Company is not currently subject to direct
regulation by the FCC or any other governmental agency (other than regulations
applicable to businesses generally), due to the increasingly widespread use of
the Internet, it is possible that additional laws and regulations may be adopted
with respect to the Internet, covering issues such as content, user privacy,
pricing, libel, intellectual property protection and infringement, and
technology export and other controls. It also is possible that the Company could
become subject to regulation by the FCC or another regulatory agency as a
provider of basic telecommunications services. The FCC is currently reviewing
its regulatory positions on whether to impose common carrier regulation on the
network transport and communications facilities aspects of an enhanced or
information service package. Such changes in the regulatory structure and
environment affecting the Internet access market, including regulatory changes
that directly or indirectly affect telecommunications costs or increase the
likelihood of competition from the RBOCs or other telecommunications companies,
could have an adverse effect on the Company's business. For example, the FCC is
considering whether ISPs should be required to pay access charges to local
telephone companies for each minute that dial-access users spend connected to
ISPs through telephone company switches, and is also considering whether ISPs
should be required to make monetary contributions to federal universal service
funds. In addition, some telephone companies are seeking similar relief through
state regulatory agencies. Such rules, if adopted at either the federal or state
level, would have a material adverse effect on the Company. The Company cannot
predict the impact, if any that future regulation or regulatory changes may have
on its business.
<PAGE>
26
Certain states have deemed the provision of Internet services to be taxable
and in such states, NETCOM collects such taxes from its customers. Other states
have not yet announced a policy in this regard or have affirmatively decided
that such services are not taxable. If such states retroactively subject the
provision of Internet services to sales tax or if customers are unwilling to pay
sales tax that may be assessed in the future, such events could have a material
adverse effect on the Company.
The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and termination of local traffic to ISPs from customers
of the ILECs, pursuant to various interconnection agreements. These ILECs have
not paid most of the bills they have received from the Company and have disputed
substantially all of these charges, arguing that ISP traffic is not local
traffic as defined by the various agreements and under state and federal laws
and public policies. To date, there have been favorable rulings from 15 states
and public utilities commissions and no unfavorable final rulings by any state
public utilities commission or the FCC that would indicate that calls placed by
end users to ISPs would not qualify as local traffic subject to the payment of
reciprocal compensation. While the Company believes that future regulatory
rulings on this issue will continue to treat such calls as local, there can be
no assurance that such future rulings will continue to be favorable.
Employees
On December 31, 1997, the Company employed a total of 2,219 individuals on
a full time basis. There are 48 employees in the Company's Oregon network
systems integration services office who are represented by collective bargaining
agreements which expire on May 31, 1998 and December 31, 2000. The Company
believes that its relations with its employees are good.
<PAGE>
27
ITEM 2. PROPERTIES
The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in the Denver metropolitan area which
houses a portion of the Company's Telecom Services business. The Company leases
approximately 176,000 square feet of office space for operations located in the
Denver metropolitan area and approximately 262,000 square feet in other areas of
the United States.
As of December 31, 1997, the Company had acquired property for and had
partially constructed its new headquarters in Englewood, Colorado, which is
planned to accommodate most of the Company's Colorado operations. In January
1998, the Company sold the substantially completed building to a third party and
entered into an agreement to lease back the approximately 265,000 square foot
facility under a long-term operating lease.
ITEM 3. LEGAL PROCEEDINGS
On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages, purportedly
on behalf of all minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of
their subsidiaries. This complaint alleges various statutory and common law
claims. The Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these proceedings
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
A putative class action lawsuit was filed on July 15, 1997 in Superior
Court of California, Orange County, alleging unfair business practice and
related causes of action against NETCOM in connection with its offers of free
trial periods and cancellation procedures and claiming damages of at least $10.0
million. The case is in the preliminary stages, the complaint has been answered
and plaintiff has served initial requests for discovery. NETCOM believes it has
meritorious defenses to such claims and intends to vigorously defend the action.
The Federal Trade Commission ("FTC") is conducting an inquiry regarding the
advertising, marketing, subscription and billing practices of NETCOM. NETCOM
believes that it has made reasonable efforts to comply with applicable laws. If
the FTC were to conclude that NETCOM violated any applicable law, it could seek
relief in the form of equitable relief, civil monetary penalties or other
remedies.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
ceased trading on the AMEX at the close of trading on August 2, 1996.
Holdings-Canada Class A Common Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997.
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the Holdings-Canada Class A Common Shares as reported on
the AMEX through August 2, 1996, and the VSE through March 12, 1997, and the
high and low sales prices of the ICG Common Stock as reported on the AMEX from
August 5, 1996 through March 24, 1997 and on the Nasdaq from March 25, 1997
through the date indicated below. The table also sets forth the average of the
monetary exchange rates on the last day of each such relevant fiscal period.
<TABLE>
<CAPTION>
American Stock
Exchange/Nasdaq National Vancouver Exchange
Market (1) Stock Exchange (1) Rate
-------------------------- ------------------------------
High Low High Low (C$/$)
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended September 30, 1996
First Quarter $ 12.75 $ 8.63 C$ - C$ - 1.36
Second Quarter 17.88 10.25 - - 1.36
Third Quarter 27.38 17.13 17.50 17.50 1.36
Fourth Quarter 25.88 18.50 - - 1.36
Three Months Ended December 31, 1996 (2) $ 22.25 $ 14.00 C$ 28.35 C$ 28.35 1.37
Fiscal Year Ended December 31, 1997 (2)
First Quarter $ 18.13 $ 10.38 C$ - C$ - 1.38
Second Quarter 21.13 8.63 N/A N/A N/A
Third Quarter 24.63 17.75 N/A N/A N/A
Fourth Quarter 28.63 19.75 N/A N/A N/A
Fiscal Year Ended December 31, 1998
Through March 26, 1998 $ 43.63 $ 24.25 C$ N/A C$ N/A N/A
(Continued)
</TABLE>
<PAGE>
29
(1) Effective at the close of trading on August 2, 1996, Holdings-Canada's
Class A Common Shares ceased trading on the AMEX and the ICG Common Stock
commenced trading on the AMEX on August 5, 1996. Effective March 25, 1997,
the ICG Common Stock ceased trading on the AMEX and commenced trading on
the Nasdaq. ICG Common Stock has never traded on the VSE. The Class A
Common Shares traded on the VSE through March 12, 1997 and all information
reported on the above table from August 5, 1996 to March 12, 1997 with
respect to the VSE relates only to the Class A Common Shares.
(2) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997.
See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of Common Stock. On March 26, 1998, there were 284
holders of record.
The Company has never declared or paid dividends on the Common Stock and
does not intend to pay cash dividends on the Common Stock in the foreseeable
future. The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. In addition, the payment of any
dividends on the Common Stock is effectively prohibited by the restrictions
contained in the Company's indentures and in the Second Amended and Restated
Articles of Incorporation of Holdings, which prohibits Holdings from making any
material payment to the Company. Certain of the Company's debt facilities
contain covenants which also may restrict the Company's ability to pay cash
dividends.
In September and October 1997, the Company's new wholly owned subsidiary,
ICG Funding, LLC, a Delaware limited liability company, completed a private
placement of $132.25 million of 6 3/4% Preferred Securities. The 6 3/4%
Preferred Securities are mandatorily redeemable November 15, 2009 at the
liquidation preference of $50.00 per security, plus accrued and unpaid
dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the
rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and,
thereafter, in cash or shares of Common Stock at the option of ICG Funding. The
6 3/4% Preferred Securities are exchangeable, at the option of the holder, into
Common Stock at an exchange price of $24.025 per share, subject to adjustment.
ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any
time on or after November 18, 2000. Prior to that time, ICG Funding may redeem
the 6 3/4% Preferred Securities if the current market value of Common Stock
equals or exceeds the exchange price, for at least 20 days of any consecutive
30-day trading period, by 170% prior to November 16, 1998; by 160% from November
16, 1998 through November 15, 1999; and by 150% from November 16, 1999 through
November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable
upon exchange of such securities have been registered under the Securities Act.
The 6 3/4% Preferred Securities are guaranteed by ICG on a full and
unconditional basis.
In October 1997, the Company sold 687,221 shares of Common Stock (the "CBG
Shares") to certain shareholders of CBG in connection with the acquisition of
CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Rule 4 (2) under the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each fiscal year in the four-year period
ended September 30, 1996, the three months ended December 31, 1996 and the
fiscal year ended December 31, 1997 has been derived from the audited
Consolidated Financial Statements of the Company. The information set forth
below should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Annual Report.
The Company's development and expansion activities, including acquisitions,
during the periods shown below materially affect the comparability of this data
from one period to another. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<PAGE>
30
<TABLE>
<CAPTION>
Three Months Fiscal
Ended Year Ended
Fiscal Years Ended September 30, December 31, December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------
Statement of Operations Data: (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services (1) $ 4,803 14,854 32,330 87,681 34,787 177,690
Network services 21,006 36,019 58,778 60,116 15,981 65,678
Satellite services(2) 3,520 8,121 20,502 21,297 6,188 29,986
Other 147 118 - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 29,476 59,112 111,610 169,094 56,956 273,354
------------ ------------ ------------ ------------ ------------ ------------
Operating costs 18,961 38,165 78,846 135,253 49,929 246,418
Selling, general and
administrative expenses 10,702 28,015 62,954 76,725 24,253 150,767
Depreciation and amortization 3,473 8,198 16,624 30,368 9,825 57,081
Net loss (gain) on disposal of
long-lived assets - - 241 5,128 (772) 671
Provision for impairment of
long-lived assets - - 7,000 9,994 - 11,950
------------ ------------ ------------ ------------ ------------ ------------
Total operating costs and
expenses 33,136 74,378 165,665 257,468 83,235 466,887
Operating loss (3,660) (15,266) (54,055) (88,374) (26,279) (193,533)
Interest expense (2,523) (8,481) (24,368) (85,714) (24,454) (117,545)
Other income, net 325 925 3,639 15,423 5,898 21,247
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes,
minority interest, share of
losses and cumulative effect
of change in accounting (5,858) (22,822) (74,784) (158,665) (44,835) (289,831)
Income tax benefit 1,552 - - 5,131 - -
------------ ------------ ------------ ------------ ------------ ------------
Loss before minority interest,
share of losses and
cumulative effect of
change in accounting (4,306) (22,822) (74,784) (153,534) (44,835) (289,831)
Minority interests, including
preferred dividends on
preferred securities (303) 435 (1,123) (25,306) (4,988) (37,812)
Share of losses of joint
venture and investment - (1,481) (741) (1,814) - -
------------ ------------ ------------ ------------ ------------ ------------
Loss before cumulative effect
of change in accounting (4,609) (23,868) (76,648) (180,654) (49,823) (327,643)
Cumulative effect of change in
accounting (1) - - - (3,453) - -
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (4,609) (23,868) (76,648) (184,107) (49,823) (327,643)
============ ============ ============ ============ ============ ============
Loss per share - basic and
diluted $ (0.39) (1.56) (3.25) (6.83) (1.56) (10.11)
============ ============ ============ ============ ============ ============
Weighted average number of
shares of Common Stock
outstanding - basic and
diluted (3) 11,671 15,342 23,604 26,955 31,840 32,399
============ ============ ============ ============ ============ ============
Other Data:
EBITDA (4) $ (187) (7,068) (30,190) (42,884) (17,226) (123,831)
Net cash used by operating
activities (2,839) (7,532) (42,798) (43,357) (8,636) (126,954)
Net cash used by investing
activities (13,401) (51,452) (71,583) (135,204) (82,342) (429,867)
Net cash provided (used) by
financing activities 30,382 49,428 377,772 360,227 (170) 315,721
Capital expenditures (5) 20,685 54,921 88,736 177,307 70,297 269,593
(Continued)
</TABLE>
<PAGE>
31
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------------------------------------------------- ----------------------------
1993 1994 1995 1996 1996 1997
----------- ----------- ------------- ----------- ----------- ------------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments
available for sale 15,581 6,025 269,416 457,914 392,535 217,015
Working capital (deficit) 7,990 (8,563) 249,089 446,164 361,601 210,876
Property and equipment, net 52,203 118,875 202,004 336,137 403,676 632,167
Total assets 95,196 201,991 583,553 939,351 944,133 1,107,664
Current portion of long-term
debt and capital lease
obligations 7,657 23,118 27,310 8,282 25,500 7,421
Long-term debt and capital
lease obligations, less
current portion 37,116 104,461 405,535 739,827 761,504 957,507
Redeemable preferred securities
of subsidiaries - - 14,986 153,318 159,120 420,171
Common stock and additional
paid-in capital 56,402 97,806 217,245 299,229 302,560 326,965
Accumulated deficit (21,650) (58,024) (134,710) (318,817) (368,640) (696,283)
Stockholders' equity (deficit) 34,753 39,782 82,535 (19,588) (66,080) (369,318)
</TABLE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Accounting Change."
(2) Revenue from Satellite Services is generated through the Company's
satellite (voice and data) operations and, after January 1995, also
includes revenue from maritime communications operations. The Company
completed the sale of four of its teleports in March 1996, and has reported
results of operations from these assets through December 31, 1995.
(3) Weighted average number of shares outstanding for fiscal years 1993, 1994
and 1995 represents Holdings-Canada common shares outstanding. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996 and fiscal 1997 represents Holdings-Canada common
shares outstanding for the period October 1, 1995 through August 2, 1996,
and represents ICG Common Stock and Holdings-Canada Class A common shares
(not owned by ICG) outstanding for the periods subsequent to August 5,
1996.
(4) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. 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 flows or results of operations in accordance
with generally accepted accounting principles ("GAAP") for the periods
indicated. EBITDA is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures of other companies. Net cash
flows from operating, investing and financing activities as determined
using GAAP are also presented in Other Data.
(5) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants, and excludes payments for
construction of the Company's new headquarters which the Company sold in
January 1998 and leased back under a long-term operating lease.
<PAGE>
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, data and value-added services, continued development of
the Company's network infrastructure and actions of competitors and regulatory
authorities that could cause actual results to differ materially from the
forward-looking statements. The results for the 12 months ended December 31,
1996 and the three months ended December 31, 1995 have been derived from the
Company's Consolidated Financial Statements included elsewhere herein and the
Company's unaudited Consolidated Financial Statements included in the Company's
Forms 10-Q filed with the SEC. The Company changed its fiscal year end to
December 31 from September 30, effective January 1, 1997. All dollar amounts are
in U.S. dollars.
Company Overview
The Company is one of the nation's leading competitive ICPs, based on
estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers, ISPs and other communications service providers
for a full range of communications services in the increasingly deregulated
telecommunications industry. Through its CLEC operations, the Company operates
networks in four regional clusters covering major metropolitan statistical areas
in California, Colorado, Ohio and the Southeast. The Company also provides a
wide range of network systems integration services, maritime and international
satellite transmission services and subsequent to January 21, 1998, a variety of
Internet connectivity and other value-added Internet services. Network Services
consist of information technology services and selected networking products,
focusing on network design, installation, maintenance and support. Satellite
Services consist of satellite voice and data services to major cruise lines,
commercial shipping vessels, yachts, the U.S. Navy and offshore oil platforms.
The Company intends to dispose of its Satellite Services operations to better
focus its efforts on its core Telecom Services unit, although it has not entered
into a formal arrangement for such disposition. As a leading participant in the
rapidly growing competitive local telecommunications industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$111.6 million for fiscal 1995 to approximately $273.4 million for fiscal 1997.
The Company's rapid growth is the result of the initial installation,
acquisition and subsequent expansion of its fiber optic networks and the
expansion of its communication service offerings.
Prior to fiscal 1996, the majority of the Company's revenue had been
derived from Network Services. However, the Company's Network Services revenue
(as well as Satellite Service revenue) will continue to represent a diminishing
percentage of the Company's consolidated revenue as the Company continues to
emphasize its core Telecom Services, including revenue generated by its newly
acquired subsidiary, NETCOM. In March 1996, the Company completed the sale of
four of its teleports which were used in the Company's Satellite Services
operations.
<PAGE>
33
The Telecommunications Act and pro-competitive 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 telephone services, including competitive
local dial tone. The Company is marketing and selling local dial tone services
in major metropolitan areas in the following regions: California, which began
service in late January 1997, followed by Ohio in February 1997, Colorado in
March 1997 and the Southeast in May 1997. During fiscal 1997, the Company sold
178,470 local access lines, of which 141,035 were in service as of December 31,
1997. In addition, the Company's operating networks have grown from 627 fiber
route miles at the end of fiscal 1995 to 3,043 fiber route miles as of December
31, 1997. The Company has 19 operating high capacity digital voice switches and
15 data communications switches, and plans to install additional switches as
demand warrants. As a complement to its local exchange services, the Company has
begun marketing bundled service offerings which include long distance, enhanced
telecommunications services and data services and plans to intensify the
offerings of such services in the near term.
The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, in January 1998, the Company completed its merger with NETCOM, a
provider of Internet connectivity and Web site hosting services and other
value-added services, located in San Jose, California. For calendar years 1995,
1996 and 1997, NETCOM reported revenue of $52.4 million, $120.5 million and
$160.7 million, respectively, and EBITDA losses of $(6.3) million, $(20.3)
million and $(1.7) million, respectively. The Company will account for the
business combination under the pooling of interests method of accounting and
accordingly, the Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all historical
periods. Also, in two transactions occurring October 1997 and March 1998, the
Company purchased 100% of the capital stock of CBG, an Ohio based local exchange
and centrex reseller which had, at December 31, 1997, 48,256 local access lines
in service, principally pursuant to various resale and other agreements with
Ameritech, the ILEC in the markets it serves. Further, for the calendar years
1995, 1996 and 1997, CBG's revenue was approximately $15.4 million, $21.4
million and $33.8 million, respectively, and EBITDA losses were approximately
$(1.3) million, $(1.0) million and $(3.2) million, respectively. The operations
of CBG have been included in the Company's operations for the period subsequent
to October 17, 1997, the acquisition closing date. In May 1997, the Company
entered into an agreement with a subsidiary of Southern permitting the Company
to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In
addition, the Company expanded its geographic focus to include Texas (and may
also expand to Arkansas, Louisiana and Oklahoma) through its strategic alliance
with CSW that will develop and market telecommunications services, including
local service, in these markets. In June 1997, the Company entered into an IRU
agreement with Qwest for approximately 1,800 miles of fiber optic network and
additional broadband capacity in California, Colorado, Ohio and the Southeast.
This new capacity will be used for the transmission of local, long distance and
communications services in and between the Company's markets.
Telecom Services revenue has increased from $32.3 million for fiscal 1995
to $177.7 million for fiscal 1997. The Company has experienced declining prices
and increasing price competition for access services which, to date, have been
more than offset by increasing network usage. The Company expects to continue to
experience declining prices and increasing price competition for the foreseeable
future.
<PAGE>
34
In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on sales, marketing,
customer service, engineering and support personnel prior to the generation of
corresponding revenue. This has and will continue to have an adverse effect on
operating margins until such time as sufficient volumes of customers'
telecommunications traffic are attained. As the Company's customer base grows,
the Company anticipates that operating margins will improve as incremental
revenue will exceed incremental operating expenses. The preceding
forward-looking statement is dependent upon the successful implementation of the
Company local dial tone, data and long distance services strategy, continued
development of the Company's network infrastructure, increased traffic on the
Company's facilities, any or all of which may not occur, and upon actions of
competitors and regulatory authorities.
Currently the Company has experienced and may continue to experience
negative operating margins from its wholesale switched services while its
networks are in the development and construction phases and while the Company
relies on ILEC networks to carry a significant portion of its customers'
switched traffic. The Company expects overall operating margins from switched
services to improve as local dial tone, local toll, long distance and data
communications services become a relatively larger portion of its business mix
and the Company de-emphasizes its wholesale switched services. In addition, the
Company believes that the unbundling of ILEC 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 local and other services. The Company has recently
raised prices on its wholesale switched services product in order to improve
margins and free up switch port capacity for its higher margin dial tone
product.
The Company believes that the provisions of the Telecommunications Act,
including the opening of the local telephone services market to competition,
will facilitate the Company's plan to provide a full array of local, long
distance and data communications services. In order to fully implement its
strategy, the Company must make significant capital expenditures to provide
additional switching capacity, network infrastructure and electronic components.
The Company must also make significant investments and expenditures to develop,
train and manage its marketing and sales personnel.
The continued development, construction and expansion of the Company's
business requires significant capital, a large portion of which is expended
before related revenue is generated. The Company has experienced, and expects to
continue to experience, negative cash flows over the near term and significant
losses while it expands its operations to provide a wide range of
telecommunications services and establishes a sufficient revenue-generating
customer base. There can be no assurance that the Company will be able to
establish or retain such a customer base.
<PAGE>
35
Results of Operations
The following table provides a breakdown of revenue and operating costs for
Telecom Services, Network Services and Satellite Services and certain other
financial data for the Company for the periods indicated. The table also shows
certain revenue, expenses, operating loss and EBITDA as a percentage of the
Company's total revenue.
<TABLE>
<CAPTION>
Three Months
Fiscal Years Ended September 30, Ended December 31,
-------------------------------------- ------------------------------------------
1995 1996 1995 1996
------------------ ------------------- ------------------- ----------------------
$ % $ % $ % $ %
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Statement of Operations Data: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services (1) 32,330 29 87,681 52 13,513 38 34,787 61
Network services 58,778 53 60,116 36 15,718 45 15,981 28
Satellite services 20,502 18 21,297 12 6,168 17 6,188 11
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Total revenue 111,610 100 169,094 100 35,399 100 56,956 100
Operating costs:
Telecom services 21,825 78,705 11,882 34,463
Network services 45,928 46,256 11,998 12,287
Satellite services 11,093 10,292 3,230 3,179
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Total operating costs 78,846 71 135,253 80 27,110 76 49,929 88
Selling, general and administrative 62,954 56 76,725 45 18,628 53 24,253 42
Depreciation and amortization 16,624 15 30,368 18 4,919 14 9,825 17
Net loss (gain) on disposal of
long-lived assets 241 * 5,128 3 1,030 3 (772) (1)
Provision for impairment of
long-lived assets 7,000 6 9,994 6 - - - -
--------- -------- ---------- -------- ---------- --------- ----------- ---------
Operating loss (54,055) (48) (88,374) (52) (16,288) (46) (26,279) (46)
Other Data:
EBITDA(2) (30,190) (27) (42,884) (25) (10,339) (29) (17,226) (30)
Net cash used by operating activities (42,798) (43,357) (4,598) (8,636)
Net cash used by investing activities (71,583) (135,204) (25,242) (82,342)
Net cash (used) provided by
financing activities 377,772 360,227 (8,413) (170)
Capital expenditures 88,736 177,307 26,882 70,297
*Less than 0.5%
</TABLE>
<PAGE>
35
<TABLE>
<CAPTION>
Twelve Months Ended Fiscal Year Ended
December 31, December 31,
------------------- ------------------
1996 1997
------------------- ------------------
$ % $ %
--------- --------- ---------- --------
Statement of Operations Data: (Dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Telecom services (1) 108,955 57 177,690 65
Network services 60,379 32 65,678 24
Satellite services 21,317 11 29,986 11
--------- -------- ---------- --------
Total revenue 190,651 100 273,354 100
Operating costs:
Telecom services 101,286 175,829
Network services 46,545 53,911
Satellite services 10,241 16,678
--------- -------- ---------- --------
Total operating costs 158,072 83 246,418 90
Selling, general and administrative 82,350 43 150,767 55
Depreciation and amortization 35,274 19 57,081 21
Net loss (gain) on disposal of
long-lived assets 3,326 2 671 *
Provision for impairment of
long-lived assets 9,994 5 11,950 5
--------- -------- ---------- --------
Operating loss (98,365) (52) (193,533) (71)
Other Data:
EBITDA(2) (49,771) (26) (123,831) (45)
Net cash used by operating
activities (47,395) (126,954)
Net cash used by investing
activities (192,304) (429,867)
Net cash (used) provided by
financing activities 368,470 315,721
Capital expenditures 220,722 269,593
</TABLE>
*Less than 0.5%
<PAGE>
36
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Changes." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) See note 4 under "Selected Financial Data" for the definition of EBITDA.
Fiscal 1997 Compared to 12 Months Ended December 31, 1996
Revenue. Revenue for fiscal 1997 increased $82.7 million or 43% from the 12
months ended December 31, 1996. Telecom Services revenue increased 63% to $177.7
million due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $48.1 million (44% of Telecom Services revenue) for the
12 months ended December 31, 1996 to $93.9 million (53% of Telecom Services
revenue) for fiscal 1997. Switched access (terminating long distance) revenue
represented approximately 77% of the Company's switched services revenue
component for fiscal 1997, compared to 100% for the 12 months ended December 31,
1996. Special access revenue increased from $39.4 million (36% of Telecom
Services revenue) for the 12 months ended December 31, 1996 to $55.4 million
(31% of Telecom Services revenue) for fiscal 1997. Also included in Telecom
Services revenue for fiscal 1997 is $28.3 million generated by Zycom, compared
to $21.5 million for the same 12-month period in 1996. The increase in Zycom
revenue for fiscal 1997 as compared to the same period in 1996 relates to
changes in the classification of certain operating costs as a result of the
Company entering into long-term contracts with its major customers. These costs
were netted against revenue through April 1996 due to the uncertainty of renewal
of short-term customer contracts. At December 31, 1997, the Company had 141,035
access lines in service compared to zero at December 31, 1996. Special access
network usage reflected in voice grade equivalents ("VGEs") increased 49% from
748,528 VGEs at December 31, 1996, to 1,111,697 VGEs at December 31, 1997. At
December 31, 1997, the Company had 2,321 buildings connected to its networks
compared to 2,069 buildings connected at December 31, 1996. Additionally,
switched minutes of use increased 43% from approximately 2.0 billion minutes
during the 12 months ended December 31, 1996 to approximately 2.9 billion
minutes during fiscal 1997. Revenue from long distance and data services did not
generate a material portion of total revenue during either period. Network
Services revenue increased 9% to $65.7 million for fiscal 1997 as compared to
$60.4 million for the 12 months ended December 31, 1996. The increase in Network
Services revenue is due to a single equipment sale during fiscal 1997 for $3.2
million as well as general increases in volume. Satellite Services revenue
increased $8.7 million, or 41%, to $30.0 million for fiscal 1997, compared to
the 12 months ended December 31, 1996. This increase is primarily due to the
operations of MCN, which comprised $6.3 million of total Satellite Services
revenue for fiscal 1997 compared to $1.8 million during the same 12-month period
in 1996. The remaining increase can be attributed to the general growth of MTN
and its increased sales of C-Band equipment to offshore oil and gas customers.
<PAGE>
37
Operating costs. Total operating costs for fiscal 1997 increased $88.3
million, or 56%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $101.3 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $175.8 million, or 99% of
Telecom Services revenue, for fiscal 1997. Telecom Services operating costs
consist of payments to ILECs for the use of network facilities to support
special and switched access services, network operating costs, right of way fees
and other costs. The increase in operating costs in absolute dollars is
attributable to the increase in switched access services and the addition of
engineering and operations personnel dedicated to the development of local
exchange services. The increase in operating costs as a percentage of total
revenue is due primarily to the increase in switched access services revenue,
and the investment in the development of local exchange services without the
benefit of substantial corresponding revenue in the same period. The Company
expects that the Telecom Services ratio of operating costs to revenue will
further improve as the Company provides a greater volume of higher margin
services, principally local exchange services, carries more traffic on its own
facilities rather than ILEC facilities and obtains the right to use unbundled
ILEC facilities on satisfactory terms, any or all of which may not occur.
Network Services operating costs increased 16% to $53.9 million and increased as
a percentage of Network Services revenue from 77% for the 12 months ended
December 31, 1996 to 82% for fiscal 1997. The increase is due to a substantially
lower margin earned on equipment sales (which constituted a larger portion of
1997 revenue) relative to other services and certain indirect project costs
included in operating costs during fiscal 1997 which were treated as selling,
general and administrative expenses during the comparable 12-month period in
1996. Network Services operating costs include the cost of equipment sold,
direct hourly labor and other indirect project costs. Satellite Services
operating costs increased to $16.7 million for fiscal 1997, from $10.2 million
for the 12 months ended December 31, 1996. Satellite Services operating costs as
a percentage of Satellite Services revenue also increased from 48% for the 12
months ended December 31, 1996 to 56% for fiscal 1997. This increase is due to
an increase in MCN's sales as well the increased volume of equipment sales, both
of which provide lower margins than other maritime services. Satellite Services
operating costs consist primarily of transponder lease costs and the cost of
equipment sold.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for fiscal 1997 increased $68.4 million, or
83%, compared to the 12 months ended December 31, 1996. This increase was
principally due to the continued rapid expansion of the Company's Telecom
Services networks and related significant additions to the Company's management
information systems, customer service, marketing and sales staffs dedicated to
the expansion of the Company's networks and implementation of the Company's
expanded services strategy, primarily the development of local and long distance
telephone and data communications services. SG&A expenses as a percentage of
total revenue increased from 43% for the 12 months ended December 31, 1996 to
55% for fiscal 1997. There is typically a period of higher administrative and
marketing expense prior to the generation of appreciable revenue from newly
developed networks or services. The Company expects SG&A expenses for Telecom
Services to increase slightly over the near term as a result of hiring new staff
to facilitate the marketing and development of local dial tone, local toll, long
distance and data transmission services.
Depreciation and amortization. Depreciation and amortization increased
$21.8 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased investment in depreciable assets resulting from the
continued expansion of the Company's networks and services. The Company reports
high levels of depreciation expense relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight-line method despite the low rate of capacity utilization in
the early stages of network operation.
<PAGE>
38
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $3.3 million for the
12 months ended December 31, 1996 to a net gain of $0.7 million for fiscal 1997.
Net loss on disposal of long-lived assets for the 12 months ended December 31,
1996 includes the loss recorded on the sale of four of the Company's teleports
used in its Satellite Services operations ($1.1 million), the loss recorded on
the disposal of other operating assets ($2.7 million) and a write-off of an
investment ($0.3 million), offset by a gain on the sale on sale of the Company's
50% interest in the Phoenix network joint venture ($0.8 million). For fiscal
1997, net loss on disposal of long-lived assets primarily relates to losses
recorded on the disposal of the Company's investment in its Melbourne network.
Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ($5.2 million), MCN
($2.9 million), Zycom ($2.7 million) and Nova-Net ($0.9 million) as well as a
write-down of other operating assets ($0.3 million). Provision for impairment of
long-lived assets for the 12 months ended December 31, 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term note receivable ($5.8 million), the
investments in the Melbourne network ($2.7 million) and the Satellite Services
Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc.
($1.3 million). Provision for impairment of long-lived assets was recorded based
on management's estimate of the net realizable value of the Company's assets at
December 31, 1996 and 1997.
Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $105.5 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Notes issued in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until the Company's senior indebtedness begins to pay
interest in cash.
Interest income. Interest income increased $0.4 million, from $21.5 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.
Other, net. Other, net decreased from $3.9 million net expense for the 12
months ended December 31, 1996 to $0.7 million net expense for fiscal 1997.
Other expense recorded for the 12 months ended December 31, 1996 consists
primarily of the write-off of deferred financing costs associated with the
conversion or repayment of debt and litigation settlement costs. For fiscal
1997, other, net consists primarily of litigation settlement costs and the loss
on disposal of non operating assets.
<PAGE>
39
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $10.7 million, from $27.1 million for the 12 months ended
December 31, 1996 to $37.8 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings ("12% Redeemable Preferred Stock")
redeemed in April 1996. Minority interest in share of losses, net of accretion
and preferred dividends on preferred securities of subsidiaries recorded during
fiscal 1997 consists of the accretion of issue costs ($0.9 million) and the
accrual of the preferred security dividends ($38.9 million) associated with the
6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred
Stock"), offset by minority interest in losses of subsidiaries of $2.0 million.
Share of losses of joint venture and investment. Effective October 1, 1996,
the Company sold its 50% interest in the Phoenix network joint venture. As a
result, no share of losses in joint venture was recorded during fiscal 1997, as
compared to the $1.6 million loss recorded during the comparable 12-month period
in 1996.
Net loss. Net loss increased $128.4 million, or 64%, due to the increases
in operating costs, SG&A expense, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
Three Months Ended December 31, 1996 Compared to Three Months Ended
December 31, 1995
Revenue. Revenue for the three months ended December 31, 1996 increased
$21.6 million, or 61%, from the three months ended December 31, 1995. The
increase in total revenue reflects continued growth in Telecom Services, Network
Services and Satellite Services, offset slightly by the loss in revenue
resulting from the sale of four of the Company's teleports during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million
due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue increased from $5.1 million (38% of Telecom Services revenue) for the
three months ended December 31, 1995, to $16.4 million (47% of Telecom Services
revenue) for the three months ended December 31, 1996. Switched access revenue
represented substantially all of the Company's switched services revenue
component for the three months ended December 31, 1996. Special access revenue
increased from $7.5 million (56% of Telecom Services revenue) for the three
months ended December 31, 1995 to $10.9 million (31% of Telecom Services
revenue) for the three months ended December 31, 1996. Also, included in Telecom
Services revenue for the three months ended December 31, 1996 is $7.5 million
generated by Zycom, compared to $0.9 million for the three months ended December
31, 1995. Approximately $6.5 million of the increase in Zycom revenue for the
three months ended December 31, 1996 as compared to the same period in 1995
relates to changes in the classification of certain operating costs as a result
of the Company entering into long-term contracts with its major customers.
Network usage as reflected in VGEs increased 53% from 488,403 VGEs on December
31, 1995 to 748,528 at December 31, 1996. On December 31, 1996, the Company had
2,069 buildings connected to its networks compared to 1,539 buildings connected
on December 31, 1995. Consistent with expectations, Network Services revenue
growth was moderate, increasing from $15.7 million to $16.0 million for the
three months ended December 31, 1995 and 1996, respectively, while the Company
repositioned its systems and operations to improve operating results. Satellite
Services revenue remained relatively stable between the three-month periods
ended December 31, 1995 and 1996 as a result of the offsetting effects of
increased maritime minutes of use from cruise ships and no revenue in the three
months ended December 31, 1996 from the four teleports sold in March 1996. On a
pro forma basis to reflect the sale of the teleports, the Company's Satellite
Services revenue for the three months ended December 31, 1995 and 1996 was $3.7
million and $6.2 million, respectively.
<PAGE>
40
Operating costs. Total operating costs for the three months ended December
31, 1996 increased $22.8 million, or 84%, from the same period in 1995. Telecom
Services operating costs increased from $11.9 million, or 88%, of Telecom
Services revenue for the three months ended December 31, 1995, to $34.5 million,
or 99%, of Telecom Services revenue for the three months ended December 31,
1996. The increase in operating costs in absolute dollars is attributable to the
increase in switched access services and the addition of engineering and
operations personnel dedicated to the development of local exchange services.
The increase in operating costs as a percentage of revenue is due primarily to
the increase in switched access services revenue. Network Services operating
costs increased 2% to $12.3 million for the three months ended December 31, 1996
and increased as a percentage of Network Services revenue from 76% to 77% for
the three month periods ended December 31, 1995 and 1996, respectively.
Satellite Services operating costs decreased 2% to $3.2 million for the three
months ended December 31, 1996. Satellite Services operating costs as a
percentage of revenue declined to 51% of Satellite Services revenue during the
three months ended December 31, 1996, from 52% during the three months ended
December 31, 1995. The decrease in percentage of revenue as well as absolute
dollars is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports in March 1996, offset by an increase in higher
margin maritime services revenue at MTN. Revenue from teleport operations
historically have yielded lower gross margins than maritime services revenue.
Selling, general and administrative expense. SG&A expenses for the three
months ended December 31, 1996 increased $5.6 million, or 30%, compared to the
three months ended December 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 management information systems, customer
service, marketing and sales staffs dedicated to the expansion of the Company's
networks and implementation of the Company's expanded services strategy,
primarily the development of the Company's CLEC operations. SG&A expenses as a
percentage of total revenue was 43% for the three months ended December 31,
1996, compared to 53% for the same period in 1995. SG&A expenses for Network
Services decreased both in absolute dollars and as a percentage of Network
Services revenue due to approximately $0.7 million in non-recurring charges,
primarily legal accruals, recorded during the three months ended December 31,
1995. Satellite Services SG&A expenses decreased in absolute dollars and as a
percentage of Satellite Services revenue due to cost control efforts by the
Company's management. Other corporate expenses increased from $4.0 million, or
11% of total revenue, for the three months ended December 31, 1995 to $5.7
million, or 10% of total revenue, for the three months ended December 31, 1996.
This increase is primarily attributable to the addition of employees,
principally human resources and regulatory personnel, for the purpose of
managing the Company's growth and its expansion into new markets as allowed
under the Telecommunications Act.
<PAGE>
41
Depreciation and amortization expense. Depreciation and amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996, as compared to the same period in 1995. Depreciation of fixed assets
increased by approximately $2.3 million as a result of the shortening of
estimated depreciable lives during fiscal 1996, as discussed in "-Accounting
Changes," and an increase in depreciable fixed assets due to the continued
expansion of the Company's networks. The increase in depreciation expense was
offset slightly due to the sale of four of the Company's teleports in March
1996.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets decreased from a net loss of $1.0 million for the
three months ended December 31, 1995 to a net gain of $0.8 million for the three
months ended December 31, 1996. Net loss on disposal of long-lived assets for
the three months ended December 31, 1995 includes the write-off of certain
operating assets. For the three months ended December 31, 1996, net gain on
disposal of long-lived assets consists of the gain on sale of the Company's 50%
interest in the Phoenix network joint venture.
Interest expense. Interest expense increased by $9.3 million, from $15.2
million for the three months ended December 31, 1995 to $24.5 million for the
three months ended December 31, 1996, which included $22.7 million of non-cash
interest. This increase was attributable to an increase in long-term debt,
primarily the 12 1/2% Senior Discount Notes (the "12 1/2% Notes") issued in
April 1996 and an increase in capitalized lease obligations to finance Telecom
Services equipment used in the expansion of the Company's networks.
Interest income. Interest income increased $2.2 million from the three
months ended December 31, 1995 to $6.0 million for the three months ended
December 31, 1996. The increase is attributable to the interest earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Preferred Stock
in April 1996.
Share of losses of joint venture and investment. As a result of the sale of
the Company's 50% interest in the Phoenix network joint venture, no share of
losses in joint venture was recorded during the three months ended December 31,
1996, as compared to the $0.2 million recorded during the same period in 1995.
Other, net. Other, net for the three months ended December 31, 1996 was
$0.1 million net expense as compared to a minor net gain for the three months
ended December 31, 1995. Other expense recorded during the three-month period
ended December 31, 1996 consists of miscellaneous other expenses.
<PAGE>
42
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $1.8 million, from $3.2 million for the three months
ended December 31, 1995 to $5.0 million for the three months ended December 31,
1996. The increase is due primarily to the issuance of the 14 1/4% Preferred
Stock in April 1996. Minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries recorded during the
current three-month period ended December 31, 1996 consists of the accretion of
issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7
million) associated with the 14 1/4% Preferred Stock, offset by minority
interest in losses of subsidiaries of $0.8 million.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The cumulative effect of change in accounting for
revenue from long-term telecom services contracts recorded during the three
months ended December 31, 1995 is due to the change in accounting principle as
described in "-Accounting Changes." As the change in accounting was applied
retroactively as of October 1, 1995, no similar amounts were recorded during the
three months ended December 31, 1996.
Net loss. Net loss increased $15.2 million, or 44%, due to the increase in
operating costs, SG&A expenses, depreciation and amortization and interest
expense noted above.
Fiscal 1996 Compared to Fiscal 1995
The following information reflects the results of operations for fiscal
1996 compared to the pro forma results of operations for fiscal 1995, assuming
the change in accounting for long-term telecom services contracts described in
"-Accounting Change" had been applied retroactively.
Revenue. Revenue for fiscal 1996 increased $58.2 million, or 52%, from
fiscal 1995. The increase in total revenue reflects continued growth in Telecom
Services, Network Services and Satellite Services, offset slightly by the loss
in revenue resulting from the sale of four of the Company's teleports. Telecom
Services revenue increased 177% to $87.7 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit prices. Switched services revenue, consisting solely of switched
access services, increased from $5.8 million (18% of Telecom Services revenue)
for fiscal 1995, to $36.7 million (42% of Telecom Services revenue) for fiscal
1996. Special access revenue increased from $25.1 million (78% of Telecom
Services revenue) for fiscal 1995 to $36.1 million (41% of Telecom Services
revenue) for fiscal 1996. Also included in Telecom Services revenue for fiscal
1996 is $14.9 million generated by Zycom, compared to $1.4 million in fiscal
1995. Approximately $10.6 million of the increase in Zycom revenue relates to
changes in the classification of certain operating costs as a result of the
Company entering into long-term contracts with its major customers. Network
usage as reflected in VGEs increased 47% from 430,535 VGEs on September 30,
1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996, the Company
had 2,067 buildings connected to its networks compared to 1,375 buildings
connected on September 30, 1995. Consistent with expectations, Network Services
revenue growth was moderate, increasing from $58.8 million to $60.1 million,
while the Company repositioned its systems and operations to improve operating
results. Satellite Services revenue increased 4% to $21.3 million for fiscal
1996 primarily due to increased maritime minutes of use from cruise ships offset
in part by the decrease resulting from the sale of four of the Company's
teleports. Satellite Services revenue for fiscal 1995 and 1996, on a pro forma
basis to reflect the sale of teleports, was $11.4 million and $18.9 million,
respectively. Satellite Services revenue decreased $0.4 million from the third
quarter of fiscal 1996 to the fourth quarter of fiscal 1996. The decrease in
revenue was primarily due to three Navy vessels being in "dry dock."
<PAGE>
43
Operating costs. Total operating costs for fiscal 1996 increased $56.4
million, or 72%, from fiscal 1995. Telecom Services operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million, or 90% of Telecom Services revenue for fiscal 1996. The increase in
operating costs in absolute dollars is attributable to the increase in switched
access services and the expansion in off-net special access service offerings.
The increase in operating costs as a percentage of total revenue is due
primarily to the increase in switched access services revenue. Network Services
operating costs increased 1% to $46.3 million and decreased as a percentage of
Network Services revenue from 78% for fiscal 1995 to 77% for fiscal 1996.
Satellite Services operating costs decreased to $10.3 million for fiscal 1996,
from $11.1 million for fiscal 1995. Satellite Services operating costs as a
percentage of revenue also declined to 48% for fiscal 1996, compared to 54% for
fiscal 1995. The decrease both in absolute dollars and as a percentage of
revenue is attributable to the decline in revenue resulting from the sale of
four of the Company's teleports, partially offset by an increase in higher
margin maritime services revenue at MTN.
Selling, general and administrative expense. SG&A expenses for fiscal 1996
increased $13.8 million, or 22%, compared to fiscal 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 management
information systems, marketing and sales staff dedicated to the expansion of the
Company's networks and implementation of the Company's switched services
strategy and development of the Company's CLEC operations. A portion of the
increase was also attributable to approximately $1.8 million of legal,
accounting, and SEC filing fees incurred in the incorporation of a new U.S.
publicly traded holding company, ICG Communications, Inc., and approximately
$1.3 million of consulting fees related to various process improvement
initiatives. SG&A expenses as a percentage of total revenue was 45% for fiscal
1996, compared to 57% for fiscal 1995. SG&A expenses for Network Services
increased due to increased engineering, marketing and sales staff to support
growth in network system installations. Satellite Services SG&A expenses
increased primarily due to the growth of MTN and MCN.
Depreciation and amortization. Depreciation and amortization increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995. Depreciation of
fixed assets increased by approximately $7.0 million as a result of the
shortening of estimated depreciable lives discussed in "-Accounting Changes,"
and an increase in depreciable fixed assets due to the continued expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the sale of four of the Company's teleports.
Net loss (gain) on disposal of long-lived assets. Net loss (gain) on
disposal of long-lived assets increased to $5.1 million during fiscal 1996 from
$0.2 million during fiscal 1995. Net loss on disposal of long-lived assets for
fiscal 1996 includes the loss recorded on the sale of four of the Company's
teleports used in its Satellite Services operations ($1.1 million), the loss
recorded on the disposal of other operating assets ($3.7 million) and a
write-off of an investment ($0.3 million).
<PAGE>
44
Provision for impairment of long-lived assets. Provision for impairment of
long-lived assets increased $3.0 million from fiscal 1995 to $10.0 million for
fiscal 1996. The amount recorded during fiscal 1996 includes valuation
allowances for the amounts receivable for advances made to the Phoenix network
joint venture included in long-term notes receivable ($5.8 million), the
investment in the Melbourne network ($2.7 million), the note receivable from
NovoComm, Inc. ($1.3 million) and the Satellite Services Mexico subsidiary ($0.2
million). The fiscal 1995 amount includes an allowance for an investment ($2.0
million) and a write-down in the goodwill associated with the acquisition of
Nova-Net ($5.0 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at September 30, 1995 and 1996.
Interest expense. Interest expense increased by $61.3 million, from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996, which included $66.5
million of non-cash interest. This increase was attributable to an increase in
long-term debt, primarily the 13 1/2% Senior Discount Notes due 2005 (the "13
1/2% Notes") issued in August 1995 and the 12 1/2% Notes issued in April 1996,
and an increase in capitalized lease obligations to finance the purchase of
Telecom Services and Satellite Services equipment. Also included in interest
expense is a charge of approximately $11.5 million for the payments made to
holders of the 13 1/2% Notes with respect to consents to amendments to the
indenture governing the 13 1/2% Notes in order to permit the offering of the 13
1/2% Notes in April 1996.
Interest income. Interest income increased $15.1 million from fiscal 1995.
The increase is attributable to the increase in cash from the proceeds of the
issuance of the 13 1/2% Notes in August 1995 and the 12 1/2% Notes and 14 1/4%
Preferred Stock in April 1996.
Share of losses of joint venture and investment. Share of losses in the
Phoenix network joint venture, in which the Company held a 50% equity interest,
increased $1.1 million, or 145%, from fiscal 1995 to $1.8 million for fiscal
1996 due to increased losses resulting from the continued expansion and
implementation of switched access services.
Other, net. Other, net increased from $0.5 million net expense for fiscal
1995 to $3.9 million net expense for fiscal 1996. Other expense recorded in
fiscal 1996 consists primarily of settlement costs of certain litigation ($1.2
million) and the write-off of deferred financing costs upon conversion or
settlement of debt ($2.7 million).
Minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses, net of accretion and preferred dividends on preferred securities of
subsidiaries increased $24.2 million, from $1.1 million for fiscal 1995 to
approximately $25.3 million for fiscal 1996. The increase is due to the
accretion of the unit warrants issued in connection with the 13% Notes ($14.4
million) and issue costs ($1.1 million) associated with the issuance of the 12%
Redeemable Preferred Stock, of Holdings (the "12% Preferred Stock") accretion of
issue costs associated with the 14 1/4% Preferred Stock ($0.3 million), accrual
of the preferred stock dividend on the 12% Preferred Stock ($2.1 million) and
the 14 1/4% Preferred Stock ($9.1 million) and the excess redemption price over
the stated value of the convertible Series B Preferred Stock of Holdings-Canada
($1.0 million), partially offset by the minority interest in losses of
subsidiaries.
<PAGE>
45
Income tax benefit. Income tax benefit for fiscal 1996 was $5.1 million.
The income tax benefit is due to an adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.
Cumulative effect of change in accounting for revenue from long-term
telecom services contracts. The increase in cumulative effect of change in
accounting for revenue from long-term telecom services contracts is due to the
change in accounting as described in "-Accounting Changes."
Net loss. Net loss increased $107.5 million, or 140%, due to the increases
in operating costs, SG&A expenses, depreciation and amortization, interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.
Quarterly Results
The following table presents selected unaudited operating results for
three-month quarterly periods, beginning with the three months ended December
31, 1995 and through the three months ended December 31, 1997. The Company
believes that all necessary adjustments have been included in the amounts stated
below to present fairly the quarterly results when read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Annual Report. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.
<PAGE>
46
<TABLE>
<CAPTION>
Three
Months
Three Months Ended Ended Three Months Ended
-------------------------------------------------- -----------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept.30, Dec. 31,
1995 1996 1996 1996 1996 1997 1997 1997 1997
------------ ------------ ------------ ----------- ------------ ----------- ---------- ----------- -------------
Statement of (Dollars in thousands)
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecom services $ 13,513 17,635 24,371 32,162 34,787 38,280 41,243 43,664 54,503
Network services 15,718 13,973 14,679 15,746 15,981 17,987 15,640 16,432 15,619
Satellites
services 6,168 4,336 5,596 5,197 6,188 6,783 7,883 7,640 7,680
------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
Total revenue 35,399 35,944 44,646 53,105 56,956 63,050 64,766 67,736 77,802
Operating loss (15,258) (15,823) (20,262) (37,031) (26,279) (40,915) (46,592) (46,543) (59,483)
Net loss before
cumulative effect
of change in
accounting (31,189) (26,939) (64,721) (57,805) (49,823) (66,781) (77,570) (80,047) (103,245)
Cumulative effect
of change in
accounting (1) (3,453) - - - - - - - -
------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
Net loss $ (34,642) (26,939) (64,721) (57,805) (49,823) (66,781) (77,570) (80,047) (103,245)
============ ============ ============ =========== ============================================== =============
Other Data:
EBITDA (2) (10,339) (8,381) (11,207) (12,957) (17,226) (29,901) (33,791) (31,699) (28,440)
Net cash used by
operating
activities (4,598) (16,400) (15,059) (7,300) (8,636) (14,770) (23,235) (33,219) (55,730)
Net cash used by
investing
activities (25,242) (51,322) (10,729) (47,911) (82,342) (60,219) (50,733) (193,587) (125,328)
Net cash (used)
provided by
financing
activities (8,413) (23,956) 400,467 (7,871) (170) 174,343 (3,100) 111,943 32,535
Capital
expenditures (3) 26,882 76,433 29,882 44,110 70,297 58,578 64,412 64,489 82,114
Statistical Data(4):
Full time employees 998 1,061 1,173 1,323 1,424 1,606 1,854 2,083 2,219
Telecom services:
Access lines in
service (5) - - - - - 5,371 20,108 50,551 141,035
Buildings connected:
On-net 304 327 384 478 522 545 560 590 596
Hybrid (6) 1,235 1,401 1,493 1,589 1,547 1,550 1,704 1,726 1,725
------------ ------------ ------------ ----------- ---------------------------------------------- -------------
Total buildings
connected 1,539 1,728 1,877 2,067 2,069 2,095 2,264 2,316 2,321
Customer circuits
in service
(VGEs) (7) 488,403 510,755 551,881 630,697 748,528 816,238 917,656 1,006,916 1,111,697
Operational
switches:
Voice 13 13 13 14 14 16 17 18 19
Data - - - - - 10 15 15 15
------------ ------------ ------------ ----------- ---------------------------------------------- -------------
Total
operational
switches 13 13 13 14 14 26 32 33 34
Switched minutes
of use (in
millions) 235 362 475 563 607 682 742 788 660
Fiber route
miles (8)
Operational 637 780 886 2,143 2,385 2,483 2,898 3,021 3,043
Under
construction - - - - - - - - 1,064
Fiber strand
miles (9)
Operational 28,779 36,310 45,098 70,067 75,490 83,334 101,788 109,510 111,435
Under
construction - - - - - - - - 16,366
Wireless
miles (10) 545 582 483 491 506 511 511 511 511
Satellite services:
VSATs 633 658 659 835 860 875 895 934 957
C-Band
installations(11) 33 36 48 48 54 57 57 54 57
L-Band
installations(12) - 3 53 109 204 355 671 768 1,239
- -----------
</TABLE>
(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. See "-Accounting Change." Other than the cumulative effect of
adopting this new method of accounting, the effect of this change in
accounting for the periods presented was not significant.
(2) EBITDA consists of revenue less operating costs and selling, general and
administrative expenses. 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 flows or results of operations in accordance
with GAAP for the periods indicated. EBITDA is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Data.
<PAGE>
47
(3) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's new headquarters which
the Company sold in January 1998 and leased back under a long-term
operating lease.
(4) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.
(5) Access lines in service at December 31, 1997 includes 66,346 lines which
are provisioned through the Company's switch and 74,689 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there are no assurances that
it will be successful in executing this strategy.
(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities. Hybrid buildings declined from
September 30, 1996 to December 31, 1996 due to the sale of the Company's
50% interest in the Phoenix joint venture.
(7) Customer circuits in service are measured in voice grade equivalents
("VGEs").
(8) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1997, the Company had 3,043
fiber route miles, of which 171 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.
(9) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1997, the Company had
111,435 fiber strand miles, of which 3,278 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.
(10) Wireless miles represents the total distance of the digital microwave paths
between Company transmitters which are used in the Company's networks.
(11) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.
(12) L-Band installations service smaller maritime installations, and both
mobile and fixed land-based units.
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. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996, Satellite Services
also contributed to the quarterly revenue growth.
<PAGE>
48
EBITDA, 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 1995 through the quarter ended December 31, 1997 resulted from a
combination of increases in negative margin switched access services revenue and
increases in personnel and other SG&A expenses to support the acquisition and
expansion of Telecom Services networks, the implementation of the Company's
switched access services strategy and development of local exchange services.
Since the quarter ended June 30, 1996, EBITDA losses have improved for each
consecutive quarter. As the Company provides a greater volume of higher margin
services, principally local exchange services, carries more traffic on its own
facilities rather than ILEC facilities and obtains the right to use unbundled
ILEC facilities, while experiencing decelerating increases in personnel and
other SG&A expenses supporting its Telecom Services networks, any or all of
which may not occur, the Company anticipates that EBITDA losses will continue to
improve in the near term.
Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.
Net Operating Loss Carryforwards
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $353.0 million, which expire at various times in
varying amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the utilization of a portion of the NOLs will be
limited. In addition, the Company is also subject to certain state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.
Section 382 of the Code 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.
Liquidity and Capital Resources
The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1997, the Company had current assets of
$310.2 million, including $217.0 million of cash, cash equivalents and
short-term investments available for sale, which exceeded current liabilities of
$99.3 million, providing working capital of $210.9 million. The Company invests
excess funds in short-term, interest-bearing investment-grade securities until
such funds are used to fund the capital investments and operating needs of the
Company's business. The Company's short term investment objectives are safety,
liquidity and yield, in that order.
<PAGE>
49
Cash Used By Operating Activities
The Company's operating activities used $42.8 million and $43.4 million in
fiscal 1995 and 1996, respectively, $4.6 million and $8.6 million for the three
months ended December 31, 1995 and 1996, respectively, and $127.0 million for
fiscal 1997. Cash used by operations is primarily due to net losses, which are
partially offset by non-cash expenses, such as depreciation and amortization
expense, deferred interest expense, preferred dividends on subsidiary preferred
securities and changes in working capital items.
The Company expects to continue to generate negative cash flows from
operating activities while it emphasizes the development, construction and
expansion of its Telecom Services business. Consequently, it does not anticipate
that cash provided by operations will be sufficient to fund operating
activities, future expansion of existing networks or the construction and
acquisition of new networks in the near term. As the Company provides a greater
volume of higher margin services, principally local exchange services, carries
more traffic on its own facilities rather than ILEC facilities and obtains the
right to use unbundled ILEC facilities, while experiencing decelerating
increases in personnel and other SG&A expenses supporting its Telecom Services
networks, any or all of which may not occur, the Company anticipates that cash
used by operating activities will continue to improve in the near term.
Cash Used By Investing Activities
Cash used by investing activities was $71.6 million and $135.2 million (net
of $21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1995 and 1996, respectively,
$25.2 million (net of $21.1 million received in connection with the
aforementioned equipment sale) and $82.3 million for the three months ended
December 31, 1995 and 1996, respectively, and $429.9 million for fiscal 1997.
Cash used by investing activities includes cash expended for the acquisition of
property, equipment and other assets of $50.1 million and $122.3 million for
fiscal 1995 and 1996, respectively, and $26.8 million and $50.8 million for the
three months ended December 31, 1995 and 1996, respectively, and $269.6 million
for fiscal 1997. Additionally, cash used by investing activities includes
payments for construction of the Company's new headquarters of $1.5 million,
$7.9 million and $29.4 million for fiscal 1996, the three months ended December
31, 1996 and fiscal 1997, respectively. The Company will continue to use cash in
investing activities in 1998 and subsequent periods for the construction of new
networks, the expansion of existing networks and potentially for acquisitions.
The Company acquired assets under capital leases and through the issuance of
debt or warrants of $38.7 million and $55.0 million in fiscal 1995 and 1996,
respectively, $0.1 million and $19.5 million for the three months ended December
31, 1995 and 1996, respectively, and zero for fiscal 1997.
<PAGE>
50
Cash Provided (Used) By Financing Activities
Financing activities provided $377.8 million and $360.2 million in fiscal
1995 and 1996, respectively, used $8.4 million and $0.2 million in the three
months ended December 31, 1995 and 1996, respectively, and provided $315.7
million in fiscal 1997. Cash provided by financing activities primarily includes
cash received in connection with the private placement of units consisting of
the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants in
August 1995, the 12 1/2% Notes and the 14 1/4% Preferred Stock in April 1996,
the 11 5/8% Notes and the 14% Preferred Stock in March 1997 and the 6 3/4%
Preferred Securities in September and October 1997. Historically, the funds to
finance the Company's business acquisitions, capital expenditures, working
capital requirements and operating losses have been obtained through public and
private offerings of ICG and Holdings-Canada common shares, convertible
subordinated notes, convertible preferred shares of Holdings-Canada, capital
lease financings and various working capital sources, including credit
facilities, in addition to the private placement of the securities previously
mentioned.
On March 11, 1997, Holdings completed a private placement of 11 5/8% Notes
and 100,000 shares of 14% Preferred Stock for net proceeds of approximately
$192.4 million. The Company believes the net proceeds of the private placement
will improve its operating and financial flexibility over the near term because
(a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and
(b) Holdings has the option to pay dividends on the 14% Preferred Stock in
additional shares of 14% Preferred Stock prior to 2002 and the Preferred Stock
is not mandatorily redeemable until 2008.
The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed
by ICG) that mature on March 15, 2007. Interest will accrue at 11 5/8% per
annum, beginning March 15, 2002, and is payable each March 15 and September 15,
commencing September 15, 2002. Dividends on the 14% Preferred Stock are
cumulative at a rate of 14% per annum and are payable quarterly in arrears each
March 15, June 15, September 15 and December 15, commencing June 15, 1997. The
14% Preferred Stock has a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends, and is mandatorily redeemable in 2008. The 14%
Preferred Stock is exchangeable, at the option of Holdings, into 14% senior
subordinated exchange debentures of Holdings due 2008, at any time after the
exchange is permitted under certain indenture restrictions.
On September 24 and October 3, 1997, ICG Funding completed a private
placement (guaranteed by ICG) of 2,645,000 6 3/4% Preferred Securities for net
proceeds, after underwriting costs, of approximately $127.6 million. Dividends
on the 6 3/4% Preferred Securities are payable quarterly in arrears each
February 15, May 15, August 15 and November 15, and commenced November 15, 1997.
The dividend is payable in cash through November 15, 2000, and in cash or shares
of ICG common stock, at the option of ICG Funding, thereafter. The 6 3/4%
Preferred Securities have a liquidation preference of $50 per security, plus
accrued and unpaid dividends, and are mandatorily redeemable in 2009. The 6 3/4%
Preferred Securities are exchangeable at any time prior to November 15, 2009
into shares of ICG Common Stock at a rate of 2.0812 shares of Common Stock per
preferred security or $24.025 per share.
<PAGE>
51
As of December 31, 1997, an aggregate of approximately $60.2 million of
capitalized lease obligations was due prior to December 31, 2001 and an
aggregate accreted value of approximately $887.5 million was outstanding under
the 13 1/2% Notes, the 12 1/2% Notes and the 11 5/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require payments of interest to
be made in cash commencing November 1, 2001 and mature on May 1, 2006. The 11
5/8% Notes require payments of interest to be made in cash commencing March 15,
2002 and mature on March 15, 2007. The 6 3/4% Preferred Securities require
payments of dividends to be made in cash and are being paid currently through
November 15, 2000. In addition, the 14% Preferred Stock and the 14 1/4%
Preferred Stock require payment of dividends to be made in cash commencing June
15, 2002 and August 1, 2001, respectively. As of December 31, 1997, the Company
had $7.9 million of other indebtedness outstanding. The Company may also have
additional payment obligations prior to such time, the amount of which cannot
presently be determined. The Company's cash on hand 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 through the first quarter of 1999.
With respect to indebtedness outstanding on December 31, 1997, the Company has
cash interest payment obligations of approximately $113.3 million in 2001,
$158.0 million in 2002 and $168.1 million in 2003. With respect to preferred
securities currently outstanding, the Company has cash dividend obligations of
approximately $8.9 million in each of 1998, 1999 and 2000, $21.5 million in
2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company
may have to refinance a substantial amount of indebtedness and obtain
substantial additional funds prior to March 2001. The Company's ability to do so
will depend on, among other things, its financial condition at the time,
restrictions in the instruments governing its indebtedness, and other factors,
including market conditions, beyond the control of the Company. There can be no
assurance that the Company will be able to refinance such indebtedness,
including such 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 or
make payments of cash dividends on, or the mandatory redemption of, its
preferred securities, would be adversely affected.
On February 12, 1998, ICG Services completed a private placement of 10%
Senior Discount Notes due 2008 for net proceeds, after underwriting costs, of
approximately $291.6 million. Interest will accrue at 10% per annum, beginning
February 15, 2003, and is payable each February 15 and August 15, commencing
August 15, 2003. The Notes will be redeemable at the option of ICG Services, in
whole or in part, on or after February 15, 2003.
Capital Expenditures
The Company expects to continue to generate negative cash flows from
operating activities over the near term 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
(including assets acquired under capital leases and excluding payments for
construction of the Company's new headquarters) were $88.7 million and $177.3
million for fiscal 1995 and 1996, respectively, $26.9 million and $70.3 million
for the three months ended December 31, 1995 and 1996, respectively, and $269.6
million for fiscal 1997. The Company anticipates that the expansion of existing
networks, construction of new networks and further development of the Company's
products and services will require capital expenditures of approximately $450.0
million during 1998, including capital expenditure requirements of NETCOM. To
facilitate the expansion of its services and networks the Company has entered
into equipment purchase agreements with various vendors under which the Company
must purchase a substantial amount of equipment and other assets, including a
full range of switching systems, fiber optic cable, network electronics,
software and services. Actual capital expenditures will depend on numerous
factors, including certain factors beyond the Company's control. These factors
include the nature of future expansion and acquisition opportunities, economic
conditions, competition, regulatory developments and the availability of equity,
debt and lease financing.
<PAGE>
52
Other Cash Commitments and Capital Requirements
The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisitions of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capitial expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited Consolidated Financial Statements for the fiscal year ended December 31,
1997 included elsewhere herein.
In view of the anticipated negative cash flows from operating activities,
the continuing development of the Company's products and services, the expansion
of existing networks and the construction, leasing and licensing of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available through 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 through the
first quarter of 1999. Additional sources of cash may include public and private
equity and debt financings, sales of non-strategic assets, capitalized leases
and other financing arrangements. The Company may 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.
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.
Year 2000 Compliance
While the Company believes that its software applications are year 2000
complaint, there can be no assurance until the year 2000 occurs that all systems
will then function adequately. Further, if the software applications of local
exchange carriers, long distance carriers or others on whose services the
Company depends are not year 2000 complaint, it could have a material adverse
effect on the Company's financial condition and results of operations.
<PAGE>
53
Accounting Change
During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.
As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Annual Report.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128") which revises the calculation and
presentation of Accounting Principles Board Opinion 15 and related
interpretations. The Company adopted SFAS 128 for the fiscal year ending
December 31, 1997, including the requirement for retroactive application. The
adoption of SFAS 128 had no effect on the Company's reported loss per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appear on page F-1 of
this Annual Report. The financial statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1
of this Annual Report.
<PAGE>
54
Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
ICG's corporate charter provides that Directors serve staggered three-year
terms. The Directors of ICG will hold office until the designated annual meeting
of stockholders 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 ICG:
Executive Committee, Audit Committee, Compensation Committee and Stock Option
Committee. The Executive Committee provides Board oversight for the operations
of the Company between Board meetings. 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, reviews certain filings
with the Securities and Exchange Commission, and reviews internal auditing
procedures and the adequacy of internal controls. The Compensation Committee
determines compensation for most executives and reviews transactions, if any,
with affiliates. The Stock Option Committee determines stock option awards. The
officers of ICG are elected by the Board 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 ICG.
Name Age Position
- ---------------------------------- ----- ---------------------------------------
William J. Laggett (2)(4)(5)(6)(7) 68 Chairman of the Board of Directors
J. Shelby Bryan (2)(6) 52 President, Chief Executive Officer
and Director
Douglas I. Falk 48 Executive Vice President -
Satellite and President of ICG
Satellite Services, Inc.
David W. Garrison (3)(4) 42 Director and President and Chief
Executive Officer of NETCOM
James D. Grenfell 46 Executive Vice President and Chief
Financial Officer
John Kane 45 Executive Vice President - Network
and President of FOTI
Marc E. Maassen 47 Executive Vice President -
Strategic Planning
Sheldon S. Ohringer 40 Executive Vice President - Telecom
and President of ICG Telecom Group
Inc.
H. Don Teague 55 Executive Vice President, General
Counsel and Secretary
Harry R. Herbst (3)(4)(5)(7) 46 Director
Leontis Teryazos (1)(5)(7) 55 Director
Walter Threadgill (1)(5)(7) 52 Director
(1) Term expires at annual meeting of stockholders in 1998.
(2) Term expires at annual meeting of stockholders in 1999.
(3) Term expires at annual meeting of stockholders in 2000.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
(6) Member of Executive Committee.
(7) Member of Stock Option Committee.
<PAGE>
56
Executive Officers of ICG
J. Shelby Bryan was appointed President, Chief Executive Officer and a Director
in May 1995. He has 18 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 cellular
service internationally, served as its President and Chief Executive Officer
from 1985 to 1994 and has served as a Director through the present.
Douglas I. Falk has been President of ICG Satellite Services, Inc. since August
1996 and Executive Vice President - Satellite since October 1996. Prior to
joining the Company, Mr. Falk held several positions in the cruise line
industry, including President of Norwegian Cruise Line, Senior Vice President -
Marketing and Sales with Holland America Lines/Westours and Executive Vice
President of Royal Viking Line. Prior to his work in the cruise line industry,
Mr. Falk held executive positions with MTI Vacations, Brown and Williamson
Tobacco, Pepsico International, Glendenning Associates and The Procter and
Gamble Company.
James D. Grenfell, Executive Vice President and Chief Financial Officer, joined
the Company in 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 telephone industry financial executive for over 16 years. He
was with BellSouth from 1985 through November 1996, 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 Corporation, including four years as Assistant
Treasurer.
John Kane has been Executive Vice President - Network and President of Fiber
Optic Technologies, Inc. since March 1998. Prior to joining the Company, Mr.
Kane had 25 years of industry experience. Most recently, Mr. Kane was Executive
Vice President Business Development for AMNEX, Inc., a specialty
telecommunications services company. From 1992 to 1995, Mr. Kane was Senior Vice
President for WCT Communications, Inc. where he built a national fiber optic
long distance network. Mr. Kane has also served as President of Americas
Carriers Telecommunications Association (ACTA) and is a frequent speaker at
industry conferences.
Marc E. Maassen has been Executive Vice President - Strategic Planning since
August 1996. Prior to this position, Mr. Maassen was Executive Vice President -
Network of ICG beginning in October 1995, and President of Fiber Optic
Technologies, Inc. in April 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. Mr. Maassen previously worked for First Interstate
as Director of Telecom and for AT&T Information Systems as an Account Executive
and for U S WEST as a Major Accounts Manager.
<PAGE>
57
Sheldon S. Ohringer has been Executive Vice President - Telecom of ICG and
President of ICG Telecom Group, Inc. since September 1997. Prior to this
position, Mr. Ohringer was Senior Vice President of Business Development and
Strategic Planning for ICG Telecom Group, Inc. since November 1994. Prior to
joining the Company, Mr. Ohringer was Senior Vice President of Sales and
Business Development for US Long Distance from May 1991 until October 1994. From
May 1984 until August 1990, Mr. Ohringer held key management and executive
positions with Telecom* USA, a major long distance carrier which was acquired by
MCI in 1990.
H. Don Teague joined the Company as Executive Vice President, General Counsel
and Secretary in May 1997. Prior to this position, Mr. Teague was Senior Vice
President, Administration and Legal with Falcon Seaboard Holdings, L.P. and its
predecessors from April 1994 through April 1997. From 1974 to April 1994, Mr.
Teague was a partner in the law firm of Vinson & Elkins L.L.P.
Directors of ICG
William J. Laggett has been Chairman of the Board of Directors 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.
David W. Garrison has been a Director of the Company since January 1998. In
March 1996, Mr. Garrison was appointed Chairman of the Board of Directors of
NETCOM and, since April 1995, Mr. Garrison has been NETCOM's Chief Executive
Officer. He has served as its President and a Director since February 1995. Mr.
Garrison also served as NETCOM's Chief Operating Officer from February 1995 to
April 1995. Mr. Garrison also serves on the Board of Directors of Ameritrade
Holding Corporation, Traveling Software, Inc. and the Internet Service
Association. From December 1990 to September 1994, Mr. Garrison was President of
SkyTel, a division of Mobile Telecommunications, Inc. ("MTEL"). During his
association with MTEL (1990 to 1994), Mr. Garrison also held positions as Senior
Vice President and Vice President. From 1986 to 1990, Mr. Garrison served
successively as Chief Operating Officer, President, Chief Executive Officer and
Chairman for Dial Page, a regional paging carrier based in Greenville, South
Carolina.
Harry R. Herbst has been a Director since October 1995 and has been Vice
President of Finance and Strategic Planning of Gulf Canada Resources Ltd. since
November 1995 and Vice President and Treasurer of Gulf Canada Resources Ltd.
from January to November 1995. Previously, Mr. Herbst was Vice President of
Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for
Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant,
formerly with Coopers & Lybrand.
<PAGE>
58
Leontis Teryazos has been a Director since June 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.
Walter Threadgill has been a Director since December 1997 and is the Managing
General Partner of Atlantic Coastal Ventures, L.P. Previously, Mr. Threadgill
was the President and CEO of Multimedia Broadcast Investment Corporation. He
also held tenures as Divisional Vice President of Fiduciary Trust Company in New
York, and as Sr. Vice President and Chief Operating Officer of United National
Bank in Washington D.C. Mr. Threadgill chaired the Presidential Small Business
Advisory Committee and served the National Association of Investment Companies
as Director, Treasurer, and Legislative Committee Chairman. Mr. Threadgill is a
member of the Federal Communications Bar Association.
Directors and Executive Officers of ICG Funding, Holdings-Canada and Holdings
The Directors and executive officers of each of ICG Funding,
Holdings-Canada and Holdings are set forth below. Biographical information
regarding each individual is set forth above (except as to Mr. Gregory C.K.
Smith, whose biographical information appears below).
ICG Funding
Common Member and Manager - ICG Communications, Inc.
Holdings-Canada
The Directors of Holdings-Canada are:
William J. Laggett (Chairman)
J. Shelby Bryan
Harry R. Herbst
Gregory C.K. Smith
Leontis Teryazos
The executive officers of Holdings-Canada are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President and Chief Financial
Officer
John Kane - Executive Vice President - Network
Marc E. Maassen - Executive Vice President - Strategic Planning
Sheldon S. Ohringer - Executive Vice President - Telecom
H. Don Teague - Executive Vice President, General Counsel and Secretary
<PAGE>
59
Gregory C.K. Smith, 39, has been a Director of Holdings-Canada since April 1994.
Mr. Smith, a lawyer, is a partner of Tupper Jonsson & Yeadon in Vancouver,
British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon
from June 1986 until he joined the partnership in April 1991.
Holdings
The Directors of Holdings are:
J. Shelby Bryan (Chairman)
James D. Grenfell
John Kane
Mark E. Maassen
Sheldon S. Ohringer
The executive officers of Holdings are:
J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Satellite
James D. Grenfell - Executive Vice President and Chief
Financial Officer
John Kane - Executive Vice President - Network
Marc E. Maassen - Executive Vice President - Strategic Planning
Sheldon S. Ohringer - Executive Vice President - Telecom
H. Don Teague - Executive Vice President, General Counsel and
Secretary
Compliance With Section 16(a) of the Exchange Act
The following table lists the Directors, officers and beneficial owners
of more than 10% of the outstanding Common Stock (each a "Reporting Person")
that failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year, the number of late reports, the
number of transactions that were not reported on a timely basis and any known
failure to file a required Form by each Reporting Person.
<TABLE>
<CAPTION>
Transactions Untimely Known Failures to File
Reporting Person Late Reports Reported Required Forms
- -------------------- -------------- --------------------- ----------------------
<S> <C> <C> <C>
Walter Threadgill 1 (Form 3) 1 None
Mark S. Helwege (1) 1 (Form 5) 3 None
</TABLE>
(1) Former Executive Vice President - Network and President of FOTI
<PAGE>
60
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
ICG compensates its non-employee Directors $250 for telephonic meetings and
$2,500 for each Board of Directors' meeting or committee meeting attended, or
$500 for committee meetings attended in conjunction with a Board of Directors'
meeting, plus reimbursement of expenses. In addition, the Chairman of the Board
receives an annual fee of $80,000 payable in quarterly installments. In fiscal
1996, all non-employee Directors of ICG were granted options to purchase 20,000
shares of Common Stock under ICG's 1995 Stock Option Plan, and during the
transition period from October 1, 1996 through December 31, 1996, all
non-employee Directors of ICG were granted options to purchase 5,000 shares of
Common Stock under ICG's 1996 Stock Option Plan (the "1996 Plan"). On January 1,
1997, all non-employee Directors of ICG were granted options to purchase 20,000
shares of Common Stock under the 1996 Plan, which vested as to 5,000 shares at
the end of each fiscal quarter. On June 17, 1997, all non-employee Directors of
ICG were granted an additional option to purchase 5,000 shares of Common Stock
under the 1996 Plan. On January 1, 1998, all non-employee Directors of ICG were
granted options to purchase 20,000 shares of Common Stock under the 1996 Plan,
which vest as to 5,000 shares at the end of each fiscal quarter.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee presently consists of four non-employee
Directors: William J. Laggett, Chairman of the Board of Directors, Harry R.
Herbst, Walter Threadgill and Leontis Teryazos.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company (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 stockholders. 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 for the Company to achieve its goals
of continuing to develop new services and expanding into new businesses and
markets. The Compensation Committee attributes a substantial portion of the
Company's overall performance, as well as the individual contributions of the
executive officers, to the executive officers' compensation.
<PAGE>
61
The Company has employment agreements with several of its executive
officers. See "Executive Employment Contracts" for descriptions of those
agreements. All senior management, except for J. Shelby Bryan, President and
Chief Executive Officer, 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 accomplishment 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 1997,
Chairman Laggett recommended, and the Compensation Committee approved, bonuses
for the named executive officers of the Company. See "Summary Compensation
Table" for the bonuses paid to executive officers.
The compensation of the Company's President and Chief Executive Officer, J.
Shelby Bryan, is set forth in his employment contract. His base salary is
computed as: the sum of (x) one percent (1%) of the increase in Revenues of the
Company for such month over Revenues of the Company for the immediately prior
month and (y) three percent (3%) of the increase in Earnings Before Income
Taxes, Depreciation and Amortization ("EBITDA") of the Company for such month
over EBITDA of the Company for the immediately prior month. In addition, Mr.
Bryan receives other benefits. See "Summary Compensation Table" for the type and
amount of these payments. The Compensation Committee believes that the
compensation paid to Mr. Bryan is a suitable compensation package based on Mr.
Bryan's experience in the communications industry and because his compensation
is directly tied to the performance of the Company.
In addition, the Stock Option Committee awarded stock options to certain
employees of the Company, including executive officers. These grants were
related to the executive officers' performance in fiscal 1996 and as incentives
for continued efforts and success and were based on individual performance and
responsibility. 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. The
Compensation and Stock Option Committees do 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 stock. See "Summary Compensation Table" for the stock
options granted to the executive officers.
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. The Compensation Committee observed that
revenue increased $82.7 million, approximately 43%, in fiscal 1997 as compared
with the 12 months ended December 31, 1996. The Company's networks have grown
from approximately 2,385 operational fiber route miles at December 1996 to
approximately 3,043 operational miles at the end of fiscal 1997. The Company
also raised net proceeds of $320.0 million from the issuance of preferred
securities and notes during fiscal 1997. These accomplishments exceeded the
Company's objectives for fiscal 1997. The Compensation Committee believes that
the Company appropriately awarded its executive officers for their short- and
long-term efforts.
<PAGE>
62
The Compensation Committee continually evaluates the compensation of the
Company's executive officers, including assessing 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
stockholder value.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Compensation Committee)
Executive Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries, to or on
behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer,
the four other most highly compensated executive officers of the Company and one
additional officer for whom disclosure would have been required but for the fact
that the individual was not serving as executive officer at December 31, 1997
(the "Named Officers") for the fiscal years ended December 31, 1997, September
30, 1996 and 1995. Due to the Company's change in year end during 1996 from
September 30 to December 31, additional amounts are shown below in the Summary
Compensation Table for the 12 months ended December 31, 1996 and are referred to
in such tables as "1996T." The Company has not maintained any long-term
incentive plans and the Company has not granted stock appreciation rights.
<PAGE>
63
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-term Compensation
----------------------------------------------- ---------------------------
Fiscal Other Annual Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options
- ------------------------------ --------- ------------- --------------- ------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
J. Shelby Bryan 1997 473,065 (1) - 86,095 (2) -
President and Chief 1996T 161,178 (1) - 91,812 (3) -
Executive Officer 1996 221,196 (1) - 78,919 (4) 450,000
1995 30,728 - - 1,550,000
James D. Grenfell 1997 200,000 68,000 26,600 (5) 47,500 (6)
Executive Vice President and 1996T 181,250 71,665 (7) 145,360 (8) 40,000
Chief Financial Officer 1996 148,526 46,665 138,435 (9) 50,000
1995 - - - -
Sheldon S. Ohringer 1997 164,792 73,245 15,112 (10) 17,500 (6)
Executive Vice President - 1996T 135,000 42,865 (11) 9,687 (12) 7,500
Telecom and President of ICG 1996 130,000 28,945 3,600 40,000
Telecom Group, Inc. 1995 110,000 - 3,600 15,000
Marc E. Maassen 1997 165,000 56,332 30,723 (13) 10,500 (6)
Executive Vice President - 1996T 156,244 43,125 (14) 25,244 (15) 7,000
Strategic Planning 1996 147,092 22,500 25,341 (16) 40,000
1995 131,933 60,000 9,291 (17) 15,000
Henry R. Carabelli 1997 178,333 58,984 14,605 (18) 50,000 (6)
Executive Vice President 1996T 113,462 91,105 (19) 77,637 (20) 35,000
and Chief of Operations of 1996 - - - -
ICG Telecom Group, Inc. 1995 - - - -
William J. Maxwell 1997 222,727 69,480 47,977 (21) 50,000 (6)
Former President of 1996T 228,750 147,880 (22) 29,322 (23) 25,000
ICG Enterprises Division 1996 222,917 117,160 18,632 (24) 75,000
1995 205,475 75,000 8,288 (17) 75,000
</TABLE>
(1) Consists of amount earned pursuant to the compensation formula in Mr.
Bryan's employment agreement.
(2) Consists of $40,777 for car allowance, $44,422 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$896.
(3) Consists of $30,236 for car allowance, $49,683 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$11,893.
(4) Consists of $25,991 for car allowance, $43,428 for housing expenses and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$9,500.
(5) Consists of $15,292 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $11,308.
(6) Includes options regranted as a result of the repricing of the Company's
options on April 16, 1997. See "-Ten-Year Option/SAR Repricings."
(7) Consists of bonus earned during fiscal 1996 ($46,665) and bonus earned
during the three months ended December 31, 1996 ($25,000).
(8) Consists of relocation expense in the amount of $121,600, car allowance of
$12,067 and Company contributions to 401(k) Defined Contribution Plan in
the amount of $11,693.
(9) Consists of relocation expenses in the amount of $117,295, car allowance of
$11,640 and Company contributions to 401(k) Defined Contribution Plan in
the amount of $9,500.
(10) Consists of $7,000 for car allowance, $234 for club dues and Company
contributions to 401(k) Defined Contribution Plan in the amount of $7,878.
(11) Consists of bonus earned during fiscal 1996 ($28,945) and bonus earned
during the three months ended December 31, 1996 ($13,920).
<PAGE>
64
(12) Consists of $3,600 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $6,087.
(13) Consists of $21,394 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,329.
(14) Consists of bonus earned during fiscal 1996 ($22,500) and bonus earned
during the three months ended December 31, 1996 ($20,625).
(15) Consists of $18,072 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,172.
(16) Consists of $16,428 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $8,913.
(17) Consists of Company contributions to 401(k) Defined Contribution Plan.
(18) Consists of $7,500 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $7,105.
(19) Consists of bonus earned during fiscal 1996 ($47,625), bonus earned during
the three months ended December 31, 1996 ($18,480) and hiring bonus
($25,000).
(20) Consists of relocation expense of $65,973, car allowance of $2,932, and
Company contributions to 401(k) Defined Contribution Plan in the amount of
$8,732.
(21) Consists of $11,000 for car allowance, $23,076 for vacation and Company
contributions to 401(k) Defined Contribution Plan in the amount of $13,901.
(22) Consists of bonus earned during fiscal 1996 ($117,160) and bonus earned
during the three months ended December 31, 1996 ($30,720).
(23) Consists of $11,300 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $18,022.
(24) Consists of $9,200 for car allowance and Company contributions to 401(k)
Defined Contribution Plan in the amount of $9,432.
<PAGE>
65
Option/SAR Grants in Last Fiscal Year
The Company granted no stock appreciation rights during fiscal 1997 to the
Named officers or to other employees. The following table provides information
on option grants during fiscal 1997 to the Named Officers:
<TABLE>
<CAPTION>
Potential realizable
value at assumed
Individual grants annual rates of stock
-------------------------------------- price appreciation for
Number of Percent of total Exercise option term
securities options granted or base ------------------------
underlying to employees in price Expiration
Name options granted fiscal year ($/Sh) date 5% ($) 10% ($)
(#)
- ----------------------- -------------------- ------------------ --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan - - - - - -
James D. Grenfell 40,000 2.9 10.375(1) 10/22/06 245,273 613,054
7,500 0.5 10.375 4/16/07 48,936 124,013
Sheldon S. Ohringer 7,500 0.5 10.375(1) 10/22/06 45,989 114,948
10,000 0.7 10.375 4/16/07 65,248 165,351
Marc E. Maassen 7,000 0.5 10.375(1) 10/22/06 42.923 107,284
3,500 0.3 10.375 4/16/07 22,837 57,873
Henry R. Carabelli 20,000 1.5 10.375(1) 3/7/06 112,684 276,690
15,000 1.1 10.375(1) 10/22/06 91,978 229,895
15,000 1.1 10.375 4/16/07 97,871 248,026
William J. Maxwell 25,000 (2) 1.8 10.375(1) 10/22/06 153,296 383,158
25,000 (2) 1.8 10.375 4/16/07 163,120 413,377
</TABLE>
(1) In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997 with
exercise prices at or in excess of $15.875 were repriced by the Stock
Option Committee of the Company's Board of Directors to $10.375, the
closing price of the Common Stock on April 16, 1997. See "-Ten-Year
Option/SAR Repricings."
(2) As a result of Mr. Maxwell's resignation on December 3, 1997, 43,750 of the
options granted during fiscal 1997 have been canceled.
<PAGE>
66
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
The following table provides information on options exercised during fiscal
1997 by the Named Officers and the value of such officers' unexercised options
at December 31, 1997:
<TABLE>
<CAPTION>
Number of securities Value of unexercised
in-the-
underlying unexercised money options at
Shares options at fiscal year end (#) fiscal year end ($)(1) (2)
acquired on Value ------------------------------- ----------------------------
Name exercise (#) realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Shelby Bryan - - 1,775,000 225,000 33,815,625 3,881,250
James D. Grenfell - - 35,000 62,500 600,000 1,064,063
Sheldon S. Ohringer - - 36,875 35,625 586,641 608,672
Marc E. Maassen - - 52,750 32,750 834,515 555,152
Henry R. Carabelli - - 8,750 41,250 147,656 696,094
William J. Maxwell - - 294,750 - 5,258,248 -
</TABLE>
(1) Based on the closing price of Common Stock of $27.25 on December 31, 1997.
(2) Options granted prior to fiscal 1994 contained exercise prices stated in
Canadian dollars; value listed is based on the exchange rate of 1.4296 in
effect on December 31, 1997.
Ten-Year Option/SAR Repricings
Report on Repricing of Options/SARs
The Stock Option Committee of the Board of Directors of the Company (the
"Committee") is responsible for administering the Company's Stock Option Plans,
as well as granting any stock options thereunder. The Committee is composed of
four independent, non-employee directors.
In 1996, the Company established the 1996 Stock Option Plan (the "Plan").
Prior to that time, the Plan was known as the IntelCom Group Inc. Restated and
Amended 1995 Stock Option Plan (the "IntelCom Plan"). Effective as of August 2,
1996, the Company assumed sponsorship of, and immediately thereafter amended and
restated, the IntelCom Plan. The Plan constitutes a continuation of the IntelCom
Plan, as assumed by the Company.
The purpose of the Plan is to promote success and enhance the value of the
Company by linking the personal interest of participants to those of the Company
stockholders by providing participants with an incentive for outstanding
performance. The Plan is further intended to assist the Company in its ability
to motivate, and retain the services of, participants upon whose judgement,
interest and special effort the successful conduct of its operations is largely
dependent. Stock options are awarded by the Committee according to the terms of
the Plan. Up to an aggregate number of 2,500,000 shares may be granted under the
Plan, reduced by the number of Common Shares of IntelCom represented by options
granted to individuals under the IntelCom Plan prior to August 2, 1996. When
awarding stock options, the Committee takes into consideration the individual's
past performance and contribution to the Company, as well as future potential.
<PAGE>
67
In April 1997, the Committee considered repricing certain existing stock
options that, as a result of recent stock declines in the Company's industry,
had an exercise price in excess of the then fair market value of the Company's
Common Stock. Specifically, approximately 154,000 stock options granted on March
7, 1996 as part of employee bonus compensation had an exercise price of $15.875,
approximately 219,000 options granted in connection with recent new hires had
exercise prices ranging from $16.25 to $26.25, and approximately 225,000 options
granted as part of employee bonus compensation on October 22, 1996 had an
exercise price of $19.125 per share. At those prices, the Committee believed
that the options were not able to effectively serve as incentives for the
employees and that, in the current competitive market place, the Company needed
to have a strong incentive compensation program in place in order to retain,
keep and motivate its employees.
Consequently, the Committee approved the repricing of all outstanding
employee stock options previously granted under the stock option plans of the
Company (and its predecessor, IntelCom Group Inc.) which options were
exercisable at prices at or in excess of $15.875 per share (the "Eligible
Options"). The repricing was accomplished through an offer to all holders of
Eligible Options to exchange the Eligible Options for new stock options (the
"Repriced Options"), as of April 19, 1997, under the same terms and conditions
(including vesting) contained in the stock option plan as originally granted the
Eligible Option. The Repriced Options are exercisable at a price of $10.375 per
share, which was the closing price of a common share of Common Stock, $.01 par
value, of the company on the Nasdaq National Market on April 19, 1997.
William J. Laggett
Harry R. Herbst
Leontis Teryazos
Walter Threadgill
(Members of the Stock Option Committee)
<PAGE>
68
The following provides information on the repricing of stock options of the
Named Officers:
<TABLE>
<CAPTION>
Number of
securities Length of original
underlying Market price of Exercise price option term
options stock at time of at time of remaining at date
repriced or repricing or repricing or New exercise of repricing or
Name Date amended (#) amendment ($) amendment ($) price ($) amendment
- ------------------------- ---------- ---------------- ------------------ ---------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Shelby Bryan 4/16/97 - - - - -
President and
Chief Executive Officer
James D. Grenfell 4/16/97 40,000 10.375 19.125 10.375 (1) 113 months
Executive Vice
President and Chief
Financial Officer
Sheldon S. Ohringer 4/16/97 7,500 10.375 19.125 10.375 (1) 113 months
Executive Vice
President - Telecom and
President of ICG
Telecom Group, Inc.
Marc E. Maassen 4/16/97 7,000 10.375 19.125 10.375 (1) 113 months
Executive Vice
President - Strategic
Planning
Henry R. Carabelli 4/16/97 15,000 10.375 19.125 10.375 (1) 113 months
Executive Vice 20,000 10.375 15.875 10.375 (1) 107 months
President and Chief of
Operations of ICG
Telecom Group, Inc.
William J. Maxwell 4/16/97 25,000 10.375 19.125 10.375 (1) 113 months
Former President of ICG
Enterprises Division
</TABLE>
(1) Represents the closing price of the Common Stock on April 16, 1997.
Executive Employment Contracts
The Company and its subsidiaries have employment agreements with Messrs. J.
Shelby Bryan, Douglas I. Falk, David W. Garrison, James D. Grenfell and H. Don
Teague.
The Company's amended employment agreement with Mr. Bryan provides for a
term of two years, which commenced June 1, 1997. As compensation, the Company
will pay Mr. Bryan a salary equal to the sum of one percent of the monthly
increase in Company revenue and three percent of the monthly increase in EBITDA.
If Mr. Bryan's salary exceeds $1,500,000 in any fiscal year, the Company may
elect to pay such excess in unregistered ICG Common Stock. Mr. Bryan is entitled
to benefits as are generally provided to executive officers of ICG, 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 six-month consecutive
period, or by Mr. Bryan for cause, including breach of the agreement or
reduction in status or responsibilities, or change of control. If the employment
agreement is terminated 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 non-competition commitment.
<PAGE>
69
The Company's employment agreement with Mr. Falk, dated August 14, 1996,
has an initial one-year term commencing August 26, 1996 and continues from
month-to-month thereafter until either party provides 30 days notice of
termination. The agreement provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Falk also receives stock options
under the stock option plans. If the Company terminates the employment agreement
without cause or if the Company or Mr. Falk terminates the employment agreement
upon the occurrence of a major transaction involving the Company, then Mr. Falk
will receive his salary and insurance benefits for a period of 12 months
following the date of termination. Mr. Falk is subject to a confidentiality
covenant and to a one-year non-competition commitment following the termination
of his employment.
NETCOM's employment agreement with Mr. Garrison which commenced June 1,
1997 provides for an annual base salary and an incentive bonus determined by the
Board of Directors. Mr. Garrison is entitled to such other benefits including
stock options under the Company's stock option plans, car allowance and
reimbursement or direct payment of reasonable out-of-pocket expenses incurred on
behalf of the Company. The Company may terminate the employment agreement at any
time and for any reason upon written notice. Mr. Garrison may terminate the
employment agreement for any reason by giving the Company 30 days written
notice. If termination without cause occurs six months after a change of
control, Mr. Garrison will receive his salary, insurance benefits and his annual
incentive bonus earned on a quarterly basis for a period of 12 months. If
termination without cause occurs within six months after a change in control,
Mr. Garrison will receive two times his salary, 200% of the greater of his prior
year's incentive bonus or his annual incentive bonus earned on a quarterly basis
and two years of life insurance. Mr. Garrison is subject to a confidentiality
covenant.
The Company's employment agreement with Mr. Grenfell originally provided
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 renewed
and will continue to automatically renew from month-to-month such that 12 months
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. 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, use of a company car and reimbursement or direct payment of
reasonable out-of-pocket expenses incurred on behalf of the Company. The
agreement provides for an annual base salary and an incentive bonus determined
by the Board of Directors. If the employment agreement is terminated without
cause by the Company or by either party upon the occurrence of a change of
control involving the Company, Mr. Grenfell will receive a termination fee equal
to his current monthly salary times the number of months remaining in the term.
Mr. Grenfell is also subject to a ten-year confidentiality covenant and a
one-year non-competition commitment.
<PAGE>
70
The Company's employment agreement with Mr. Teague provides for an initial
two-year term which commenced May 19, 1997. Upon completion of the first 12
months of the initial term, the agreement automatically renews from
month-to-month such that 12 months remain in the term. The agreement provides
for an annual base salary and an incentive bonus determined by the Board of
Directors. Mr. Teague is also 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 car allowance and reimbursement of reasonable
out-of-pocket expenses incurred on behalf of the Company. The agreement may be
terminated by the Company upon 30 days written notice if Mr. Teague is unable to
perform his duties for 140 days in any 180-day period due to illness or
incapacity. The agreement may also be terminated by the Company or Mr. Teague
upon 30 days written notice in certain other circumstances. If the employment
agreement is terminated as a result of illness or incapacity or without cause by
the Company or by either party upon the occurrence of a change of control
involving the Company, Mr. Teague will receive a termination fee equal to his
current monthly salary times the number of months remaining in the term. Mr.
Teague is also subject to a ten-year confidentiality covenant and a one-year
non-competition commitment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, the number of
shares of Common Stock owned by all executive officers and Directors of ICG
individually and as a group, and each person who owned of record, or was known
to own beneficially, more than 5% of the outstanding shares of Common Stock. The
persons named in the table below have sole voting and investment power with
respect to all of the shares of Common Stock owned by them, unless otherwise
noted.
<PAGE>
71
<TABLE>
<CAPTION>
Amount/Nature of
Beneficial Ownership
Name and Address of Beneficial Owner Percent (1)
----------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
Montgomery Asset Management, L.P. . . . . . . . . . . . . . . . 4,158,000 9.3%
101 California Street
San Francisco, CA 94111
FMR Corporation . . . . . . . . . . . . . . . . . . . . . . . . 3,245,923 7.3%
82 Devonshire Street
Boston, MA 02109
Franklin Advisers, Inc. . . . . . . . . . . . . . . . . . . . 3,182,130 (2) 7.2%
777 Mariners Island Boulevard
San Mateo, CA 94404
William J. Laggett . . . . . . . . . . . . . . . . . . . . . . 80,297 (3) *
Chairman of the Board
J. Shelby Bryan . . . . . . . . . . . . . . . . . . . . . . . 1,795,736 (4) 3.9%
President, Chief Executive Officer and Director
Douglas I. Falk . . . . . . . . . . . . . . . . . . . . . . . 8,079 (5) *
Executive Vice President - Satellite and President of ICG
Satellite Services, Inc.
David W. Garrison . . . . . . . . . . . . . . . . . . . . . . 263,209 (6) *
Director and President and Chief Executive Officer of NETCOM
James D. Grenfell . . . . . . . . . . . . . . . . . . . . . . 37,964 (7) *
Executive Vice President and Chief Financial Officer
Mark S. Helwege .. . . . . . . . . . . . . . . . . . . . . . . 3,258 (8) *
Former Executive Vice President - Network and President of FOTI
Marc E. Maassen . . . . . . . . . . . . . . . . . . . . . . . 57,531 (9) *
Executive Vice President - Strategic Planning
Sheldon S. Ohringer . . . . . . . . . . . . . . . . . . . . . 62,475 (10) *
Executive Vice President - Telecom and President of ICG Telecom
Group, Inc.
H. Don Teague . . . . . . . . . . . . . . . . . . . . . . . . 12,500 (3) *
Executive Vice President, General Counsel and Secretary
Harry R. Herbst . . . . . . . . . . . . . . . . . . . . . . . 55,934 (3) *
Director
Leontis Teryazos . . . . . . . . . . . . . . . . . . . . . . . 75,000 (3) *
Director
(Continued)
</TABLE>
<PAGE>
72
<TABLE>
<CAPTION>
Amount/Nature of
Beneficial Ownership
Name and Address of Beneficial Owner Percent (1)
----------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
Walter Threadgill . . . . . . . . . . . . . . . . . . . . . . 5,000 (3) *
Director
All executive officers and Directors as a group (12 persons) 2,456,983 (11) 5.2%
</TABLE>
- ------------------
*Less than one percent of the outstanding shares of Common Stock.
(1) Based on 44,476,632 issued and outstanding shares of Common Stock on
February 28, 1998, plus shares of Common Stock which may be acquired by the
person or group indicated pursuant to any options and warrants exercisable,
or pursuant to any shares vesting under the Company's 401(k) Plan within 60
days.
(2) Franklin Advisers, Inc. has reported on Schedule 13G that its parent
holding company, Franklin Resources, Inc. ("FRI"), and Charles B. Johnson
and Rupert H. Johnson, Jr., principal shareholders of FRI, beneficially own
the shares reflected in this table.
(3) Represents shares which may be acquired pursuant to the exercise of
outstanding stock options.
(4) Includes 15,000 shares of Common Stock held by Mr. Bryan, 2,000 shares of
Common Stock held in Mr. Bryan's spouse's name for which Mr. Bryan
disclaims beneficial ownership, 3,736 shares of Common Stock held by a
401(k) Plan in Mr. Bryan's name and 1,775,000 shares of Common Stock which
may be acquired pursuant to the exercise of outstanding stock options.
(5) Includes 475 shares of Common Stock held by Mr. Falk, 729 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 6,875
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(6) Includes 17,256 shares of Common Stock held directly by Mr. Garrison and
245,953 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(7) Includes 662 shares of Common Stock held by a 401(k) Plan, 427 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 36,875
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(8) Includes 436 shares of Common Stock held by a 401(k) Plan, 322 unrestricted
shares of Common Stock held by an Employee Stock Purchase Plan and 2,500
shares of Common Stock which may be acquired pursuant to the exercise of
outstanding stock options.
(9) Includes 3,572 shares of Common Stock held by a 401(k) Plan, 334
unrestricted shares of Common Stock held by an Employee Stock Purchase Plan
and 53,625 shares of Common Stock which may be acquired pursuant to the
exercise of outstanding stock options.
(10) Includes 20,800 shares of Common Stock held directly by Mr. Ohringer, 1,057
shares of Common Stock held by a 401(k) Plan, 1,243 unrestricted shares of
Common Stock held by an Employee Stock Purchase Plan and 39,375 shares of
Common Stock which may be acquired pursuant to the exercise of outstanding
stock options.
(11) Includes 55,531 shares of Common Stock held directly by the executive
officers and Directors of ICG as a group, 9,463 shares of Common Stock held
by a 401(k) Plan, 3,055 shares of Common Stock held by an Employee Stock
Purchase Plan and 2,388,934 shares of Common Stock which may be acquired
pursuant to the exercise of outstanding stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To facilitate the acquisition of certain competitive access networks and
satellite services businesses which held common carrier radio licenses subject
<PAGE>
73
to foreign ownership restrictions, the common carrier licenses used by the
Company's teleports and the wireless competitive access networks were
controlled, prior to November 30, 1997, by Teleport Transmissions Holdings Inc.
("TTH"), a corporation owned one-third each by U.S. Director William J. Laggett
and two former Directors. TTH's subsidiaries gave 15-year promissory notes to
ICG to acquire the FCC licenses. After receipt of approval from the FCC, the
Company exercised its option on November 30, 1997 to have the common carrier
licenses transferred back to the Company. Upon completion of the transfer of the
licenses, the promissory notes were canceled. In fiscal 1997, the Company paid
or accrued approximately $0.6 million to TTH's subsidiaries for common carrier
services, and the Company received from TTH's subsidiaries approximately $2.4
million as payment in full on the promissory notes, management services,
equipment leases and technical support. In addition, approximately $1.1 million
of the note balances were canceled due to the sale of the licenses in
conjunction with the sale of four of the Company's teleports. See
"Business-Regulation."
Holdings-Canada and International Communications Consulting, Inc. ("ICC")
have entered into a three-year consulting agreement whereby ICC will provide
various consulting services to the Company through December 1999 in exchange for
approximately $4.2 million in consulting fees to be paid during the term of the
agreement. During fiscal 1997, the Company paid approximately $1.1 million
related to this consulting agreement. William W. Becker, a former Director and
stockholder of the Company, is President and Chief Executive Officer of ICC.
As part of a resolution and settlement of certain transactions in 1995
between the Company and the Becker Group of Companies (the "Becker Group"), a
company founded by William W. Becker, the Company was assigned a note receivable
in the amount of $200,000, which had previously been advanced to John D. Field,
a former executive officer of the Company, by the Becker Group. The note
receivable is evidenced by a promissory note from Mr. Field to the Company
payable on demand, which bears interest at a rate of 7% per annum.
In order to facilitate the relocation of William J. Maxwell, a former
executive officer of the Company, 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 March 1998, the April 1994 promissory
note was replaced with a new promissory note for $125,000 which is due in full
on September 30, 1998.
<PAGE>
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included
in Item 8 of Part II:
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997. . . F-3
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995(unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Years Ended September 30, 1995 and 1996, the
Three Months Ended December 31, 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements, December 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . F-12
(2) Financial Statement Schedule. The following Financial
Statement Schedule is submitted herewith:
Independent Auditors' Report . . . . . . . . . . . . . . . . S-2
Schedule II: Valuation and Qualifying Accounts . . . . . . . S-3
(3) List of Exhibits.
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
<PAGE>
75
(3) Corporate Organization.
3.1: Memorandum and Articles of IntelCom Group Inc., as amended, filed
with the Registrar of Companies, Province of British Columbia,
Canada [Incorporated by reference to IntelCom Group Inc.'s Annual
Report on Form 20-F for the year ended September 30, 1992].
3.2: Altered Memorandum and Articles of IntelCom Group Inc., as
amended by Special Resolution passed October 7, 1994, filed with
the Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual Report
on Form 10-K for the year ended September 30, 1994].
3.3: Certificate of Incorporation, as amended, from the Registrar of
Companies, Province of British Columbia, Canada [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1992].
3.4: Certificate of Change of Name (under the B.C. Act) from the
Registrar of Companies, Province of British Columbia, Canada
[Incorporated by reference to IntelCom Group Inc.'s Annual Report
on Form 20-F for the year ended September 30, 1993, as filed on
September 30, 1994].
3.5: Certificate of Continuance from Industry Canada, dated October
30, 1995. [Incorporated by reference to Exhibit 3.5 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1995].
3.6: Certificate of Incorporation of ICG Communications, Inc. dated
April 11, 1996. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of ICG Communications, Inc.,
File No. 333-4226].
3.7: By-laws of ICG Communications, Inc. [Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
(4) Instruments Defining the Rights of Security Holders, Including
Indentures.
4.1: Memorandum of Articles for the Registrant, Certificate of
Incorporation and copies of all Amendments thereto, filed with
the Registrar of Companies for the Province of British Columbia,
Canada [Incorporated by reference to Exhibit (i) to IntelCom
Group Inc.'s Form 20-F for the fiscal year ending September 30,
1991].
4.2: Note Purchase Agreement dated September 16, 1993 [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1993, as filed on September 30,
1994].
4.3: Note Purchase Agreement dated October 27, 1993 [Incorporated by
reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
the year ended September 30, 1993, as filed on September 30,
1994].
<PAGE>
76
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 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 Registration Statement on Form S-1 of IntelCom Group Inc.,
File No. 33-75636].
4.6: Note Purchase Agreement, dated as of July 14, 1995, among the
Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley Group
Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P.,
PGI Investments Limited, PGI Investments Limited, PGI Sweden AB,
and Gregor von Opel and Morgan Stanley Group, Inc., as Agent for
the Purchasers [Incorporated by reference to Exhibit 4.1 to Form
8-K of IntelCom Group Inc., dated July 18, 1995].
4.7: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference to
Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated July 18,
1995].
4.8: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.),
Inc., File No. 333-04569].
4.9: Articles of Continuation of IntelCom Group Inc. [Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-4 of
ICG Communications, Inc., File No. 333-4226].
4.10:Indenture, dated August 8, 1995, among IntelCom Group (U.S.A.)
Inc., IntelCom Group Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.6 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.)
Inc., File Number 33-96540].
4.11:Indenture, dated April 30, 1996, among IntelCom Group (U.S.A.)
Inc., IntelCom Group Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.14 to
Registration Statement on Form S-4 of IntelCom Group (U.S.A.)
Inc., File No. 333-04569].
4.12:Indenture, dated March 11, 1997, among ICG Holdings, Inc., ICG
Communications, Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4 of ICG Communications, Inc.,
File No. 333-24359].
4.13:Written Action of the Manager of ICG Funding, LLC, dated as of
September 24, 1997, with respect to the terms of the 6 3/4%
Exchangeable Limited Liability Company Preferred Securities
[Incorporated by reference to Exhibit 4.8 to Registration
Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495].
<PAGE>
77
4.14:Amended and Restated Limited Liability Company Agreement of ICG
Funding, LLC, dated as of September 23, 1997 [Incorporated by
reference to Exhibit 4.4 to Registration Statement on Form S-3 of
ICG Funding, LLC, File No. 333-40495].
(9) Voting Trust Agreement. None.
(10) Material Contracts.
10.1:Arrangement and Support Agreement dated June 27, 1996 between
ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by
reference to Exhibit 2.1 to Registration Statement on Form S-4 of
ICG Communications, Inc. (Commission File No. 333-4226)].
10.2:Stock Purchase Agreement and Accord and Satisfaction Agreement
dated June 24, 1993, between Joseph T. Buck III and William A.
Byrd and TDI [Incorporated by reference to Exhibit 3.28 to
IntelCom Group Inc.'s Annual Report on Form 20-F for the fiscal
year ended September 30, 1993].
10.3:Full Payout Net Lease dated June 7, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.34 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993.]
10.4:Full Payout Net Lease dated June 18, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.35 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.5:Full Payout Net Lease dated July 16, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.36 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.6:Full Payout Net Lease dated November 10, 1993 between Applied
Telecommunications Technologies, Inc. and Teleport Denver, Inc.
[Incorporated by reference to Exhibit 3.37 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.7:Stock Purchase Agreement dated August 23, 1993, between Cliff
Arellano, Nancy Arellano and TDI [Incorporated by reference to
Exhibit 3.29 to IntelCom Group Inc.'s Annual Report on Form 20-F
for the fiscal year ended September 30, 1993].
<PAGE>
78
10.8:Asset Purchase Agreement dated November 18, 1993, between Mtel
Digital Services, Inc. and IntelCom Group Inc. [Incorporated by
reference to Exhibit 3.30 to IntelCom Group Inc.'s Annual Report
on Form 20-F for the fiscal year ended September 30, 1993].
10.9: Stock Purchase Agreement dated November 18, 1993, between
IntelCom Group Inc., TDI, Pacific Telecom Inc., PTI Harbor Bay,
Inc., Bay Area Teleport, Inc., and Upsouth Corporation
[Incorporated by reference to Exhibit 3.31 to IntelCom Group
Inc.'s Annual Report on Form 20-F for the fiscal year ended
September 30, 1993].
10.10: Agreement and Plan of Merger dated May 24, 1994, by and among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc. and FiberCAP,
Inc. [Incorporated by reference to Exhibit 10.69 to the
Registration Statement on Form S-1, Amendment No. 4 of IntelCom
Group Inc., File No. 33-76568, filed August 26, 1994].
10.11: Note Sale and Purchase Agreement dated August 3, 1994, by and
between IntelCom Group Inc., ICG Wireless Services, Inc., Noon
Investments Ltd., Melco Investments Ltd. and Polera Overseas Inc.
[Incorporated by reference to Exhibit 10.70 to the Registration
Statement on Form S-1, Amendment No. 4 of IntelCom Group Inc.,
File No. 33-76568, filed August 26, 1994].
10.12: Agreement and Plan of Merger dated July 22, 1994, by and among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., DataCom
Integrated Systems Corporation, Larry DiGioia and Richard
Williams [Incorporated by reference to Exhibit 10.71 to the
Registration Statement on Form S-1, Amendment No. 4 of IntelCom
Group Inc., File No. 33-76568, filed August 26, 1994].
10.13: Share Exchange Agreement, dated May 31, 1994, between IntelCom
Group Inc. and Worldwide Condominium Developments, Inc.
[Incorporated by reference to Exhibit 10.71 to the Registration
Statement on Form S-1, Amendment No. 7 of IntelCom Group Inc.,
File No. 33-76568, filed October 17, 1994.]
10.14: Incentive Stock Option Plan #2 [Incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.15: Form of Stock Option Agreement for Incentive Stock Option Plan
#2 [Incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346,
filed November 14, 1994].
10.16: Incentive Stock Option Plan #3 [Incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.17: Form of Stock Option Agreement for Incentive Stock Option Plan
#3 [Incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346,
filed November 14, 1994].
<PAGE>
79
10.18: 1994 Employee Stock Option Plan [Incorporated by reference to
Exhibit 4.5 to the Registration Statement on Form S-8 of IntelCom
Group Inc., File No. 33-86346, filed November 14, 1994].
10.19: Form of Stock Option Agreement for 1994 Employee Stock Option
Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc., File
No. 33-86346, filed November 14, 1994].
10.20: PEDTS Acquisition Note 1994-1, dated April 29, 1994, by Pacific
& Eastern Digital Transmission Services, Inc. ("PEDTS") to
IntelCom Group (U.S.A.), Inc. ("ICG"), in the amount of
$2,928,591 [Incorporated by reference to Exhibit 10.27 to
IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal
year ended September 30, 1994].
10.21: PEDTS Acquisition Note 1994-2, dated April 29, 1994, by PEDTS
to ICG, in the amount of $1,230,475 [Incorporated by reference to
Exhibit 10.28 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.22: PEDTS Acquisition Note 1994-3, dated April 29, 1994, by PEDTS
to ICG, in the amount of $932,239 [Incorporated by reference to
Exhibit 10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K
for the fiscal year ended September 30, 1994].
10.23: TTC Acquisition Note, dated November 3, 1994, by Teleport
Transmission Holdings, Inc. to ICG, in the amount of $125,242.33
[Incorporated by reference to Exhibit 10.30 to IntelCom Group
Inc.'s Annual Report on Form 10-K for the fiscal year ended
September 30, 1994].
10.24: 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 IntelCom Group Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 30, 1995].
10.25: Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.26: Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.27: Indemnification Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.7 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.28: Letter Agreement, dated July 12, 1995, between IntelCom Group
Inc. and Larry L. Becker [Incorporated by reference to Exhibit
10.8 to Form 8-K of IntelCom Group Inc., as filed on August 2,
1995].
<PAGE>
80
10.29: Agreement and General Release, made effective July 12, 1995,
between IntelCom Group Inc. and Larry L. Becker [Incorporated by
reference to Exhibit 10.9 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.30: Subscription and Exchange Agreement, dated as of July 14, 1995,
among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., Princes
Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments
Limited, PGI Sweden AB, and Gregor von Opel [Incorporated by
reference to Exhibit 10.4 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.31: Security Agreement, dated July 18, 1995, from IntelCom Group
(U.S.A.), Inc. as issuer, and the Grantors named therein, as
grantors, to MS Group, as agent [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.32: Pledge Agreement, dated July 18, 1995, from IntelCom Group
Inc., as a pledgor, to MS Group, as agent [Incorporated by
reference to Exhibit 10.2 to Form 8-K of IntelCom Group Inc., as
filed on August 2, 1995].
10.33: Subsidiary Guarantee, dated July 18, 1995, from the persons set
forth on the signature pages thereof, as guarantors, in favor of
the purchasers to the Note Purchase Agreement referred to
therein, and MS Group, as agent [Incorporated by reference to
Exhibit 10.3 to Form 8-K of IntelCom Group Inc., as filed on
August 2, 1995].
10.34: Placement Agreement, dated as of August 3, 1995, among IntelCom
Group Inc., IntelCom Group (U.S.A.), Inc., certain subsidiaries
of IntelCom Group (U.S.A.), Inc. and Morgan Stanley & Co.
Incorporated [Incorporated by reference to Exhibit 10.1 to Form
8-K of IntelCom Group Inc., as filed on August 9, 1995].
10.35: Form of Exchange Agent Agreement between IntelCom Group
(U.S.A.), Inc. and Norwest Banks [Incorporated by reference to
Exhibit 10.11 to Registration Statement on Form S-4 of IntelCom
Group (U.S.A.), Inc., File No. 33-96540].
10.36: Employment Agreement between IntelCom Group Inc. and James D.
Grenfell, dated November 1, 1995. [Incorporated by reference to
Exhibit 10.38 to IntelCom Group Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1995].
10.37: Employment Agreement between Fiber Optic Technologies, Inc. and
Mark S. Helwege, dated July 8, 1996 [Incorporated by reference to
Exhibit 10.39 to ICG Communications, Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1996.]
10.38: Purchase and Sale Agreement, dated as of October 19, 1995, by
and among ICG Wireless Services, Inc., IntelCom Group (U.S.A.),
Inc., UpSouth Corporation and Vyvx, Inc. [Incorporated by
reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report
on Form 10-K for the fiscal year ended September 30, 1995].
<PAGE>
81
10.39: Employment Agreement between ICG Satellite Services, Inc. and
Douglas I. Falk, dated August 14, 1996 [Incorporated by reference
to Exhibit 10.41 to ICG Communications, Inc.'s Annual Report on
Form 10-K/A for the fiscal year ended September 30, 1996.]
10.40: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to Exhibit 10.42 to
ICG Communications, Inc.'s Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1996.]
10.41: ICG Communications, Inc. 1996 Employee Stock Purchase Plan.
[Incorporated by reference to the Registration Statement on Form
S-8 of ICG Communications, Inc., File No. 33-14127, filed on
October 14, 1996].
10.42: Consulting Services Agreement, by and between IntelCom Group
Inc. and International Communications Consulting, Inc., effective
January 1, 1996 [Incorporated by reference to Exhibit 10.44 to
ICG Communications, Inc.'s Transition Report on Form 10-K/A for
the three months ended December 31, 1996].
10.43: Confidential General Release and Convenant Not to Sue, by and
between ICG Communications, Inc. and John D. Field, dated
November 5, 1996 [Incorporated by reference to Exhibit 10.45 to
ICG Communications, Inc.'s Transition Report on Form 10-K/A for
the three months ended December 31, 1996].
10.44: Amendment, dated as of March 26, 1997, between ICG
Communications, Inc. and J. Shelby Bryan, to Employment
Agreement, dated as of May 30, 1995, between IntelCom Group Inc.
and J. Shelby Bryan [Incorporated by reference to Exhibit 10 to
ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997].
10.45: 1996 Stock Option Plan [Incorporated by reference to Exhibit
4.6 to the Registration Statement on Form S-8 of ICG
Communications, Inc., File No. 333-25957, filed on April 28,
1997].
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.47: Consulting Agreement, dated as of May 12, 1997, between ICG
Communications, Inc. and Jay E. Ricks [Incorporated by reference
to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997].
10.48: Employment Agreement, dated as of April 22, 1997, between ICG
Communications, Inc. and Don Teague [Incorporated by reference to
Exhibit 10.2 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997].
10.49: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock
Option Plan [Incorporated by reference to Exhibit 10.1 to ICG
Communications, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997].
10.50: Employment Agreement, dated October 17, 1997, between
Communications Buying Group, Inc. and Robert Daly [Incorporated
by reference to Exhibit 10.2 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997].
<PAGE>
82
10.51: Employment Agreement, dated June 1, 1997, between NETCOM
On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc., dated
January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X,
Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.53: Agreement and Plan of Merger, dated October 12, 1997, by and
among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM
On-Line Communication Services, Inc. [Incorporated by reference
to Exhibit 2.1 to Form 8-K, dated January 21, 1998].
10.54: Amendment to Agreement and Plan of Merger, dated December 15,
1997, by and among ICG Communications, Inc., ICG Acquisition,
Inc. and NETCOM On-Line Communication Services, Inc.
[Incorporated by reference to Exhibit 2.2 to Form 8-K, dated
January 21, 1998].
(11) Statement re Computation of per Share Earnings.
Not Applicable
(12) Statement re Computation of Ratios.
Not Applicable
(13) Annual Report to Security Holders.
Not Applicable
(18) Letter re Change in Accounting Principles. Letter dated March 22, 1996
from KPMG Peat Marwick LLP to the Company [Incorporated by reference
to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report on Form 10-Q/A
for the quarter ended December 31, 1995].
(21) Subsidiaries of the Registrant.
(22) Published Report re Matters Submitted to Vote of Security Holders.
Not Applicable
<PAGE>
83
(23) Consent.
23.1: Consent of KPMG Peat Marwick LLP.
(24) Power of Attorney.
Not Applicable
(27) Financial Data Schedule.
(99) Additional Exhibits.
99.1:Report by the FCC on Preliminary Statistics of Communications
Common Carriers (1993 Edition) (pp. 39-40) [Incorporated by
reference to Exhibit 99.8 to the Registration Statement on Form
S-1, Amendment No. 4 of IntelCom Group Inc., File No. 33-76568,
filed August 26, 1994].
99.2:In re Expanded Interconnection with Local Telephone Company
Facilities (Phases I & II) (FCC 1992) [Incorporated by reference
to Exhibit 3.46 to IntelCom Group Inc.'s Annual Report on Form
20-F for the fiscal year ended September 30, 1993].
99.3:In re Teleport Transmission Holdings, (FCC 1993) [Incorporated
by reference to Exhibit 3.49 to IntelCom Group Inc.'s Annual
Report on Form 20-F for the fiscal year ended September 30,
1993].
(B) Report on Form 8-K. The following report on Form 8-K was filed by the
Registrants during the fiscal quarter ended December 31, 1997:
ICG Communications, Inc. Current Report on Form 8-K dated October
ICG Holdings (Canada), Inc. 21, 1997, announcing the proposed merger
ICG Holdings, Inc.: between ICG Communications, Inc. and NETCOM
On-Line Communication Services, Inc.
(C) Exhibits. The exhibits required by this Item are listed under Item
14(A)(3).
(D) Financial Statement Schedule. The financial statement schedule required by
this Item is listed under Item 14(A)(2).
<PAGE>
F-1
FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997 . . . . . F-3
Consolidated Statements of Operations, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal
Year Ended December 31, 1997 . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Years Ended September 1994, 1995 and 1996,
the Three Months Ended December 31, 1996, and Fiscal Year
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows, Fiscal Years Ended
September 30, 1995 and 1996, the Three Months Ended
December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements, December 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
<PAGE>
F-2
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fiscal years ended September 30, 1995 and 1996, the
three-month period ended December 31, 1996, and the fiscal year ended December
31, 1997. 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 ICG Communications,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the fiscal years ended September 30, 1995
and 1996, the three-month period ended December 31, 1996, and the fiscal year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 19, 1998
<PAGE>
F-3
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
Assets 1996 1997
- ------
------------------------ ----------------------
(in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 359,934 118,834
Short-term investments available for sale (note 4) 32,601 98,181
Receivables:
Trade, net of allowance of $2,515 and $5,376 at
December 31, 1996 and 1997, respectively 41,131 59,042
Revenue earned, but unbilled 6,053 8,599
Due from affiliate (note 5) - 9,384
Other (note 8) 1,440 1,696
------------------------ ----------------------
48,624 78,721
------------------------ ----------------------
Inventory 2,845 3,901
Prepaid expenses and deposits 5,019 10,543
Notes receivable, net 200 -
------------------------ ----------------------
Total current assets 449,223 310,180
------------------------ ----------------------
Property and equipment (notes 6, 9 and 10) 460,221 738,488
Less accumulated depreciation (56,545) (106,321)
------------------------ ----------------------
Net property and equipment 403,676 632,167
------------------------ ----------------------
Investments (note 3) 5,170 -
Long-term notes receivable from affiliate and others,
net(note 5) 623 10,375
Restricted cash (notes 11 and 14) 13,333 38,749
Other assets, net of accumulated amortization:
Goodwill (note 3) 31,881 77,562
Deferred financing costs (note 10) 21,963 23,196
Transmission and other licenses 8,526 6,031
Other (note 7) 9,738 9,404
------------------------ ----------------------
72,108 116,193
------------------------ ----------------------
$ 944,133 1,107,664
======================== ======================
(Continued)
</TABLE>
<PAGE>
F-4
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
Liabilities and Stockholders' Deficit 1996 1997
- -------------------------------------
------------------------ ---------------------
(in thousands)
Current liabilities:
<S> <C> <C>
Accounts payable $ 24,813 29,143
Accrued liabilities 31,890 57,691
Deferred revenue 5,419 5,049
Current portion of capital lease obligations (notes 9 and 14) 24,683 5,637
Current portion of long-term debt (note 10) 817 1,784
------------------------ ---------------------
Total current liabilities 87,622 99,304
------------------------ ---------------------
Capital lease obligations, less current portion (note 9) 71,146 66,939
Long-term debt, net of discount, less current portion (note 10) 690,358 890,568
------------------------ ---------------------
Total liabilities 849,126 1,056,811
------------------------ ---------------------
Minority interests 1,967 -
Redeemable preferred stock of subsidiary ($164.8 million and $301.2 million
liquidation value at December 31, 1996 and 1997, respectively) (notes 10
and 11) 159,120 292,442
Company-obligated mandatorily redeemable preferred securities of subsidiary
limited liability company which holds solely Company preferred stock ($133.4
million liquidation value at December 31, 1997) (note 11)
- 127,729
Stockholders' deficit:
Common stock (notes 1 and 12) 8,088 647
Additional paid-in capital 294,472 326,318
Accumulated deficit (368,640) (696,283)
------------------------ ---------------------
Total stockholders' deficit (66,080) (369,318)
------------------------ ---------------------
Commitments and contingencies (notes 8, 9, 10, 11 and 14)
$ 944,133 1,107,664
======================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-5
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
----------------------------- ---------------------------
1995 1996 1995 1996 1997
-------------- -------------- ------------- ------------- ------------------
(unaudited)
(in thousands, except per share data)
Revenue:
<S> <C> <C> <C> <C> <C>
Telecom services (note 2) $ 32,330 87,681 13,513 34,787 177,690
Network services (note 17) 58,778 60,116 15,718 15,981 65,678
Satellite services (note 13) 20,502 21,297 6,168 6,188 29,986
-------------- -------------- ------------- ------------- ------------------
Total revenue 111,610 169,094 35,399 56,956 273,354
-------------- -------------- ------------- ------------- ------------------
Operating costs and expenses:
Operating costs 78,846 135,253 27,110 49,929 246,418
Selling, general and administrative
expenses 62,954 76,725 18,628 24,253 150,767
Depreciation and amortization (note 2) 16,624 30,368 4,919 9,825 57,081
Net loss (gain) on disposal of
long-lived assets (note 3) 241 5,128 1,030 (772) 671
Provision for impairment of
long-lived assets (note 3) 7,000 9,994 - - 11,950
-------------- -------------- ------------- ------------- ------------------
Total operating costs and expenses 165,665 257,468 51,687 83,235 466,887
-------------- -------------- ------------- ------------- ------------------
Operating loss (54,055) (88,374) (16,288) (26,279) (193,533)
Other income (expense):
Interest expense (note 10) (24,368) (85,714) (15,215) (24,454) (117,545)
Interest income 4,162 19,300 3,750 5,962 21,907
Other, net (note 10) (523) (3,877) 7 (64) (660)
-------------- -------------- ------------- ------------- ------------------
(20,729) (70,291) (11,458) (18,556) (96,298)
-------------- -------------- ------------- ------------- ------------------
Loss before income taxes, minority
interest, share of losses and
cumulative effect of change in
accounting (74,784) (158,665) (27,746) (44,835) (289,831)
Income tax benefit (note 15) - 5,131 - - -
-------------- -------------- ------------- ------------- ------------------
Loss before minority interest, share of
losses and cumulative effect of
change in accounting (74,784) (153,534) (27,746) (44,835) (289,831)
Minority interest in share of losses, net
of accretion and preferred dividends
on preferred securities of subsidiaries
(note 11) (1,123) (25,306) (3,215) (4,988) (37,812)
Share of losses of joint venture and
investment (note 3) (741) (1,814) (228) - -
-------------- -------------- ------------- ------------- ------------------
Loss before cumulative effect of change
in accounting (76,648) (180,654) (31,189) (49,823) (327,643)
Cumulative effect of change in accounting - (3,453) (3,453) - -
-------------- -------------- ------------- ------------- ------------------
Net loss $ (76,648) (184,107) (34,642) (49,823) (327,643)
============== ============== ============= ============= ==================
(Continued)
</TABLE>
<PAGE>
F-6
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
----------------------------- ------------------------------
1995 1996 1995 1996 1997
-------------- -------------- --------------- -------------- ------------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Loss per share - basic and diluted:
Loss before cumulative effect of
change in accounting $ (3.25) (6.70) (1.24) (1.56) (10.11)
Cumulative effect of change in
accounting - (0.13) (0.14) - -
============== ============== =============== ============== ==================
Loss per share - basic and
diluted (3.25) (6.83) (1.38) (1.56) (10.11)
============== ============== =============== ============== ==================
Weighted average number of shares
outstanding - basic and diluted 23,604 26,955 25,139 31,840 32,399
============== ============== =============== ============== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
F-7
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Years Ended September 30, 1995 and 1996, the
Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
(deficit)
-------------- -------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balances at October 1, 1994 17,047 $ 95,606 2,200 (58,024) 39,782
Shares issued for cash (note 12):
Public offering and private placements 6,312 84,498 - - 84,498
Public offering and private placement costs - (6,162) - - (6,162)
Exercise of options and warrants 338 1,471 - - 1,471
Shares issued as repayment of debt and related
accrued interest(note 10) 683 9,482 - - 9,482
Shares issued in connection with business
combinations (note 3) 130 1,737 - - 1,737
Conversion of ICG Holdings (Canada), Inc.
preferred shares 302 2,000 - - 2,000
Shares issued as contribution to 401(k) plan
(note 16) 38 490 - - 490
Warrants issued in connection with offerings
(notes 10, 11 and 12) - - 24,134 - 24,134
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 - - - (76,648) (76,648)
------------- -------------- -------------- ------------- --------------
Balances at September 30, 1995 24,991 190,753 26,492 (134,710) 82,535
Shares issued for cash in connection with the
exercise of options and warrants 1,522 1,742 152 - 1,894
Shares issued as repayment of debt and related
accrued interest (note 10) 130 687 - - 687
Shares issued in connection with business
combinations (note 3) 64 749 - - 749
Conversion of ICG Holdings (Canada), Inc.
preferred shares 496 3,780 - - 3,780
Shares issued as contribution to 401(k) plan
(note 16) 87 856 300 - 1,156
Shares issued upon conversion of subordinated
notes (note 10) 4,413 76,336 - - 76,336
Repurchase of warrants - - (2,671) - (2,671)
Compensation expense related to issuance of
common stock options - - 53 - 53
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (248,682) 248,682 - -
Net loss - - - (184,107) (184,107)
------------- -------------- -------------- ------------- --------------
Balances at September 30, 1996 31,703 $ 26,221 273,008 (318,817) (19,588)
(Continued)
</TABLE>
<PAGE>
F-8
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit), Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
(deficit)
------------- ------------- ------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Shares issued for cash in connection with the
exercise of options and warrants 132 $ 1,800 284 - 2,084
Shares issued in connection with business
combination (note 3) 18 - 350 - 350
Shares issued as contribution to 401(k) plan
(note 16) 19 - 480 - 480
Shares issued upon conversion of subordinated
notes (note 10) 23 417 - - 417
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (20,350) 20,350 - -
Net loss - - - (49,823) (49,823)
------------- ------------- ------------- -------------- --------------
Balances at December 31, 1996 31,895 8,088 294,472 (368,640) (66,080)
Shares issued for cash in connection with the
exercise of options and warrants 938 5 4,111 - 4,116
Shares issued in connection with business
combination (note 3) 687 7 15,953 - 15,960
Shares issued for cash in connection with
employee stock purchase plan 109 1 1,318 - 1,319
Shares issued as contribution to 401(k)
plan (note 16) 179 2 3,008 - 3,010
Exchange of ICG Holdings (Canada), Inc. common
shares for ICG common stock - (7,456) 7,456 - -
Net loss - - - (327,643) (327,643)
------------- ------------- ------------- -------------- --------------
Balances at December 31, 1997 33,808 $ 647 326,318 (696,283) (369,318)
============= ============= ============= ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
F-9
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended September 30, 1995 and 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
--------------------------- ----------------------------
1995 1996 1995 1996 1997
------------- ------------- ------------- ---------------------------------
(unaudited)
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $ (76,648) (184,107) (34,642) (49,823) (327,643)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting - 3,453 3,453 - -
Share of losses of joint venture and investment 741 1,814 228 - -
Minority interest in share of losses, net of
accretion and non-cash preferred dividends
on preferred securities of subsidiaries 656 24,279 2,188 4,988 35,457
Depreciation and amortization 16,624 30,368 4,919 9,825 57,081
Compensation expense related to issuance of
common stock options 158 53 14 - -
Interest expense deferred and included in
long-term debt 14,068 63,951 12,004 22,087 102,947
Amortization of deferred financing costs
included in interest expense 989 2,573 527 612 2,514
Write-off of non operating assets - 2,650 - - 200
Contribution to 401(k) plan through issuance
of common shares 490 1,156 405 480 3,010
Deferred income tax benefit - (5,329) - - -
Provision for impairment of long-lived assets 7,000 9,994 - - 11,950
Net loss (gain) on disposal of long-lived
assets 241 5,128 1,030 (772) 671
Change in operating assets and liabilities,
excluding the effects of business acquisitions,
dispositions and non-cash transactions:
Receivables (6,092) (13,293) (3,742) (7,790) (24,452)
Inventory (447) (1,200) (272) 361 (2,822)
Prepaid expenses and deposits (2,482) (2,975) (459) (910) (5,405)
Accounts payable and accrued liabilities 514 16,674 8,970 9,731 19,908
Deferred revenue 1,390 1,454 779 2,575 (370)
------------- ------------ ------------- -------------- -----------------
Net cash used by operating activities $ (42,798) (43,357) (4,598) (8,636) (126,954)
------------- ------------- ------------- -------------- -----------------
(Continued)
</TABLE>
<PAGE>
F-10
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year
September 30, December 31, ended December
31,
-------------------------- -------------------------
1995 1996 1995 1996 1997
------------ ------------ ------------- ----------- ------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
(Increase) decrease in notes receivable from
affiliate and others $ 348 4 (1,263) 133 (9,552)
Advances to affiliates (2,184) (109) (15) - -
Investment in and advances to joint venture (5,452) (4,308) - - -
Payments for business acquisitions, net of cash
acquired (8,168) (8,441) - - (45,861)
Acquisition of property, equipment and other
assets (50,066) (122,277) (26,798) (50,818) (269,593)
Payments for construction of new headquarters - (1,501) - (7,945) (29,432)
Proceeds from disposition of property, equipment
and other assets - 21,593 21,146 2,057 15,567
Purchase of short-term investments - (6,832) (4,979) (25,769) (65,580)
Increase in restricted cash - (13,333) (13,333) - (25,416)
Other investments (6,061) - - - -
------------ ------------ ------------- ----------- ------------------
Net cash used by investing activities (71,583) (135,204) (25,242) (82,342) (429,867)
------------ ------------ ------------- ----------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Common stock offering 84,498 - - - -
Business combination (note 3) - - - - 15,960
Exercise of stock options and warrants 1,471 1,894 101 2,084 4,116
Employee stock purchase plan - - - - 1,319
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance
costs 28,800 144,000 - - 223,628
Proceeds from issuance of convertible preferred
stock of subsidiary 16,000 - - - -
Offering costs related to common and preferred
stock offerings (5,565) - - - -
Redemption of preferred shares (3,800) (5,570) (5,570) - -
Repurchase of redeemable preferred stock of
subsidiary and payment of accrued dividend - (32,629) - - -
Repurchase of redeemable warrants - (2,671) - - -
Proceeds from issuance of short-term debt - 17,500 17,500 - -
Principal payments on short-term debt - (21,192) (3,692) - -
Proceeds from issuance of long-term debt 305,613 300,034 - - 99,908
Deferred debt issuance costs (13,641) (11,915) - - (3,554)
Principal payments on long-term debt (29,333) (16,920) (13,761) (279) (1,598)
Principal payments on capital lease obligations (6,271) (12,304) (2,991) (1,975) (24,058)
------------ ----------- ------------- ----------- ------------------
Net cash provided (used) by financing
activities 377,772 360,227 (8,413) (170) 315,721
------------ ----------- ------------- ----------- ------------------
Net (decrease) increase in cash and cash
equivalents 263,391 181,666 (38,253) (91,148) (241,100)
Cash and cash equivalents, beginning of period 6,025 269,416 269,416 451,082 359,934
------------ ----------- ------------- ----------- ------------------
Cash and cash equivalents, end of period $269,416 451,082 231,163 359,934 118,834
------------ ----------- ------------- ----------- ------------------
(Continued)
</TABLE>
<PAGE>
F-11
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
------------------------- -------------------------
1995 1996 1995 1996 1997
------------ ----------- ----------- ------------ -------------------
(unaudited)
(in thousands)
Supplemental disclosure of cash flows information:
<S> <C> <C> <C> <C> <C>
Cash paid for interest $ 9,311 19,190 2,684 1,755 12,084
============ =========== =========== ============ ===================
Supplemental schedule of non-cash investing and
financing activities:
Common shares issued in connection with
business combinations, repayment of debt or
conversion of liabilities to equity $ 11,452 77,772 - 350 -
============ =========== =========== ============ ===================
Common shares issued in exchange for notes
receivable, investments and other assets $ 1,398 - - - -
============ =========== =========== ============ ===================
Assets acquired under capital leases and
through the issuance of debt or warrants
(note 14) $ 38,670 55,030 84 19,479 -
============ =========== =========== ============ ===================
Reclassification of investment in joint
venture to long-term notes receivable $ 6,882 - - - -
============ =========== =========== ============ ===================
Conversion of notes receivable related to
business combinations $ 6,330 - - - -
============ =========== =========== ============ ===================
Capitalized interest on assets under
construction $ - 4,916 - 1,966 3,179
============ =========== =========== ============ ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
F-12
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- -------------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. Pursuant to a Plan of Arrangement (the
"Arrangement"), which was approved by Holdings-Canada shareholders on July
30, 1996, and by the Ontario Court of Justice on August 2, 1996, each
shareholder of Holdings-Canada exchanged their common shares on a
one-for-one basis for either (i) shares of $.01 par value common stock of
ICG (the "Common Stock"), or (ii) Class A common shares of Holdings-Canada
(which are exchangeable at any time on a one-for-one basis into shares of
ICG Common Stock). On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the Arrangement
was accounted for in a manner similar to a pooling of interests since ICG
and Holdings-Canada had common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflect
the equivalent shares outstanding for the combined companies. On September
17, 1997, ICG formed a new special purpose entity, ICG Funding, LLC, a
Delaware limited liability company and wholly owned subsidiary of ICG ("ICG
Funding"). ICG and its subsidiaries are collectively referred to as the
"Company."
The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services, and as
of January 21, 1998, the Company also began providing Internet Services,
through its recently acquired subsidiary, NETCOM On-Line Communication
Services, Inc. ("NETCOM"). Telecom Services consists of the Company's
competitive local exchange carrier operations which provide services to
business end users, long distance carriers and resellers. Network Services
supplies information technology services and selected networking products,
focusing on network design, installation, maintenance and support for a
variety of end users, including Fortune 1000 firms and other large
businesses and telecommunications companies. Satellite Services provides
satellite voice and data services to major cruise ship lines, the
commercial shipping industry, yachts, the U.S. Navy and offshore oil
platforms. The Company intends to dispose of its Satellite Services
operations to better focus on its core Telecom Services unit, although it
has not entered into a formal arrangement for such dispostion. Beginning in
1998, the Company's Internet Services
<PAGE>
F-13
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
- -------------------------------------------------------------------------------
(1) Organization and Nature of Business
includes Internet access, World Wide Web (the "Web") site hosting services
and other value-added connectivity services, which are primarily targeted
to small and medium-sized business customers in the United States, Canada
and the United Kingdom.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
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
majority and wholly owned subsidiaries. Financial information prior to
the completion of the Arrangement on August 2, 1996 represents the
financial position and results of operations of Holdings-Canada and
Holdings, which are considered to be predecessor entities to ICG.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Change in Fiscal Year End
The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1995, 1996 and
1997 relate to the years ended September 30, 1995 and 1996 and
December 31, 1997, respectively.
Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.
<PAGE>
F-14
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(c) Cash Equivalents and Short-term Investments Available for Sale
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents and short-term investments at cost, which
approximates fair value.
(d) Inventory
Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.
(e) Investments
Investments in joint ventures are accounted for using the equity
method, under which the Company's share of earnings or losses of the
joint ventures are reflected in operations and dividends are credited
against the investment when received. Losses recognized in excess of
the Company's investment due to additional investment or financing
requirements, or guarantees, are recorded as a liability in the
consolidated financial statements. Other investments representing an
interest of 20% or more, but less than 50%, are accounted for using
the equity method of accounting. Investments of less than a 20% equity
interest are accounted for using the cost method, unless the Company
exercises significant influence and/or control over the operations of
the investee company, in which case the equity method is used.
<PAGE>
F-15
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(f) Property and Equipment
Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.
Estimated useful lives of major categories of property and equipment
are as follows: Office furniture and equipment 3 to 7 years Buildings
and improvements 31.5 years Machinery and equipment 3 to 8 years
Switch equipment 10 years Fiber optic transmission system 20 years
The Company capitalizes the direct costs associated with the
installation of dial tone customers' service, including labor and an
allocation of overhead costs, and amortizes these costs over two
years, the estimated average customer contract term.
(g) Other Assets
Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.
Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.
Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.
<PAGE>
F-16
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
(i) Revenue Recognition
The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communication systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.
Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer is included in
receivables-revenue earned, but unbilled in the consolidated financial
statements. Deferred revenue includes monthly advance billings to
customers for certain services provided by the Company's Telecom
Services and Satellite Services, as well as Network Services revenue
which has been billed to the customer in compliance with contract
terms, but not yet earned under the percentage of completion method.
Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue
<PAGE>
F-17
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
was recognized. Revenue recognized in excess of normal monthly
billings during the year was limited to an amount which did not exceed
such installation and selling expense. The remaining revenue from the
contract was recognized ratably over the remaining non-cancelable
portion of the contract. The Company believes the new method is
preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.
(j) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Loss Per Share
Loss per share is calculated by dividing the net loss by the weighted
average number of shares outstanding. Weighted average number of
shares outstanding for fiscal year 1995 and the three months ended
December 31, 1995 represents outstanding Holdings-Canada common
shares. Weighted average number of shares outstanding for fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997 represents
Holdings-Canada common shares outstanding for the period October 1,
<PAGE>
F-18
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
subsequent to August 5, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128") which revises the
calculation and presentation provisions of Accounting Principles Board
Opinion No. 15 and related interpretations. Under SFAS 128, basic loss
per share is computed on the basis of weighted average common shares
outstanding. Diluted loss per share considers potential common stock
instruments in the calculation. The Company adopted SFAS 128 for its
fiscal year ending December 31, 1997, including the requirement for
retroactive application. The adoption of SFAS 128 had no effect on the
Company's previously reported loss per share. Potential common stock
instruments, which include options, warrants and convertible
subordinated notes and preferred securities, are not included in the
loss per share calculation as their effect is anti-dilutive.
(l) Stock-Based Compensation
The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and loss
per share as if the fair value based method of accounting for these
plans, as prescribed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had
been applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1996,
the three months ended December 31, 1996 and fiscal 1997.
(m) Impairment of Long-Lived Assets
The Company provides for the impairment of long-lived assets pursuant
to Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS 121") which requires that long-lived assets and
certain identifiable intangibles held and used by an
<PAGE>
F-19
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized when estimated
undiscounted future cash flows expected to be generated by the asset
is less than its carrying value. Measurement of the impairment loss is
based on the fair value of the asset, which is generally determined
using valuation techniques such as the discounted present value of
expected future cash flows.
(n) Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period's presentation.
(3) Business Combinations and Investments
(a) Acquisition During Fiscal 1997
On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997, the Company sold 687,221 shares of Common Stock for
approximately $16.0 million to certain shareholders of CBG. Subsequent
to December 31,1997, the Company purchased the remaining approximately
9% interest in CBG for approximately $2.9 million in cash.
The Company has accounted for the acquisition under the purchase
method of accounting, and accordingly, the operations of CBG have been
included in the Company's operations since the acquisition date. The
excess of the purchase price over the fair value of the net
identifiable assets acquired of $48.8 million has been recorded as
goodwill and is being amortized on a straight-line basis over six
years. Revenue, net loss and loss per share on a pro forma combined
basis are not significantly different from the Company's historical
results for the periods presented herein.
<PAGE>
F-20
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(b) Acquisitions and Investments During Fiscal 1996
In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million.
In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner of
Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.
In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico. In the fourth
quarter of fiscal 1997, the Company recorded a provision for
impairment of $2.9 million of its investment in MCN.
In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.
<PAGE>
F-21
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
The acquisitions described above have been accounted for using the
purchase method of accounting and, accordingly, the net assets and
results of operations are included in the consolidated financial
statements from the respective dates of acquisition. Revenue, net loss
and loss per share on a pro forma basis are not significantly
different from the Company's historical results for the periods
presented herein. The aggregate purchase price of the 1996
acquisitions, in which the Company obtained a controlling interest,
was allocated based on fair values of the underlying assets acquired
as follows (in thousands):
Current assets $ 6,563
Property and equipment 7,542
Other assets, including goodwill 10,647
Current liabilities (775)
Long-term liabilities (6,314)
Minority interest (1,422)
===================
$ 16,241
===================
(c) Acquisitions and Investments During Fiscal 1995
In January 1995, the Company and an unaffiliated entity formed
Maritime Telecommunications Network, Inc. ("MTN") to provide wireless
communications through satellites to the maritime cruise industry,
U.S. Navy vessels and offshore oil platforms. The Company acquired (i)
approximately 64% of MTN, (ii) approximately $4.4 million in notes
receivable from MTN and (iii) consulting and non-compete agreements
valued at an aggregate of approximately $0.3 million in exchange for
(i) approximately $9.0 million in cash, (ii) the surrender and
cancellation of a note to the Company from the other entity for $0.6
million plus interest, (iii) 408,347 Holdings-Canada common shares
valued at approximately $5.1 million (of which 256,303 common shares
were issued in the fourth quarter of fiscal 1994), and (iv) the
Company's commitment to provide 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.
MTN also assumed approximately $2.1 million of obligations of such
predecessor business. The Company paid a $0.5 million finder's fee
obligation of the predecessor to a third party. As part of the terms
of the original purchase agreement, the
<PAGE>
F-22
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
Company agreed to purchase, at fair market value, all of the shares of
MTN that were owned by the minority shareholders, upon demand of the
minority shareholders, if a transaction was not effected which
converted the minority shares into publicly traded securities or cash
by January 3, 1998. As of the current date, no such demand has been
made by the minority shareholders.
During fiscal 1995, the Company purchased a 58% interest in Zycom
Corporation ("Zycom"), an Alberta, Canada corporation whose shares are
traded on the Alberta Stock Exchange. Consideration for the purchase
was approximately $0.8 million in cash, the conversion of $2.0 million
in notes receivable, and the assumption of approximately $0.7 million
in debt for total consideration of approximately $3.5 million. In
March 1996, the Company acquired an additional approximate 12% equity
interest in Zycom by converting a $3.2 million receivable due from
Zycom into common stock. In the fourth quarter of fiscal 1997, the
Company recorded a provision for impairment of $2.7 million of its
investment in Zycom.
The acquisitions described above were accounted for using the purchase
method of accounting, and accordingly, the net assets and the results
of operations are included in the consolidated financial statements
from the respective dates of acquisition. Revenue, net loss and loss
per share on a pro forma basis are not significantly different from
the Company's historical results for the periods presented herein. The
aggregate purchase price of the 1995 acquisitions, in which the
Company obtained a controlling interest, was allocated based on fair
values of the underlying assets acquired as follows (in thousands):
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
======================
<PAGE>
F-23
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
During fiscal 1995, the Company invested approximately $5.2 million
($3.9 million in cash, $1.1 million in common shares of
Holdings-Canada, and the conversion of approximately $0.2 million 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. In December
1997, a senior secured creditor of StarCom notified the Company that
it intended to foreclose on its collateral in StarCom, and in January
1998, StarCom commenced bankruptcy proceedings. Based on management's
estimate of the net realizable value of its investment, the Company
recorded a provision for impairment of its investment of $5.2 million
in fiscal 1997.
(d) Investments in Joint Venture and Affiliate
In September 1992, the Company entered into a joint venture agreement
with Greenstar Technologies Inc. (now GST Telecommunications, Inc.
("GST")) to design, construct and operate a competitive access network
in Phoenix. The Company and GST each had a 50% equity interest in the
joint venture. All financing provided to the joint venture by the
Company, as well as the recognition of the Company's share of the
joint venture's losses, were recorded according to the equity method
of accounting. During fiscal 1996, the Company recorded a valuation
allowance of approximately $5.8 million for the amounts receivable
arising from advances made to the Phoenix network joint venture, based
on management's estimate of the net realizable value of the
receivable.
In October 1996, the Company sold its interest in the joint venture to
GST. The Company received approximately $2.1 million in cash,
representing $1.3 million of consideration for its 50% interest and
$0.8 million for equipment and amounts advanced to the joint venture.
In addition, the Company received equipment with a net book value of
$2.4 million and assumed liabilities of $0.3 million. A gain on sale
of the joint venture of approximately $0.8 million was recorded in the
consolidated financial statements during the three months ended
December 31, 1996.
<PAGE>
F-24
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(3) Business Combinations and Investments (continued)
(e) Merger Subsequent to December 31, 1997
On January 21, 1998, the Company completed a merger with NETCOM.
Located in San Jose, California, NETCOM is a provider of Internet
connectivity and Web site hosting services and other value-added
Internet services. At the effective time of the merger, each
outstanding share of NETCOM common stock became automatically
convertible into shares of Common Stock at an exchange ratio of 0.8628
shares of Common Stock per NETCOM common share. As a result of the
transaction, the Company expects to issue an estimated 10.2 million
shares of Common Stock for the NETCOM common shares outstanding on
January 21, 1998. Cash will be paid in lieu of fractional shares. The
Company will account for the business combination under the
pooling-of-interests method of accounting and accordingly, the
Company's financial statements will be restated to reflect the
operations of NETCOM and the Company on a combined basis for all
historical periods.
The following unaudited pro forma information presents the combined
results of operations of the Company and NETCOM as if the business
combination had been consummated on October 1, 1994. The Company does
not anticipate any significant adjustments to conform the accounting
policies of NETCOM with those of the Company.
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
---------------------------
1995 1996 1996 1997
------------- ------------- ------------------------- -----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Revenue $164,032 289,634 93,335 434,014
Net loss (90,712) (228,372) (61,313) (360,735)
Loss per share -
basic and diluted (2.94) (6.19) (1.46) (8.49)
</TABLE>
<PAGE>
F-25
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(4) Short-term Investments Available for Sale
Short-term investments available for sale are comprised of the following:
December 31,
------------------------------------
1996 1997
---------------- ---------------
(in thousands)
Money market investments $ 10,000 -
Commercial paper 5,500 4,000
U.S. Treasury securities 17,101 94,181
================ ===============
$ 32,601 98,181
================ ===============
At December 31, 1996 and 1997, the estimated fair value of the Company's
money market instruments, commercial paper and U.S. Treasury securities
approximated cost, and the amount of gross unrealized gains was not
significant. All money market instruments, commercial paper and U.S.
Treasury securities mature within one year.
(5) Notes Receivable and Due from Affiliate
In January 1997, the Company announced a strategic alliance with Central
and South West Corporation ("CSW") which is developing and marketing
telecommunications services in certain cities in Texas. The venture entity,
a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based
in Austin, Texas. CSW holds 100% of the interest in ChoiceCom, and CSW and
the Company each have two representatives on the Management Committee of
the general partner of ChoiceCom. The Company has committed to loan
ChoiceCom $15.0 million under two promissory notes, which are payable on
demand and earn interest at LIBOR plus 2% per annum (7.97% at December 31,
1997). Advances under these promissory notes were $10.0 million at December
31, 1997.
Additionally, the Company has agreed to perform certain administrative
services for ChoiceCom and make certain payments to vendors on behalf of
ChoiceCom, for which such services and payments are to be conducted on an
arm's length basis and reimbursed by ChoiceCom. At December 31, 1997,
amounts outstanding under this arrangement and included in due from
affiliate were approximately $9.4 million, and were collected in full
during the subsequent fiscal quarter.
<PAGE>
F-26
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(6) Property and Equipment
Property and equipment, including assets held under capital leases, is
comprised of the following:
December 31,
-------------------------------
1996 1997
------------- ---------------
(in thousands)
Land $ 306 709
Buildings and improvements 2,300 2,238
Furniture, fixtures and office equipment 35,904 46,711
Machinery and equipment 10,764 31,630
Fiber optic equipment 143,133 156,255
Satellite equipment 19,408 29,760
Switch equipment 58,199 85,546
Fiber optic transmission system 117,281 192,756
Build out/site preparation 13,284 13,898
Construction in progress (see note 14) 59,642 178,985
------------- ---------------
460,221 738,488
Less accumulated depreciation (56,545) (106,321)
============= ===============
$ 403,676 632,167
============= ===============
Property and equipment includes approximately $179.0 million of equipment
which has not been placed in service at December 31, 1997, and accordingly,
is not being depreciated. The majority of this amount is related to new
network construction (see note 14).
<PAGE>
F-27
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(6) Property and Equipment (continued)
Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1997. The
following is a summary of property and equipment held under capital leases:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Machinery and equipment $ 1,842 3,926
Fiber optic equipment 7,514 6,314
Switch equipment 22,280 21,380
Fiber optic transmission system 55,746 58,806
Construction in progress 20,187 17,895
------------- ----------------
107,569 108,321
Less accumulated depreciation (4,424) (8,409)
============= ================
$ 103,145 99,912
============= ================
(7) Other Assets
Other assets are comprised of the following:
December 31,
--------------------------------
1996 1997
------------- ----------------
(in thousands)
Deposits $ 3,579 2,429
Pace customer base 2,581 2,805
Rights of way 1,739 425
Minutes of use agreement 1,421 -
Non-compete agreements 902 1,386
Right of entry - 5,019
Other 1,063 839
------------- ----------------
11,285 12,903
Less accumulated amortization (1,547) (3,499)
============= ================
Other $ 9,738 9,404
============= ================
<PAGE>
F-28
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(8) Related Party Transactions
During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996 and
fiscal 1997, the Company paid approximately $1.3 million, $0.3 million and
$1.1 million, respectively, related to this consulting agreement. William
W. Becker, a stockholder and former director of the Company, is President
and Chief Executive Officer of ICC.
At December 31, 1996 and 1997, receivables from officers and employees of
approximately $1.0 million and $0.9 million, respectively, are primarily
comprised of promissory notes from officers for relocation expenses, which
are generally payable on demand and bear interest at 7% per annum, and are
included in receivables-other in the accompanying consolidated financial
statements.
(9) Capital Lease Obligations
The Company has payment obligations under various capital lease agreements
for equipment. The future required payments under the Company's capital
lease obligations subsequent to December 31, 1997 are as follows (in
thousands):
Due December 31:
1998 $ 15,651
1999 13,782
2000 14,431
2001 16,350
2002 11,009
Thereafter 93,584
---------------------
Total minimum lease payments 164,807
Less amounts representing interest (92,231)
---------------------
Present value of net minimum lease payments 72,576
Less current portion (5,637)
=====================
$ 66,939
=====================
<PAGE>
F-29
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1997
---------------------- ----------------------
(in thousands)
<S> <C> <C>
11 5/8% Senior discount notes, net of discount (a) $ - 109,436
12 1/2% Senior discount notes, net of discount (b) 325,530 367,494
13 1/2% Senior discount notes, net of discount (c) 355,955 407,409
Note payable with interest at the 90-day commercial
paper rate plus 4 3/4% (10.3% at December 31, 1997),
due 2001, secured by certain telecommunications equipment 5,815 4,932
Note payable with interest at 11%, due monthly through
fiscal 1999, secured by equipment 2,625 1,860
Mortgage payable with interest at 8 1/2%, due monthly
through 2009, secured by building 1,177 1,131
Other 73 90
---------------------- ---------------------
691,175 892,352
Less current portion (817) (1,784)
---------------------- ---------------------
$ 690,358 890,568
====================== =====================
</TABLE>
(a) 11 5/8% Notes
On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.
The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the
<PAGE>
F-30
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(10) Long-term Debt (continued)
11 5/8% Notes contains certain covenants which provide for limitations
on indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes and the debt issuance costs
are being accreted over ten years until maturity at March 15, 2007.
The accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
(b) 12 1/2% Notes
On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Manditorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.
The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibits the payment of cash dividends.
The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes and the debt issuance costs
are being accreted over ten years until maturity at May 1, 2006. The
accretion of the discount and debt issuance costs is included in
interest expense in the accompanying consolidated financial
statements.
<PAGE>
F-31
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.
(c) 13 1/2% Notes
On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.
The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on the indebtedness, dividends, asset
sales and certain other transactions and effectively prohibits the
payment of cash dividends.
The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes and the debt issuance costs are being accreted over five years
until September 15, 2000, the date at which the 13 1/2% Notes can
first be
<PAGE>
F-32
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(10) Long-term Debt (continued)
redeemed. The value assigned to the Unit Warrants, representing
additional debt discount, is also being accreted over the five-year
period. The accretion of the total discount is included in interest
expense in the accompanying consolidated financial statements.
Holdings may redeem the 13 1/2% Notes on or after September 15, 2000,
in whole or in part, at the redemption prices set forth in the
agreement, plus unpaid interest, if any, at the date of redemption.
The Unit Warrants entitle the holder to purchase one common share of
Holdings-Canada, which is exchangeable into one share of Common Stock,
at the exercise price of $12.51 per share and are exercisable at any
time between August 8, 1996 and August 8, 2005.
In connection with the issuance of the 13 1/2% Notes, the Company
obtained $6.0 million 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 12 (c)). The $6.0
million was repaid with a portion of the proceeds from the 1995
Private Offering. As a result of the repayment of the interim
financing, the value assigned to the Series A Warrants totaling
approximately $3.0 million, representing debt discount, was charged to
interest expense during the year ended September 30, 1995.
<PAGE>
F-33
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(10) Long-term Debt (continued)
Scheduled principal maturities of long-term debt as of December 31,
1997 are as follows (in thousands):
Due December 31:
1998 $ 1,784
1999 1,686
2000 1,290
2001 938
2002 938
Thereafter (a) 1,311,976
-----------------
1,318,612
Less unaccreted discount on
the 11 5/8% Notes, the 12 1/2%
Notes and the 13 1/2% Notes (426,260)
==================
$ 892,352
==================
(a) Includes $176.0 million, $550.3 million and $584.3 million of 11
5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes, respectively, due
at maturity.
(e) Private Placement of Senior Discount Notes Completed Subsequent to
December 31, 1997
On February 12, 1998, ICG Services, Inc., a Delaware corporation and
new wholly owned subsidiary of ICG ("ICG Services"), completed a
private placement of 10% Senior Discount Notes due 2008 (the "10%
Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting costs of approximately
$9.0 million, were approximately $291.6 million.
The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.
<PAGE>
F-34
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries
Redeemable preferred stock of subsidiary is summarized as follows:
December 31,
--------------------------------
1996 1997
-------------- -----------------
(in thousands)
14% Exchangeable preferred stock,
mandatorily redeemable in 2008 (a) $ - 108,022
14 1/4% Exchangeable preferred stock,
mandatorily redeemable in 2007 (b) 159,120 184,420
============== =================
$ 159,120 292,442
============== =================
(a) 14% Preferred Stock
In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock into
14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.
(b) 14 1/4% Preferred Stock
In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.
<PAGE>
F-35
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
(c) 6 3/4% Preferred Securities
During fiscal 1997, a new subsidiary of the Company, ICG Funding,
completed a private placement of 6 3/4% Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs, were
approximately $127.6 million. Restricted cash at December 31, 1997 of
$38.7 million includes the proceeds from the offering which are
designated for the payment of cash dividends on the 6 3/4% Preferred
Securities through November 15, 2000.
The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of Common Stock at a rate of 2.0812
shares of Common Stock per preferred security, or $24.025 per share,
subject to adjustment. ICG Funding may, at its option, redeem the 6
3/4% Preferred Securities at any time on or after November 18, 2000.
Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of Common Stock equals or
exceeds the exchange price, for at least 20 days of any 30-day trading
period, by 170% prior to November 16, 1998; 160% from November 16,
1998 through November 15, 1999; and 150% from November 16, 1999
through November 15, 2000. The 6 3/4% Preferred Securities are subject
to mandatory redemption on November 15, 2009.
On February 15, 1998, ICG Funding used the remaining proceeds from the
private placement of the 6 3/4% Preferred Securities to purchase
$112.4 million of ICG Communications, Inc. Preferred Stock ("ICG
Preferred Stock") which pays dividends each February 15, May 15,
August 15 and November 15 in additional shares of ICG Preferred Stock
through November 15, 2000. Subsequent to November 15, 2000, dividends
are payable in cash or shares of Common Stock, at the option of ICG.
The ICG Preferred Stock is exchangeable, at the option of ICG
<PAGE>
F-36
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(11) Redeemable Preferred Securities of Subsidiaries (continued)
Funding, at any time prior to November 15, 2009 into shares of Common
Stock at an exchange rate based on the exchange rate of the 6 3/4%
Preferred Securities. The ICG Preferred Stock is subject to mandatory
redemption on November 15, 2009.
The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1997.
Included in minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries is
approximately $1.3 million, $27.0 million, $5.8 million and $39.8 million
for fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively, associated with the accretion of issuance costs,
discount and preferred security dividend accruals for the 6 3/4% Preferred
Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the
Redeemable Preferred Stock (issued in connection with the 1995 Private
Offering and redeemed in April 1996). These costs are partially offset by
the minority interest share in losses of subsidiaries of approximately $0.6
million, $2.7 million, $0.8 million and $2.0 million for fiscal 1995 and
1996, the three months ended December 31, 1996 and fiscal 1997,
respectively.
(12) Stockholders' Deficit
(a) Common Stock
Common stock outstanding at December 31, 1997 represents the issued
and outstanding Common Stock of ICG and Class A common shares of
Holdings-Canada (not owned by ICG) which are exchangeable at any time,
on a one-for-one basis, for ICG Common Stock. The following table sets
forth the number of shares outstanding for ICG and Holdings-Canada on
a separate company basis as of December 31, 1997:
<PAGE>
F-37
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
Shares Shares not owned
owned by ICG by ICG
-------------------- -------------------
ICG Common Stock, $.01 par value,
100,000,000 shares authorized;
31,087,825 and 33,784,500 shares
issued and outstanding at December
31, 1996 and 1997, respectively - 33,784,500
Holdings-Canada Class A common shares,
no par value, 100,000,000 shares
authorized; 31,795,270 and
31,822,756 shares issued and
outstanding at December 31, 1996
and 1997, respectively:
Class A common shares,
exchangeable on a one-for-one
basis for ICG Common Stock
at any time - 23,700
Class A common shares owned
by ICG 31,799,056 -
-------------------
Total shares outstanding 33,808,200
===================
(b) Stock Options and Employee Stock Purchase Plan
In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.
In fiscal years 1994, 1995 and 1996, the three months ended December
31, 1996 and fiscal 1997, the Company's Board of Directors approved
incentive and non-qualified stock option plans and replenishments to
plans which provide for the granting of options to certain directors,
officers and employees to purchase 2,536,000 shares of
<PAGE>
F-38
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the Company's Common Stock under the 1994 plan and an aggregate of
2,700,000 shares of the Company's Common Stock under the 1995 and 1996
plans. A total of 5,709,426 options have been granted under these
plans at original exercise prices ranging from $7.94 to $27.06, none
of which were less than 100% of the fair market value of the shares
underlying options on the date of grant, and accordingly, no
compensation expense was recorded for these options under APB 25. The
options granted under these plans are subject to various vesting
requirements and expire in five and ten years from the date of grant.
In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of the
Company's Common Stock on the Nasdaq National Market on April 16,
1997. A total of 597,600 options, with original exercise prices
ranging from $15.875 to $26.25, were canceled and regranted. There was
no effect on the Company's consolidated financial statements as a
result of the cancellation and regranting of options.
In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary, to be used to purchase shares of the Company's Common
Stock, up to a limit of $25,000 in Common Stock each year, at a 15%
discount to fair market value. Stock purchases will occur four times a
year on February 1, May 1, August 1 and November 1, with the price per
share equaling the lower of 85% of the market price at the beginning
or end of the offering period. The Company is authorized to issue a
total of 1,000,000 shares of Common Stock to participants in the plan.
During fiscal 1997, the Company sold 109,213 shares of the Company's
Common Stock to employees under this plan.
The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.2 million and $0.1 million for fiscal 1995 and 1996, respectively,
pursuant to the intrinsic value based method of APB 25. Had
compensation expense for the Company's plans been determined based on
the fair market value of the options at the grant dates for awards
<PAGE>
F-39
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
under those plans consistent with the provisions of SFAS 123, the
Company's pro forma net loss and loss per share would have been as
presented below. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during fiscal 1995 and
1996, the three months ended December 31, 1996 and fiscal 1997.
<TABLE>
<CAPTION>
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
-----------------------------------
1995 1996 1996 1997
--------------- ---------------- -------------------------- --------------------------
(in thousands, except per share amounts)
Net loss:
<S> <C> <C> <C> <C>
As reported $ (76,648) (184,107) (49,823) (327,643)
Pro forma (82,544) (186,831) (50,819) (331,715)
Loss per share - basic
and diluted:
As reported $ (3.25) (6.83) (1.56) (10.11)
Pro forma (3.50) (6.93) (1.60) (10.24)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions: an expected option life of three years
for directors, officers and other executives, and two years for other
employees, for all periods; expected volatility of 50% for all
periods; and risk-free interest rates ranging from 5.03% to 7.42% for
fiscal 1995 and 1996 and the three months ended December 31, 1996, and
risk-free interest rates ranging from 5.61% to 6.74% for fiscal 1997.
Risk-free interest rates, as were currently available on the grant
date, were assigned to each granted option based on the zero-coupon
rate of U.S. Treasury bills to be held for the same period as the
assumed option life. Since the Company does not anticipate issuing any
dividends on its Common Stock, the dividend yield was assumed to be
zero. The weighted average fair market value of options granted during
fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997 was approximately $4.11, $5.28, $9.42 and $5.75 per
option, respectively.
<PAGE>
F-40
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
As options outstanding at December 31, 1997 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans and options granted prior to 1995 have
not been considered, the above pro forma results are not necessarily
indicative of the impact on net loss and loss per share in future
periods.
The following table summarizes the status of the Company's stock-based
compensation plans:
<TABLE>
<CAPTION>
Shares Weighted
underlying average Options
options exercise price exercisable
------------------- -------------------- ------------------------
(in thousands) (in thousands)
<S> <C> <C> <C>
Outstanding at October 1, 1994 1,319 $ 6.81 769
Granted 2,520 9.73
Exercised (264) 3.32
Canceled (201) 13.25
-------------------
Outstanding at September 30, 1995 3,374 9.08 940
Granted 1,322 11.78
Exercised (248) 7.55
Canceled (243) 11.12
-------------------
Outstanding at September 30, 1996 4,205 9.77 2,264
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
-------------------
Outstanding at December 31, 1996 4,453 10.34 2,969
Granted 1,546 13.55
Exercised (632) 7.54
Canceled (860) 16.08
-------------------
Outstanding at December 31, 1997 4,507 10.62 3,037
===================
</TABLE>
<PAGE>
F-41
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The following table summarizes information about options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------- ---------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------ ------------------ ----------------- ------------------ ----------------- -------------
(in thousands) (in years) (in thousands)
<S> <C> <C> <C> <C> <C>
$4.00 - 6.25 98 4.95 $ 4.23 98 $ 4.23
7.94 1,550 7.41 7.94 1,550 7.94
8.50 - 10.38 1,689 8.35 10.02 607 9.71
10.50 - 26.88 1,135 7.89 15.26 782 13.70
27.06 35 9.77 27.06 - -
------------------ ------------------
4,507 3,037
================== ==================
</TABLE>
(c) Warrants
During fiscal 1995 and 1996, the three months ended December 31, 1996
and fiscal 1997, the Company's warrant activity was as follows:
(i) During fiscal 1993, the Company issued 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 fiscal
1994, 17,067 warrants were exercised for proceeds of
approximately $0.1 million. In addition, during fiscal 1994, the
Company issued to the same debt holder additional warrants to
purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada
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 issued on July
10, 1995 at an exercise price of $14.50, which expire on July 9,
2000. Also issued on July 10, 1995 were 60,000 additional
warrants to an affiliate of the debt holder at an exercise price
of $14.50, which expire on July 9, 2000. During the three months
ended December 31, 1996, 1,231 of
<PAGE>
F-42
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
the $7.38 warrants, 4,456 of the $7.88 warrants and 2,215 of the
$11.80 warrants were canceled. During fiscal 1997, 2,024 of the
$7.38 warrants, 6,583 of the $7.88 warrants, 1,450 of the $11.80
warrants and 17,429 of the $14.50 warrants were exercised in
exchange for Holdings-Canada Class A common shares. In addition,
50,296 of the $14.50 warrants were canceled. At December 31,
1997, a total of 17,249 of these warrants remained outstanding.
(ii) During fiscal 1994, the Company issued to two financial advisors
warrants to purchase 75,000 and 200,000 common shares of
Holdings-Canada. These warrants have an exercise price of $7.94
and $18.00 and are exercisable for two- and five-year periods,
respectively. During fiscal 1995 and 1996, 74,335 and 665 of the
75,000 warrants were exercised for total proceeds of
approximately $0.6 million. During the three months ended
December 31, 1996, 100,000 of the 200,000 warrants were exercised
for proceeds of approximately $1.8 million. At December 31, 1997,
100,000 warrants remained outstanding.
(iii)Pursuant to a private placement of the Redeemable Preferred
Stock and the interim financing arrangement during fiscal 1995,
the Company issued 1,895,000 Series A Warrants and 1,375,000
Series B Warrants to purchase an equal number of common shares of
Holdings-Canada with exercise prices of $7.94 and $8.73,
respectively, which expire on July 14, 2000. During fiscal 1996,
the Company repurchased 458,333 each of the Series A and Series B
Warrants for $3.21 and $2.52, respectively (see note 10 (c)). In
addition, 1,853,334 warrants were exercised in June 1996 through
a cashless exercise in which 1,271,651 Holdings-Canada common
shares were issued. During fiscal 1997, the remaining 500,000
warrants of the Series A and Series B warrants were exercised in
exchange for 346,014 common shares of Holdings-Canada, which were
in turn converted into an equal number of shares of ICG Common
Stock.
<PAGE>
F-43
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
(iv) In connection with the 1995 Private Offering, the Company issued
1,928,190 warrants to purchase an equal number of common shares
of Holdings-Canada. The warrants were exercisable beginning
August 8, 1996 at $12.51 per share and expire on August 6, 2005.
During fiscal 1997, 71,775 warrants were exercised for total
proceeds of approximately $0.9 million and were in turn converted
into an equal number of shares of ICG Common Stock. At December
31, 1997, 1,856,415 of these warrants remained outstanding.
The following table summarizes warrant activity for fiscal 1995 and 1996,
the three months ended December 31, 1996 and fiscal 1997:
Outstanding Price
warrants range
------------------- -----------------------
(in thousands)
Outstanding, October 1, 1994 310 $ 7.38 - 21.51
Granted 5,266 7.94 - 14.50
Exercised (74) 7.94
-------------------
Outstanding, September 30, 1995 5,502 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------------
Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------------
Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
====================
Outstanding, December 31, 1997 1,974 12.51 - 21.51
====================
<PAGE>
F-44
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(12) Stockholders' Deficit (continued)
The warrants outstanding on December 31, 1997 expire on the following
dates:
Outstanding Exercise
Expiration date warrants price
----------------- ------------------ ----------------
(in thousands)
November 10, 1998 2 $ 21.51
December 17, 1998 100 18.00
March 24, 1999 15 20.01
August 6, 2005 1,857 12.51
==================
1,974
==================
(13) Sale of Teleports
In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain related
assets, and entered into a management agreement with the purchaser whereby
the purchaser assumed control of the teleport operations. Upon approval of
the transaction by the Federal Communications Commission ("FCC"), the
Company completed the sale in March 1996 and received an additional $0.4
million due to certain closing adjustments, for total proceeds of $21.5
million. The Company recognized a loss of approximately $1.1 million on the
sale. Revenue associated with these operations was approximately $9.1
million and $2.5 million for fiscal 1995 and 1996, respectively. The
Company has reported results of operations from these assets through
December 31, 1995.
(14) Commitments and Contingencies
(a) Network Construction
In March 1996, the Company and Southern California Edison Company
("SCE") jointly entered into a 25-year agreement under which the
Company will lease 1,258 miles of fiber optic cable in Southern
California, and can install up to 500 additional miles of fiber optic
cable. This network, which will be maintained and operated primarily
by the Company, stretches from Los Angeles to southern Orange County.
Under the terms of this agreement, SCE will be entitled to receive an
annual fee for
<PAGE>
F-45
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
ten years, certain fixed quarterly payments, a quarterly payment equal
to a percentage of certain network revenue, and certain other
installation and fiber connection fees. The aggregate fixed payments
remaining under the agreement totaled approximately $144.7 million at
December 31, 1997. The agreement has been accounted for as a capital
lease in the accompanying consolidated balance sheets.
In May 1997, the Company entered into a long-term agreement with The
Southern Company ("Southern") that will permit the Company to
construct a 100-mile fiber optic network in the Atlanta metropolitan
area. The Company paid $5.5 million upon execution of the agreement
and is responsible for reimbursement to Southern for costs of network
design, construction, installation, maintenance and repair.
Additionally, the Company is also required to pay Southern a quarterly
fee based on specified percentages of the Company's revenue derived
from services provided over this network. Network construction on the
initial 43-mile build is expected to be completed by May of 1998. The
Company estimates costs to complete the initial build to be
approximately $5.2 million. Other than the initial $5.5 million
payment, no costs have been incurred as of December 31, 1997.
In January 1997, the Company announced the formation of ChoiceCom, a
strategic alliance between the Company and CSW, which is expected to
develop and market telecommunications services in certain cities in
Texas. CSW holds 100% of the partnership interest in ChoiceCom and the
Company has an option to purchase a 50% interest at any time prior to
July 1, 2003. Subsequent to July 1, 1999, if the Company has not
exercised its option, CSW will have the right to sell, at price
pursuant to the terms of the limited partnership agreement, either 51%
or 100% of the partnership interest in ChoiceCom to the Company.
Additionally, the Company has committed to loan $15.0 million to
ChoiceCom under two promissory notes, of which $10.0 million was
advanced as of December 31, 1997 and the remaining $5.0 million was
advanced during the first quarter of fiscal 1998.
In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast.
Network construction is ongoing and is expected to be complete by
December 1998. The Company is responsible for payment on the
construction as segments of the network are completed and has incurred
<PAGE>
f-46
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
approximately $8.0 million as of December 31, 1997, with total costs
anticipated to be approximately $35.0 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1998.
(b) Company Headquarters
During the three months ended December 31, 1996, the Company acquired
property for its new headquarters and commenced construction of an
office building that will accommodate most of the Company's Colorado
operations. The total cost of the project is expected to be
approximately $44.2 million, of which $29.4 million had been incurred
as of December 31, 1997 and is included in construction in progress.
In January 1998, the Company sold the substantially completed building
to a third party and entered into an agreement to lease back all of
the office space under a 15-year operating lease which includes two
ten-year renewal terms.
(c) Other Commitments
As part of the terms of the original purchase agreement, the Company
was obligated to purchase, at fair market value, all of the shares of
Maritime Telecommunications Network, Inc. ("MTN"), a 64% owned
subsidiary of the Company, that were owned by the minority
shareholders, upon demand of the minority shareholders, if a
transaction was not effected which converted the minority shares into
publicly traded securities or cash by January 3, 1998. As of the
current date, no such demand has been made by the minority
shareholders.
The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue for that year certain discounts, allowances and
incentives otherwise provided to the Company. In addition, the
agreements may be terminated by either the Company or the vendor upon
prior written notice.
Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $19.5 million at December 31, 1997.
<PAGE>
f-47
ICG COMMUNICATIONS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(d) Leases
The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $2.8 million, $5.1
million, $1.3 million and $11.8 million for fiscal 1995 and 1996, the
three months ended December 31, 1996 and fiscal 1997, respectively.
Estimated future minimum lease payments for the years subsequent to
December 31, 1997 are (in thousands):
Due December 31:
1998 $12,765
1999 9,563
2000 8,536
2001 8,003
2002 6,292
Thereafter 53,631
=================
$ 98,790
=================
(e) Reciprocal Compensation
The Company has recorded revenue of approximately $4.9 million for
fiscal 1997 for reciprocal compensation relating to the transport and
termination of local traffic to Internet service providers from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that
such calls are not local traffic as defined by the various agreements
and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility
commissions and/or by the FCC. To date, there have been favorable
rulings from 15 states and no unfavorable final rulings by any state
public utilities commission or the FCC that would indicate that calls
placed by end users to Internet service providers would not qualify as
local traffic subject to the payment of reciprocal compensation. While
the Company believes that all revenue recorded through December 31,
1997 is collectible and that future reciprocal compensation revenue
will be realized, there can be no assurance that such future
regulatory rulings will be favorable to the Company.
<PAGE>
F-48
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(14) Commitments and Contingencies (continued)
(f) Litigation
On April 4, 1997, certain shareholders of the Company's majority owned
subsidiary, Zycom Corporation ("Zycom"), an Alberta, Canada
corporation, filed a shareholder derivative suit and class action
complaint for unspecified damages, purportedly on behalf of all of the
minority shareholders of Zycom, in the District Court of Harris
County, Texas (Cause No. 97-17777) against the Company, Zycom and
certain of their subsidiaries. This complaint alleges that the Company
and certain of its subsidiaries breached certain duties owed to the
plaintiffs. The Company is vigorously defending the claims. While it
is not possible to predict the outcome of this litigation, management
believes these proceedings will not have a material adverse effect on
the Company's financial condition, results of operations or cash
flows.
The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.
(15) Income Taxes
The components of income tax benefit for fiscal 1996 are as follows (in
thousands):
Current income tax expense $ (198)
Deferred income tax benefit 5,329
---------------------
Total $ 5,131
=====================
Current income tax expense for fiscal 1996 represents state income tax
relating to operations of companies in states requiring separate entity tax
returns. Accordingly, these entities' taxable income cannot be offset by
the Company's net operating loss carryforwards. No income tax expense or
benefit was recorded in fiscal 1995, the three months ended December 31,
1996 or fiscal 1997.
<PAGE>
F-49
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(15) Income Taxes (continued)
During fiscal 1996, the deferred tax liability was adjusted for the effects
of certain changes in estimated lives of property and equipment as
discussed in note 2 (j). As a result, the Company recognized an income tax
benefit of $5.3 million.
Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1997
------------------- -----------------
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 14,106 6,254
------------------- ----------------
Deferred income tax assets:
Net operating loss carryforwards (68,740) (141,185)
Accrued interest on high yield debt obligations
deductible when paid (32,873) (72,330)
Accrued expenses not currently deductible for
tax purposes (2,031) (7,968)
Less valuation allowance 89,538 215,229
------------------- -----------------
Net deferred income tax asset (14,106) (6,254)
-------------------- -----------------
Net deferred income tax liability $ - -
=================== =================
</TABLE>
<PAGE>
F-50
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(15) Income Taxes (continued)
As of December 31, 1997, the Company has net operating losses ("NOLs") of
approximately $353.0 million for U.S. tax purposes which expire in varying
amounts through 2012. However, due to the provisions of Section 382,
Section 1502 and certain other provisions of the Internal Revenue Code (the
"Code"), the utilization of these NOLs will be limited. The Company is also
subject to certain state income tax laws, which will also limit the
utilization of NOLs.
A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management cannot determine when the Company will
generate future taxable income.
(16) Employee Benefit Plans
The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plan after meeting
minimum service and age requirements. The Company makes a matching
contribution of its Common Stock (up to
(16) Employee Benefit Plans (continued)
a maximum of 6% of an employee's eligible earnings) which totaled
approximately $0.5 million, $1.2 million, $0.5 million and $3.0 million
during fiscal 1995 and 1996, the three months ended December 31, 1996 and
fiscal 1997, respectively.
(17) Significant Customer
During fiscal 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 as of, or for the respective periods ended September 30, 1996,
December 31, 1996 or 1997.
(18) Summarized Financial Information of ICG Holdings, Inc.
As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada. The separate complete financial statements of
Holdings have not been included herein because such disclosure is not
considered to be significant to the holders of the 11 5/8% Notes, the 12
1/2% Notes and the 13 1/2% Notes. However, summarized combined financial
information for Holdings and subsidiaries and affiliates is as follows:
<PAGE>
F-51
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(18) Summarized Financial Information of ICG Holdings, Inc. (continued)
Summarized Consolidated Balance Sheet Information
December 31,
---------------------------------------
1996 1997
------------------ ------------------
(in thousands)
Current assets $ 449,059 215,817
Property and equipment, net 403,676 632,167
Other non-current assets, net 88,439 122,768
Current liabilities 87,423 98,351
Long-term debt, less current portion 690,293 890,503
Due to parent 11,485 30,970
Other long-term liabilities 73,113 66,939
Preferred stock 159,120 292,442
Stockholders' deficit (80,260) (408,453)
<TABLE>
<CAPTION>
Summarized Consolidated and Combined Statement of Operations Information (a)
Fiscal years ended Three months ended Fiscal year ended
September 30, December 31, December 31,
--------------------------------- --------------------------------
1995 1996 1995 1996 1997
--------------- ---------------- ---------------- --------------- ----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ 111,610 169,094 35,399 56,956 273,354
Total operating costs
and expenses 157,384 238,908 50,296 83,934 465,517
Operating loss (45,774) (69,814) (14,897) (26,978) (192,163)
Net loss (68,760) (172,687) (34,281) (49,750) (328,193)
</TABLE>
(a) Holdings-Canada's 51% interest in FOTI was contributed to Holdings
effective in February 1995 (the remaining 49% was purchased in January
1996) and, accordingly, FOTI's operations have been included in the
consolidated amounts subsequent to that date.
<PAGE>
F-52
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc.
Condensed financial information for Holdings-Canada only is as follows:
Condensed Balance Sheet Information
December 31,
---------------------------------------------
1996 1997
--------------------- ---------------------
(in thousands)
Current assets $ 165 162
Advances to subsidiaries 11,485 30,790
Non-current assets, net 2,793 3,800
Current liabilities 199 107
Long-term debt, less current portion 65 65
Due to parent 1,566 22,342
Preferred stock 127,729 -
Share of losses of subsidiary 80,260 408,453
Shareholders' deficit (67,647) (396,035)
<PAGE>
F-53
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------
(19) Financial Information of ICG Holdings (Canada), Inc. (continued)
<TABLE>
<CAPTION>
Condensed Statement of Operations Information
Fiscal years ended Three months ended December Fiscal year ended
September 30, 31, December 31,
--------------------------------- -------------------------------
1995 1996 1995 1996 1997
----------------- -------------- --------------- -------------- ----------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Total revenue $ - - - - -
Total operating costs
and expenses 1,309 3,438 361 73 195
Operating loss (1,309) (3,438) (361) (73) (195)
Losses from subsidiaries (68,760) (172,687) (34,281) (49,750) (328,193)
Net loss attributable to
common shareholders (76,648) (184,107) (34,642) (49,823) (328,388)
</TABLE>
(20) Summarized Financial Information of ICG Funding, LLC
As discussed in note 11, the 6 3/4% Preferred Securities issued by ICG
Funding during fiscal 1997 are guaranteed by ICG. The separate complete
financial statements of ICG Funding have not been included herein because
such disclosure is not considered to be significant to the holders of the 6
3/4% Preferred Securities. For fiscal 1997, the statement of operations of
ICG Funding included only the preferred dividends paid and accrued on the 6
3/4% Preferred Securities and interest income earned on the proceeds from
the offering of such securities. The summarized balance sheet information
for ICG Funding is as follows:
<PAGE>
F-54
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- ------------------------------------------------------------------------------
(20) Summarized Financial Information of ICG Funding, LLC (continued)
Summarized Balance Sheet Information
December 31,
1997
-------------------------
(in thousands)
Cash, cash equivalents and short-term
investments available for sale $ 94,182
Other current assets 19
Restricted cash 38,749
Dividends payable 1,116
Due to parent 4,642
Preferred securities 127,729
Member deficit (537)
(21) Condensed Financial Information of ICG Communications, Inc. (Parent
company)
The primary asset of ICG is its investment in Holdings-Canada. Certain
corporate expenses of the parent company are included in ICG's statement of
operations and were approximately $1.2 million for fiscal 1997. At December
31, 1997, ICG had no operations other than those of ICG Funding,
Holdings-Canada and its subsidiaries.
<PAGE>
FINANCIAL STATEMENT SCHEDULE
ICG Communications, Inc. Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . S-2
<PAGE>
S-1
Independent Auditors' Report
The Board of Directors and Stockholders
ICG Communications, Inc.:
Under the date of February 19, 1998, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders= equity
(deficit) and cash flows for the fiscal years ended September 30, 1995 and 1996,
the three months ended December 31, 1996, and the fiscal year ended December 31,
1997 as contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as whole, presents
fairly, in all material respects, the information set forth therein.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
February 19, 1998
<PAGE>
S-2
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- ------------ -------------- ------------- -------------- -------------
(in thousands)
Allowance for uncollectible trade receivables:
<S> <C> <C> <C> <C> <C>
Fiscal year ended September 30, 1995 $ 1,061 2,360 - (1,204) 2,217
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,217 1,585 - (1,293) 2,509
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 2,509 914 - (908) 2,515
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 2,515 4,003 - (1,142) 5,376
------------- -------------- ------------- -------------- -------------
Allowance for uncollectible note receivable:
Fiscal year ended September 30, 1995 $ - 175 - - 175
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275
------------- -------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 7,275 - - - 7,275
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 7,275 - - 3,975 3,300
------------- -------------- ------------- -------------- -------------
Allowance for investment impairment:
Fiscal year ended September 30, 1995 $ - 2,000 - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000
-------------- ------------- ------------- -------------- -------------
Three months ended December 31, 1996 $ 2,000 - - - 2,000
------------- -------------- ------------- -------------- -------------
Fiscal year ended December 31, 1997 $ 2,000 5,170 - 2,000 5,170
------------- -------------- ------------- -------------- -------------
See accompanying independent auditors'report.
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<PAGE>
EXHIBITS
21: Subsidiaries of the Registrant.
23.1: Consent of KPMG Peat Marwick LLP.
27: Financial Data Schedule.
10.46: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.51: Employment Agreement, dated June 1, 1997, between NETCOM
On-Line Communication Services, Inc. and David W. Garrison.
10.52a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.52b: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc., dated
January 15, 1998.
10.52c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.52d: Commercial Lease - Net between TriNet Essential Facilities X,
Inc. and ICG Holdings, Inc., dated January 15, 1998.
10.52e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.52f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1998.
ICG Communications, Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998
- -----------------------
William J. Laggett
President, Chief Executive Officer and
/s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President and Chief
Financial Officer (Principal Financial
/s/James D. Grenfell Officer) March 30, 1998
- -----------------------
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
/s/David W. Garrison Director March 30, 1998
- -----------------------
David W. Garrison
/s/Harry R. Herbst Director March 30, 1998
- -----------------------
Harry R. Herbst
/s/Leontis Teryazos Director March 30, 1998
- -----------------------
Leontis Teryazos
/s/Walter Threadgill Director March 30, 1998
- -----------------------
Walter Threadgill
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1997.
ICG Funding, LLC
By: ICG Communications, Inc.
Common Member and Manager
By: /s/James D. Grenfell
James D. Grenfell
Executive Vice President and
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1998.
ICG Holdings (Canada), Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/William J. Laggett Chairman of the Board of Directors March 30, 1998
- -----------------------
William J. Laggett
President, Chief Executive Officer and
/s/J. Shelby Bryan Director (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President and Chief
/s/James D. Grenfell Financial Officer(Principal Financial March 30, 1998
- ----------------------- Officer)
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
Director
- -----------------------
Harry R. Herbst
/s/Gregory C.K. Smith Director March 30, 1998
- -----------------------
Gregory C.K. Smith
/s/Leontis Teryazos Director March 30, 1998
- -----------------------
Leontis Teryazos
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1997.
ICG Holdings, Inc.
By: /s/J. Shelby Bryan
J. Shelby Bryan
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board of Directors,
President and Chief Executive Officer
/s/J. Shelby Bryan (Principal Executive Officer) March 30, 1998
- -----------------------
J. Shelby Bryan
Executive Vice President, Chief Financial
Officer and Director(Principal Financial
/s/James D. Grenfell Officer) March 30, 1998
- -----------------------
James D. Grenfell
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1998
- -----------------------
Richard Bambach
Executive Vice President - Network and
/s/John Kane Director Marc 30, 1998
- -----------------------
John Kane
Executive Vice President - Strategic
/s/Marc E. Maassen Planning and Director March 30, 1998
- -----------------------
Marc E. Maassen
Executive Vice President - Telecom
/s/Sheldon S. Ohringer and Director March 30, 1998
- -----------------------
Sheldon S. Ohringer
EXHIBIT 21
Subsidiaries of the Registrant
State of Doing Business
Name of Subsidiary Incorporation As
- --------------------------------------- ----------------- ------------------
Bay Area Teleport, Inc. Delaware --
Communications Buying Group, Inc. Ohio --
Conticomm, Inc. Colorado --
Fiber Optic Technologies of the
Northwest, Inc.(formerly known as
Fiber Optic Technologies of
Oregon, Inc.) Oregon --
ICG Fiber Optic Technologies, Inc. Colorado --
ICG Access Services - Southeast, Inc.
(formerly known as PrivaCom, Inc.) Delaware --
ICG Corporate Services, Inc. Colorado --
ICG Enhanced Services, Inc. Colorado --
ICG Equipment, Inc. Colorado --
ICG Funding, LLC Delaware --
ICG Holdings, Inc.
(formerly known as IntelCom Group
(U.S.A.), Inc.) Colorado --
ICG Holdings-Canada, Inc.
(formerly known as IntelCom Group
Inc.) Federal Canadian --
ICG Investments, Inc. Colorado --
ICG Leasing, Inc. Colorado --
ICG Ohio LINX, Inc. Ohio --
ICG Satellite Services, Inc.
(formerly known as Commden Ltd.
and as ICG Wireless Services, Inc.) Colorado --
ICG Services, Inc. Delaware --
ICG Southwest Holdings, Inc. Colorado --
ICG SWL, Inc. Colorado --
ICG SWP, Inc. Colorado --
ICG Telecom Canada, Inc. Federal Canadian --
ICG Telecom Group, Inc.
(formerly known as ICG Access
Services, Inc.) Colorado --
ICG Telecom of San Diego, L.P. California --
ICG Telecom Services, Inc. Colorado --
MarineSat Communications Network, Inc.
(formally known as Maritime Cellular
Tele-Network, Inc.) Delaware --
Maritime Telecommunications Network,
Inc. Colorado --
NETCOM On-Line Communication Services,
Inc. Delaware --
Nova-Net Communications, Inc. Colorado --
PTI Harbor Bay, Inc. Washington --
TDIJV, Inc. Colorado --
Teleport Denver Ltd. Colorado --
TransAmerican Cable, Inc. Kentucky MidAmerican Cable
UpSouth Corporation Georgia --
Zycom Corporation Alberta, Canada --
Zycom Corporation Texas --
Zycom Network Services, Inc. Texas --
Consent of Independent Auditors
The Board of Directors
ICG Communications, Inc.:
We consent to incorporation by reference in the registration statement Nos.
33-96660, 333-08729, 333-18839, 333-38823, 333-40495 and 333-40495-01 on Form
S-3 of IntelCom Group Inc. and Nos. 33-14127, 333-25957, 333-39737 and 333-45213
on Form S-8 of ICG Communications, Inc. of our reports dated February 19, 1998,
relating to the consolidated balance sheets of ICG Communications, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
fiscal years ended September 30, 1995 and 1996, the three-month period ended
December 31, 1996, and the fiscal year ended December 31, 1997, and the related
financial statement schedule, which reports appear in the December 31, 1997
Annual Report on Form 10-K of ICG Communications, Inc.
As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATION, INC. AND
SUBSIDIARIES FOR THE FISCAL ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 118,834
<SECURITIES> 98,181
<RECEIVABLES> 84,097
<ALLOWANCES> 5,376
<INVENTORY> 3,901
<CURRENT-ASSETS> 310,180
<PP&E> 738,488
<DEPRECIATION> 106,321
<TOTAL-ASSETS> 1,107,664
<CURRENT-LIABILITIES> 99,304
<BONDS> 957,507
420,171
0<F1>
<COMMON> 647
<OTHER-SE> (369,965)
<TOTAL-LIABILITY-AND-EQUITY> 1,107,664
<SALES> 0<F1>
<TOTAL-REVENUES> 273,354
<CGS> 0<F1>
<TOTAL-COSTS> 246,418
<OTHER-EXPENSES> 187,272
<LOSS-PROVISION> 11,950
<INTEREST-EXPENSE> 117,545
<INCOME-PRETAX> (289,831)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (327,643)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (327,643)
<EPS-PRIMARY> (10.11)
<EPS-DILUTED> 0<F1>
<FN>
<F1>THIS VALUE IS NOT APPLICABLE.
</FN>
</TABLE>
AMENDMENT NO. 1
TO THE
ICG COMMUNICATIONS, INC.
1996 STOCK OPTION PLAN
Effective for Options granted on or after February 11, 1997 under the ICG
Communications, Inc. 1996 Stock Option Plan, as effective August 2, 1996 (the
"Plan"), the Plan is hereby amended as follows:
1. The last sentence of Clause (viii) of Subsection A of SECTION V of the
Plan is hereby amended by deleting such sentence in its entirety and by
substituting therefor the following:
"Notwithstanding the provisions of the immediately preceding sentence,
if an Optionee's employment is terminated by the Corporation or by any
Parent or Subsidiary for Good Cause, the Optionee shall, at the time
of such termination of employment, forfeit his rights to exercise all
of such Options."
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of June, 1997, by and between
DAVID W. GARRISON (the "Employee") and NETCOM ON-LINE COMMUNICATION SERVICES,
INC., a Delaware corporation (the "Corporation").
For ease of reference, this Agreement is divided into the following parts, which
begin on the pages indicated:
FIRSTPART: TERM OF EMPLOYMENT, DUTIES AND SCOPE, COMPENSATION AND
BENEFITS DURING EMPLOYMENT
(Sections 1-5, beginning on page 2)
SECOND PART: COMPENSATION AND BENEFITS IN CASE OF ACTUAL OR CONSTRUCTIVE
TERMINATION NOT OCCURRING WITHIN SIX MONTHS AFTER A CHANGE IN
CONTROL
(Sections 6-8, beginning on page 5)
THIRD PART: COMPENSATION AND BENEFITS IN CASE OF ACTUAL OR CONSTRUCTIVE
TERMINATION OCCURRING WITHIN SIX MONTHS AFTER A CHANGE IN CONTROL
(Sections 9-12, beginning on page 8)
FOURTH PART: PARACHUTE PAYMENTS
(Sections 13-14, beginning on page 10)
FIFTH PART: TRADE SECRETS, SUCCESSORS, MISCELLANEOUS PROVISIONS,
SIGNATURE PAGE
(Sections 15-17, beginning on page 12)
<PAGE>
FIRST PART: TERM OF EMPLOYMENT, DUTIES AND SCOPE, COMPENSATION AND BENEFITS
DURING EMPLOYMENT
Section 1: Term of Employment
(a) Basic Rule. The Corporation agrees to continue the Employee's employment,
and the Employee agrees to remain in employment with the Corporation, from
June 1, 1997, until the earliest of:
(1) The date of the Employee's death; or
(2) The date when the Employee's employment terminates pursuant to
Subsection (b), (c), (d) or (e) below.
(b) Early Termination or Resignation. The Corporation may terminate the
Employee's employment at any time and for any reason by giving the Employee
written notice. The Employee may terminate the Employee's employment for
any reason by giving the Corporation not less than 30 days' advance notice
in writing.
(c) Termination for Cause. The Corporation may terminate the Employee's
employment at any time for Cause shown. For all purposes under this
Agreement, "Cause" shall mean (1) a willful failure by the Employee to
substantially perform the Employee's duties under this Agreement, other
than a failure resulting from the Employee's complete or partial incapacity
due to physical or mental illness or impairment, (2) a willful act by the
Employee that constitutes gross misconduct and that is materially injurious
to the Corporation, (3) a willful breach by the Employee of a material
provision of this Agreement or (4) a material and willful violation of a
federal or state law or regulation applicable to the business of the
Corporation that is materially and demonstrably injurious to the
Corporation. No act, or failure to act, by the Employee shall be considered
"willful" unless committed without good faith and without a reasonable
belief that the act or omission was in the Corporation's best interest.
(d) Termination for Disability. The Corporation may terminate the Employee's
employment for Disability by giving the Employee written notice. For all
purposes under this Agreement, "Disability" shall mean that the Employee,
at the time the notice is given, has been unable to perform the Employee's
duties under this Agreement for a period of not less than three consecutive
months as a result of the Employee's incapacity due to physical or mental
illness. In the event that the Employee resumes the performance of
substantially all of the Employee's duties under this Agreement before the
termination of the Employee's employment under this Section becomes
effective, the notice of termination shall automatically be deemed to have
been revoked.
(e) Termination of Agreement. This Agreement shall expire when all obligations
of the parties hereunder have been satisfied. In addition, either the
Corporation or the Employee may terminate this Agreement for any reason,
and without affecting the Employee's status as an employee, by giving the
other party one year's advance notice in writing. A termination of this
Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or
provision of compensation or benefits under this Agreement on account of a
termination of employment occurring prior to the termination of this
Agreement.
Section 2: Duties and Scope of Employment
(a) Position. The Corporation agrees to employ the Employee for the term of
employment under this Agreement in the position of Chief Executive Officer.
Employee shall be given such duties, responsibilities and authorities as
are appropriate to his position.
(b) Obligations. During the term of employment under this Agreement, the
Employee shall devote the Employee's full business efforts and time to the
business and affairs of the Corporation as needed to carry out his duties
and responsibilities hereunder subject to the overall supervision of the
Corporation's Board of Directors. The foregoing shall not preclude the
Employee from engaging in appropriate civic, charitable or religious
activities or from devoting a reasonable amount of time to private
investments or from serving on the boards of directors of other entities,
as long as such activities and service do not interfere or conflict with
the Employee's responsibilities to the Corporation.
Section 3: Base Compensation
During the term of employment under this Agreement, the Corporation agrees to
pay the Employee as compensation for services a base salary at the annual rate
of $350,000, or at such higher rate as the Compensation/Option Committee of the
Board of Directors may determine from time to time. Such salary shall be payable
in accordance with the standard payroll procedures of the Corporation. Once the
Corporation's Compensation/Option Committee of the Board of Directors has
increased such salary, it thereafter shall not be reduced; provided, however,
that if a Change in Control has not occurred, such salary (including any
increases) may be reduced by the Corporation if (1) the Employee commits an act
or omission that meets the definition of Cause, as defined in Section 1(c), or
(2) the Employee and all other executive officers of the Corporation who are
parties to written employment agreements containing substantially the same
provisions as this Agreement have their salaries (including any increases)
reduced by the same percentage amount for the same time period. The annual
compensation specified in this Section 3, together with any increases in such
compensation that the Compensation/Option Committee of the Board of Directors
may grant from time to time, and together with any reductions made in accordance
with this Section 3, is referred to in this Agreement as "Base Compensation."
Section 4: Employee Benefits
In General. During the term of employment under this Agreement, the Employee
shall be eligible to participate in the employee benefit plans and executive
compensation programs maintained by the Corporation, including (without
limitation) savings or profit-sharing plans, deferred compensation plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the discretion and determinations of any person,
committee or entity administering such plan or program. In addition, Employee
shall be eligible for a car allowance of $600 per month and a cellular
telephone.
Section 5: Business Expenses and Travel
During the term of employment under this Agreement, the Employee shall be
authorized to incur necessary and reasonable travel, entertainment and other
business expenses in connection with the Employee's duties hereunder. The
Corporation shall reimburse the Employee for such expenses upon presentation of
an itemized account and appropriate supporting documentation, all in accordance
with generally applicable policies.
<PAGE>
SECOND PART: COMPENSATION AND BENEFITS IN CASE OF ACTUAL OR CONSTRUCTIVE
TERMINATION NOT OCCURRING WITHIN SIX MONTHS AFTER A CHANGE
IN CONTROL
Section 6: Terminations Not Relating to a Change in Control
This Second Part of the Agreement, consisting of Sections 6 through 8, describes
the benefits and compensation, if any, payable in case of termination of
employment that does not occur within six months after a Change in Control (as
defined in Section 12). The Third Part of the Agreement, consisting of Sections
9 through 12, describes benefits and compensation, if any, payable in case of
termination occurring within six months after a Change in Control. If benefits
and compensation are payable under this Second Part, then no benefits and
compensation are payable under the Third Part.
Section 7: Involuntary Actual Or Constructive Termination Without Cause
or Disability
In the event that, during the term of this Agreement, the Employee's employment
terminates in a Qualifying Termination, as defined in Subsection (a), and such
termination does not occur within six months after a Change in Control, then,
after executing the release of claims described in Section 7(d), the Employee
shall be entitled to receive the payments and benefits described in Subsections
(b) and (c).
(a) Qualifying Termination. A Qualifying Termination occurs if:
(1) The Corporation terminates the Employee's employment for any reason
other than Cause or Disability; or
(2) The Employee separates from employment with the Corporation in
response to a "Constructive Termination," which means a material
reduction in salary or benefits (subject to Section 3), a material
change in responsibilities, or a requirement to relocate, except for
office relocations that would not increase the Employee's one-way
commute distance by more than 20 miles.
(b) Severance (1x payment). The Corporation shall pay to the Employee following
the date of the employment termination and over the succeeding 12 months,
in accordance with standard payroll procedures, an amount equal to the
following:
(1) One times the Employee's Base Compensation in effect on the date of
the employment termination; plus
(2) 100% of the Employee's annual incentive bonus earned on a quarterly
basis as of the date of the termination, assuming the Employee was
employed on the last day of the quarter in which termination of
employment occurred.
Any other provision of this Agreement or of the Corporation's
Incentive Bonus Plan notwithstanding, after the amount described in
this Subsection (b) has been paid to the Employee, the Employee shall
have no further interest in such Plan.
(c) Twelve Months of Life Insurance and Health Plan Coverage. The coverage
described in this Subsection (c) shall be provided for a "Continuation
Period" beginning on the date when the employment termination is effective
and ending on the earlier of (1) the 12-month anniversary of the date when
the employment termination is effective or (2) the date of the Employee's
death. During the Continuation Period, the Employee (and, where applicable,
the Employee's dependents) shall be entitled to continue participation in
the group term life insurance plan and in the health care plan for
employees maintained by the Corporation as if the Employee were still an
employee of the Corporation. The coverage provided under this Subsection
(c) shall run concurrently with and shall be offset against any
continuation coverage under Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended. Where applicable, the Employee's
compensation for purposes of such plans shall be deemed to be equal to the
Employee's compensation (as defined in such plans) in effect on the date of
the employment termination. To the extent that the Corporation finds it
undesirable to cover the Employee under the group life insurance and health
plans of the Corporation, the Corporation shall provide the Employee (at
its own expense) with the same level of coverage under individual policies.
(d) Release of Claims. As a condition to the receipt of the payments and
benefits described in this Section 7, the Employee shall be required to
execute a release of all claims arising out of the Employee's employment or
the termination thereof including, but not limited to, any claim of
discrimination under state or federal law, but excluding claims for
indemnification from the Corporation under any indemnification agreement
with the Corporation, its certificate of incorporation and by-laws or
applicable law or claims for directors and officers' insurance coverage.
(e) Conditions to Receipt of Payments and Benefits. In view of Employee's
position and his access to Confidential Information, as a condition to the
receipt of payments and benefits described in this Section 7, the Employee
shall not, without the Corporation's written consent, directly or
indirectly, alone or as a partner, joint venturer, officer, director,
employee, consultant, agent or stockholder (other than a less than 5%
stockholder of a publicly traded company) (i) engage in any activity which
is in competition with the business, the products or services of the
Corporation (a list of competitors and competitive products and services,
which may be updated, is attached hereto), (ii) solicit any of the
Corporation's employees, consultants or customers, (iii) hire any of the
Corporation's employees or consultants in an unlawful manner or actively
encourage employees or consultants to leave the Corporation, or (iv)
otherwise breach his Confidential Information obligations.
(f) No Mitigation. The Employee shall not be required to mitigate the amount of
any payment or benefit contemplated by this Section 7, nor shall any such
payment or benefit be reduced by any earnings or benefits that the Employee
may receive from any other source.
Section 8: Other Terminations Under This Part
If termination of employment, actual or constructive, occurs at a time that is
not within six months after a Change in Control, and the termination is not
described in Section 7, then the Employee is entitled only to the compensation,
benefits and reimbursements payable under the terms of Sections 3, 4 and 5 of
this Agreement for the period preceding the effective date of the termination
including any disability or death benefits to which Employee (or his estate or
beneficiary(s)) may be entitled as a result of termination of his employment on
account of Disability or death. The payments under this Agreement shall fully
discharge all responsibilities of the Corporation to the Employee upon
termination of the Employee's employment. This Section 8 applies, without
limitation, to any termination of employment initiated by the Employee (except
an Employee-initiated termination that is described in Paragraph 2 of Section
7(a)), termination of employment caused by the Employee's death or Disability,
termination of the Employee for Cause, and any constructive termination (not
described in Section 7).
<PAGE>
THIRD PART: COMPENSATION AND BENEFITS IN CASE OF ACTUAL OR CONSTRUCTIVE
TERMINATION OCCURRING WITHIN SIX MONTHS AFTER A CHANGE IN CONTROL
Section 9: Terminations Relating to a Change in Control
This Third Part of the Agreement, consisting of Sections 9 through 12, describes
the benefits and compensation, if any, payable in case of termination of
employment that occurs within six months after a Change in Control (as defined
in Section 12). The Second Part of the Agreement, consisting of Sections 6
through 8, describes benefits and compensation, if any, payable in case of
termination that does not occur within six months after a Change in Control. If
benefits and compensation are payable under this Third Part, then no benefits
and compensation are payable under the Second Part.
Section 10: Involuntary Actual or Constructive Termination Without Cause
In the event that, during the term of this Agreement and within six months after
a Change in Control, the Employee's employment terminates in a Qualifying
Termination, the Employee shall be entitled to receive the payments and benefits
described in Subsections (a), (b) and (c).
(a) Severance (2x payment). The Corporation shall pay to the Employee in a lump
sum, not less than 31 days nor more than 60 days following the date of the
employment termination, an amount equal to the following:
(1) Two times the Employee's Base Compensation in effect on the date of
the employment termination; plus
(2) 200% of the greater of his prior year's incentive bonus or his annual
incentive bonus earned on a quarterly basis as of the date of the
termination, assuming the Employee was employed on the last day of the
quarter in which termination of employment occurred.
Any other provision of this Agreement or of the Corporation's
Incentive Bonus Plan notwithstanding, after the amount described in
this Subsection (a) has been paid to the Employee, the Employee shall
have no further interest in such Plan.
(b) Two Years of Life Insurance and Health Plan Coverage. The coverage
described in this Subsection (c) shall be provided for a "Continuation
Period" beginning on the date when the employment termination is effective
and ending on the earlier of (1) the second anniversary of the date when
the employment termination is effective or (2) the date of the Employee's
death. During the Continuation Period, the Employee (and, where applicable,
the Employee's dependents) shall be entitled to continue participation in
the group term life insurance plan and in the health care plan for
employees maintained by the Corporation as if the Employee were still an
employee of the Corporation. The coverage provided under this Subsection
(c) shall run concurrently with and shall be offset against any
continuation coverage under Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended. Where applicable, the Employee's
compensation for purposes of such plans shall be deemed to be equal to the
Employee's compensation (as defined in such plans) in effect on the date of
the employment termination. To the extent that the Corporation finds it
undesirable to cover the Employee under the group life insurance and health
plans of the Corporation, the Corporation shall provide the Employee (at
its own expense) with the same level of coverage under individual policies.
(c) Incentive Programs. All options granted by the Corporation shall vest an
additional 50% (or the remaining unvested options if less than 50%) upon
the effective date of the Change in Control and any remaining unvested
options shall fully vest upon a Qualifying Termination within 6 months
after the Change in Control.
(d) No Mitigation. The Employee shall not be required to mitigate the amount of
any payment or benefit contemplated by this Section 10, nor shall any such
payment or benefit be reduced by any earnings or benefits that the Employee
may receive from any other source.
Section 11: Other Terminations Under This Part
If termination of employment, actual or constructive, occurs at a time that is
within six months after a Change in Control, and the termination is not
described in Section 10, then the Employee is entitled only to the compensation,
benefits and reimbursements payable under the terms of Sections 3, 4 and 5 of
this Agreement for the period preceding the effective date of the termination
including any disability or death benefits to which Employee (or his estate or
beneficiary(s)) may be entitled as a result of termination of his employment on
account of Disability or death. The payments under this Agreement shall fully
discharge all responsibilities of the Corporation to the Employee upon
termination of the Employee's employment. This Section 11 applies, without
limitation, to any termination of employment initiated by the Employee (except
an Employee-initiated termination that is described in Paragraph (2) of Section
7(a)) or a termination of employment caused by Disability, Cause or the
Employee's death.
Section 12: Definition of Change in Control
For all purposes under this Agreement, "Change in Control" shall mean a "Change
in Control" of the Corporation, as defined in the NetCom On-Line Communications
Services, Inc. 1993 Stock Option Plan as in effect on the date this Agreement is
executed.
<PAGE>
FOURTH PART: PARACHUTE PAYMENTS
Section 13: Gross-Up Payment.
In the event it is determined that any payment or distribution of any type to or
for the benefit of the Employee, pursuant to this Agreement or otherwise, by the
Corporation, any Person who acquires ownership or effective control of the
Corporation, or ownership of a substantial portion of the assets of the
Corporation (within the meaning of section 260G of the Code and the regulations
thereunder) or any affiliate of such Person (the "Total Payments") would be
subject to the excise tax imposed by section 4999 of the Code or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are collectively referred to as the "Excise Tax"),
then the Employee shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that, after payment by the Employee of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Employee
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments.
Section 14: Determination by Accountant
All mathematical determinations and determinations as to whether any of the
Total Payments are "parachute payments" (within the meaning of section 280G of
the Code), in each case which determinations are required to be made under this
Section 14, including whether a Gross-Up Payment is required, the amount of such
Gross-Up Payment, and amounts relevant to the last sentence of this Section 14,
shall be made by an independent accounting firm selected by the Employee from
amount the largest six accounting firms in the United States (the "Accounting
Firm"). The Accounting Firm shall provide to the Corporation and to the Employee
its determination (the "Determination"), together with detailed supporting
calculations regarding the amount of any Gross-Up Payment and any other relevant
matter, within ten days after termination of the Employee's employment, if
applicable, or at such earlier time following termination of employment as is
requested by the Employee (if the Employee reasonably believes that any of the
Total Payments may be subject to the Excise Tax). If the Accounting Firm
determines that no Excise Tax is payable by the Employee, it shall furnish the
Employee with a written statement that such Accounting Firm has concluded that
no Excise Tax is payable (including the reasons therefor) and that the Employee
has substantial authority not to report any Excise Tax on the Employee's federal
income tax return. If a Gross-Up Payment is determined to be payable, it shall
be paid to the Employee within ten days after the Determination is delivered to
the Corporation or the Employee. Any determination by the Accounting Firm shall
be binding upon the Corporation and the Employee, absent manifest error.
As a result of uncertainty in the application of section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments not made by the Corporation and members of the
Corporation should have been made ("Underpayment"), or that Gross-Up Payments
will have been made by the Corporation and members of the Corporation that
should not have been made ("Overpayments"). In either such event, the Accounting
Firm shall determine the amount of the Underpayment or Overpayment that has
occurred. In the case of an Underpayment, the Corporation promptly shall pay, or
cause to be paid, the amount of such Underpayment to or for the benefit of the
Employee. In the case of an Overpayment, the Employee shall, at the direction
and expense of the Corporation, take such steps as are reasonably necessary
(including the filing of returns and claims for refund), follow reasonable
instructions from, and procedures established by, the Corporation, and otherwise
reasonably cooperate with the Corporation to correct such Overpayment; provided,
however, that (1) Employee shall not in any event be obligated to return to the
Corporation an amount greater than the net after-tax portion of the Overpayment
that he has retained or recovered as a refund from the applicable taxing
authorities and (2) this provision shall be interpreted in a manner consistent
with the intent of Section 13, which is to make the Employee whole, on an
after-tax basis, from the application of the Excise Tax, it being understood
that the correction of an Overpayment may result in the Employee repaying to the
Corporation an amount that is less than the Overpayment.
<PAGE>
FIFTH PART: TRADE SECRETS, SUCCESSORS, MISCELLANEOUS PROVISIONS,
SIGNATURE PAGE
Section 15: Confidential Information
(a) Acknowledgement. The Corporation and the Employee acknowledge that the
services to be performed by the Employee under this Agreement are unique
and extraordinary and that, as a result of the Employee's employment, the
Employee will be in a relationship of confidence and trust with the
Corporation and will come into possession of "Confidential Information" (1)
owned or controlled by the Corporation, (2) in the possession of the
Corporation and belonging to third parties or (3) conceived, originated,
discovered or developed, in whole or in part, by the Employee. As used
herein "Confidential Information includes trade secrets and other
confidential or proprietary business, technical, personnel or financial
information, whether or not the Employee's work product, in written,
graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs,
drawings, diagrams, models, customer names, ID's or e-mail addresses,
business or marketing plans, studies, analyses, projections and reports,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under
their direction (including attorney work product), and software systems and
processes. Any information that is not readily available to the public
shall be considered to be a trade secret and confidential and proprietary,
even if it is not specifically marked as such, unless the Corporation
advises the Employee otherwise in writing.
(b) Nondisclosure. The Employee agrees that the Employee will not, without the
prior written consent of the Corporation, directly or indirectly use or
disclose Confidential Information to any person, during or after the
Employee's employment, except as may be necessary in the ordinary course of
performing the Employee's duties under this Agreement. The Employee will
keep the Confidential Information in strictest confidence and trust. This
Section 15 shall apply indefinitely, both during and after the term of this
Agreement.
(c) Surrender Upon Termination. The Employee agrees that in the event of the
termination of the Employee's employment for any reason, the Employee will
immediately deliver to the Corporation all property belonging to the
Corporation, including all documents and materials of any nature pertaining
to the Employee's work with the Corporation, and will not take with the
Employee any documents or materials of any description, or any reproduction
thereof of any description, containing or pertaining to any Confidential
Information. It is understood that the Employee is free to use information
that is in the public domain (not as a result of a breach of this
Agreement).
Section 16: Successors
(a) Corporation's Successors. The Corporation shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Corporation's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree
expressly to perform this Agreement in the same manner and to the same
extent as the Corporation would be required to perform it in the absence of
a succession. The Corporation's failure to obtain such agreement prior to
the effectiveness of a succession shall be a breach of this Agreement and
shall entitle the Employee to all of the compensation and benefits to which
the Employee would have been entitled hereunder if the Corporation had
involuntarily terminated the Employee's employment without Cause or
Disability, on the date when such succession becomes effective. For all
purposes under this Agreement, the term "Corporation" shall include any
successor to the Corporation's business and/or assets that executes and
delivers the assumption agreement described in this Subsection (a) or that
becomes bound by this Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
Section 17: Miscellaneous Provisions
(a) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the
Corporation (other than the Employee). No waiver by either party of any
breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another
time.
(b) Whole Agreement. No agreements, representations or understandings (whether
oral or written and whether express or implied) that are not expressly set
forth in this Agreement, or any existing indemnification agreement for the
benefit of the Employee, have been made or entered into by either party
with respect to the subject matter hereof. In addition, the Employee hereby
acknowledges and agrees that this Agreement supersedes in its entirety any
employment agreement between the Employee and the Corporation in effect
immediately prior to the effective date of this Agreement. As of the
effective date of this Agreement, such employment agreement shall terminate
without any further obligation by either party thereto, and the Employee
hereby relinquishes any further rights that the Employee may have had under
such prior employment agreement.
(c) Notice. Notices and all other communications contemplated by this Agreement
shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to the Employee at the home address that
the Employee most recently communicated to the Corporation in writing. In
the case of the Corporation, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention
of its Chief Operating Officer.
(d) No Setoff. There shall be no right of setoff or counterclaim, with respect
to any claim, debt or obligation, against payments to the Employee under
this Agreement.
(e) Choice of Law. The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of California,
irrespective of California's choice-of-law principles.
(f) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(g) Arbitration. Except as otherwise provided in Section 14 and in the
enforcement of Section 15, any dispute or controversy arising out of the
Employee's employment or the termination thereof, including, but not
limited to, any claim of discrimination under state or federal law, shall
be settled exclusively by arbitration in San Jose, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
(h) No Assignment of Benefits. The rights of any person to payments or benefits
under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law,
including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Subsection (i)
shall be void.
(i) Employment at Will; Limitation of Remedies. The Corporation and the
Employee acknowledge that the Employee's employment is at will, as defined
under applicable law. If the Employee's employment terminates for any
reason, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement.
(j) Employment Taxes. All payments made pursuant to this Agreement shall be
subject to withholding of applicable taxes.
(k) Benefit Coverage Non-Additive. In the event that the Employee is entitled
to life insurance and health plan coverage under more than one provision
hereunder, only one provision shall apply, and neither the periods of
coverage nor the amounts of benefits shall be additive.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Corporation by its duly authorized officer, as of the day and year first
above written. Employee has consulted (or has had the opportunity to consult)
with his own counsel (who is other than the Corporation's counsel, Pillsbury
Madison & Sutro, LLP) prior to execution of this Agreement.
/s/ David W. Garrison
------------------------------
David W. Garrison
Employee
NETCOM ON-LINE COMMUNICATIONS SERVICES, INC.
By /s/Stephen J. Getsey
--------------------------
Its _________________________
<PAGE>
PURCHASE AGREEMENT
between
ICG HOLDINGS, INC.
and
TRINET CORPORATE REALTY TRUST, INC.
December 9, 1997
ICG Holdings Headquarters
Englewood, Colorado
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 Purchase and Sale...........................................1
1.1 The Property................................................1
1.2 The Project.................................................1
ARTICLE 2 Purchase Price..............................................2
2.1 Amount and Payment..........................................2
2.2 Liquidated Damages..........................................2
ARTICLE 3 Completion of Sale..........................................2
3.1 Place and Date..............................................2
3.2 Buyer's Right to Terminate..................................3
3.3 Buyer's Right to Accelerate Closing.........................3
ARTICLE 4 Title to the Property.......................................4
4.1 Real Property...............................................4
4.2 Leaseback of Real Property..................................4
4.3 Personal Property...........................................4
4.4 Contracts...................................................4
4.5 Permits.....................................................5
ARTICLE 5 Review of the Property......................................5
5.1 Delivery of Documents.......................................5
5.2 Documents Obtained by Buyer.................................6
5.3 Access for Review...........................................7
5.4 Property Approval Period....................................7
5.5 Survey......................................................8
5.6 Environmental Definitions...................................8
ARTICLE 6 Representations and Warranties..............................9
6.1 Seller......................................................9
6.2 Buyer......................................................13
ARTICLE 7 Covenants..................................................13
7.1 Seller.....................................................13
7.2 Buyer......................................................16
7.3 Casualty Damage............................................17
7.4 Eminent Domain.............................................18
7.5 Construction of the Project................................18
(a) Commencement and Completion.........................18
(b) Construction........................................19
(c) Plans and Specifications............................19
(d) Construction Information; Inspections...............21
(e) Prohibited Contracts................................21
(f) Construction Responsibilities.......................21
(g) Surveys.............................................22
(h) Construction Contract and Architect's Agreement.....22
(i) Substantial Completion..............................22
(j) Punch-list Items....................................23
ARTICLE 8 Conditions Precedent.......................................23
8.1 Seller.....................................................23
8.2 Buyer......................................................24
ARTICLE 9 Closing....................................................26
9.1 Procedure..................................................26
9.2 Possession.................................................27
9.3 Closing Costs and Credits..................................27
9.4 Prorations.................................................27
ARTICLE 10 General....................................................28
10.1 Notices....................................................28
10.2 Attorneys' Fees............................................28
10.3 Governing Law..............................................28
10.4 Construction...............................................29
10.5 Terms Generally............................................29
10.6 Further Assurances.........................................29
10.7 Partial Invalidity.........................................29
10.8 Waivers....................................................29
10.9 No Third Party Beneficiaries...............................29
10.10 Relationship of Parties....................................29
10.11 Seller's Default...........................................30
10.12 Miscellaneous..............................................30
10.13 Confidentiality............................................30
Exhibit A Commitment
Exhibit B Personal Property
Exhibit C Contracts
Exhibit D Permits
Exhibit E Description of Project
Exhibit F Description of Plans and Specifications
Exhibit G [Reserved]
Exhibit H Special Warranty Deed
Exhibit I Lease
Exhibit J Bill of Sale
Exhibit K Assignment of Contracts
Exhibit L Assignment of Permits
Exhibit M Survey Requirements
Exhibit N Seller's Closing Certificate
Exhibit O Buyer's Closing Certificate
Exhibit P Architect's Certificate
Exhibit Q Seller's Completion Certificate
Exhibit R Certificate of Non-Foreign Status
<PAGE>
1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT ("Agreement"), made as of December 9, 1997, by and
between ICG HOLDINGS, INC., a Colorado corporation ("Seller"), and TRINET
CORPORATE REALTY TRUST, INC., a Maryland corporation ("Buyer"),
W I T N E S S E T H:
In consideration of the covenants in this Agreement, Seller and Buyer agree
as follows:
ARTICLE 1
Purchase and Sale
1.1 The Propert. Seller agrees to sell to Buyer and Buyer agrees to
purchase from Seller, upon and subject to the terms and conditions in this
Agreement, all of the following property (collectively the "Property"):
(a) The real property in the City of Englewood, County of Arapahoe, State
of Colorado, commonly known as 161 Inverness Drive West, Englewood, Colorado, as
described in commitment no. ABS568808-2 dated as of July 17, 1997 (the
"Commitment"), prepared by Land Title Company ("Escrow Company"), as agent for
Chicago Title Insurance Company (the "Title Company"), attached hereto as
Exhibit A, together with all buildings, structures and improvements now or
hereafter located on such real property (including the Project (as defined in
section 1.2)), and all Seller's right, title and interest in and to all
machinery, fixtures and equipment affixed or attached to such real property and
all easements and rights appurtenant to such real property (all such real
property, buildings, structures, improvements, machinery, fixtures, equipment,
easements and rights are collectively the "Real Property");
(b) All Seller's right, title and interest in and to all tangible and
intangible personal property (the "Personal Property") described in Exhibit B
attached hereto;
(c) Seller's interest in all contracts, agreements, warranties and
guaranties (the "Contracts") described in Exhibit C attached hereto; and
(d) Seller's interest in all building permits, certificates of occupancy,
and other certificates, permits, licenses and approvals relating to the Real
Property (the "Permits"), including those described in Exhibit D attached
hereto.
1.2 the Project. Seller shall cause to be constructed, in accordance with
section 7.5, the building(s) and improvements (the "Project") described in
Exhibit E attached hereto, in accordance with the plans and specifications (the
"Plans and Specifications") described in Exhibit F attached hereto.
<PAGE>
2
ARTICLE 2
Purchase Price
2.1 Amount and Payment. The total purchase price for the Property shall be
forty-four million two hundred thousand dollars ($44,200,000). At the Closing
(as defined in section 3.1) on the Closing Date (as defined in section 3.1),
Buyer shall pay the total purchase price for the Property, adjusted to reflect
credits and prorations as provided in this Agreement, to Seller in cash in
immediately available funds.
2.2 Liquidated Damages. SELLER AND BUYER AGREE THAT, IF AFTER BUYER HAS
DELIVERED TO SELLER THE BOARD APPROVAL, BUYER MATERIALLY DEFAULTS UNDER OR
MATERIALLY BREACHES THIS AGREEMENT AND, THEREFORE, THE PURCHASE AND SALE OF THE
PROPERTY IS NOT COMPLETED, THEN THIS AGREEMENT SHALL TERMINATE AND BUYER SHALL
PAY TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) TO SELLER UPON
TERMINATION OF THIS AGREEMENT WHICH AMOUNT SHALL BE RETAINED BY SELLER AS
LIQUIDATED DAMAGES AND AS SELLER'S SOLE REMEDY AT LAW OR IN EQUITY. SELLER AND
BUYER AGREE THAT, UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS
AGREEMENT, ACTUAL DAMAGES MAY BE DIFFICULT TO ASCERTAIN AND THAT THE AMOUNT
SPECIFIED ABOVE IS A REASONABLE ESTIMATE OF THE DAMAGES THAT WILL BE INCURRED BY
SELLER IF BUYER MATERIALLY DEFAULTS UNDER OR MATERIALLY BREACHES THIS AGREEMENT
AND FAILS TO PURCHASE THE PROPERTY.
Seller's initials: JDG Buyer's initials: GPL
ARTICLE 3
Completion of Sale
3.1 Place and Date. The purchase and sale of the Property shall be
completed in accordance with Article 9 hereof (the "Closing"). The Closing shall
occur through an escrow with Escrow Company, at 3033 East First Avenue, Suite
600, Denver, Colorado 80206, on the date that is ten (10) business days after
the date on which the condition set forth in section 8.2(d) shall have been
satisfied, or at such other place or on such other date as Seller and Buyer
agree in writing. The date on which the Closing occurs is referred to herein as
the "Closing Date". Prior to the Closing Date, Seller and Buyer each shall give
appropriate written escrow instructions, consistent with this Agreement, to the
Escrow Company for the Closing in accordance with this Agreement.
3.2 Buyer's Right to Terminate. Buyer shall have the right to terminate
this Agreement, upon written notice to Seller, upon any of the following events:
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3
(a) if the Project shall not have been Substantially Completed (as
defined in section 7.5(i)) on or prior to February 28, 1998; or
(b) if the Closing shall not have occurred on or prior to March 15,
1998.
If Buyer delivers such notice of termination, this Agreement shall terminate
immediately and neither party shall have any further obligations to the other
hereunder, except as provided in the following sentence. If (1) Seller shall
have ceased, for a period of thirty (30) days or more, to diligently prosecute
the completion of the Project or shall have stated its intention to discontinue
work on the Project, and (2) such cessation or discontinuance is not
necessitated by Force Majeure (as defined below), and (3) Buyer terminates this
Agreement, then Seller shall pay to Buyer two hundred fifty thousand dollars
($250,000) as liquidated damages for Seller's failure to complete the Project.
SELLER AND BUYER AGREE THAT, IF THE EVENTS LISTED IN CLAUSES 1, 2 AND 3 OF THE
PRECEDING SENTENCE OCCUR, THEN IT SHALL CONSTITUTE A MATERIAL DEFAULT BY SELLER
UNDER THIS AGREEMENT AND THAT, UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE
OF THIS AGREEMENT, ACTUAL DAMAGES MAY BE DIFFICULT TO ASCERTAIN AND THAT THE
AMOUNT SPECIFIED ABOVE IS A REASONABLE ESTIMATE OF THE DAMAGES THAT WILL BE
INCURRED BY BUYER IF SELLER MATERIALLY DEFAULTS UNDER THIS AGREEMENT AS
DESCRIBED ABOVE. Nothing in this section 3.2 shall impair Buyer's right to
specifically enforce Seller's obligations under this Agreement in lieu of
seeking the remedy set forth in this section 3.2.
Seller's initials: JDG Buyer's initials: GPL
As used herein, the term "Force Majeure" shall mean fire, earthquake, tornado,
flood, other acts of God, strike, lockout, acts of public enemy, riot,
insurrection, or governmental regulation of the sale or transportation of
materials, supplies or labor.
3.3 Buyer's Right to Accelerate Closing. Buyer shall have the right to
accelerate the Closing Date, by notice to Seller, to a date in December 1997
specified in such notice (provided that such date shall be not less than ten
(10) business days after the date such notice is delivered) notwithstanding that
the condition set forth in section 8.2(d) shall not have been satisfied. In the
event that on such specified date (the "Accelerated Closing Date") any other
condition set forth in section 8.2 shall not have been satisfied, Buyer shall
have the right to postpone the Closing until such condition has been satisfied.
On the Accelerated Closing Date, the Closing shall occur in accordance with
Articles 8 and 9 of this Agreement, except that a portion of the purchase price
equal to one hundred thirty percent (130%) of the Unpaid Project Cost (as
defined below) shall be held in escrow on such terms as Buyer may reasonably
require and shall be paid to Seller after the Closing as follows: Buyer will
instruct the escrow holder to disburse to Seller, from time to time, amounts
equal to amounts paid by Seller for completed portions of the Unfinished Work
(as defined below), as evidenced by paid invoices describing the completed
portions; the balance of such funds shall be paid upon satisfaction of the
condition set forth in section 8.2(d), but subject to the terms of section
7.5(j). The term "Unpaid Project Costs" means the cost, as reasonably estimated
by the Architect (as defined in section 7.5(h)) and reasonably approved by
Buyer, of the work remaining to be completed as of the Closing Date ("Unfinished
Work") in order to achieve substantial completion of the Project. In the event
the actual amount of the Unpaid Project Costs exceeds the amount so held in
escrow, Seller shall pay such excess costs.
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4
ARTICLE 4
Title to the Property
4.1 Real Property. Seller shall convey good and marketable fee simple
absolute title to the Real Property to Buyer, by a duly executed and
acknowledged Special Warranty Deed (the "Deed") in the form of Exhibit H
attached hereto, free and clear of all liens, encumbrances, leases, easements,
restrictions, rights, covenants and conditions of any kind or nature whatsoever,
except only the following to the extent Buyer approves them during the Property
Approval Period (as defined in section 5.4) (the "Permitted Exceptions"): (a)
the matters shown as exceptions 9 through 25 in the Commitment, (b) the Lease
(as defined in section 4.2), (c) the Approved Utility Easements (as defined in
section 7.1), and (d) any matters shown on the Final Survey (as defined in
section 7.5(g)).
4.2 Leaseback of Real Property. On the Closing Date, Buyer shall lease the
Real Property back to Seller pursuant to the Lease in the form of Exhibit I
attached hereto (the "Lease").
4.3 Personal Property. Seller shall transfer good title to the Personal
Property to Buyer, by a duly executed Bill of Sale (the "Bill of Sale") in the
form of Exhibit J attached hereto, free and clear of all liens, encumbrances,
security interests and adverse claims of any kind or nature whatsoever.
4.4 Contracts. Seller shall assign good title to Seller's interest in the
Contracts to Buyer, by a duly executed Assignment of Contracts (the "Assignment
of Contracts") in the form of Exhibit K attached hereto, free and clear of all
liens, encumbrances, security interests and adverse claims of any kind or nature
whatsoever.
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5
4.5 Permits. Seller shall assign all of Seller's right, title and interest
in, to and under the Permits to Buyer, by a duly executed Assignment of Permits
(the "Assignment of Permits") in the form of Exhibit L attached hereto, free and
clear of all liens, encumbrances, security interests and adverse claims of any
kind or nature whatsoever.
ARTICLE 5
Review of the Property
5.1 Delivery of Documents. On or before the date of this Agreement or as
promptly thereafter as practicable, Seller shall, at the expense of Seller,
deliver to Buyer legible copies of the following documents:
(a) Audited financial statements ("Financial Statements") of ICG
Communications, Inc., a Delaware corporation, or its predecessor, IntelCom
Group, Inc., a Canadian federal corporation (collectively, "ICGC"), and its
consolidated subsidiaries for the fiscal years 1994, 1995 and 1996, which
Financial Statements shall include an audited consolidated balance sheet of ICGC
and its consolidated subsidiaries as at the end of such fiscal year, a
consolidated statement of operations of ICGC and its consolidated subsidiaries
for such fiscal year, and a certificate of Seller's auditor (which shall be a
recognized national independent accounting firm) to the effect that such
Financial Statements were prepared in accordance with generally accepted
accounting principles consistently applied and fairly present the financial
condition and operations of ICGC and its consolidated subsidiaries for and as at
the end of such fiscal year;
(b) All of the Contracts;
(c) All of the Permits;
(d) Bills for real property taxes and assessments imposed upon the Real
Property for the most recent tax fiscal year;
(e) All architectural, engineering and other drawings, plans and
specifications for the Project (including the Plans and Specifications) and for
all other buildings, structures, improvements, machinery, fixtures and equipment
included in the Real Property insofar as any thereof have heretofore been
prepared by, for or at the request of Seller or are in the possession of or
available to Seller;
(f) All reports, studies, investigations, appraisals and other materials
insofar as any thereof have heretofore been prepared by, for or at the request
of Seller or are in the possession of or available to Seller concerning the
design, construction, condition or status of the Project or the Real Property or
any of the buildings, structures, improvements, machinery, fixtures or equipment
included in the Project or the Real Property, or any system, element or
component thereof;
(g) All reports, studies, investigations, appraisals and other materials
insofar as any thereof have heretofore been prepared by, for or at the request
of Seller or are in the possession of or available to Seller concerning the
environmental condition or status of the Real Property or any of the buildings,
structures or improvements included in the Real Property, or any past or present
Release (as defined in section 5.6) or threatened Release of any Hazardous
Substances (as defined in section 5.6) in, on, under or within the Real Property
or any other real property in the vicinity of the Real Property, or the
compliance of the Real Property with Environmental Laws (as defined in section
5.6);
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6
(h) All environmental impact reports, environmental impact certifications
and zoning, land use or development agreements relating to the Real Property or
the Project heretofore prepared by, for or at the request of Seller or in the
possession of or available to Seller;
(i) All documents referred to in the exceptions listed in the Commitment
and all other documents referred to therein; and
(j) All of the following documents to the extent in the possession of or
available to Seller (and as to which documents Seller makes no representation or
warranty as to their completeness or accuracy): articles of incorporation,
bylaws, minutes of meetings of either any board of directors or of owners,
members or shareholders, budgets, operating statements, assessments, statement
of capital or operating reserves, and any other documents pertaining to any
owner's association with control or jurisdiction over any portion of the Real
Property.
5.2 Documents Obtained by Buyer. After the date of this Agreement, Buyer
intends to obtain appraisals of the Real Property ("Appraisals"), a Phase I
environmental assessment covering the Real Property (the "Phase I Report") and,
if recommended in the Phase I Report, a Phase II environmental assessment (the
"Phase II Report" which, together with the Phase I Report, is collectively
referred to herein as the "Environmental Reports"), an architectural and
structural engineering review (the "Structural Report") of the Plans and
Specifications and other design and engineering documents relating to the
Project (the "Design Documents"), and other reports, studies and analyses
relevant to Buyer's investigation of the Property and the Seller, prepared by
such appraisers, engineers and consultants as Buyer may select. Seller shall
provide relevant information to and shall cooperate with such appraisers,
engineers and consultants in connection with such investigation. The costs of
the Appraisals, the Environmental Reports and the Structural Report and the
costs of such other reports, studies and analyses are among the costs for which
Seller shall reimburse Buyer at Closing in accordance with section 9.3(b).
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5.3 Access for Review. From the date of this Agreement to the Closing Date,
Seller shall provide Buyer and Buyer's representatives with access to the Real
Property, the Personal Property, the Design Documents and all other drawings,
plans and specifications for the Real Property, all engineering and other
reports and studies relating to the Real Property, all files and correspondence
relating to the Real Property, and all financial and accounting books and
records relating to the ownership, management, operation, maintenance or repair
of the Real Property at all reasonable times. Buyer and its representatives may
make such studies, inspections, tests (including subsurface tests, borings,
samplings and measurements), copies and verifications as Buyer, in Buyer's
discretion, considers reasonably necessary or desirable in the circumstances.
Buyer shall restore the Real Property to its condition existing immediately
before Buyer's entry upon the Real Property, and Buyer shall indemnify and
defend Seller against and hold Seller harmless from all claims, demands,
liabilities, losses, damages, costs and expenses, including reasonable
attorneys' fees and disbursements (collectively, "Claims"), arising from any
bodily injury, property damage or mechanics' lien claim caused by Buyer in
connection with entry on the Real Property by Buyer pursuant to this section
5.3; provided, however, Buyer's foregoing obligations shall not include any
obligation or duty with respect to Claims (including Claims that the Real
Property has declined in value) arising out of, resulting from or incurred in
connection with (i) the discovery of any Hazardous Substances, or (ii) the
results, findings, tests or analyses of Buyer's environmental investigation of
the Real Property.
5.4 Property Approval Period. Between the date of this Agreement and the
Property Approval Deadline (as defined below), Buyer shall have the right to
review and investigate the physical and environmental condition of the Property,
the Design Documents, the character, quality, value and general utility of the
Property, the zoning, land use, environmental and building requirements and
restrictions applicable to the Real Property, the construction of improvements
on the Real Property, the state of title to the Real Property, and any other
factors or matters relevant to Buyer's decision to purchase the Property. As
used in this Agreement, the phrase "Property Approval Period" shall mean the
period commencing on the date of this Agreement and ending on the last to occur
of the date (the "Property Approval Deadline") which is (a) twenty (20) business
days after the date of execution of this Agreement, or (b) twenty (20) business
days after the date on which all of the documents described in sections 5.1 and
5.5 have been delivered to Buyer. Buyer may determine whether or not the
Property is acceptable to Buyer within the Property Approval Period. If during
the Property Approval Period Buyer determines that the Property is not
acceptable for any reason whatsoever, then Buyer shall have the right, by giving
notice to Seller, to terminate this Agreement. In addition, if Buyer fails to
obtain the Board Approval (as defined in section 8.2(a)) by the Board Approval
Date, than Buyer shall have the right, by giving notice to Seller, to terminate
this Agreement. If Buyer exercises the right to terminate this Agreement in
accordance with this section 5.4, this Agreement shall terminate as of the date
such termination notice is given by Buyer. If Buyer does not exercise the right
to terminate this Agreement in accordance with this section 5.4, then this
Agreement shall continue in full force and effect, and Buyer shall have no
further right to terminate this Agreement pursuant to this section 5.4.
Notwithstanding the foregoing or any contrary provisions of this Agreement, if
Buyer fails to deliver to Seller notice of the Board Approval on or before the
Board Approval Date, then Seller may deliver to Buyer notice of Buyer's failure,
and if Buyer fails to deliver to Seller notice of the Board Approval within two
(2) business days after Buyer's receipt of Seller's notice, then this Agreement
shall automatically terminate as of the date of Seller's notice.
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8
5.5 Survey. On or before the date of this Agreement or as promptly
thereafter as practicable, Seller shall, at the expense of Seller, deliver to
Buyer a survey of the Real Property prepared by a licensed land surveyor or a
registered civil engineer approved in writing by Buyer. Such survey shall comply
with the current minimum standard detail requirements for land title surveys
established by the American Land Title Association and the American Congress on
Surveying and Mapping, shall contain the legal description of the Real Property,
shall include the surveyor's or engineer's certification (in form and substance
satisfactory to Buyer), as of a date not earlier than sixty (60) days prior to
the Property Approval Deadline, to Buyer, Buyer's lenders and any agent bank for
such lenders (collectively, "Lender"), Title Company and any other person
designated by Buyer, signed by the surveyor or engineer, that the survey
correctly shows the Real Property on the basis of a field survey and in
accordance with the current minimum standard detail requirements for land title
surveys established by the American Land Title Association and the American
Congress on Surveying and Mapping, shall contain all of the information detailed
in Exhibit M attached hereto, and shall otherwise be in form and substance
satisfactory to Buyer.
5.6 Environmental Definitions. As used in this Agreement, the following
definitions shall apply: "Environmental Laws" shall mean all federal, state and
local laws, ordinances, rules and regulations now or hereafter in force, as
amended from time to time, and all federal and state court decisions, consent
decrees and orders interpreting or enforcing any of the foregoing, in any way
relating to or regulating human health or safety, or industrial hygiene or
environmental conditions, or protection of the environment, or pollution or
contamination of the air, soil, surface water or groundwater, and includes the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. section 9601, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. section 6901, et seq., and the Clean Water Act, 33 U.S.C. section 1251,
et seq. "Hazardous Substances" shall mean any substance or material that is
described as a toxic or hazardous substance, waste or material or a pollutant or
contaminant, or words of similar import, in any of the Environmental Laws, and
includes asbestos, petroleum (including crude oil or any fraction thereof,
natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable
for fuel, or any mixture thereof), petroleum products, polychlorinated
biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and
chemicals which may cause cancer or reproductive toxicity. "Release" shall mean
any spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping or disposing into the environment,
including continuing migration, of Hazardous Substances into or through soil,
surface water or groundwater.
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ARTICLE 6
Representations and Warranties
6.1 Seller. The representations and warranties of Seller in this section
6.1 and in Seller's Closing Certificate (as defined in section 7.1(c)) are a
material inducement for Buyer to enter into this Agreement. Buyer would not
purchase the Property from Seller without such representations and warranties of
Seller. All representations and warranties of Seller shall survive the Closing.
Seller represents and warrants to Buyer as of the date of this Agreement as
follows:
(a) Seller is a corporation existing under the laws of the State of
Colorado. Seller has full power and authority to enter into this Agreement and
the Lease and to perform this Agreement and the Lease. The execution, delivery
and performance of this Agreement and the Lease by Seller have been duly and
validly authorized by all necessary action on the part of Seller and all
required consents and approvals have been duly obtained. This Agreement is, and
upon execution the Lease will be, a legal, valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms, subject to the
effect of applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws affecting the rights of creditors generally.
Neither the execution and delivery of this Agreement or the Lease, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of, or give rise to a default under
(i) any provision of Seller's articles of incorporation or bylaws, (ii) any
material instrument or contract to which Seller is a party or by which Seller is
bound, or (iii) any federal, state, local or foreign judgment, writ, decree,
order, statute, rule or regulation applicable to Seller, the Property or any
other property of Seller.
(b) There are no presently effective leases, lease amendments, lease
guaranties, work letter agreements, improvement agreements, subleases,
assignments, licenses, concessions or other agreements with respect to the
leasing, use or occupancy of the Real Property or any part thereof. There are no
persons leasing, using or occupying the Real Property or any part thereof except
Seller. All of the Personal Property is described in Exhibit B attached hereto,
which is an accurate and complete list of all tangible and intangible personal
property owned by Seller relating to the ownership, construction, management,
operation, maintenance or repair of the Real Property. All of the tangible
Personal Property is located at the Real Property. All of the Contracts are
described in Exhibit C attached hereto, which is an accurate and complete list
of all presently effective contracts, agreements, warranties and guaranties to
which Seller is a party or by which Seller or the Property may be bound,
relating to the advertising, promotion, design, construction, ownership,
management, operation, maintenance or repair of the Real Property, and which
could continue to be in effect after the Closing Date. All of the Permits are
described in Exhibit D attached hereto, which is an accurate and complete list
of all presently effective building permits, certificates of occupancy, and
other necessary certificates, permits, licenses and approvals relating to the
design, construction, ownership, occupancy, use, management, operation,
maintenance or repair of the Real Property. Seller has good title to the
Personal Property, the Contracts and the Permits, free and clear of all liens,
encumbrances, security interests and adverse claims of any kind or nature
whatsoever. All of the copies of the documents delivered to Buyer pursuant to
section 5.1 are accurate and complete copies of all originals of the documents
described in section 5.1.
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10
(c) Except for the fee payable by Seller to the Broker in connection with
the transactions described in this Agreement, there are no leasing commissions
or other commissions, fees or compensation presently owed or which will become
due and payable with respect to the Lease or which could become due and payable
in the future upon the exercise of any right or option contained in the Lease.
(d) The Real Property and every part thereof and (as of the Closing Date)
the use and occupancy of the Real Property are in full compliance with all
applicable building, earthquake, zoning, land use, environmental, antipollution,
health, fire, safety, access and accommodations for the physically handicapped,
subdivision, energy and resource conservation or similar laws, statutes, rules,
regulations and ordinances and all covenants, conditions and restrictions
applicable to the Real Property. Seller has received no notice, citation or
other claim alleging any violation of any such law, statute, rule, regulation,
ordinance, covenant, condition or restriction. The Real Property (as shown in
the Design Documents) includes sufficient parking spaces to satisfy all zoning
and private land use requirements. The Real Property has direct access to one or
more public streets. The Permits have been duly and validly issued, are in full
force and effect, and are all of the certificates, permits, licenses and
approvals that are required by law to own, operate, use and occupy the Real
Property as it is presently, or is presently contemplated to be, owned,
operated, used and occupied. Seller has fully performed, satisfied and
discharged all of the obligations, requirements and conditions imposed on the
Real Property by the Permits.
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11
(e) Except as permitted by applicable Environmental Laws or disclosed in
the Environmental Reports, to the actual knowledge of Seller, no Hazardous
Substances are present in, on or under the Real Property or any nearby real
property which could migrate to the Real Property, and there is no present
Release or threatened Release of any Hazardous Substances in, on or under the
Real Property. Seller has never used the Real Property or any part thereof, and
Seller has never permitted any person to use the Real Property or any part
thereof, for the production, processing, manufacture, generation, treatment,
handling, storage or disposal of Hazardous Substances, except in compliance with
applicable Environmental Laws. Except for one (1) 20,000 gallon underground
water tank, no underground or above-ground storage tanks, barrels, wells, pits,
sumps, lagoons or other containers of any kind are, or to the actual knowledge
of Seller, have been located in, on, under or about the Real Property. The Real
Property and every part thereof, and all operations and activities therein and
thereon and the use and occupancy thereof, comply with all applicable
Environmental Laws, and neither Seller nor any person using or occupying the
Real Property or any part thereof is violating any Environmental Laws. Seller
has all permits, licenses and approvals (which are included in the Permits)
required by all applicable Environmental Laws for the use and occupancy of, and
all operations and activities in, the Real Property; Seller is in full
compliance with all such permits, licenses and approvals; and all such permits,
licenses and approvals were duly issued and are in full force and effect. No
claim, demand, action or proceeding of any kind relating to any past or present
Release or threatened Release of any Hazardous Substances in, on or under the
Real Property or any past or present violation of any Environmental Laws at the
Real Property has been made or commenced, or is pending, or is being threatened
or contemplated by any person. For purposes of this section 6.1(e), the phrase
"actual knowledge of Seller" shall mean the actual knowledge of Douglas O.
McKinnon, the officer of Seller primarily responsible for the Real Property and
the Project, without any duty of special inquiry or investigation.
(f) There is no litigation, arbitration or other legal or administrative
suit, action, proceeding or investigation of any kind pending, or, to the best
of Seller's knowledge, threatened or being contemplated, against or involving
Seller relating to the Real Property or any part thereof, and, to the best of
Seller's knowledge, there is no valid basis for any such litigation, arbitration
or, to the best of Seller's knowledge, other legal or administrative suit,
action, proceeding or investigation. There is no general plan, land use or
zoning action or proceeding of any kind, or general or special assessment action
or proceeding of any kind, or condemnation or eminent domain action or
proceeding of any kind pending or, to the best of Seller's knowledge, threatened
or being contemplated with respect to the Real Property or any part thereof.
There is no legal or administrative action or proceeding pending to contest or
appeal the amount of real property taxes or assessments levied against the Real
Property or any part thereof or the assessed value of the Real Property or any
part thereof for real property tax purposes. No supplemental real property taxes
have been or will be levied against or assessed with respect to the Real
Property or any part thereof based on any change in ownership or new
construction or other event or occurrence relating to the Real Property before
the date of this Agreement, except any such supplemental real property taxes as
have been paid in full and discharged. The Real Property consists of a separate
tax parcel, and no real property other than the Real Property is assessed for
real property tax purposes as a portion of that tax parcel.
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12
(g) All water, sewer, gas, electric, telephone and drainage facilities and
all other utilities required by law or reasonably necessary or proper and usual
for the full operation, use and occupancy of the Real Property are (or, prior to
the Closing Date, will be) installed to the boundary lines of the Real Property,
are (or, prior to the Closing Date, will be) connected with valid permits, and
are (or, prior to the Closing Date, will be) adequate to service the Real
Property and to allow full compliance with all applicable laws, and the cost of
installation and connection of all such utilities to the Property has been (or,
prior to the Closing Date, will be) fully paid.
(h) Seller is not a "foreign person" as defined in section 1445 of the
Internal Revenue Code of 1986, as amended, and the Income Tax Regulations
thereunder.
(i) Except for Cushman & Wakefield of Colorado, Inc. ("Broker"), Seller has
not dealt with any investment advisor, real estate broker or finder, or incurred
any liability for any commission or fee to any investment advisor, real estate
broker or finder, in connection with the sale of the Property or this Agreement.
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13
6.2 Buyer. The representations and warranties of Buyer in this section 6.2
and in Buyer's Closing Certificate (as defined in section 7.2(a)) are a material
inducement for Seller to enter into this Agreement. Seller would not sell the
Property to Buyer without such representations and warranties of Buyer. Such
representations and warranties shall survive the Closing. Buyer represents and
warrants to Seller as of the date of this Agreement as follows:
(a) Buyer is a corporation duly incorporated and organized and validly
existing and in good standing under the laws of the State of Maryland. Subject
to obtaining the Board Approval, Buyer has full corporate power and authority to
enter into this Agreement and to perform this Agreement. The execution, delivery
and performance of this Agreement by Buyer have been duly and validly authorized
by all necessary action on the part of Buyer and all required consents and
approvals have been duly obtained, subject to the Board Approval. This Agreement
is a legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting the rights of creditors generally.
(b) Buyer has not incurred any liability for any commission or fee to
any investment advisor, real estate broker or finder, in connection with the
sale of the Property or this Agreement.
ARTICLE 7
Covenants
7.1 Seller. Seller covenants and agrees with Buyer as follows:
(a) Between the date of this Agreement and the Closing Date, Seller shall
not, without the prior approval of Buyer, which approval may be withheld in the
sole and absolute discretion of Buyer, in any respect execute any lease,
sublease or other occupancy agreement affecting the Real Property or any portion
thereof. Between the date of this Agreement and the Closing Date, except with
the prior approval of Buyer, Seller shall not enter into any agreement affecting
the Property which could continue in effect after the Closing Date (excepting
the Approved Utility Easements, as defined below) or could affect the rights or
obligations of Buyer, or amend, modify, renew, extend or terminate, or waive
rights under, any existing Contract or Permit. The term "Approved Utility
Easements" means customary easements for the location and maintenance of utility
service facilities on, over or under the Real Property, pursuant to written
easement agreements in form and substance reasonably satisfactory to (and
approved in writing by) Buyer, the location of which easements shall be
reflected in the Final Survey. Between the date of this Agreement and the
Closing Date, Seller shall, to the extent consistent with the ongoing
construction of the Project: manage, operate, maintain and repair the Real
Property and the Personal Property in the ordinary course of business in
accordance with sound property management practice; keep the Real Property and
the Personal Property and every part thereof in good repair and working order
and sound condition; comply with the Permits and all covenants, conditions,
restrictions, laws, statutes, rules, regulations and ordinances applicable to
the Real Property or the Personal Property; keep the Contracts and the Permits
in force; immediately give Buyer copies of all notices received by Seller
asserting any breach or default under the Contracts or any violation of the
Permits or any covenants, conditions, restrictions, laws, statutes, rules,
regulations or ordinances applicable to the Real Property or the Personal
Property; and perform when due all of Seller's obligations under the Contracts
and the Permits in accordance with the Contracts and the Permits and all
applicable laws. Between the date of this Agreement and the Closing Date, Seller
shall keep in force property insurance covering all buildings, structures,
improvements, machinery, fixtures and equipment included in the Real Property
insuring against all risks of physical loss or damage, subject to standard
exclusions, in an amount equal to the actual replacement cost (without deduction
for depreciation) of such buildings, structures, improvements, machinery,
fixtures and equipment.
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(b) Between the date of this Agreement and the Closing Date, Seller shall:
(i) not use, produce, process, manufacture, generate, treat, handle, store or
dispose of any Hazardous Substances in, on or under the Real Property, or use
the Real Property for any such purposes, except in compliance with all
Environmental Laws, or Release any Hazardous Substances into any air, soil,
surface water or groundwater comprising the Real Property, or permit any person
using or occupying the Real Property or any part thereof to do any of the
foregoing; (ii) comply, and shall cause all persons using or occupying the Real
Property or any part thereof to comply, with all Environmental Laws applicable
to the Real Property, or the use or occupancy thereof, or any operations or
activities therein or thereon; (iii) duly obtain all permits, licenses and
approvals required by all applicable Environmental Laws for the use and
occupancy of, and all operations and activities in, the Real Property, comply
fully with all such permits, licenses and approvals, and keep all such permits,
licenses and approvals in full force and effect; (iv) give notice to Buyer
immediately after Seller obtains any information indicating that any Hazardous
Substances may be present or any Release or threatened Release of Hazardous
Substances may have occurred in, on or under the Real Property (or any nearby
real property which could migrate to the Real Property) or that any violation of
any Environmental Laws may have occurred at the Real Property, together with a
reasonably detailed description of the event, occurrence or condition in
question; and (v) immediately furnish to Buyer copies of all written
communications received by Seller from any person (including notices,
complaints, claims or citations that any Release or threatened Release of any
Hazardous Substances or any violation of any Environmental Laws has actually or
allegedly occurred) or given by Seller to any person concerning any past or
present Release or threatened Release of any Hazardous Substances in, on or
under the Real Property (or any nearby real property which could migrate to the
Real Property) or any past or present violation of any Environmental Laws at the
Real Property.
(c) All representations and warranties made by Seller in section 6.1 and in
Seller's Closing Certificate shall survive the Closing for the entire term of
the Lease. Seller shall use diligent efforts, in good faith, to cause all of the
representations and warranties made by Seller in section 6.1 to be true and
correct on and as of the Closing Date. At the Closing, Seller shall execute and
deliver to Buyer a Seller's Closing Certificate ("Seller's Closing Certificate")
in the form of Exhibit N attached hereto, certifying to Buyer that all such
representations and warranties are true and correct on and as of the Closing
Date, with only such exceptions therein as are necessary to reflect facts or
circumstances arising between the date of this Agreement and the Closing Date
that would make any such representation or warranty untrue or incorrect on and
as of the Closing Date.
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(d) Seller shall indemnify and defend Buyer against and hold Buyer harmless
from all Claims that may be suffered or incurred by Buyer if any representation
or warranty made by Seller in section 6.1 or in Seller's Closing Certificate was
untrue or incorrect in any respect when made or that may be caused by any breach
by Seller of any such representation or warranty.
(e) Seller shall indemnify and defend Buyer against and hold Buyer harmless
from all Claims arising from or based on any failure by Seller to perform all
obligations of Seller in accordance with the Contracts or the Permits before the
Closing Date, or any breach, default or violation by Seller (or any event by
Seller or condition that, after notice or the passage of time, or both, would
constitute a breach, default or violation by Seller) under the Contracts or the
Permits that occurs before the Closing Date, or any condition, event or
circumstance relating to the Real Property that existed or occurred before the
Closing Date, or any personal injury or property damage occurring in, on or
about the Real Property before the Closing Date.
(f) Seller shall indemnify and defend Buyer against and hold Buyer harmless
from all Claims in any way arising from, relating to or connected with any past
or present Release or threatened Release of any Hazardous Substances in, on or
under the Real Property or any past or present violation of any Environmental
Laws at the Real Property that exists or occurs, or the onset of which exists or
occurs, before the Closing Date. The foregoing indemnification shall include all
expenses of investigation and monitoring, costs of containment, abatement,
removal, repair, cleanup, restoration and remedial work, penalties and fines,
attorneys' fees and disbursements, and other response costs.
(g) Between the date of this Agreement and the Closing Date, except
pursuant to the Approved Utility Easements, Seller shall not in any manner sell,
convey, assign, transfer, encumber or otherwise dispose of the Real Property,
the Personal Property, the Contracts or the Permits, or any part thereof or
interest therein, nor enter into any agreement to do so.
(h) Seller shall pay all commissions, fees and expenses due to Broker in
respect of the sale of the Property or this Agreement and shall indemnify and
defend Buyer against and hold Buyer harmless from all Claims arising from or
based on any obligation or alleged obligation to pay any commission or fee to
any investment advisor, real estate broker or finder in connection with the sale
of the Property or this Agreement, excluding any such person engaged by Buyer.
(i) Seller shall cause to be removed or deleted from title to the Real
Property on or before the Closing Date any mortgage, lien or similar encumbrance
(other than a Permitted Exception) which may be removed or deleted by the
payment of money; provided, however, Seller's failure to so remove or delete any
such exception shall entitle Buyer, if Buyer so elects in its discretion, to
cause any such exception to be removed or deleted and all costs incurred and
amounts paid by Buyer in connection therewith shall be credited to the payment
of the purchase price in accordance with section 2.1.
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7.2 Buyer. Buyer covenants and agrees with Seller as follows:
(a) All representations and warranties made by Buyer in section 6.2 and in
Buyer's Closing Certificate shall survive the Closing. Buyer shall use its best
efforts, in good faith and with diligence, to cause all of the representations
and warranties made by Buyer in section 6.2 to be true and correct on and as of
the Closing Date. At the Closing, Buyer shall execute and deliver to Seller a
Buyer's Closing Certificate ("Buyer's Closing Certificate") in the form of
Exhibit O attached hereto, certifying to Seller that all such representations
and warranties are true and correct on and as of the Closing Date, with only
such exceptions therein as are necessary to reflect facts or circumstances
arising between the date of this Agreement and the Closing Date that would make
any such representation or warranty untrue or incorrect on and as of the Closing
Date.
(b) Buyer shall indemnify and defend Seller against and hold Seller
harmless from all Claims that may be suffered or incurred by Seller if any
representation or warranty made by Buyer in section 6.2 or in Buyer's Closing
Certificate was untrue or incorrect in any respect when made or that may be
caused by any breach by Buyer of any such representation or warranty.
(c) Except as set forth in section 7.1(e), Buyer shall indemnify and defend
Seller against and hold Seller harmless from all Claims arising from or based on
any failure by Buyer to perform all obligations of Buyer in accordance with the
Contracts arising or accruing on or after the Closing Date and during Buyer's
ownership of the Property or any breach, default or violation by Buyer (or any
event by Buyer or condition that, after notice or the passage of time, or both,
would constitute a breach, default or violation by Buyer) under the Contracts
that occurs on or after the Closing Date and during Buyer's ownership of the
Property.
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7.3 Casualty Damage. If, before the Closing Date, the improvements on the
Real Property are damaged by any casualty and the cost to restore such
improvements, as reasonably determined by Buyer, is more than one million
dollars ($1,000,000), Buyer shall have the right, by giving notice to Seller
within thirty (30) days after Seller gives notice of the occurrence of such
casualty to Buyer, to terminate this Agreement, in which event this Agreement
shall terminate. If the cost to restore such improvements, as reasonably
determined by Seller, is more than twenty million dollars ($20,000,000), Seller
shall have the right, by giving notice to Buyer within twenty (20) days after
the casualty occurs, to terminate this Agreement, in which event this Agreement
shall terminate, provided that Seller shall pay Buyer an amount equal to all of
Buyer's costs calculated in accordance with section 9.3(b). If, before the
Closing Date, the improvements on the Real Property are damaged by any casualty
and the cost to restore such improvements, as reasonably determined by Buyer, is
one million dollars ($1,000,000) or less, or if Buyer and/or Seller has the
right to terminate this Agreement pursuant to the preceding sentence but neither
party exercises such right, then this Agreement shall remain in full force and
effect and Seller shall promptly commence and diligently prosecute to completion
the repair and restoration of the damaged improvements. Seller shall give notice
to Buyer immediately after the occurrence of any damage to the improvements on
the Real Property by any casualty. Buyer shall have a period of thirty (30) days
(or such shorter period as Buyer may elect by giving notice to Seller) after
Seller has given the notice to Buyer required by this section 7.3 to evaluate
the extent of the damage and make the determination as to whether to terminate
this Agreement. If necessary, the Closing Date shall be postponed until Seller
has given the notice to Buyer required by this section 7.3, the period of thirty
(30) days described in this section 7.3 has expired, and (if Buyer so elects)
the repair and restoration of the improvements has been completed.
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7.4 Eminent Domain. If, before the Closing Date, proceedings are commenced
for the taking by exercise of the power of eminent domain of all or any part of
the Property which, as reasonably determined by Buyer, would render the Real
Property unacceptable to Buyer or unsuitable for Buyer's intended use as an
office building, Buyer shall have the right, by giving notice to Seller within
thirty (30) days after Seller gives notice of the commencement of such
proceedings to Buyer, to terminate this Agreement, in which event this Agreement
shall terminate. If such proceedings are commenced and such taking would render
the Real Property unsuitable for Seller's use under the Lease, as reasonably
determined by Seller, Seller shall have the right, by giving notice to Buyer
within thirty (30) days after commencement of such proceedings, to terminate
this Agreement, in which event this Agreement shall terminate. If either Buyer
or Seller terminate this Agreement pursuant to this section 7.4, Seller shall
thereupon pay Buyer an amount equal to all of Buyer's costs calculated in
accordance with section 9.3(b), and the condemnation award shall be paid to
Seller. If Buyer and/or Seller has the right to terminate this Agreement
pursuant to the preceding sentence but neither party exercises such right, then
this Agreement shall remain in full force and effect and, on the Closing Date,
the condemnation award (or, if not theretofore received, the right to receive
such award) payable on account of the taking shall be transferred to Buyer.
Seller shall give notice to Buyer immediately after Seller's receiving notice of
the commencement of any proceedings for the taking by exercise of the power of
eminent domain of all or any part of the Property. Buyer shall have a period of
thirty (30) days (or such shorter period as Buyer may elect by giving notice to
Seller) after Seller has given the notice to Buyer required by this section 7.4
to evaluate the extent of the taking and make the determination as to whether to
terminate this Agreement. If necessary, the Closing Date shall be postponed
until Seller has given the notice to Buyer required by this section 7.4 and the
period of thirty (30) days described in this section 7.4 has expired.
7.5 Construction of the Project
(a) Commencement and Compeletion. Seller shall commence without delay and
shall diligently prosecute construction of the Project continuously to
completion, and shall cause construction of the Project to be Substantially
Completed no later than February 28, 1998. Seller shall promptly notify Buyer in
writing of any event causing delay or interruption of construction or the timely
completion of construction. The notice shall specify the particular work delayed
and the cause and period of each delay.
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(b) Construction. Seller shall construct the Project in a good and
workmanlike manner in accordance with the Plans and Specifications and the
recommendations of any soils or engineering report approved by Buyer. In
constructing the Project, Seller shall comply with all applicable laws,
ordinances, rules, regulations, building restrictions, recorded covenants and
restrictions, and requirements of all regulatory authorities having jurisdiction
over the Project or the Property (collectively the "Requirements"). If
necessary, the Plans and Specifications shall be modified to comply with the
Requirements, subject to the provisions of section 7.5(c). Seller represents and
warrants to Buyer and agrees that the Project has been designed and shall be
constructed and completed, and thereafter maintained, in strict accordance and
full compliance with all of the requirements of the Americans with Disabilities
Act, as amended from time to time. Seller shall be responsible for all costs of
compliance with the Americans with Disabilities Act.
(c) Plans and Specifications. Prior to the Board Approval Date, Buyer shall
approve the Plans and Specifications. Except as otherwise provided in this
section 7.5, after Buyer's approval, Seller shall not change the Plans and
Specifications or permit the Plans and Specifications to be changed without
Buyer's prior written approval, except for Minor Changes (as defined below).
Requests for approval shall be submitted on a change order form acceptable to
Buyer signed by Seller and, if required by Buyer, the project architect and the
general contractor, accompanied by working drawings and a written narrative of
the proposed change. As conditions to its approval, Buyer may require
satisfactory evidence of the cost of the proposed change and the time necessary
to complete the proposed change. Seller acknowledges that this approval process
may result in delays. Upon Buyer's request, Seller, the project architect and
the general contractor shall initial the copy of the Plans and Specifications
delivered to and approved by, Buyer as a true copy of the Plans and
Specifications for the Project. Seller shall maintain at all times a full set of
the Plans and Specifications and any other working drawings for the Project
available for inspection by Buyer. Within thirty (30) days after Substantial
Completion of the Project, Seller shall deliver to Buyer complete as-built Plans
and Specifications for the completed Project.
The prior written consent of Buyer shall not be required for any "Minor
Change" in the Plans and Specifications, meaning a change which does not (a)
constitute a material adverse change in the building material or equipment
specifications or the architectural or structural design, value or quality of
any of the Project, or (b) result in a change in Total Project Cost (as defined
below) which causes Total Project Cost to be less than forty-three million five
hundred thousand dollars ($43,500,000), or (c) adversely affect the structural
integrity, quality of building material or equipment, or overall efficiency of
operating systems or utility systems of the Project, or (d) require the approval
(which has not been given as of the date of any such change) of any other
person, entity, agency or authority. The term "Total Project Cost" shall mean
all of the out-of-pocket costs incurred by Seller in acquiring the Real Property
and constructing the Project, whether incurred before or after the date of this
Agreement, including the following:
(1) The cost of acquiring the Real Property;
(2) The cost of demolishing and removing any buildings or structures
on the Real Property prior to commencement of construction of the Project,
and the cost of grading and otherwise preparing the Real Property for
construction of the Project;
(3) The costs of fees and other compensation paid to architects,
engineers, and other design professionals in connection with the design and
planning of the Project;
(4) The costs of fees and other compensation paid to consultants and
professionals, including legal, accounting, financial, political and
environmental, necessary or incident to the Project or the determination as
to the feasibility or practicality thereof;
(5) The amounts paid to contractors, subcontractors and suppliers for
construction of the Project;
(6) The amount paid by Seller to Buyer pursuant to section 9.3(b); and
(7) The costs of interest on, and fees and expenses incurred in
connection with, borrowings made for the purpose of constructing the
Project;
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provided, however, that Total Project Costs shall not include (1) costs
(including legal costs, title premiums, transfer taxes, recording fees and
escrow fees) incurred by Seller in connection with the sale-leaseback
transaction contemplated by this Agreement, except costs specifically described
in clause (6) of the preceding sentence, or (2) any costs incurred for
equipment, machinery, trade fixtures, furniture, furnishings or decorations
installed in the Project. Notwithstanding the foregoing, Seller shall submit all
proposed changes in the Plans and Specifications to Buyer at least ten (10) days
prior to the commencement of construction relating to such proposed change,
whether or not any such change is subject to Buyer's approval; provided,
however, that if a change is necessitated by a site condition discovered in the
course of the Project and such ten (10) day notice requirement would
unreasonably interfere with the orderly progress of the Project, then Seller may
proceed with such change upon shorter notice, and as to changes requiring
Buyer's approval, Buyer shall respond to requests for approval as promptly as
practicable.
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21
(d) Construction Information; Inspections. Buyer and its employees, agents
and contractors are authorized to contact the Contractor and the Architect and,
at all reasonable times, to enter the Real Property and inspect the Project and
the work of construction in order to verify information disclosed pursuant to
this section or for any other purpose. Buyer may delegate its inspection, review
and approval rights under this section 7.5 to an architect, contractor or
engineer designated by Buyer ("Buyer's Architect"). From time to time, and
within ten (10) days after Buyer's request, Seller shall deliver to Buyer:
(1) Copies of each contract and subcontract entered into in connection
with the Project, including any changes thereto;
(2) A cost breakdown, in a form acceptable to Buyer, stating the
estimated total cost of constructing the Project, and that portion, if any,
of each cost item (i) which has been incurred and (ii) which has been paid,
all as of the date of such cost breakdown;
(3) A construction progress schedule, in a form acceptable to Buyer,
showing the progress of construction and the estimated sequencing and
completion time for uncompleted work, all as of the date of such schedule;
and
(4) With respect to any item designated above which has been
previously delivered, such update thereof as Buyer may request.
(e) Prohibited Contracts. Without Buyer's prior written consent, Seller
shall not contract for any materials, furnishings, equipment, fixtures or other
parts or components of the Project, or other property for the use or occupancy
of the Property or the Project, if any third party retains or purports to retain
any interest (other than lien rights, if any, created by operation of law) in
such items after their delivery to the Property. Seller shall have five (5) days
to effect the removal of any such retained interest.
(f) Construction Responsibilities. Seller shall be solely responsible for
all aspects of the Project, including, without limitation, the quality and
suitability of the Plans and Specifications and their compliance with the
Requirements, the supervision of the work of construction, and the
qualifications, financial condition and performance of all architects,
engineers, contractors, material suppliers, consultants and property managers.
Buyer is not obligated to supervise, inspect or inform Seller or any third party
of any aspect of the construction of the Project or any other matter referred to
in this section. Any inspection or review by Buyer is to determine whether
Seller is properly discharging its obligations to Buyer and may not be relied
upon by Seller or any third party. Buyer owes no duty of care to Seller or any
third party to protect against, or to inform Seller or any third party of, any
negligent, faulty, inadequate or defective design or construction of the
Project.
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(g) Surveys. Seller shall deliver to Buyer, at Seller's expense, upon
completion of the Project, an as-built survey of the Real Property meeting the
requirements described in section 5.5 (the "Final Survey").
(h) Construction Contract and Architect's Agreement. Seller and Weitz-Cohen
Construction Co. (the "Contractor") have entered into the Standard Form of
Agreement Between Owner and Contractor (the "Construction Contract") dated as of
September 20, 1996, pursuant to which the Contractor is to construct the
Project. Seller shall require the Contractor to perform in accordance with the
Construction Contract and shall not amend, modify or terminate the warranty
obligations of the Contractor under the Construction Contract, nor materially
amend or modify any other provision of, nor terminate the Construction Contract
without Buyer's prior written consent. At the Closing, Seller shall assign its
rights under the Construction Contract, including all warranties, to Buyer and
shall cause the Contractor to consent to such assignment.
Seller and C.W. Fentress J.H. Bradburn & Associates, P.C. (the "Architect")
have entered into the Standard Form of Agreement Between Owner and Architect
(the "Architect's Agreement") dated January 4, 1996, pursuant to which the
Architect is to design the Project, prepare the Plans and Specifications and
supervise construction of the Project. Seller shall require the Architect to
perform in accordance with the Architect's Agreement and shall not materially
amend or modify, nor terminate the duties of the Architect under the Architect's
Agreement without Buyer's prior written consent. At the Closing, Seller shall
assign Seller's rights under the Architect's Agreement and the Plans and
Specifications to Buyer and shall cause the Architect to consent to such
assignment.
(i) Substantial Completion. For purposes of this Agreement, the Project
shall be deemed to be "Substantially Completed" (and "Substantial Completion"
shall be deemed to have occurred) only when each of the following conditions
shall have been met:
(1) Buyer shall have received an Architect's Certificate in the form
of Exhibit P attached hereto, signed by the Architect, certifying, among
other things, that the Project has been completed, subject only to minor
"punch-list" items which can be corrected in less than thirty (30) days at
a cost less than one million dollars ($1,000,000) in the aggregate
("Punch-list Items");
(2) Buyer shall have received a certificate in the form of Exhibit Q
attached hereto, signed by Seller, certifying, among other things, that the
Project has been completed to Seller's satisfaction;
(3) Buyer shall have received original Certificates of Occupancy, or
other evidence reasonably satisfactory to Buyer that the Project has been
approved for occupancy by all governmental authorities with jurisdiction
over the Real Property;
(4) Buyer shall have received evidence reasonably satisfactory to
Buyer that all mechanics' liens, stop notices, equitable lien claims or
other lien claim rights have been waived or extinguished;
(5) Buyer shall have received the Final Survey and it shall show no
material encroachments, bases for third-party claims or violations of law
or private covenants not shown on the survey delivered pursuant to section
5.5; and
(6) Buyer shall have received evidence reasonably satisfactory to
Buyer that Seller shall have installed equipment and software to operate
Seller's system control center in the Project.
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(j) Punch-list Items. Promptly after Substantial Completion, Seller shall
correct all of the Punch-list Items at Seller's sole cost. Until such Punch-list
items are completed to Buyer's reasonable satisfaction, upon the Closing a
portion of the purchase price equal to one hundred thirty percent (130%) of the
estimated cost of completing such items (as reasonably determined by the
Architect and reasonably approved by Buyer) shall be held in escrow on such
terms as Buyer may reasonably require.
ARTICLE 8
Conditions Precedent
8.1 Seller. The obligations of Seller under this Agreement are subject to
satisfaction of all of the conditions set forth in this section 8.1. Seller may
waive any or all of such conditions in whole or in part but any such waiver
shall be effective only if made in writing. After the Closing, any such
condition that has not been satisfied shall be treated as having been waived in
writing. No such waiver shall constitute a waiver by Seller of any of its rights
or remedies if Buyer defaults in the performance of any material covenant or
agreement to be performed by Buyer under this Agreement or if Buyer breaches any
representation or warranty made by Buyer in section 6.2 or in Buyer's Closing
Certificate. If any condition set forth in this section 8.1 is not fully
satisfied or waived in writing by Seller, this Agreement shall, at Seller's
option, terminate, but without releasing Buyer from liability if Buyer defaults
in the performance of any such covenant or agreement to be performed by Buyer or
if Buyer breaches any such representation or warranty made by Buyer before such
termination.
(a) On the Closing Date, Buyer shall not be in default in the performance
of any material covenant or agreement to be performed by Buyer under this
Agreement.
(b) On the Closing Date, all representations and warranties made by Buyer
in section 6.2 shall be true and correct in all material respects as if made on
and as of the Closing Date and Seller shall have received Buyer's Closing
Certificate, executed by Buyer, in which Buyer certifies to Seller that all
representations and warranties made by Buyer in section 6.2 are true and correct
in all material respects on and as of the Closing Date.
(c) On the Closing Date, no judicial or administrative suit, action,
investigation, inquiry or other proceeding by any person shall have been
instituted against Seller which challenges the validity or legality of any of
the transactions contemplated by this Agreement.
(d) On the Closing Date, Seller and Buyer shall have entered into the
Lease.
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8.2 Buyer. The obligations of Buyer under this Agreement are subject to
satisfaction of all of the conditions set forth in this section 8.2. Buyer may
waive any or all of such conditions in whole or in part but any such waiver
shall be effective only if made in writing. After the Closing, any such
condition that has not been satisfied shall be treated as having been waived in
writing. No such waiver shall constitute a waiver by Buyer of any of its rights
or remedies if Seller defaults in the performance of any covenant or agreement
to be performed by Seller or if Seller breaches any representation or warranty
made by Seller in section 6.1 or in Seller's Closing Certificate. If any
condition set forth in this section 8.2 is not fully satisfied or waived in
writing by Buyer by the applicable dates set forth below, this Agreement shall,
at Buyer's option, terminate, but without releasing Seller from liability if
Seller defaults in the performance of any such covenant or agreement to be
performed by Seller or if Seller breaches any such representation or warranty
made by Seller before such termination.
(a) No later than the date (the "Board Approval Date") which is three (3)
business days after the Property Approval Deadline, (i) the Board of Directors
of Buyer shall have given final authorization and approval, in the sole and
absolute discretion of such Board of Directors, of this Agreement, the
transactions contemplated by this Agreement, and the execution, delivery and
performance of this Agreement by Buyer and (ii) Buyer shall have given notice of
such authorization and approval to Seller (collectively, the "Board Approval").
(b) On the Closing Date, Seller shall not be in default in the performance
of any material covenant or agreement to be performed by Seller under this
Agreement.
(c) On the Closing Date, all representations and warranties made by Seller
in section 6.1 shall be true and correct in all material respects as if made on
and as of the Closing Date and Buyer shall have received Seller's Closing
Certificate, executed by Seller, in which Seller certifies to Buyer that all
representations and warranties made by Seller in section 6.1 are true and
correct in all material respects on and as of the Closing Date.
(d) The Project shall have been Substantially Completed (as defined in
section 7.5(i)).
(e) On the Closing Date, no judicial or administrative suit, action,
investigation, inquiry or other proceeding by any person shall have been
instituted that challenges the validity or legality of any of the transactions
contemplated by this Agreement or which, if adversely determined, would
materially adversely affect the value of the Property.
(f) On the Closing Date, the Title Company shall be unconditionally and
irrevocably committed to issue to Buyer an American Land Title Association
Owner's Policy (Form 1992) of title insurance, with liability not less than the
purchase price, containing such endorsements as Buyer may reasonably require,
insuring Buyer that fee simple absolute title to the Real Property is vested in
Buyer subject only to the Permitted Exceptions.
(g) On the Closing Date, Buyer shall have received, at Seller's sole cost,
reasonably satisfactory evidence (in the form of a title endorsement and/or a
certificate from the Architect and/or an appropriate government agency) that the
construction and use of the Real Property complies with all applicable building,
zoning, subdivision and land-use codes, laws, ordinances and regulations.
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(h) On the Closing Date, Seller and Buyer shall have entered into the
Lease, and Buyer shall have received reasonably satisfactory evidence of the
power and authority of Seller to enter into the Lease.
(i) On the Closing Date, Lease Guaranties in the form attached to the Lease
(the "Lease Guaranties") shall have been executed by ICGC and ICG Holdings
(Canada), Inc. (collectively, the "Guarantors") and delivered to Buyer, and
Buyer shall have received reasonably satisfactory evidence of the power and
authority of the Guarantors to enter into the Lease Guaranties.
(j) On or before the Closing Date, Seller shall have delivered to Buyer an
Estoppel Certificate, in the form attached to the Lease as Exhibit A (the
"Estoppel Certificate"), executed by Seller.
(k) Buyer shall have received reasonably satisfactory evidence that there
shall have been no Material Adverse Change between December 31, 1996 and the
Closing Date. As used in this Agreement, the term "Material Adverse Change"
shall mean a material adverse change in (i) the business, assets, operations,
prospects or financial condition of Seller or either Guarantor, (ii) the ability
of Seller, as Tenant under the Lease, to pay and perform its obligations in
accordance with the Lease, or (iii) the ability of either Guarantor to pay and
perform its obligations in accordance with the Guaranty to which it is a party.
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ARTICLE 9
Closing
9.1 Procedure. Seller and Buyer shall cause the following to occur at the
Closing on the Closing Date:
(a) The Deed, duly executed and acknowledged by Seller, shall be recorded
in the Official Records of the County of Arapahoe, Colorado.
(b) Seller shall date as of the Closing Date, execute and deliver to Buyer
(i) the Lease, (ii) the Bill of Sale, (iii) the Assignment of Contracts, (iv)
the Assignment of Permits, (v) Seller's Closing Certificate, (vi) a Certificate
of Non-Foreign Status in accordance with section 1445 of the Internal Revenue
Code of 1986, as amended, and the Income Tax Regulations thereunder in the form
of Exhibit R attached hereto, and (vii) the Estoppel Certificate.
(c) Buyer shall date as of the Closing Date, execute and deliver to Seller
(i) the Lease, (ii) the Assignment of Contracts, and (iii) Buyer's Closing
Certificate.
(d) Guarantors shall date as of the Closing Date, execute and deliver to
Buyer the Lease Guaranties.
(e) Buyer shall pay to Seller the net purchase price for the Property in
accordance with section 2.1.
(f) The Title Company shall issue to Buyer the title insurance policy
described in section 8.2(f).
(g) The Escrow Company shall file the information return for the sale of
the Property required by section 6045 of the Internal Revenue Code of 1986, as
amended, and the Income Tax Regulations thereunder.
<PAGE>
27
9.2 Possession. Seller shall transfer possession of the Real Property and
the Personal Property to Buyer on the Closing Date. If not previously delivered
to Buyer, Seller shall deliver originals of the documents described in section
5.1, all files, correspondence, maintenance records and operating manuals
relating to the Real Property. The originals of such documents shall become the
property of Buyer on the Closing Date. On the Closing Date Seller and Buyer
shall send notices, in form and substance reasonably satisfactory to Buyer, to
all vendors and contractors under the Contracts informing them that Seller sold
the Property to Buyer on the Closing Date.
9.3 Closing Costs and Credits.
(a) Seller shall pay all costs in connection with the Closing, including:
the premium for the ALTA Owner's title insurance policy described in section
8.2(f), including any costs charged for endorsements requested by Buyer; the
recording fee for the Deed; the escrow fee charged by the Escrow Company; the
cost of the survey described in Section 5.5 and the Final Survey; and all
transfer or documentary stamp taxes.
(b) On the Closing Date, in addition to the costs described in section
9.3(a), Seller shall reimburse Buyer, through a credit toward payment of the
purchase price, an amount equal to all out-of-pocket costs (but not in excess of
two hundred fifty thousand dollars ($250,000)) incurred by Buyer in connection
with this Purchase Agreement and the transactions contemplated herein, the Lease
and the Project, including the cost of the Appraisals, the Environmental Reports
and the Structural Report and costs of Buyer's appraisers, engineers,
architects, consultants, accountants and legal counsel).
9.4 Prorations. Seller shall pay all taxes, assessments, utilities,
maintenance charges, invoices for goods furnished or services supplied, and all
other expenses relating to the Property, whether allocable to the period before
or after the Closing Date.
<PAGE>
28
ARTICLE 10
General
10.1 Notices. All notices and other communications under this Agreement
shall be properly given only if made in writing and either mailed by certified
mail, return receipt requested, postage prepaid, or delivered by hand (including
messenger or recognized delivery, courier or air express service) to the party
at the address set forth in this section 10.1 or such other address as such
party may designate by notice to the other party. Such notices and other
communications shall be effective on the date of receipt (evidenced by the
certified mail receipt) if mailed or on the date of hand delivery if hand
delivered. If any such notice or communication is not received or cannot be
delivered due to a change in the address of the receiving party of which notice
was not previously given to the sending party or due to a refusal to accept by
the receiving party, such notice or other communication shall be effective on
the date delivery is attempted. Any notice or other communication under this
Agreement may be given on behalf of a party by the attorney for such party.
(a) The address of Seller is 9605 East Maroon Circle, Suite 100, Englewood,
Colorado 80112, attention: Douglas O. McKinnon, with a copy to Sherman & Howard
L.L.C., 633 Seventeenth Street, Suite 3000, Denver, Colorado 80202, attention:
James L. Cunningham, Esq.
(b) The address of Buyer is 1235 Westlakes Drive, Suite 220, Berwyn,
Pennsylvania 19312, attention: Mr. Gary P. Lyon, with a copy to Buyer at Four
Embarcadero Center, Suite 3150, San Francisco, California 94111, attention: Mr.
Mark S. Whiting, with a further copy to Pillsbury Madison & Sutro LLP, 235
Montgomery Street, 14th Floor, San Francisco, California 94104, attention: Glenn
Q. Snyder, Esq.
10.2 Attorneys' Fees. If there is any legal action or proceeding between
Seller and Buyer arising from or based on this Agreement, the unsuccessful party
to such action or proceeding shall pay to the prevailing party all costs and
expenses, including reasonable attorneys' fees and disbursements, incurred by
such prevailing party in such action or proceeding and in any appeal in
connection therewith. If such prevailing party recovers a judgment in any such
action, proceeding or appeal, such costs, expenses and attorneys' fees and
disbursements shall be included in and as a part of such judgment.
10.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
<PAGE>
29
10.4 Construction. Seller and Buyer acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any document executed and delivered by either party in connection with the
transactions contemplated by this Agreement. The captions in this Agreement are
for convenience of reference only and shall not be used to interpret this
Agreement.
10.5 Terms Generally. The defined terms in this Agreement shall apply
equally to both the singular and the plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The term "person" includes individuals, corporations,
partnerships, trusts, other legal entities, organizations and associations, and
any government or governmental agency or authority. The words "include,"
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation." The words "approval," "consent" and "notice" shall be deemed to be
preceded by the word "written."
10.6 Further Assurances. From and after the date of this Agreement, Seller
and Buyer agree to do such things, perform such acts, and make, execute,
acknowledge and deliver such documents as may be reasonably necessary or proper
and usual to complete the transactions contemplated by this Agreement and to
carry out the purpose of this Agreement in accordance with this Agreement.
10.7 Partial Invalidity. If any provision of this Agreement is determined
by a proper court to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement and this Agreement shall remain in full force and effect without such
invalid, illegal or unenforceable provision.
10.8 Waivers. No waiver of any provision of this Agreement or any breach of
this Agreement shall be effective unless such waiver is in writing and signed by
the waiving party and any such waiver shall not be deemed a waiver of any other
provision of this Agreement or any other or subsequent breach of this Agreement.
10.9 No Third Party Beneficiaries. No person or entity other than Buyer and
Seller and their permitted successors and assigns shall be a third party
beneficiary of this Agreement or shall have any right of action hereunder.
10.10 Relationship of Parties. The relationship of Seller and Buyer under
this Agreement and its exhibits is, and shall at all times remain, solely that
of buyer and seller (and, as to the Lease, landlord and tenant). No partnership,
joint venture or fiduciary relationship of any kind or nature whatsoever exists
or shall exist between Seller and Buyer, and Seller and Buyer are not members of
any joint or common enterprise. Buyer neither undertakes nor assumes any
responsibility or duty to Seller to any third party with respect to the Property
or the Project, except as expressly stated in this Agreement.
<PAGE>
30
10.11 Seller's Default. In the event of a material breach by Seller in the
performance of its obligations under this Agreement, Buyer shall have the right
to all remedies it may have against Seller at law or in equity. Without limiting
the generality of the foregoing, Buyer shall have the right to injunctive relief
(including specific enforcement of Seller's obligation to sell the Property),
and Buyer and Seller hereby agree that money damages may be an inadequate remedy
for a default by Seller.
10.12 Miscellaneous. The Exhibits attached to this Agreement are made a
part of this Agreement. This Agreement shall benefit and bind Seller and Buyer
and their respective personal representatives, heirs, successors and assigns.
Buyer shall have the right, without releasing Buyer from any obligation under
this Agreement, by giving notice to Seller before the Closing Date, to assign
this Agreement or to have Seller convey, assign and transfer the Property at the
Closing in accordance with this Agreement to any person designated by Buyer in
such notice. Time is of the essence of this Agreement. This Agreement may be
executed in counterparts, each of which shall be an original, but all of which
shall constitute one and the same Agreement. This Agreement may not be amended
or modified except by a written instrument signed by Seller and Buyer. This
Agreement constitutes the entire and integrated agreement between Seller and
Buyer relating to the purchase and sale of the Property and supersedes all prior
agreements, understandings, offers and negotiations, oral or written, with
respect to the purchase and sale of the Property. The covenants, terms and
conditions of this Agreement shall survive the Closing.
10.13 Confidentiality. This Agreement is entered into by Buyer on the
condition, and Seller covenants, that Seller shall not disclose the existence of
this Agreement and its terms to any person, except on a strictly confidential
basis to the Escrow Company, to Title Company, to Seller's contractors, and to
Seller's partners and their respective partners, directors, officers,
affiliates, employees and advisors, who are directly involved in Seller's
obligations under this Agreement and to Seller's lenders. Seller shall not make,
and Seller shall use its best efforts to ensure that the foregoing third parties
do not make, any public announcement of this Agreement or the transactions
contemplated by this Agreement without the prior consent of Buyer, which consent
may be withheld by Buyer in its sole and absolute discretion, unless such public
announcement is necessary to comply with applicable law. Buyer shall not
disclose any confidential or proprietary information regarding the business or
financial condition of Seller to any person, except on a strictly confidential
basis to Buyer's contractors, and to Buyer's directors, officers, affiliates,
employees and advisors, who are directly involved in Seller's obligations under
this Agreement, or as such disclosure may be necessary to comply with applicable
law.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the
date first hereinabove written.
SELLER: ICG HOLDINGS, INC., a Colorado corporation
By /s/James D. Grenfell
-------------------------------
James D. Grenfell
Its Executive Vice President
and Chief Financial Officer
BUYER: TRINET CORPORATE REALTY TRUST, INC., a
Maryland corporation
By Gary P. Lyon
------------------------------
Gary P. Lyon, Executive Vice President
<PAGE>
EXHIBIT A
COMMITMENT
<PAGE>
EXHIBIT B
PERSONAL PROPERTY
All tangible and intangible personal property located on or within the Real
Property or used exclusively in the operation, management, repair or maintenance
of the Real Property (excluding items relating primarily to the operation of
Tenant's business as opposed to the operation of the Real Property), including,
without limitation, the following:
1. all plans, specifications, drawings, surveys, studies and reports
respecting the Real Property or the Project, including the Plans and
Specifications (as defined in Section 1.2 of the Purchase Agreement to
which this Exhibit is attached), as modified and/or supplemented in
accordance with section 7.5(c) of the Purchase Agreement;
2. any and all draperies, curtains, and other window coverings; all
storm windows and storm doors; all building system components and
replacement parts; and all machinery, equipment, tools, supplies and other
items of personal property used or useful in the operation, management,
repair and maintenance of the Real Property.
<PAGE>
EXHIBIT C
CONTRACTS
1. [Construction Contract]
2. [Architect's Agreement]
3. [Warranties]
<PAGE>
EXHIBIT D
PERMITS
<PAGE>
EXHIBIT E
DESCRIPTION OF PROJECT
<PAGE>
EXHIBIT F
PLANS AND SPECIFICATIONS
The Project Drawings, Specifications and Other Requirements listed in the
Document Log attached hereto (consisting of 20 pages).
<PAGE>
EXHIBIT G
[RESERVED]
<PAGE>
EXHIBIT H
When Recorded Mail to:
PILLSBURY MADISON & SUTRO
P.O. Box 7880
San Francisco, CA 94120-7880
Attn: Glenn Q. Snyder, Esq.
Mail Tax Statements to:
TRINET CORPORATE REALTY TRUST, INC.
Four Embarcadero Center, Suite 3150
San Francisco, CA 94111
Attn: Ms. Debra H. Paul
SPECIAL WARRANTY DEED
For valuable consideration, receipt of which is acknowledged, ICG HOLDINGS,
INC., a Colorado corporation ("Grantor"), hereby sells and conveys to TRINET
CORPORATE REALTY TRUST, INC., a Maryland corporation, the real property in the
County of Arapahoe, State of Colorado, described in Exhibit A attached hereto
and made a part hereof by this reference.
TOGETHER, with all and singular the hereditaments and appurtenances thereto
belonging, or in anywise appertaining, and the reversion and reversions,
remainder and remainders, rents, issues and profits thereof, and all the estate,
right, title, interest, claim and demand whatsoever of the grantor, either in
law or equity, of, in and to the Property, with the hereditaments and
appurtenances;
TO HAVE AND TO HOLD the Property, with the appurtenances, unto the grantee,
its successors and assigns forever. The grantor, for itself, its successors and
assigns, does covenant and agree that it shall and will WARRANT AND FOREVER
DEFEND the Property in the quiet and peaceable possession of the grantee, its
successors and assigns, against all and every person or persons claiming the
whole or any part thereof, by, through or under the grantor;
SUBJECT TO: those matters as set forth on Exhibit B attached hereto and
made a part hereof by this reference.
IN WITNESS WHEREOF, the grantor has executed this Special Warranty Deed on
the date set forth below.
Dated: ___________, 199__.
ICG HOLDINGS, INC., a
Colorado corporation
By __________________________
Its ______________________
By __________________________
Its ______________________
<PAGE>
EXHIBIT H
EXHIBIT A
SPECIAL WARRANTY DEED
All of the real property in the City of Englewood, County of Arapahoe,
State of Colorado, described as follows:
<PAGE>
EXHIBIT H
EXHIBIT B
SPECIAL WARRANTY DEED
Grantor's warranty of title to the real property described in Exhibit A is
subject to the following:
<PAGE>
EXHIBIT I
COMMERCIAL LEASE - NET
(Single Tenant Building)
Basic Lease Information
Date: _________________, 199_
Landlord: TriNet Corporate Realty Trust, Inc., a Maryland corporation
Tenant: ICG Holdings, Inc., a Colorado corporation
Premises (section 1.1): Address: 161 Inverness Drive West, City of Englewood,
County of Arapahoe, State of Colorado
Term (section 2.1): Fifteen (15) years plus the partial month between the
Commencement Date and the last day of the calendar month during which the
Commencement Date occurs.
Commencement Date (section 2.1): _________________, 199_
Expiration Date (section 2.1): _________________ , 201_
Initial Base Rent (section 3.1(a)): $395,222.00 per month.
Use (section 6.1): Office purposes and, to the extent permitted by Legal
Requirements and subject to the terms of section 6.1, ancillary uses
typical of headquarters buildings such as employee cafeteria, training
rooms, child-care center, testing laboratories, light assembly of products
and storage of inventory and supplies.
Liability Insurance (section 10.3): $5,000,000
Insuring Party for Property Insurance (section 10.4): Landlord.
Landlord's Address (section 23.1): Four Embarcadero Center, Suite 3150, San
Francisco, CA 94111, Attn: Mr. Mark W. Whiting.
Tenant's Address (section 23.1): 161 Inverness Drive West, Englewood, CO 80___,
Attn: ____________; with a copy to Tenant at the same address, Attention:
General Counsel.
Guarantors (section 24.1): ICG Communications, Inc., a Delaware corporation; ICG
Holdings (Canada), Inc., a Federal Canadian corporation.
Exhibits and Addenda (section 24.3): Exhibit A - Form of Estoppel Certificate;
Exhibit B - Form of Lease Guaranty.
The foregoing Basic Lease Information is incorporated in and made a part of
the Lease to which it is attached. If there is any conflict between the Basic
Lease Information and the Lease, the Lease shall control.
Landlord: Tenant:
TRINET CORPORATE REALTY TRUST, INC., ICG HOLDINGS, INC.,
a Marylandcorporation a Colorado corporation
By __________________________ By __________________________
Its ______________________ Its ______________________
<PAGE>
TABLE OF CONTENTS
Page
1 Premises................................................... 1
2 Term....................................................... 1
3 Rent....................................................... 2
4 Payment of Operating Expenses.............................. 5
5 Operating Expenses, Property Taxes and
Other Taxes Defined; Contest Rights........................ 7
6 Use ....................................................... 11
7 Services................................................... 12
8 Maintenance and Repairs; Capital Improvements.............. 13
9 Alterations................................................ 14
10 Insurance.................................................. 16
11 Compliance With Legal Requirements......................... 19
12 Assignment or Sublease.................................... 20
13 Entry by Landlord......................................... 21
14 Events of Default and Remedies............................ 22
15 Damage or Destruction..................................... 28
16 Eminent Domain............................................ 30
17 Subordination, Merger and Sale............................ 32
18 Estoppel Certificate...................................... 33
19 Holding Over.............................................. 34
20 Financial Statements...................................... 34
21 Hazardous Materials....................................... 35
22 Waiver.................................................... 37
23 Notices................................................... 37
24 Guaranties; Letters of Credit............................. 37
25 Miscellaneous............................................. 43
26 Option to Expand the Building............................. 44
<PAGE>
1
LEASE
THIS LEASE, made as of the date specified in the Basic Lease Information,
by and between the landlord specified in the Basic Lease Information
("Landlord"), and the tenant specified in the Basic Lease Information
("Tenant"),
W I T N E S S E T H:
ARTICLE 1
Premises
1.1 Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the covenants hereinafter set forth, to
all of which Landlord and Tenant hereby agree, the building specified in the
Basic Lease Information (the "Building") containing approximately 239,749
rentable square feet of space, and the land on which the Building is located
(such land, together with the Building and the other improvements thereon are
referred to herein, collectively, as the "Premises").
ARTICLE 2
Term
2.1 The term of this Lease shall be the term specified in the Basic Lease
Information, which shall commence on the commencement date specified in the
Basic Lease Information (the "Commencement Date") and, unless sooner terminated
as hereinafter provided, shall end on the expiration date specified in the Basic
Lease Information (the "Expiration Date").
2.2 If the Commencement Date is not the first day of a calendar month,
Tenant shall pay to Landlord, as additional rent, the Base Rent payable under
section 3.1, calculated on a per diem basis, for the period from the
Commencement Date until the first day of the next full calendar month. Tenant
shall pay the Base Rent in respect of such period to Landlord on the
Commencement Date.
2.3 Tenant shall accept the Premises "as is" on the Commencement Date.
Landlord shall have no obligation to construct or install any improvements in
the Premises. Tenant acknowledges that, prior to the Commencement Date, Tenant
occupied the Premises. Tenant's possession of the Premises shall constitute
Tenant's acknowledgment that the Premises are in all respects in the condition
in which Landlord is required to deliver the Premises to Tenant under this Lease
and that Tenant has examined the Premises and is fully informed to Tenant's
satisfaction of the physical and environmental condition and the utility of the
Premises. Tenant acknowledges that Landlord, its agents and employees and other
persons acting on behalf of Landlord have made no representation or warranty of
any kind in connection with any matter relating to the physical or environmental
condition, value, fitness, use or zoning of the Premises upon which Tenant has
relied directly or indirectly for any purpose.
<PAGE>
2
2.4 Provided that Tenant is not in monetary or other material default under
or breach of this Lease, either at the time of exercising the applicable option
to renew described below or at the time such renewal term commences, Tenant
shall have the option to renew this Lease for two (2) additional terms of ten
(10) years each. Tenant shall exercise each option to renew by delivering to
Landlord written notice of Tenant's election to renew the term of this Lease at
least eighteen (18) months before the expiration of the then-existing term of
this Lease. Landlord's failure to receive Tenant's written notice duly electing
to renew the term of this Lease shall be conclusively deemed Tenant's election
not to exercise its option to renew, in which event the term shall expire on the
last day of the then-existing term. If Tenant duly exercises an option to renew,
then Tenant shall continue to occupy the Premises on all of the terms and
conditions of this Lease, except that: (a) the Base Rent payable by Tenant
during the applicable renewal term shall be increased as set forth in section
3.1(a); and (b) after the second renewal term, Tenant shall have no further
renewal options under this Lease. Tenant's rights to extend the term of this
Lease are personal to Tenant, may not be exercised by or be assigned to any
person or entity other than Tenant or a Corporate Successor (as defined in
section 12.1), and shall terminate and be of no further effect upon any
assignment of this Lease or subletting of all or any part of the Premises to any
person or entity.
ARTICLE 3
Rent
3.1 Tenant shall pay to Landlord the following amounts as base monthly rent
for the Premises ("Base Rent"):
(a) During the period between the Commencement Date and the last day of the
twelfth full calendar month thereafter, Tenant shall pay to Landlord the amount
of monthly rent specified in the Basic Lease Information (the "Initial Base
Rent"). Commencing on the first day of the thirteenth full calendar month after
the Commencement Date, and on each anniversary of that date thereafter,
including during all renewal terms (each, an "Adjustment Date"), the Base Rent
shall be increased to an amount equal to the greater of:
(i) the sum of (A) the Base Rent in effect during the month
immediately preceding the Adjustment Date, plus (B) the product of (1) the
Base Rent in effect during the month immediately preceding the Adjustment
Date, multiplied by (2) the lesser of (x) three percent (3.0%), and (y) the
product of two (2), multiplied by the percentage increase in the Consumer
Price Index (as defined below) measured from the last month for which the
Consumer Price Index is published immediately preceding the date twelve
(12) months prior to the Adjustment Date in question to the last month for
which the Consumer Price Index is published immediately preceding the CPI
Adjustment Date in question; and
<PAGE>
3
(ii) the lesser of (A) the Initial Base Rent increased by three
percent (3%) per year, compounded, from the Commencement Date to the
Adjustment Date in question, and (B) the sum of (1) an amount equal to the
Initial Base Rent, plus (2) the product of (x) an amount equal to the
Initial Base Rent, multiplied by (y) the product of two (2), multiplied by
the percentage increase in the Consumer Price Index measured from the last
month for which the Consumer Price Index is published immediately preceding
the Commencement Date to the last month for which the Consumer Price Index
is published immediately preceding the Adjustment Date in question;
provided, however, that in no event shall the Base Rent after any Adjustment
Date be less than the product of an amount equal to the Base Rent in effect for
the month immediately preceding such Adjustment Date, multiplied by one hundred
one and one-half percent (101.5%).
(b) Landlord and Tenant each shall, promptly after any determination of the
Base Rent pursuant to section 3.1(a), execute and deliver to the other a written
confirmation which sets forth the Base Rent, but such Base Rent shall become
effective whether or not such confirmation is executed.
(c) As used in this Lease, "Consumer Price Index" shall mean the Consumer
Price Index for All Cities, All Urban Consumers, All Items, 1982-1984 equals
100, published by the United States Department of Labor, Bureau of Labor
Statistics. If the comparison Consumer Price Index required for the calculation
specified in section 3.1(a) is not available on the Adjustment Date in question,
Tenant shall to pay, as of such Adjustment Date, one hundred three percent
(103%) of the Base Rent payable during the period immediately preceding such
Adjustment Date until the Consumer Price Index is available and the necessary
calculation is made. As soon as such calculation is made, Tenant shall
immediately pay to Landlord or Landlord shall credit Tenant (as the case may be)
the amount of any underpayment or overpayment of Base Rent for the month or
months that may have elapsed pending the calculation of the Base Rent for the
Adjustment Date in question. If the federal government revises or ceases to
publish the Consumer Price Index, this section 3.1 shall automatically be
amended to provide that, as of each Adjustment Date thereafter, the Base Rent
shall be one hundred three percent (103%) of the Base Rent payable during the
period immediately preceding such Adjustment Date.
<PAGE>
4
(d) Throughout the term of this Lease, Tenant shall pay, as additional
rent, all Other Taxes (as defined in section 5.3), all Operating Expenses (as
defined in section 5.1) and all other amounts of money and charges required to
be paid by Tenant under this Lease, whether or not such amounts of money or
charges are designated "additional rent." As used in this Lease, "rent" shall
mean and include all Base Rent and additional rent payable by Tenant in
accordance with this Lease.
3.2 It is the intention of Landlord and Tenant that the Base Rent payable
by Tenant to Landlord during the entire term of this Lease shall be absolutely
net of all costs and expenses incurred in connection with the management,
operation, maintenance, repair and replacement of the Premises in accordance
with this Lease, except as expressly provided in section 8.3. Landlord shall
have no obligations or liabilities whatsoever with respect to the costs and
expenses of management, operation, maintenance, repair or replacement of the
Premises during the term of this Lease, except as expressly provided in section
8.3, and Tenant shall pay all costs and expenses incurred in connection
therewith. Without limiting the generality of the foregoing, throughout the
entire term of this Lease, Tenant shall pay, as additional rent, all Operating
Expenses (as defined in section 5.1) that accrue during or are allocable to the
term of this Lease.
3.3 Tenant shall pay all Base Rent to Landlord, in advance, on or before
the first day of each and every calendar month during the term of this Lease.
Tenant shall pay all additional rent upon demand. Tenant shall pay all rent to
Landlord without notice, demand, deduction or offset, in lawful money of the
United States of America, at the address of Landlord specified in the Basic
Lease Information, or to such other person or at such other place as Landlord
may from time to time designate in writing.
3.4 Tenant acknowledges that the late payment by Tenant of any Base Rent or
additional rent (including the items described in section 3.2) will cause
Landlord to incur costs and expenses, the exact amount of which is extremely
difficult and impractical to fix. Such costs and expenses will include
administration and collection costs and processing and accounting expenses.
Therefore, if any Base Rent or additional rent is not received by Landlord
within five (5) Business Days (as defined below) after it is due, Tenant shall
immediately pay to Landlord a late charge equal to six percent (6%) of such
delinquent amount. The term "Business Days" means any day other than Saturdays,
Sundays and days on which national banks are permitted to be closed in
accordance with Federal banking laws and regulations. Landlord and Tenant agree
that such late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for the loss suffered by Tenant's
failure to make timely payment. In no event shall such late charge be deemed to
grant to Tenant a grace period or extension of time within which to pay any rent
or prevent Landlord from exercising any right or enforcing any remedy available
to Landlord upon Tenant's failure to pay all rent due under this Lease in a
timely fashion, including the right to terminate this Lease. All amounts of
money payable by Tenant to Landlord hereunder, if not paid when due, shall bear
interest from the due date until paid at a rate (the "Interest Rate") per annum
equal to five (5) percentage points plus the prime or reference rate announced
from time to time by Bank of America N.T.&S.A. (the "Reference Rate"), provided
that the Interest Rate shall at no time exceed twelve percent (12%) per annum.
<PAGE>
5
ARTICLE 4
Payment of Operating Expenses
4.1(a) In addition to the Base Rent payable during the term of this Lease,
Tenant shall pay to Landlord, as additional rent, an amount equal to the
Operating Expenses paid or incurred by Landlord in any calendar year (or partial
year) during the term of this Lease. If it shall not be lawful for Tenant to
reimburse Landlord for any Operating Expenses, as defined herein, the Base Rent
payable to Landlord shall be increased to net Landlord the same net Base Rent
after payment of such Operating Expenses as would have been received by Landlord
prior to the payment of such Operating Expenses.
(b) During December of each calendar year or as soon thereafter as
practicable, Landlord shall give Tenant notice of its estimate of the amounts
payable pursuant to section 4.1(a) above for the succeeding calendar year. On or
before the first day of each month during the succeeding calendar year, Tenant
shall pay to Landlord, as additional rent, one twelfth (1/12) of such estimated
amounts. If Landlord fails to deliver such notice to Tenant in December, Tenant
shall continue to pay Operating Expenses on the basis of the prior year's
estimate until the first day of the next calendar month after such notice is
given, provided that on such date Tenant shall pay to Landlord the amount of
such estimated adjustment payable to Landlord for prior months during the year
in question, less any portion thereof previously paid by Tenant. If at any time
it appears to Landlord that the amounts payable under this section 4.1(b) for
the current calendar year will vary from Landlord's estimate, Landlord may, by
giving written notice to Tenant, revise Landlord's estimate for such year, and
subsequent payments by Tenant for such year shall be based on such revised
estimate.
(c)(i) Within ninety (90) days after the close of each calendar year or as
soon after such ninety (90) day period as practicable, Landlord shall deliver to
Tenant a statement of the amounts payable under section 4.1(a) above for such
calendar year (the "annual statement") and such statement shall be final and
binding upon Landlord and Tenant, subject to the terms of section 4.1(c)(ii). If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. If on the basis of such statement Tenant has paid to Landlord an
amount in excess of the amounts payable under section 4.1(a) above for the
preceding calendar year and Tenant is not in default in the performance of any
of its covenants under this Lease, then Landlord, at its option, shall either
promptly refund such excess to Tenant or credit the amount thereof to the Base
Rent next becoming due from Tenant until such credit has been exhausted.
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6
(ii) Tenant shall have the right, during the one hundred eighty (180) day
period following delivery of an annual statement, at Tenant's sole cost to
review in Landlord's offices Landlord's records of Operating Expenses and Real
Property Taxes for the subject calendar year. Such review shall be carried out
only by regular employees of Tenant or by a "Big Six" accounting firm and not by
any other third party. No person conducting such an audit shall be compensated
on a "contingency" or other incentive basis. If, as of the one hundred eightieth
day after delivery to Tenant of an annual statement, Tenant shall not have
delivered to Landlord an objection statement (as defined below), then such
annual statement shall be final and binding upon Landlord and Tenant, and Tenant
shall have no further right to object to such annual statement. If within such
one hundred eighty (180) day period, Tenant delivers to Landlord a written
statement specifying objections to such annual statement (an "objection
statement"), then Tenant and Landlord shall meet to attempt to resolve such
objection within thirty (30) days after delivery of the objection statement. If
such objection is not resolved within such thirty (30) day period, then either
party shall have the right to require that the dispute be submitted to binding
arbitration under the rules of the American Arbitration Association.
Notwithstanding that any such dispute remains unresolved, Tenant shall be
obligated to pay Landlord all amounts payable in accordance with this section
4.1 (including any disputed amount). If such dispute results in an agreement or
an arbitrator's determination that Tenant is entitled to a refund, Landlord
shall, at its option, either pay such refund or credit the amount thereof to the
Base Rent next becoming due from Tenant.
(d) If this Lease terminates on a day other than the last day of a calendar
year, the amounts payable by Tenant under section 4.1(a) above with respect to
the calendar year in which such termination occurs shall be prorated on the
basis which the number of days from the commencement of such calendar year, to
and including such termination date, bears to 360. The termination of this Lease
shall not affect the obligations of Landlord and Tenant pursuant to section
4.1(c) above to be performed after such termination.
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7
ARTICLE 5
Operating Expenses, Property Taxes and
Other Taxes Defined; Contest Rights
5.1 "Operating Expenses" shall mean the total costs and expenses incurred
by Landlord in connection with the management, operation, maintenance, repair
and ownership of the Premises, including, without limitation, the following
costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the management, operation,
repair, or maintenance of the Premises and costs of training such employees; (2)
payroll, social security, workers' compensation, unemployment and similar taxes
with respect to such employees of Landlord or its agents, and the cost of
providing disability or other benefits imposed by law or otherwise, with respect
to such employees; (3) Property Taxes and Other Taxes (as such terms are defined
below); (4) premiums and other charges incurred by Landlord with respect to
fire, other casualty, boiler and machinery, theft, rent interruption and
liability insurance and any other insurance as is deemed necessary or advisable
in the reasonable judgment of Landlord, all in such amounts as Landlord
determines to be appropriate, and costs of repairing an insured casualty to the
extent of the deductible amount under the applicable insurance policy; (5) water
charges and sewer rents or fees; (6) license, permit and inspection fees and
charges; (7) sales, use and excise taxes on goods and services purchased by
Landlord in connection with the operation, maintenance or repair of the Premises
and building systems and equipment; (8) telephone, telegraph, postage,
stationery supplies and other expenses incurred in connection with the
operation, maintenance, or repair of the Premises; (9) reasonable management
fees and expenses (including fees and expenses for accounting, financial
management, data processing and information services); (10) repairs to and
physical maintenance of the Premises, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent otherwise included as an Operating Expense
pursuant to this section 5.1); (11) janitorial, window cleaning, guard,
extermination, water treatment, rubbish removal, plumbing and other services and
inspection or service contracts for elevator, electrical, mechanical, sanitary,
heating, ventilation and air conditioning, and other building equipment and
systems or as may otherwise be necessary or proper for the operation or
maintenance of the Premises; (12) supplies, tools, materials and equipment used
in connection with the operation, maintenance or repair of the Premises; (13)
accounting, legal and other professional, consulting or service fees and
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8
expenses; (14) painting the exterior or the interior areas of the Premises and
the cost of maintaining the sidewalks, landscaping and other outdoor areas of
the Premises; (15) all costs and expenses for electricity, chilled water, air
conditioning, water for heating, gas, fuel, steam, heat, lights, sewer service,
communications service, power and other energy related utilities required in
connection with the operation, maintenance and repair of the Premises; (16) the
cost of any capital improvements made by Landlord to the Premises or capital
assets acquired by Landlord required under any governmental law, regulation or
insurance requirement with which the Premises was not required to comply on the
Commencement Date, such cost or allocable portion to be amortized over the
useful life thereof, together with interest on the unamortized balance at a rate
per annum equal to the Reference Rate (as defined in section 3.4 hereof) charged
at the time such capital improvements or capital assets are constructed or
acquired or such higher rate as may have been paid by Landlord on funds borrowed
for the purpose of constructing or acquiring such capital improvements or
capital assets; (17) the cost of any capital improvements made by Landlord to
the Building or capital assets acquired by Landlord for the protection of the
health and safety of the occupants of the Premises (provided that, as to any
such improvements or assets which would be considered unnecessary or
unreasonably expensive by a reasonable owner of a comparable building, Landlord
shall first have obtained Tenant's reasonable approval) or that are designed to
reduce other Operating Expenses, such cost or allocable portion thereof to be
amortized over the useful life thereof (except that Landlord may include as an
Operating Expense in any calendar year a portion of the cost of such a capital
improvement or capital asset equal to Landlord's estimate of the amount of the
reduction of other Operating Expenses in such year resulting from such capital
improvement or capital asset), together with interest on the unamortized balance
at a rate per annum equal to the Reference Rate charged at the time such capital
improvements or capital assets are constructed or acquired or such higher rate
as may have been paid by Landlord on funds borrowed for the purpose of
constructing or acquiring such capital improvements or capital assets; (18) the
cost of furniture, window coverings, carpeting, decorations, landscaping and
other customary and ordinary items of personal property provided by Landlord for
use in common areas of the Premises or in the Building office (to the extent
that such Building office is dedicated to the operation and management of the
Premises), such costs to be amortized over the useful life thereof; (19) the
cost of any capital improvements made by Landlord to the Premises or capital
assets acquired by Landlord to the extent that the cost of any such improvement
or asset is less than fifty thousand dollars ($50,000); (20) the cost of any
capital improvements made by Landlord to the Premises or capital assets acquired
by Landlord after the Base Year which have a useful life of five (5) years or
less (and the cost of which is not otherwise included in Operating Costs
pursuant to this section 5.1), such cost to be amortized over the useful life
thereof, together with interest on the unamortized balance at a rate per annum
equal to the Reference Rate charged at the time such capital improvements or
<PAGE>
9
capital assets are constructed or acquired or such higher rate as may have been
paid by Landlord on funds borrowed for the purpose of constructing or acquiring
such capital improvements or capital assets; (21) any such expenses and costs
resulting from substitution of work, labor, material or services in lieu of any
of the above itemizations, or for any such additional work, labor, services or
material resulting from compliance with any governmental laws, rules,
regulations or orders applicable to the Premises or any part thereof; (22)
property management office rent or rental value; (23) cost of operation, repair
and maintenance of the parking areas on the Premises, including resurfacing,
restriping and cleaning; and (24) appropriate reserves to provide for
maintenance, repair and replacement of improvements (specifically including
roofs, structural components and building systems), fixtures, equipment and
personal property, as determined by Landlord consistent with prudent accounting
practices.
To the extent costs and expenses described above relate to both the
Premises and other property, such costs and expenses shall, in determining the
amount of Operating Expenses, be allocated as Landlord may reasonably determine
to be appropriate.
Prior to the beginning of each calendar year during the term of this Lease,
or as soon thereafter as practicable, Landlord shall deliver to Tenant an
operating and capital budget for such year setting forth the estimated Operating
Expenses. The operating and capital budget shall be consistent with reasonable
and prudent property management practices.
Operating Expenses shall not include the following: (i) depreciation on the
Building; (ii) debt service; (iii) rental under any ground or underlying lease;
(iv) interest (except as expressly provided in this section 5.1); (v) attorneys'
fees and expenses incurred in connection with lease negotiations with
prospective tenants; (vi) the cost of any improvements or equipment (except to
the extent such costs are included in amounts payable by Tenant as reserves as
set forth in clause (24) above) which would be properly classified as capital
expenditures (except for any capital expenditures expressly included in
Operating Expenses pursuant to this section 5.1); (vii) advertising expenses
relating to vacant space; or (viii) real estate brokers' or other leasing
commissions.
Landlord may, but shall not be obligated to, cause some or all of its
duties under this agreement to be performed by a property management company on
such terms as Landlord may deem appropriate. The property management company
shall be subject to the approval of Tenant, which approval shall not be
unreasonably withheld.
5.2 "Property Taxes" shall mean all taxes, assessments, excises, levies,
fees and charges (and any tax, assessment, excise, levy, fee or charge levied
wholly or partly in lieu thereof or as a substitute therefor or as an addition
thereto) of every kind and description, general or special, ordinary or
extraordinary, foreseen or unforeseen, secured or unsecured, whether or not now
customary or within the contemplation of Landlord and Tenant, that are levied,
assessed, charged, confirmed or imposed by any public or government authority on
or against, or otherwise with respect to, the Premises or any part thereof or
any personal property used in connection with the Premises. Property Taxes shall
not include net income (measured by the income of Landlord from all sources or
from sources other than solely rent), franchise, inheritance or capital stock
taxes of Landlord, unless levied or assessed against Landlord in whole or in
part in lieu of, as a substitute for, or as an addition to any Property Taxes.
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10
5.3 "Other Taxes" shall mean all taxes, assessments, excises, levies,
owner's association dues or similar charges, fees and charges, including all
payments related to the cost of providing facilities or services, whether or not
now customary or within the contemplation of Landlord and Tenant, that are
levied, assessed, charged, confirmed or imposed by any public or government
authority upon, or measured by, or reasonably attributable to (a) the Premises,
(b) the cost or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises or the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements is vested in Tenant or Landlord, (c) any rent payable
under this Lease, including any gross receipts tax or excise tax levied by any
public or government authority with respect to the receipt of any such rent, (d)
the possession, leasing, operation, management, maintenance, alteration, repair,
replacement, use or occupancy by Tenant of the Premises, or (e) this transaction
or any document to which Tenant is a party creating or transferring an interest
or an estate in the Premises. Other Taxes shall not include net income taxes
(measured by the income of Landlord from all sources or from sources other than
solely rent), franchise, inheritance or capital stock taxes of Landlord, unless
levied or assessed against Landlord in whole or in part in lieu of, as a
substitute for, or as an addition to any Other Taxes.
5.4 In the event that Tenant reasonably and in good faith disputes the
validity or amount of any Property Taxes or Other Taxes, then Tenant shall have
the right to defer payment thereof, provided that (a) Tenant shall have given
Landlord written notice of such contest and the nature thereof and Tenant shall
thereafter diligently and continuously prosecute such contest to completion or
compromise, (b) no such deferral of payment shall result in any fines or
penalties being assessed against Tenant, Landlord or the Premises or any lien
foreclosure rights against the Premises being commenced, (c) Tenant shall
promptly pay any amounts (including any interest, fines or penalties) finally
determined to be owing, and (d) at Landlord's reasonable request, Tenant shall
provide such bond or other security as may be necessary to protect Landlord and
the Premises against any loss or liability.
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11
ARTICLE 6
Use
6.1 The Premises shall be used only for the purpose specified in the Basic
Lease Information and no other purpose without Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed; provided, however,
Landlord's withholding of consent shall be conclusively presumed reasonable if
the proposed use would materially increase the wear and tear on or the risk of
damage to the Premises above levels or risks resulting from Tenant's use of the
Premises exclusively for office purposes or if the proposed use is for an
illegal, immoral or disreputable purpose; and provided, further, that only the
Tenant originally named herein, and no subtenant, assignee or other successor to
such original Tenant, shall have the right to use the Premises or any part
thereof for any purpose other than office use. Notwithstanding anything to the
contrary in the Basic Lease Information, (a) Tenant's right to use the Premises
or any part thereof for any use other than general office use (whether or not
such other use is listed in the Basic Lease Information) is subject to the
following conditions: (i) such ancillary (non-office) uses shall be limited to
areas comprising less than thirty percent (30%) of the total rentable square
footage of the building in the aggregate, and (ii) all such uses shall be
consistent with Tenant's obligations under Articles 11 and 21 hereof; and (b)
any subtenant or assignee of the original Tenant named herein shall use the
Premises exclusively for office purposes and no other use shall be permitted,
except that the original Tenant named herein may sublease the portions of the
Premises to be used as an employee cafeteria or child care center to the
operators of those facilities. Tenant shall not do or permit to be done in, on
or about the Premises, nor bring or keep or permit to be brought or kept
therein, anything which is prohibited by or will in any way conflict with any
law, ordinance, rule, regulation or order now in force or which may hereafter be
enacted, or which is prohibited by any insurance policy for the Premises, or
will in any way increase the existing rate of, or cause a cancellation of, or
affect any insurance for the Premises. Tenant shall not do or permit anything to
be done in, on or about the Premises which will in any way obstruct or interfere
with the rights of Landlord. Tenant shall not maintain or permit any nuisance
in, on or about the Premises or commit or suffer to be committed any waste in,
on or about the Premises.
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ARTICLE 7
Services
7.1 Landlord shall, at Tenant's sole cost and expense, supply the Premises
with electricity, heating, ventilating and air conditioning, water, natural gas,
lighting replacement for all lights, restroom supplies, telephone service,
window washing, security service, janitor, scavenger and disposal services, and
such other services as Landlord determines to furnish to the Premises. Landlord
shall not be in default hereunder or be liable for any damage or loss directly
or indirectly resulting from, nor shall the rent be abated or a constructive or
other eviction be deemed to have occurred by reason of, the installation, use or
interruption of use of any equipment in connection with the furnishing of any of
the foregoing services, any failure to furnish or delay in furnishing any such
services, whether such failure or delay is caused by accident or any condition
beyond the control of Landlord or Tenant or by the making of repairs or
improvements to the Premises, or any limitation, curtailment, rationing or
restriction on use of water, electricity, gas or any form of energy serving the
Premises, whether such results from mandatory governmental restriction or
voluntary compliance with governmental guidelines. Tenant shall pay the full
cost of all of the foregoing services as additional rent in accordance with
Article 4.
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13
ARTICLE 8
Maintenance and Repairs; Capital Improvements
8.1 Landlord shall, at all times during the term of this Lease and at
Tenant's sole cost and expense (except as otherwise provided in section 8.3),
maintain, repair and replace the Premises and every part thereof and all
grounds, landscaping, parking areas, lighting, roof, walls, floors, foundations,
signs, heating, ventilating and air conditioning, mechanical, electrical,
plumbing, sprinkler and life safety systems, equipment, fixtures, alterations,
additions and improvements therein or thereon and keep all of the foregoing
clean and in good order and operating condition (including painting the exterior
of the Premises as often as reasonably needed to keep such exterior in a good,
well painted condition, cleaning interior and exterior doors, windows and glass,
and repairing and replacing any exterior windows and glass that is broken,
cracked or damaged). Landlord shall engage a duly licensed independent
contractor to perform all maintenance and repair services on all heating,
ventilating and air conditioning, mechanical, electrical, plumbing, sprinkler
and life safety systems and equipment in the Premises that is to be performed by
Landlord in accordance with this section 8.1. Tenant hereby waives all rights to
make repairs at the expense of Landlord or in lieu thereof to vacate the
Premises. Subject to section 9.2, Tenant shall, at the end of the term of this
Lease, surrender to Landlord the Premises and all alterations, additions,
fixtures and improvements therein or thereto in the same condition as when
received, ordinary wear and tear and damage thereto by fire or other casualty
excepted.
8.2 In the event Landlord fails to perform any maintenance and repair
obligation under section 8.1 within fifteen (15) days after Tenant delivers to
Landlord notice specifying such obligation (or such longer period as may be
reasonably required due to the nature of such obligation), then Tenant may, upon
a further ten (10) days' notice to Landlord, perform at Tenant's own expense
such obligation (unless Landlord cures its nonperformance within such 10-day
period). Notwithstanding the foregoing, in the event that (i) maintenance or
repairs are, in Tenant's reasonable judgment, urgently required to avoid
material disruption of or interference with the operation of Tenant's business
on the Premises or to avoid imminent danger to health or safety, and (ii)
Landlord, having received notice thereof, does not, in Tenant's reasonable
judgment, commence with appropriate promptness and pursue with appropriate
diligence the required maintenance or repairs, then Tenant may perform such
maintenance or repairs without waiting for the time periods set forth in the
preceding sentence.
8.3 To the extent included within the definition of "Operating Expenses" in
section 5.1, the costs incurred by Landlord in performing its obligations under
section 8.1 shall be recoverable from Tenant pursuant to Article 4. To the
extent such costs are excluded from the definition of "Operating Expenses," such
costs shall be Landlord's responsibility, subject to Landlord's right to collect
reserves for anticipated capital repairs, improvements and replacements in
accordance with the definition of "Operating Expenses". In the event that the
cost of any such capital repairs, improvements or replacements exceeds the
amount that Landlord has specified to be reserved therefor, Landlord shall bear
such cost to the extent of such excess.
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ARTICLE 9
Alterations
9.1 Tenant shall not make any alterations, additions or improvements in or
to the Premises or any part thereof, or attach any fixtures or equipment
thereto, without Landlord's prior written consent, which consent shall not be
unreasonably withheld. Notwithstanding the preceding sentence, Tenant may make
such alterations, additions or improvements without Landlord's consent only if
the total cost of such alterations, additions or improvements is fifty thousand
dollars ($50,000) or less and such alterations, additions or improvements will
not affect in any way the structural, exterior or roof elements of the Premises
or mechanical, electrical, plumbing, utility or life safety systems of the
Premises, but Tenant shall give prior written notice of any such alterations,
additions or improvements to Landlord. In no event shall Tenant be permitted to
install underground storage tanks (excepting a single 20,000 gallon water tank)
or fuel systems on the Premises. Landlord's refusal to consent to the
installation of an underground tank or fuel system shall be conclusively
presumed to be reasonable. All alterations, additions and improvements in or to
the Premises to which Landlord consents shall be made by Tenant at Tenant's sole
cost and expense as follows:
(a) Tenant shall submit to Landlord, for Landlord's written approval,
complete plans and specifications for all work to be done by Tenant. Such plans
and specifications shall be prepared by the licensed architect(s) and
engineer(s), shall comply with all applicable codes, laws, ordinances, rules and
regulations, shall not adversely affect the structural elements of the Premises,
shall be in a form sufficient to secure the approval of all government
authorities with jurisdiction over the Premises, and shall be otherwise
satisfactory to Landlord in Landlord's reasonable discretion.
(b) Landlord shall notify Tenant in writing, within fifteen (15) Business
Days after Landlord's receipt of such plans and specifications, whether Landlord
approves or disapproves such plans and specifications and, if Landlord
disapproves such plans and specifications, Landlord shall describe the reasons
for disapproval. Tenant may submit to Landlord revised plans and specifications
for Landlord's prior written approval. Tenant shall pay all costs, including the
fees and expenses of the licensed architect(s) and engineer(s), in preparing
such plans and specifications.
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15
(c) All changes in the plans and specifications approved by Landlord shall
be subject to Landlord's prior written approval. If Tenant wishes to make any
such change in such approved plans and specifications, Tenant shall have such
architect(s) and engineer(s) prepare plans and specifications for such change
and submit them to Landlord for Landlord's written approval. Landlord shall
notify Tenant in writing promptly whether Landlord approves or disapproves such
change and, if Landlord disapproves such change, Landlord shall describe the
reasons for disapproval. Tenant may submit to Landlord revised plans and
specifications for such change for Landlord's written approval. After Landlord's
written approval of such change, such change shall become part of the plans and
specifications approved by Landlord.
(d) Tenant shall obtain and comply with all building permits and other
governmental permits and approvals required in connection with the work. Tenant
shall, through Tenant's licensed contractor, perform the work substantially in
accordance with (i) the plans and specifications approved in writing by
Landlord, (ii) the permits obtained by Tenant, and (iii) all applicable codes,
laws, ordinances, rules and regulations. Tenant shall pay, as additional rent,
the entire cost of all work (including the cost of all utilities, permits, fees,
taxes, and property and liability insurance premiums in connection therewith)
required to make the alterations, additions and improvements. Under no
circumstances shall Landlord be liable to Tenant for any damage, loss, cost or
expense incurred by Tenant on account of any plans and specifications,
contractors or subcontractors, design of any work, construction of any work, or
delay in completion of any work.
(e) Tenant shall give written notice to Landlord of the date on which
construction of any work will be commenced at least ten (10) days prior to such
date. Tenant shall keep the Premises free from mechanics', materialmen's and all
other liens arising out of any work performed, labor supplied, materials
furnished or other obligations incurred by Tenant. Tenant shall promptly and
fully pay and discharge all claims on which any such lien could be based or, in
the event Tenant reasonably disputes the validity or amount of any such claim,
Tenant may bond over such lien to Landlord's reasonable satisfaction. Landlord
shall have the right to post and keep posted on the Premises any notices that
may be provided by law or which Landlord may deem to be proper for the
protection of Landlord and the Premises from such liens, and to take any other
action Landlord deems necessary to remove or discharge liens or encumbrances at
the expense of Tenant.
9.2 All alterations, additions, fixtures and improvements, whether
temporary or permanent in character, made in or to the Premises by Landlord or
Tenant, shall become part of the Premises and Landlord's property excluding,
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16
however, underground tanks which shall remain the property of Tenant and shall
be registered in the name of Tenant so long as this Lease remains in effect.
Upon termination of this Lease, Landlord shall have the right, at Landlord's
option, by giving written notice to Tenant at any time before or within ten (10)
days after such termination, to retain all such alterations, additions, fixtures
and improvements in the Premises, without compensation to Tenant, or to remove
all such alterations, additions, fixtures and improvements from the Premises,
repair all damage caused by any such removal, and restore the Premises to the
condition in which the Premises existed before such alterations, additions,
fixtures and improvements were made, and in the latter case Tenant shall pay to
Landlord, upon billing by Landlord, the cost of such removal, repair and
restoration (including a reasonable charge for Landlord's oversight and
administration of such work). Notwithstanding the foregoing, all movable
furniture, equipment, trade fixtures (including the video screen walls, visual
systems, projectors and related equipment in Tenant's service reliability
center) and other personal property shall remain the property of Tenant. Upon
termination of this Lease, Tenant shall, at Tenant's expense, remove all such
movable furniture, equipment, trade fixtures other personal property from the
Premises and repair all damage caused by any such removal. Termination of this
Lease shall not affect the obligations of Tenant pursuant to this section 9.2 to
be performed after such termination.
ARTICLE 10
Insurance
10.1 Landlord shall not be liable to Tenant for any damage to or loss or
theft of any property or for any bodily or personal injury, illness or death of
any person in, on or about the Premises arising at any time and from any cause
whatsoever, except to the extent caused by the gross negligence or willful
misconduct of Landlord. Tenant waives all claims against Landlord arising from
any liability described in this section 10.1, except to the extent caused by the
gross negligence or willful misconduct of Landlord.
10.2 Tenant shall indemnify and defend Landlord against and hold Landlord
harmless from all claims, demands, liabilities, damages, losses, costs and
expenses, including reasonable attorneys' fees and disbursements, arising from
or related to any use or occupancy of the Premises, or any condition of the
Premises, or any default in the performance of Tenant's obligations, or any
damage to any property (including property of employees and invitees of Tenant)
or any bodily or personal injury, illness or death of any person (including
employees and invitees of Tenant) occurring in, on or about the Premises or any
part thereof or any part of the building or the land containing the Premises
arising at any time and from any cause whatsoever (except to the extent caused
by the gross negligence or willful misconduct of Landlord) or occurring outside
the Premises when such damage, bodily or personal injury, illness or death is
caused by any act or omission of Tenant or its agents, officers, employees,
contractors, invitees or licensees. This section 10.2 shall survive the
termination of this Lease with respect to any damage, bodily or personal injury,
illness or death occurring prior to such termination.
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10.3 Tenant shall, at all times during the term of this Lease and at
Tenant's sole cost and expense, obtain and keep in force commercial general
liability insurance, including contractual liability (specifically covering this
Lease), cross liability, fire legal liability, and premises operations, all on
an "occurrence" policy form, with a minimum combined single limit in the amount
specified in the Basic Lease Information per occurrence for bodily or personal
injury to, illness of, or death of persons and damage to property occurring in,
on or about the Premises, such insurance shall name the Landlord and any other
parties designated by Landlord, or any other party with an insurable interest,
as additional insureds. Tenant shall, at Tenant's sole cost and expense, be
responsible for insuring Tenant's furniture, equipment, fixtures, computers,
office machines and personal property.
10.4 Tenant shall, at all times during the term of this Lease and at
Tenant's sole cost and expense, obtain and keep in force worker's compensation
and employer's liability insurance in all states in which the Premises and any
other operations of the Tenant are located and any other state in which the
Tenant or its contractors or subcontractors may be subject to any statutory or
other liability arising in any manner whatsoever out of the actual or alleged
employment of others. The total limits of the employer's liability coverage
required hereunder shall not be less than the amounts specified in section 10.3.
10.5 The insuring party for property insurance specified in the Basic Lease
Information shall, at all times during the term of this Lease, at such party's
sole cost and expense, obtain and keep in force (a) insurance against loss or
damage to the Premises by fire and all other risks of physical loss covered by
insurance of the type now known as "all risk," with difference in conditions
coverage, in an amount not less than the full replacement cost of the Premises
(without deduction for depreciation), including the cost of debris removal, and
such endorsements as Landlord may reasonably require, including the "Replacement
Cost Endorsement"; (b) boiler and machinery insurance covering pressure vessels,
air tanks, boilers, machinery, pressure piping, heating, ventilation and air
conditioning equipment, and elevator and escalator equipment, provided the
Premises contain equipment of such nature and insurance against loss of
occupancy or use arising from any breakdown of any such items, in such amounts
as Landlord may reasonably determine; and (c) plate glass insurance in such
amounts as Landlord may reasonably determine if the Premises contain plate glass
[Add flood insurance?]. In addition to the insurance specifically described
above, Tenant shall obtain and keep in force such other insurance (or the
above-described insurance at increased limits) as Landlord may reasonably
require from time to time.
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10.6 All insurance required to be maintained by Tenant under this Article
10 and all renewals thereof shall be issued by good and responsible companies
qualified to do and doing business in the state where the Premises are located
and having a rating in Best's Insurance Guide of at least A-XI. All deductible
amounts under each such insurance policy shall be subject to Landlord's prior
written approval. Each policy to be maintained by Tenant shall expressly provide
that the policy shall not be canceled or altered without sixty (60) days' prior
written notice to Landlord and shall remain in effect notwithstanding any such
cancellation or alteration until such notice shall have been given to Landlord
and such period of sixty (60) days shall have expired. All insurance under this
Article 10 to be maintained by Tenant shall name Landlord and any other parties
designated by Landlord, or any other party with an insurable interest, as an
additional insured or loss payee, shall be primary and noncontributing with any
insurance which may be carried by Landlord, shall afford coverage for all claims
based on any act, omission, event or condition that occurred or arose (or the
onset of which occurred or arose) during the policy period, and shall expressly
provide that Landlord, although named as an additional insured, shall
nevertheless be entitled to recover under the policy for any loss, injury or
damage to Landlord. Upon the issuance of each such policy to be maintained by
Tenant, Tenant shall deliver each such policy or a certified copy and a
certificate thereof to Landlord for retention by Landlord. If Tenant fails to
insure or fails to furnish to Landlord upon notice to do so any policy to be
maintained by Tenant or certified copy and certificate thereof as required,
Landlord shall have the right from time to time to effect such insurance for the
benefit of Tenant or Landlord or both of them and all premiums paid by Landlord
shall be payable by Tenant as additional rent on demand. Tenant shall pay to
Landlord, immediately upon demand all costs incurred by Landlord as a result of
Tenant's failure to obtain and maintain in effect the policies of insurance
required under this Article 10.
10.7 Tenant waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Tenant insuring or covering the Premises, or any portion or
any contents thereof, or any operations therein, all rights of subrogation which
any insurer might otherwise, if at all, have to any claims of Tenant against
Landlord. Landlord waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Landlord insuring or covering the Premises or any portion
or any contents thereof, or any operations therein, all rights of subrogation
which any insurer might otherwise, if at all, have to any claims of Landlord
against Tenant. Tenant shall, prior to or immediately after the date of this
Lease, procure from each of the insurers under all policies of property,
liability and other insurance (excluding workers' compensation) now or hereafter
carried by Tenant insuring or covering the Premises, or any portion or any
contents thereof, or any operations therein, a waiver of all rights of
subrogation which the insurer might otherwise, if at all, have to any claims of
Tenant against Landlord as required by this section 10.6.
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ARTICLE 11
Compliance With Legal Requirements
11.1 Tenant shall, at Tenant's sole cost and expense, promptly comply with
all of the following (collectively, "Legal Requirements") laws, ordinances,
rules, regulations, orders and other requirements of any government or public
authority now in force or which may hereafter be in force, with all requirements
of any board of fire underwriters or other similar body now or hereafter
constituted, with all directions and certificates of occupancy issued pursuant
to any law by any governmental agency or officer and with all recorded
covenants, conditions or restrictions, insofar as any thereof relate to or are
required by the condition, use or occupancy of the Premises or the operation,
use or maintenance of any personal property, fixtures, machinery, equipment or
improvements in the Premises. Tenant's obligations under this Section 11.1 shall
include the obligation to make alterations or improvements to the Premises if
required to comply with any Legal Requirements.
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20
ARTICLE 12
Assignment or Sublease
12.1 Tenant shall not, directly or indirectly, without the prior written
consent of Landlord (which consent shall not be unreasonably withheld), assign
this Lease or any interest herein or sublease the Premises or any part thereof,
or permit the use or occupancy of the Premises by any person or entity other
than Tenant; provided, however, Landlord's withholding of consent shall be
conclusively presumed reasonable if: (a) the financial condition of the proposed
transferee is not suitable to perform the obligations being assumed by it
hereunder; or (b) the proposed use of the Premises (i) is not permitted
hereunder or under any Legal Requirements, or (ii) is other than office use
(except in the case of a sublease of the portions of the Premises to be used for
an employee cafeteria and child care center to the operators of those
facilities). This Lease shall not, nor shall any interest herein, be assignable
as to the interest of Tenant involuntarily or by operation of law without the
prior written consent of Landlord. Any of the foregoing acts without such prior
written consent of Landlord shall be void and shall, at the option of Landlord,
constitute a default that entitles Landlord to terminate this Lease.
Notwithstanding the foregoing, Landlord hereby consents to any sublease or
assignment to any direct or indirect wholly-owned subsidiary of either Tenant or
ICG Communications, Inc., a Delaware corporation or to any surviving corporation
resulting from a merger with Tenant, or to any corporation as part of the
acquisition of all or substantially all of the assets and business of Tenant
(collectively, a "Corporate Successor"), provided such sublease or assignment
otherwise complies with this Article 12, and provided further that Landlord does
not approve any such sublease or assignment in connection with a merger or
acquisition if the net worth or creditworthiness of such subtenant or assignee
is, in Landlord's reasonable judgment, less than that of Tenant prior to such
merger or acquisition transaction. Tenant agrees that the instrument by which
any assignment or sublease to which Landlord consents is accomplished shall
expressly provide that the assignee or subtenant will perform all of the
covenants to be performed by Tenant under this Lease (in the case of a sublease,
only insofar as such covenants relate to the portion of the Premises subject to
such sublease) as and when performance is due after the effective date of the
assignment or sublease and that Landlord will have the right to enforce such
covenants directly against such assignee or subtenant. Any purported assignment
or sublease without an instrument containing the foregoing provisions shall be
void. Tenant shall in all cases remain liable for the performance by any
assignee or subtenant of all such covenants.
12.2 If Landlord consents in writing, Tenant may complete the intended
assignment or sublease subject to the following covenants: (a) no assignment or
sublease shall be valid and no assignee or subtenant shall take possession of
the Premises or any part thereof until an executed duplicate original of such
assignment or sublease, in compliance with section 12.1, has been delivered to
Landlord, (b) no assignee or subtenant shall have a right further to assign or
sublease.
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12.3 No assignment or sublease whatsoever shall release Tenant from
Tenant's obligations and liabilities under this Lease or alter the primary
liability of Tenant to pay all rent and to perform all obligations to be paid
and performed by Tenant. The acceptance of rent by Landlord from any other
person or entity shall not be deemed to be a waiver by Landlord of any provision
of this Lease. Consent to one assignment or sublease shall not be deemed consent
to any subsequent assignment or sublease. If any assignee, subtenant or
successor of Tenant defaults in the performance of any obligation to be
performed by Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against such assignee,
subtenant or successor. Landlord may consent to subsequent assignments or
subleases or amendments or modifications to this Lease with assignees,
subtenants or successors of Tenant, without notifying Tenant or any successor of
Tenant and without obtaining any consent thereto from Tenant or any successor of
Tenant, and such action shall not release Tenant from liability under this
Lease.
12.4 Upon Tenant's entering into any agreement to sell or transfer all or
substantially all of its assets (whether or not the assets to be sold or
transferred include this Lease), Tenant shall within three (3) days thereafter
notify Landlord of the essential terms of such agreement. If Tenant sells or
transfers substantially all of its assets but does not expressly assign this
Lease to the transferee, then at Landlord's option, this Lease shall be deemed
to have been assigned to such transferee and such transferee shall be deemed to
have assumed all of Tenant's obligations under this Lease. If such transferee
does not expressly assume such obligations in writing within ten (10) days after
demand delivered to Tenant, the Stipulated Difference (as defined in section
14.2(c)) shall be increased by five million dollars ($5,000,000).
ARTICLE 13
Entry by Landlord
13.1 Landlord shall have the right, upon not less than twenty-four (24)
hours prior notice (except in cases of emergency), to enter the Premises at any
time to (a) inspect the Premises, (b) exhibit the Premises to prospective
purchasers, lenders or (during the last eighteen (18) months of the term)
tenants, (c) determine whether Tenant is performing all of Tenant's obligations,
(d) perform any obligations of Tenant in accordance with section 14.5, (e) post
notices of nonresponsibility in and about the Premises, (f) make any repairs to
the Premises and (g) investigate and perform tests to determine Tenant's
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22
compliance with Article 21. In connection with any such entry, Landlord shall
use reasonable efforts to avoid any unnecessary disruption of or interference
with Tenant's business operation. Tenant waives all claims for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises or any other loss occasioned by
such entry. If Landlord removes any existing underground tanks and fueling
system from the Premises, Landlord shall have no obligation to replace them or
provide alternate tanks or a fueling system. Landlord shall at all times have a
key to unlock all such doors and Landlord shall have the right to use any and
all means which Landlord may deem proper to open such doors in an emergency to
obtain entry to the Premises. Any entry to the Premises obtained by Landlord by
any of such means shall not under any circumstances be construed or deemed to be
a forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
ARTICLE 14
Events of Default and Remedies
14.1 The occurrence of any one or more of the following events ("Event of
Default") shall constitute a breach of this Lease by Tenant:
(a) Tenant fails to pay any Base Rent within five (5) days after the date
when such rent becomes due or fails to make the additional deposits to the Draw
Account within the time period set forth in section 24.5; or
(b) Tenant fails to pay any additional rent or other amount of money or
charge payable by Tenant hereunder as and when such additional rent or amount or
charge becomes due and payable and such failure continues for more than ten (10)
Business Days after Landlord gives written notice thereof to Tenant; provided,
however, that after the second such failure in a calendar year, only the passage
of time, but no further notice, shall be required to establish an Event of
Default in the same calendar year; or
(c) Tenant fails to perform or breaches any other agreement or covenant of
this Lease to be performed or observed by Tenant as and when performance or
observance is due and such failure or breach continues for more than ten (10)
Business Days after Landlord gives written notice thereof to Tenant; provided,
however, that if, by the nature of such agreement or covenant, such failure or
breach cannot reasonably be cured within such period of ten (10) Business Days,
an Event of Default shall not exist as long as Tenant commences with due
diligence and dispatch the curing of such failure or breach within a reasonable
period of time after becoming aware of such failure or breach and, having so
commenced, thereafter prosecutes with diligence and dispatch and completes the
curing of such failure or breach within a reasonable time; or
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(d) Tenant or any Guarantor (i) files, or consents by answer or otherwise
to the filing against it of, a petition for relief or reorganization or
arrangement or any other petition in bankruptcy or for liquidation or to take
advantage of any bankruptcy, insolvency or other debtors' relief law of any
jurisdiction, (ii) makes an assignment for the benefit of its creditors, (iii)
consents to the appointment of a custodian, receiver, trustee or other officer
with similar powers of Tenant (or any Guarantors) or of any substantial part of
Tenant's (or any Guarantor's) property, or (iv) takes action for the purpose of
any of the foregoing; or
(e) Without consent by Tenant or a Guarantor (as the case may be), a court
or government authority enters an order, and such order is not vacated within
thirty (30) days, (i) appointing a custodian, receiver, trustee or other officer
with similar powers with respect to Tenant or any Guarantor, or with respect to
any substantial part of Tenant's or any Guarantor's property, or (ii)
constituting an order for relief or approving a petition for relief or
reorganization or arrangement or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy, insolvency or other debtors'
relief law of any jurisdiction, or (iii) ordering the dissolution, winding-up or
liquidation of Tenant or any Guarantor; or
(f) This Lease or any estate of Tenant hereunder is levied upon under any
attachment or execution and such attachment or execution is not vacated within
thirty (30) days; or
(g) Tenant vacates or abandons the Premises; or
(h) Any Lease Guaranty (as defined in section 24.1) ceases to be in full
force and effect; or
(i) Tenant merges or sells or transfers all or substantially all of its
assets (whether or not the assets sold or transferred include this Lease),
unless Landlord consents to such transaction in accordance with section 12.1.
14.2 If an Event of Default occurs, Landlord shall have the right at any
time to give a written termination notice to Tenant and, on the date specified
in such notice, Tenant's right to possession shall terminate and this Lease
shall terminate. Upon such termination, Landlord shall have the right to recover
from Tenant:
(a) The worth at the time of award of all unpaid rent which had been earned
at the time of termination;
(b) The worth at the time of award of the amount by which all unpaid rent
which would have been earned after termination until the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided;
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(c) The worth at the time of award of the amount by which all unpaid rent
for the balance of the term of this Lease after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided;
provided that, in the event that, at the time of the termination of this Lease,
the Premises or any substantial portion of the Premises have not been relet, in
lieu of such amount, Landlord shall be entitled to withdraw the balance then
held in the Draw Account and retain such balance as liquidated damages for the
loss of the rents payable under this Lease for the balance of the term of this
Lease, in which event such liquidated damages would be accepted by Landlord in
full satisfaction of all damages suffered by Landlord for the loss of rents that
would have been payable under the Lease with respect to the period after the
date of termination of the Lease. The amount of funds from time to time in the
Draw Account pursuant to this Article 24 (subject to section 12.4) is referred
to herein as the "Stipulated Difference." Tenant and Landlord agree that (a) the
Stipulated Difference is a fair and reasonable estimate of the difference in
value of the Premises if Tenant's covenants and obligations, as tenant under the
Leases, are performed in all material respects and the value of the Premises if
such covenants and obligations are not performed in all material respects, (b)
that the definition of the term "Event of Default" reflects Tenant's and
Landlord's negotiated agreement as to a fair standard for determining whether
such covenants and obligations are being performed in all material respects, and
(c) that such difference in value will not be precisely calculable since it will
involve complex and intangible factors such as reduced salability of the
Premises, reduced creditworthiness of Landlord and harm to Landlord's business
reputation. Said liquidated damages would not be in lieu of or otherwise replace
amounts that Landlord would be entitled to collect under Sections 14.2(a), (b)
and (d), and Landlord would be entitled to collect all of the same from Tenant
in addition to the liquidated damages provided for in this section 14.2(c); and
(d) All other amounts necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform all of Tenant's
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom. The "worth at the time of award" of the amounts
referred to in clauses (a) and (b) above shall be computed by allowing interest
at the Interest Rate (as defined in section 3.4). The "worth at the time of
award" of the amount referred to in clause (c) above shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank located
nearest the Premises at the time of award plus one percent (1%). For the purpose
of determining unpaid rent under clauses (a), (b) and (c) above, the rent
reserved in this Lease shall be deemed to be the total rent payable by Tenant
under Articles 3 and 5 hereof.
14.3 If an Event of Default occurs, Landlord may, without terminating this
Lease, terminate Tenant's right to possession of the Premises, in which event:
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25
(a) Landlord may, with or without process of law, retake possession of the
Premises;
(b) Tenant's obligations under this Lease (including the obligation to pay
rent on the dates specified in this Lease) shall continue unaffected for the
entire term of this Lease or until such earlier time as Landlord may, at its
option, elect to terminate this Lease which Landlord may, at its option, do at
any time;
(c) Without being deemed to have elected to terminate this Lease, Landlord
may relet the Premises in accordance with Section 14.4 for the account of
Tenant, in the name of Landlord or in the name of Tenant on such terms and
conditions and to such tenants as Landlord may, in its discretion, determine.
Landlord shall be entitled to remodel and repair the Premises, to subdivide the
Premises, or to combine all or any portion or portions of the Premises with
other premises in any manner which Landlord shall deem appropriate in order to
accomplish such reletting; and Tenant shall reimburse Landlord, on demand, for
all costs and expenses in connection with such repair or remodeling and
reletting ("Reletting Costs"). Notwithstanding Landlord's recovery of possession
and notwithstanding any reletting, Tenant shall continue to pay all rent
provided for herein as and when it comes due, less the net proceeds received by
Landlord from any reletting; provided that, if the proceeds of reletting exceed
the amount due from Tenant, on or before the 15th day of each month, Landlord
shall refund to Tenant any amount by which the rent paid by Tenant through such
date, when added to the amount, if any, recovered by Landlord through any
reletting of the Premises through such date, reduced by all Reletting Costs for
which Tenant has not paid Landlord, and reduced by all amounts Landlord has
previously refunded to Tenant under this subsection, and reduced any other
amounts Tenant owes Landlord under this Lease, exceeds the rent due under this
Lease through such date. Tenant shall reimburse Landlord upon demand for all
Reletting Costs and any other costs and expenses which Landlord may incur in
connection with recovery of possession or repair of the Premises;
(d) In the event Landlord proceeds under this Section 14.3, Landlord may at
any time terminate this Lease by notice to Tenant. Such termination shall have
the effect specified in Section 14.2 and Landlord shall be entitled to all
remedies under Section 14.2 upon termination.
14.4 Landlord shall have no duty to attempt to mitigate its damages by
retaking and reletting the Premises; provided that, if Landlord retakes
possession of the Premises under either Section 14.2 or Section 14.3, Landlord
shall use good faith reasonable efforts to relet the Premises, subject to the
following terms, conditions and limitations:
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(a) Any reletting of the Premises shall be on the terms and conditions
determined by Landlord in its reasonable good faith discretion and to such
tenants as Landlord shall approve in its reasonable good faith discretion.
Without limiting the generality of the foregoing, Tenant acknowledges that, in
reletting the Premises, Landlord may legitimately consider the effect of any
such reletting on the Premises and on any other property owned by Landlord or
any other person or entity controlling, controlled by, or under common control
with Landlord, or otherwise affiliated with Landlord (which parties are referred
to herein collectively as "Landlord Affiliates"), and, therefore, may decide not
to lease the Premises at rates which are lower than Landlord is otherwise
endeavoring to maintain in the Premises, or at rates which are lower than the
rate that Landlord believes to be appropriate for the Premises.
(b) Tenant recognizes that Landlord and Landlord's Affiliates currently and
in the future may have vacant space in the Premises and other property and may
in the future also have vacant space in new projects in competition with the
Premises. In no event shall Landlord be obligated to use any effort to relet the
Premises in preference to leasing any such other vacant space then available for
leasing by landlord or any of Landlord's Affiliates. Landlord shall not be
deemed to have failed to mitigate damages solely on account of the leasing of
other space which Landlord or Landlord's Affiliates have available instead of
the reletting of the Premises.
14.5 Whether or not Landlord elects to terminate this Lease on account of
any Event of Default by Tenant, and subject to Landlord's duty to attempt to
mitigate its damages as provided herein, Landlord shall have the right to
terminate any and all subleases, licenses, concessions or other consensual
arrangements for possession entered into by Tenant and affecting the Premises or
may, in Landlord's sole discretion, succeed to Tenant's interest in such
sublease, licenses, concessions or arrangements. In the event of Landlord's
election to succeed to Tenant's interest in any such subleases, licenses,
concessions or arrangements, Tenant shall, as of the date of notice by Landlord
of such election, have no further right to or interest in the rent or other
consideration receivable thereunder, except that amounts actually received by
Landlord thereunder shall be credited against any amounts payable by Tenant
hereunder.
14.6 Except as otherwise provided in section 14.2(c), the remedies provided
for in this Lease are in addition to all other remedies available to Landlord at
law or in equity by statute or otherwise.
14.7 All agreements and covenants to be performed or observed by Tenant
under this Lease shall be at Tenant's sole cost and expense and without any
abatement of rent. If Tenant fails to pay any sum of money to be paid by Tenant
or to perform any other act to be performed by Tenant under this Lease, Landlord
shall have the right, but shall not be obligated, and without waiving or
releasing Tenant from any obligations of Tenant, to make any such payment or to
perform any such other act on behalf of Tenant in accordance with this Lease.
All sums so paid by Landlord and all necessary incidental costs shall be deemed
additional rent hereunder and shall be payable by Tenant to Landlord on demand,
together with interest on all such sums from the date of expenditure by Landlord
to the date of repayment by Tenant at the Interest Rate. Landlord shall have, in
addition to all other rights and remedies of Landlord, the same rights and
remedies in the event of the nonpayment of such sums plus interest by Tenant as
in the case of default by Tenant in the payment of rent.
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14.8 If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise, any movable furniture, equipment, trade fixtures or
personal property belonging to Tenant and left in the Premises shall be deemed
to be abandoned, at the option of Landlord, and Landlord shall have the right to
sell or otherwise dispose of such personal property in any commercially
reasonable manner.
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ARTICLE 15
Damage or Destruction
15.1 If the Premises, or any part thereof, is damaged by fire or other
casualty before the Commencement Date or during the term of this Lease, Tenant
shall repair such damage and restore the Premises to substantially the same or
better condition as existed before the occurrence of such fire or other
casualty, Tenant shall repair and replace all such movable furniture, equipment,
trade fixtures and personal property, and this Lease shall remain in full force
and effect. Such repair and replacement by Tenant shall be done in accordance
with Article 9. In no event shall rent abate. Provided that Tenant shall have
unconditionally ratified in writing its repair and restoration obligations
pursuant to this section 15.1 with respect to such casualty, Tenant shall have
the right to participate in the adjustment of any insurance claim arising from
such casualty and shall have the right to approve any settlement or adjustment,
which approval shall not unreasonably be withheld or delayed. Provided Tenant is
not in default under this Lease (and no event has occurred which, with the
passage of time, the giving of notice, or both, would constitute a default), and
provided Tenant has (i) delivered to Landlord plans and specifications and a
budget for such repair and restoration (all of which Landlord shall have
approved in its reasonable judgment), and (ii) deposited with Landlord cash in
the sum equal to the excess, if any, of the total cost set forth in such
approved budget over the amount of insurance proceeds received on account of
such casualty, then Landlord shall make available to Tenant all insurance
proceeds actually received by Landlord on account of such casualty, for
application to the costs of such approved repair and restoration, as follows:
(a) No more frequently than once per calendar month, Tenant may request
that Landlord reimburse Tenant for costs incurred by Tenant for work in place to
repair and restore the Premises during the immediately preceding calendar month.
Tenant's request shall certify that all work for which reimbursement is
requested was performed in compliance with the plans and specifications approved
by Landlord pursuant to Article 9 and all applicable laws, and shall include
reasonably satisfactory evidence of the costs incurred by Tenant and
unconditional lien releases in form and substance required by applicable law
executed by all mechanic's, materialmen, laborers, suppliers and contractors who
performed any portion of the repair work or supplied materials.
(b) Within fifteen (15) days after receiving Tenant's request, Landlord
shall approve or disapprove Tenant's request, which approval shall not be
unreasonably withheld, by written notice to Tenant. If Landlord approves all or
any portion of a request and Landlord has received (and not previously
disbursed) insurance proceeds, then Landlord's approval shall include a check in
the amount approved by Landlord. If Landlord disapproves all or any portion of a
request, then Landlord's notice shall state the reasons for that disapproval.
Landlord's failure to deliver a notice approving or disapproving a request shall
be conclusively deemed Landlord's disapproval of the request. In addition,
Landlord shall have the right to impose other conditions upon disbursement so
long as they are consistent with customary construction loan disbursement
practices. Landlord shall maintain in an interest-bearing account any proceeds
of insurance held by Landlord and any sums deposited with Landlord by Tenant
pursuant to this section 15.1, and so long as no default by Tenant under this
Lease has occurred, interest earned on such account shall be disbursed to Tenant
upon completion of such repair and restoration, except to the extent such
interest has been applied to the costs of such repair and restoration.
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15.2 If the Premises, or any part thereof, is damaged by fire or other
casualty and (a) such fire or other casualty occurs during the last twelve (12)
months of the term of this Lease and the repair and restoration work to be
performed by Tenant in accordance with section 15.1 cannot, as reasonably
estimated by Landlord, be completed within four (4) months after the occurrence
of such fire or other casualty, or (b) the insurance proceeds received by
Landlord and Tenant in respect of such damage are not adequate to pay the entire
cost, as reasonably estimated by Landlord, of the repair and restoration work to
be performed by Landlord in accordance with section 15.1 and Tenant does not
deposit such shortfall with Landlord, then, in any such event, Landlord shall
have the right, by giving written notice to Tenant within sixty (60) days after
the occurrence of such fire or other casualty, to terminate this Lease as of the
date of such notice, in which case all insurance proceeds on account of such
casualty shall be paid to Landlord. If Landlord does not exercise the right to
terminate this Lease in accordance with this section 15.2, Tenant shall repair
such damage and restore the Premises in accordance with section 15.1 and this
Lease shall remain in full force and effect.
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ARTICLE 16
Eminent Domain
16.1 If a substantial portion of the Premises is taken and the remaining
portion of the Premises is not reasonably suitable for Tenant's purposes, or if
a portion of the Premises is taken resulting in a substantial loss of access to
and from the Premises without reasonable substitute access being available,
Landlord and Tenant each shall have the right, by giving written notice to the
other within thirty (30) days after the date of such taking, to terminate this
Lease. If either Landlord or Tenant exercises such right to terminate this Lease
in accordance with this section 16.1, this Lease shall terminate as of the date
of such taking. If neither Landlord nor Tenant exercises such right to terminate
this Lease in accordance with this section 16.1, this Lease shall terminate as
to the portion of the Premises so taken as of the date of such taking and shall
remain in full force and effect as to the portion of the Premises not so taken,
Tenant shall restore the portion of the Premises not so taken to an integrated
architectural unit in accordance with Article 9 and the Base Rent shall be
reduced as of the date of such taking in the proportion that the rentable area
of the Premises so taken bears to the total rentable area of the Premises. If
all of the Premises is taken by exercise of the power of eminent domain before
the Commencement Date or during the term of this Lease, this Lease shall
terminate as of the date of such taking.
16.2 If all or any part of the Premises is taken by exercise of the power
of eminent domain, all awards, compensation, damages, income, rent and interest
payable in connection with such taking shall, except as expressly set forth in
this section 16.2, be paid to and become the property of Landlord, and Tenant
hereby assigns to Landlord all of the foregoing. Without limiting the generality
of the foregoing, Tenant shall have no claim against Landlord or the entity
exercising the power of eminent domain for the value of the leasehold estate
created by this Lease or any unexpired term of this Lease. Tenant shall have the
right to claim and receive directly from the entity exercising the power of
eminent domain only the share of any award determined to be owing to Tenant for
the taking of improvements installed in the portion of the Premises so taken by
Tenant at Tenant's sole cost and expense based on the unamortized cost actually
paid by Tenant for such improvements, for the taking of Tenant's movable
furniture, equipment, trade fixtures and personal property, for loss of
goodwill, for interference with or interruption of Tenant's business, or for
removal and relocation expenses.
16.3 In the event of any taking other than a taking referred to in section
16.1, this Lease shall continue in full force and effect, Tenant shall continue
to pay all of the rent and to perform all of the covenants of Tenant in
accordance with this Lease and Tenant shall restore the Premises to an
integrated architectural unit in accordance with Article 9. Provided Tenant is
not in default under this Lease (and no event has occurred which, with the
passage of time, the giving of notice, or both, would constitute a default), and
provided Tenant has (i) delivered to Landlord plans and specifications and a
budget for such repair and restoration (all of which Landlord shall have
approved in its reasonable judgment), and (ii) deposited with Landlord cash in
the sum equal to the excess, if any, of the total cost set forth in such
approved budget over the amount of condemnation award proceeds received on
account of such taking, then Landlord shall make available to Tenant all
condemnation award proceeds actually received by Landlord on account of such
taking, for application to the costs of such approved repair and restoration, as
follows:
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(a) No more frequently than once per calendar month, Tenant may request
that Landlord reimburse Tenant for costs incurred by Tenant for work in place to
repair and restore the Premises during the immediately preceding calendar month.
Tenant's request shall certify that all work for which reimbursement is
requested was performed in compliance with the plans and specifications approved
by Landlord pursuant to Article 9 and all applicable laws, and shall include
reasonably satisfactory evidence of the costs incurred by Tenant and
unconditional lien releases in form and substance required by applicable law
executed by all mechanic's, materialmen, laborers, suppliers and contractors who
performed any portion of the repair work or supplied materials.
(b) Within fifteen (15) days after receiving Tenant's request, Landlord
shall approve or disapprove Tenant's request, which approval shall not be
unreasonably withheld, by written notice to Tenant. If Landlord approves all or
any portion of a request and Landlord has received (and not previously
disbursed) condemnation award proceeds, then Landlord's approval shall include a
check in the amount approved by Landlord. If Landlord disapproves all or any
portion of a request, then Landlord's notice shall state the reasons for that
disapproval. Landlord's failure to deliver a notice approving or disapproving a
request shall be conclusively deemed Landlord's disapproval of the request. In
addition, Landlord shall have the right to impose other conditions upon
disbursement so long as they are consistent with customary construction loan
disbursement practices. Landlord shall maintain in an interest-bearing account
any condemnation award held by Landlord and any sums deposited with Landlord by
Tenant pursuant to this section 16.3, and so long as no default by Tenant under
this Lease has occurred, interest earned on such account shall be disbursed to
Tenant upon completion of such repair and restoration, except to the extent such
interest has been applied to the costs of such repair and restoration.
16.4 As used in this Article 16, a "taking" means the acquisition of all or
part of the Premises for a public use by exercise of the power of eminent domain
(or a sale of any or all of the Premises in lieu, or under threat, thereof) and
the taking shall be considered to occur as of the earlier of the date on which
possession of the Premises (or part so taken) by the entity exercising the power
of eminent domain is authorized as stated in an order for possession or the date
on which title to the Premises (or part so taken) vests in the entity exercising
the power of eminent domain.
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ARTICLE 17
Subordination, Merger and Sale
17.1 This Lease shall be subject and subordinate at all times to the lien
of all mortgages and deeds of trust securing any amount or amounts whatsoever,
and any ground lease or master lease of the Premises, which may now exist or
hereafter be placed on or against the Premises or on or against Landlord's
interest or estate therein, all without the necessity of having further
instruments executed by Tenant to effect such subordination. Notwithstanding the
foregoing, in the event of a foreclosure of any such mortgage or deed of trust
or of any other action or proceeding for the enforcement thereof, or of any sale
thereunder, or in the event any such ground lease or master lease is terminated,
this Lease shall not be terminated or extinguished, nor shall the rights and
possession of Tenant hereunder be disturbed, if no Event of Default then exists
under this Lease, and Tenant shall attorn to the person who acquires Landlord's
interest hereunder through any such mortgage or deed of trust. Tenant agrees to
execute, acknowledge and deliver upon demand such further instruments evidencing
such subordination of this Lease to the lien of all such mortgages and deeds of
trust or to all such ground leases or master leases of the Premises as may
reasonably be required by Landlord, but Tenant's covenant to subordinate this
Lease to mortgages or deeds of trust, or ground leases or master leases,
hereafter executed is conditioned upon each such senior mortgage or deed of
trust, or ground lease or master lease, or a separate subordination agreement,
containing the commitments specified in the preceding sentence. Without limiting
the generality of the foregoing, Tenant agrees to enter into a subordination,
nondisturbance and attornment agreement in the form required by the holder of
any such mortgage or deed of trust or by any party to any such ground lease or
master lease.
17.2 The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or operate as
an assignment to Landlord of any or all such subleases or subtenancies.
17.3 If the original Landlord hereunder, or any successor owner of the
Premises, sells or conveys the Premises, all liabilities and obligations on the
part of the original Landlord, or such successor owner, under this Lease
accruing after such sale or conveyance shall terminate and the original
Landlord, or such successor owner, shall automatically be released therefrom,
and thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner.
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ARTICLE 18
Estoppel Certificate
18.1(a) At any time and from time to time, Tenant shall, within ten (10)
days after written request by Landlord, execute, acknowledge and deliver to
Landlord a certificate, in the form attached as Exhibit A, or such other form as
may be requested, certifying: (a) that this Lease is unmodified and in full
force and effect (or, if there have been modifications, that this Lease is in
full force and effect as modified, and stating the date and nature of each
modification); (b) the Commencement Date and the Expiration Date determined in
accordance with Article 2 and the date, if any, to which all rent and other sums
payable hereunder have been paid; (c) that no notice has been received by Tenant
of any default by Tenant hereunder which has not been cured, except as to
defaults specified in such certificate; (d) that Landlord is not in default
under this Lease, except as to defaults specified in such certificate; and (e)
such other matters as may be reasonably requested by Landlord or any actual or
prospective purchaser or mortgage lender. Any such certificate may be relied
upon by Landlord and any actual or prospective purchaser or mortgage lender of
the Premises or any part thereof.
(b) At any time and from time to time, Landlord shall, within ten (10) days
after written request by Tenant, execute, acknowledge and deliver to Tenant a
certificate certifying: (a) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full force
and effect as modified, and stating the date and nature of each modification);
(b) the Commencement Date and the Expiration Date determined in accordance with
Article 2 and the date, if any, to which all rent and other sums payable
hereunder have been paid; (c) that no notice has been received by Landlord of
any default by Landlord hereunder which has not been cured, except as to
defaults specified in such certificate; (d) that Tenant is not in default under
this Lease, except as to defaults specified in such certificate; and (e) such
other matters as may be reasonably requested by Tenant. Any such certificate may
be relied upon by Tenant and any actual or prospective lender.
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ARTICLE 19
Holding Over
19.1 If, without objection by Landlord, Tenant holds possession of the
Premises after expiration of the term of this Lease, Tenant shall become a
tenant from month to month upon the terms herein specified but at a Base Rent
equal to one hundred twenty percent (120%) of the Base Rent in effect at the
expiration of the term of this Lease pursuant to Article 3, payable in advance
on or before the first day of each month. Such month to month tenancy may be
terminated by either Landlord or Tenant by giving thirty (30) days' written
notice of termination to the other at any time.
ARTICLE 20
Financial Statements
20.1 On or before April 1 of each year, Tenant shall deliver to Landlord
audited consolidated financial statements of ICG Communications, Inc., a
Delaware corporation ("ICGC"), and its consolidated subsidiaries ("Financial
Statements") for the fiscal year of ICGC ended on the previous December 31,
which Financial Statements shall include an audited consolidated balance sheet
of ICGC and its consolidated subsidiaries as at the end of such fiscal year, a
consolidated statement of operations of ICGC and its consolidated subsidiaries
for such fiscal year, and a certificate of ICGC's auditor (which shall be a
recognized national independent accounting firm) to the effect that such
Financial Statements were prepared in accordance with generally accepted
accounting principals consistently applied and fairly present the financial
condition and operations of ICGC and its consolidated subsidiaries for and as at
the end of such fiscal year.
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35
ARTICLE 21
Hazardous Materials
21.1 As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material or waste, or any pollutant or contaminant, or words of
similar import, which is or becomes regulated by any local governmental
authority, the state in which the Premises are located, or the United States
Government. The term "Hazardous Material" includes, but is not limited to, any
material or substance which is, (i) designated as a "hazardous substance"
pursuant to section 311 of the Federal Water Pollution Control Act (33 U.S.C.
section 1317), (ii) defined as a "hazardous waste" pursuant to section 1004 of
the Federal Resource Conservation and Recovery Act, 42 U.S.C. section 6901, et
seq. (42 U.S.C. section 6903), (iii) defined as a "hazardous substance" pursuant
to section 101 of the Comprehensive Environmental Response Compensation and
Liability Act (42 U.S.C. section 9601, et seq.), (iv) asbestos, (v) petroleum
(including crude oil or any fraction thereof, natural gas, natural gas liquids,
liquefied natural gas, or synthetic gas usable for fuel, or any mixture
thereof), (vi) petroleum products, (vii) polychlorinated biphenyls, (viii) urea
formaldehyde, (ix) radon gas, (x) radioactive matter, (xi) medical waste, and
(xii) chemicals which may cause cancer or reproductive toxicity.
21.2 As used herein, the term "Environmental Requirements" means all laws,
ordinances, rules, regulations, orders and other requirements of any government
or public authority now in force or which may hereafter be in force relating to
protection of human health or the environment, including all requirements
pertaining to reporting, licensing, permitting, investigation and remediation of
emissions, discharges, storage, disposal or releases of Hazardous Materials and
all requirements pertaining to the protection of the health and safety of
employees or the public.
21.3 Tenant shall not permit or conduct the handling, use, generation,
treatment, storage or disposal on, in or about the Premises of any Hazardous
Material (other than normal quantities of office supplies and cleaning supplies
which Tenant shall handle, use, store and dispose of in compliance with all
Environmental Requirements) without prior written notice to Landlord. Any such
notice by Tenant to Landlord shall be in writing and shall demonstrate to the
reasonable satisfaction of Landlord that such Hazardous Material is necessary to
the business of Tenant and will be handled, used, generated, treated, stored or
disposed of in a manner that complies with all Environmental Requirements. Any
such handling, use, generation, treatment, storage or disposal of any Hazardous
Material permitted by Landlord hereunder shall be in compliance with all
Environmental Requirements.
21.4 Tenant shall, within five (5) days after the receipt thereof, give
written notice to Landlord of any notice or other communication regarding any
(a) actual or alleged violation of Environmental Requirements by Tenant or with
respect to the Premises, (b) actual or threatened migration of Hazardous
Material from the Premises, or (c) the existence of Hazardous Material in or on
the Premises or regarding any actual or threatened investigation, inquiry,
lawsuit, claim, citation, directive, summons, proceeding, complaint, notice,
order, writ or injunction relating to any of the foregoing.
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21.5 Tenant shall indemnify and defend Landlord against and hold Landlord
harmless from all claims, demands, liabilities, damages, fines, encumbrances,
liens, losses, costs and expenses, including reasonable attorneys' fees and
disbursements, and costs and expenses of investigation, arising from or related
to the existence on or after the Commencement Date of Hazardous Material in or
on the Premises or the actual or threatened migration on or after the
Commencement Date of Hazardous Material from the Premises or the existence on or
after the Commencement Date of a violation of Environmental Requirements by
Tenant or with respect to the Premises. The obligations of Tenant under this
section 21.5 shall not be affected by any investigation by or on behalf of
Landlord or by any information which Landlord may have or obtain with respect
thereto. Tenant shall, to the reasonable satisfaction of Landlord, perform all
remedial actions necessary to remove any Hazardous Material in or on the
Premises on or after the Commencement Date or to remedy actual or threatened
migration from the Premises of any Hazardous Material or to remedy any actual or
threatened violation of Environmental Requirements, provided such remedial
action is required under Environmental Requirements. This section 21.5 shall
survive termination of this Lease.
21.6 If, at any time when the term of this Lease (including any renewal
term) would expire but for the terms of this section 21.6, Hazardous Material
exists in, on, about or under the Premises, then the term of this Lease shall
automatically be extended and this Lease shall remain in effect until the
earlier of (i) the completion of all remedial action required under section
21.5, or (ii) the date specified in a written notice from Landlord to Tenant
terminating this Lease. During any such extension period, Tenant shall perform
all of its obligations under this Lease including payments of all rent due
hereunder.
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ARTICLE 22
Waiver
22.1 The waiver by Landlord or Tenant of any breach of any covenant in this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other covenant in this Lease, nor shall any custom or practice which may
grow up between Landlord and Tenant in the administration of this Lease be
construed to waive or to lessen the right of Landlord or Tenant to insist upon
the performance by Landlord or Tenant in strict accordance with this Lease. The
subsequent acceptance of rent hereunder by Landlord or the payment of rent by
Tenant shall not waive any preceding breach by Tenant of any covenant in this
Lease, nor cure any Event of Default, nor waive any forfeiture of this Lease or
unlawful detainer action, other than the failure of Tenant to pay the particular
rent so accepted, regardless of Landlord's or Tenant's knowledge of such
preceding breach at the time of acceptance or payment of such rent.
ARTICLE 23
Notices
23.1 All requests, approvals, consents, notices and other communications
given by Landlord or Tenant under this Lease shall be properly given only if
made in writing and either deposited in the United States mail, postage prepaid,
certified with return receipt requested, or delivered by hand (which may be
through a messenger or recognized delivery or courier service) and addressed as
follows: To Landlord at the address of Landlord specified in the Basic Lease
Information, or at such other place as Landlord may from time to time designate
in a written notice to Tenant; and to Tenant, before the Commencement Date, at
the address of Tenant specified in the Basic Lease Information, and after the
Commencement Date, at the Premises, or at such other place as Tenant may from
time to time designate in a written notice to Landlord. Such requests,
approvals, consents, notices and other communications shall be effective on the
date of receipt (evidenced by the certified mail receipt) if mailed or on the
date of delivery if hand delivered.
ARTICLE 24
Guaranties; Security Deposit
24.1 As a condition precedent for Landlord's benefit to the effectiveness
of this Lease and the Commencement Date, on or before the Commencement Date
Tenant shall cause to be delivered to Landlord Continuing Lease Guaranties in
the form attached hereto as Exhibit B, executed by the respective Guarantors
specified in the Basic Lease Information (the "Lease Guaranties").
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24.2 As a condition precedent for Landlord's benefit to the effectiveness
of this Lease and the Commencement Date, on or before the Commencement Date
Tenant shall deposit with Landlord by wire transfer the amount of ten million
dollars ($10,000,000) (the "Security Amount") to be held by Landlord as a
security deposit in accordance with this Article 24. The Security Amount shall
be held in an interest-bearing account in Landlord's own name as secured party
with respect to the security interest hereby granted by Tenant, as cash
collateral (the "Draw Account"), established with a financial institution
selected by Landlord and reasonably satisfactory to Tenant. Funds in the Draw
Account shall be invested in such Permitted Investments (as hereinafter
defined), as Tenant may from time to time designate by written notice to
Landlord and as approved by Landlord in its reasonable discretion. The term
"Permitted Investments" means money market accounts with, or certificates of
deposit issued by, a national bank or other depository institution which bank or
institution is satisfactory to Landlord in its sole discretion; United States
Treasury securities; or commercial paper rated AAA or better by Standard and
Poors Corporation (or equivalent rating of another nationally recognized credit
rating agency). Risk of loss of the amounts held in the Draw Account shall be
borne by Tenant, and Landlord shall have no liability for any loss, or
diminution in value, of the Draw Account due to any failure of, or other
financial problems affecting, such financial institution. Interest earned on the
Draw Account shall for all purposes become part of the Draw Account. On each
anniversary of the date the funds are deposited in the Draw Account, amounts
held in the Draw Account in excess of the Security Amount (as the same may have
been adjusted pursuant to section 24.6) shall be disbursed as follows: (a)
first, to pay all reasonable costs to establish and maintain the Draw Account;
and (b) second, the balance, if any, to Tenant. Tenant hereby grants to Landlord
a security interest in the Draw Account and all proceeds thereof to secure the
full and timely performance of Tenant's obligations under this Lease. In
addition to the remedies set forth in this Lease, Landlord shall have all of the
rights and remedies of a secured party pursuant to the [Colorado Uniform
Commercial Code]. On or prior to the Commencement Date, Tenant shall execute and
deliver to Landlord such security agreements, financing statements and other
documents as Landlord may reasonably require to further evidence and perfect
such security interest.
24.3 If this Lease is terminated and Landlord is entitled to liquidated
damages in accordance with section 14.2(c), Landlord may withdraw all of the
funds then remaining in the Draw Account and retain the withdrawn amount.
24.4 Landlord may, from time to time, withdraw funds from the Draw Account
for application against any installment of Rent not paid when due or to pay any
other amount payable by Tenant hereunder that is not paid when due, including
amounts payable by Tenant under this Lease to reimburse Landlord for amounts
paid by Landlord for the account of Tenant as provided for in this Lease.
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24.5 In the event of a partial withdrawal of funds from the Draw Account in
accordance with section 24.4, Tenant shall, within five (5) business days after
Landlord has given Tenant notice of such withdrawal (including the purpose of
such withdrawal), deposit to the Draw Account such additional funds as shall be
necessary to cause the amount of funds in the Draw Account to be returned to the
Security Amount and if Tenant fails to do so within that 5-day period, an Event
of Default shall be deemed to have occurred and the Landlord may terminate this
Lease and/or exercise any of its other rights and remedies, including its rights
under this Article 24.
24.6 The Security Amount shall be subject to adjustment on the terms and
conditions set forth in this section 24.6. As of April 15 of each year
commencing with April 15, 2001 (each a "Reduction Date"), the Security Amount
shall be reduced by the Reduction Amount (as defined below) applicable to such
Reduction Date, provided that, as of such Reduction Date, all of the following
conditions (the "Reduction Conditions") are satisfied:
(a) Either
(i) (A) the net income of ICGC during each of the immediately
preceding three fiscal years shall have been more than one dollar
($1.00), and (B) the average annual net income of ICGC during the
immediately preceding three fiscal years shall have been more than an
amount equal to (1) ten (10), multiplied by (2) the average annual
Base Rent payable under this Lease during such three fiscal year
period; or
(ii) (A) during each of the immediately preceding three (3)
fiscal years, the ratio of (1) ICGC's Net Cash Flow (as defined below)
during such year, to (2) ICGC's Fixed Charges (as defined below)
during such year shall have exceeded 2.0 to 1, and (B) the average
annual Net Cash Flow of ICGC during the immediately preceding three
(3) fiscal years shall have been more than an amount equal to (1) ten
(10), multiplied by (2) the average annual Base Rent payable under
this Lease during such three fiscal year period; and
(b) ICGC's Market Capitalization (as defined below) exceeds one
billion dollars ($1,000,000,000); and
(c) ICG Holdings, Inc. occupies one hundred percent (100%) of the
Premises as its headquarters and system operations center; and
(d) no Event of Default has occurred and is continuing; and
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(e) no Reduction Event shall have occurred during the previous three
hundred sixty-five (365) days; and
(f) Tenant shall have delivered to Landlord (i) a certificate signed
by the Chief Financial Officer of ICGC and a senior executive officer of
Tenant, certifying that, as of the date of such certificate, each of the
Reduction Conditions is satisfied, and (ii) detailed calculations, based
upon the Financial Statements of ICGC for the relevant years, demonstrating
to Landlord's reasonable satisfaction that the Reduction Condition set
forth in clause (a) above is satisfied.
References in this section 24.6 to ICGC mean ICGC and its consolidated
subsidiaries, on a consolidated basis in accordance with GAAP. References in
this section 24.6 to financial terms refer to such terms determined in
accordance with GAAP. As used herein, the following terms have the meanings
indicated below:
"Fixed Charges" means, for any period, all taxes, interest expense
(cash and non-cash), rent and lease expenses and the current portion of
long-term debt for such period.
"Market Capitalization" means, as of any date, the product of (1) the
total number of shares of common stock of ICGC traded on a major stock
exchange or on the NASDAQ National Market System, multiplied by (2) the per
share price of such common stock most recently quoted on such exchange or
Market System, as published in The Wall Street Journal.
"Net Cash Flow" means, for any period, net income during such period,
plus depreciation, amortization, impairment losses [and non-cash interest]
during such period.
"Reduction Amount" means the respective amounts set forth below for
the respective Reduction Dates indicated:
Reduction Date Reduction Amount
------------------ -------------------
April 15, 2001 $1,250,000
April 15, 2002 $1,250,000
Each April 15
from April 15,
2003 to April 15,
2007, inclusive $1,500,000
Each April 15
from April 15,
2008 to April 15,
2012, inclusive $2,000,000
Upon the occurrence of any Reduction Event, Landlord shall deliver to Tenant an
amount equal to the excess of the funds then held in the Draw Account over the
adjusted Security Amount becoming effective upon such Reduction Date.
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24.7 (a) The Security Amount shall be reduced to five million dollars
($5,000,000) at any time that Tenant delivers to Landlord reasonably
satisfactory evidence that:
(i) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than twelve (12) months (without any
"CreditWatch" or downgrade consideration), ratings of its unsecured debt of
BBB- or better from Standard and Poor's Corporation ("S&P") and Baa3 or
better from Moody's Investors Service ("Moody's"); or
(ii) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than eighteen (18) months (without any
"CreditWatch" or downgrade consideration), a rating of its unsecured debt
of BBB- or better from S&P or Baa3 or better from Moody's, and a rating of
its unsecured debt of BBB- or better from Duff & Phelps Credit Rating Co.
("Duff");
provided that, as of the date Tenant would be entitled to such reduction, no
Event of Default has occurred and is continuing. Upon the occurrence of any such
reduction, Landlord shall deliver to Tenant from the Draw Account an amount
equal to the excess (if any) of the funds then held in the Draw Account over the
adjusted Security Amount becoming effective upon such reduction. If the Security
Amount is less than five million dollars ($5,000,000), this section 24.7(a)
shall have no effect.
(b) Tenant's obligations pursuant to this Article 24 to provide
security shall terminate, and Landlord shall return to Tenant all funds
remaining in the Draw Account at any time that Tenant delivers to Landlord
reasonably satisfactory evidence that:
(i) either Tenant or ICGC shall have obtained, and maintained for
a continuous period of not less than eighteen (18) months (without any
"CreditWatch" or downgrade consideration), ratings of its unsecured
debt of BBB or better from S&P and Baa2 or better from Moody's; or
(ii) either Tenant or ICGC shall have obtained, and maintained
for a continuous period of not less than twenty-four (24) months
(without any "CreditWatch" or downgrade consideration), ratings of its
unsecured debt of BBB- or better from S&P and Baa3 or better from
Moody's; or
(iii) either Tenant or ICGC shall have obtained, and maintained
for a continuous period of not less than thirty (30) months (without
any "CreditWatch" or downgrade consideration), a rating of its
unsecured debt of BBB- or better from S&P or Baa3 or better from
Moody's, and a rating of its unsecured debt of BBB- or better from
Duff & Phelps Credit Rating Co. ("Duff");
<PAGE>
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provided that, as of the time that Tenant delivers to Landlord such evidence of
such ratings, no Event of Default has occurred and is continuing.
24.8 Upon the expiration or sooner termination of this Lease, Landlord
shall return to Tenant any funds remaining in the Draw Account, provided that
Landlord shall have the right to retain in the Draw Account (and draw in
accordance with this Article 24) an amount which Landlord reasonably determines
to be equal to the damages Landlord has suffered arising from any uncured
default by Tenant.
24.9 So long as no Event of Default has occurred and is continuing, Tenant
shall have the right to provide Landlord, in lieu of the security described in
this Article 24, an irrevocable standby letter of credit in the amount of the
Security Amount, in form and substance satisfactory to Landlord and issued by a
bank satisfactory to Landlord (a "Letter of Credit"). In the event Tenant elects
to so provide a Letter of Credit, Landlord and Tenant shall negotiate in good
faith an amendment to this Lease to set forth the rights and obligations of
Landlord and Tenant with respect to the Letter of Credit, the terms of which
amendment shall provide Landlord with comparable security, in Landlord's
reasonable judgment, to that provided pursuant to this Article 24.
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ARTICLE 25
Miscellaneous
25.1 The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. The words "include," "includes" and "including"
shall be deemed to be followed by the phrase "without limitation." Tenant shall
indemnify and defend Landlord against and hold Landlord harmless from all
claims, demands, liabilities, damages, losses, costs and expenses, including
reasonable attorneys' fees and disbursements, arising out of or resulting from
any failure by Tenant to perform any of its obligations or any breach by Tenant
of any of its representations or warranties in accordance with this Lease. If
there is more than one Tenant, the obligations hereunder imposed upon Tenant
shall be joint and several. Time is of the essence of this Lease and each and
all of its provisions. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for lease,
and it is not effective as a lease or otherwise until execution and delivery by
both Landlord and Tenant. Subject to Article 12, this Lease shall benefit and
bind Landlord and Tenant and the personal representatives, heirs, successors and
assigns of Landlord and Tenant. If any provision of this Lease is determined to
be illegal or unenforceable, such determination shall not affect any other
provision of this Lease and all such other provisions shall remain in full force
and effect. This Lease shall be governed by and construed in accordance with the
laws of the state where the Premises are located.
25.2 If there is any legal action or proceeding between Landlord and Tenant
to enforce this Lease or to protect or establish any right or remedy under this
Lease, the unsuccessful party to such action or proceeding shall pay to the
prevailing party all costs and expenses, including reasonable attorneys' fees
and disbursements, incurred by such prevailing party in such action or
proceeding and in any appeal in connection therewith. If such prevailing party
recovers a judgment in any such action, proceeding or appeal, such costs,
expenses and attorneys' fees and disbursements shall be included in and as a
part of such judgment.
25.3 The exhibits and addenda, if any, specified in the Basic Lease
Information are attached to and made a part of this Lease.
25.4 Tenant warrants and represents to Landlord that Tenant and has not
authorized or employed, or acted by implication to authorize or to employ, any
real estate broker or salesman to act for Tenant in connection with this Lease.
25.5 Tenant and each person executing this Lease on behalf of Tenant
represents and warrants to Landlord that (a) Tenant is a corporation, duly
organized and validly existing under the laws of the State of Colorado, (b)
Tenant is qualified to do business in the state where the Premises is located,
(c) Tenant has full right, power and authority to enter into this Lease and to
perform all of Tenant's obligations hereunder, and (d) each person signing this
Lease on behalf of Tenant is duly and validly authorized to do so.
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25.6 There are no oral agreements between Landlord and Tenant affecting
this Lease, and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, offers, agreements and understandings,
oral or written, if any, between Landlord and Tenant or displayed by Landlord to
Tenant with respect to the subject matter of this Lease or the Premises. There
are no representations between Landlord and Tenant or between any real estate
broker and Tenant other than those expressly set forth in this Lease and all
reliance with respect to any representations is solely upon representations
expressly set forth in this Lease. This Lease may not be amended or modified in
any respect whatsoever except by an instrument in writing signed by Landlord and
Tenant.
ARTICLE 26
Option to Expand the Building
26.1 (a) Upon and subject to the terms and conditions of this Article 26,
Landlord hereby grants to Tenant the right and option (the "Expansion Option")
(i) to request that Landlord construct the Expansion Improvements (as defined
below) and lease the Expansion Improvements to Tenant in accordance with
Sections 26.2 and 26.4, or (ii) to request that Landlord purchase from, and
lease back to, Tenant the Expansion Improvements upon Tenant's construction
thereof in accordance with Sections 26.3 and 26.4, or (iii) if Landlord declines
to construct or purchase from Tenant the Expansion Improvements, to (A)
subdivide the Premises and purchase the portion of the Premises on which the
Expansion Improvements are to be constructed and construct the Expansion
Improvements itself in accordance with Section 26.5, or (B) construct the
Expansion Premises itself as a leasehold improvement without subdividing the
Premises in accordance with Section 26.6.
(b) The additional improvements to be constructed if the Expansion Option
is exercised (the "Expansion Improvements") shall (i) be one or more buildings
separate from the existing Building, of design, nature and type substantially
similar to the existing Building, and (ii) be of a size and be located and
configured per the location and configuration of "Phase 2" shown in the Site
Plan attached hereto as Exhibit C, unless at the request of the Tenant,
Landlord, in its sole and absolute discretion, shall agree to construct or allow
Tenant to construct Expansion Improvements of a different design, nature or
type. Landlord shall have the right, but not the obligation, to provide a
proposal to construct the Expansion Improvements.
(c) The Expansion Option shall be exercised by Tenant, if at all, by
written notice thereof (an "Expansion Notice") to Landlord given not earlier
than the Commencement Date and not later than the tenth (10th) anniversary of
the Commencement Date (the "Exercise Period"). The Expansion Notice may propose
either one or two buildings and shall be accompanied by preliminary conceptual
plans and specifications for the Expansion Improvements ("Preliminary Plans").
The Expansion Notice shall specify whether Tenant (1) proposes to construct the
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45
Expansion Improvements itself and requests that Landlord purchase and lease back
the Expansion Improvements in accordance with Sections 26.3 and 26.4, or (2)
requests that Landlord construct the Expansion Improvements and lease them to
Tenant in accordance with Sections 26.2 and 26.4. The Expansion Option may be
exercised from time to time, each exercise relating to a single additional
building. No purported exercise of the Expansion Option which fails to satisfy
the conditions set forth in Section 26.7 and no valid exercise which is later
rescinded shall impair Tenant's right thereafter to exercise the Expansion
Option during the Exercise Period. As of the end of the Exercise Period, the
Expansion Option shall lapse and be of no further force and effect, except to
the extent theretofore exercised. Time is of the essence of this provision.
26.2 If the Expansion Notice requests that Landlord constructs the
Expansion Improvements, then not later than sixty (60) days after delivery of
the Expansion Notice, Landlord shall notify Tenant if it elects not to construct
the Expansion Improvements (which election shall be in Landlord's sole
discretion), or, in the event Landlord proposes to construct the Expansion
Improvements, Landlord shall submit to Tenant a notice (the "Specification
Notice") which notice shall contain Landlord's best good faith estimate of (i)
the total costs (hard and soft) of constructing the Expansion Improvements, (ii)
the projected date for completion and delivery to Tenant of the Expansion
Improvements, and (iii) the projected Expansion Base Rent. Tenant may elect, by
written notice to Landlord within sixty (60) days following Tenant's receipt of
the Specification Notice, either to accept the terms of the Specification Notice
or to rescind its exercise of the Expansion Option. In the event Landlord shall
have notified Tenant that Landlord elects not to construct the Expansion
Improvements, then Tenant may elect, by written notice to Landlord within sixty
(60) days following Tenant's receipt of Landlord's notice, to either (A) rescind
its exercise of the Expansion Option, (B) exercise the right (the "Leasehold
Improvement Option") to construct the Expansion Improvements on the Premises at
its sole cost in accordance with Section 26.6, or (C) exercise the right (the
"Tenant Subdivision Option") to cause the Premises to be subdivided such that
the site on which the proposed Expansion Improvements are to be constructed (the
"Expansion Site") is a separate legal parcel in compliance with all applicable
laws, codes, ordinances and regulations and with the requirements of Section
26.5 and to purchase the Expansion Site from Landlord and construct the
Expansion Improvements itself, all in accordance with Section 26.5; provided,
however, that if Tenant elects to either rescind the exercise of the Expansion
Option or to exercise the Tenant Subdivision Option or the Leasehold Improvement
Option, Tenant shall pay to Landlord as additional rent an amount equal to 150%
of Landlord's out-of-pocket costs incurred to third parties (including, without
limitation, architects, engineers and other design professionals) in preparing
the Specification Notice, and Tenant shall, upon payment, be entitled to copies
of all plans, specifications and designs. Tenant's failure to timely exercise
the Tenant Subdivision Option or the Leasehold Improvement Option shall be
conclusively deemed to constitute a rescission of the exercise of the Expansion
Option. Time is of the essence of this provision.
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46
26.3 If the Expansion Notice proposes that Tenant constructs the Expansion
Improvements and requests that Landlord purchase the Expansion Improvements,
then not later than sixty (60) days after delivery of the Expansion Notice,
Landlord shall notify Tenant whether or not it elects to purchase the Expansion
Improvements (which election shall be in Landlord's sole discretion), and the
provisions of subsection (a) or (b) of this Section 26.3, as applicable shall
apply.
(a) In the event Landlord shall have notified Tenant that Landlord elects
to purchase the Expansion Improvements (the "Purchase Notice"), then Tenant
shall undertake construction of the Expansion Improvements ("Tenant's Work") and
the provisions of Section 26.3(a)(i) through 26.3(a)(ix) hereinbelow shall be
applicable
(i) Tenant shall cause to be constructed the Expansion Improvements in
accordance with all applicable laws and the procedures set forth
hereinbelow. Upon the Expansion Rent Commencement Date (as defined in
Section 26.4(a)), Landlord shall purchase and Tenant shall sell the
Expansion Improvements for a net price equal to Tenant's Expansion Costs
(as defined below), and Tenant shall execute and deliver to Landlord such
documents and instruments as Landlord may reasonably request in connection
with such purchase and sale. The term "Tenant's Expansion Costs" means all
hard and soft costs incurred by Tenant (but excluding land costs) in
connection with the design and construction of the Expansion Improvements,
as said term may be further defined in the Lease Amendment described below.
Tenant shall pay all closing costs in connection with such purchase and
sale, including the premium for an endorsement to Landlord's title policy
to increase the liability amount to reflect the price of the Expansion
Improvements. From and after the Expansion Rent Commencement Date and for
the remainder of the term (as the same may be extended pursuant to Section
26.4(c)), Tenant pay Expansion Base Rent (as defined in Section 26.4(a))
for the Expansion Improvements; the Expansion Improvements shall be deemed
to be a part of the Premises hereunder; and Tenant shall pay all Operating
Expenses for the Expansion Improvements as set forth in Section 3.1(b) and
shall perform all other obligations of Tenant under this Lease as if the
Expansion Improvements were part of the original Premises. At the
conclusion of this Lease, the Expansion Improvements shall be delivered to
Landlord in good condition (reasonable wear and tear excepted). Title to
the Expansion Improvements shall, at all times, remain in the name of
Landlord and shall not pass to Tenant.
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(ii) On or before ten (10) days from the date of the Purchase Notice,
Tenant shall notify Landlord of the identity and mailing address of the
licensed architect engaged by Tenant for the preparation of plans for
Tenant's Work. On or before forty-five (45) days from the date of the
Purchase Notice, Tenant, at Tenant's expense, shall cause Tenant's
architect to prepare and deliver to Landlord for Landlord's reasonable
approval five (5) sets of final plans and specifications for Tenant's Work.
(iii) Landlord shall review said plans and specifications and notify
Tenant within fifteen (15) days of receipt of said plans and specifications
in Landlord's office, of the matters, if any, in said plans which fail to
conform to Landlord's construction requirements or otherwise fail to meet
with Landlord's approval which approval shall not be unreasonably withheld,
conditioned or delayed. Tenant shall, within ten (10) days from receipt of
any such notice from Landlord, cause said plans to be revised in such
manner as is requisite to obtaining Landlord's approval and shall submit
revised plans for Landlord's approval. When Landlord has approved Tenant's
plans, Landlord shall initial and return one (1) set of approved plans to
Tenant, which set shall also show the date of Landlord's approval. Tenant's
Work shall be carried out pursuant to a fixed price or not-to-exceed
construction contract in form and substance reasonably satisfactory to
Landlord, and with a licensed contractor reasonably satisfactory to
Landlord. Landlord shall have the right to require that Tenant obtain
payment and completion bonds on terms satisfactory to Landlord prior to
commencing Tenant's Work. Tenant agrees not to commence Tenant's Work until
Landlord has approved the final plans, the contractor and the construction
contract, all required permits have been issued and this Lease has been
amended in accordance with section 26.8. Tenant shall reimburse Landlord
for actual costs expended for review of all plans.
(iv) Tenant shall not deviate from the final set of plans and
specifications approved by Landlord without Landlord's prior written
consent, which consent shall not be unreasonably withheld. Landlord's
approval of plans and specifications shall not constitute the assumption of
any responsibility by Landlord for any of Tenant's Work or the accuracy or
sufficiency of Tenant's plans and specifications.
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(v) If Tenant fails to complete the Tenant's Work in accordance with
such plans and specifications prior to the Construction Deadline (as
defined below), Landlord, at Landlord's option, may terminate this Lease
or, at Landlord's option, may enter the Expansion Improvements, complete
Tenant's Work, and Tenant shall pay the cost thereof to Landlord upon
demand. The term "Construction Deadline" means the date eighteen (18)
months after commencement of construction, plus the number of days that
construction is delayed due to Force Majeure; provided that such date shall
be extended an additional six (6) months so long as Tenant is continuously
and diligently proceeding with construction.
(vi) Tenant shall comply with and shall require its contractors to
comply with all federal, state, and local laws, ordinances, regulations and
directions relating to the employment, conditions of employment and hours
of labor in connection with any construction, alteration, installation or
repair work done by or for Tenant in or about the Premises. If Landlord is
damaged as a result of any breach by Tenant of these covenants, Tenant
shall pay to Landlord the amount of such damage, upon demand.
(vii) Upon completion of construction of the Expansion Improvements,
Tenant shall submit:
(1) Properly notarized final releases of liens from Tenant's
general contractor and all subcontractors.
(2) Properly notarized final releases of liens from Tenant's
major suppliers, architect or anyone supplying a significant amount of
materials or services for the construction of the Expansion
Improvements.
(3) A certificate of occupancy and a final inspection report (as
applicable) from the appropriate governing body, indicating that the
Expansion Improvements has no violation of local building codes.
(viii) At all times prior to the completion of Tenant's Work, Tenant
shall cause its general contractor and subcontractors to maintain such
insurance as Landlord may reasonably require, with insurance carriers
reasonably approved by Landlord, in amounts reasonably approved by
Landlord.
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(ix) Tenant's Work shall be completed, lien-free in a good and
workmanlike manner, and shall constitute Class A office space constructed
to the same standards as the existing Building. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all liens and/or
claims placed against the Premises, arising out of, or in connection with,
Tenant's Work; and notwithstanding anything to the contrary contained in
this Lease, no liens of any nature, whether voluntary or involuntary, may
be placed or allowed by Tenant on the Premises. However, Tenant may bond
around any mechanic's liens within thirty (30) days of recording, without
an Event of Default occurring. Landlord shall have no liability of any
kind, and Tenant shall be solely responsible, for any defects or legal
violations respecting the Expansion Improvements. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all claims and
liabilities of any kind, howsoever arising, relating to the Expansion
Improvements and Tenant shall execute an indemnity, reasonably satisfactory
to Landlord in form and content, prior to commencement of Tenant's Work.
(b) In the event Landlord shall have notified Tenant that Landlord elects
not to purchase the Expansion Improvements, then Tenant may elect, by written
notice to Landlord within sixty (60) days following Tenant's receipt of
Landlord's notice, to either (A) rescind its exercise of the Expansion Option,
(B) exercise the Leasehold Improvement Option, or (C) exercise the Tenant
Subdivision Option. Tenant's failure to timely exercise the Tenant Subdivision
Option or the Leasehold Improvement Option shall be conclusively deemed to
constitute a rescission of the exercise of the Expansion Option. Time is of the
essence of this provision.
26.4 (a) Base Rent for the Expansion Improvements if the Expansion
Improvements are constructed by Landlord or if Landlord purchases the Expansion
Improvements in accordance with section 26.3(a) ("Expansion Base Rent"),
calculated as provided in Section 26.4(b), shall commence upon the date (the
"Expansion Rent Commencement Date") the Expansion Improvements are substantially
completed, subject only to "punch list" items and other items of incomplete work
that do not materially interfere with the use and occupancy of the Expansion
Improvements (as certified to Landlord and Tenant by the supervising architect,
or, as evidenced by the issuance of a temporary or permanent certificate of
occupancy), and delivered to Tenant for Tenant's occupancy. Expansion Base Rent
shall be included in "Base Rent" for purposes of this Lease, and shall be
payable concurrently with payments of Base Rent hereunder as set forth in
Article 3 of this Lease. From and after the Expansion Rent Commencement Date,
the Expansion Improvements shall be deemed to be a part of the Premises
hereunder, and in addition to Expansion Base Rent, Tenant shall pay all
Operating Expenses for the Expansion Improvements as set forth in Section 3.1(b)
and shall perform all other obligations of Tenant under this Lease as if the
Expansion Improvements were part of the original Premises.
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(b) If the Expansion Improvements are constructed by Landlord or if
Landlord purchases the Expansion Improvements in accordance with section
26.3(a), Expansion Base Rent shall be: (i) for the first twelve (12) months
after the Expansion Rent Commencement Date, an amount calculated to provide
Landlord with an annual return on Landlord's investment of Total Expansion Costs
(as defined below) equal to the Rent Yield (as defined below), and (ii) for each
successive twelve (12) month period thereafter, an amount equal to one hundred
three percent (103%) of the Expansion Base Rent in effect during the preceding
12-month period. The term "Total Expansion Costs" means all hard and soft costs
incurred by Landlord (including a reasonable development fee payable to Landlord
and financing charges, but excluding land costs) in connection with the design
and construction of the Expansion Improvements, as said term may be further
defined in the Lease Amendment described below. In the event Landlord purchases
the Expansion Improvements in accordance with Section 26.3(a), "Total Expansion
Costs" shall mean Tenant's Expansion Costs. The term "Rent Yield" means a
percentage equal to Landlord's Spread (as defined below) plus the Assumed Loan
Constant (as defined below). The term "Landlord's Spread" means (x) if, as of
the Expansion Rent Commencement Date, Tenant shall have satisfied the debt
rating conditions set forth in Section 24.7, seventy-five (75) basis points; and
(y) if, as of the Expansion Rent Commencement Date, Tenant shall not have
satisfied the debt rating conditions set forth in Section 24.7, one hundred
twenty-five (125) basis points. The term "Assumed Loan Constant" means a
percentage equal to the percentage of Total Expansion Costs which Landlord would
be required to pay annually as debt service on a secured loan in a principal
amount equal to Total Expansion Costs, with amortization of principal over a
term which ends five (5) years after the term of this Lease (as the same may be
extended pursuant to Section 26.4(c)) and interest at the then prevailing rate
(determined with reference to loan terms being proposed by major life insurance
company lenders such as Principal Mutual, Metropolitan Life and Teachers
Insurance) for fully amortizing mortgage loans of like tenor secured by property
comparable to the Premises. Effective upon the Expansion Rent Commencement Date,
the Security Amount shall be increased by an amount equal to twenty percent
(20%) of the Total Expansion Costs, provided that the Security Amount shall not
be required to exceed ten million dollars ($10,000,000). Effective upon the
Expansion Rent Commencement Date, Section 24.6 shall be amended to provide that
the first Reduction Date shall occur on the fourth (4th) April 15 to occur after
the Expansion Rent Commencement Date, and subsequent Reduction Dates shall occur
annually thereafter (but the Reduction Amounts applicable on the successive
Reduction Dates shall remain as set forth in Section 24.6).
(c) In the event the Expansion Commencement Date occurs later than the
third (3rd) anniversary of the Commencement Date, the term of this Lease shall
automatically be extended such that the Expiration Date shall be the date twelve
(12) years after the Expansion Commencement Date. If Landlord constructs or
purchases the Expansion Improvements, Base Rent for the extended term shall be
calculated in accordance with section 3.1 based upon the Base Rent (including
Expansion Base Rent).
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26.5 In the event that Landlord elects not to undertake construction of the
Expansion Improvements or elects not to purchase the Expansion Improvements
pursuant to Section 26.3(a), and Tenant exercises the Tenant Subdivision Option
and elects to undertake construction of the Expansion Improvements ("Tenant's
Work"), the provisions of Section 26.5(a) through 26.5(f) hereinbelow shall be
applicable.
(a) Tenant shall, at its sole cost and expense and upon and subject to the
terms of this Section 26.5 and the other applicable provisions of this Article
26, (A) cause the Premises to be subdivided so that the Expansion Site is a
separate legal parcel, (B) purchase the Expansion Site from Landlord, and (C)
cause to be constructed the Expansion Improvements in accordance with all
applicable laws and the procedures set forth hereinbelow. For the remainder of
the term of this Lease, the Expansion Site and the Expansion Improvements shall
not be a part of the Premises hereunder.
(b) On or before forty-five (45) days after the date of Tenant's exercise
of the Tenant Subdivision Option, Tenant, at Tenant's expense, shall (A) cause a
registered surveyor or civil engineer to prepare and deliver to Landlord a
proposed subdivision map (the "Proposed Subdivision Map"), complying in all
respects with all laws, statutes, codes and ordinances, to legally separate the
Expansion Site and the remainder of the Premises (the "Remaining Parcel") such
that each parcel complies with all applicable laws, statutes, codes, ordinances
and covenants, conditions and restrictions ("Legal Requirements"), and (B) cause
Tenant's architect to prepare and deliver to Landlord for Landlord's approval
five (5) sets of final plans and specifications for Tenant's Work including a
detailed depiction of all proposed improvements (the "Final Plans"). The
Proposed Subdivision Map shall be subject to Landlord's approval, which shall
not be unreasonably withheld. Without limiting the foregoing, Landlord may
disapprove the Proposed Subdivision Map if (1) Landlord would be required to
expend any sums to improve the Remaining Parcel to cause it to be in compliance
with any Legal Requirements, (2) the Remaining Parcel would, in Landlord's
reasonable judgment, be of less value than the value prior to the subdivision
minus the Site Price (as defined below), or (3) the expense of owning,
operating, managing or maintaining the Remaining Parcel would be increased by
the subdivision. Landlord shall review the Proposed Subdivision Map and notify
Tenant within fifteen (15) days of receipt of the matters, if any, which fail to
conform to Landlord's reasonable requirements.
(c) Landlord shall review the Final Plans and notify Tenant within fifteen
(15) days of receipt of said plans and specifications in Landlord's office, of
the matters, if any, in said plans which fail to meet with Landlord's approval
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which approval shall not be unreasonably withheld, conditioned or delayed.
Tenant shall, within ten (10) days from receipt of any such notice from
Landlord, cause the Proposed Subdivision Map and/or the Final Plans, as the case
may be, to be revised in such manner as is requisite to obtaining Landlord's
approval and shall submit a revised Proposed Subdivision Map and/or Final Plans
for Landlord's approval. The Proposed Subdivision Map as approved by Landlord is
referred to herein as the "Subdivision Map." As promptly as reasonably
practicable after Landlord's approval of the Subdivision Map and the Final
Plans, Tenant shall cause the Subdivision Map to be recorded and shall take all
other steps necessary to cause the Premises to be subdivided. Tenant agrees not
to commence Tenant's Work until Landlord has approved the Subdivision Map and
the Final Plans, the Premises has been legally subdivided in accordance with the
approved Subdivision Map, Tenant has purchased the Expansion Site in accordance
with this Section 26.5, all required permits have been issued and this Lease has
been amended in accordance with Section 26.8. Tenant shall reimburse Landlord
for actual costs expended for review of all maps and plans. Tenant shall not
materially deviate from the Final Plans approved by Landlord without Landlord's
prior written consent, which shall not be unreasonably withheld. Landlord's
approval of plans and specifications shall not constitute the assumption of any
responsibility by Landlord for any of Tenant's Work or the accuracy or
sufficiency of Tenant's plans and specifications.
(d) Immediately upon recordation of the Subdivision Map and completion of
all procedures necessary to legally subdivide the Premises, Tenant shall
purchase the Expansion Site from Landlord for a price (the "Site Price"), net to
Landlord, equal to the product of (i) the number of gross square feet of land
area in the Expansion Site, multiplied by (ii) the Square Foot Price (as defined
below) in effect as of the date of the sale. The term "Square Foot Price" means
(A) during the twelve (12) month period commencing on the Commencement Date,
seven and one-half dollars ($7.50) (the "Initial Price"), and (B) during each
successive twelve (12) month period, the Initial Price increased by five percent
(5%) per year on a compounded basis. Tenant shall bear all costs and expenses,
and shall reimburse Landlord for all costs and expenses incurred by Landlord, in
connection with such purchase, including the subdivision of the Premises and the
Lease Amendment. After the recordation of the Subdivision Map and upon
completion of the sale of the Expansion Site to Tenant, Tenant shall be subject
to no further restriction on encumbrance of the Expansion Site with a mortgage
or deed of trust.
(e) If Tenant fails to commence construction of Tenant's work within nine
(9) months after delivery of the Expansion Notice or fails to complete the
Tenant's Work in accordance with the Final Plans prior to the Construction
Deadline, Landlord, at Landlord's option, may rescind the sale of the Expansion
Site in which case the sale of the Expansion Site shall be reversed (with Tenant
conveying the Expansion Site to Landlord at a net price equal to the Site
Price), and Tenant shall be deemed to have elected not to exercise the Expansion
Option.
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(f) Landlord and Tenant acknowledge that the subdivision of the Premises
and construction of the Expansion Improvements will require modification of
and/or additions to the parking facilities on the Premises. Landlord and Tenant
shall include in the Final Plans provisions for parking facilities serving both
the existing Building and the Expansion Improvements. Such parking facilities
shall be designed and constructed at Tenant's sole cost and expense. If adequate
parking facilities are not constructed on each respective parcel sufficient to
serve that parcel and it is necessary or appropriate to construct parking
facilities on one of the parcels to provide parking for both parcels, then
Landlord and Tenant shall enter into an appropriate perpetual access and parking
easement simultaneously with Tenant's purchase of the Expansion Site.
26.6 In the event that Landlord elects not to undertake construction of the
Expansion Improvements or elects not to purchase the Expansion Improvements
pursuant to Section 26.3(a), and Tenant exercises the Leasehold Improvement
Option and elects to undertake construction of the Expansion Improvements
("Tenant's Work"), the provisions of Section 26.6(a) through 26.6(c) hereinbelow
shall be applicable.
(a) Tenant shall cause to be constructed the Expansion Improvements in
accordance with all applicable laws and the procedures set forth hereinbelow.
Landlord shall have no obligation to purchase the Expansion Improvements, and
Tenant shall, for the remainder of the term, pay no Expansion Base Rent for the
Expansion Improvements, but the Expansion Improvements shall be deemed to be a
part of the Premises hereunder, and Tenant shall pay all Operating Expenses for
the Expansion Improvements as set forth in Section 3.1(b) and shall perform all
other obligations of Tenant under this Lease as if the Expansion Improvements
were part of the original Premises. At the conclusion of this Lease, the
Expansion Improvements shall be delivered to Landlord in good condition
(reasonable wear and tear excepted). Title to the Expansion Improvements shall,
at all times, remain in the name of Landlord and shall not pass to Tenant.
Landlord shall have no liability of any kind, and Tenant shall be solely
responsible, for any defects or legal violations respecting the Expansion
Improvements in the event Tenant performs Tenant's Work. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all claims and
liabilities of any kind, howsoever arising, relating to the Expansion
Improvements and Tenant shall execute an indemnity, reasonably satisfactory to
Landlord in form and content, prior to commencement of Tenant's Work.
(b) The design and construction of the Expansion Improvements shall be
carried out in accordance with the terms of Sections 26.3(a)(ii) through
26.3(a)(ix), all of which shall be applicable to Tenant's Work pursuant to this
Section 26.6.
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(c) Notwithstanding that Tenant may pay for the construction of the
Expansion Improvements, if an Event of Default occurs, Landlord shall retain all
rights in law and equity against Tenant, including, without limitation, the
right to dispossess Tenant from the Expansion Improvements without compensation
for the cost thereof.
26.7 Anything in this Article 26 to the contrary notwithstanding, Tenant's
notice of exercise of the Expansion Option or the Tenant Subdivision Option or
the Leasehold Improvement Option shall be effective, only if at the time of such
notice of exercise the following conditions (the "Expansion Conditions") shall
be satisfied:
(i) Landlord shall not have notified Tenant that Tenant is in default
in the performance of any of the terms, covenants or conditions contained
in this Lease which default has not been cured within any applicable grace
period or cure period.
(ii) This Lease shall not have been terminated and shall be in full
force and effect.
(iii) There shall have been no assignment of Tenant's interest in this
Lease except to a Corporate Successor as permitted by Section 12.1 hereof.
Tenant acknowledges that the Expansion Option and all other rights of
Tenant under this Article 26 are personal to Tenant, and not a right of any
successor to the rights of Tenant under this Lease.
(iv) There shall have been no material adverse change in the financial
condition of Tenant or the Guarantor since the execution of this Lease, and
Landlord shall determine, at its sole reasonable discretion, that Tenant
and Guarantor are each creditworthy in light of the obligations undertaken
pursuant to this Lease and the other existing obligations of Tenant and
Guarantor.
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26.8 Notwithstanding anything to the contrary herein, promptly after Tenant
accepts the proposal in Landlord's Specification Notice, or Landlord elects to
purchase the Expansion Improvements pursuant to Section 26.3(a), or Tenant
exercises the Tenant Subdivision Option or the Leasehold Improvement Option, as
the case may be, Landlord and Tenant shall enter into an amendment to this Lease
(the "Lease Amendment") setting forth the terms of the expanded lease or the
terms relating to Tenant's Subdivision Option or Leasehold Improvement Option,
in form and substance mutually agreeable to Landlord and Tenant which shall be
consistent with the applicable terms of this Article 26.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date first hereinabove written.
Landlord: Tenant:
TRINET CORPORATE REALTY TRUST, INC., ICG HOLDINGS, INC.,
a Maryland corporation a Colorado corporation
By ___________________________ By ______________________________
Its _______________________ Its __________________________
<PAGE>
1
EXHIBIT A
TENANT ESTOPPEL CERTIFICATE
TO: TriNet Corporate Realty Trust, Inc. Four Embarcadero Center, Suite 3150 San
Francisco, CA 94111 Attn: Mr. Mark S. Whiting
Re: Lease, dated as of ___________, 199_, between ICG HOLDINGS, INC., a
Colorado corporation, as tenant (the original named tenant under the
Lease, together with such tenant's successors and assigns, being
hereinafter referred to as the "Tenant"), and TRINET ESSENTIAL
FACILITIES _________, INC., a Maryland corporation, as landlord
("TriNet"), covering certain premises known by the street address 161
Inverness Drive West, in the City of Englewood, County of Arapahoe,
State of Colorado (the "Leased Premises"), as amended as noted on
attached Schedule A (collectively, the "Lease")
Gentlemen:
The undersigned Tenant hereby represents, warrants and certifies to TriNet
that:
1. The Lease has not been modified, changed, altered or amended in any
respect, either orally or in writing, except as may be indicated on Schedule A
annexed hereto, and constitutes the entire agreement between Tenant and TriNet
affecting Tenant's leasing of the Leased Premises. A true and correct copy of
the Lease is attached as Schedule B. The Lease is in full force and effect and
is not subject to any contingencies or conditions not set forth in the Lease.
2. The term of the Lease commenced on __________________, 199_, and will
expire on __________________, 201_; Tenant has two (2) successive options to
renew the Lease term, each for an additional period of ten (10) years.
3. Tenant has paid all fixed and additional rent and other sums which are
due and payable under the Lease through the date hereof, and Tenant has not made
and will not make any prepayments of fixed rent for more than one month in
advance. There are no presently unexpired rental concessions or abatements due
under the Lease except as set forth on Schedule A annexed hereto. Tenant has no
credits, offsets, abatements, defenses, counterclaims or deductions against any
rental or other payments due under the Lease or with respect to its performance
of the other terms and conditions of the Lease, and has asserted no claims
against TriNet.
<PAGE>
2
4. Tenant has paid to TriNet a security deposit in the amount of
$___________. Tenant has not made any other the payments to TriNet as a security
deposit, advance or prepaid rent.
5. TriNet has completed, and, if required under the Lease, paid for, any
and all tenant work required under the Lease and Tenant has accepted the Leased
Premises. Tenant is not entitled to any further payment or credit for tenant
work.
6. To the best knowledge of Tenant, TriNet is not in default in the
performance of any of the terms of the Lease, nor is there now any fact or
condition which, with notice or lapse of time or both, will become such a
default. Tenant has not delivered to TriNet any notice of default with respect
to the TriNet's obligations under the Lease.
7. Tenant is in actual possession of the entire Leased Premises and, to the
best knowledge of Tenant, is not in any respect in default under any of the
terms and conditions of the Lease, nor is there now any fact or condition which,
with notice or lapse of time or both, will become such a default. Tenant has not
received from TriNet any notice of default with respect to Tenant's obligations
under the Lease.
8. Tenant has not assigned, transferred, mortgaged or otherwise encumbered
its interest under the Lease, nor subleased any of the Leased Premises, nor
permitted any person or entity to use the Leased Premises, except as otherwise
indicated on Schedule A annexed hereto.
9. Except as expressly provided in the Lease, Tenant
(i) does not have any right to renew or extend the term of the Lease,
(ii) does not have any right to cancel or surrender the Lease prior to
the expiration of the term of the Lease,
(iii) does not have any option or rights of first refusal or first
offer to purchase or lease all or any part of the Leased Premises or the
real property of which the Leased Premises are a part,
(iv) does not have any right, title or interest with respect to the
Leased Premises other than as lessee under the Lease, and
(v) does not have any right to relocate into other property owned by
TriNet or any of TriNet's affiliates.
<PAGE>
3
10. There has not been filed by or against Tenant a petition in bankruptcy,
voluntary or otherwise, any assignment for the benefit of creditors, any
petition seeking reorganization or arrangement under the bankruptcy laws of the
United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Tenant.
11. If Tenant is required to provide insurance coverage under the Lease,
Tenant has not given or received written notice that Tenant insurance coverage
will be canceled or will not be renewed.
12. To the best knowledge of Tenant, all systems, elements and components
of the Leased Premises are in good working order and repair and sound operating
condition. To the best knowledge of Tenant, Tenant's use and occupancy of the
Leased Premises complies with all applicable building, zoning, land use,
environmental, anti-pollution, health, fire, safety, access accommodations for
the physically handicapped, subdivision, energy and resource conservation and
similar laws, statutes, rules, regulations and ordinances, and all covenants,
conditions and restrictions applicable to the Leased Premises. Tenant has not
received any notice, citation or other claim alleging any violation of any such
law, statute, rule, regulation, ordinance, covenant, condition or restriction.
13. To the best knowledge of Tenant, any and all brokerage and leasing
commissions relating to and/or resulting from Tenant's execution and delivery of
the Lease and occupancy of the Leased Premises have been paid in full.
14. The individual executing this Tenant Estoppel Certificate on behalf of
Tenant represents and warrants that __he has the power and the authority to
execute this Tenant Estoppel Certificate on behalf of Tenant.
Dated this ____ day of _______________, 199_.
Tenant
ICG HOLDINGS, INC., a Colorado corporation
By:
Its:
<PAGE>
4
SCHEDULE A
TO ESTOPPEL CERTIFICATE
<PAGE>
5
SCHEDULE B
TO ESTOPPEL CERTIFICATE
<PAGE>
1
EXHIBIT B
CONTINUING LEASE GUARANTY
THIS GUARANTY, made as of ___________ __, ____, by _______________________
("Guarantor") to __________________ ("Landlord").
W I T N E S S E T H:
1. For valuable consideration, receipt of which is acknowledged, and to
satisfy certain requirements under the Lease dated _____________ __, 19__ (the
"Lease") between Landlord and __________________________ ("Tenant"), Guarantor
hereby absolutely, unconditionally and irrevocably guarantees to Landlord, and
agrees fully to pay, perform and discharge, as and when payment, performance and
discharge are due, all of the covenants, obligations and liabilities of Tenant
under the Lease and all amendments, modifications, renewals, extensions,
supplements, substitutions and replacements of the Lease arising during the
period beginning on the date hereof and ending on the date this Guaranty is
terminated (the "Guaranteed Obligations"). The obligations of Guarantor under
this Guaranty shall be absolute, unconditional and irrevocable and shall
continue and remain in full force and effect until all of the Guaranteed
Obligations have been fully paid, performed and discharged.
2. The obligations of Guarantor under this Guaranty shall not be affected,
modified or impaired by the occurrence of any of the following events, whether
or not with notice to, or the consent of, Guarantor: (a) the waiver, surrender,
compromise, settlement, release or termination of any or all of the Guaranteed
Obligations; (b) the failure to give notice to Guarantor of the occurrence of an
event of default under the Guaranteed Obligations; (c) the extension of the time
for the payment, performance or discharge of any or all of the Guaranteed
Obligations; (d) the amendment or modification (whether material or otherwise)
of the Guaranteed Obligations in any respect; (e) any failure, omission, delay
or lack on the part of Landlord to enforce, assert or exercise any right, power
or remedy conferred on Landlord under the Guaranteed Obligations; (f) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or adjustment of debts,
or other similar proceedings affecting Tenant or Guarantor or any of the assets
of either of them; (g) the release or discharge by operation of law of Tenant
from the payment, performance or discharge of any or all of the Guaranteed
Obligations; (h) the release or discharge by operation of law of Guarantor from
any or all of the obligations of Guarantor under this Guaranty; or (i) the
invalidity or unenforceability of any or all of the Guaranteed Obligations.
Guarantor acknowledges that Landlord would not enter into the Lease without this
Guaranty and that Landlord is relying on this Guaranty.
<PAGE>
2
3. The obligations of Guarantor under this Guaranty are independent of the
Guaranteed Obligations. Guarantor agrees that Landlord shall have the right to
proceed against Guarantor directly and independently of Tenant. A separate
action may be brought and prosecuted against Guarantor whether or not an action
is brought against Tenant or Tenant is joined in any such action. Guarantor
authorizes Landlord and Tenant, without notice to, demand of, or consent from
Guarantor and without releasing or affecting Guarantor's liability under this
Guaranty, from time to time to amend, modify, renew, extend, supplement or
replace the Guaranteed Obligations or otherwise change the terms of the
Guaranteed Obligations, to take and hold security for the Guaranteed
Obligations, and to enforce, waive, surrender, impair, compromise or release any
such security or any or all of the Guaranteed Obligations or any person or
entity liable for any or all of the Guaranteed Obligations. Guarantor shall be
and remain bound under this Guaranty notwithstanding any such act or omission by
Tenant or Landlord. Guarantor waives the right, if any, to require Landlord to
proceed against Tenant, to proceed against or exhaust any security held by
Landlord, or to pursue any other remedy in Landlord's power. Landlord shall have
the right to exercise or enforce any right or remedy Landlord may have against
Tenant or any security held by Landlord. Guarantor waives the right, if any, to
the benefit of, or to direct the application of, any security held by Landlord.
Guarantor waives (a) any defense arising out of any alteration of the original
Guaranteed Obligations, (b) any defense arising out of the absence, impairment
or loss of any right of reimbursement or subrogation or other right or remedy of
Guarantor against Tenant or any security held by Landlord, and (c) any defense
arising by reason of any disability or other defense of Tenant or by reason of
the cessation or reduction from any cause whatsoever of the liability of Tenant
other than full payment, performance and discharge of the Guaranteed
Obligations. The cessation or reduction of the liability of Tenant for any
reason whatsoever other than full payment, performance and discharge of the
Guaranteed Obligations shall not release or affect in any way the liability of
Guarantor under this Guaranty.
4. If Tenant becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the federal Bankruptcy Code, or if such a
petition is filed against Tenant, or if Tenant makes a general assignment for
the benefit of creditors, and in any such proceeding any or all of the
Guaranteed Obligations are terminated or rejected or any or all of the
Guaranteed Obligations are modified or abrogated, then Guarantor agrees that
Guarantor's liability under this Guaranty shall not thereby be affected or
modified and such liability shall continue in full force and effect as if no
such action or proceeding had occurred. This Guaranty shall continue to be
effective or be reinstated, as the case may be, if any payment of the Guaranteed
Obligations must be returned by Landlord upon the insolvency, bankruptcy or
reorganization of Tenant or Guarantor, or otherwise, as though such payment had
not been made.
<PAGE>
3
5. Guarantor assumes the responsibility for being and keeping Guarantor
informed of the financial condition of Tenant and of all other circumstances
bearing upon the risk of failure to pay, perform or discharge any of the
Guaranteed Obligations which diligent inquiry would reveal, and Guarantor agrees
that Landlord has no duty to advise Guarantor of information known to Landlord
regarding such condition or any such circumstance. Guarantor acknowledges that
repeated and successive demands may be made and payments or performance made
hereunder in response to such demands as and when, from time to time, Tenant
defaults in the payment, performance or discharge of the Guaranteed Obligations.
Notwithstanding any such payments and performance hereunder, this Guaranty shall
remain in full force and effect and shall apply to any and all subsequent
defaults by Tenant. It is not necessary for Landlord to inquire into the
capacity, authority or powers of Tenant or the partners, directors, officers,
employees, agents or representatives acting or purporting to act on behalf of
Tenant, and all of the Guaranteed Obligations made or created in reliance upon
the purported exercise of such powers shall be guaranteed under this Guaranty.
6. If Tenant and Guarantor fail to pay, perform and discharge, as and when
payment, performance and discharge are due, all of the Guaranteed Obligations,
Landlord shall have the right, but no obligation, and without releasing Tenant
or Guarantor from any of the Guaranteed Obligations, to pay, perform and
discharge any or all of the Guaranteed Obligations on behalf of Tenant and
Guarantor. Guarantor shall, on demand, pay to Landlord all sums expended by
Landlord in the payment, performance and discharge of the Guaranteed
Obligations, together with interest on all such sums from the date of
expenditure to the date all such sums are paid by Tenant or Guarantor to
Landlord at the Interest Rate (as defined in the Lease). Guarantor waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor and notices of acceptance of this
Guaranty. Guarantor agrees to pay all costs and expenses, including reasonable
attorneys' fees and disbursements, which are incurred by Landlord in the
enforcement of this Guaranty. If any provision of this Guaranty is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Guaranty shall not be affected. If there is more than one Guarantor, all
<PAGE>
4
obligations of Guarantor under this Guaranty shall be the joint and several
obligations of each Guarantor. This Guaranty may not be amended or modified in
any respect except by a written instrument signed by Guarantor and Landlord. As
used in this Guaranty, the singular shall include the plural. This Guaranty
shall bind and inure to the benefit of Guarantor and Landlord and their
respective transferees, personal representatives, heirs, successors and assigns.
This Guaranty shall be governed by and construed in accordance with the laws of
the State where the premises leased by Tenant from Landlord are located.
Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of the
courts of the States of Colorado and California and any federal court of the
United States of America located in the City of San Francisco, California, or
the city of Denver, Colorado. Guarantor and Landlord each waive any right to
trial by jury in connection herewith. Without limiting anything else contained
herein, the fullest extent it may effectively do so under applicable law,
Guarantor irrevocably waives and agrees not to assert, by way of motion, as a
defense or otherwise, any claim that it is not subject to the jurisdiction of
any such court, any objection that it may now or hereafter have to the laying of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
<PAGE>
5
7. To induce Landlord to enter into the Lease, Guarantor represents and
warrants to Landlord as follows: Guarantor is a corporation existing under the
laws of the ________ of _________. Guarantor has full power and authority to
enter into this Guaranty and to perform its obligations under this Guaranty. The
execution, delivery and performance of this Guaranty by Guarantor have been duly
and validly authorized by all necessary action on the part of Guarantor and all
required consents and approvals have been duly obtained. This Guaranty is a
legal, valid and binding obligation of Guarantor, enforceable against Guarantor
in accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting the rights of creditors generally. Neither the execution and delivery
of this Guaranty nor the consummation of the transactions contemplated hereby
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of, or give rise to a default
under (i) any provision of Guarantor's articles of incorporation or bylaws, (ii)
any material instrument or contract to which Guarantor is a party or by which
Guarantor is bound, or (iii) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to Guarantor, or any
property of Guarantor.
IN WITNESS WHEREOF, Guarantor has executed this Continuing Lease Guaranty
as of the date first hereinabove written.
Guarantor:
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
<PAGE>
1
EXHIBIT J
BILL OF SALE
For valuable consideration, receipt of which is acknowledged, ICG HOLDINGS,
INC., a Colorado corporation ("Seller"), hereby sells, assigns, transfers and
delivers to TRINET CORPORATE REALTY TRUST, INC., a Maryland corporation
("Buyer"), all of the personal property described in Exhibit A attached hereto
and made a part hereof. Seller warrants to Buyer that Seller has good title to
all such personal property, free and clear of all liens, encumbrances, security
interests and adverse claims of any kind or nature whatsoever, and Seller shall
forever warrant and defend the title to all such personal property unto Buyer.
Dated: ____________, 1997.
SELLER: ICG HOLDINGS, INC., a Colorado corporation
By
Its
By
Its
<PAGE>
2
EXHIBIT A
BILL OF SALE
<PAGE>
1
EXHIBIT K
ASSIGNMENT OF CONTRACTS
THIS ASSIGNMENT, made as of _______________, 1997, by and between ICG
HOLDINGS, INC., a Colorado corporation ("Seller"), and TRINET CORPORATE REALTY
TRUST, INC., a Maryland corporation ("Buyer"),
W I T N E S S E T H:
For valuable consideration, receipt of which is acknowledged, Seller and
Buyer agree as follows:
1. Assignment and Assumption.
(a) Seller hereby assigns and transfers to Buyer all right, title and
interest of Seller in, to and under the contracts (the "Contracts") described in
Exhibit A attached hereto and made a part hereof.
(b) Buyer hereby accepts the foregoing assignment, and assumes and agrees
to perform all of the covenants and agreements in the Contracts to be performed
by Seller thereunder that arise or accrue from and after the date of this
Assignment as long as Buyer owns the real property subject to the Contracts.
2. Indemnification.
(a) Seller shall indemnify and defend Buyer against and hold Buyer harmless
from all claims, demands, liabilities, losses, damages, costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
that are caused by any failure by Seller to perform the obligations of Seller
under the Contracts before the date of this Assignment.
(b) Buyer shall indemnify and defend Seller against and hold Seller
harmless form all claims, demands, liabilities, losses, damages, costs and
expenses, including, without limitation, reasonable attorneys' fees and
disbursements, that are caused by any failure by Buyer to perform the
obligations of Seller arising or accruing under the Contracts on or after the
date of this Assignment and during Buyer's ownership of the real property
subject to the Contracts.
3. Further Assurances. Seller and Buyer agree to execute such other
documents and perform such other acts as may be reasonably necessary or proper
and usual to effect this Assignment.
4. Governing Law. This Assignment shall be governed by and construed in
accordance with the laws of the State of Colorado.
5. Successors and Assigns. This Assignment shall be binding upon and shall
inure to the benefit of Seller and Buyer and their respective personal
representatives, heirs, successors and assigns.
<PAGE>
2
6. Counterparts. This Assignment may be signed in multiple counterparts
which, when signed by all parties, shall constitute a binding agreement.
IN WITNESS WHEREOF, Seller and Buyer have executed this Assignment as of
the date first hereinabove written.
SELLER: ICG HOLDINGS, INC., a Colorado
corporation
By
Its
By
Its
BUYER: TRINET CORPORATE REALTY TRUST, INC.,
a Maryland corporation
By
Its
<PAGE>
3
EXHIBIT K
EXHIBIT A
ASSIGNMENT OF CONTRACTS
<PAGE>
1
EXHIBIT L
ASSIGNMENT OF PERMITS
For valuable consideration, receipt of which is acknowledged, ICG HOLDINGS,
INC., a Colorado corporation ("Seller"), hereby assigns and transfers to TRINET
CORPORATE REALTY TRUST, INC., a Maryland corporation all of Seller's right,
title and interest in, to and under the Permits described in Exhibit A attached
hereto and made a part hereof.
Dated: ____________, 1997.
SELLER: ICG HOLDINGS, INC., a Colorado corporation
By
Its
By
Its
<PAGE>
2
EXHIBIT L
EXHIBIT A
ASSIGNMENT OF PERMITS
<PAGE>
1
EXHIBIT M
TRINET CORPORATE REALTY TRUST, INC.
SURVEY REQUIREMENTS
The following items are to be included in the ALTA/ACSM LAND TITLE SURVEY;
1. Monuments placed (or a reference monument or witness to the corner) at all
major corners of the boundary of the property, unless already marked or
referenced by an existing monument or witness to the corner, except in the
states of California, Oregon and Washington, wherein the local Government
requires a record plat of new monuments set which mandate substantially
higher fee to cover review costs.
2. Flood zone designation (with property annotation based on Federal Flood
Insurance Rate Maps or the state or local equivalent, by scaled map
location and graphic plotting only). If the property resides in two or more
zones then the survey shall clearly display the limits of each zone by
graphically transposing each zone line from the FIRM to the survey.
3. Land area.
4. Identify, and show if possible, setback, height and bulk restrictions of
record or disclosed by applicable zoning or building codes (in addition to
those recorded in subdivision maps). If none, so state.
5. (a) Exterior dimensions of all buildings at ground level
(b) Square footage of exterior footprint of all buildings, or gross floor
area of all buildings, at ground level
(c) Height of all buildings above grade at a defined location.
6. Parking areas and, if striped, the striping and the type (e.g. handicapped,
motorcycle, regular, etc.) and number of parking spaces. Designate all
"handicapped" spaces as such on the survey. Show all striped parking spaces
within the fee owned or leased land and within the limits of all REAs with
typical sizes. List in a tabular format the number of regular spaces and
handicap spaces, both within the limits of the fee owned or leased land
plus within the limits of any and all REAs.
7. Indication of access to a public way, such as curb cuts, driveways marked.
8. Location of utilities serving or existing on the property, as evidenced by
on-site observation or as determined by records provided by client, utility
companies and other appropriate sources (with reference as to the source of
information). For example: (a) railroad tracks and sidings; (b) manholes,
catch basins, valve vaults or other surface indications of subterranean
uses; (c) wires and cables (including their function) crossing the surveyed
premises, all poles on or within ten feet of the surveyed premises and the
dimensions of all crosswires or overhangs affecting the surveyed premises;
and (d) utility company installations on the surveyed premises.
<PAGE>
2
In addition to the above the surveyor shall report all visible roof drains
and surface lines, including their outfalls. For hidden underground
utilities the surveyor is to show the approximate location of underground
connecting lines as may be discernible from visible appurtenances. For
hidden underground gravity flow as may be discernible from visible
appurtenances.
9. Significant observations not otherwise disclosed including but not limited
to, visible evidence of unusual subsurface matters (such as underground
storage tanks as may be apparent by surface appurtenances) and general
knowledge about the neighborhood (such as condemnation of the area by US
EPA) or restricted building heights by the FFA. If the surveyor questions
what is to be reported or encounters a special reporting problem, he is to
consult with his client.
10. Areas denoted or restricted in Reciprocal Easement Agreements ("REA"). The
surveyor shall show the limits of any offsite appurtenant easements on his
survey, but no improvements or utilities within said easements need to be
field measured and reported on the survey. However, the surveyor shall show
the outlines of any and all buildings within the REA by transposing
building location information from available site plans, aerial photographs
or other plans and stating the source of such information on his survey. If
no other information is available showing the location of buildings within
the REA, then the surveyor shall advise the client prior to the completion
of his survey. If the client requires additional field work to locate and
report the location of buildings, then this shall constitute an additional
work order beyond the scope of the survey. In the event the property is
disproportionately smaller than the REA or appurtenant easements, then the
surveyor shall provide on his survey smaller (larger scale) drawing to
depict the area affected in relationship to the fee or leased land.
11. Add the limits of any REAs or offsite appurtenant and beneficial easements
to the land subject to your survey and report the location of all
buildings, parking spaces and other improvements on those lands.
12. Add a note after your legal description stating it describes the same
property as insured in the title commitment. If there are exceptions to
this statement, then qualify such within the note.
<PAGE>
EXHIBIT N
SELLER'S CLOSING CERTIFICATE
For valuable consideration, receipt of which is acknowledged, ICG HOLDINGS,
INC., a Colorado corporation ("Seller"), hereby certifies to TRINET CORPORATE
REALTY TRUST, INC., a Maryland corporation ("Buyer"), that all representations
and warranties made by Seller in section 6.1 of the Purchase Agreement (the
"Purchase Agreement") dated __________, 1996, between Seller and Buyer are true
and correct in all material respects on and as of the date of this Certificate.
This Certificate is executed by Seller and delivered to Buyer pursuant to the
Purchase Agreement.
Dated: ____________, 1997.
SELLER: ICG HOLDINGS, INC., a Colorado corporation
By
Its
By
Its
<PAGE>
EXHIBIT O
BUYER'S CLOSING CERTIFICATE
For valuable consideration, receipt of which is acknowledged, TRINET
CORPORATE REALTY TRUST, INC., a Maryland corporation ("Buyer"), hereby certifies
to ICG HOLDINGS, INC., a Colorado corporation ("Seller"), that all
representations and warranties made by Buyer in section 6.2 of the Purchase
Agreement (the "Purchase Agreement") dated ___________, 1996, between Seller and
Buyer are true and correct in all material respects on and as of the date of
this Certificate. This Certificate is executed by Buyer and delivered to Seller
pursuant to the Purchase Agreement.
Dated: ____________, 1997.
TRINET CORPORATE REALTY TRUST, INC.,
a Maryland corporation
By
Its
<PAGE>
EXHIBIT P
ARCHITECT'S CERTIFICATE OF SUBSTANTIAL COMPLETION
____________________________________________ ("Architect") hereby certifies
to TRINET CORPORATE REALTY TRUST, INC. a Maryland corporation ("Buyer"), as
follows:
(1) Architect has served as the architect for ICG Holdings, Inc. ("Seller")
in the design, and in monitoring the construction, of the improvements (the
"Project"), located at 161 Inverness Drive West, Englewood, Colorado, consisting
of a _________ square foot office building [describe other improvements].
(2) The Project has been completed, subject only to the punch-list items
described in Exhibit 1 attached hereto (the "Punch-List Items"), in accordance
with the Standard Form of Agreement Between Owner and Contractor (the
"Construction Contract") dated as of September 20, 1996 between Seller and
Weitz-Cohen Construction Co. (the "Contractor"), the [Architect's Agreement]
between Seller and Architect dated as of _______, 199_, the [Plans and
Specifications] and the recommendations of any soils or engineering report
approved by Seller, and in compliance with all applicable laws, ordinances,
rules, regulations, building restrictions, zoning codes, subdivision codes,
land-use codes, recorded covenants and restrictions, and requirements of all
regulatory authorities having jurisdiction over the Project.
(3) The Project has been approved for occupancy by all governmental
authorities with jurisdiction over the Project.
(4) All of the Punch-List Items can be completed or corrected within thirty
(30) days of the date of this Architect's Certificate of Substantial Completion
at an aggregate cost as shown on Exhibit 1, which is less of than one million
dollars ($1,000,000).
Architect acknowledges that Buyer will rely upon this Certificate in
acquiring the Project from Seller.
Dated: ________________, 199_
ARCHITECT: _____________________________
By _________________________
Its ____________________
<PAGE>
EXHIBIT Q
SELLER'S CERTIFICATE OF SUBSTANTIAL COMPLETION
With reference to the Purchase and Sale Agreement dated as of
_____________, 1997 (the "Purchase Agreement") between ICG HOLDINGS, INC., a
Colorado corporation ("Seller"), and TRINET CORPORATE REALTY TRUST, INC., a
Maryland corporation ("Buyer"), Seller hereby certifies to Buyer as follows:
(1) The Project has been completed to Seller's satisfaction, subject to the
Punch-list Items described in Exhibit 1 attached hereto, in accordance with the
Construction Contract, the Architect's Agreement, the Plans and Specifications
and the recommendations of any soils or engineering report approved by Seller,
and in compliance with all applicable laws, ordinances, rules, regulations,
building restrictions, zoning codes, subdivision codes, land-use codes, recorded
covenants and restrictions, and requirements of all regulatory authorities
having jurisdiction over the Project or the Property.
(2) The Project has been approved for occupancy by all governmental
authorities with jurisdiction over the Real Property and a true and complete
copy of the [Certificate of Occupancy] evidencing such approval is attached
hereto as Exhibit 2.
(3) All mechanics' liens, stop notices, equitable lien claims or other lien
claim rights affecting the Property have been waived or extinguished.
(4) The Final Survey has been provided to Buyer and shows no material
encroachments, bases for third-party claims or violations of law or private
covenants not shown on the survey.
(5) Seller has installed and paid for equipment and software for the
purpose of operating the Seller's system control center in the Real Property,
with a total cost in excess of ______________ dollars ($__________).
(6) The actual Total Project Cost paid by Seller exceeded forty-three
million five hundred thousand dollars ($43,500,000).
<PAGE>
Capitalized terms not otherwise defined herein have the meanings ascribed
thereto in the Purchase Agreement.
Seller acknowledges that Buyer will rely on this Certificate in acquiring
the Property pursuant to the Purchase Agreement.
Dated: ________________, 199_
SELLER: ICG HOLDINGS, INC., a
Colorado corporation
By _________________________
Its ____________________
By _________________________
Its ____________________
<PAGE>
EXHIBIT R
CERTIFICATE OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a transferee of a
U.S. real property interest must withhold tax if the transferor is a foreign
person. To inform the transferee that withholding of tax is not required upon
the disposition of a U.S. real property interest by ICG HOLDINGS, INC., a
Colorado corporation ("Seller"), the undersigned hereby certifies the following
on behalf of Seller:
1. Seller is not a foreign corporation, foreign partnership, foreign trust
or foreign estate (as those terms are defined in the Internal Revenue Code and
Income Tax Regulations);
2. Seller's U.S. employer identification number is ___________; and
3. Seller's office address is ___________________________________.
Seller understands that this certification may be disclosed to the Internal
Revenue Service by the transferee and that any false statement contained herein
could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this certificate
and to the best of my knowledge and belief it is true, correct and complete, and
I further declare that I have authority to sign this document on behalf of
Seller.
Dated: ____________, 1997.
SELLER: ICG HOLDINGS, INC., a Colorado corporation
By
Its
By
Its
<PAGE>
1
FIRST AMENDMENT TO PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (the "Amendment"), is made as of
January 15, 1998, by and between ICG HOLDINGS, INC., a Colorado corporation
("Seller"), and TRINET ESSENTIAL FACILITIES X, INC., a Maryland corporation
("Buyer"), with reference to the following facts:
A. Seller and Buyer entered into that certain Purchase Agreement, dated as
of December 9, 1997 (the "Agreement"), with respect to the purchase and sale of
the Property. Each capitalized term used in this Amendment, but not defined
herein, shall have the meaning ascribed to it in the Agreement.
B. Buyer and Seller have agreed that Buyer shall waive the condition
precedent to the Closing that the Project has been Substantially Completed by
the Closing Date, as set forth in Section 8.2(d) of the Agreement, as long as
one hundred thirty percent (130%) of the Unpaid Project Costs shall not be
disbursed to Seller at Closing, but is held in escrow to pay for the Unpaid
Project Costs pursuant to the terms and provisions contained herein.
C. Because the actual amount of Buyer's out-of-pocket costs in connection
with the Purchase Agreement and the transactions contemplated thereby, the Lease
and the Project, for which Seller is required to reimburse Buyer up to two
hundred fifty thousand dollars ($250,000) pursuant to Section 9.3(b) of the
Purchase Agreement, will not be determined by Closing, Buyer and Seller have
agreed that two hundred eighteen thousand seven hundred ninety-seven and
twenty-five hundredths dollars ($218,797.25) of the Purchase Price shall not be
disbursed to Seller at Closing, but shall be held in escrow to satisfy Seller's
obligation.
D. Seller and Buyer desire to enter into this Amendment to modify the terms
of the Agreement, all as set forth hereinbelow.
NOW, THEREFORE, the parties agree as follows:
1. Holdback Escrow. The Agreement is hereby amended by adding new Sections
2.3 through 2.5 thereto, which read in their entirety as follows:
"2.3 Funds for Unpaid Project Costs Held in Escrow.
"(a) Escrow Account-A. Buyer and Seller acknowledge that there will be
Unpaid Project Costs after the Closing Date. In order to assure Buyer that
such Unpaid Project Costs will be paid promptly as they become due, Seller
and Buyer agree that, upon and subject to the terms and conditions of this
section 2.3 and an escrow agreement (the "Escrow Agreement") in the form
attached hereto as Exhibit S, at the Closing, one hundred thirty percent
(130%) of the Unpaid Project Costs shall not be then disbursed to Seller,
and shall be held in escrow by the Escrow Holder in an interest-bearing
escrow account ("Escrow Account-A"), pursuant to the Escrow Agreement. Such
escrowed funds are referred to herein as "Escrow Amount-A". All interest
earned on Escrow Amount-A shall be paid to Seller. Escrow Amount-A shall be
held and disbursed in accordance with the terms of this section 2.3 and the
Escrow Agreement.
<PAGE>
2
"(b) Completion of Unfinished Work. Seller shall promptly complete all
Unfinished Work; in any event, all Unfinished Work shall be completed by
Seller no later than by June 30, 1998. If Seller has not completed the
Unfinished Work by June 30, 1998, Buyer may complete the Unfinished Work
and receive disbursements from Escrow Account-A upon Buyer's instruction to
the Escrow Agent to pay for the costs incurred in completing such
Unfinished Work. If at any time Escrow Amount-A is insufficient to cover
such costs incurred by Buyer to complete the Unfinished Work, Seller shall
promptly pay Buyer for such costs upon demand by Buyer, as additional rent
under the Lease. Seller's failure to pay such additional costs within ten
(10) days after demand shall constitute an Event of Default under the
Lease.
"(c) Disbursements to Seller from Escrow Account-A.
(i) Substantial Completion. From time to time, whenever Buyer receives
evidence from Seller that Seller has paid for any Unfinished Work (in the
form of one or more invoices together with such lien releases or other
evidence of payment as Buyer may reasonably require) which has been
completed and is in place (as evidenced by an architect's certificate or
such other evidence as Buyer may reasonably require), Buyer and Seller
shall instruct the Escrow Holder to disburse to Seller from Escrow
Account-A the amount paid by Seller for such Unfinished Work; provided,
however, that no disbursement from Escrow Account-A shall exceed the amount
of the then remaining Escrow Amount-A.
(ii) Punch-list Items. Upon satisfaction of the conditions set forth
in Sections 7.5(i)(1) through 7.5(i)(4) and 7.5(i)(6) (i.e. once the
Project is Substantially Completed), Buyer and Seller shall instruct the
Escrow Holder to disburse to Seller an amount equal to the remaining Escrow
Amount-A less the amount required to be held in escrow pursuant to Section
7.5(j). Buyer and Seller shall instruct the Escrow Holder to make
disbursements to Seller from Escrow Account-A amounts paid by Seller to
complete the Punch-list Items pursuant to Section 2.3(c)(i).
<PAGE>
3
"(d) Termination of Escrow Agreement. Buyer and Seller shall instruct
the Escrow Holder that Escrow Account-A shall be closed and the Escrow
Agreement shall terminate with respect to Escrow Account-A and any
remaining amounts of Escrow Amount-A shall be paid to Seller upon the
earlier to occur of the following: (i) all sums have been disbursed from
Escrow Account-A in accordance with this section 2.3; or (ii) Buyer has
received adequate evidence from Seller (in the form of an architect's
certificate or such other evidence as Buyer may reasonably require) that
the Punch-list Items have been completed in their entirety.
"2.4 Funds for Out-of-Pocket Costs Held in Escrow.
"(a) Escrow Account-B. Buyer and Seller acknowledge that, after the
Closing Date, there will be out-of-pocket costs which have been incurred by
Buyer prior to the Closing Date and which will be incurred by Buyer after
the Closing Date that are required to be reimbursed, but will not be
reimbursed by the Closing Date, by Seller pursuant to Section 9.3(b)
("Out-of-Pocket Costs"). In order to assure Buyer that such Out-of-Pocket
Costs will be paid promptly as they become due, Seller and Buyer agree
that, upon and subject to the terms and conditions of this section 2.4 and
the Escrow Agreement, at the Closing, two hundred eighteen thousand seven
hundred ninety-seven and twenty-five hundredths dollars ($218,797.25) of
the Purchase Price shall not be then disbursed to Seller, and shall be held
in escrow by the Escrow Holder in an interest-bearing escrow account
("Escrow Account-B"), pursuant to the Escrow Agreement. Such escrowed funds
are referred to herein as "Escrow Amount-B". All interest earned on Escrow
Amount-B shall be paid to Seller. Escrow Amount-B shall be held and
disbursed in accordance with the terms of this section 2.4 and the Escrow
Agreement.
"(b) Disbursements to Seller from Escrow Account-B. From time to time,
whenever Seller receives evidence from Buyer that Buyer owes any
Out-of-Pocket Costs (in the form of one or more invoices or other such
evidence as Seller may reasonably require), Buyer and Seller shall instruct
the Escrow Holder to disburse to Buyer from Escrow Account-B the amount
paid by Buyer for such Out-of-Pocket Costs; provided, however, that no
disbursement from Escrow Account-B shall exceed the amount of the then
remaining Escrow Amount-B.
"(c) Termination of Escrow Agreement. Buyer and Seller shall instruct
the Escrow Holder that Escrow Account-B shall be closed and the Escrow
Agreement shall terminate with respect to Escrow Account-B and any
remaining amounts of Escrow Amount-B shall be paid to Seller upon the
earlier to occur of the following: (i) all sums have been disbursed from
Escrow Account-B in accordance with this section 2.4; or (ii) Buyer and
Seller have agreed in writing that Seller has fully satisfied its
obligation to reimburse Seller for the Out-of-Pocket Costs.
<PAGE>
4
"2.5 Arbitration.
"(a) Buyer and Seller agree that any dispute respecting their rights
to Escrow Amount-A and/or Escrow Amount-B (the "Escrow Amount") shall be
determined exclusively by final and binding arbitration in accordance with
this section 2.5. In the event either party wishes to commence an
arbitration proceeding to resolve any dispute relating to the parties'
rights to the Escrow Amount, such arbitration shall be final and binding on
Buyer and Seller, shall be conducted in the County of Arapahoe, Colorado,
and shall be administered by and in accordance with the Comprehensive or
Streamlined Arbitration Rules and Procedures of J.A.M.S./Endispute, as
applicable, or, if such rules no longer exist, the then existing rules of
practice and procedure of J.A.M.S./Endispute (both sets of rules are
collectively referred to as the "Rules of J.A.M.S./Endispute"). The
arbitrator shall be a retired Colorado or federal judge selected in
accordance with the Rules of J.A.M.S./Endispute. The arbitrator and not a
jury will decide the matter submitted to arbitration.
"The arbitrator shall determine only the rights of Buyer and Seller to
the Escrow Amount and no other issues. Judgment upon any decision rendered
by the arbitrator may be entered by any state or federal court having
jurisdiction thereof. Subject to the final sentence of this Section 2.5,
the arbitrator shall have the power to award damages in accordance with
this section 2.5 payable from Escrow Account-A and/or Escrow Account-B,
whichever is applicable, and to order the disposition of the Escrow Amount,
but shall not have the power to award any other damages or grant any other
relief, and shall not have the power to vary the provisions of this
Agreement.
"Discovery in any arbitration shall be permitted but it shall be
limited to one deposition and the exchange of documents and witness lists.
"Except as otherwise required by law, the parties agree that the
arbitration proceeding will be confidential; all conduct, statements,
promises, offers, views and opinions, oral or written, made during the
arbitration by any party or a party's agent, employee or attorney will
remain confidential and, where appropriate, will be considered work product
and privileged; and the existence and the results of the arbitration will
be maintained by the parties and their respective agents, employees and
attorneys as confidential at all times.
"In the event that J.A.M.S./Endispute is no longer in existence at the
time that arbitration is requested, the dispute shall be submitted to
arbitration in accordance with the rules and procedures of the successor to
J.A.M.S./Endispute or, if there is no such successor, the matter shall be
submitted to an organization which consists of members similar to
J.A.M.S./Endispute or its successor.
<PAGE>
5
"The losing party shall bear all of its own and the prevailing party's
costs and expenses incurred in connection with the arbitration, including
the arbitrator's fees and costs."
2. Survey. The Agreement is hereby further amended as follows:
(a) Subparagraph (5) of Section 7.5(i) is hereby deleted.
(b) Section 7.5(g) is hereby replaced in its entirety with the
following paragraph:
"7.5(g) Surveys. If Buyer requests upon completion of the
Project, Seller shall deliver to Buyer, at Seller's expense, an
as-built survey of the Real Property meeting the requirements
described in Section 5.5 and showing no material encroachments, bases
for third-party claims or violations of law or private covenants not
shown on the survey delivered pursuant to Section 5.5 (the "Final
Survey").
3. No Other Amendment; Conflict. Except as set forth in this Amendment, the
provisions of the Agreement shall remain in full force. If the provisions of
this Amendment conflict with the provisions of the Agreement, then the
provisions of this Amendment shall prevail.
4. Counterparts. This Amendment may be signed in multiple counterparts
which, when signed by all parties, shall constitute a binding agreement.
SELLER: ICG HOLDINGS, INC., a Colorado
corporation
By: /s/ James D. Grenfell
--------------------------------
James D. Grenfell
Its: Executive Vice President
and Chief Financial Officer
BUYER: TRINET ESSENTIAL FACILITIES X, INC.,
a Maryland corporation
By: /s/Gary P. Lyon
--------------------------------
Garry P. Lyon
Its: Executive Vice President
<PAGE>
1
ASSIGNMENT OF PURCHASE AGREEMENT
This Assignment of Purchase Agreement ("Assignment") is made as of January
15, 1998, by and between TRINET CORPORATE REALTY TRUST, INC., a Maryland
corporation ("Assignor"), and TRINET ESSENTIAL FACILITIES X, INC., a Maryland
corporation ("Assignee"), with reference to the following facts:
A. ICG HOLDINGS, INC., a Colorado corporation ("Seller"), as seller, and
Assignor, as buyer, entered into that certain Purchase Agreement, dated as of
December 9, 1997 (the "Purchase Agreement"), covering the Property (as defined
in the Purchase Agreement).
B. Assignee is a wholly-owned subsidiary of Assignor.
C. The parties desire to enter into this Assignment to assign Assignor's
rights under the Purchase Agreement to Assignee.
THEREFORE, the parties agree as follows:
1. Assignment and Assumption.
(a) Assignor hereby assigns and transfers to Assignee all right, title
and interest of Assignor in, to and under the Purchase Agreement.
(b) Assignee hereby accepts the foregoing assignment, and assumes and
agrees to perform all of the covenants and agreements in the Purchase
Agreement to be performed by the Buyer thereunder.
2. Further Assurances. Assignor and Assignee agree to execute such other
documents and perform such other acts as may be reasonably necessary or proper
and usual to effect this Assignment.
3. Governing Law. This Assignment shall be governed by and construed in
accordance with the laws of the State of Colorado.
4. Successors and Assigns. This Assignment shall be binding upon and shall
inure to the benefit of Assignor and Assignee and their respective personal
representatives, heirs, successors and assigns.
<PAGE>
2
5. Counterparts. This Assignment may be signed in multiple counterparts
which, when signed by all parties, shall constitute a binding agreement.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as
of the date first hereinabove written.
ASSIGNOR: TRINET CORPORATE REALTY TRUST, INC.,
a Maryland corporation
By /s/ Gary P. Lyon
---------------------------------
Gary P. Lyon
Its Executive Vice President
ASSIGNEE: TRINET ESSENTIAL FACILITIES X, INC.,
a Maryland corporation
By /s/ Gary P. Lyon
---------------------------------
Gary P. Lyon
Its Executive Vice President
<PAGE>
COMMERCIAL LEASE - NET
(Single Tenant Building)
Basic Lease Information
Date: January 15, 1998
Landlord: TriNet Essential Facilities X, Inc., a Maryland corporation
Tenant: ICG Holdings, Inc., a Colorado corporation
Premises (section 1.1): Address: 161 Inverness Drive West, City of Englewood,
County of Arapahoe, State of Colorado
Term (section 2.1): Fifteen (15) years plus the partial month between the
Commencement Date and the last day of the calendar month during which the
Commencement Date occurs.
Commencement Date (section 2.1): January 20, 1998
Expiration Date (section 2.1): January 31, 2013
Initial Base Rent (section 3.1(a)): $395,222.00 per month.
Use (section 6.1): Office purposes and, to the extent permitted by Legal
Requirements and subject to the terms of section 6.1, ancillary uses
typical of headquarters buildings such as employee cafeteria, training
rooms, child-care center, testing laboratories, light assembly of products
and storage of inventory and supplies.
Liability Insurance (section 10.3): $5,000,000
Insuring Party for Property Insurance (section 10.4): Landlord.
Landlord's Address (section 23.1): Four Embarcadero Center, Suite 3150, San
Francisco, CA 94111, Attn: Mr. Mark W. Whiting.
Tenant's Address (section 23.1): 9605 East Maroon Circle, Englewood, CO 80112,
Attn: Mr. Douglas McKinnon; with a copy to Tenant at the same address,
Attention: General Counsel.
Guarantors (section 24.1): ICG Communications, Inc., a Delaware corporation; ICG
Holdings (Canada), Inc., a Federal Canadian corporation.
Exhibits and Addenda (section 24.3): Exhibit A - Form of Estoppel Certificate;
Exhibit B - Form of Lease Guaranty.
<PAGE>
The foregoing Basic Lease Information is incorporated in and made a part of
the Lease to which it is attached. If there is any conflict between the Basic
Lease Information and the Lease, the Lease shall control.
Landlord: Tenant:
TRINET ESSENTIAL FACILITIES X, INC., ICG HOLDINGS, INC.,
a Maryland corporation a Colorado corporation
By /s/Gary P. Lyon By /s/ James D. Grenfell
----------------------------- ---------------------------
Gary P. Lyon James D. Grenfell
Its Executive Vice President Its Executive Vice President
and Chief Financial Officer
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 Premises....................................................1
ARTICLE 2 Term........................................................1
ARTICLE 3 Rent........................................................2
ARTICLE 4 Payment of Operating Expenses...............................5
ARTICLE 5 Operating Expenses, Property Taxes and Other Taxes
Defined; Contest Rights.....................................7
ARTICLE 6 Use....................................................... 11
ARTICLE 7 Services.................................................. 12
ARTICLE 8 Maintenance and Repairs; Capital Improvements............. 13
ARTICLE 9 Alterations............................................... 14
ARTICLE 10 Insurance................................................. 16
ARTICLE 11 Compliance With Legal Requirements........................ 19
ARTICLE 12 Assignment or Sublease.................................... 20
ARTICLE 13 Entry by Landlord......................................... 21
ARTICLE 14 Events of Default and Remedies............................ 22
ARTICLE 15 Damage or Destruction..................................... 27
ARTICLE 16 Eminent Domain............................................ 29
ARTICLE 17 Subordination, Merger and Sale............................ 31
ARTICLE 18 Estoppel Certificate...................................... 32
ARTICLE 19 Holding Over.............................................. 33
ARTICLE 20 Financial Statements...................................... 33
ARTICLE 21 Hazardous Materials....................................... 34
ARTICLE 22 Waiver.................................................... 36
ARTICLE 23 Notices................................................... 36
ARTICLE 24 Guaranties; Security Deposit.............................. 36
ARTICLE 25 Miscellaneous............................................. 42
ARTICLE 26 Option to Expand the Building............................. 43
<PAGE>
1
LEASE
THIS LEASE, made as of the date specified in the Basic Lease Information,
by and between the landlord specified in the Basic Lease Information
("Landlord"), and the tenant specified in the Basic Lease Information
("Tenant"),
W I T N E S S E T H:
ARTICLE 1
Premises
1.1 Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the covenants hereinafter set forth, to
all of which Landlord and Tenant hereby agree, the building located at the
address specified in the Basic Lease Information (the "Building") containing
approximately 239,749 rentable square feet of space, and the land on which the
Building is located (such land, together with the Building and the other
improvements thereon are referred to herein, collectively, as the "Premises").
ARTICLE 2
Term
2.1 The term of this Lease shall be the term specified in the Basic Lease
Information, which shall commence on the commencement date specified in the
Basic Lease Information (the "Commencement Date") and, unless sooner terminated
as hereinafter provided, shall end on the expiration date specified in the Basic
Lease Information (the "Expiration Date").
2.2 If the Commencement Date is not the first day of a calendar month,
Tenant shall pay to Landlord, as additional rent, the Base Rent payable under
section 3.1, calculated on a per diem basis, for the period from the
Commencement Date until the first day of the next full calendar month. Tenant
shall pay the Base Rent in respect of such period to Landlord on the
Commencement Date.
2.3 Tenant shall accept the Premises "as is" on the Commencement Date.
Landlord shall have no obligation to construct or install any improvements in
the Premises. Tenant acknowledges that, prior to the Commencement Date, Tenant
occupied the Premises. Tenant's possession of the Premises shall constitute
Tenant's acknowledgment that the Premises are in all respects in the condition
in which Landlord is required to deliver the Premises to Tenant under this Lease
and that Tenant has examined the Premises and is fully informed to Tenant's
satisfaction of the physical and environmental condition and the utility of the
Premises. Tenant acknowledges that Landlord, its agents and employees and other
persons acting on behalf of Landlord have made no representation or warranty of
any kind in connection with any matter relating to the physical or environmental
condition, value, fitness, use or zoning of the Premises upon which Tenant has
relied directly or indirectly for any purpose.
<PAGE>
2
2.4 Provided that Tenant is not in monetary or other material default under
or breach of this Lease, either at the time of exercising the applicable option
to renew described below or at the time such renewal term commences, Tenant
shall have the option to renew this Lease for two (2) additional terms of ten
(10) years each. Tenant shall exercise each option to renew by delivering to
Landlord written notice of Tenant's election to renew the term of this Lease at
least eighteen (18) months before the expiration of the then-existing term of
this Lease. Landlord's failure to receive Tenant's written notice duly electing
to renew the term of this Lease shall be conclusively deemed Tenant's election
not to exercise its option to renew, in which event the term shall expire on the
last day of the then-existing term. If Tenant duly exercises an option to renew,
then Tenant shall continue to occupy the Premises on all of the terms and
conditions of this Lease, except that: (a) the Base Rent payable by Tenant
during the applicable renewal term shall be increased as set forth in section
3.1(a); and (b) after the second renewal term, Tenant shall have no further
renewal options under this Lease. Tenant's rights to extend the term of this
Lease are personal to Tenant, may not be exercised by or be assigned to any
person or entity other than Tenant or a Corporate Successor (as defined in
section 12.1), and shall terminate and be of no further effect upon any
assignment of this Lease or subletting of all or any part of the Premises to any
person or entity.
ARTICLE 3
Rent
3.1 Tenant shall pay to Landlord the following amounts as base monthly rent
for the Premises ("Base Rent"):
(a) During the period between the Commencement Date and the last day of the
twelfth full calendar month thereafter, Tenant shall pay to Landlord the amount
of monthly rent specified in the Basic Lease Information (the "Initial Base
Rent"). Commencing on the first day of the thirteenth full calendar month after
the Commencement Date, and on each anniversary of that date thereafter,
including during all renewal terms (each, an "Adjustment Date"), the Base Rent
shall be increased to an amount equal to the greater of:
(i) the sum of (A) the Base Rent in effect during the month
immediately preceding the Adjustment Date, plus (B) the product of (1) the
Base Rent in effect during the month immediately preceding the Adjustment
Date, multiplied by (2) the lesser of (x) three percent (3.0%), and (y) the
product of two (2), multiplied by the percentage increase in the Consumer
Price Index (as defined below) measured from the last month for which the
Consumer Price Index is published immediately preceding the date twelve
(12) months prior to the Adjustment Date in question to the last month for
which the Consumer Price Index is published immediately preceding the CPI
Adjustment Date in question; and
<PAGE>
3
(ii) the lesser of (A) the Initial Base Rent increased by three
percent (3%) per year, compounded, from the Commencement Date to the
Adjustment Date in question, and (B) the sum of (1) an amount equal to the
Initial Base Rent, plus (2) the product of (x) an amount equal to the
Initial Base Rent, multiplied by (y) the product of two (2), multiplied by
the percentage increase in the Consumer Price Index measured from the last
month for which the Consumer Price Index is published immediately preceding
the Commencement Date to the last month for which the Consumer Price Index
is published immediately preceding the Adjustment Date in question;
provided, however, that in no event shall the Base Rent after any Adjustment
Date be less than the product of an amount equal to the Base Rent in effect for
the month immediately preceding such Adjustment Date, multiplied by one hundred
one and one-half percent (101.5%).
(b) Landlord and Tenant each shall, promptly after any determination of the
Base Rent pursuant to section 3.1(a), execute and deliver to the other a written
confirmation which sets forth the Base Rent, but such Base Rent shall become
effective whether or not such confirmation is executed.
(c) As used in this Lease, "Consumer Price Index" shall mean the Consumer
Price Index for All Cities, All Urban Consumers, All Items, 1982-1984 equals
100, published by the United States Department of Labor, Bureau of Labor
Statistics. If the comparison Consumer Price Index required for the calculation
specified in section 3.1(a) is not available on the Adjustment Date in question,
Tenant shall to pay, as of such Adjustment Date, one hundred three percent
(103%) of the Base Rent payable during the period immediately preceding such
Adjustment Date until the Consumer Price Index is available and the necessary
calculation is made. As soon as such calculation is made, Tenant shall
immediately pay to Landlord or Landlord shall credit Tenant (as the case may be)
the amount of any underpayment or overpayment of Base Rent for the month or
months that may have elapsed pending the calculation of the Base Rent for the
Adjustment Date in question. If the federal government revises or ceases to
publish the Consumer Price Index, this section 3.1 shall automatically be
amended to provide that, as of each Adjustment Date thereafter, the Base Rent
shall be one hundred three percent (103%) of the Base Rent payable during the
period immediately preceding such Adjustment Date.
<PAGE>
4
(d) Throughout the term of this Lease, Tenant shall pay, as additional
rent, all Other Taxes (as defined in section 5.3), all Operating Expenses (as
defined in section 5.1) and all other amounts of money and charges required to
be paid by Tenant under this Lease, whether or not such amounts of money or
charges are designated "additional rent." As used in this Lease, "rent" shall
mean and include all Base Rent and additional rent payable by Tenant in
accordance with this Lease.
3.2 It is the intention of Landlord and Tenant that the Base Rent payable
by Tenant to Landlord during the entire term of this Lease shall be absolutely
net of all costs and expenses incurred in connection with the management,
operation, maintenance, repair and replacement of the Premises in accordance
with this Lease, except as expressly provided in section 8.3. Landlord shall
have no obligations or liabilities whatsoever with respect to the costs and
expenses of management, operation, maintenance, repair or replacement of the
Premises during the term of this Lease, except as expressly provided in section
8.3, and Tenant shall pay all costs and expenses incurred in connection
therewith. Without limiting the generality of the foregoing, throughout the
entire term of this Lease, Tenant shall pay, as additional rent, all Operating
Expenses (as defined in section 5.1) that accrue during or are allocable to the
term of this Lease.
3.3 Tenant shall pay all Base Rent to Landlord, in advance, on or before
the first day of each and every calendar month during the term of this Lease.
Tenant shall pay all additional rent upon demand. Tenant shall pay all rent to
Landlord without notice, demand, deduction or offset, in lawful money of the
United States of America, at the address of Landlord specified in the Basic
Lease Information, or to such other person or at such other place as Landlord
may from time to time designate in writing.
3.4 Tenant acknowledges that the late payment by Tenant of any Base Rent or
additional rent (including the items described in section 3.2) will cause
Landlord to incur costs and expenses, the exact amount of which is extremely
difficult and impractical to fix. Such costs and expenses will include
administration and collection costs and processing and accounting expenses.
Therefore, if any Base Rent or additional rent is not received by Landlord
within five (5) Business Days (as defined below) after it is due, Tenant shall
immediately pay to Landlord a late charge equal to six percent (6%) of such
delinquent amount. The term "Business Days" means any day other than Saturdays,
Sundays and days on which national banks are permitted to be closed in
accordance with Federal banking laws and regulations. Landlord and Tenant agree
that such late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for the loss suffered by Tenant's
failure to make timely payment. In no event shall such late charge be deemed to
grant to Tenant a grace period or extension of time within which to pay any rent
or prevent Landlord from exercising any right or enforcing any remedy available
to Landlord upon Tenant's failure to pay all rent due under this Lease in a
timely fashion, including the right to terminate this Lease. All amounts of
money payable by Tenant to Landlord hereunder, if not paid when due, shall bear
interest from the due date until paid at a rate (the "Interest Rate") per annum
equal to five (5) percentage points plus the prime or reference rate announced
from time to time by Bank of America N.T.&S.A. (the "Reference Rate"), provided
that the Interest Rate shall at no time exceed twelve percent (12%) per annum.
<PAGE>
5
ARTICLE 4
Payment of Operating Expenses
4.1(a) In addition to the Base Rent payable during the term of this Lease,
Tenant shall pay to Landlord, as additional rent, an amount equal to the
Operating Expenses paid or incurred by Landlord in any calendar year (or partial
year) during the term of this Lease. If it shall not be lawful for Tenant to
reimburse Landlord for any Operating Expenses, as defined herein, the Base Rent
payable to Landlord shall be increased to net Landlord the same net Base Rent
after payment of such Operating Expenses as would have been received by Landlord
prior to the payment of such Operating Expenses.
(b) During December of each calendar year or as soon thereafter as
practicable, Landlord shall give Tenant notice of its estimate of the amounts
payable pursuant to section 4.1(a) above for the succeeding calendar year. On or
before the first day of each month during the succeeding calendar year, Tenant
shall pay to Landlord, as additional rent, one twelfth (1/12) of such estimated
amounts. If Landlord fails to deliver such notice to Tenant in December, Tenant
shall continue to pay Operating Expenses on the basis of the prior year's
estimate until the first day of the next calendar month after such notice is
given, provided that on such date Tenant shall pay to Landlord the amount of
such estimated adjustment payable to Landlord for prior months during the year
in question, less any portion thereof previously paid by Tenant. If at any time
it appears to Landlord that the amounts payable under this section 4.1(b) for
the current calendar year will vary from Landlord's estimate, Landlord may, by
giving written notice to Tenant, revise Landlord's estimate for such year, and
subsequent payments by Tenant for such year shall be based on such revised
estimate.
(c)(i) Within ninety (90) days after the close of each calendar year or as
soon after such ninety (90) day period as practicable, Landlord shall deliver to
Tenant a statement of the amounts payable under section 4.1(a) above for such
calendar year (the "annual statement") and such statement shall be final and
binding upon Landlord and Tenant, subject to the terms of section 4.1(c)(ii). If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. If on the basis of such statement Tenant has paid to Landlord an
amount in excess of the amounts payable under section 4.1(a) above for the
preceding calendar year and Tenant is not in default in the performance of any
of its covenants under this Lease, then Landlord, at its option, shall either
promptly refund such excess to Tenant or credit the amount thereof to the Base
Rent next becoming due from Tenant until such credit has been exhausted.
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6
(ii) Tenant shall have the right, during the one hundred eighty (180) day
period following delivery of an annual statement, at Tenant's sole cost to
review in Landlord's offices Landlord's records of Operating Expenses and Real
Property Taxes for the subject calendar year. Such review shall be carried out
only by regular employees of Tenant or by a "Big Six" accounting firm and not by
any other third party. No person conducting such an audit shall be compensated
on a "contingency" or other incentive basis. If, as of the one hundred eightieth
day after delivery to Tenant of an annual statement, Tenant shall not have
delivered to Landlord an objection statement (as defined below), then such
annual statement shall be final and binding upon Landlord and Tenant, and Tenant
shall have no further right to object to such annual statement. If within such
one hundred eighty (180) day period, Tenant delivers to Landlord a written
statement specifying objections to such annual statement (an "objection
statement"), then Tenant and Landlord shall meet to attempt to resolve such
objection within thirty (30) days after delivery of the objection statement. If
such objection is not resolved within such thirty (30) day period, then either
party shall have the right to require that the dispute be submitted to binding
arbitration under the rules of the American Arbitration Association.
Notwithstanding that any such dispute remains unresolved, Tenant shall be
obligated to pay Landlord all amounts payable in accordance with this section
4.1 (including any disputed amount). If such dispute results in an agreement or
an arbitrator's determination that Tenant is entitled to a refund, Landlord
shall, at its option, either pay such refund or credit the amount thereof to the
Base Rent next becoming due from Tenant.
(d) If this Lease terminates on a day other than the last day of a calendar
year, the amounts payable by Tenant under section 4.1(a) above with respect to
the calendar year in which such termination occurs shall be prorated on the
basis which the number of days from the commencement of such calendar year, to
and including such termination date, bears to 360. The termination of this Lease
shall not affect the obligations of Landlord and Tenant pursuant to section
4.1(c) above to be performed after such termination.
<PAGE>
7
ARTICLE 5
Operating Expenses, Property Taxes and
Other Taxes Defined; Contest Rights
5.1 "Operating Expenses" shall mean the total costs and expenses incurred
by Landlord in connection with the management, operation, maintenance, repair
and ownership of the Premises, including, without limitation, the following
costs: (a) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the management, operation,
repair, or maintenance of the Premises and costs of training such employees; (b)
payroll, social security, workers' compensation, unemployment and similar taxes
with respect to such employees of Landlord or its agents, and the cost of
providing disability or other benefits imposed by law or otherwise, with respect
to such employees; (c) Property Taxes and Other Taxes (as such terms are defined
below); (d) premiums and other charges incurred by Landlord with respect to
fire, other casualty, boiler and machinery, theft, rent interruption and
liability insurance and any other insurance as is deemed necessary or advisable
in the reasonable judgment of Landlord, all in such amounts as Landlord
determines to be appropriate, and costs of repairing an insured casualty to the
extent of the deductible amount under the applicable insurance policy; (e) water
charges and sewer rents or fees; (f) license, permit and inspection fees and
charges; (g) sales, use and excise taxes on goods and services purchased by
Landlord in connection with the operation, maintenance or repair of the Premises
and building systems and equipment; (h) telephone, telegraph, postage,
stationery supplies and other expenses incurred in connection with the
operation, maintenance, or repair of the Premises; (i) reasonable management
fees and expenses (including fees and expenses for accounting, financial
management, data processing and information services); (j) repairs to and
physical maintenance of the Premises, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent otherwise included as an Operating Expense
pursuant to this section 5.1); (k) janitorial, window cleaning, guard,
extermination, water treatment, rubbish removal, plumbing and other services and
inspection or service contracts for elevator, electrical, mechanical, sanitary,
heating, ventilation and air conditioning, and other building equipment and
systems or as may otherwise be necessary or proper for the operation or
maintenance of the Premises; (l) supplies, tools, materials and equipment used
in connection with the operation, maintenance or repair of the Premises; (m)
accounting, legal and other professional, consulting or service fees and
expenses; (n) painting the exterior or the interior areas of the Premises and
the cost of maintaining the sidewalks, landscaping and other outdoor areas of
the Premises; (o) all costs and expenses for electricity, chilled water, air
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8
conditioning, water for heating, gas, fuel, steam, heat, lights, sewer service,
communications service, power and other energy related utilities required in
connection with the operation, maintenance and repair of the Premises; (p) the
cost of any capital improvements made by Landlord to the Premises or capital
assets acquired by Landlord required under any governmental law, regulation or
insurance requirement with which the Premises was not required to comply on the
Commencement Date, such cost or allocable portion to be amortized over the
useful life thereof, together with interest on the unamortized balance at a rate
per annum equal to the Reference Rate (as defined in section 3.4 hereof) charged
at the time such capital improvements or capital assets are constructed or
acquired or such higher rate as may have been paid by Landlord on funds borrowed
for the purpose of constructing or acquiring such capital improvements or
capital assets; (q) the cost of any capital improvements made by Landlord to the
Building or capital assets acquired by Landlord for the protection of the health
and safety of the occupants of the Premises (provided that, as to any such
improvements or assets which would be considered unnecessary or unreasonably
expensive by a reasonable owner of a comparable building, Landlord shall first
have obtained Tenant's reasonable approval) or that are designed to reduce other
Operating Expenses, such cost or allocable portion thereof to be amortized over
the useful life thereof (except that Landlord may include as an Operating
Expense in any calendar year a portion of the cost of such a capital improvement
or capital asset equal to Landlord's estimate of the amount of the reduction of
other Operating Expenses in such year resulting from such capital improvement or
capital asset), together with interest on the unamortized balance at a rate per
annum equal to the Reference Rate charged at the time such capital improvements
or capital assets are constructed or acquired or such higher rate as may have
been paid by Landlord on funds borrowed for the purpose of constructing or
acquiring such capital improvements or capital assets; (r) the cost of
furniture, window coverings, carpeting, decorations, landscaping and other
customary and ordinary items of personal property provided by Landlord for use
in common areas of the Premises or in the Building office (to the extent that
such Building office is dedicated to the operation and management of the
Premises), such costs to be amortized over the useful life thereof; (s) the cost
of any capital improvements made by Landlord to the Premises or capital assets
acquired by Landlord to the extent that the cost of any such improvement or
asset is less than fifty thousand dollars ($50,000); (t) the cost of any capital
improvements made by Landlord to the Premises or capital assets acquired by
Landlord after the Base Year which have a useful life of five (5) years or less
(and the cost of which is not otherwise included in Operating Costs pursuant to
this section 5.1), such cost to be amortized over the useful life thereof,
together with interest on the unamortized balance at a rate per annum equal to
the Reference Rate charged at the time such capital improvements or capital
assets are constructed or acquired or such higher rate as may have been paid by
Landlord on funds borrowed for the purpose of constructing or acquiring such
capital improvements or capital assets; (u) any such expenses and costs
<PAGE>
9
resulting from substitution of work, labor, material or services in lieu of any
of the above itemizations, or for any such additional work, labor, services or
material resulting from compliance with any governmental laws, rules,
regulations or orders applicable to the Premises or any part thereof; (v)
property management office rent or rental value; (w) cost of operation, repair
and maintenance of the parking areas on the Premises, including resurfacing,
restriping and cleaning; and (x) appropriate reserves to provide for
maintenance, repair and replacement of improvements (specifically including
roofs, structural components and building systems), fixtures, equipment and
personal property, as determined by Landlord consistent with prudent accounting
practices.
To the extent costs and expenses described above relate to both the
Premises and other property, such costs and expenses shall, in determining the
amount of Operating Expenses, be allocated as Landlord may reasonably determine
to be appropriate.
Prior to the beginning of each calendar year during the term of this Lease,
or as soon thereafter as practicable, Landlord shall deliver to Tenant an
operating and capital budget for such year setting forth the estimated Operating
Expenses. The operating and capital budget shall be consistent with reasonable
and prudent property management practices.
Operating Expenses shall not include the following: (i) depreciation on the
Building; (ii) debt service; (iii) rental under any ground or underlying lease;
(iv) interest (except as expressly provided in this section 5.1); (v) attorneys'
fees and expenses incurred in connection with lease negotiations with
prospective tenants; (vi) the cost of any improvements or equipment (except to
the extent such costs are included in amounts payable by Tenant as reserves as
set forth in clause (x) above) which would be properly classified as capital
expenditures (except for any capital expenditures expressly included in
Operating Expenses pursuant to this section 5.1); (vii) advertising expenses
relating to vacant space; or (viii) real estate brokers' or other leasing
commissions.
Landlord may, but shall not be obligated to, cause some or all of its
duties under this agreement to be performed by a property management company on
such terms as Landlord may deem appropriate. The property management company
shall be subject to the approval of Tenant, which approval shall not be
unreasonably withheld.
5.2 "Property Taxes" shall mean all taxes, assessments, excises, levies,
fees and charges (and any tax, assessment, excise, levy, fee or charge levied
wholly or partly in lieu thereof or as a substitute therefor or as an addition
thereto) of every kind and description, general or special, ordinary or
extraordinary, foreseen or unforeseen, secured or unsecured, whether or not now
customary or within the contemplation of Landlord and Tenant, that are levied,
assessed, charged, confirmed or imposed by any public or government authority on
or against, or otherwise with respect to, the Premises or any part thereof or
any personal property used in connection with the Premises. Property Taxes shall
not include net income (measured by the income of Landlord from all sources or
from sources other than solely rent), franchise, inheritance or capital stock
taxes of Landlord, unless levied or assessed against Landlord in whole or in
part in lieu of, as a substitute for, or as an addition to any Property Taxes.
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10
5.3 "Other Taxes" shall mean all taxes, assessments, excises, levies,
owner's association dues or similar charges, fees and charges, including all
payments related to the cost of providing facilities or services, whether or not
now customary or within the contemplation of Landlord and Tenant, that are
levied, assessed, charged, confirmed or imposed by any public or government
authority upon, or measured by, or reasonably attributable to (a) the Premises,
(b) the cost or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises or the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements is vested in Tenant or Landlord, (c) any rent payable
under this Lease, including any gross receipts tax or excise tax levied by any
public or government authority with respect to the receipt of any such rent, (d)
the possession, leasing, operation, management, maintenance, alteration, repair,
replacement, use or occupancy by Tenant of the Premises, or (e) this transaction
or any document to which Tenant is a party creating or transferring an interest
or an estate in the Premises. Other Taxes shall not include net income taxes
(measured by the income of Landlord from all sources or from sources other than
solely rent), franchise, inheritance or capital stock taxes of Landlord, unless
levied or assessed against Landlord in whole or in part in lieu of, as a
substitute for, or as an addition to any Other Taxes.
5.4 In the event that Tenant reasonably and in good faith disputes the
validity or amount of any Property Taxes or Other Taxes, then Tenant shall have
the right to defer payment thereof, provided that (a) Tenant shall have given
Landlord written notice of such contest and the nature thereof and Tenant shall
thereafter diligently and continuously prosecute such contest to completion or
compromise, (b) no such deferral of payment shall result in any fines or
penalties being assessed against Tenant, Landlord or the Premises or any lien
foreclosure rights against the Premises being commenced, (c) Tenant shall
promptly pay any amounts (including any interest, fines or penalties) finally
determined to be owing, and (d) at Landlord's reasonable request, Tenant shall
provide such bond or other security as may be necessary to protect Landlord and
the Premises against any loss or liability.
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11
ARTICLE 6
Use
6.1 The Premises shall be used only for the purpose specified in the Basic
Lease Information and no other purpose without Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed; provided, however,
Landlord's withholding of consent shall be conclusively presumed reasonable if
the proposed use would materially increase the wear and tear on or the risk of
damage to the Premises above levels or risks resulting from Tenant's use of the
Premises exclusively for office purposes or if the proposed use is for an
illegal, immoral or disreputable purpose; and provided, further, that only the
Tenant originally named herein, and no subtenant, assignee or other successor to
such original Tenant, shall have the right to use the Premises or any part
thereof for any purpose other than office use. Notwithstanding anything to the
contrary in the Basic Lease Information, (a) Tenant's right to use the Premises
or any part thereof for any use other than general office use (whether or not
such other use is listed in the Basic Lease Information) is subject to the
following conditions: (i) such ancillary (non-office) uses shall be limited to
areas comprising less than thirty percent (30%) of the total rentable square
footage of the building in the aggregate, and (ii) all such uses shall be
consistent with Tenant's obligations under Articles 11 and 21 hereof; and (b)
any subtenant or assignee of the original Tenant named herein shall use the
Premises exclusively for office purposes and no other use shall be permitted,
except that the original Tenant named herein may sublease the portions of the
Premises to be used as an employee cafeteria or child care center to the
operators of those facilities. Tenant shall not do or permit to be done in, on
or about the Premises, nor bring or keep or permit to be brought or kept
therein, anything which is prohibited by or will in any way conflict with any
law, ordinance, rule, regulation or order now in force or which may hereafter be
enacted, or which is prohibited by any insurance policy for the Premises, or
will in any way increase the existing rate of, or cause a cancellation of, or
affect any insurance for the Premises. Tenant shall not do or permit anything to
be done in, on or about the Premises which will in any way obstruct or interfere
with the rights of Landlord. Tenant shall not maintain or permit any nuisance
in, on or about the Premises or commit or suffer to be committed any waste in,
on or about the Premises.
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ARTICLE 7
Services
7.1 Landlord shall, at Tenant's sole cost and expense, supply the Premises
with electricity, heating, ventilating and air conditioning, water, natural gas,
lighting replacement for all lights, restroom supplies, telephone service,
window washing, security service, janitor, scavenger and disposal services, and
such other services as Landlord determines to furnish to the Premises. Landlord
shall not be in default hereunder or be liable for any damage or loss directly
or indirectly resulting from, nor shall the rent be abated or a constructive or
other eviction be deemed to have occurred by reason of, the installation, use or
interruption of use of any equipment in connection with the furnishing of any of
the foregoing services, any failure to furnish or delay in furnishing any such
services, whether such failure or delay is caused by accident or any condition
beyond the control of Landlord or Tenant or by the making of repairs or
improvements to the Premises, or any limitation, curtailment, rationing or
restriction on use of water, electricity, gas or any form of energy serving the
Premises, whether such results from mandatory governmental restriction or
voluntary compliance with governmental guidelines. Tenant shall pay the full
cost of all of the foregoing services as additional rent in accordance with
Article 4.
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ARTICLE 8
Maintenance and Repairs; Capital Improvements
8.1 Landlord shall, at all times during the term of this Lease and at
Tenant's sole cost and expense (except as otherwise provided in section 8.3),
maintain, repair and replace the Premises and every part thereof and all
grounds, landscaping, parking areas, lighting, roof, walls, floors, foundations,
signs, heating, ventilating and air conditioning, mechanical, electrical,
plumbing, sprinkler and life safety systems, equipment, fixtures, alterations,
additions and improvements therein or thereon and keep all of the foregoing
clean and in good order and operating condition (including painting the exterior
of the Premises as often as reasonably needed to keep such exterior in a good,
well painted condition, cleaning interior and exterior doors, windows and glass,
and repairing and replacing any exterior windows and glass that is broken,
cracked or damaged). Landlord shall engage a duly licensed independent
contractor to perform all maintenance and repair services on all heating,
ventilating and air conditioning, mechanical, electrical, plumbing, sprinkler
and life safety systems and equipment in the Premises that is to be performed by
Landlord in accordance with this section 8.1. Tenant hereby waives all rights to
make repairs at the expense of Landlord or in lieu thereof to vacate the
Premises. Subject to section 9.2, Tenant shall, at the end of the term of this
Lease, surrender to Landlord the Premises and all alterations, additions,
fixtures and improvements therein or thereto in the same condition as when
received, ordinary wear and tear and damage thereto by fire or other casualty
excepted.
8.2 In the event Landlord fails to perform any maintenance and repair
obligation under section 8.1 within fifteen (15) days after Tenant delivers to
Landlord notice specifying such obligation (or such longer period as may be
reasonably required due to the nature of such obligation), then Tenant may, upon
a further ten (10) days' notice to Landlord, perform at Tenant's own expense
such obligation (unless Landlord cures its nonperformance within such 10-day
period). Notwithstanding the foregoing, in the event that (a) maintenance or
repairs are, in Tenant's reasonable judgment, urgently required to avoid
material disruption of or interference with the operation of Tenant's business
on the Premises or to avoid imminent danger to health or safety, and (b)
Landlord, having received notice thereof, does not, in Tenant's reasonable
judgment, commence with appropriate promptness and pursue with appropriate
diligence the required maintenance or repairs, then Tenant may perform such
maintenance or repairs without waiting for the time periods set forth in the
preceding sentence.
8.3 To the extent included within the definition of "Operating Expenses" in
section 5.1, the costs incurred by Landlord in performing its obligations under
section 8.1 shall be recoverable from Tenant pursuant to Article 4. To the
extent such costs are excluded from the definition of "Operating Expenses," such
costs shall be Landlord's responsibility, subject to Landlord's right to collect
reserves for anticipated capital repairs, improvements and replacements in
accordance with the definition of "Operating Expenses". In the event that the
cost of any such capital repairs, improvements or replacements exceeds the
amount that Landlord has specified to be reserved therefor, Landlord shall bear
such cost to the extent of such excess.
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14
ARTICLE 9
Alterations
9.1 Tenant shall not make any alterations, additions or improvements in or
to the Premises or any part thereof, or attach any fixtures or equipment
thereto, without Landlord's prior written consent, which consent shall not be
unreasonably withheld. Notwithstanding the preceding sentence, Tenant may make
such alterations, additions or improvements without Landlord's consent only if
the total cost of such alterations, additions or improvements is fifty thousand
dollars ($50,000) or less and such alterations, additions or improvements will
not affect in any way the structural, exterior or roof elements of the Premises
or mechanical, electrical, plumbing, utility or life safety systems of the
Premises, but Tenant shall give prior written notice of any such alterations,
additions or improvements to Landlord. In no event shall Tenant be permitted to
install underground storage tanks (excepting a single 20,000 gallon water tank)
or fuel systems on the Premises. Landlord's refusal to consent to the
installation of an underground tank or fuel system shall be conclusively
presumed to be reasonable. All alterations, additions and improvements in or to
the Premises to which Landlord consents shall be made by Tenant at Tenant's sole
cost and expense as follows:
(a) Tenant shall submit to Landlord, for Landlord's written approval,
complete plans and specifications for all work to be done by Tenant. Such plans
and specifications shall be prepared by the licensed architect(s) and
engineer(s), shall comply with all applicable codes, laws, ordinances, rules and
regulations, shall not adversely affect the structural elements of the Premises,
shall be in a form sufficient to secure the approval of all government
authorities with jurisdiction over the Premises, and shall be otherwise
satisfactory to Landlord in Landlord's reasonable discretion.
(b) Landlord shall notify Tenant in writing, within fifteen (15) Business
Days after Landlord's receipt of such plans and specifications, whether Landlord
approves or disapproves such plans and specifications and, if Landlord
disapproves such plans and specifications, Landlord shall describe the reasons
for disapproval. Tenant may submit to Landlord revised plans and specifications
for Landlord's prior written approval. Tenant shall pay all costs, including the
fees and expenses of the licensed architect(s) and engineer(s), in preparing
such plans and specifications.
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15
(c) All changes in the plans and specifications approved by Landlord shall
be subject to Landlord's prior written approval. If Tenant wishes to make any
such change in such approved plans and specifications, Tenant shall have such
architect(s) and engineer(s) prepare plans and specifications for such change
and submit them to Landlord for Landlord's written approval. Landlord shall
notify Tenant in writing promptly whether Landlord approves or disapproves such
change and, if Landlord disapproves such change, Landlord shall describe the
reasons for disapproval. Tenant may submit to Landlord revised plans and
specifications for such change for Landlord's written approval. After Landlord's
written approval of such change, such change shall become part of the plans and
specifications approved by Landlord.
(d) Tenant shall obtain and comply with all building permits and other
governmental permits and approvals required in connection with the work. Tenant
shall, through Tenant's licensed contractor, perform the work substantially in
accordance with (i) the plans and specifications approved in writing by
Landlord, (ii) the permits obtained by Tenant, and (iii) all applicable codes,
laws, ordinances, rules and regulations. Tenant shall pay, as additional rent,
the entire cost of all work (including the cost of all utilities, permits, fees,
taxes, and property and liability insurance premiums in connection therewith)
required to make the alterations, additions and improvements. Under no
circumstances shall Landlord be liable to Tenant for any damage, loss, cost or
expense incurred by Tenant on account of any plans and specifications,
contractors or subcontractors, design of any work, construction of any work, or
delay in completion of any work.
(e) Tenant shall give written notice to Landlord of the date on which
construction of any work will be commenced at least ten (10) days prior to such
date. Tenant shall keep the Premises free from mechanics', materialmen's and all
other liens arising out of any work performed, labor supplied, materials
furnished or other obligations incurred by Tenant. Tenant shall promptly and
fully pay and discharge all claims on which any such lien could be based or, in
the event Tenant reasonably disputes the validity or amount of any such claim,
Tenant may bond over such lien to Landlord's reasonable satisfaction. Landlord
shall have the right to post and keep posted on the Premises any notices that
may be provided by law or which Landlord may deem to be proper for the
protection of Landlord and the Premises from such liens, and to take any other
action Landlord deems necessary to remove or discharge liens or encumbrances at
the expense of Tenant.
9.2 All alterations, additions, fixtures and improvements, whether
temporary or permanent in character, made in or to the Premises by Landlord or
Tenant, shall become part of the Premises and Landlord's property excluding,
however, underground tanks which shall remain the property of Tenant and shall
be registered in the name of Tenant so long as this Lease remains in effect.
Upon termination of this Lease, Landlord shall have the right, at Landlord's
option, by giving written notice to Tenant at any time before or within ten (10)
days after such termination, to retain all such alterations, additions, fixtures
and improvements in the Premises, without compensation to Tenant, or to remove
all such alterations, additions, fixtures and improvements from the Premises,
repair all damage caused by any such removal, and restore the Premises to the
<PAGE>
16
condition in which the Premises existed before such alterations, additions,
fixtures and improvements were made, and in the latter case Tenant shall pay to
Landlord, upon billing by Landlord, the cost of such removal, repair and
restoration (including a reasonable charge for Landlord's oversight and
administration of such work). Notwithstanding the foregoing, all movable
furniture, equipment, trade fixtures (including the video screen walls, visual
systems, projectors and related equipment in Tenant's service reliability
center) and other personal property shall remain the property of Tenant. Upon
termination of this Lease, Tenant shall, at Tenant's expense, remove all such
movable furniture, equipment, trade fixtures other personal property from the
Premises and repair all damage caused by any such removal. Termination of this
Lease shall not affect the obligations of Tenant pursuant to this section 9.2 to
be performed after such termination.
ARTICLE 10
Insurance
10.1 Landlord shall not be liable to Tenant for any damage to or loss or
theft of any property or for any bodily or personal injury, illness or death of
any person in, on or about the Premises arising at any time and from any cause
whatsoever, except to the extent caused by the gross negligence or willful
misconduct of Landlord. Tenant waives all claims against Landlord arising from
any liability described in this section 10.1, except to the extent caused by the
gross negligence or willful misconduct of Landlord.
10.2 Tenant shall indemnify and defend Landlord against and hold Landlord
harmless from all claims, demands, liabilities, damages, losses, costs and
expenses, including reasonable attorneys' fees and disbursements, arising from
or related to any use or occupancy of the Premises, or any condition of the
Premises, or any default in the performance of Tenant's obligations, or any
damage to any property (including property of employees and invitees of Tenant)
or any bodily or personal injury, illness or death of any person (including
employees and invitees of Tenant) occurring in, on or about the Premises or any
part thereof or any part of the building or the land containing the Premises
arising at any time and from any cause whatsoever (except to the extent caused
by the gross negligence or willful misconduct of Landlord) or occurring outside
the Premises when such damage, bodily or personal injury, illness or death is
caused by any act or omission of Tenant or its agents, officers, employees,
contractors, invitees or licensees. This section 10.2 shall survive the
termination of this Lease with respect to any damage, bodily or personal injury,
illness or death occurring prior to such termination.
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17
10.3 Tenant shall, at all times during the term of this Lease and at
Tenant's sole cost and expense, obtain and keep in force commercial general
liability insurance, including contractual liability (specifically covering this
Lease), cross liability, fire legal liability, and premises operations, all on
an "occurrence" policy form, with a minimum combined single limit in the amount
specified in the Basic Lease Information per occurrence for bodily or personal
injury to, illness of, or death of persons and damage to property occurring in,
on or about the Premises, such insurance shall name the Landlord and any other
parties designated by Landlord, or any other party with an insurable interest,
as additional insureds. Tenant shall, at Tenant's sole cost and expense, be
responsible for insuring Tenant's furniture, equipment, fixtures, computers,
office machines and personal property.
10.4 Tenant shall, at all times during the term of this Lease and at
Tenant's sole cost and expense, obtain and keep in force worker's compensation
and employer's liability insurance in all states in which the Premises and any
other operations of the Tenant are located and any other state in which the
Tenant or its contractors or subcontractors may be subject to any statutory or
other liability arising in any manner whatsoever out of the actual or alleged
employment of others. The total limits of the employer's liability coverage
required hereunder shall not be less than the amounts specified in section 10.3.
10.5 The insuring party for property insurance specified in the Basic Lease
Information shall, at all times during the term of this Lease, at such party's
sole cost and expense, obtain and keep in force (a) insurance against loss or
damage to the Premises by fire and all other risks of physical loss covered by
insurance of the type now known as "all risk," with difference in conditions
coverage, in an amount not less than the full replacement cost of the Premises
(without deduction for depreciation), including the cost of debris removal, and
such endorsements as Landlord may reasonably require, including the "Replacement
Cost Endorsement"; (b) boiler and machinery insurance covering pressure vessels,
air tanks, boilers, machinery, pressure piping, heating, ventilation and air
conditioning equipment, and elevator and escalator equipment, provided the
Premises contain equipment of such nature and insurance against loss of
occupancy or use arising from any breakdown of any such items, in such amounts
as Landlord may reasonably determine; and (c) plate glass insurance in such
amounts as Landlord may reasonably determine if the Premises contain plate
glass. In addition to the insurance specifically described above, Tenant shall
obtain and keep in force such other insurance (or the above-described insurance
at increased limits) as Landlord may reasonably require from time to time.
10.6 All insurance required to be maintained by Tenant under this Article
10 and all renewals thereof shall be issued by good and responsible companies
qualified to do and doing business in the state where the Premises are located
and having a rating in Best's Insurance Guide of at least A-XI. All deductible
amounts under each such insurance policy shall be subject to Landlord's prior
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18
written approval. Each policy to be maintained by Tenant shall expressly provide
that the policy shall not be canceled or altered without sixty (60) days' prior
written notice to Landlord and shall remain in effect notwithstanding any such
cancellation or alteration until such notice shall have been given to Landlord
and such period of sixty (60) days shall have expired. All insurance under this
Article 10 to be maintained by Tenant shall name Landlord and any other parties
designated by Landlord, or any other party with an insurable interest, as an
additional insured or loss payee, shall be primary and noncontributing with any
insurance which may be carried by Landlord, shall afford coverage for all claims
based on any act, omission, event or condition that occurred or arose (or the
onset of which occurred or arose) during the policy period, and shall expressly
provide that Landlord, although named as an additional insured, shall
nevertheless be entitled to recover under the policy for any loss, injury or
damage to Landlord. Upon the issuance of each such policy to be maintained by
Tenant, Tenant shall deliver each such policy or a certified copy and a
certificate thereof to Landlord for retention by Landlord. If Tenant fails to
insure or fails to furnish to Landlord upon notice to do so any policy to be
maintained by Tenant or certified copy and certificate thereof as required,
Landlord shall have the right from time to time to effect such insurance for the
benefit of Tenant or Landlord or both of them and all premiums paid by Landlord
shall be payable by Tenant as additional rent on demand. Tenant shall pay to
Landlord, immediately upon demand all costs incurred by Landlord as a result of
Tenant's failure to obtain and maintain in effect the policies of insurance
required under this Article 10.
10.7 Tenant waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Tenant insuring or covering the Premises, or any portion or
any contents thereof, or any operations therein, all rights of subrogation which
any insurer might otherwise, if at all, have to any claims of Tenant against
Landlord. Landlord waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Landlord insuring or covering the Premises or any portion
or any contents thereof, or any operations therein, all rights of subrogation
which any insurer might otherwise, if at all, have to any claims of Landlord
against Tenant. Tenant shall, prior to or immediately after the date of this
Lease, procure from each of the insurers under all policies of property,
liability and other insurance (excluding workers' compensation) now or hereafter
carried by Tenant insuring or covering the Premises, or any portion or any
contents thereof, or any operations therein, a waiver of all rights of
subrogation which the insurer might otherwise, if at all, have to any claims of
Tenant against Landlord as required by this section 10.6.
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ARTICLE 11
Compliance With Legal Requirements
11.1 Tenant shall, at Tenant's sole cost and expense, promptly comply with
all of the following (collectively, "Legal Requirements") laws, ordinances,
rules, regulations, orders and other requirements of any government or public
authority now in force or which may hereafter be in force, with all requirements
of any board of fire underwriters or other similar body now or hereafter
constituted, with all directions and certificates of occupancy issued pursuant
to any law by any governmental agency or officer and with all recorded
covenants, conditions or restrictions, insofar as any thereof relate to or are
required by the condition, use or occupancy of the Premises or the operation,
use or maintenance of any personal property, fixtures, machinery, equipment or
improvements in the Premises. Tenant's obligations under this section 11.1 shall
include the obligation to make alterations or improvements to the Premises if
required to comply with any Legal Requirements.
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20
ARTICLE 12
Assignment or Sublease
12.1 Tenant shall not, directly or indirectly, without the prior written
consent of Landlord (which consent shall not be unreasonably withheld), assign
this Lease or any interest herein or sublease the Premises or any part thereof,
or permit the use or occupancy of the Premises by any person or entity other
than Tenant; provided, however, Landlord's withholding of consent shall be
conclusively presumed reasonable if: (a) the financial condition of the proposed
transferee is not suitable to perform the obligations being assumed by it
hereunder; or (b) the proposed use of the Premises (i) is not permitted
hereunder or under any Legal Requirements, or (ii) is other than office use
(except in the case of a sublease of the portions of the Premises to be used for
an employee cafeteria and child care center to the operators of those
facilities). This Lease shall not, nor shall any interest herein, be assignable
as to the interest of Tenant involuntarily or by operation of law without the
prior written consent of Landlord. Any of the foregoing acts without such prior
written consent of Landlord shall be void and shall, at the option of Landlord,
constitute a default that entitles Landlord to terminate this Lease.
Notwithstanding the foregoing, Landlord hereby consents to any sublease or
assignment to any direct or indirect wholly-owned subsidiary of either Tenant or
ICG Communications, Inc., a Delaware corporation or to any surviving corporation
resulting from a merger with Tenant, or to any corporation as part of the
acquisition of all or substantially all of the assets and business of Tenant
(collectively, a "Corporate Successor"), provided such sublease or assignment
otherwise complies with this Article 12, and provided further that Landlord does
not approve any such sublease or assignment in connection with a merger or
acquisition if the net worth or creditworthiness of such subtenant or assignee
is, in Landlord's reasonable judgment, less than that of Tenant prior to such
merger or acquisition transaction. Tenant agrees that the instrument by which
any assignment or sublease to which Landlord consents is accomplished shall
expressly provide that the assignee or subtenant will perform all of the
covenants to be performed by Tenant under this Lease (in the case of a sublease,
only insofar as such covenants relate to the portion of the Premises subject to
such sublease) as and when performance is due after the effective date of the
assignment or sublease and that Landlord will have the right to enforce such
covenants directly against such assignee or subtenant. Any purported assignment
or sublease without an instrument containing the foregoing provisions shall be
void. Tenant shall in all cases remain liable for the performance by any
assignee or subtenant of all such covenants.
12.2 If Landlord consents in writing, Tenant may complete the intended
assignment or sublease subject to the following covenants: (a) no assignment or
sublease shall be valid and no assignee or subtenant shall take possession of
the Premises or any part thereof until an executed duplicate original of such
assignment or sublease, in compliance with section 12.1, has been delivered to
Landlord, (b) no assignee or subtenant shall have a right further to assign or
sublease.
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12.3 No assignment or sublease whatsoever shall release Tenant from
Tenant's obligations and liabilities under this Lease or alter the primary
liability of Tenant to pay all rent and to perform all obligations to be paid
and performed by Tenant. The acceptance of rent by Landlord from any other
person or entity shall not be deemed to be a waiver by Landlord of any provision
of this Lease. Consent to one assignment or sublease shall not be deemed consent
to any subsequent assignment or sublease. If any assignee, subtenant or
successor of Tenant defaults in the performance of any obligation to be
performed by Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against such assignee,
subtenant or successor. Landlord may consent to subsequent assignments or
subleases or amendments or modifications to this Lease with assignees,
subtenants or successors of Tenant, without notifying Tenant or any successor of
Tenant and without obtaining any consent thereto from Tenant or any successor of
Tenant, and such action shall not release Tenant from liability under this
Lease.
12.4 Upon Tenant's entering into any agreement to sell or transfer all or
substantially all of its assets (whether or not the assets to be sold or
transferred include this Lease), Tenant shall within three (3) days thereafter
notify Landlord of the essential terms of such agreement. If Tenant sells or
transfers substantially all of its assets but does not expressly assign this
Lease to the transferee, then at Landlord's option, this Lease shall be deemed
to have been assigned to such transferee and such transferee shall be deemed to
have assumed all of Tenant's obligations under this Lease. If such transferee
does not expressly assume such obligations in writing within ten (10) days after
demand delivered to Tenant, the Stipulated Difference (as defined in section
14.2(c)) shall be increased by five million dollars ($5,000,000).
ARTICLE 13
Entry by Landlord
13.1 Landlord shall have the right, upon not less than twenty-four (24)
hours prior notice (except in cases of emergency), to enter the Premises at any
time to (a) inspect the Premises, (b) exhibit the Premises to prospective
purchasers, lenders or (during the last eighteen (18) months of the term)
tenants, (c) determine whether Tenant is performing all of Tenant's obligations,
(d) perform any obligations of Tenant in accordance with section 14.5, (e) post
notices of nonresponsibility in and about the Premises, (f) make any repairs to
the Premises and (g) investigate and perform tests to determine Tenant's
compliance with Article 21. In connection with any such entry, Landlord shall
use reasonable efforts to avoid any unnecessary disruption of or interference
with Tenant's business operation. Tenant waives all claims for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises or any other loss occasioned by
such entry. If Landlord removes any existing underground tanks and fueling
system from the Premises, Landlord shall have no obligation to replace them or
provide alternate tanks or a fueling system. Landlord shall at all times have a
key to unlock all such doors and Landlord shall have the right to use any and
all means which Landlord may deem proper to open such doors in an emergency to
obtain entry to the Premises. Any entry to the Premises obtained by Landlord by
any of such means shall not under any circumstances be construed or deemed to be
a forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
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ARTICLE 14
Events of Default and Remedies
14.1 The occurrence of any one or more of the following events ("Event of
Default") shall constitute a breach of this Lease by Tenant:
(a) Tenant fails to pay any Base Rent within five (5) days after the date
when such rent becomes due or fails to make the additional deposits to the Draw
Account within the time period set forth in section 24.5; or
(b) Tenant fails to pay any additional rent or other amount of money or
charge payable by Tenant hereunder as and when such additional rent or amount or
charge becomes due and payable and such failure continues for more than ten (10)
Business Days after Landlord gives written notice thereof to Tenant; provided,
however, that after the second such failure in a calendar year, only the passage
of time, but no further notice, shall be required to establish an Event of
Default in the same calendar year; or
(c) Tenant fails to perform or breaches any other agreement or covenant of
this Lease to be performed or observed by Tenant as and when performance or
observance is due and such failure or breach continues for more than ten (10)
Business Days after Landlord gives written notice thereof to Tenant; provided,
however, that if, by the nature of such agreement or covenant, such failure or
breach cannot reasonably be cured within such period of ten (10) Business Days,
an Event of Default shall not exist as long as Tenant commences with due
diligence and dispatch the curing of such failure or breach within a reasonable
period of time after becoming aware of such failure or breach and, having so
commenced, thereafter prosecutes with diligence and dispatch and completes the
curing of such failure or breach within a reasonable time; or
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(d) Tenant or any Guarantor (i) files, or consents by answer or otherwise
to the filing against it of, a petition for relief or reorganization or
arrangement or any other petition in bankruptcy or for liquidation or to take
advantage of any bankruptcy, insolvency or other debtors' relief law of any
jurisdiction, (ii) makes an assignment for the benefit of its creditors, (iii)
consents to the appointment of a custodian, receiver, trustee or other officer
with similar powers of Tenant (or any Guarantors) or of any substantial part of
Tenant's (or any Guarantor's) property, or (iv) takes action for the purpose of
any of the foregoing; or
(e) Without consent by Tenant or a Guarantor (as the case may be), a court
or government authority enters an order, and such order is not vacated within
thirty (30) days, (i) appointing a custodian, receiver, trustee or other officer
with similar powers with respect to Tenant or any Guarantor, or with respect to
any substantial part of Tenant's or any Guarantor's property, or (ii)
constituting an order for relief or approving a petition for relief or
reorganization or arrangement or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy, insolvency or other debtors'
relief law of any jurisdiction, or (iii) ordering the dissolution, winding-up or
liquidation of Tenant or any Guarantor; or
(f) This Lease or any estate of Tenant hereunder is levied upon under any
attachment or execution and such attachment or execution is not vacated within
thirty (30) days; or
(g) Tenant vacates or abandons the Premises; or
(h) Any Lease Guaranty (as defined in section 24.1) ceases to be in full
force and effect; or
(i) Tenant merges or sells or transfers all or substantially all of its
assets (whether or not the assets sold or transferred include this Lease),
unless Landlord consents to such transaction in accordance with section 12.1.
14.2 If an Event of Default occurs, Landlord shall have the right at any
time to give a written termination notice to Tenant and, on the date specified
in such notice, Tenant's right to possession shall terminate and this Lease
shall terminate. Upon such termination, Landlord shall have the right to recover
from Tenant:
(a) The worth at the time of award of all unpaid rent which had been earned
at the time of termination;
(b) The worth at the time of award of the amount by which all unpaid rent
which would have been earned after termination until the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided;
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(c) The worth at the time of award of the amount by which all unpaid rent
for the balance of the term of this Lease after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided;
provided that, in the event that, at the time of the termination of this Lease,
the Premises or any substantial portion of the Premises have not been relet, in
lieu of such amount, Landlord shall be entitled to withdraw the balance then
held in the Draw Account and retain such balance as liquidated damages for the
loss of the rents payable under this Lease for the balance of the term of this
Lease, in which event such liquidated damages would be accepted by Landlord in
full satisfaction of all damages suffered by Landlord for the loss of rents that
would have been payable under the Lease with respect to the period after the
date of termination of the Lease. The amount of funds from time to time in the
Draw Account pursuant to this Article 24 (subject to section 12.4) is referred
to herein as the "Stipulated Difference." Tenant and Landlord agree that (a) the
Stipulated Difference is a fair and reasonable estimate of the difference in
value of the Premises if Tenant's covenants and obligations, as tenant under the
Leases, are performed in all material respects and the value of the Premises if
such covenants and obligations are not performed in all material respects, (b)
that the definition of the term "Event of Default" reflects Tenant's and
Landlord's negotiated agreement as to a fair standard for determining whether
such covenants and obligations are being performed in all material respects, and
(c) that such difference in value will not be precisely calculable since it will
involve complex and intangible factors such as reduced salability of the
Premises, reduced creditworthiness of Landlord and harm to Landlord's business
reputation. Said liquidated damages would not be in lieu of or otherwise replace
amounts that Landlord would be entitled to collect under sections 14.2(a), (b)
and (d), and Landlord would be entitled to collect all of the same from Tenant
in addition to the liquidated damages provided for in this section 14.2(c); and
(d) All other amounts necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform all of Tenant's
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom. The "worth at the time of award" of the amounts
referred to in clauses (a) and (b) above shall be computed by allowing interest
at the Interest Rate (as defined in section 3.4). The "worth at the time of
award" of the amount referred to in clause (c) above shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank located
nearest the Premises at the time of award plus one percent (1%). For the purpose
of determining unpaid rent under clauses (a), (b) and (c) above, the rent
reserved in this Lease shall be deemed to be the total rent payable by Tenant
under Articles 3 and 5 hereof.
14.3 If an Event of Default occurs, Landlord may, without terminating this
Lease, terminate Tenant's right to possession of the Premises, in which event:
(a) Landlord may, with or without process of law, retake possession of
the Premises;
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25
(b) Tenant's obligations under this Lease (including the obligation to
pay rent on the dates specified in this Lease) shall continue unaffected
for the entire term of this Lease or until such earlier time as Landlord
may, at its option, elect to terminate this Lease which Landlord may, at
its option, do at any time;
(c) Without being deemed to have elected to terminate this Lease,
Landlord may relet the Premises in accordance with section 14.4 for the
account of Tenant, in the name of Landlord or in the name of Tenant on such
terms and conditions and to such tenants as Landlord may, in its
discretion, determine. Landlord shall be entitled to remodel and repair the
Premises, to subdivide the Premises, or to combine all or any portion or
portions of the Premises with other premises in any manner which Landlord
shall deem appropriate in order to accomplish such reletting; and Tenant
shall reimburse Landlord, on demand, for all costs and expenses in
connection with such repair or remodeling and reletting ("Reletting
Costs"). Notwithstanding Landlord's recovery of possession and
notwithstanding any reletting, Tenant shall continue to pay all rent
provided for herein as and when it comes due, less the net proceeds
received by Landlord from any reletting; provided that, if the proceeds of
reletting exceed the amount due from Tenant, on or before the 15th day of
each month, Landlord shall refund to Tenant any amount by which the rent
paid by Tenant through such date, when added to the amount, if any,
recovered by Landlord through any reletting of the Premises through such
date, reduced by all Reletting Costs for which Tenant has not paid
Landlord, and reduced by all amounts Landlord has previously refunded to
Tenant under this subsection, and reduced any other amounts Tenant owes
Landlord under this Lease, exceeds the rent due under this Lease through
such date. Tenant shall reimburse Landlord upon demand for all Reletting
Costs and any other costs and expenses which Landlord may incur in
connection with recovery of possession or repair of the Premises;
(d) In the event Landlord proceeds under this section 14.3, Landlord
may at any time terminate this Lease by notice to Tenant. Such termination
shall have the effect specified in section 14.2 and Landlord shall be
entitled to all remedies under section 14.2 upon termination.
14.4 Landlord shall have no duty to attempt to mitigate its damages by
retaking and reletting the Premises; provided that, if Landlord retakes
possession of the Premises under either section 14.2 or section 14.3, Landlord
shall use good faith reasonable efforts to relet the Premises, subject to the
following terms, conditions and limitations:
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(a) Any reletting of the Premises shall be on the terms and conditions
determined by Landlord in its reasonable good faith discretion and to such
tenants as Landlord shall approve in its reasonable good faith discretion.
Without limiting the generality of the foregoing, Tenant acknowledges that,
in reletting the Premises, Landlord may legitimately consider the effect of
any such reletting on the Premises and on any other property owned by
Landlord or any other person or entity controlling, controlled by, or under
common control with Landlord, or otherwise affiliated with Landlord (which
parties are referred to herein collectively as "Landlord Affiliates"), and,
therefore, may decide not to lease the Premises at rates which are lower
than Landlord is otherwise endeavoring to maintain in the Premises, or at
rates which are lower than the rate that Landlord believes to be
appropriate for the Premises.
(b) Tenant recognizes that Landlord and Landlord's Affiliates
currently and in the future may have vacant space in the Premises and other
property and may in the future also have vacant space in new projects in
competition with the Premises. In no event shall Landlord be obligated to
use any effort to relet the Premises in preference to leasing any such
other vacant space then available for leasing by landlord or any of
Landlord's Affiliates. Landlord shall not be deemed to have failed to
mitigate damages solely on account of the leasing of other space which
Landlord or Landlord's Affiliates have available instead of the reletting
of the Premises.
14.5 Whether or not Landlord elects to terminate this Lease on account of
any Event of Default by Tenant, and subject to Landlord's duty to attempt to
mitigate its damages as provided herein, Landlord shall have the right to
terminate any and all subleases, licenses, concessions or other consensual
arrangements for possession entered into by Tenant and affecting the Premises or
may, in Landlord's sole discretion, succeed to Tenant's interest in such
sublease, licenses, concessions or arrangements. In the event of Landlord's
election to succeed to Tenant's interest in any such subleases, licenses,
concessions or arrangements, Tenant shall, as of the date of notice by Landlord
of such election, have no further right to or interest in the rent or other
consideration receivable thereunder, except that amounts actually received by
Landlord thereunder shall be credited against any amounts payable by Tenant
hereunder.
14.6 Except as otherwise provided in section 14.2(c), the remedies provided
for in this Lease are in addition to all other remedies available to Landlord at
law or in equity by statute or otherwise.
14.7 All agreements and covenants to be performed or observed by Tenant
under this Lease shall be at Tenant's sole cost and expense and without any
abatement of rent. If Tenant fails to pay any sum of money to be paid by Tenant
or to perform any other act to be performed by Tenant under this Lease, Landlord
shall have the right, but shall not be obligated, and without waiving or
releasing Tenant from any obligations of Tenant, to make any such payment or to
perform any such other act on behalf of Tenant in accordance with this Lease.
All sums so paid by Landlord and all necessary incidental costs shall be deemed
additional rent hereunder and shall be payable by Tenant to Landlord on demand,
together with interest on all such sums from the date of expenditure by Landlord
to the date of repayment by Tenant at the Interest Rate. Landlord shall have, in
addition to all other rights and remedies of Landlord, the same rights and
remedies in the event of the nonpayment of such sums plus interest by Tenant as
in the case of default by Tenant in the payment of rent.
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14.8 If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise, any movable furniture, equipment, trade fixtures or
personal property belonging to Tenant and left in the Premises shall be deemed
to be abandoned, at the option of Landlord, and Landlord shall have the right to
sell or otherwise dispose of such personal property in any commercially
reasonable manner.
ARTICLE 15
Damage or Destruction
15.1 If the Premises, or any part thereof, is damaged by fire or other
casualty before the Commencement Date or during the term of this Lease, Tenant
shall repair such damage and restore the Premises to substantially the same or
better condition as existed before the occurrence of such fire or other
casualty, Tenant shall repair and replace all such movable furniture, equipment,
trade fixtures and personal property, and this Lease shall remain in full force
and effect. Such repair and replacement by Tenant shall be done in accordance
with Article 9. In no event shall rent abate. Provided that Tenant shall have
unconditionally ratified in writing its repair and restoration obligations
pursuant to this section 15.1 with respect to such casualty, Tenant shall have
the right to participate in the adjustment of any insurance claim arising from
such casualty and shall have the right to approve any settlement or adjustment,
which approval shall not unreasonably be withheld or delayed. Provided Tenant is
not in default under this Lease (and no event has occurred which, with the
passage of time, the giving of notice, or both, would constitute a default), and
provided Tenant has (i) delivered to Landlord plans and specifications and a
budget for such repair and restoration (all of which Landlord shall have
approved in its reasonable judgment), and (ii) deposited with Landlord cash in
the sum equal to the excess, if any, of the total cost set forth in such
approved budget over the amount of insurance proceeds received on account of
such casualty, then Landlord shall make available to Tenant all insurance
proceeds actually received by Landlord on account of such casualty, for
application to the costs of such approved repair and restoration, as follows:
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(a) No more frequently than once per calendar month, Tenant may
request that Landlord reimburse Tenant for costs incurred by Tenant for
work in place to repair and restore the Premises during the immediately
preceding calendar month. Tenant's request shall certify that all work for
which reimbursement is requested was performed in compliance with the plans
and specifications approved by Landlord pursuant to Article 9 and all
applicable laws, and shall include reasonably satisfactory evidence of the
costs incurred by Tenant and unconditional lien releases in form and
substance required by applicable law executed by all mechanic's,
materialmen, laborers, suppliers and contractors who performed any portion
of the repair work or supplied materials.
(b) Within fifteen (15) days after receiving Tenant's request,
Landlord shall approve or disapprove Tenant's request, which approval shall
not be unreasonably withheld, by written notice to Tenant. If Landlord
approves all or any portion of a request and Landlord has received (and not
previously disbursed) insurance proceeds, then Landlord's approval shall
include a check in the amount approved by Landlord. If Landlord disapproves
all or any portion of a request, then Landlord's notice shall state the
reasons for that disapproval. Landlord's failure to deliver a notice
approving or disapproving a request shall be conclusively deemed Landlord's
disapproval of the request. In addition, Landlord shall have the right to
impose other conditions upon disbursement so long as they are consistent
with customary construction loan disbursement practices. Landlord shall
maintain in an interest-bearing account any proceeds of insurance held by
Landlord and any sums deposited with Landlord by Tenant pursuant to this
section 15.1, and so long as no default by Tenant under this Lease has
occurred, interest earned on such account shall be disbursed to Tenant upon
completion of such repair and restoration, except to the extent such
interest has been applied to the costs of such repair and restoration.
15.2 If the Premises, or any part thereof, is damaged by fire or other
casualty and (a) such fire or other casualty occurs during the last twelve (12)
months of the term of this Lease and the repair and restoration work to be
performed by Tenant in accordance with section 15.1 cannot, as reasonably
estimated by Landlord, be completed within four (4) months after the occurrence
of such fire or other casualty, or (b) the insurance proceeds received by
Landlord and Tenant in respect of such damage are not adequate to pay the entire
cost, as reasonably estimated by Landlord, of the repair and restoration work to
be performed by Landlord in accordance with section 15.1 and Tenant does not
deposit such shortfall with Landlord, then, in any such event, Landlord shall
have the right, by giving written notice to Tenant within sixty (60) days after
the occurrence of such fire or other casualty, to terminate this Lease as of the
date of such notice, in which case all insurance proceeds on account of such
casualty shall be paid to Landlord. If Landlord does not exercise the right to
terminate this Lease in accordance with this section 15.2, Tenant shall repair
such damage and restore the Premises in accordance with section 15.1 and this
Lease shall remain in full force and effect.
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ARTICLE 16
Eminent Domain
16.1 If a substantial portion of the Premises is taken and the remaining
portion of the Premises is not reasonably suitable for Tenant's purposes, or if
a portion of the Premises is taken resulting in a substantial loss of access to
and from the Premises without reasonable substitute access being available,
Landlord and Tenant each shall have the right, by giving written notice to the
other within thirty (30) days after the date of such taking, to terminate this
Lease. If either Landlord or Tenant exercises such right to terminate this Lease
in accordance with this section 16.1, this Lease shall terminate as of the date
of such taking. If neither Landlord nor Tenant exercises such right to terminate
this Lease in accordance with this section 16.1, this Lease shall terminate as
to the portion of the Premises so taken as of the date of such taking and shall
remain in full force and effect as to the portion of the Premises not so taken,
Tenant shall restore the portion of the Premises not so taken to an integrated
architectural unit in accordance with Article 9 and the Base Rent shall be
reduced as of the date of such taking in the proportion that the rentable area
of the Premises so taken bears to the total rentable area of the Premises. If
all of the Premises is taken by exercise of the power of eminent domain before
the Commencement Date or during the term of this Lease, this Lease shall
terminate as of the date of such taking.
16.2 If all or any part of the Premises is taken by exercise of the power
of eminent domain, all awards, compensation, damages, income, rent and interest
payable in connection with such taking shall, except as expressly set forth in
this section 16.2, be paid to and become the property of Landlord, and Tenant
hereby assigns to Landlord all of the foregoing. Without limiting the generality
of the foregoing, Tenant shall have no claim against Landlord or the entity
exercising the power of eminent domain for the value of the leasehold estate
created by this Lease or any unexpired term of this Lease. Tenant shall have the
right to claim and receive directly from the entity exercising the power of
eminent domain only the share of any award determined to be owing to Tenant for
the taking of improvements installed in the portion of the Premises so taken by
Tenant at Tenant's sole cost and expense based on the unamortized cost actually
paid by Tenant for such improvements, for the taking of Tenant's movable
furniture, equipment, trade fixtures and personal property, for loss of
goodwill, for interference with or interruption of Tenant's business, or for
removal and relocation expenses.
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16.3 In the event of any taking other than a taking referred to in section
16.1, this Lease shall continue in full force and effect, Tenant shall continue
to pay all of the rent and to perform all of the covenants of Tenant in
accordance with this Lease and Tenant shall restore the Premises to an
integrated architectural unit in accordance with Article 9. Provided Tenant is
not in default under this Lease (and no event has occurred which, with the
passage of time, the giving of notice, or both, would constitute a default), and
provided Tenant has (i) delivered to Landlord plans and specifications and a
budget for such repair and restoration (all of which Landlord shall have
approved in its reasonable judgment), and (ii) deposited with Landlord cash in
the sum equal to the excess, if any, of the total cost set forth in such
approved budget over the amount of condemnation award proceeds received on
account of such taking, then Landlord shall make available to Tenant all
condemnation award proceeds actually received by Landlord on account of such
taking, for application to the costs of such approved repair and restoration, as
follows:
(a) No more frequently than once per calendar month, Tenant may
request that Landlord reimburse Tenant for costs incurred by Tenant for
work in place to repair and restore the Premises during the immediately
preceding calendar month. Tenant's request shall certify that all work for
which reimbursement is requested was performed in compliance with the plans
and specifications approved by Landlord pursuant to Article 9 and all
applicable laws, and shall include reasonably satisfactory evidence of the
costs incurred by Tenant and unconditional lien releases in form and
substance required by applicable law executed by all mechanic's,
materialmen, laborers, suppliers and contractors who performed any portion
of the repair work or supplied materials.
(b) Within fifteen (15) days after receiving Tenant's request,
Landlord shall approve or disapprove Tenant's request, which approval shall
not be unreasonably withheld, by written notice to Tenant. If Landlord
approves all or any portion of a request and Landlord has received (and not
previously disbursed) condemnation award proceeds, then Landlord's approval
shall include a check in the amount approved by Landlord. If Landlord
disapproves all or any portion of a request, then Landlord's notice shall
state the reasons for that disapproval. Landlord's failure to deliver a
notice approving or disapproving a request shall be conclusively deemed
Landlord's disapproval of the request. In addition, Landlord shall have the
right to impose other conditions upon disbursement so long as they are
consistent with customary construction loan disbursement practices.
Landlord shall maintain in an interest-bearing account any condemnation
award held by Landlord and any sums deposited with Landlord by Tenant
pursuant to this section 16.3, and so long as no default by Tenant under
this Lease has occurred, interest earned on such account shall be disbursed
to Tenant upon completion of such repair and restoration, except to the
extent such interest has been applied to the costs of such repair and
restoration.
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16.4 As used in this Article 16, a "taking" means the acquisition of all or
part of the Premises for a public use by exercise of the power of eminent domain
(or a sale of any or all of the Premises in lieu, or under threat, thereof) and
the taking shall be considered to occur as of the earlier of the date on which
possession of the Premises (or part so taken) by the entity exercising the power
of eminent domain is authorized as stated in an order for possession or the date
on which title to the Premises (or part so taken) vests in the entity exercising
the power of eminent domain.
ARTICLE 17
Subordination, Merger and Sale
17.1 This Lease shall be subject and subordinate at all times to the lien
of all mortgages and deeds of trust securing any amount or amounts whatsoever,
and any ground lease or master lease of the Premises, which may now exist or
hereafter be placed on or against the Premises or on or against Landlord's
interest or estate therein, all without the necessity of having further
instruments executed by Tenant to effect such subordination. Notwithstanding the
foregoing, in the event of a foreclosure of any such mortgage or deed of trust
or of any other action or proceeding for the enforcement thereof, or of any sale
thereunder, or in the event any such ground lease or master lease is terminated,
this Lease shall not be terminated or extinguished, nor shall the rights and
possession of Tenant hereunder be disturbed, if no Event of Default then exists
under this Lease, and Tenant shall attorn to the person who acquires Landlord's
interest hereunder through any such mortgage or deed of trust. Tenant agrees to
execute, acknowledge and deliver upon demand such further instruments evidencing
such subordination of this Lease to the lien of all such mortgages and deeds of
trust or to all such ground leases or master leases of the Premises as may
reasonably be required by Landlord, but Tenant's covenant to subordinate this
Lease to mortgages or deeds of trust, or ground leases or master leases,
hereafter executed is conditioned upon each such senior mortgage or deed of
trust, or ground lease or master lease, or a separate subordination agreement,
containing the commitments specified in the preceding sentence. Without limiting
the generality of the foregoing, Tenant agrees to enter into a subordination,
nondisturbance and attornment agreement in the form required by the holder of
any such mortgage or deed of trust or by any party to any such ground lease or
master lease.
17.2 The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or operate as
an assignment to Landlord of any or all such subleases or subtenancies.
17.3 If the original Landlord hereunder, or any successor owner of the
Premises, sells or conveys the Premises, all liabilities and obligations on the
part of the original Landlord, or such successor owner, under this Lease
accruing after such sale or conveyance shall terminate and the original
Landlord, or such successor owner, shall automatically be released therefrom,
and thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner.
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ARTICLE 18
Estoppel Certificate
18.1(a) At any time and from time to time, Tenant shall, within ten (10)
days after written request by Landlord, execute, acknowledge and deliver to
Landlord a certificate, in the form attached as Exhibit A, or such other form as
may be requested, certifying: (i) that this Lease is unmodified and in full
force and effect (or, if there have been modifications, that this Lease is in
full force and effect as modified, and stating the date and nature of each
modification); (ii) the Commencement Date and the Expiration Date determined in
accordance with Article 2 and the date, if any, to which all rent and other sums
payable hereunder have been paid; (iii) that no notice has been received by
Tenant of any default by Tenant hereunder which has not been cured, except as to
defaults specified in such certificate; (iv) that Landlord is not in default
under this Lease, except as to defaults specified in such certificate; and (v)
such other matters as may be reasonably requested by Landlord or any actual or
prospective purchaser or mortgage lender. Any such certificate may be relied
upon by Landlord and any actual or prospective purchaser or mortgage lender of
the Premises or any part thereof.
(b) At any time and from time to time, Landlord shall, within ten (10) days
after written request by Tenant, execute, acknowledge and deliver to Tenant a
certificate certifying: (i) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full force
and effect as modified, and stating the date and nature of each modification);
(ii) the Commencement Date and the Expiration Date determined in accordance with
Article 2 and the date, if any, to which all rent and other sums payable
hereunder have been paid; (iii) that no notice has been received by Landlord of
any default by Landlord hereunder which has not been cured, except as to
defaults specified in such certificate; (iv) that Tenant is not in default under
this Lease, except as to defaults specified in such certificate; and (v) such
other matters as may be reasonably requested by Tenant. Any such certificate may
be relied upon by Tenant and any actual or prospective lender.
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33
ARTICLE 19
Holding Over
19.1 If, without objection by Landlord, Tenant holds possession of the
Premises after expiration of the term of this Lease, Tenant shall become a
tenant from month to month upon the terms herein specified but at a Base Rent
equal to one hundred twenty percent (120%) of the Base Rent in effect at the
expiration of the term of this Lease pursuant to Article 3, payable in advance
on or before the first day of each month. Such month to month tenancy may be
terminated by either Landlord or Tenant by giving thirty (30) days' written
notice of termination to the other at any time.
ARTICLE 20
Financial Statements
20.1 On or before April 1 of each year, Tenant shall deliver to Landlord
audited consolidated financial statements of ICG Communications, Inc., a
Delaware corporation ("ICGC"), and its consolidated subsidiaries ("Financial
Statements") for the fiscal year of ICGC ended on the previous December 31,
which Financial Statements shall include an audited consolidated balance sheet
of ICGC and its consolidated subsidiaries as at the end of such fiscal year, a
consolidated statement of operations of ICGC and its consolidated subsidiaries
for such fiscal year, and a certificate of ICGC's auditor (which shall be a
recognized national independent accounting firm) to the effect that such
Financial Statements were prepared in accordance with generally accepted
accounting principals consistently applied and fairly present the financial
condition and operations of ICGC and its consolidated subsidiaries for and as at
the end of such fiscal year.
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ARTICLE 21
Hazardous Materials
21.1 As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material or waste, or any pollutant or contaminant, or words of
similar import, which is or becomes regulated by any local governmental
authority, the state in which the Premises are located, or the United States
Government. The term "Hazardous Material" includes, but is not limited to, any
material or substance which is, (a) designated as a "hazardous substance"
pursuant to section 311 of the Federal Water Pollution Control Act (33 U.S.C.
section 1317), (b) defined as a "hazardous waste" pursuant to section 1004 of
the Federal Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et
seq. (42 U.S.C. section 6903), (c) defined as a "hazardous substance" pursuant
to section 101 of the Comprehensive Environmental Response Compensation and
Liability Act (42 U.S.C. section 9601 et seq.), (d) asbestos, (e) petroleum
(including crude oil or any fraction thereof, natural gas, natural gas liquids,
liquefied natural gas, or synthetic gas usable for fuel, or any mixture
thereof), (f) petroleum products, (g) polychlorinated biphenyls, (h) urea
formaldehyde, (i) radon gas, (j) radioactive matter, (k) medical waste, and (l)
chemicals which may cause cancer or reproductive toxicity.
21.2 As used herein, the term "Environmental Requirements" means all laws,
ordinances, rules, regulations, orders and other requirements of any government
or public authority now in force or which may hereafter be in force relating to
protection of human health or the environment, including all requirements
pertaining to reporting, licensing, permitting, investigation and remediation of
emissions, discharges, storage, disposal or releases of Hazardous Materials and
all requirements pertaining to the protection of the health and safety of
employees or the public.
21.3 Tenant shall not permit or conduct the handling, use, generation,
treatment, storage or disposal on, in or about the Premises of any Hazardous
Material (other than normal quantities of office supplies and cleaning supplies
which Tenant shall handle, use, store and dispose of in compliance with all
Environmental Requirements) without prior written notice to Landlord. Any such
notice by Tenant to Landlord shall be in writing and shall demonstrate to the
reasonable satisfaction of Landlord that such Hazardous Material is necessary to
the business of Tenant and will be handled, used, generated, treated, stored or
disposed of in a manner that complies with all Environmental Requirements. Any
such handling, use, generation, treatment, storage or disposal of any Hazardous
Material permitted by Landlord hereunder shall be in compliance with all
Environmental Requirements.
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21.4 Tenant shall, within five (5) days after the receipt thereof, give
written notice to Landlord of any notice or other communication regarding any
(a) actual or alleged violation of Environmental Requirements by Tenant or with
respect to the Premises, (b) actual or threatened migration of Hazardous
Material from the Premises, or (c) the existence of Hazardous Material in or on
the Premises or regarding any actual or threatened investigation, inquiry,
lawsuit, claim, citation, directive, summons, proceeding, complaint, notice,
order, writ or injunction relating to any of the foregoing.
21.5 Tenant shall indemnify and defend Landlord against and hold Landlord
harmless from all claims, demands, liabilities, damages, fines, encumbrances,
liens, losses, costs and expenses, including reasonable attorneys' fees and
disbursements, and costs and expenses of investigation, arising from or related
to the existence on or after the Commencement Date of Hazardous Material in or
on the Premises or the actual or threatened migration on or after the
Commencement Date of Hazardous Material from the Premises or the existence on or
after the Commencement Date of a violation of Environmental Requirements by
Tenant or with respect to the Premises. The obligations of Tenant under this
section 21.5 shall not be affected by any investigation by or on behalf of
Landlord or by any information which Landlord may have or obtain with respect
thereto. Tenant shall, to the reasonable satisfaction of Landlord, perform all
remedial actions necessary to remove any Hazardous Material in or on the
Premises on or after the Commencement Date or to remedy actual or threatened
migration from the Premises of any Hazardous Material or to remedy any actual or
threatened violation of Environmental Requirements, provided such remedial
action is required under Environmental Requirements. This section 21.5 shall
survive termination of this Lease.
21.6 If, at any time when the term of this Lease (including any renewal
term) would expire but for the terms of this section 21.6, Hazardous Material
exists in, on, about or under the Premises, then the term of this Lease shall
automatically be extended and this Lease shall remain in effect until the
earlier of (a) the completion of all remedial action required under section
21.5, or (b) the date specified in a written notice from Landlord to Tenant
terminating this Lease. During any such extension period, Tenant shall perform
all of its obligations under this Lease including payments of all rent due
hereunder.
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ARTICLE 22
Waiver
22.1 The waiver by Landlord or Tenant of any breach of any covenant in this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other covenant in this Lease, nor shall any custom or practice which may
grow up between Landlord and Tenant in the administration of this Lease be
construed to waive or to lessen the right of Landlord or Tenant to insist upon
the performance by Landlord or Tenant in strict accordance with this Lease. The
subsequent acceptance of rent hereunder by Landlord or the payment of rent by
Tenant shall not waive any preceding breach by Tenant of any covenant in this
Lease, nor cure any Event of Default, nor waive any forfeiture of this Lease or
unlawful detainer action, other than the failure of Tenant to pay the particular
rent so accepted, regardless of Landlord's or Tenant's knowledge of such
preceding breach at the time of acceptance or payment of such rent.
ARTICLE 23
Notices
23.1 All requests, approvals, consents, notices and other communications
given by Landlord or Tenant under this Lease shall be properly given only if
made in writing and either deposited in the United States mail, postage prepaid,
certified with return receipt requested, or delivered by hand (which may be
through a messenger or recognized delivery or courier service) and addressed as
follows: To Landlord at the address of Landlord specified in the Basic Lease
Information, or at such other place as Landlord may from time to time designate
in a written notice to Tenant; and to Tenant, before the Commencement Date, at
the address of Tenant specified in the Basic Lease Information, and after the
Commencement Date, at the Premises, or at such other place as Tenant may from
time to time designate in a written notice to Landlord. Such requests,
approvals, consents, notices and other communications shall be effective on the
date of receipt (evidenced by the certified mail receipt) if mailed or on the
date of delivery if hand delivered.
ARTICLE 24
Guaranties; Security Deposit
24.1 As a condition precedent for Landlord's benefit to the effectiveness
of this Lease and the Commencement Date, on or before the Commencement Date
Tenant shall cause to be delivered to Landlord Continuing Lease Guaranties in
the form attached hereto as Exhibit B, executed by the respective Guarantors
specified in the Basic Lease Information (the "Lease Guaranties").
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37
24.2 As a condition precedent for Landlord's benefit to the effectiveness
of this Lease and the Commencement Date, on or before the Commencement Date
Tenant shall deposit with Landlord by wire transfer the amount of ten million
dollars ($10,000,000) (the "Security Amount") to be held by Landlord as a
security deposit in accordance with this Article 24. The Security Amount shall
be held in an interest-bearing account in Landlord's own name as secured party
with respect to the security interest hereby granted by Tenant, as cash
collateral (the "Draw Account"), established with a financial institution
selected by Landlord and reasonably satisfactory to Tenant. Funds in the Draw
Account shall be invested in such Permitted Investments (as hereinafter
defined), as Tenant may from time to time designate by written notice to
Landlord and as approved by Landlord in its reasonable discretion. The term
"Permitted Investments" means money market accounts with, or certificates of
deposit issued by, a national bank or other depository institution which bank or
institution is satisfactory to Landlord in its sole discretion; United States
Treasury securities; or commercial paper rated AAA or better by Standard and
Poors Corporation (or equivalent rating of another nationally recognized credit
rating agency). Risk of loss of the amounts held in the Draw Account shall be
borne by Tenant, and Landlord shall have no liability for any loss, or
diminution in value, of the Draw Account due to any failure of, or other
financial problems affecting, such financial institution. Interest earned on the
Draw Account shall for all purposes become part of the Draw Account. On each
anniversary of the date the funds are deposited in the Draw Account, amounts
held in the Draw Account in excess of the Security Amount (as the same may have
been adjusted pursuant to section 24.6) shall be disbursed as follows: (a)
first, to pay all reasonable costs to establish and maintain the Draw Account;
and (b) second, the balance, if any, to Tenant. Tenant hereby grants to Landlord
a security interest in the Draw Account and all proceeds thereof to secure the
full and timely performance of Tenant's obligations under this Lease. In
addition to the remedies set forth in this Lease, Landlord shall have all of the
rights and remedies of a secured party pursuant to the Massachusetts Uniform
Commercial Code. At any time upon Landlord's request, Tenant shall execute and
deliver to Landlord such security agreements, financing statements and other
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documents as Landlord may reasonably require to further evidence and perfect
such security interest.
24.3 If this Lease is terminated and Landlord is entitled to liquidated
damages in accordance with section 14.2(c), Landlord may withdraw all of the
funds then remaining in the Draw Account and retain the withdrawn amount.
24.4 Landlord may, from time to time, withdraw funds from the Draw Account
for application against any installment of Rent not paid when due or to pay any
other amount payable by Tenant hereunder that is not paid when due, including
amounts payable by Tenant under this Lease to reimburse Landlord for amounts
paid by Landlord for the account of Tenant as provided for in this Lease.
24.5 In the event of a partial withdrawal of funds from the Draw Account in
accordance with section 24.4, Tenant shall, within five (5) business days after
Landlord has given Tenant notice of such withdrawal (including the purpose of
such withdrawal), deposit to the Draw Account such additional funds as shall be
necessary to cause the amount of funds in the Draw Account to be returned to the
Security Amount and if Tenant fails to do so within that 5-day period, an Event
of Default shall be deemed to have occurred and the Landlord may terminate this
Lease and/or exercise any of its other rights and remedies, including its rights
under this Article 24.
24.6 The Security Amount shall be subject to adjustment on the terms and
conditions set forth in this section 24.6. As of April 15 of each year
commencing with April 15, 2001 (each a "Reduction Date"), the Security Amount
shall be reduced by the Reduction Amount (as defined below) applicable to such
Reduction Date, provided that, as of such Reduction Date, all of the following
conditions (the "Reduction Conditions") are satisfied:
(a) Either
(i)(A) the net income of ICGC during each of the immediately
preceding three fiscal years shall have been more than one dollar
($1.00), and (B) the average annual net income of ICGC during the
immediately preceding three fiscal years shall have been more than an
amount equal to (1) ten (10), multiplied by (2) the average annual
Base Rent payable under this Lease during such three fiscal year
period; or
(ii)(A) during each of the immediately preceding three (3) fiscal
years, the ratio of (1) ICGC's Net Cash Flow (as defined below) during
such year, to (2) ICGC's Fixed Charges (as defined below) during such
year shall have exceeded 2.0 to 1, and (B) the average annual Net Cash
Flow of ICGC during the immediately preceding three (3) fiscal years
shall have been more than an amount equal to (1) ten (10), multiplied
by (2) the average annual Base Rent payable under this Lease during
such three fiscal year period; and
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(b) ICGC's Market Capitalization (as defined below) exceeds one
billion dollars ($1,000,000,000); and
(c) ICG Holdings, Inc. occupies one hundred percent (100%) of the
Premises as its headquarters and system operations center; and
(d) no Event of Default has occurred and is continuing; and
(e) no Reduction Event shall have occurred during the previous three
hundred sixty-five (365) days; and
(f) Tenant shall have delivered to Landlord (i) a certificate signed
by the Chief Financial Officer of ICGC and a senior executive officer of
Tenant, certifying that, as of the date of such certificate, each of the
Reduction Conditions is satisfied, and (ii) detailed calculations, based
upon the Financial Statements of ICGC for the relevant years, demonstrating
to Landlord's reasonable satisfaction that the Reduction Condition set
forth in clause (a) above is satisfied.
References in this section 24.6 to ICGC mean ICGC and its consolidated
subsidiaries, on a consolidated basis in accordance with GAAP. References in
this section 24.6 to financial terms refer to such terms determined in
accordance with GAAP. As used herein, the following terms have the meanings
indicated below:
"Fixed Charges" means, for any period, all taxes, interest expense
(cash and non-cash), rent and lease expenses and the current portion of
long-term debt for such period.
"Market Capitalization" means, as of any date, the product of (1) the
total number of shares of common stock of ICGC traded on a major stock
exchange or on the NASDAQ National Market System, multiplied by (2) the per
share price of such common stock most recently quoted on such exchange or
Market System, as published in The Wall Street Journal.
"Net Cash Flow" means, for any period, net income during such period,
plus depreciation, amortization, impairment losses [and non-cash interest]
during such period.
"Reduction Amount" means the respective amounts set forth below for
the respective Reduction Dates indicated:
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Reduction Date Reduction Amount
--------------------- ------------------
April 15, 2001 $1,250,000
April 15, 2002 $1,250,000
Each April 15
from April 15,
2003 to April 15,
2007, inclusive $1,500,000
Each April 15
from April 15,
2008 to April 15,
2012, inclusive $2,000,000
Upon the occurrence of any Reduction Event, Landlord shall deliver to Tenant an
amount equal to the excess of the funds then held in the Draw Account over the
adjusted Security Amount becoming effective upon such Reduction Date.
24.7(a) The Security Amount shall be reduced to five million dollars
($5,000,000) at any time that Tenant delivers to Landlord reasonably
satisfactory evidence that:
(i) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than twelve (12) months (without any
"CreditWatch" or downgrade consideration), ratings of its unsecured debt of
BBB- or better from Standard and Poor's Corporation ("S&P") and Baa3 or
better from Moody's Investors Service ("Moody's"); or
(ii) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than eighteen (18) months (without any
"CreditWatch" or downgrade consideration), a rating of its unsecured debt
of BBB- or better from S&P or Baa3 or better from Moody's, and a rating of
its unsecured debt of BBB- or better from Duff & Phelps Credit Rating Co.
("Duff");
provided that, as of the date Tenant would be entitled to such reduction, no
Event of Default has occurred and is continuing. Upon the occurrence of any such
reduction, Landlord shall deliver to Tenant from the Draw Account an amount
equal to the excess (if any) of the funds then held in the Draw Account over the
adjusted Security Amount becoming effective upon such reduction. If the Security
Amount is less than five million dollars ($5,000,000), this section 24.7(a)
shall have no effect.
(b) Tenant's obligations pursuant to this Article 24 to provide security
shall terminate, and Landlord shall return to Tenant all funds remaining in the
Draw Account at any time that Tenant delivers to Landlord reasonably
satisfactory evidence that:
(i) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than eighteen (18) months (without any
"CreditWatch" or downgrade consideration), ratings of its unsecured debt of
BBB or better from S&P and Baa2 or better from Moody's; or
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41
(ii) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than twenty-four (24) months (without any
"CreditWatch" or downgrade consideration), ratings of its unsecured debt of
BBB- or better from S&P and Baa3 or better from Moody's; or
(iii) either Tenant or ICGC shall have obtained, and maintained for a
continuous period of not less than thirty (30) months (without any
"CreditWatch" or downgrade consideration), a rating of its unsecured debt
of BBB- or better from S&P or Baa3 or better from Moody's, and a rating of
its unsecured debt of BBB- or better from Duff & Phelps Credit Rating Co.
("Duff");
provided that, as of the time that Tenant delivers to Landlord such evidence of
such ratings, no Event of Default has occurred and is continuing.
24.8 Upon the expiration or sooner termination of this Lease, Landlord
shall return to Tenant any funds remaining in the Draw Account, provided that
Landlord shall have the right to retain in the Draw Account (and draw in
accordance with this Article 24) an amount which Landlord reasonably determines
to be equal to the damages Landlord has suffered arising from any uncured
default by Tenant.
24.9 So long as no Event of Default has occurred and is continuing, Tenant
shall have the right to provide Landlord, in lieu of the security described in
this Article 24, an irrevocable standby letter of credit in the amount of the
Security Amount, in form and substance satisfactory to Landlord and issued by a
bank satisfactory to Landlord (a "Letter of Credit"). In the event Tenant elects
to so provide a Letter of Credit, Landlord and Tenant shall negotiate in good
faith an amendment to this Lease to set forth the rights and obligations of
Landlord and Tenant with respect to the Letter of Credit, the terms of which
amendment shall provide Landlord with comparable security, in Landlord's
reasonable judgment, to that provided pursuant to this Article 24.
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ARTICLE 25
Miscellaneous
25.1 The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. The words "include," "includes" and "including"
shall be deemed to be followed by the phrase "without limitation." Tenant shall
indemnify and defend Landlord against and hold Landlord harmless from all
claims, demands, liabilities, damages, losses, costs and expenses, including
reasonable attorneys' fees and disbursements, arising out of or resulting from
any failure by Tenant to perform any of its obligations or any breach by Tenant
of any of its representations or warranties in accordance with this Lease. If
there is more than one Tenant, the obligations hereunder imposed upon Tenant
shall be joint and several. Time is of the essence of this Lease and each and
all of its provisions. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for lease,
and it is not effective as a lease or otherwise until execution and delivery by
both Landlord and Tenant. Subject to Article 12, this Lease shall benefit and
bind Landlord and Tenant and the personal representatives, heirs, successors and
assigns of Landlord and Tenant. If any provision of this Lease is determined to
be illegal or unenforceable, such determination shall not affect any other
provision of this Lease and all such other provisions shall remain in full force
and effect. This Lease shall be governed by and construed in accordance with the
laws of the state where the Premises are located.
25.2 If there is any legal action or proceeding between Landlord and Tenant
to enforce this Lease or to protect or establish any right or remedy under this
Lease, the unsuccessful party to such action or proceeding shall pay to the
prevailing party all costs and expenses, including reasonable attorneys' fees
and disbursements, incurred by such prevailing party in such action or
proceeding and in any appeal in connection therewith. If such prevailing party
recovers a judgment in any such action, proceeding or appeal, such costs,
expenses and attorneys' fees and disbursements shall be included in and as a
part of such judgment.
25.3 The exhibits and addenda, if any, specified in the Basic Lease
Information are attached to and made a part of this Lease.
25.4 Tenant warrants and represents to Landlord that Tenant and has not
authorized or employed, or acted by implication to authorize or to employ, any
real estate broker or salesman to act for Tenant in connection with this Lease.
25.5 Tenant and each person executing this Lease on behalf of Tenant
represents and warrants to Landlord that (a) Tenant is a corporation, duly
organized and validly existing under the laws of the State of Colorado, (b)
Tenant is qualified to do business in the state where the Premises is located,
(c) Tenant has full right, power and authority to enter into this Lease and to
perform all of Tenant's obligations hereunder, and (d) each person signing this
Lease on behalf of Tenant is duly and validly authorized to do so.
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25.6 There are no oral agreements between Landlord and Tenant affecting
this Lease, and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, offers, agreements and understandings,
oral or written, if any, between Landlord and Tenant or displayed by Landlord to
Tenant with respect to the subject matter of this Lease or the Premises. There
are no representations between Landlord and Tenant or between any real estate
broker and Tenant other than those expressly set forth in this Lease and all
reliance with respect to any representations is solely upon representations
expressly set forth in this Lease. This Lease may not be amended or modified in
any respect whatsoever except by an instrument in writing signed by Landlord and
Tenant.
ARTICLE 26
Option to Expand the Building
26.1(a) Upon and subject to the terms and conditions of this Article 26,
Landlord hereby grants to Tenant the right and option (the "Expansion Option")
(i) to request that Landlord construct the Expansion Improvements (as defined
below) and lease the Expansion Improvements to Tenant in accordance with
sections 26.2 and 26.4, or (ii) to request that Landlord purchase from, and
lease back to, Tenant the Expansion Improvements upon Tenant's construction
thereof in accordance with sections 26.3 and 26.4, or (iii) if Landlord declines
to construct or purchase from Tenant the Expansion Improvements, to (A)
subdivide the Premises and purchase the portion of the Premises on which the
Expansion Improvements are to be constructed and construct the Expansion
Improvements itself in accordance with section 26.5, or (B) construct the
Expansion Premises itself as a leasehold improvement without subdividing the
Premises in accordance with section 26.6.
(b) The additional improvements to be constructed if the Expansion Option
is exercised (the "Expansion Improvements") shall (i) be one or more buildings
separate from the existing Building, of design, nature and type substantially
similar to the existing Building, and (ii) be of a size and be located and
configured per the location and configuration of "Phase 2" shown in the Site
Plan attached hereto as Exhibit C, unless at the request of the Tenant,
Landlord, in its sole and absolute discretion, shall agree to construct or allow
Tenant to construct Expansion Improvements of a different design, nature or
type. Landlord shall have the right, but not the obligation, to provide a
proposal to construct the Expansion Improvements.
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44
(c) The Expansion Option shall be exercised by Tenant, if at all, by
written notice thereof (an "Expansion Notice") to Landlord given not earlier
than the Commencement Date and not later than the tenth (10th) anniversary of
the Commencement Date (the "Exercise Period"). The Expansion Notice may propose
either one or two buildings and shall be accompanied by preliminary conceptual
plans and specifications for the Expansion Improvements ("Preliminary Plans").
The Expansion Notice shall specify whether Tenant (i) proposes to construct the
Expansion Improvements itself and requests that Landlord purchase and lease back
the Expansion Improvements in accordance with sections 26.3 and 26.4, or (ii)
requests that Landlord construct the Expansion Improvements and lease them to
Tenant in accordance with sections 26.2 and 26.4. The Expansion Option may be
exercised from time to time, each exercise relating to a single additional
building. No purported exercise of the Expansion Option which fails to satisfy
the conditions set forth in section 26.7 and no valid exercise which is later
rescinded shall impair Tenant's right thereafter to exercise the Expansion
Option during the Exercise Period. As of the end of the Exercise Period, the
Expansion Option shall lapse and be of no further force and effect, except to
the extent theretofore exercised. Time is of the essence of this provision.
26.2 If the Expansion Notice requests that Landlord constructs the
Expansion Improvements, then not later than sixty (60) days after delivery of
the Expansion Notice, Landlord shall notify Tenant if it elects not to construct
the Expansion Improvements (which election shall be in Landlord's sole
discretion), or, in the event Landlord proposes to construct the Expansion
Improvements, Landlord shall submit to Tenant a notice (the "Specification
Notice") which notice shall contain Landlord's best good faith estimate of (a)
the total costs (hard and soft) of constructing the Expansion Improvements, (b)
the projected date for completion and delivery to Tenant of the Expansion
Improvements, and (c) the projected Expansion Base Rent. Tenant may elect, by
written notice to Landlord within sixty (60) days following Tenant's receipt of
the Specification Notice, either to accept the terms of the Specification Notice
or to rescind its exercise of the Expansion Option. In the event Landlord shall
have notified Tenant that Landlord elects not to construct the Expansion
Improvements, then Tenant may elect, by written notice to Landlord within sixty
(60) days following Tenant's receipt of Landlord's notice, to either (i) rescind
its exercise of the Expansion Option, (ii) exercise the right (the "Leasehold
Improvement Option") to construct the Expansion Improvements on the Premises at
its sole cost in accordance with section 26.6, or (iii) exercise the right (the
"Tenant Subdivision Option") to cause the Premises to be subdivided such that
the site on which the proposed Expansion Improvements are to be constructed (the
"Expansion Site") is a separate legal parcel in compliance with all applicable
laws, codes, ordinances and regulations and with the requirements of section
26.5 and to purchase the Expansion Site from Landlord and construct the
Expansion Improvements itself, all in accordance with section 26.5; provided,
however, that if Tenant elects to either rescind the exercise of the Expansion
Option or to exercise the Tenant Subdivision Option or the Leasehold Improvement
Option, Tenant shall pay to Landlord as additional rent an amount equal to 150%
of Landlord's out-of-pocket costs incurred to third parties (including, without
limitation, architects, engineers and other design professionals) in preparing
the Specification Notice, and Tenant shall, upon payment, be entitled to copies
of all plans, specifications and designs. Tenant's failure to timely exercise
the Tenant Subdivision Option or the Leasehold Improvement Option shall be
conclusively deemed to constitute a rescission of the exercise of the Expansion
Option. Time is of the essence of this provision.
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45
26.3 If the Expansion Notice proposes that Tenant constructs the Expansion
Improvements and requests that Landlord purchase the Expansion Improvements,
then not later than sixty (60) days after delivery of the Expansion Notice,
Landlord shall notify Tenant whether or not it elects to purchase the Expansion
Improvements (which election shall be in Landlord's sole discretion), and the
provisions of subsection (a) or (b) of this section 26.3, as applicable, shall
apply.
(a) In the event Landlord shall have notified Tenant that Landlord elects
to purchase the Expansion Improvements (the "Purchase Notice"), then Tenant
shall undertake construction of the Expansion Improvements ("Tenant's Work") and
the provisions of section 26.3(a)(i) through 26.3(a)(ix) hereinbelow shall be
applicable.
(i) Tenant shall cause to be constructed the Expansion Improvements in
accordance with all applicable laws and the procedures set forth
hereinbelow. Upon the Expansion Rent Commencement Date (as defined in
section 26.4(a)), Landlord shall purchase and Tenant shall sell the
Expansion Improvements for a net price equal to Tenant's Expansion Costs
(as defined below), and Tenant shall execute and deliver to Landlord such
documents and instruments as Landlord may reasonably request in connection
with such purchase and sale. The term "Tenant's Expansion Costs" means all
hard and soft costs incurred by Tenant (but excluding land costs) in
connection with the design and construction of the Expansion Improvements,
as said term may be further defined in the Lease Amendment described below.
Tenant shall pay all closing costs in connection with such purchase and
sale, including the premium for an endorsement to Landlord's title policy
to increase the liability amount to reflect the price of the Expansion
Improvements. From and after the Expansion Rent Commencement Date and for
the remainder of the term (as the same may be extended pursuant to section
26.4(c)), Tenant pay Expansion Base Rent (as defined in section 26.4(a))
for the Expansion Improvements; the Expansion Improvements shall be deemed
to be a part of the Premises hereunder; and Tenant shall pay all Operating
Expenses for the Expansion Improvements as set forth in section 3.1(b) and
shall perform all other obligations of Tenant under this Lease as if the
Expansion Improvements were part of the original Premises. At the
conclusion of this Lease, the Expansion Improvements shall be delivered to
Landlord in good condition (reasonable wear and tear excepted). Title to
the Expansion Improvements shall, at all times, remain in the name of
Landlord and shall not pass to Tenant.
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(ii) On or before ten (10) days from the date of the Purchase Notice,
Tenant shall notify Landlord of the identity and mailing address of the
licensed architect engaged by Tenant for the preparation of plans for
Tenant's Work. On or before forty-five (45) days from the date of the
Purchase Notice, Tenant, at Tenant's expense, shall cause Tenant's
architect to prepare and deliver to Landlord for Landlord's reasonable
approval five (5) sets of final plans and specifications for Tenant's Work.
(iii) Landlord shall review said plans and specifications and notify
Tenant within fifteen (15) days of receipt of said plans and specifications
in Landlord's office, of the matters, if any, in said plans which fail to
conform to Landlord's construction requirements or otherwise fail to meet
with Landlord's approval which approval shall not be unreasonably withheld,
conditioned or delayed. Tenant shall, within ten (10) days from receipt of
any such notice from Landlord, cause said plans to be revised in such
manner as is requisite to obtaining Landlord's approval and shall submit
revised plans for Landlord's approval. When Landlord has approved Tenant's
plans, Landlord shall initial and return one (1) set of approved plans to
Tenant, which set shall also show the date of Landlord's approval. Tenant's
Work shall be carried out pursuant to a fixed price or not-to-exceed
construction contract in form and substance reasonably satisfactory to
Landlord, and with a licensed contractor reasonably satisfactory to
Landlord. Landlord shall have the right to require that Tenant obtain
payment and completion bonds on terms satisfactory to Landlord prior to
commencing Tenant's Work. Tenant agrees not to commence Tenant's Work until
Landlord has approved the final plans, the contractor and the construction
contract, all required permits have been issued and this Lease has been
amended in accordance with section 26.8. Tenant shall reimburse Landlord
for actual costs expended for review of all plans.
(iv) Tenant shall not deviate from the final set of plans and
specifications approved by Landlord without Landlord's prior written
consent, which consent shall not be unreasonably withheld. Landlord's
approval of plans and specifications shall not constitute the assumption of
any responsibility by Landlord for any of Tenant's Work or the accuracy or
sufficiency of Tenant's plans and specifications.
(v) If Tenant fails to complete the Tenant's Work in accordance with
such plans and specifications prior to the Construction Deadline (as
defined below), Landlord, at Landlord's option, may terminate this Lease
or, at Landlord's option, may enter the Expansion Improvements, complete
Tenant's Work, and Tenant shall pay the cost thereof to Landlord upon
demand. The term "Construction Deadline" means the date eighteen (18)
months after commencement of construction, plus the number of days that
construction is delayed due to Force Majeure; provided that such date shall
be extended an additional six (6) months so long as Tenant is continuously
and diligently proceeding with construction.
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(vi) Tenant shall comply with and shall require its contractors to
comply with all federal, state, and local laws, ordinances, regulations and
directions relating to the employment, conditions of employment and hours
of labor in connection with any construction, alteration, installation or
repair work done by or for Tenant in or about the Premises. If Landlord is
damaged as a result of any breach by Tenant of these covenants, Tenant
shall pay to Landlord the amount of such damage, upon demand.
(vii) Upon completion of construction of the Expansion Improvements,
Tenant shall submit:
(A) Properly notarized final releases of liens from Tenant's
general contractor and all subcontractors.
(B) Properly notarized final releases of liens from Tenant's
major suppliers, architect or anyone supplying a significant amount of
materials or services for the construction of the Expansion
Improvements.
(C) A certificate of occupancy and a final inspection report (as
applicable) from the appropriate governing body, indicating that the
Expansion Improvements has no violation of local building codes.
(viii) At all times prior to the completion of Tenant's Work, Tenant
shall cause its general contractor and subcontractors to maintain such
insurance as Landlord may reasonably require, with insurance carriers
reasonably approved by Landlord, in amounts reasonably approved by
Landlord.
(ix) Tenant's Work shall be completed, lien-free in a good and
workmanlike manner, and shall constitute Class A office space constructed
to the same standards as the existing Building. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all liens and/or
claims placed against the Premises, arising out of, or in connection with,
Tenant's Work; and notwithstanding anything to the contrary contained in
this Lease, no liens of any nature, whether voluntary or involuntary, may
be placed or allowed by Tenant on the Premises. However, Tenant may bond
around any mechanic's liens within thirty (30) days of recording, without
an Event of Default occurring. Landlord shall have no liability of any
kind, and Tenant shall be solely responsible, for any defects or legal
violations respecting the Expansion Improvements. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all claims and
liabilities of any kind, howsoever arising, relating to the Expansion
Improvements and Tenant shall execute an indemnity, reasonably satisfactory
to Landlord in form and content, prior to commencement of Tenant's Work.
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(b) In the event Landlord shall have notified Tenant that Landlord elects
not to purchase the Expansion Improvements, then Tenant may elect, by written
notice to Landlord within sixty (60) days following Tenant's receipt of
Landlord's notice, to either (i) rescind its exercise of the Expansion Option,
(ii) exercise the Leasehold Improvement Option, or (iii) exercise the Tenant
Subdivision Option. Tenant's failure to timely exercise the Tenant Subdivision
Option or the Leasehold Improvement Option shall be conclusively deemed to
constitute a rescission of the exercise of the Expansion Option. Time is of the
essence of this provision.
26.4(a) Base Rent for the Expansion Improvements if the Expansion
Improvements are constructed by Landlord or if Landlord purchases the Expansion
Improvements in accordance with section 26.3(a) ("Expansion Base Rent"),
calculated as provided in section 26.4(b), shall commence upon the date (the
"Expansion Rent Commencement Date") the Expansion Improvements are substantially
completed, subject only to "punch list" items and other items of incomplete work
that do not materially interfere with the use and occupancy of the Expansion
Improvements (as certified to Landlord and Tenant by the supervising architect,
or, as evidenced by the issuance of a temporary or permanent certificate of
occupancy), and delivered to Tenant for Tenant's occupancy. Expansion Base Rent
shall be included in "Base Rent" for purposes of this Lease, and shall be
payable concurrently with payments of Base Rent hereunder as set forth in
Article 3 of this Lease. From and after the Expansion Rent Commencement Date,
the Expansion Improvements shall be deemed to be a part of the Premises
hereunder, and in addition to Expansion Base Rent, Tenant shall pay all
Operating Expenses for the Expansion Improvements as set forth in section 3.1(b)
and shall perform all other obligations of Tenant under this Lease as if the
Expansion Improvements were part of the original Premises.
(b) If the Expansion Improvements are constructed by Landlord or if
Landlord purchases the Expansion Improvements in accordance with section
26.3(a), Expansion Base Rent shall be: (i) for the first twelve (12) months
after the Expansion Rent Commencement Date, an amount calculated to provide
Landlord with an annual return on Landlord's investment of Total Expansion Costs
(as defined below) equal to the Rent Yield (as defined below), and (ii) for each
successive twelve (12) month period thereafter, an amount equal to one hundred
three percent (103%) of the Expansion Base Rent in effect during the preceding
12-month period. The term "Total Expansion Costs" means all hard and soft costs
incurred by Landlord (including a reasonable development fee payable to Landlord
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49
and financing charges, but excluding land costs) in connection with the design
and construction of the Expansion Improvements, as said term may be further
defined in the Lease Amendment described below. In the event Landlord purchases
the Expansion Improvements in accordance with section 26.3(a), "Total Expansion
Costs" shall mean Tenant's Expansion Costs. The term "Rent Yield" means a
percentage equal to Landlord's Spread (as defined below) plus the Assumed Loan
Constant (as defined below). The term "Landlord's Spread" means (x) if, as of
the Expansion Rent Commencement Date, Tenant shall have satisfied the debt
rating conditions set forth in section 24.7, seventy-five (75) basis points; and
(y) if, as of the Expansion Rent Commencement Date, Tenant shall not have
satisfied the debt rating conditions set forth in section 24.7, one hundred
twenty-five (125) basis points. The term "Assumed Loan Constant" means a
percentage equal to the percentage of Total Expansion Costs which Landlord would
be required to pay annually as debt service on a secured loan in a principal
amount equal to Total Expansion Costs, with amortization of principal over a
term which ends five (5) years after the term of this Lease (as the same may be
extended pursuant to section 26.4(c)) and interest at the then prevailing rate
(determined with reference to loan terms being proposed by major life insurance
company lenders such as Principal Mutual, Metropolitan Life and Teachers
Insurance) for fully amortizing mortgage loans of like tenor secured by property
comparable to the Premises. Effective upon the Expansion Rent Commencement Date,
the Security Amount shall be increased by an amount equal to twenty percent
(20%) of the Total Expansion Costs, provided that the Security Amount shall not
be required to exceed ten million dollars ($10,000,000). Effective upon the
Expansion Rent Commencement Date, section 24.6 shall be amended to provide that
the first Reduction Date shall occur on the fourth (4th) April 15 to occur after
the Expansion Rent Commencement Date, and subsequent Reduction Dates shall occur
annually thereafter (but the Reduction Amounts applicable on the successive
Reduction Dates shall remain as set forth in section 24.6).
(c) In the event the Expansion Commencement Date occurs later than the
third (3rd) anniversary of the Commencement Date, the term of this Lease shall
automatically be extended such that the Expiration Date shall be the date twelve
(12) years after the Expansion Commencement Date. If Landlord constructs or
purchases the Expansion Improvements, Base Rent for the extended term shall be
calculated in accordance with section 3.1 based upon the Base Rent (including
Expansion Base Rent).
26.5 In the event that Landlord elects not to undertake construction of the
Expansion Improvements or elects not to purchase the Expansion Improvements
pursuant to section 26.3(a), and Tenant exercises the Tenant Subdivision Option
and elects to undertake construction of the Expansion Improvements ("Tenant's
Work"), the provisions of section 26.5(a) through 26.5(f) hereinbelow shall be
applicable.
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(a) Tenant shall, at its sole cost and expense and upon and subject to the
terms of this section 26.5 and the other applicable provisions of this Article
26, (i) cause the Premises to be subdivided so that the Expansion Site is a
separate legal parcel, (ii) purchase the Expansion Site from Landlord, and (iii)
cause to be constructed the Expansion Improvements in accordance with all
applicable laws and the procedures set forth hereinbelow. For the remainder of
the term of this Lease, the Expansion Site and the Expansion Improvements shall
not be a part of the Premises hereunder.
(b) On or before forty-five (45) days after the date of Tenant's exercise
of the Tenant Subdivision Option, Tenant, at Tenant's expense, shall (i) cause a
registered surveyor or civil engineer to prepare and deliver to Landlord a
proposed subdivision map (the "Proposed Subdivision Map"), complying in all
respects with all laws, statutes, codes and ordinances, to legally separate the
Expansion Site and the remainder of the Premises (the "Remaining Parcel") such
that each parcel complies with all applicable laws, statutes, codes, ordinances
and covenants, conditions and restrictions ("Legal Requirements"), and (iii)
cause Tenant's architect to prepare and deliver to Landlord for Landlord's
approval five (5) sets of final plans and specifications for Tenant's Work
including a detailed depiction of all proposed improvements (the "Final Plans").
The Proposed Subdivision Map shall be subject to Landlord's approval, which
shall not be unreasonably withheld. Without limiting the foregoing, Landlord may
disapprove the Proposed Subdivision Map if (A) Landlord would be required to
expend any sums to improve the Remaining Parcel to cause it to be in compliance
with any Legal Requirements, (B) the Remaining Parcel would, in Landlord's
reasonable judgment, be of less value than the value prior to the subdivision
minus the Site Price (as defined below), or (C) the expense of owning,
operating, managing or maintaining the Remaining Parcel would be increased by
the subdivision. Landlord shall review the Proposed Subdivision Map and notify
Tenant within fifteen (15) days of receipt of the matters, if any, which fail to
conform to Landlord's reasonable requirements.
(c) Landlord shall review the Final Plans and notify Tenant within fifteen
(15) days of receipt of said plans and specifications in Landlord's office, of
the matters, if any, in said plans which fail to meet with Landlord's approval
which approval shall not be unreasonably withheld, conditioned or delayed.
Tenant shall, within ten (10) days from receipt of any such notice from
Landlord, cause the Proposed Subdivision Map and/or the Final Plans, as the case
may be, to be revised in such manner as is requisite to obtaining Landlord's
approval and shall submit a revised Proposed Subdivision Map and/or Final Plans
for Landlord's approval. The Proposed Subdivision Map as approved by Landlord is
referred to herein as the "Subdivision Map." As promptly as reasonably
practicable after Landlord's approval of the Subdivision Map and the Final
Plans, Tenant shall cause the Subdivision Map to be recorded and shall take all
other steps necessary to cause the Premises to be subdivided. Tenant agrees not
to commence Tenant's Work until Landlord has approved the Subdivision Map and
the Final Plans, the Premises has been legally subdivided in accordance with the
approved Subdivision Map, Tenant has purchased the Expansion Site in accordance
with this section 26.5, all required permits have been issued and this Lease has
been amended in accordance with section 26.8. Tenant shall reimburse Landlord
for actual costs expended for review of all maps and plans. Tenant shall not
materially deviate from the Final Plans approved by Landlord without Landlord's
prior written consent, which shall not be unreasonably withheld. Landlord's
approval of plans and specifications shall not constitute the assumption of any
responsibility by Landlord for any of Tenant's Work or the accuracy or
sufficiency of Tenant's plans and specifications.
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51
(d) Immediately upon recordation of the Subdivision Map and completion of
all procedures necessary to legally subdivide the Premises, Tenant shall
purchase the Expansion Site from Landlord for a price (the "Site Price"), net to
Landlord, equal to the product of (i) the number of gross square feet of land
area in the Expansion Site, multiplied by (ii) the Square Foot Price (as defined
below) in effect as of the date of the sale. The term "Square Foot Price" means
(A) during the twelve (12) month period commencing on the Commencement Date,
seven and one-half dollars ($7.50) (the "Initial Price"), and (B) during each
successive twelve (12) month period, the Initial Price increased by five percent
(5%) per year on a compounded basis. Tenant shall bear all costs and expenses,
and shall reimburse Landlord for all costs and expenses incurred by Landlord, in
connection with such purchase, including the subdivision of the Premises and the
Lease Amendment. After the recordation of the Subdivision Map and upon
completion of the sale of the Expansion Site to Tenant, Tenant shall be subject
to no further restriction on encumbrance of the Expansion Site with a mortgage
or deed of trust.
(e) If Tenant fails to commence construction of Tenant's work within nine
(9) months after delivery of the Expansion Notice or fails to complete the
Tenant's Work in accordance with the Final Plans prior to the Construction
Deadline, Landlord, at Landlord's option, may rescind the sale of the Expansion
Site in which case the sale of the Expansion Site shall be reversed (with Tenant
conveying the Expansion Site to Landlord at a net price equal to the Site
Price), and Tenant shall be deemed to have elected not to exercise the Expansion
Option.
(f) Landlord and Tenant acknowledge that the subdivision of the Premises
and construction of the Expansion Improvements will require modification of
and/or additions to the parking facilities on the Premises. Landlord and Tenant
shall include in the Final Plans provisions for parking facilities serving both
the existing Building and the Expansion Improvements. Such parking facilities
shall be designed and constructed at Tenant's sole cost and expense. If adequate
parking facilities are not constructed on each respective parcel sufficient to
serve that parcel and it is necessary or appropriate to construct parking
facilities on one of the parcels to provide parking for both parcels, then
Landlord and Tenant shall enter into an appropriate perpetual access and parking
easement simultaneously with Tenant's purchase of the Expansion Site.
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26.6 In the event that Landlord elects not to undertake construction of the
Expansion Improvements or elects not to purchase the Expansion Improvements
pursuant to section 26.3(a), and Tenant exercises the Leasehold Improvement
Option and elects to undertake construction of the Expansion Improvements
("Tenant's Work"), the provisions of section 26.6(a) through 26.6(c) hereinbelow
shall be applicable.
(a) Tenant shall cause to be constructed the Expansion Improvements in
accordance with all applicable laws and the procedures set forth hereinbelow.
Landlord shall have no obligation to purchase the Expansion Improvements, and
Tenant shall, for the remainder of the term, pay no Expansion Base Rent for the
Expansion Improvements, but the Expansion Improvements shall be deemed to be a
part of the Premises hereunder, and Tenant shall pay all Operating Expenses for
the Expansion Improvements as set forth in section 3.1(b) and shall perform all
other obligations of Tenant under this Lease as if the Expansion Improvements
were part of the original Premises. At the conclusion of this Lease, the
Expansion Improvements shall be delivered to Landlord in good condition
(reasonable wear and tear excepted). Title to the Expansion Improvements shall,
at all times, remain in the name of Landlord and shall not pass to Tenant.
Landlord shall have no liability of any kind, and Tenant shall be solely
responsible, for any defects or legal violations respecting the Expansion
Improvements in the event Tenant performs Tenant's Work. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from any and all claims and
liabilities of any kind, howsoever arising, relating to the Expansion
Improvements and Tenant shall execute an indemnity, reasonably satisfactory to
Landlord in form and content, prior to commencement of Tenant's Work.
(b) The design and construction of the Expansion Improvements shall be
carried out in accordance with the terms of sections 26.3(a)(ii) through
26.3(a)(ix), all of which shall be applicable to Tenant's Work pursuant to this
section 26.6.
(c) Notwithstanding that Tenant may pay for the construction of the
Expansion Improvements, if an Event of Default occurs, Landlord shall retain all
rights in law and equity against Tenant, including, without limitation, the
right to dispossess Tenant from the Expansion Improvements without compensation
for the cost thereof.
26.7 Anything in this Article 26 to the contrary notwithstanding, Tenant's
notice of exercise of the Expansion Option or the Tenant Subdivision Option or
the Leasehold Improvement Option shall be effective, only if at the time of such
notice of exercise the following conditions (the "Expansion Conditions") shall
be satisfied:
(i) Landlord shall not have notified Tenant that Tenant is in default
in the performance of any of the terms, covenants or conditions contained
in this Lease which default has not been cured within any applicable grace
period or cure period.
<PAGE>
53
(ii) This Lease shall not have been terminated and shall be in full
force and effect.
(iii) There shall have been no assignment of Tenant's interest in this
Lease except to a Corporate Successor as permitted by section 12.1 hereof.
Tenant acknowledges that the Expansion Option and all other rights of
Tenant under this Article 26 are personal to Tenant, and not a right of any
successor to the rights of Tenant under this Lease.
(iv) There shall have been no material adverse change in the financial
condition of Tenant or the Guarantor since the execution of this Lease, and
Landlord shall determine, at its sole reasonable discretion, that Tenant
and Guarantor are each creditworthy in light of the obligations undertaken
pursuant to this Lease and the other existing obligations of Tenant and
Guarantor.
26.8 Notwithstanding anything to the contrary herein, promptly after Tenant
accepts the proposal in Landlord's Specification Notice, or Landlord elects to
purchase the Expansion Improvements pursuant to section 26.3(a), or Tenant
exercises the Tenant Subdivision Option or the Leasehold Improvement Option, as
the case may be, Landlord and Tenant shall enter into an amendment to this Lease
(the "Lease Amendment") setting forth the terms of the expanded lease or the
terms relating to Tenant's Subdivision Option or Leasehold Improvement Option,
in form and substance mutually agreeable to Landlord and Tenant which shall be
consistent with the applicable terms of this Article 26.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
date first hereinabove written.
Landlord: Tenant:
TRINET ESSENTIAL FACILITIES X, INC., ICG HOLDINGS, INC.,
a Maryland corporation a Colorado corporation
By /s/Gary P. Lyon By /s/ James D. Grenfell
----------------------------- ---------------------------
Gary P. Lyon James D. Grenfell
Its Executive Vice President Its Executive Vice President
and Chief Financial Officer
<PAGE>
1
EXHIBIT A
TENANT ESTOPPEL CERTIFICATE
TO: TriNet Corporate Realty Trust, Inc. Four Embarcadero Center, Suite 3150 San
Francisco, CA 94111 Attn: Mr. Mark S. Whiting
Re: Lease, dated as of January 15, 1998, between ICG HOLDINGS, INC., a
Colorado corporation, as tenant (the original named tenant under the
Lease, together with such tenant's successors and assigns, being
hereinafter referred to as the "Tenant"), and TRINET ESSENTIAL
FACILITIES X, INC., a Maryland corporation, as landlord ("TriNet"),
covering certain premises known by the street address 161 Inverness
Drive West, in the City of Englewood, County of Arapahoe, State of
Colorado (the "Leased Premises"), as amended as noted on attached
Schedule A (collectively, the "Lease")
Gentlemen:
The undersigned Tenant hereby represents, warrants and certifies to TriNet
that:
1. The Lease has not been modified, changed, altered or amended in any
respect, either orally or in writing, except as may be indicated on Schedule A
annexed hereto, and constitutes the entire agreement between Tenant and TriNet
affecting Tenant's leasing of the Leased Premises. A true and correct copy of
the Lease is attached as Schedule B. The Lease is in full force and effect and
is not subject to any contingencies or conditions not set forth in the Lease.
2. The term of the Lease commenced on __________________, 1998, and will
expire on __________________, 2013; Tenant has two (2) successive options to
renew the Lease term, each for an additional period of ten (10) years.
3. Tenant has paid all fixed and additional rent and other sums which are
due and payable under the Lease through the date hereof, and Tenant has not made
and will not make any prepayments of fixed rent for more than one month in
advance. There are no presently unexpired rental concessions or abatements due
under the Lease except as set forth on Schedule A annexed hereto. Tenant has no
credits, offsets, abatements, defenses, counterclaims or deductions against any
rental or other payments due under the Lease or with respect to its performance
of the other terms and conditions of the Lease, and has asserted no claims
against TriNet.
<PAGE>
2
4. Tenant has paid to TriNet a security deposit in the amount of
$___________. Tenant has not made any other the payments to TriNet as a security
deposit, advance or prepaid rent.
5. TriNet has completed, and, if required under the Lease, paid for, any
and all tenant work required under the Lease and Tenant has accepted the Leased
Premises. Tenant is not entitled to any further payment or credit for tenant
work.
6. To the best knowledge of Tenant, TriNet is not in default in the
performance of any of the terms of the Lease, nor is there now any fact or
condition which, with notice or lapse of time or both, will become such a
default. Tenant has not delivered to TriNet any notice of default with respect
to the TriNet's obligations under the Lease.
7. Tenant is in actual possession of the entire Leased Premises and, to the
best knowledge of Tenant, is not in any respect in default under any of the
terms and conditions of the Lease, nor is there now any fact or condition which,
with notice or lapse of time or both, will become such a default. Tenant has not
received from TriNet any notice of default with respect to Tenant's obligations
under the Lease.
8. Tenant has not assigned, transferred, mortgaged or otherwise encumbered
its interest under the Lease, nor subleased any of the Leased Premises, nor
permitted any person or entity to use the Leased Premises, except as otherwise
indicated on Schedule A annexed hereto.
9. Except as expressly provided in the Lease, Tenant
(i) does not have any right to renew or extend the term of the Lease,
(ii) does not have any right to cancel or surrender the Lease prior to
the expiration of the term of the Lease,
(iii) does not have any option or rights of first refusal or first
offer to purchase or lease all or any part of the Leased Premises or the
real property of which the Leased Premises are a part,
(iv) does not have any right, title or interest with respect to the
Leased Premises other than as lessee under the Lease, and
(v) does not have any right to relocate into other property owned by
TriNet or any of TriNet's affiliates.
<PAGE>
3
10. There has not been filed by or against Tenant a petition in bankruptcy,
voluntary or otherwise, any assignment for the benefit of creditors, any
petition seeking reorganization or arrangement under the bankruptcy laws of the
United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Tenant.
11. If Tenant is required to provide insurance coverage under the Lease,
Tenant has not given or received written notice that Tenant insurance coverage
will be canceled or will not be renewed.
12. To the best knowledge of Tenant, all systems, elements and components
of the Leased Premises are in good working order and repair and sound operating
condition. To the best knowledge of Tenant, Tenant's use and occupancy of the
Leased Premises complies with all applicable building, zoning, land use,
environmental, anti-pollution, health, fire, safety, access accommodations for
the physically handicapped, subdivision, energy and resource conservation and
similar laws, statutes, rules, regulations and ordinances, and all covenants,
conditions and restrictions applicable to the Leased Premises. Tenant has not
received any notice, citation or other claim alleging any violation of any such
law, statute, rule, regulation, ordinance, covenant, condition or restriction.
13. To the best knowledge of Tenant, any and all brokerage and leasing
commissions relating to and/or resulting from Tenant's execution and delivery of
the Lease and occupancy of the Leased Premises have been paid in full.
14. The individual executing this Tenant Estoppel Certificate on behalf of
Tenant represents and warrants that __he has the power and the authority to
execute this Tenant Estoppel Certificate on behalf of Tenant.
Dated this ____ day of _______________, 199_.
Tenant
ICG HOLDINGS, INC., a Colorado corporation
By:
Its:
<PAGE>
4
SCHEDULE A
TO ESTOPPEL CERTIFICATE
<PAGE>
5
SCHEDULE B
TO ESTOPPEL CERTIFICATE
<PAGE>
1
EXHIBIT B
CONTINUING LEASE GUARANTY
THIS GUARANTY, made as of ___________ __, ____, by _______________________
("Guarantor") to TriNet Essential Facilities X, Inc., a Maryland corporation
("Landlord").
W I T N E S S E T H:
1. For valuable consideration, receipt of which is acknowledged, and to
satisfy certain requirements under the Lease dated January 15, 1998 (the
"Lease") between Landlord and ICG Holdings, Inc., a Colorado corporation
("Tenant"), Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Landlord, and agrees fully to pay, perform and discharge, as and
when payment, performance and discharge are due, all of the covenants,
obligations and liabilities of Tenant under the Lease and all amendments,
modifications, renewals, extensions, supplements, substitutions and replacements
of the Lease arising during the period beginning on the date hereof and ending
on the date this Guaranty is terminated (the "Guaranteed Obligations"). The
obligations of Guarantor under this Guaranty shall be absolute, unconditional
and irrevocable and shall continue and remain in full force and effect until all
of the Guaranteed Obligations have been fully paid, performed and discharged.
2. The obligations of Guarantor under this Guaranty shall not be affected,
modified or impaired by the occurrence of any of the following events, whether
or not with notice to, or the consent of, Guarantor: (a) the waiver, surrender,
compromise, settlement, release or termination of any or all of the Guaranteed
Obligations; (b) the failure to give notice to Guarantor of the occurrence of an
event of default under the Guaranteed Obligations; (c) the extension of the time
for the payment, performance or discharge of any or all of the Guaranteed
Obligations; (d) the amendment or modification (whether material or otherwise)
of the Guaranteed Obligations in any respect; (e) any failure, omission, delay
or lack on the part of Landlord to enforce, assert or exercise any right, power
or remedy conferred on Landlord under the Guaranteed Obligations; (f) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or adjustment of debts,
or other similar proceedings affecting Tenant or Guarantor or any of the assets
of either of them; (g) the release or discharge by operation of law of Tenant
from the payment, performance or discharge of any or all of the Guaranteed
Obligations; (h) the release or discharge by operation of law of Guarantor from
any or all of the obligations of Guarantor under this Guaranty; or (i) the
invalidity or unenforceability of any or all of the Guaranteed Obligations.
Guarantor acknowledges that Landlord would not enter into the Lease without this
Guaranty and that Landlord is relying on this Guaranty.
<PAGE>
2
3. The obligations of Guarantor under this Guaranty are independent of the
Guaranteed Obligations. Guarantor agrees that Landlord shall have the right to
proceed against Guarantor directly and independently of Tenant. A separate
action may be brought and prosecuted against Guarantor whether or not an action
is brought against Tenant or Tenant is joined in any such action. Guarantor
authorizes Landlord and Tenant, without notice to, demand of, or consent from
Guarantor and without releasing or affecting Guarantor's liability under this
Guaranty, from time to time to amend, modify, renew, extend, supplement or
replace the Guaranteed Obligations or otherwise change the terms of the
Guaranteed Obligations, to take and hold security for the Guaranteed
Obligations, and to enforce, waive, surrender, impair, compromise or release any
such security or any or all of the Guaranteed Obligations or any person or
entity liable for any or all of the Guaranteed Obligations. Guarantor shall be
and remain bound under this Guaranty notwithstanding any such act or omission by
Tenant or Landlord. Guarantor waives the right, if any, to require Landlord to
proceed against Tenant, to proceed against or exhaust any security held by
Landlord, or to pursue any other remedy in Landlord's power. Landlord shall have
the right to exercise or enforce any right or remedy Landlord may have against
Tenant or any security held by Landlord. Guarantor waives the right, if any, to
the benefit of, or to direct the application of, any security held by Landlord.
Guarantor waives (a) any defense arising out of any alteration of the original
Guaranteed Obligations, (b) any defense arising out of the absence, impairment
or loss of any right of reimbursement or subrogation or other right or remedy of
Guarantor against Tenant or any security held by Landlord, and (c) any defense
arising by reason of any disability or other defense of Tenant or by reason of
the cessation or reduction from any cause whatsoever of the liability of Tenant
other than full payment, performance and discharge of the Guaranteed
Obligations. The cessation or reduction of the liability of Tenant for any
reason whatsoever other than full payment, performance and discharge of the
Guaranteed Obligations shall not release or affect in any way the liability of
Guarantor under this Guaranty.
4. If Tenant becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the federal Bankruptcy Code, or if such a
petition is filed against Tenant, or if Tenant makes a general assignment for
the benefit of creditors, and in any such proceeding any or all of the
Guaranteed Obligations are terminated or rejected or any or all of the
Guaranteed Obligations are modified or abrogated, then Guarantor agrees that
Guarantor's liability under this Guaranty shall not thereby be affected or
modified and such liability shall continue in full force and effect as if no
such action or proceeding had occurred. This Guaranty shall continue to be
effective or be reinstated, as the case may be, if any payment of the Guaranteed
Obligations must be returned by Landlord upon the insolvency, bankruptcy or
reorganization of Tenant or Guarantor, or otherwise, as though such payment had
not been made.
<PAGE>
3
5. Guarantor assumes the responsibility for being and keeping Guarantor
informed of the financial condition of Tenant and of all other circumstances
bearing upon the risk of failure to pay, perform or discharge any of the
Guaranteed Obligations which diligent inquiry would reveal, and Guarantor agrees
that Landlord has no duty to advise Guarantor of information known to Landlord
regarding such condition or any such circumstance. Guarantor acknowledges that
repeated and successive demands may be made and payments or performance made
hereunder in response to such demands as and when, from time to time, Tenant
defaults in the payment, performance or discharge of the Guaranteed Obligations.
Notwithstanding any such payments and performance hereunder, this Guaranty shall
remain in full force and effect and shall apply to any and all subsequent
defaults by Tenant. It is not necessary for Landlord to inquire into the
capacity, authority or powers of Tenant or the partners, directors, officers,
employees, agents or representatives acting or purporting to act on behalf of
Tenant, and all of the Guaranteed Obligations made or created in reliance upon
the purported exercise of such powers shall be guaranteed under this Guaranty.
6. If Tenant and Guarantor fail to pay, perform and discharge, as and when
payment, performance and discharge are due, all of the Guaranteed Obligations,
Landlord shall have the right, but no obligation, and without releasing Tenant
or Guarantor from any of the Guaranteed Obligations, to pay, perform and
discharge any or all of the Guaranteed Obligations on behalf of Tenant and
Guarantor. Guarantor shall, on demand, pay to Landlord all sums expended by
Landlord in the payment, performance and discharge of the Guaranteed
Obligations, together with interest on all such sums from the date of
expenditure to the date all such sums are paid by Tenant or Guarantor to
Landlord at the Interest Rate (as defined in the Lease). Guarantor waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor and notices of acceptance of this
Guaranty. Guarantor agrees to pay all costs and expenses, including reasonable
attorneys' fees and disbursements, which are incurred by Landlord in the
enforcement of this Guaranty. If any provision of this Guaranty is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Guaranty shall not be affected. If there is more than one Guarantor, all
obligations of Guarantor under this Guaranty shall be the joint and several
obligations of each Guarantor. This Guaranty may not be amended or modified in
any respect except by a written instrument signed by Guarantor and Landlord. As
<PAGE>
4
used in this Guaranty, the singular shall include the plural. This Guaranty
shall bind and inure to the benefit of Guarantor and Landlord and their
respective transferees, personal representatives, heirs, successors and assigns.
This Guaranty shall be governed by and construed in accordance with the laws of
the State where the premises leased by Tenant from Landlord are located.
Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of the
courts of the States of Colorado and California and any federal court of the
United States of America located in the City of San Francisco, California, or
the city of Denver, Colorado. Guarantor and Landlord each waive any right to
trial by jury in connection herewith. Without limiting anything else contained
herein, the fullest extent it may effectively do so under applicable law,
Guarantor irrevocably waives and agrees not to assert, by way of motion, as a
defense or otherwise, any claim that it is not subject to the jurisdiction of
any such court, any objection that it may now or hereafter have to the laying of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
<PAGE>
5
7. To induce Landlord to enter into the Lease, Guarantor represents and
warrants to Landlord as follows: Guarantor is a corporation existing under the
laws of the ________ of _________. Guarantor has full power and authority to
enter into this Guaranty and to perform its obligations under this Guaranty. The
execution, delivery and performance of this Guaranty by Guarantor have been duly
and validly authorized by all necessary action on the part of Guarantor and all
required consents and approvals have been duly obtained. This Guaranty is a
legal, valid and binding obligation of Guarantor, enforceable against Guarantor
in accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting the rights of creditors generally. Neither the execution and delivery
of this Guaranty nor the consummation of the transactions contemplated hereby
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of, or give rise to a default
under (i) any provision of Guarantor's articles of incorporation or bylaws, (ii)
any material instrument or contract to which Guarantor is a party or by which
Guarantor is bound, or (iii) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to Guarantor, or any
property of Guarantor.
IN WITNESS WHEREOF, Guarantor has executed this Continuing Lease Guaranty
as of the date first hereinabove written.
Guarantor:
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
<PAGE>
6
EXHIBIT C
<PAGE>
1
CONTINUING LEASE GUARANTY
THIS GUARANTY, made as of January 20, 1998, by ICG COMMUNICATIONS, INC., a
Delaware corporation ("Guarantor") to TRINET ESSENTIAL FACILITIES X, INC., a
Maryland corporation ("Landlord").
W I T N E S S E T H:
1. For valuable consideration, receipt of which is acknowledged, and to
satisfy certain requirements under the Lease dated January 15, 1998 (the
"Lease") between Landlord and ICG Holdings, Inc., a Colorado corporation
("Tenant"), Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Landlord, and agrees fully to pay, perform and discharge, as and
when payment, performance and discharge are due, all of the covenants,
obligations and liabilities of Tenant under the Lease and all amendments,
modifications, renewals, extensions, supplements, substitutions and replacements
of the Lease arising during the period beginning on the date hereof and ending
on the date this Guaranty is terminated (the "Guaranteed Obligations"). The
obligations of Guarantor under this Guaranty shall be absolute, unconditional
and irrevocable and shall continue and remain in full force and effect until all
of the Guaranteed Obligations have been fully paid, performed and discharged.
2. The obligations of Guarantor under this Guaranty shall not be affected,
modified or impaired by the occurrence of any of the following events, whether
or not with notice to, or the consent of, Guarantor: (a) the waiver, surrender,
compromise, settlement, release or termination of any or all of the Guaranteed
Obligations; (b) the failure to give notice to Guarantor of the occurrence of an
event of default under the Guaranteed Obligations; (c) the extension of the time
for the payment, performance or discharge of any or all of the Guaranteed
Obligations; (d) the amendment or modification (whether material or otherwise)
of the Guaranteed Obligations in any respect; (e) any failure, omission, delay
or lack on the part of Landlord to enforce, assert or exercise any right, power
or remedy conferred on Landlord under the Guaranteed Obligations; (f) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or adjustment of debts,
or other similar proceedings affecting Tenant or Guarantor or any of the assets
of either of them; (g) the release or discharge by operation of law of Tenant
from the payment, performance or discharge of any or all of the Guaranteed
Obligations; (h) the release or discharge by operation of law of Guarantor from
any or all of the obligations of Guarantor under this Guaranty; or (i) the
invalidity or unenforceability of any or all of the Guaranteed Obligations.
Guarantor acknowledges that Landlord would not enter into the Lease without this
Guaranty and that Landlord is relying on this Guaranty.
<PAGE>
2
3. The obligations of Guarantor under this Guaranty are independent of the
Guaranteed Obligations. Guarantor agrees that Landlord shall have the right to
proceed against Guarantor directly and independently of Tenant. A separate
action may be brought and prosecuted against Guarantor whether or not an action
is brought against Tenant or Tenant is joined in any such action. Guarantor
authorizes Landlord and Tenant, without notice to, demand of, or consent from
Guarantor and without releasing or affecting Guarantor's liability under this
Guaranty, from time to time to amend, modify, renew, extend, supplement or
replace the Guaranteed Obligations or otherwise change the terms of the
Guaranteed Obligations, to take and hold security for the Guaranteed
Obligations, and to enforce, waive, surrender, impair, compromise or release any
such security or any or all of the Guaranteed Obligations or any person or
entity liable for any or all of the Guaranteed Obligations. Guarantor shall be
and remain bound under this Guaranty notwithstanding any such act or omission by
Tenant or Landlord. Guarantor waives the right, if any, to require Landlord to
proceed against Tenant, to proceed against or exhaust any security held by
Landlord, or to pursue any other remedy in Landlord's power. Landlord shall have
the right to exercise or enforce any right or remedy Landlord may have against
Tenant or any security held by Landlord. Guarantor waives the right, if any, to
the benefit of, or to direct the application of, any security held by Landlord.
Guarantor waives (a) any defense arising out of any alteration of the original
Guaranteed Obligations, (b) any defense arising out of the absence, impairment
or loss of any right of reimbursement or subrogation or other right or remedy of
Guarantor against Tenant or any security held by Landlord, and (c) any defense
arising by reason of any disability or other defense of Tenant or by reason of
the cessation or reduction from any cause whatsoever of the liability of Tenant
other than full payment, performance and discharge of the Guaranteed
Obligations. The cessation or reduction of the liability of Tenant for any
reason whatsoever other than full payment, performance and discharge of the
Guaranteed Obligations shall not release or affect in any way the liability of
Guarantor under this Guaranty.
4. If Tenant becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the federal Bankruptcy Code, or if such a
petition is filed against Tenant, or if Tenant makes a general assignment for
the benefit of creditors, and in any such proceeding any or all of the
Guaranteed Obligations are terminated or rejected or any or all of the
Guaranteed Obligations are modified or abrogated, then Guarantor agrees that
Guarantor's liability under this Guaranty shall not thereby be affected or
modified and such liability shall continue in full force and effect as if no
such action or proceeding had occurred. This Guaranty shall continue to be
effective or be reinstated, as the case may be, if any payment of the Guaranteed
Obligations must be returned by Landlord upon the insolvency, bankruptcy or
reorganization of Tenant or Guarantor, or otherwise, as though such payment had
not been made.
<PAGE>
3
5. Guarantor assumes the responsibility for being and keeping Guarantor
informed of the financial condition of Tenant and of all other circumstances
bearing upon the risk of failure to pay, perform or discharge any of the
Guaranteed Obligations which diligent inquiry would reveal, and Guarantor agrees
that Landlord has no duty to advise Guarantor of information known to Landlord
regarding such condition or any such circumstance. Guarantor acknowledges that
repeated and successive demands may be made and payments or performance made
hereunder in response to such demands as and when, from time to time, Tenant
defaults in the payment, performance or discharge of the Guaranteed Obligations.
Notwithstanding any such payments and performance hereunder, this Guaranty shall
remain in full force and effect and shall apply to any and all subsequent
defaults by Tenant. It is not necessary for Landlord to inquire into the
capacity, authority or powers of Tenant or the partners, directors, officers,
employees, agents or representatives acting or purporting to act on behalf of
Tenant, and all of the Guaranteed Obligations made or created in reliance upon
the purported exercise of such powers shall be guaranteed under this Guaranty.
6. If Tenant and Guarantor fail to pay, perform and discharge, as and when
payment, performance and discharge are due, all of the Guaranteed Obligations,
Landlord shall have the right, but no obligation, and without releasing Tenant
or Guarantor from any of the Guaranteed Obligations, to pay, perform and
discharge any or all of the Guaranteed Obligations on behalf of Tenant and
Guarantor. Guarantor shall, on demand, pay to Landlord all sums expended by
Landlord in the payment, performance and discharge of the Guaranteed
Obligations, together with interest on all such sums from the date of
expenditure to the date all such sums are paid by Tenant or Guarantor to
Landlord at the Interest Rate (as defined in the Lease). Guarantor waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor and notices of acceptance of this
Guaranty. Guarantor agrees to pay all costs and expenses, including reasonable
attorneys' fees and disbursements, which are incurred by Landlord in the
enforcement of this Guaranty. If any provision of this Guaranty is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Guaranty shall not be affected. If there is more than one Guarantor, all
obligations of Guarantor under this Guaranty shall be the joint and several
obligations of each Guarantor. This Guaranty may not be amended or modified in
any respect except by a written instrument signed by Guarantor and Landlord. As
used in this Guaranty, the singular shall include the plural. This Guaranty
shall bind and inure to the benefit of Guarantor and Landlord and their
respective transferees, personal representatives, heirs, successors and assigns.
This Guaranty shall be governed by and construed in accordance with the laws of
the State where the premises leased by Tenant from Landlord are located.
Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of the
courts of the States of Colorado and California and any federal court of the
United States of America located in the City of San Francisco, California, or
the city of Denver, Colorado. Guarantor and Landlord each waive any right to
trial by jury in connection herewith. Without limiting anything else contained
herein, the fullest extent it may effectively do so under applicable law,
Guarantor irrevocably waives and agrees not to assert, by way of motion, as a
defense or otherwise, any claim that it is not subject to the jurisdiction of
any such court, any objection that it may now or hereafter have to the laying of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
<PAGE>
4
7. To induce Landlord to enter into the Lease, Guarantor represents and
warrants to Landlord as follows: Guarantor is a corporation existing under the
laws of the State of Delaware. Guarantor has full power and authority to enter
into this Guaranty and to perform its obligations under this Guaranty. The
execution, delivery and performance of this Guaranty by Guarantor have been duly
and validly authorized by all necessary action on the part of Guarantor and all
required consents and approvals have been duly obtained. This Guaranty is a
legal, valid and binding obligation of Guarantor, enforceable against Guarantor
in accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting the rights of creditors generally. Neither the execution and delivery
of this Guaranty nor the consummation of the transactions contemplated hereby
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of, or give rise to a default
under (i) any provision of Guarantor's articles of incorporation or bylaws, (ii)
any material instrument or contract to which Guarantor is a party or by which
Guarantor is bound, or (iii) any federal, state, local or foreign judgment,
writ,
<PAGE>
5
decree, order, statute, rule or regulation applicable to Guarantor, or any
property of Guarantor.
IN WITNESS WHEREOF, Guarantor has executed this Continuing Lease Guaranty
as of the date first hereinabove written.
Guarantor:
ICG COMMUNICATIONS, INC.,
a Delaware corporation
By /s/ James D. Grenfell
---------------------------
James D. Grenfell
Its Executive Vice President
and Chief Financial Officer
<PAGE>
1
CONTINUING LEASE GUARANTY
THIS GUARANTY, made as of January 20, 1998, by ICG HOLDINGS (CANADA), INC.,
a Federal Canadian corporation ("Guarantor") to TRINET ESSENTIAL FACILITIES X,
INC., a Maryland corporation ("Landlord").
W I T N E S S E T H:
1. For valuable consideration, receipt of which is acknowledged, and to
satisfy certain requirements under the Lease dated January 15, 1998 (the
"Lease") between Landlord and ICG Holdings, Inc., a Colorado corporation
("Tenant"), Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Landlord, and agrees fully to pay, perform and discharge, as and
when payment, performance and discharge are due, all of the covenants,
obligations and liabilities of Tenant under the Lease and all amendments,
modifications, renewals, extensions, supplements, substitutions and replacements
of the Lease arising during the period beginning on the date hereof and ending
on the date this Guaranty is terminated (the "Guaranteed Obligations"). The
obligations of Guarantor under this Guaranty shall be absolute, unconditional
and irrevocable and shall continue and remain in full force and effect until all
of the Guaranteed Obligations have been fully paid, performed and discharged.
2. The obligations of Guarantor under this Guaranty shall not be affected,
modified or impaired by the occurrence of any of the following events, whether
or not with notice to, or the consent of, Guarantor: (a) the waiver, surrender,
compromise, settlement, release or termination of any or all of the Guaranteed
Obligations; (b) the failure to give notice to Guarantor of the occurrence of an
event of default under the Guaranteed Obligations; (c) the extension of the time
for the payment, performance or discharge of any or all of the Guaranteed
Obligations; (d) the amendment or modification (whether material or otherwise)
of the Guaranteed Obligations in any respect; (e) any failure, omission, delay
or lack on the part of Landlord to enforce, assert or exercise any right, power
or remedy conferred on Landlord under the Guaranteed Obligations; (f) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or adjustment of debts,
or other similar proceedings affecting Tenant or Guarantor or any of the assets
of either of them; (g) the release or discharge by operation of law of Tenant
from the payment, performance or discharge of any or all of the Guaranteed
Obligations; (h) the release or discharge by operation of law of Guarantor from
any or all of the obligations of Guarantor under this Guaranty; or (i) the
invalidity or unenforceability of any or all of the Guaranteed Obligations.
Guarantor acknowledges that Landlord would not enter into the Lease without this
Guaranty and that Landlord is relying on this Guaranty.
<PAGE>
2
3. The obligations of Guarantor under this Guaranty are independent of the
Guaranteed Obligations. Guarantor agrees that Landlord shall have the right to
proceed against Guarantor directly and independently of Tenant. A separate
action may be brought and prosecuted against Guarantor whether or not an action
is brought against Tenant or Tenant is joined in any such action. Guarantor
authorizes Landlord and Tenant, without notice to, demand of, or consent from
Guarantor and without releasing or affecting Guarantor's liability under this
Guaranty, from time to time to amend, modify, renew, extend, supplement or
replace the Guaranteed Obligations or otherwise change the terms of the
Guaranteed Obligations, to take and hold security for the Guaranteed
Obligations, and to enforce, waive, surrender, impair, compromise or release any
such security or any or all of the Guaranteed Obligations or any person or
entity liable for any or all of the Guaranteed Obligations. Guarantor shall be
and remain bound under this Guaranty notwithstanding any such act or omission by
Tenant or Landlord. Guarantor waives the right, if any, to require Landlord to
proceed against Tenant, to proceed against or exhaust any security held by
Landlord, or to pursue any other remedy in Landlord's power. Landlord shall have
the right to exercise or enforce any right or remedy Landlord may have against
Tenant or any security held by Landlord. Guarantor waives the right, if any, to
the benefit of, or to direct the application of, any security held by Landlord.
Guarantor waives (a) any defense arising out of any alteration of the original
Guaranteed Obligations, (b) any defense arising out of the absence, impairment
or loss of any right of reimbursement or subrogation or other right or remedy of
Guarantor against Tenant or any security held by Landlord, and (c) any defense
arising by reason of any disability or other defense of Tenant or by reason of
the cessation or reduction from any cause whatsoever of the liability of Tenant
other than full payment, performance and discharge of the Guaranteed
Obligations. The cessation or reduction of the liability of Tenant for any
reason whatsoever other than full payment, performance and discharge of the
Guaranteed Obligations shall not release or affect in any way the liability of
Guarantor under this Guaranty.
4. If Tenant becomes insolvent or is adjudicated bankrupt or files a
petition for reorganization, arrangement, composition or similar relief under
any present or future provision of the federal Bankruptcy Code, or if such a
petition is filed against Tenant, or if Tenant makes a general assignment for
the benefit of creditors, and in any such proceeding any or all of the
Guaranteed Obligations are terminated or rejected or any or all of the
Guaranteed Obligations are modified or abrogated, then Guarantor agrees that
Guarantor's liability under this Guaranty shall not thereby be affected or
modified and such liability shall continue in full force and effect as if no
such action or proceeding had occurred. This Guaranty shall continue to be
effective or be reinstated, as the case may be, if any payment of the Guaranteed
Obligations must be returned by Landlord upon the insolvency, bankruptcy or
reorganization of Tenant or Guarantor, or otherwise, as though such payment had
not been made.
<PAGE>
3
5. Guarantor assumes the responsibility for being and keeping Guarantor
informed of the financial condition of Tenant and of all other circumstances
bearing upon the risk of failure to pay, perform or discharge any of the
Guaranteed Obligations which diligent inquiry would reveal, and Guarantor agrees
that Landlord has no duty to advise Guarantor of information known to Landlord
regarding such condition or any such circumstance. Guarantor acknowledges that
repeated and successive demands may be made and payments or performance made
hereunder in response to such demands as and when, from time to time, Tenant
defaults in the payment, performance or discharge of the Guaranteed Obligations.
Notwithstanding any such payments and performance hereunder, this Guaranty shall
remain in full force and effect and shall apply to any and all subsequent
defaults by Tenant. It is not necessary for Landlord to inquire into the
capacity, authority or powers of Tenant or the partners, directors, officers,
employees, agents or representatives acting or purporting to act on behalf of
Tenant, and all of the Guaranteed Obligations made or created in reliance upon
the purported exercise of such powers shall be guaranteed under this Guaranty.
6. If Tenant and Guarantor fail to pay, perform and discharge, as and when
payment, performance and discharge are due, all of the Guaranteed Obligations,
Landlord shall have the right, but no obligation, and without releasing Tenant
or Guarantor from any of the Guaranteed Obligations, to pay, perform and
discharge any or all of the Guaranteed Obligations on behalf of Tenant and
Guarantor. Guarantor shall, on demand, pay to Landlord all sums expended by
Landlord in the payment, performance and discharge of the Guaranteed
Obligations, together with interest on all such sums from the date of
expenditure to the date all such sums are paid by Tenant or Guarantor to
Landlord at the Interest Rate (as defined in the Lease). Guarantor waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor and notices of acceptance of this
Guaranty. Guarantor agrees to pay all costs and expenses, including reasonable
attorneys' fees and disbursements, which are incurred by Landlord in the
enforcement of this Guaranty. If any provision of this Guaranty is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Guaranty shall not be affected. If there is more than one Guarantor, all
obligations of Guarantor under this Guaranty shall be the joint and several
obligations of each Guarantor. This Guaranty may not be amended or modified in
any respect except by a written instrument signed by Guarantor and Landlord. As
used in this Guaranty, the singular shall include the plural. This Guaranty
shall bind and inure to the benefit of Guarantor and Landlord and their
respective transferees, personal representatives, heirs, successors and assigns.
<PAGE>
4
This Guaranty shall be governed by and construed in accordance with the laws of
the State where the premises leased by Tenant from Landlord are located.
Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of the
courts of the States of Colorado and California and any federal court of the
United States of America located in the City of San Francisco, California, or
the city of Denver, Colorado. Guarantor and Landlord each waive any right to
trial by jury in connection herewith. Without limiting anything else contained
herein, the fullest extent it may effectively do so under applicable law,
Guarantor irrevocably waives and agrees not to assert, by way of motion, as a
defense or otherwise, any claim that it is not subject to the jurisdiction of
any such court, any objection that it may now or hereafter have to the laying of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
7. To induce Landlord to enter into the Lease, Guarantor represents and
warrants to Landlord as follows: Guarantor is a corporation existing under the
laws of Canada, a foreign nation. Guarantor has full power and authority to
enter into this Guaranty and to perform its obligations under this Guaranty. The
execution, delivery and performance of this Guaranty by Guarantor have been duly
and validly authorized by all necessary action on the part of Guarantor and all
required consents and approvals have been duly obtained. This Guaranty is a
legal, valid and binding obligation of Guarantor, enforceable against Guarantor
in accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting the rights of creditors generally. Neither the execution and delivery
of this Guaranty nor the consummation of the transactions contemplated hereby
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of, or give rise to a default
under (i) any provision of Guarantor's articles of incorporation or bylaws, (ii)
any material instrument or contract to which Guarantor is a party or by which
Guarantor is bound, or (iii) any federal, state, local or foreign judgment,
writ,
<PAGE>
5
decree, order, statute, rule or regulation applicable to Guarantor, or any
property of Guarantor.
IN WITNESS WHEREOF, Guarantor has executed this Continuing Lease Guaranty
as of the date first hereinabove written.
Guarantor:
ICG HOLDINGS (CANADA), INC., a
Federal Canadian corporation
By /s/ James D. Grenfell
---------------------------
James D. Grenfell
Its Executive Vice President
and Chief Financial Officer