-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OLPO4+At/dekCPMBNlVqql6mc1PpIF6gZd4bn+UH4s7RPpknTWqqCVZqnsrFUDQE Knui77TuRcBRu2fQMiEbyg== 0000786343-98-000002.txt : 19980401 0000786343-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000786343-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICG HOLDINGS CANADA INC CENTRAL INDEX KEY: 0000786343 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841128866 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11052 FILM NUMBER: 98581750 BUSINESS ADDRESS: STREET 1: 161 INVERNESS DRIVE WEST STREET 2: 9605 EAST MAROON CIRCLE P O BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 303-414-5000 MAIL ADDRESS: STREET 1: C/O INTELCOM GROUP (USA) INC STREET 2: PO BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: INTERTEL COMMUNICATIONS INC DATE OF NAME CHANGE: 19930107 10-K 1 ANNUAL REPORT FOR FISCAL YEAR ENDING 12/31/97 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 - ---------------------------------------- --------------------------------------- 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. 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 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 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." 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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. 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. 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. 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." 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. 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. 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. 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. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996 to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996, Holdings-Canada's common shares had been listed on the AMEX under the symbol "ITR" from January 14, 1993 through February 28, 1996, and under the symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares ceased trading on the AMEX at the close of trading on August 2, 1996. Holdings-Canada Class A Common Shares, which were listed on the Vancouver Stock Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the close of trading on March 12, 1997. The following table sets forth, for the fiscal periods indicated, the high and low sales prices of the Holdings-Canada Class A Common Shares as reported on the AMEX through August 2, 1996, and the VSE through March 12, 1997, and the high and low sales prices of the ICG Common Stock as reported on the AMEX from August 5, 1996 through March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated below. The table also sets forth the average of the monetary exchange rates on the last day of each such relevant fiscal period.
American Stock Exchange/Nasdaq National Vancouver Exchange Market (1) Stock Exchange (1) Rate -------------------------- ------------------------------ High Low High Low (C$/$) ----------- ----------- ------------- ------------- ------------- 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)
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." 30
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) 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)
31
At September 30, At December 31, ----------------------------------------------------------- ---------------------------- 1993 1994 1995 1996 1996 1997 ----------- ----------- ------------- ----------- ----------- ------------ Balance Sheet Data: (in thousands) 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)
(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. 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. 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. 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. 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.
Three Months Fiscal Years Ended September 30, Ended December 31, -------------------------------------- ------------------------------------------ 1995 1996 1995 1996 ------------------ ------------------- ------------------- ---------------------- $ % $ % $ % $ % --------- -------- ---------- -------- ---------- --------- ----------- --------- Statement of Operations Data: (Dollars in thousands) 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%
35
Twelve Months Ended Fiscal Year Ended December 31, December 31, ------------------- ------------------ 1996 1997 ------------------- ------------------ $ % $ % --------- --------- ---------- -------- Statement of Operations Data: (Dollars in thousands) 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
*Less than 0.5% 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. 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. 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. 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. 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. 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. 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." 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). 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. 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. 46
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: 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 - -----------
(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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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.
Transactions Untimely Known Failures to File Reporting Person Late Reports Reported Required Forms - -------------------- -------------- --------------------- ---------------------- Walter Threadgill 1 (Form 3) 1 None Mark S. Helwege (1) 1 (Form 5) 3 None
(1) Former Executive Vice President - Network and President of FOTI 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. 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 $320.0 million from the issuance of preferred securities and notes during fiscal 1997. These accomplishments exceeded the Company's objectives for fiscal 1997. The Compensation Committee believes that the Company appropriately awarded its executive officers for their short- and long-term efforts. 62 The Compensation Committee continually evaluates the compensation of the Company's executive officers, including assessing compensation reports for comparable companies and for the telecommunications industry. The Compensation Committee believes that maintaining suitable executive compensation programs is necessary to support the future development of the Company and growth in stockholder value. William J. Laggett Harry R. Herbst Leontis Teryazos Walter Threadgill (Members of the Compensation Committee) Executive Compensation The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries, to or on behalf of J. Shelby Bryan, the Company's President and Chief Executive Officer, the four other most highly compensated executive officers of the Company and one additional officer for whom disclosure would have been required but for the fact that the individual was not serving as executive officer at December 31, 1997 (the "Named Officers") for the fiscal years ended December 31, 1997, September 30, 1996 and 1995. Due to the Company's change in year end during 1996 from September 30 to December 31, additional amounts are shown below in the Summary Compensation Table for the 12 months ended December 31, 1996 and are referred to in such tables as "1996T." The Company has not maintained any long-term incentive plans and the Company has not granted stock appreciation rights. 63
Summary Compensation Table Annual Compensation Long-term Compensation ----------------------------------------------- --------------------------- Fiscal Other Annual Securities Underlying Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options - ------------------------------ --------- ------------- --------------- ------------------- ---------------------------- 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
(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). 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 $9,432. 65 Option/SAR Grants in Last Fiscal Year The Company granted no stock appreciation rights during fiscal 1997 to the Named officers or to other employees. The following table provides information on option grants during fiscal 1997 to the Named Officers:
Potential realizable value at assumed Individual grants annual rates of stock -------------------------------------- price appreciation for Number of Percent of total Exercise option term securities options granted or base ------------------------ underlying to employees in price Expiration Name options granted fiscal year ($/Sh) date 5% ($) 10% ($) (#) - ----------------------- -------------------- ------------------ --------- ------------ ----------- ------------ 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
(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 $10.375, the closing price of the Common Stock on April 16, 1997. See "-Ten-Year Option/SAR Repricings." (2) As a result of Mr. Maxwell's resignation on December 3, 1997, 43,750 of the options granted during fiscal 1997 have been canceled. 66 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table provides information on options exercised during fiscal 1997 by the Named Officers and the value of such officers' unexercised options at December 31, 1997:
Number of securities Value of unexercised in-the- underlying unexercised money options at Shares options at fiscal year end (#) fiscal year end ($)(1) (2) acquired on Value ------------------------------- ---------------------------- Name exercise (#) realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---------------------------------------------------------------------------------------------------------------- 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 -
(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. 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, $.01 par value, of the company on the Nasdaq National Market on April 19, 1997. William J. Laggett Harry R. Herbst Leontis Teryazos Walter Threadgill (Members of the Stock Option Committee) 68 The following provides information on the repricing of stock options of the Named Officers:
Number of securities Length of original underlying Market price of Exercise price option term options stock at time of at time of remaining at date repriced or repricing or repricing or New exercise of repricing or Name Date amended (#) amendment ($) amendment ($) price ($) amendment - ------------------------- ---------- ---------------- ------------------ ---------------- --------------- --------------------- 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
(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. 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. 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. 71
Amount/Nature of Beneficial Ownership Name and Address of Beneficial Owner Percent (1) ----------------------------------------------------------------- ----------------------- ------------------------ 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)
72
Amount/Nature of Beneficial Ownership Name and Address of Beneficial Owner Percent (1) ----------------------------------------------------------------- ----------------------- ------------------------ Walter Threadgill . . . . . . . . . . . . . . . . . . . . . . 5,000 (3) * Director All executive officers and Directors as a group (12 persons) 2,456,983 (11) 5.2%
- ------------------ *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 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. 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)]. 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]. 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]. 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]. 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]. 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]. 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]. 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]. 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 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). 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 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 F-3 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1997 - --------------------------------------------------------------------------------
December 31, ------------------------------------------------ Assets 1996 1997 - ------ ------------------------ ---------------------- (in thousands) Current assets: 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)
F-4 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued - --------------------------------------------------------------------------------
December 31, ---------------------------------------------- Liabilities and Stockholders' Deficit 1996 1997 - ------------------------------------- ------------------------ --------------------- (in thousands) Current liabilities: 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 ======================== =====================
See accompanying notes to consolidated financial statements. 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 - --------------------------------------------------------------------------------
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: 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)
F-6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations, Continued - --------------------------------------------------------------------------------
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) 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.
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 - --------------------------------------------------------------------------------
Additional Total Common stock paid-in Accumulated stockholders' Shares Amount capital deficit equity (deficit) -------------- -------------- ------------- ------------- -------------- (in thousands) 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)
F-8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit), Continued - --------------------------------------------------------------------------------
Additional Total Common stock paid-in Accumulated stockholders' Shares Amount capital deficit equity (deficit) ------------- ------------- ------------- -------------- -------------- (in thousands) 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.
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 - --------------------------------------------------------------------------------
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: 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)
F-10 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued - --------------------------------------------------------------------------------
Fiscal years ended Three months ended Fiscal year September 30, December 31, ended December 31, -------------------------- ------------------------- 1995 1996 1995 1996 1997 ------------ ------------ ------------- ----------- ------------------ (unaudited) (in thousands) 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)
F-11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued - --------------------------------------------------------------------------------
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: 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.
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 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. 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. 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. 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 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, 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 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. 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. 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 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 ====================== 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. 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.
Fiscal years ended Three months ended Fiscal year ended September 30, December 31, December 31, --------------------------- 1995 1996 1996 1997 ------------- ------------- ------------------------- ----------------------- (unaudited) (in thousands) 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)
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. 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). 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 ============= ================ 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 ===================== F-29 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------- (10) Long-term Debt Long-term debt is summarized as follows:
December 31, ----------------------------------------------- 1996 1997 ---------------------- ---------------------- (in thousands) 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 ====================== =====================
(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 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. 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 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. 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. 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. 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 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: 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 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 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.
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: 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)
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. 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:
Shares Weighted underlying average Options options exercise price exercisable ------------------- -------------------- ------------------------ (in thousands) (in thousands) 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 ===================
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:
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) $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 ================== ==================
(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 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. 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 ==================== 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 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 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. 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. 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. 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:
December 31, -------------------------------------- 1996 1997 ------------------- ----------------- (in thousands) 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 $ - - =================== =================
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: 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)
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) 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)
(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. 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) F-53 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------- (19) Financial Information of ICG Holdings (Canada), Inc. (continued)
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) 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)
(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: 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. FINANCIAL STATEMENT SCHEDULE ICG Communications, Inc. Page Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1 Schedule II: Valuation and Qualifying Accounts . . . . . . . . S-2 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 S-2 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts - -------------------------------------------------------------------------------
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: 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.
S-2 INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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. 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 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 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 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 EX-21 2 SUBSIDIARIES OF THE REGISTRANT 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 -- EX-23.1 3 CONSENT OF KPMG PEAT MARWICK LLP. 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 EX-27 4 SUMMARY FINANCIAL INFORMATION
5 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. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 118,834 98,181 84,097 5,376 3,901 310,180 738,488 106,321 1,107,664 99,304 957,507 420,171 0 647 (369,965) 1,107,664 0 273,354 0 246,418 187,272 11,950 117,545 (289,831) 0 (327,643) 0 0 0 (327,643) (10.11) 0 THIS VALUE IS NOT APPLICABLE.
EX-10.46 5 AMENDMENT NO. 1 TO THE ICG 1996 STOCK OPTION PLAN 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." EX-10.51 6 EMPLOYMENT AGREEMENT, DATED 6-1-97 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) 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. 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). 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. 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. 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 _________________________ EX-10.52A 7 PURCHASE AGREEMENT PURCHASE AGREEMENT between ICG HOLDINGS, INC. and TRINET CORPORATE REALTY TRUST, INC. December 9, 1997 ICG Holdings Headquarters Englewood, Colorado 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 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. 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: 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. 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. 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); 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). 7 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. 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. 9 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. 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. 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. 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. 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. 14 (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. 15 (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. 16 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. 17 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. 18 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. 19 (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; 20 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. 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. 22 (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. 23 (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. 24 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. 25 (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. 26 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. 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. 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. 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. 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 EXHIBIT A COMMITMENT 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. EXHIBIT C CONTRACTS 1. [Construction Contract] 2. [Architect's Agreement] 3. [Warranties] EXHIBIT D PERMITS EXHIBIT E DESCRIPTION OF PROJECT EXHIBIT F PLANS AND SPECIFICATIONS The Project Drawings, Specifications and Other Requirements listed in the Document Log attached hereto (consisting of 20 pages). EXHIBIT G [RESERVED] 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 ______________________ 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: 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: 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 ______________________ 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 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. 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 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. 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. 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. 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. 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 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 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. 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. 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. 12 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. 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. 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. 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, 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. 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 [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. 18 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. 19 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. 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. 21 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 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 23 (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; 24 (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: 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: 26 (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. 27 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. 28 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. 29 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. 30 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: 31 (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. 32 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. 33 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. 34 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. 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. 36 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. 37 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"). 38 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. 39 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 40 (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. 41 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"); 42 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. 43 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. 44 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 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. 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. 47 (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. 48 (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. 49 (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. 50 (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). 51 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 52 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. 53 (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. 54 (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. 55 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 __________________________ 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. 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. 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: 4 SCHEDULE A TO ESTOPPEL CERTIFICATE 5 SCHEDULE B TO ESTOPPEL CERTIFICATE 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. 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. 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 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. 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: ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------ 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 2 EXHIBIT A BILL OF SALE 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. 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 3 EXHIBIT K EXHIBIT A ASSIGNMENT OF CONTRACTS 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 2 EXHIBIT L EXHIBIT A ASSIGNMENT OF PERMITS 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. 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. 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 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 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 ($1,000,000). Architect acknowledges that Buyer will rely upon this Certificate in acquiring the Project from Seller. Dated: ________________, 199_ ARCHITECT: _____________________________ By _________________________ Its ____________________ EXHIBIT Q SELLER'S CERTIFICATE OF SUBSTANTIAL COMPLETION With reference to the Purchase and Sale Agreement dated as of _____________, 1997 (the "Purchase Agreement") between ICG HOLDINGS, INC., a Colorado corporation ("Seller"), and TRINET CORPORATE REALTY TRUST, INC., a Maryland corporation ("Buyer"), Seller hereby certifies to Buyer as follows: (1) The Project has been completed to Seller's satisfaction, subject to the Punch-list Items described in Exhibit 1 attached hereto, in accordance with the Construction Contract, the Architect's Agreement, the Plans and Specifications and the recommendations of any soils or engineering report approved by Seller, and in compliance with all applicable laws, ordinances, rules, regulations, building restrictions, zoning codes, subdivision codes, land-use codes, recorded covenants and restrictions, and requirements of all regulatory authorities having jurisdiction over the Project or the Property. (2) The Project has been approved for occupancy by all governmental authorities with jurisdiction over the Real Property and a true and complete copy of the [Certificate of Occupancy] evidencing such approval is attached hereto as Exhibit 2. (3) All mechanics' liens, stop notices, equitable lien claims or other lien claim rights affecting the Property have been waived or extinguished. (4) The Final Survey has been provided to Buyer and shows no material encroachments, bases for third-party claims or violations of law or private covenants not shown on the survey. (5) Seller has installed and paid for equipment and software for the purpose of operating the Seller's system control center in the Real Property, with a total cost in excess of ______________ dollars ($__________). (6) The actual Total Project Cost paid by Seller exceeded forty-three million five hundred thousand dollars ($43,500,000). 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 ____________________ 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 EX-10.52B 8 FIRST AMENDMENT TO PURCHASE AGREEMENT 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. 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). 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. 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. 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 EX-10.52C 9 ASSIGNMENT OF PURCHASE AGREEMENT 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. 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 EX-10.52D 10 COMMERCIAL LEASE - NET 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. 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 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 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. 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 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. 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. 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. 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. 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 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 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. 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. 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. 12 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. 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 (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. 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. 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 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. 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 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. 19 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. 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. 21 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. 22 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 23 (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; 24 (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; 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: 26 (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. 27 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: 28 (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. 29 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. 30 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. 31 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. 32 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. 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. 34 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. 35 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. 36 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"). 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 38 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 39 (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: 40 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 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. 42 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. 43 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. 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. 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. 46 (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. 47 (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. 48 (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 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. 50 (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. 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. 52 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. 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 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. 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. 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: 4 SCHEDULE A TO ESTOPPEL CERTIFICATE 5 SCHEDULE B TO ESTOPPEL CERTIFICATE 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. 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. 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 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. 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: ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------ ------------------------------ 6 EXHIBIT C EX-10.52E 11 CONTINUING LEASE GUARANTY BY ICG COMMUNICATIONS 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. 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. 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. 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, 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 EX-10.52F 12 CONTINUING LEASE GUARANTY BY ICG HOLDINGS 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. 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. 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. 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, 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 -----END PRIVACY-ENHANCED MESSAGE-----