-----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, JbutVWnehP7kEk7w14F1JD6MUBD4dMAtHu0xp4KfvyNfvYWirKXDQAPbhZ6KAVu1 SqqqRXZ0YJ8L9qYDUKlX0Q== 0000786343-99-000001.txt : 19990402 0000786343-99-000001.hdr.sgml : 19990402 ACCESSION NUMBER: 0000786343-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICG HOLDINGS CANADA CO /CO/ 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: 99579610 BUSINESS ADDRESS: STREET 1: 161 INVERNESS DRIVE WEST STREET 2: P O BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80155-6742 BUSINESS PHONE: 3034145431 MAIL ADDRESS: STREET 1: 161 INVERNESS DRIVE STREET 2: PO BOX 6742 CITY: ENGLEWOOD STATE: CO ZIP: 80155-6742 FORMER COMPANY: FORMER CONFORMED NAME: ICG HOLDINGS CANADA INC DATE OF NAME CHANGE: 19970225 FORMER COMPANY: FORMER CONFORMED NAME: INTERTEL COMMUNICATIONS INC DATE OF NAME CHANGE: 19930107 10-K 1 ANNUAL REPORT FOR FISCAL YEAR ENDING 12/31/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Commission file Number 1-11965) ICG COMMUNICATIONS, INC. (Commission file Number 1-11052) ICG HOLDINGS (CANADA) CO. (Commission file Number 33-96540) ICG HOLDINGS, INC. (Exact names of registrants as specified in their charters) - ----------------------------------------- ------------------------------------- Delaware 84-1342022 Nova Scotia Not applicable Colorado 84-1158866 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) - ----------------------------------------- ------------------------------------- 161 Inverness Drive West Not applicable Englewood, Colorado 80112 161 Inverness Drive West c/o ICG Communications, Inc. Englewood, Colorado 80112 161 Inverness Drive West P.O. Box 6742 Englewood, Colorado 80155-6742 161 Inverness Drive West Not applicable Englewood, Colorado 80112 (Address of principal executive offices) (Address of U.S. agent for service) - ----------------------------------------- ------------------------------------- Registrants' telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000 Securities registered pursuant to Section 12(b) of the Act: - ------------------------------------------------------------------------------- Title of class - ------------------------------------------------------------------------------- Not applicable Not applicable Not applicable - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: - -------------------------------------------- ---------------------------------- Name of each exchange on Title of each class which registered - -------------------------------------------- ---------------------------------- Common Stock, $.01 par value Nasdaq National Market (46,770,440 shares outstanding on March 29, 1999) Not applicable Not applicable Not applicable Not applicable - -------------------------------------------- ---------------------------------- Indicate by check mark whether the registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] On March 29, 1999 the aggregate market value of ICG Communications, Inc. Common Stock held by non-affiliates (using the closing price of $18.63 on March 29, 1999) was approximately $871,333,297. ICG Canadian Acquisition, Inc., a wholly owned subsidiary of ICG Communications, Inc., owns all of the issued and outstanding common shares of ICG Holdings (Canada) Co. ICG Holdings (Canada) Co. owns all of the issued and outstanding shares of common stock of ICG Holdings, Inc. DOCUMENTS INCORPORATED BY REFERENCE The definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the Securities and Exchange Commission not later than April 30, 1999 has been incorporated by reference in whole or in part for Part III, Items 10, 11, 12 and 13, of the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 of ICG Communications, Inc. TABLE OF CONTENTS PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Recent Developments. . . . . . . . . . . . . . . . . . . . . 6 Telecom Services . . . . . . . . . . . . . . . . . . . . . . 10 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 10 Networks . . . . . . . . . . . . . . . . . . . . . . . . . 11 Services . . . . . . . . . . . . . . . . . . . . . . . . . 12 Industry . . . . . . . . . . . . . . . . . . . . . . . . . 14 Network Services . . . . . . . . . . . . . . . . . . . . . . 14 Satellite Services . . . . . . . . . . . . . . . . . . . . . 15 Customers And Marketing . . . . . . . . . . . . . . . . . . 16 Competition. . . . . . . . . . . . . . . . . . . . . . . . . 17 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 18 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 23 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 24 ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 56 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . . . . 57 PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . . . . . 58 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 59 PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K. 60 Financial Statements . . . . . . . . . . . . . . . . . . . . 60 Report on Form 8-K . . . . . . . . . . . . . . . . . . . . . 66 3 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Financial Statement Schedule . . . . . . . . . . . . . . . . 66 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . S-1 4 PART I Unless the context otherwise requires, the term "Company" or "ICG" means the combined business operations of ICG Communications, Inc. ("ICG") and its subsidiaries, including ICG Holdings (Canada) Co. ("Holdings-Canada") and ICG Holdings, Inc. ("Holdings"); the terms "fiscal" and "fiscal year" refer to ICG's fiscal years ending December 31 for 1997 and 1998 and September 30 for years prior to 1997. The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. All dollar amounts are in U.S. dollars. ITEM 1. BUSINESS Overview The Company is one of the nation's leading competitive integrated communications providers ("ICPs"), based on estimates of the industry's 1998 revenue. ICPs seek to provide an alternative to incumbent local exchange carriers ("ILECs"), long distance carriers and other communications service providers for a full range of communications services in the increasingly deregulated telecommunications industry. Through its competitive local exchange carrier ("CLEC") operations, the Company operates fiber networks in regional clusters covering major metropolitan statistical areas in California, Colorado, Ohio, the Southeast and Texas. The Company also provides a wide range of network systems integration services and maritime and international satellite transmission services. Additionally, the Company began providing wholesale network services over its nationwide data network in February 1999. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from approximately $154.1 million for fiscal 1996 to approximately $397.6 million for fiscal 1998. The Company's rapid growth is the result of the initial installation, acquisition and subsequent expansion of its fiber optic networks and the expansion of its communications service offerings. The Federal Telecommunications Act of 1996 (the "Telecommunications Act") and pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Under the Telecommunications Act, the Company is permitted to offer all interstate and intrastate telephone services, including competitive local dial tone. In early 1997, the Company began marketing and selling local dial tone services in major metropolitan areas in California, Colorado, Ohio and the Southeast and, in December 1998, began offering services in Texas through an acquired business. During fiscal 1997 and 1998, the Company sold 178,470 and 206,458 local access lines, respectively, net of cancellations, of which 354,482 were in service at December 31, 1998. The Company had 29 operating high capacity digital voice switches and 16 data communications switches at December 31, 1998, and plans to install additional switches as demand warrants. As a complement to its local exchange services offered to business end users, the Company markets bundled service offerings provided over its regional fiber network which include long distance, enhanced telecommunications services and data services. Additionally, the Company owns and operates a nationwide data network, with 236 points of presence ("POPs") over which the Company recently began providing wholesale Internet access and enhanced network services to MindSpring Enterprises, Inc. ("MindSpring") and intends to offer similar services to other Internet service providers ("ISPs") and telecommunications providers in the future. 5 In developing its telecommunications service offerings, the Company continues to invest significant resources to expand its network. This expansion is being undertaken through a combination of constructing owned facilities, entering into long-term agreements with other telecommunications carriers and through mergers and acquisitions. See "-Recent Developments." Recent Developments Sale of Operations of NETCOM On-Line Communication Services, Inc. On January 21, 1998, the Company acquired NETCOM On-Line Communication Services, Inc., a Delaware corporation and provider of Internet connectivity and Web site hosting services and other value-added services located in San Jose, California ("NETCOM") in a transaction accounted for as a pooling of interests for approximately 10.2 million shares of common stock of ICG ("ICG Common Stock"), valued at approximately $284.9 million on the date of the merger. On February 17, 1999, the Company sold certain of the operating assets and liabilities of NETCOM to MindSpring, an ISP located in Atlanta, Georgia. Total proceeds from the sale were $245.0 million, consisting of $215.0 million in cash and 376,116 shares of unregistered common stock of MindSpring, valued at approximately $79.76 per share at the time of the transaction. Assets and liabilities sold to MindSpring include those directly related to the domestic operations of NETCOM's Internet dial-up, dedicated access and Web site hosting services. On March 16, 1999, the Company sold all of the capital stock of NETCOM's international operations for total proceeds of approximately $41.1 million. MetroNET Communications Corp. ("MetroNET"), a Canadian entity, and Providence Equity Partners ("Providence"), located in Providence, Rhode Island, together purchased the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9 million in cash. Additionally, Providence purchased all of the capital stock of NETCOM Internet Access Services Limited, NETCOM's operations in the United Kingdom, for approximately $12.2 million in cash. The Company expects to record a combined gain on the NETCOM transactions of approximately $200 million, net of income taxes of approximately $6.5 million, during the three months ended March 31, 1999. In conjunction with the sale to MindSpring, the legal name of the NETCOM subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic Internet backbone assets formerly owned by NETCOM which include 236 POPs serving approximately 700 cities nationwide. PST intends to utilize the retained network operating assets to provide wholesale Internet access and enhanced network services to MindSpring and other ISPs and telecommunications providers. On February 17, 1999, the Company entered into an agreement to lease to MindSpring for a one-year period the capacity of certain network operating assets for a minimum of $27.0 million, although subject to increase dependent upon network usage. MindSpring will utilize the capacity to provide Internet access to the dial-up services customers formerly owned by NETCOM. In addition, the Company will receive for a one-year period 50% of the gross revenue earned by MindSpring from the dedicated access customers formerly owned by NETCOM. 6 Effective November 3, 1998, the Company's board of directors adopted the formal plan to dispose of the operations of NETCOM and accordingly, the Company's consolidated financial statements reflect the operations of NETCOM as discontinued for all periods presented. For fiscal 1996, 1997 and 1998, NETCOM reported revenue of $120.5 million, $160.7 million and $164.6 million, respectively, and EBITDA (before nonrecurring charges) of $(31.0) million, $(9.4) million and $(14.7) million, respectively. Announcement of New Service Offerings. In August 1998, the Company began offering enhanced telephony services via Internet protocol ("IP") technology. The Company currently offers these services in 230 major cities in the United States, covering more than 90% of the commercial long distance market. The Company carries the IP traffic over its nationwide data network and terminates a large portion of the traffic via its own POPs, thereby eliminating terminating charges from the use of other carriers' network facilities. Calls that cannot be terminated over the Company's own facilities are billed at higher per minute rates to compensate for the charges associated with using other carriers' facilities. The Company currently does not generate any significant revenue from this service. In December 1998, the Company announced its plans to offer three new network services, to be available beginning in early 1999: Modemless remote access service ("RAS") allows the Company to provide modem access at its own switch location, rather than requiring ISPs to deploy modems physically at each of their POPs. This service will enable the Company to act as an aggregator for ISP traffic while limiting the ISP's capital deployment. Through its strategic relationship with Lucent Technologies, Inc. ("Lucent"), the Company is currently retrofitting all of its Lucent-5ESS switches with the new Lucent product that allows for RAS functionality. This service eliminates the need for ISPs to separately purchase modems and shifts the network management responsibilities to the Company. The Company plans to be the first to market RAS using Lucent's modem technology and expects the service will be available to customers in the second quarter of 1999. Through the same technology that allows it to provide RAS, the Company plans to offer interLATA (local access and transport area) expanded originating service ("EOS"), enabling regional or local ISPs to expand their geographical footprint outside their current physical locations by carrying the ISP's out-of-region traffic on the Company's own nationwide data network. The Company will initially offer this service within its CLEC regional clusters during the first quarter of 1999, and plans to expand EOS offerings to other areas as demand warrants. Through digital subscriber line ("DSL") technology, the Company plans to provide high-speed data transmission services primarily to business end users and, on a wholesale basis, to ISPs. DSL technology utilizes the existing ILEC twisted copper pair connection to the customer, giving the customer significantly greater bandwidth, and consequently speed, when connecting to the Internet. The Company expects to offer DSL in over 400 central offices by the end of 1999 through alliances with other companies focusing on DSL service. For example, on February 18, 1999, the Company entered into a letter of intent with NorthPoint Communications, Inc., a privately held data CLEC based in San Francisco, California ("NorthPoint"). If this agreement is finalized, NorthPoint will be designated as the Company's preferred DSL provider for a two-year period 7 and the Company will purchase up to 75,000 DSL lines from NorthPoint over the two-year term. This alliance will enable the Company to accelerate the expansion of its DSL service offerings and allow NorthPoint to gain access to the Company's collocation facilities in markets where NorthPoint currently has limited or no operations. If the agreement is finalized, NorthPoint will provision and manage all of the Company's DSL services offered under this agreement. The Company expects to begin offering DSL services under this agreement in the second quarter of 1999. Acquisition of CSW/ICG ChoiceCom, L.P. In January 1997, the Company announced a strategic alliance with Central and South West Corporation ("CSW") formed for the purpose of developing and marketing telecommunications services in certain cities in Texas. Based in Austin, Texas, the venture entity was a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"). On December 31, 1998, the Company purchased 100% of the partnership interests in ChoiceCom from CSW for approximately $55.7 million in cash and the assumption of certain liabilities of approximately $7.3 million. In addition, the Company converted approximately $31.6 million of receivables from prior advances made to ChoiceCom by the Company to its investment in ChoiceCom. The acquired company currently provides local exchange and long distance services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom reported revenue of $0.3 million and $5.8 million, respectively, and EBITDA losses (before nonrecurring charges) of $(5.5) million and $(13.6) million, respectively. Acquisition of DataChoice Network Services, L.L.C. On July 27, 1998, the Company acquired DataChoice Network Services, L.L.C., a Colorado limited liability company providing point-to-point data transmission resale services through its long-term agreements with multiple regional carriers and nationwide providers ("DataChoice"). The Company paid total consideration of approximately $5.9 million, consisting of 145,997 shares of ICG Common Stock and approximately $1.1 million in cash. The historical results of operations of DataChoice are not significant to the Company's consolidated results of operations. Acquisition of NikoNET, Inc. The Company completed a series of transactions on July 30, 1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced Messaging Services, Inc. (collectively, "NikoNET"). The Company paid total consideration of approximately $13.8 million in cash, which included dividends payable by NikoNET to its former owners and amounts to satisfy NikoNET's former line of credit, assumed approximately $0.7 million in liabilities and issued 356,318 shares of ICG Common Stock with a fair market value of approximately $10.7 million on the date of the acquisition, for all the capital stock of NikoNET. Located in Atlanta, Georgia, NikoNET provides broadcast facsimile services and enhanced messaging services to financial institutions, corporate investor and public relations departments and other customers. The Company believes the acquisition of NikoNET enables the Company to offer expanded services to its existing customers. The historical results of operations of NikoNET are not significant to the Company's consolidated results of operations. Discontinuance of Operations of Zycom. Due primarily to the loss of a major customer, which generated a significant obligation under a volume discount agreement with its call transport provider, the board of directors of Zycom Corporation, a 70%-owned subsidiary of the Company which operated an 800/888/900 number services bureau and switch platform ("Zycom"), approved a plan on August 25, 1998 to wind down and ultimately discontinue Zycom's operations. On October 8 22, 1998, Zycom completed the transfer of all customer traffic to other providers and on January 4, 1999, the Company completed the sale of the remainder of Zycom's operating assets to an unrelated third party. For fiscal 1996, 1997 and 1998, Zycom reported revenue of $14.9 million, $28.3 million and $17.0 million, respectively, and EBITDA (before nonrecurring charges) of $0.6 million, $(2.7) million and $(3.3) million, respectively. The Company's consolidated financial statements reflect the operations of Zycom as discontinued for all periods presented. Sale of Satellite Services Operating Subsidiaries. On August 12 and November 18, 1998, the Company completed the sales of the capital stock of MarineSat Communications, Inc. ("MCN") and Nova-Net Communications, Inc. ("Nova-Net"), respectively, two wholly owned subsidiaries within the Company's Satellite Services operations. MCN is a Florida-based provider of cellular and satellite communications for commercial ships, private vessels and land-based mobile units. Nova-Net provides private data networks utilizing very small aperture terminals ("VSATs") and specializes in data collection and in monitoring and control of customer production and transmission facilities in various industries, including oil and gas, electric and water utilities and environmental monitoring industries. The Company recorded a gain on the sale of MCN of approximately $0.9 million and a loss on the sale of Nova-Net of approximately $0.2 million in its consolidated statement of operations during fiscal 1998. The Company believes that the dispositions of MCN and Nova-Net will further management's ability to focus on the development and deployment of its core Telecom Services. The combined historical results of operations of MCN and Nova-Net are not significant to the Company's consolidated results of operations. The Company's remaining Satellite Services operations consists principally of the operations of Maritime Telecommunications Network, Inc. ("MTN"). See "-Satellite Services." Financings. On February 12, 1998, ICG Services, Inc., a Delaware corporation and newly formed wholly owned subsidiary of the Company ("ICG Services"), completed a private placement of 10% Senior Discount Notes due 2008 (the "10% Notes") for gross proceeds of approximately $300.6 million. Net proceeds from the offering, after underwriting and other offering costs of approximately $9.7 million, were approximately $290.9 million. The 10% Notes are unsecured senior obligations of ICG Services that mature on February 15, 2008, at a maturity value of $490.0 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable in cash each February 15 and August 15, commencing August 15, 2003. The 10% Notes have been registered under the Securities Act of 1933, as amended (the "Securities Act"). On April 27, 1998, ICG Services completed a private placement of 9 7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross proceeds of approximately $250.0 million. Net proceeds from the offering, after underwriting and other offering costs of approximately $7.9 million, were approximately $242.1 million. The 9 7/8% Notes are unsecured senior obligations of ICG Services that mature on May 1, 2008, at a maturity value of $405.3 million. Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes have been registered under the Securities Act. ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment, Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG Equipment"), for the principal purpose of purchasing telecommunications equipment, software, network capacity and related services for sale or lease to 9 other operating subsidiaries of ICG ("Holdings' Subsidiaries"). By purchasing assets through ICG Equipment, the Company defers sales tax on asset purchases over the term of the operating leases between ICG Equipment and Holdings' Subsidiaries, which sales tax would otherwise be paid in full at the time of the purchase. The equipment and services provided to Holdings' Subsidiaries are utilized to upgrade and expand the Company's network infrastructure. All such arrangements are intended to be conducted on the basis of fair market value and on comparable terms that Holdings' Subsidiaries would be able to obtain from a third party. As of December 31, 1998, approximately $195.0 million of telecommunications equipment, software, network capacity and related services were under lease to Holdings' Subsidiaries by ICG Equipment. Telecom Services The Company operates local exchange networks in the following markets within its regional clusters: California (Sacramento, San Diego and portions of the Los Angeles and San Francisco metropolitan areas); Colorado (Denver, Colorado Springs and Boulder); Ohio (Akron, Cincinnati, Cleveland, Columbus, and Dayton); the Southeast (Atlanta, Georgia; Birmingham, Alabama; Charlotte, North Carolina; Louisville, Kentucky; and Nashville, Tennessee); and Texas (Austin, Corpus Christi, Dallas, Houston and San Antonio). The Company will continue to expand its network through construction, leased facilities and strategic alliances and, potentially, through acquisitions. The Company's operating regional fiber networks have grown from 2,143 fiber route miles at the end of fiscal 1996 to 4,255 fiber route miles as of December 31, 1998. Telecom Services revenue has increased from approximately $72.8 million for fiscal 1996 to approximately $303.3 million for fiscal 1998. Since February 1999, the Company also operates a nationwide data network with 236 POPs over which the Company provides wholesale Internet access services to MindSpring and intends to provide such services and enhanced network services to other ISPs and telecommunications providers in the future. Strategy The Company's objective is to be a premier provider of high quality communications services to its targeted business, ISP and carrier customers. The key elements of this strategy are: Increase Revenue and Margins through Bundled Services to Business End Users. The Company believes that its commercial customers are increasingly demanding a broad, full service approach to providing telecommunications services. By offering integrated technology-based communications solutions, management believes the Company will be better able to capture business from telecommunications-intensive commercial accounts. To this end, the Company is complementing its competitive local service offerings with long distance and data service offerings, including its recently offered IP telephony services, and marketing these combined products through ICG's direct sales force and sales agents. Management believes a targeted business end user strategy can better leverage ICG's network footprint and telecommunications investment. Increase Revenue and Margins through New Wholesale Network Products Offered to ISPs and Telecommunications Providers. The Company believes the Internet business is one of the fastest growing segments of the telecommunications service sector, thereby providing enormous growth opportunities for network 10 service providers supporting the growing base of ISPs. The Company plans to take advantage of these opportunities through the offering of wholesale Internet access and other enhanced network services to ISPs and other telecommunications providers, and expanding its current primary rate interface ("PRI") offerings with RAS, EOS and DSL. See "-Recent Developments." Management believes these new products will leverage the Company's relationships with ISPs and will position the Company to lead in the provisioning of new services to this emerging customer base. Concentrate Networks in Regional Clusters. The Company believes that by focusing on regional clusters it will be able to more effectively service its customers' needs and efficiently market, operate and control its networks and expanded service offerings. As a result, the Company has concentrated its fiber networks in regional clusters serving major metropolitan areas in California, Colorado, Ohio, the Southeast and Texas. Networks The Company's networks generally comprise fiber optic cables, switching facilities, advanced electronics, transmission equipment and related wiring and equipment. The Company typically designs a ring architecture with a view toward making the network accessible to the largest concentration of telecommunications-intensive businesses in a given market. The Company's networks are generally configured in redundant synchronous optical network ("SONET") rings that offer the advantage of uninterrupted service in the event of a fiber cut or equipment failure, resulting in limited outages and increased network reliability. The Company generally markets its services at prices below those charged by the ILEC. Management believes these factors combine to create a more reliable and cost effective alternative to ILEC networks and services. The Company's networks are constructed to access long distance carriers as well as areas of significant end user telecommunications traffic in a cost efficient manner. The construction period of a new network varies depending upon the scope of the activities, such as the number of backbone route miles to be installed, the initial number of buildings targeted for connection to the network backbone and the general deployment of the network infrastructure. Construction is planned to allow revenue-generating operations to commence prior to the completion of the entire network backbone. When constructing and relying principally on its own facilities, the Company has experienced a period of 12 to 18 months from initial design of a network to revenue generation from such network. Based upon its experience of using ILEC facilities to provide initial customer service and the Company's agreements to use utilities' existing fiber, the Company has experienced revenue generation within nine months after commencing network design. After installing the initial network backbone, extensions to additional buildings and expansions to other regions of a metropolitan area are evaluated, based on detailed assessments of market potential. The Company is currently expanding all of its existing networks to reduce its reliance on the ILECs and evaluating development of new networks both inside and outside its existing regional clusters. Switched services involve the transmission of voice, video or data to long distance carrier-specified or end user-specified termination sites. The switch is required in order for the Company to provide the full range of local telephone services. By contrast, the special access services provided by the 11 Company and other CLECs involve a fixed communications link or "pipe," usually between an end user and a specific long distance carrier's POP. With a switch and interconnection to various carriers' networks, it is possible for the Company to direct a long distance carrier's traffic to any end user regardless of whether the end user is physically connected to the Company's owned or leased network. The Company is marketing and selling competitive local dial tone services in California, Colorado, Ohio, the Southeast and Texas. See "-Regulation - State Regulation." The Company's network monitoring center in Denver, Colorado monitors and manages the Company's regional fiber networks and provides high-level monitoring of the Company's local exchange switches. Centralized electronic monitoring and control of the Company's networks allows the Company to avoid duplication of this function in each city, thereby reducing costs. The Company owns and operates a nationwide data network consisting of 236 POPs and 13 hubs containing frame relay switches and high-performance routers connecting a backbone of leased Asynchronous Transfer Mode ("ATM") switches and leased high-speed dedicated data lines in the United States. The design and architecture of the physical network permits the Company to offer highly flexible, reliable high-speed services to its customers. The data network infrastructure is monitored by a network operations center in San Jose, California. Services The Company's competitive local exchange services include local dial tone, long distance, enhanced telephony, data, special access and interstate and intrastate switched access services. Competitive local dial tone services consist of basic local exchange lines and trunks for business, related line features (such as voice mail, Direct Inward Dialing (DID), hunting and custom calling features), local calling, and intraLATA, also called local toll, calling. The Company believes that having a full complement of communications services, including local, long distance and data services, will strengthen its overall market position and help the Company to better penetrate the local exchange marketplace. The Company has also developed long distance services, including calling and debit cards, to complement its local exchange services family of products. The Company offers a bundled service of local, long distance and data services, delivered over a T-1 connection in several markets and intends to expand this bundled service offering to its remaining markets in the future. The Company offers long distance services to end user customers. Although the Company carries some of its long distance traffic on its own switches, it relies upon obtaining long distance transmission capacity from other carriers to provide its services. Therefore, the Company has entered into transmission agreements, which typically provide for transmission on a per minute basis, with long distance carriers to fulfill such needs. To reduce its cost of services, the Company leases point-to-point circuits on a monthly or longer term fixed cost basis where it anticipates high traffic volume. The Company also offers enhanced telephony services via IP technology in 230 major cities in the United States, covering more than 90% of the commercial long distance market. The Company carries the IP traffic over its nationwide data network and terminates a large portion of the traffic via its own POPs, thereby eliminating terminating charges from the use of other carriers' network 12 facilities. Calls that cannot be terminated over the Company's own facilities are billed at higher per minute rates to compensate for the charges associated with using other carriers' facilities. Private line services are generally used to connect the separate locations of a single business outside of the local calling area or LATA. Special access services are generally used to connect end user customers to a long distance telephone carrier's facilities, to connect long distance carrier's facilities to the local telephone company's central offices, and to connect different facilities of the same long distance carrier or facilities of different long distance carriers all within the same LATA. As part of its initial "carrier's carrier" strategy, the Company targeted the transport between long distance company facilities and the local telephone company central offices, and, for high volume customers, between the long distance company and the end user customer's office. In order to leverage its significant network investment, the Company also markets these services directly to end user business customers. The Company's interstate and intrastate switched access services include the transport and switching of calls between the long distance carrier's facilities and either the local telephone company's central offices or end users. By performing the switching services, the Company can reduce the long distance carriers' local access costs, which constitute their major operating expense. Until recently, the Company experienced negative operating margins from the provision of wholesale switched services because it relies on ILEC networks to terminate and originate customers' switched traffic. The Company has raised prices on its wholesale switched services product in order to improve margins and has de-emphasized its wholesale switched services to focus on its higher margin products. The Company's Signaling System 7 ("SS7") services provide signaling connections between long distance and local exchange carriers, and between long distance carriers' networks. SS7, sometimes referred to as "look-ahead routing," is used by local exchange companies, long distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up and resulting in more efficient use of network resources. SS7 is now the standard method for telecommunications signaling worldwide. The Company has deployed signal transfer points ("STPs") throughout its networks to efficiently route SS7 data across the United States. SS7 is also the enabling technology for advanced intelligence network platforms, a set of services and signaling options that carriers can use to create new services or customer options. Carriers purchase connections into the Company's SS7 network, and also purchase connections to other local and long distance carriers on a monthly recurring basis. The Company has also developed a nationwide SS7 service with Southern New England Telecommunications Corporation ("SNET"), a subsidiary of SBC Communications, Inc. The Company believes that, together with SNET, it is one of the largest independent suppliers of SS7 services. The Company's STPs are integrated with two SNET "gateway" STPs in Connecticut. Through NikoNET, the Company provides broadcast facsimile services and enhanced messaging services to financial institutions, corporate investor and public relations departments and other customers. NikoNET also provides facsimile to e-mail and e-mail to facsimile translation services. This product leverages the Company's network and creates high margin minutes of use. 13 As part of its new strategy to maximize the value of its nationwide data network by including high-growth ISPs in its customer base, the Company is currently offering Internet access services and recently announced its plans to offer other new wholesale network services, including RAS, EOS and DSL, to ISPs, to be available beginning in early 1999. See "-Recent Developments." Industry The Company operates in the local telephone services market as an ICP. The Company is competing in the local, long distance, enhanced telephony and data communications markets, to provide "full service" to its business, ISP and carrier customers. The Company believes it can maximize revenue and profit opportunities by leveraging its extensive network facilities in providing multiple communications services to its customers. Local telephone service competition was made possible by the Telecommunications Act and by deregulatory actions at the state level. Prior to passage of the Telecommunications Act, firms like the Company were generally limited to providing private line and special access services. These firms, including the Company, installed fiber optic cable connecting long distance telephone carriers' POPs within a metropolitan area and, in some cases, connecting end users (primarily large businesses and government entities) with long distance carrier POPs. The greater capacity and economies of scale inherent in fiber optic cable enabled competitive access providers to offer customers less expensive services at higher quality than the ILECs. The Telecommunications Act, subsequent Federal Communications Commission ("FCC") decisions and many state legislative and regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Due to these regulatory changes, CLECs are now legally able to offer many communications services, including local dial tone and all interstate and intrastate switched services, effectively opening up the local telephone market to full competition. Because of these changes in state and federal regulations, CLECs have expanded their services from providing competitive access and private line services to providing all local exchange services to become true competitors to the ILECs. See "-Regulation." Network Services Through the Company's wholly owned subsidiary, ICG Fiber Optic Technologies, Inc. ("FOTI"), the Company supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Revenue from Network Services was approximately $53.9 million for fiscal 1998. The Company provides network infrastructure, systems and support services, including the design, engineering and installation of local and wide area networks ("LANs/WANs") for its customers. These networks (within end user offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial and other network technologies. The Company specializes in turnkey network installations including cabling and electronics that address specific requirements. The Company also provides professional network support services. 14 These services include move, add and change services and ongoing maintenance and support services. Network Services revenue is expected to constitute a smaller percentage of the Company's future revenue as Telecom Services revenue increases. The Company offers these network integration and support services through offices located within five regions. The regional headquarters are located in Dallas, Denver, Portland (Oregon), Los Angeles and San Francisco. Satellite Services The Company's Satellite Services operations consist of satellite voice, data and video services provided to major cruise lines, the U.S. Navy, the offshore oil and gas industry and other ICPs. The Company also owns a teleport facility which provides international voice and data transmission services. Revenue from Satellite Services was approximately $40.5 million for fiscal 1998. MTN. MTN provides digital wireless communications through satellites to the maritime cruise industry, U.S. Navy vessels and offshore oil and gas platforms utilizing an experimental radio frequency license and a grant of Special Temporary Authority ("STA") issued by the FCC. MTN provides private communications networks to various cruise lines allowing for the transmission of data communications and allowing passengers to make calls from their cabins to anywhere in the world. MTN additionally provides its communications services to seismic vessels, to commercial shipping vessels and to the U.S. Navy in conjunction with a major long distance provider, which serves as the long distance carrier, while MTN provides the shipboard communications equipment. The Company believes that the radio spectrum employed under an experimental license and a grant of STA, which uses C-band radio frequencies, enables it to provide a higher quality maritime service than is available through the radio frequencies currently allocated to other maritime service providers. In April 1996, the FCC issued a waiver allowing MTN to apply for a permanent FCC license to utilize C-band frequencies authorized under a previously issued experimental license. MTN's application is pending. Additionally, in January 1997, the FCC granted the STA, which enables MTN to conduct operations, for up to an initial six-month period, which period can be renewed for six-month terms, while the FCC's review of the permanent license application is pending. The most recent extension of the STA was received by MTN on January 29, 1999. MTN's FCC experimental license allows it to operate its shipboard earth stations on a fixed and mobile basis throughout domestic waters on a non-interference basis using C-band frequencies. MTN filed an application for renewal of the experimental authorization on January 22, 1999. MTN may continue to operate under the terms of its experimental authorization pending action on the renewal application. There can be no assurance that the Company will be granted permanent licenses, that the experimental license and STA currently being used will continue to be renewed for future terms or that any license granted by the FCC will not require substantial payments from the Company. See "-Regulation." Teleport. The teleport in Holmdel, New Jersey, acquired as part of the Company's acquisition of MTN, is located 20 miles south of Newark and specializes in international digital voice and data communications services with 15 full fiber interconnect to the local telephone company facilities in New York City. Teleport services are also provided to the maritime industry, including support of the Company's cruise ship, U.S. Navy and offshore oil platform telephone and data services business. In addition, the Company markets the resale of services from the four teleports it sold in 1996. Customers And Marketing The Company's primary marketing strategies for Telecom Services are to offer a broad range of local, long distance, enhanced telephony and data services, to the Company's business and ISP customers at cost effective rates. Wholesale customers typically re-market the Company's services to the retailer's end user, under the retailer's brand name. The Company markets its services in regional clusters, which it believes is the most effective and efficient way to penetrate its markets. The Company markets its Telecom Services products through direct sales to end users and wholesale accounts, sales agents and direct mail, to a limited extent. Telecom Services revenue from major long distance carriers and resellers constituted approximately 83%, 76% and 34% of the Company's Telecom Services revenue in fiscal 1996, 1997 and 1998, respectively. The balance of the Company's Telecom Services revenue was derived from end users. The Company anticipates revenue from business and ISP customers will increase in the future as it continues to expand its bundled service offerings, increases its sales and marketing teams and focuses more on these segments of the market. In support of this strategy, the Company has substantially increased its direct sales and marketing staff. Telecommunications service agreements with its customers typically provide for terms of one to five years, fixed prices and early termination penalties. The Company has telecommunications sales offices in: Irvine, Los Angeles, Oakland, Sacramento, San Diego, San Francisco and San Jose, California; Denver, Colorado Springs and Boulder, Colorado; Akron, Columbus, Dayton, and Independence, Ohio; Birmingham, Alabama; Atlanta, Georgia; Louisville, Kentucky; Charlotte, North Carolina; and Nashville, Tennessee; and Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas. The Company's marketing staff is located in Denver, Colorado. The Company markets its network systems integration products and services through a direct sales force located in the Rocky Mountains, Pacific Northwest, Texas and California regions. The Company also has entered into resale agreements with manufacturers of network integration products and services. The Company offers satellite private line transmission services from its teleport to business customers that can benefit from the Company's international and domestic transmission capabilities. The Company also markets voice and data communications to the maritime industry, including cruise ships, U.S. Navy vessels, offshore oil and gas platforms and mobile land-based units. The Company is currently utilizing its nationwide data network to provide wholesale Internet access services to MindSpring for a one-year period. During the term of this agreement, the Company plans to evaluate various strategies to identify and market similar services and other enhanced network services to 16 primarily local and regional ISPs and other telecommunications providers. Competition The Company operates in an increasingly competitive environment dominated by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE which are among the Company's current competitors. Also included among the Company's current competitors are other ILECs, other CLECs, other ICPs, network systems integration service providers, microwave and satellite service providers, teleport operators and private networks built by large end users. Potential competitors (using similar or different technologies) include cable television companies, utilities, ISPs, ILECs outside their current local service areas, and the local access operations of long distance carriers. Consolidation of telecommunications companies, including mergers between certain of the RBOCs, between long distance companies and cable television companies and between long distance companies and CLECs, and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to increased competition. One of the primary purposes of the Telecommunications Act is to promote competition, particularly in the local telephone market. Since the enactment of the Telecommunications Act, several telecommunications companies have indicated their intention to aggressively expand their ability to address many segments of the telecommunications industry, including segments in which the Company participates and expects to participate. This may result in more participants than can ultimately be successful in a given market. Telecom Services. The bases of competition in competitive local telecommunications services are generally price, service, reliability, transmission speed, technological innovation and availability. The Company believes that its expertise in developing and operating highly reliable, advanced digital networks which offer substantial transmission capacity at competitive prices enables the Company to compete effectively against the ILECs, other CLECs and others providing local and enhanced telephony services. In every market in which the Company operates telecom service networks, the ILECs (which are the historical monopoly providers of local telephone services) are the primary competitors. The ILECs have long-standing relationships with their customers and provide those customers with various transmission and switching services. The ILECs also have the potential to subsidize access and switched services with revenue from a variety of businesses and historically have benefited from certain state and federal regulations that have favored the ILECs over the Company. In certain markets where the Company operates, other CLECs also operate or have announced plans to enter the market. Some of those CLECs are affiliated with major long distance companies which have resources available to sustain an initially capital-intensive business through the point of profitability. Current competitors also include network systems integration services providers, wireless telecommunications providers and private networks built by large end users. Additional competition may emerge from cable television operators and electric utilities. Many of the Company's actual and potential competitors have greater financial, technical and marketing resources than the Company. 17 In addition, the long distance and data transmission businesses are extremely competitive and prices have declined substantially in recent years and are expected to continue to decline. As a recent entrant into the wholesale network services sector, the Company faces competition from existing providers of the Company's planned services, primarily UUNet Technologies, Inc., PSINet, Inc. and, ultimately, Level 3 Communications, Inc. and Qwest Communications International, Inc. once their networks have been sufficiently developed. Other competitors also include GTE, AT&T, Sprint Corporation and the RBOCs that currently offer similar wholesale network service products to ISPs. While strong competition currently exists in this sector, the Company believes that the recent growth in the Internet industry provides expanded opportunity and demand for new providers such as the Company, and that early participants in this growing sector have increased opportunity for establishing and, once experienced, growing market share. There can be no assurance that sufficient demand will exist for the Company's wholesale network services in its selected markets, that market prices will not dramatically decline or the Company will be successful in executing its strategy in time to meet new competitors, or at all. Network Services. The bases of competition in the network services market are primarily technological capability and experience, value-added services and price. In this market, the Company competes with a variety of local and regional system integrators. Satellite Services. In the delivery of domestic and international satellite services, the Company competes with other full service teleports in the northeast region of the United States. The bases of competition are primarily reliability, price and transmission quality. Most of the Company's satellite competitors focus on the domestic video market. Competition is expected principally from a number of domestic and foreign telecommunications carriers, many of which have substantially greater financial and other resources than the Company. In the maritime telecommunications market, MTN competes primarily with COMSAT Corporation ("COMSAT") in providing similar telecommunications services. COMSAT has FCC licenses that are similar to MTN's and it is the sole point of control in the United States for direct access to Intelsat satellites. Regulation The Company's services are subject to significant federal, state and local regulation. The Company operates in an industry that is undergoing substantial change as a result of the passage of the Telecommunications Act. The Telecommunications Act opened the local and long distance markets to additional competition and changed the division of oversight between federal and state regulators. Under previous law, state regulators had authority over those services that originated and terminated within the state ("intrastate") and federal regulators had jurisdiction over services that originated within one state and terminated in another state ("interstate"). State and federal regulators now share responsibility to some extent for implementing and enforcing the pro-competitive policies and the provisions for the Telecommunications Act. The Telecommunications Act generally requires ILECs to negotiate agreements to provide interconnection and nondiscriminatory access to their networks on more favorable terms than were previously available in the past. However, such 18 new agreements are subject to negotiations with each ILEC which may involve considerable delays and may not necessarily be obtained on terms and conditions that are desirable to the Company. In such instances, the Company may petition the proper state regulatory agency to arbitrate disputed issues. Ultimately, the terms of an arbitrated agreement are subject to review by the federal courts. Additionally, the Company is in the process of renegotiating and extending the terms of certain of the interconnection agreements executed by the Company. There can be no assurance that the Company will be able to negotiate and/or arbitrate acceptable new interconnection agreements. On August 8, 1996, in two separate decisions, the FCC adopted rules and policies implementing the local competition provisions of the Telecommunications Act. The FCC, among other things, adopted national guidelines with respect to the unbundling of ILECs' network elements, resale of ILEC services, the pricing of interconnection services and unbundled elements, and other local competition issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit Court, and in 1997, the Eighth Circuit Court issued a decision which upheld certain of the FCC's rules but reversed many of the FCC's rules on other issues, including the pricing rules. On January 25, 1999, the United States Supreme Court (the "Supreme Court") largely reversed the Eighth Circuit Court's decision and reestablished the validity of many of the FCC's interconnection rules including the FCC's jurisdiction to adopt pricing guidelines under the Telecommunications Act. The Supreme Court also upheld the FCC's "pick and choose" rules, which allow CLECs to adopt individual rates, terms and conditions from agreements that an ILEC has with other carriers. The Supreme Court did not, however, evaluate the specific pricing methodologies adopted by the FCC, and the appellate court will further consider those methodologies. Additionally, the Supreme Court vacated the FCC rules defining what network elements must be unbundled and made available to the CLECs by the ILECs. The Supreme Court held that the FCC must provide a stronger rationale to support the degree of unbundling ordered. As a result, the FCC likely will soon hold a rulemaking proceeding to revise its rules on unbundled network elements. Management views the Supreme Court decision as a favorable development for the CLEC industry, although the ultimate outcome of the further FCC and court proceedings resulting from the decision cannot be predicted. On December 31, 1997, the United States District Court for the Northern District of Texas (the "District Court"), in a case brought by SBC Communications, Inc., issued a decision holding that Sections 271 through 275 of the Telecommunications Act are unconstitutional. The decision addressed the restrictions contained in Sections 271 through 275 of the Telecommunications Act on the lines of businesses in which the RBOCs may engage, including establishing the conditions that the RBOCs must satisfy before they may provide interLATA long distance telecommunications services in their local telephone service areas. On September 4, 1998, the Fifth Circuit Court of Appeals reversed the District Court decision and ruled that Sections 271 through 275 are not unconstitutional. A separate decision by the D.C. Circuit Court of Appeals issued in December 1998 also ruled that Section 271 is not unconstitutional. The Company believes that it is entitled to receive reciprocal compensation from ILECs for the transport and termination of Internet traffic from ILEC customers as local traffic pursuant to various interconnection agreements. The ILECs have not paid most of the bills they have received from the Company and 19 have disputed substantially all of these charges based on the argument that ISP traffic is not local traffic as defined by the various interconnection agreements and under state and federal laws and public policies. The resolution of these disputes will be based on rulings by state public utility commissions and/or by the FCC. See "-Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Transport and Termination Charges." Federal Regulation. The Company generally operates as a regulated carrier with fewer regulatory obligations than the ILECs. The Company must comply with the requirements of the Telecommunications Act, such as offering service on a non-discriminatory basis at just and reasonable rates. The FCC treats the Company as a non-dominant carrier. The FCC has established different levels of regulation for dominant and non-dominant carriers. Of domestic common carriers, only the ILECs are classified as dominant carriers for the provision of access services, and all other providers of domestic common carrier services are classified as non-dominant. Under the FCC's streamlined regulation of non-dominant carriers, the Company must file tariffs with the FCC for domestic and international long distance services on an ongoing basis. The Company's provision of international long distance services requires prior authorization by the FCC pursuant to Section 214 of the Telecommunications Act, which the Company has obtained. The FCC recently eliminated the requirement that non-dominant interstate access carriers must file tariffs. The Company is not subject to price cap or rate of return regulation, nor is it currently required to obtain FCC authorization for the installation or operation of its fiber optic network facilities used for services in the United States. The Company may install and operate non-radio facilities for the transmission of domestic interstate communications without prior FCC authorization. The Company's use of digital microwave radio frequencies and satellite earth stations in connection with certain of its telecommunications services is subject to FCC radio frequency licensing regulation. See "-Federal Regulation of Microwave and Satellite Radio Frequencies." State Regulation. In general, state regulatory agencies have regulatory jurisdiction over the Company when Company facilities and services are used to provide local and other intrastate services. Under the Telecommunications Act, state commissions continue to set the requirements for providers of local and intrastate services, including quality of services criteria. State regulators also can regulate the rates charged by CLECs for intrastate and local services and can set prices for interconnection by CLECs with the ILEC networks. The Company's provision of local dial tone and intrastate switched and dedicated services are classified as intrastate and therefore subject to state regulation. The Company expects that it will offer more intrastate services as its business and product lines expand. To provide intrastate service (particularly local dial tone service), the Company generally must obtain a Certificate of Public Convenience and Necessity ("CPCN") from the state regulatory agency prior to offering service. In most states, the Company also is required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate, and to update or amend its tariffs as rates change or new products are added. The Company may also be subject to various reporting and record-keeping requirements. The Company currently holds CPCNs (or their equivalents) to provide competitive local services in the following states: Alabama, California, Colorado, Delaware, Florida, Georgia, Hawaii, Indiana, Kansas, Kentucky, Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West 20 Virginia, and Wisconsin. Additionally, the Company holds CPCNs (or their equivalents) to provide intrastate long distance services in the following states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming. Local Government Authorizations. Under the Telecommunications Act, local authorities retain jurisdiction under applicable state law to control the Company's access to municipally owned or controlled rights of way and to require the Company to obtain street opening and construction permits to install and expand its fiber optic network. In addition, many municipalities require the Company to obtain licenses or franchises (which generally have terms of 10 to 20 years) and to pay license or franchise fees, often based on a percentage of gross revenue, in order to provide telecommunications services, although in certain states including California and Colorado, current state law prescribes the amount of such fees. Certain municipalities in Colorado, however, are continuing to charge franchise fees pending enforcement by the Colorado courts. There is no assurance that certain cities that do not impose fees will not seek to impose fees, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. In many markets, the ILECs have been excused from paying such franchise fees or pay fees that are materially lower than those required to be paid by the Company for access to public rights of way. However, under the Telecommunications Act, while municipalities may still regulate use of their streets and rights of way, municipalities may not prohibit or effectively prohibit any entity from providing any telecommunications services. In addition, the Telecommunications Act requires that local governmental authorities treat telecommunications carriers in a non-discriminatory and competitively neutral manner. If any of the Company's existing franchise or license agreements are terminated prior to their expiration dates or not renewed, and the Company is forced to remove its fiber from the streets or abandon its network in place, such termination could have a material adverse effect on the Company. Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC continues to regulate radio frequency use by both private and common carriers under the Telecommunications Act. Unlike common carriers, private carriers contract with select customers to provide services tailored to the customer's specific needs. The FCC does not currently regulate private carriers (other than their use of radio frequencies) and has preempted the states from regulating private carriers. The Company offers certain services as a private carrier. The Company is required to obtain authorization from the FCC for its use of radio frequencies to provide satellite and wireless services. The Company holds a number of point-to-point microwave radio licenses that are used to provide telecommunications services in California. Additionally, the Company holds a number of satellite earth station licenses in connection with its operation of satellite-based networks. The Company also provides maritime communications services pursuant to an experimental license and a grant of STA. The Company's experimental license has been renewed by the FCC on several occasions. On January 22, 1999, the Company submitted an application for an additional two-year renewal of the experimental license, which was due to expire in February 1999. Under the FCC's procedures, the experimental license remains 21 valid pending FCC action on the renewal application. The STA was first granted on January 30, 1997 and enables the Company to conduct operations pursuant to the STA of the Company's application for a permanent license. The Company applied for six-month extensions of the STA, most recently on January 29, 1999, and received verbal grants by the FCC of each of the requested extensions. The Company also filed 32 applications for permanent full-term FCC licenses to operate shipboard earth stations in fixed ports. Those applications are pending. There can be no assurance that the Company will be granted permanent licenses, that the experimental license and STA currently being used will continue to be renewed for future terms or that any license granted by the FCC will not require substantial payments from the Company. Employees On December 31, 1998, the Company employed a total of 3,415 individuals on a full time basis. There are 39 employees in the Company's Oregon and Washington network systems integration services offices who are represented by collective bargaining agreements. The collective bargaining agreement with certain IBEW (International Brotherhood of Electrical Workers) employees in Oregon and southern Washington expires on December 31, 2000. Additionally, several IBEW employees in other areas of Washington are currently in negotiations for a new collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company's physical properties include owned and leased space for offices, storage and equipment rooms and collocation sites. Additional space may be purchased or leased by the Company as networks are expanded. The Company owns a 30,000 square-foot building located in Englewood, Colorado which houses a portion of the Company's Telecom Services business. Currently, the Company leases approximately 324,000 square feet of office space for operations located in the Denver metropolitan area and approximately 846,000 square feet in other areas of the United States. As of December 31, 1998, the Company's corporate headquarters building, land and improvements were leased by the Company under an operating lease from an unrelated third party. The Company has entered into a letter of intent to purchase the approximately 265,000 square foot facility located in Englewood, Colorado, as well as the other previously leased assets, and expects to complete the purchase of those assets in early 1999. ITEM 3. LEGAL PROCEEDINGS On April 4, 1997, certain shareholders of Zycom filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of their subsidiaries. This complaint alleges that the Company and certain of its subsidiaries breached certain duties owed to the plaintiffs. The plaintiffs were denied class certification by the trial court and this decision has been appealed. Trial has been tentatively set for August 1999. The Company is vigorously defending the claims. While it is not possible to predict the outcome 22 of this litigation, management believes these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. A putative class action lawsuit was filed on July 15, 1997 in Superior Court of California, Orange County, alleging unfair business practices and related causes of action against NETCOM in connection with its offers of free trial periods and cancellation procedures and claiming damages of at least $10.0 million. Although the case is plead as a class action, the class has not been certified. The parties are currently conducting discovery. Trial has been tentatively set for June 1999. The Company believes it has meritorious defenses to such claims and intends to vigorously defend the action. The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996 to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996, Holdings-Canada's common shares had been listed on the AMEX under the symbol "ITR" from January 14, 1993 through February 28, 1996, and under the symbol "ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares (the "Class A Shares") ceased trading on the AMEX at the close of trading on August 2, 1996. The Class A Shares, which were listed on the Vancouver Stock Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the close of trading on March 12, 1997. During fiscal 1998, all of the remaining Class A Shares outstanding held by third parties were exchanged into shares of ICG Common Stock. The following table sets forth, for the fiscal periods indicated, the high and low sales prices of the ICG Common Stock as reported on the AMEX through March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated below. The VSE reported no trading activity for the Class A Shares from January 1, 1997 through March 12, 1997, the date on which the Class A Shares ceased trading on the VSE. American Stock Exchange/Nasdaq National Market -------------------------------------- High Low ----------------- ----------------- Fiscal 1997: First Quarter $ 18.13 $ 10.38 Second Quarter 21.13 8.63 Third Quarter 24.63 17.75 Fourth Quarter 28.63 19.75 Fiscal 1998: First Quarter $ 44.25 $ 24.38 Second Quarter 38.88 28.50 Third Quarter 36.63 15.50 Fourth Quarter 26.56 11.13 Fiscal 1999: Through March 29, 1999 $ 24.13 $ 15.25 See the cover page of this Annual Report for a recent bid price and related number of shares outstanding of ICG Common Stock. On March 29, 1999, there were 281 holders of record. The Company has never declared or paid dividends on the ICG Common Stock and does not intend to pay cash dividends on the ICG Common Stock in the 24 foreseeable future. The Company intends to retain future earnings, if any, to finance the development and expansion of its business. In addition, the payment of any dividends on the ICG Common Stock is effectively prohibited by the restrictions contained in the Company's indentures to the Company's senior indebtedness and in the Second Amended and Restated Articles of Incorporation of Holdings, which prohibits Holdings from making any material payment to the Company. Certain of the Company's debt facilities contain covenants which also may restrict the Company's ability to pay cash dividends. In April 1998, ICG Services sold $405.3 million principal amount at maturity ($250.0 million original issue price) of 9 7/8% Notes. Morgan Stanley & Co. Incorporated acted as placement agent for the offering and received placement fees of approximately $7.5 million. In February 1998, ICG Services sold $490.0 million principal amount at maturity ($300.6 million original issue price) of 10% Notes. Morgan Stanley & Co. Incorporated acted as placement agent for the offering and received placement fees of approximately $9.0 million. In September and October 1997, ICG Funding, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company ("ICG Funding"), completed a private placement of $132.25 million of 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities"). The 6 3/4% Preferred Securities are mandatorily redeemable November 15, 2009 at the liquidation preference of $50.00 per security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred Securities are cumulative at the rate of 6 3/4% per annum and are payable in cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the option of the holder, into ICG Common Stock at an exchange price of $24.025 per share, subject to adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any time on or after November 18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred Securities if the current market value of ICG Common Stock equals or exceeds, for at least 20 days of any consecutive 30-day trading period, 160% of the exchange price through November 15, 1999, and 150% of the exchange price from November 16, 1999 through November 15, 2000. Morgan Stanley & Co. Incorporated and Deutsche Morgan Grenfell Inc. acted as placement agents for the offering and received aggregate placement fees of approximately $4.0 million. In March 1997, Holdings sold $176.0 million principal amount at maturity ($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") and 100,000 shares of 14% Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock"), having a liquidation preference of $1,000 per share. These securities are guaranteed by the Company on a full and unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent for the offering and received placement fees of approximately $7.5 million. In April 1996, Holdings sold $550.3 million principal amount at maturity ($300.0 million original issue price) of 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and 150,000 shares of 14 1/4% Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"), having a liquidation preference of $1,000 per share. These securities are guaranteed by the Company on a full and unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent for the offering and received placement fees of approximately $16.5 million. 25 Each of the foregoing offerings were exempt from registration pursuant to Rule 144A under the Securities Act. Sales were made only to "qualified institutional buyers," as defined in Rule 144A under the Securities Act, and other institutional accredited investors. The securities sold in each of the foregoing offerings were subsequently registered under the Securities Act. In October 1997, the Company issued 687,221 shares of Common Stock (the "CBG Shares") to certain shareholders of CBG in connection with the acquisition of CBG for a purchase price of approximately $16.0 million. The sale of the CBG Shares was exempt from registration under Section 4(2) of the Securities Act because the offers and sales were made to a limited number of investors in a private transaction. Resale of the CBG Shares was subsequently registered on a Form S-3 registration statement which was declared effective on October 31, 1997. In July 1998, the Company issued 145,997 shares of ICG Common Stock in connection with the acquisition of DataChoice, valued at approximately $32.88 per share on the date of the sale (the "DataChoice Shares"). The sale of the DataChoice Shares was exempt from registration under Section 4(2) of the Securities Act because the offers and sales were made to a limited number of investors in a private transaction. The Company is required to register the resale of the DataChoice Shares. Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in connection with the acquisition of NikoNET, valued at approximately $30.03 per share on the date of the sale (the "NikoNET Shares"). The sale of the NikoNET Shares was exempt from registration under Section 4 (2) of the Securities Act because the offer and sales were made to a limited number of investors in a private transaction. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for fiscal years ended September 30, 1994, 1995 and 1996, the three months ended December 31, 1996, and the fiscal years ended December 31, 1997 and 1998 has been derived from the audited consolidated financial statements of the Company. The information set forth below should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report. The Company's development and expansion activities, including acquisitions, during the periods shown below materially affect the comparability of this data from one period to another. The Company's consolidated financial statements reflect the operations of Zycom and NETCOM as discontinued for all periods presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 26
Three Months Ended Fiscal Years Ended Fiscal Years Ended September 30, December 31, December 31, --------------------------------------- --------------------------- 1994 1995 1996 1996 1997 1998 ----------- ----------- ---------- --------------- ---------- ------------- (in thousands, except per share amounts) Statement of Operations Data: Revenue (1) $ 59,112 110,188 154,143 49,477 245,022 397,619 Operating costs and expenses: Operating costs 38,165 77,944 121,983 42,485 217,927 254,689 Selling, general and administrative expenses 28,015 61,305 75,646 23,868 148,254 183,683 Depreciation and amortization 8,198 16,350 30,030 9,691 56,501 101,545 Provision for impairment of long-lived assets - 7,000 9,994 - 9,261 - Net loss (gain) on disposal of long-lived assets - 241 5,128 (772) 243 4,055 Restructuring costs - - - - - 2,339 ----------- ----------- ---------- --------------- ---------- ------------- Total operating costs and expenses 74,378 162,840 242,781 75,272 432,186 546,311 Operating loss (15,266) (52,652) (88,638) (25,795) (187,164) (148,692) Interest expense (8,481) (24,389) (85,714) (24,454) (117,520) (170,127) Other income, net 925 3,141 15,585 5,898 21,549 23,762 ----------- ----------- ---------- --------------- ---------- ------------- Loss from continuing operations before income taxes, preferred dividends, share of losses and cumulative effect of change in accounting (22,822) (73,900) (158,767) (44,351) (283,135) (295,057) Income tax benefit (expense) - - 5,131 - - (90) ----------- ----------- ---------- --------------- ---------- ------------- Loss from continuing operations before preferred dividends, share of losses and cumulative effect of change in accounting (22,822) (73,900) (153,636) (44,351) (283,135) (295,147) Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses 435 (1,636) (25,409) (4,988) (38,117) (55,183) Share of losses of joint venture (1,481) (741) (1,814) - - - ----------- ----------- ---------- --------------- ---------- ------------- Loss from continuing operations before cumulative effect of change in accounting (23,868) (76,277) (180,859) (49,339) (321,252) (350,330) Loss from discontinued operations (100,000) (14,435) (44,060) (11,974) (39,483) (67,715) Cumulative effect of change in accounting (1) - - (3,453) - - ----------- ----------- ---------- --------------- ---------- ------------- Net loss $ (123,868) (90,712) (228,372) (61,313) (360,735) (418,045) =========== =========== ========== =============== ========== ============= Loss per share from continuing operations - basic and diluted $ (1.17) (2.48) (4.90) (1.18) (7.56) (7.75) =========== =========== ========== =============== ========== ============= Net loss per share - basic and diluted $ (6.06) (2.94) (6.19) (1.47) (8.49) (9.25) =========== =========== ========== =============== ========== ============= Weighted average number of shares outstanding - basic and diluted (2) 20,455 30,808 36,875 41,760 42,508 45,194 =========== =========== ========== =============== ========== ============= Other Data: Net cash used by operating activities of continuing operations (7,532) (41,947) (39,099) (6,436) (117,191) (105,358) Net cash used by investing activities of continuing operations (51,452) (65,772) (134,832) (82,342) (429,512) (349,082) Net cash (used) provided by financing activities of continuing operations (49,428) 377,772 355,811 (1,886) 308,136 530,915 EBITDA (3) (7,068) (36,302) (58,608) (16,104) (130,663) (47,147) EBITDA (before nonrecurring charges) (3) (7,068) (29,061) (43,486) (16,876) (121,159) (40,753) Capital expenditures of continuing operations (4) 54,921 82,623 176,935 70,297 268,796 368,946 Capital expenditures of discontinued operations (4) 11,143 49,714 54,364 8,554 18,055 25,981 (Continued)
27
At September 30, At December 31, -------------------------------------- ------------------------------------------- 1994 1995 1996 1996 1997 1998 ----------- ----------- ------------ ------------ ------------ ------------- (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments available for sale $ 6,025 269,404 457,388 391,891 230,850 262,831 Net current assets (liabilities) of discontinued operations (5) 15,551 131,571 54,226 54,481 38,331 (23,272) Working capital 6,988 381,006 499,810 415,247 263,674 294,934 Property and equipment, net 118,875 201,038 334,646 402,251 631,454 934,134 Net non-current assets of discontinued operations (5) 12,413 59,936 97,561 97,425 76,577 54,243 Total assets 229,955 767,072 1,081,896 1,086,734 1,217,440 1,615,425 Current portion of long-term debt and capital lease obligations 23,118 23,487 8,282 25,500 7,421 5,132 Long-term debt and capital lease obligations, less current portion 97,811 405,535 739,827 761,504 957,507 1,662,357 Redeemable preferred securities of subsidiaries - 24,336 153,318 159,120 420,171 466,352 Common stock and additional paid-in capital 129,483 420,516 504,851 508,182 534,290 578,404 Accumulated deficit (61,737) (152,487) (380,859) (430,682) (791,417) (1,209,462) Stockholders' equity (deficit) 67,746 268,001 125,203 78,711 (256,983) (631,177)
(1) During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts to recognize revenue as services are provided. Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Change." (2) Weighted average number of shares outstanding for fiscal years 1994 and 1995 represents Holdings-Canada common shares outstanding. Weighted average number of shares outstanding for fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998 represents Holdings-Canada common shares outstanding for the period October 1, 1995 through August 2, 1996, and represents ICG Common Stock and Class A Shares (not owned by ICG) outstanding for the periods subsequent to August 5, 1996. During fiscal 1998, all of the remaining Class A Shares outstanding held by third parties were exchanged into shares of ICG Common Stock. (3) EBITDA consists of earnings (loss) from continuing operations before interest, income taxes, depreciation and amortization, other expense, net and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, or simply, operating loss plus depreciation and amortization. EBITDA (before nonrecurring charges) represents EBITDA before certain nonrecurring charges such as the net loss (gain) on disposal of long-lived assets, provision for impairment of long-lived assets and restructuring costs. EBITDA and EBITDA (before nonrecurring charges) are provided because they are measures commonly used in the telecommunications industry. EBITDA and EBITDA (before nonrecurring charges) are presented to enhance an understanding of the Company's operating results and are not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA (before nonrecurring charges) are not measurements under GAAP and are not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities of 28 continuing operations as determined using GAAP are also presented in Other Data. (4) Capital expenditures includes assets acquired under capital leases and through the issuance of debt or warrants and excludes payments for construction of the Company's corporate headquarters. Capital expenditures of discontinued operations includes the capital expenditures of Zycom and NETCOM combined for all periods presented. (5) Net non-current assets of discontinued operations and net current assets (liabilities) of discontinued operations represents the assets and liabilities of Zycom and NETCOM combined for all periods presented. 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements which are affected by important factors including, but not limited to, dependence on increased traffic on the Company's facilities, the successful implementation of the Company's strategy of offering an integrated telecommunications package of local, long distance, enhanced telephony and wholesale and retail data services, continued development of the Company's network infrastructure and actions of competitors and regulatory authorities that could cause actual results to differ materially from the forward-looking statements. The results for the 12 months ended December 31, 1996 and for fiscal 1997 and 1998 have been derived from the Company's audited consolidated financial statements included elsewhere herein and the Company's unaudited consolidated financial statements included in the Company's Forms 10-Q filed with the Securities and Exchange Commission. The Company's consolidated financial statements reflect the operations of Zycom and NETCOM as discontinued for all periods presented. The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. All dollar amounts are in U.S. dollars. Company Overview The Company is one of the nation's leading competitive ICPs, based on estimates of the industry's 1998 revenue. ICPs seek to provide an alternative to ILECs, long distance carriers and other communications service providers for a full range of communications services in the increasingly deregulated telecommunications industry. The Company's Telecom Services primarily include its CLEC operations, in which the Company operates fiber networks in regional clusters covering major metropolitan statistical areas in California, Colorado, Ohio, the Southeast and Texas, offering local, long distance, data and enhanced telephony services to business end users and ISPs. Additionally, in February 1999, the Company began providing wholesale network services over its nationwide data network. The Company also provides a wide range of network systems integration services and maritime and international satellite transmission services. Network Services consists of information technology services and selected networking products, focusing on network design, installation, maintenance and support. Satellite Services consists of satellite voice, data and video services provided to major cruise lines, the U.S. Navy, the offshore oil and gas industry and ICPs. As a leading participant in the rapidly growing competitive local telecommunications industry, the Company has experienced significant growth, with total revenue increasing from approximately $154.1 million for fiscal 1996 to approximately $397.6 million for fiscal 1998. The Company's rapid growth is the result of the initial installation, acquisition and subsequent expansion of its fiber optic networks and the expansion of its communications service offerings. The Telecommunications Act and pro-competitive state regulatory initiatives have substantially changed the telecommunications regulatory environment in the United States. Under the Telecommunications Act, the Company is permitted to offer all interstate and intrastate telephone services, including competitive local dial tone. In early 1997, the Company began marketing and selling local dial tone services in major metropolitan areas in California, Colorado, Ohio and the Southeast and, in December 1998, began offering services through an acquired business. During fiscal 1997 and 1998, the Company sold 178,470 and 206,458 30 local access lines, respectively, net of cancellations, of which 354,482 were in service at December 31, 1998. In addition, the Company's regional fiber networks have grown from 2,143 fiber route miles at the end of fiscal 1996 to 4,255 fiber route miles at December 31, 1998. The Company had 29 operating high capacity digital voice switches and 16 data communications switches at December 31, 1998, and plans to install additional switches as demand warrants. As a complement to its local exchange services offered to business end users, the Company markets bundled service offerings provided over its regional fiber network which include long distance, enhanced telecommunications services and data services. Additionally, the Company owns and operates a nationwide data network with 236 POPs over which the Company recently began providing wholesale Internet access and enhanced network services to MindSpring and intends to offer similar services to other ISPs and telecommunications providers in the future. The Company will continue to expand its network through construction, leased facilities, strategic alliances and mergers and acquisitions. For example, on December 31, 1998, the Company purchased from CSW 100% of the partnership interests in ChoiceCom, a strategic alliance with CSW formed for the purpose of developing and marketing telecommunications services in certain cities in Texas. ChoiceCom is based in Austin, Texas and currently provides local exchange and long distance services in Austin, Corpus Christi, Dallas, Houston, and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom reported revenue of $0.3 million and $5.8 million, respectively, and EBITDA losses (before nonrecurring charges) of $(5.5) million and $(13.6) million, respectively. Additionally, ChoiceCom has five operating high capacity digital voice switches and two data communications switches as of December 31, 1998 and has 19,569 access lines in service, including 15,282 access lines previously sold by ICG on behalf of ChoiceCom. To better focus its efforts on its core Telecom Services operations, the Company progressed toward the disposal of certain assets which management believes do not complement its overall business strategy. On August 12 and November 18, 1998, the Company completed the sales of the capital stock of MCN and Nova-Net, respectively, two wholly owned subsidiaries within the Company's Satellite Services operations. The results of operations of MCN and Nova-Net, which are not significant to the Company's consolidated results, have been included in the Company's consolidated results of operations through the closing date of each sale. Due primarily to the loss of a major customer, which generated a significant obligation under a volume discount agreement with its call transport provider, the board of directors of Zycom approved a plan on August 25, 1998 to wind down and ultimately discontinue Zycom's operations. On October 22, 1998, Zycom completed the transfer of all customer traffic to other providers and on January 4, 1999, the Company completed the sale of the remainder of Zycom's operating assets to an unrelated third party. Additionally, effective November 3, 1998, the Company's board of directors adopted the formal plan to dispose of the operations of NETCOM. On February 17, 1999, the Company sold certain of the operating assets and liabilities of NETCOM to MindSpring for total proceeds of $245.0 million, and on March 16, 1999, the Company sold all of the capital stock of NETCOM's international operations in Canada and the United Kingdom to other unrelated third parties for total proceeds of approximately $41.1 million. Since the Company expects to record a gain on the disposition of NETCOM, the Company has deferred the net operating losses of NETCOM from November 3, 1998 through December 31, 1998 of approximately $10.8 million. The Company expects to record a combined gain on the NETCOM transactions of approximately $200 million, including the recognition of the deferred losses of NETCOM from November 3, 1998 through the sale dates and net of income taxes of 31 approximately $6.5 million, during the three months ended March 31, 1999. Since the operations sold were acquired by the Company in a transaction accounted for as a pooling of interests, the gain on the NETCOM transaction will be classified in the Company's consolidated statement of operations as an extraordinary item. For fiscal 1996, 1997 and 1998, Zycom and NETCOM combined reported revenue of $135.4 million, $189.0 million and $181.6 million, respectively, and EBITDA losses (before nonrecurring charges) of $(30.4) million, $(12.1) million and $(18.0) million, respectively. The Company's consolidated financial statements reflect the operations of Zycom and NETCOM as discontinued for all periods presented. The Company will from time to time evaluate all of its assets as to their core need and, based on such analysis, may sell or otherwise dispose of assets which do not complement its overall business strategy. In conjunction with the sale to MindSpring, the legal name of the NETCOM subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic Internet backbone assets formerly owned by NETCOM which include 236 POPs serving approximately 700 cities nationwide. PST intends to utilize the retained network operating assets to provide wholesale Internet access and enhanced network services to MindSpring and other ISPs and telecommunications providers. On February 17, 1999, the Company entered into an agreement to lease to MindSpring for a one-year period the capacity of certain network operating assets for a minimum of $27.0 million, although subject to increase dependent upon network usage. MindSpring will utilize the capacity to provide Internet access to the dial-up services customers formerly owned by NETCOM. In addition, the Company will receive for a one-year period 50% of the gross revenue earned by MindSpring from the dedicated access customers formerly owned by NETCOM. In August 1998, the Company began offering enhanced telephony services via IP technology. The Company currently offers these services in 230 major cities in the United States, covering more than 90% of the commercial long distance market. The Company carries the IP traffic over its nationwide data network and terminates a large portion of the traffic via its own POPs, thereby eliminating terminating charges from the use of other carriers' network facilities. Calls that cannot be terminated over the Company's own facilities are billed at higher per minute rates to compensate for the charges associated with using other carriers' facilities. The Company currently does not generate any significant revenue from this service. In December 1998, the Company announced its plans to offer three new network services (RAS, EOS and DSL), to be available beginning in 1999. RAS allows the Company to provide modem access at its own switch location, rather than requiring ISPs to deploy modems physically at each of their POPs. This service will enable the Company to act as an aggregator for ISP traffic, while limiting the ISP's capital deployment. Through its strategic relationship with Lucent, the Company is currently retrofitting all of its Lucent-5ESS switches with the new Lucent product that allows for RAS functionality. This service eliminates the need for ISPs to separately purchase modems and shifts network management responsibilities to the Company. The Company plans to be the first to market RAS using Lucent's modem technology and expects the service will be available to customers in the second quarter of 1999. Through the same technology that allows it to provide RAS, the Company plans to offer EOS, enabling regional or local ISPs to expand their geographical footprint outside their current physical locations by carrying the ISP's out-of-region traffic on 32 the Company's own nationwide data network. The Company will initially offer this service within its CLEC regional clusters during the first quarter of 1999, and plans to expand EOS offerings to other areas as demand warrants. Through DSL technology, the Company plans to provide high-speed data transmission services primarily to business end users and, on a wholesale basis, to ISPs. DSL technology utilizes the existing ILEC twisted copper pair connection to the customer, giving the customer significantly greater bandwidth, and consequently speed, when connecting to the Internet. The Company expects to offer DSL in over 400 central offices by the end of 1999 through alliances with other companies focusing on DSL service. For example, on February 18, 1999, the Company entered into a letter of intent with NorthPoint which, if the agreement is finalized, will designate NorthPoint as the Company's preferred DSL provider for a two-year period and the Company will purchase up to 75,000 DSL lines from NorthPoint over the two-year term. This alliance will enable the Company to accelerate the expansion of its DSL service offerings and allow NorthPoint to gain access to the Company's collocation facilities in markets where NorthPoint currently has limited or no operations. If the agreement is finalized, NorthPoint will provision and manage all of the Company's DSL services offered under this agreement. The Company expects to begin offering DSL services under this agreement in the second quarter of 1999. The Company is not presently able to determine the impact that the offerings of RAS, EOS and DSL will have on revenue or EBITDA in 1999, 2000 or future years. These service offerings are dependent upon demand from ISPs and, while the Company believes this market sector will benefit from these new services, there is no assurance that the Company will be able to successfully deploy and market these services efficiently, or at all, or obtain and retain new customers in a competitive marketplace. In conjunction with the increase in its service offerings, the Company has and will continue to need to spend significant amounts on sales, marketing, customer service, engineering and support personnel prior to the generation of corresponding revenue. EBITDA, EBITDA (before nonrecurring charges), and operating and net losses have generally increased immediately preceding and during periods of relatively rapid network expansion and development of new services. Since the quarter ended June 30, 1996, EBITDA losses (before nonrecurring charges) have improved for each consecutive quarter, through and including the quarter ended December 31, 1998 for which the Company reported positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other selling, general and administrative expenses supporting its operations, any or all of which may not occur, the Company anticipates that EBITDA performance will continue to improve in the near term. Results of Operations The following table provides a breakdown of revenue, operating costs and selling, general and administrative expenses for Telecom Services, Network Services and Satellite Services and certain other financial data for the Company for the periods indicated. The table also shows certain revenue, expenses, operating loss and EBITDA as a percentage of the Company's total revenue. 33
12 Months Ended Fiscal Years Ended December 31, December 31, ---------------------------------------------- 1996 (1) 1997 1998 -------------------- --------------------- ---------------------- $ % $ % $ % ----------- ------- ------------ ------ ------------ ------- (Dollars in thousands) Statement of Operations Data: Revenue: Telecom services $ 87,379 52 149,358 61 303,317 76 Network services 60,380 36 65,678 27 53,851 14 Satellite services 21,317 12 29,986 12 40,451 10 ----------- ------- ------------ ------ ------------ ------- Total revenue 169,076 100 245,022 100 397,619 100 Operating costs: Telecom services 81,110 147,338 187,260 Network services 46,545 53,911 47,321 Satellite services 10,241 16,678 20,108 ----------- ------- ------------ ------ ------------ ------- Total operating costs 137,896 82 217,927 89 254,689 64 Selling, general and administrative: Telecom services 32,633 94,037 137,207 Network services 15,841 13,136 12,275 Satellite services 13,152 13,234 13,255 Corporate services (2) 19,640 27,811 20,946 ----------- ------- ------------ ------ ------------ ------- Total selling, general and administrative 81,266 48 148,254 60 183,683 46 Depreciation and amortization 34,888 20 56,501 23 101,545 25 Provision for impairment of long-lived assets 9,994 6 9,261 4 - - Net loss on disposal of long-lived assets 3,326 2 243 - 4,055 1 Restructuring costs - - - - 2,339 1 ----------- ------- ------------ ------ ------------ ------- Operating loss (98,294) (58) (187,124) (76) (148,692) (37) Other Data: Net cash used by operating activities of continuing operations (40,829) (117,191) (105,358) Net cash used by investing activities of continuing operations (191,932) (429,512) (349,082) Net cash provided by financing activities of continuing operations 362,338 308,136 530,915 EBITDA (3) (63,406) (130,663) (47,147) EBITDA (before nonrecurring charges) (3) (50,086) (38) (121,159) (53) (40,753) (12) Capital expenditures of continuing operations 220,350 (30) 268,796 (49) 368,946 (10) Capital expenditures of discontinued operations 49,770 18,055 25,981
(1) The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. The results for the 12 months ended December 31, 1996 have been derived from the Company's unaudited consolidated financial statements included in the Company's Forms 10-Q filed with the Securities and Exchange Commission and reclassified to present such periods in conformity with the fiscal 1998 presentation. (2) Corporate Services consists of the operating activities of ICG Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada) Co., ICG Holdings, Inc., ICG Services, Inc. and ICG Equipment, Inc., which primarily hold securities and provide certain legal, accounting and finance, personnel and other administrative support services to the business units. 34 (3) See note 3 under "Selected Financial Data" for the definitions of EBITDA and EBITDA (before nonrecurring charges). Fiscal 1998 Compared to Fiscal 1997 Revenue. Total revenue for fiscal 1998 increased $152.6 million, or 62%, from fiscal 1997. Telecom Services revenue increased 103% to $303.3 million due to an increase in revenue from local services (dial tone), long distance and special access services, offset in part by a decline in average unit pricing and in wholesale switched services revenue. Local services revenue increased from $21.3 million (14% of Telecom Services revenue) for fiscal 1997 to $157.1 million (52% of Telecom Services revenue) for fiscal 1998, primarily due to an increase in local access lines from 141,035 lines in service at December 31, 1997 to 354,482 lines in service at December 31, 1998. In addition, local access revenue includes revenue of approximately $4.9 million and $58.3 million for fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the transport and termination of local traffic to ISPs from customers of ILECs pursuant to various interconnection agreements. These agreements are subject to renegotiation over the next several months. While management believes that these agreements will be replaced by agreements offering the Company some form of compensation for ISP traffic, the renegotiated agreements may reflect rates for reciprocal compensation which are lower than the rates under the current contracts. See "Liquidity -Transport and Termination Charges." Revenue from long distance services generated $22.7 million for fiscal 1998, compared to no reported revenue for fiscal 1997. Special access revenue increased from $55.4 million (37% of Telecom Services revenue) for fiscal 1997 to $74.5 million (25% of Telecom Services revenue) for 1998. Switched access (terminating long distance) revenue decreased to approximately $49.0 million for fiscal 1998, compared to $72.7 million for fiscal 1997. The Company has raised prices on its wholesale switched services product in order to improve margins and has de-emphasized its wholesale switched services to focus on its higher margin products. Revenue from data services did not generate a material portion of total revenue during either period. Network Services revenue decreased 18% to $53.9 million for fiscal 1998 compared to $65.7 million for fiscal 1997. The decrease in Network Services revenue is partially due to the decline in network integration services projects from new and existing customers during fiscal 1998 and project delays by customers from 1998 into 1999, offset slightly by increases in integrated cabling services revenue. In addition, Network Services provides certain cabling and other service installation on behalf of Telecom Services, as Telecom Services provisions new customers and services. Due to the growth of Telecom Services during fiscal 1998, Network Services has been and will continue to be required to spend increasing management attention and resources on providing cabling and other service installation for Telecom Services. Amounts received from Telecom Services for work performed is eliminated in consolidation. Satellite Services revenue increased $10.5 million, or 35%, to $40.5 million for fiscal 1998. This increase is due to the operations of MTN, which comprised $30.0 million of total Satellite Services revenue for fiscal 1998, compared to $19.0 million for fiscal 1997, offset by decreases in revenue of MCN and Nova-Net, which the Company sold in August and November 1998, respectively. 35 MTN's C-band installations, which include both military and cruise vessels, increased from 57 at December 31, 1997 to 76 at December 31, 1998, an increase of 33%. Operating costs. Total operating costs for fiscal 1998 increased $36.8 million, or 17%, from fiscal 1997. Telecom Services operating costs increased from $147.3 million, or 99% of Telecom Services revenue, for fiscal 1997, to $187.3 million, or 62% of Telecom Services revenue, for fiscal 1998. Telecom Services operating costs consist of payments to ILECs for the use of network facilities to support special and switched access services, network operating costs, right of way fees and other costs. The increase in operating costs in absolute dollars is attributable to the increase in volume of local and special access services and the addition of network operating costs which include engineering and operations personnel dedicated to the development and launch of local exchange services. The decrease in operating costs as a percentage of Telecom Services revenue is due primarily to a greater volume of higher margin services, principally local exchange services. The Company expects the Telecom Services ratio of operating costs to revenue will further improve as the Company provides a greater margin of higher volume services, principally local exchange services, carries more traffic on its own facilities rather than the ILEC facilities and obtains the right to use unbundled ILEC facilities on satisfactory terms, any or all of which may not occur. Network Services operating costs decreased 12% to $47.3 million and increased as a percentage of revenue from 82% for fiscal 1997 to 88% for fiscal 1998. The decrease in operating costs in absolute dollars is due to a decrease in general business volume from external customers between the comparative periods. Network Services operating costs increased as a percentage of Network Services revenue due to cost overruns and the decline in higher margin network integration services projects during fiscal 1998. Satellite Services operating costs increased to $20.1 million for fiscal 1998, from $16.7 million for fiscal 1997. Satellite Services operating costs, as a percentage of Satellite Services revenue, decreased from 56% for fiscal 1997 to 50% for fiscal 1998, due to the increase in revenue of MTN, which provides relatively higher margins than other maritime services. Satellite Services operating costs consist primarily of transponder lease costs and the cost of equipment sold. Selling, general and administrative expenses. Total selling, general and administrative ("SG&A") expenses for fiscal 1998 increased $35.4 million, or 24%, compared to fiscal 1997, and decreased as a percentage of total revenue from 61% for fiscal 1997 to 46% for fiscal 1998. Telecom Services SG&A expense increased from $94.1 million, or 63% of Telecom Services revenue, for fiscal 1997, to $137.2 million, or 45% of Telecom Services revenue, for fiscal 1998. The increase in absolute dollars is principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local and long distance telephone services. As the Company begins to benefit from the revenue generated by newly developed services requiring substantial administrative, selling and marketing expense prior to initial service offerings, Telecom Services has experienced and expects to continue to experience declining SG&A expenses as a percentage of Telecom Services revenue. 36 Network Services SG&A expense decreased $0.9 million to $12.3 million for fiscal 1998 compared to fiscal 1997. This decrease is primarily due to a reduction in personnel as a result of the decentralization of Network Services during fiscal 1998. In addition, certain long-term operating leases on field offices expired during fiscal 1998. Satellite Services SG&A expense was $13.2 million for both fiscal 1997 and 1998. SG&A expense decreased as a percentage of Satellite Services revenue from 44% for fiscal 1997 to 33% for fiscal 1998 due to the growth of MTN revenue, without proportional increases in SG&A expenses, and the sales of MCN and Nova-Net in August and November, 1998, respectively, which companies generated higher SG&A expenses in relation to revenue than MTN. Corporate Services SG&A expense decreased $6.9 million to $20.9 million for fiscal 1998 compared to $27.8 million for fiscal 1997. This decrease is primarily due to a change in the allocation of payroll costs associated with the Company's information technology and human resources personnel, which costs were allocated to Corporate Services for fiscal 1997 and to Telecom Services for fiscal 1998. Depreciation and amortization. Depreciation and amortization increased $45.0 million, or 80%, for fiscal 1998 compared to fiscal 1997, primarily due to increased investment in depreciable assets resulting from the continued expansion of the Company's networks and services. Additionally, the Company experienced increased amortization arising from goodwill recorded in conjunction with the purchases of NikoNET and DataChoice during fiscal 1998 as well as the full year impact of goodwill amortization from the purchase of Communications Buying Group, Inc. in October 1997. The Company expects that depreciation and amortization will continue to increase as the Company continues to invest in the expansion and upgrade of its regional fiber and nationwide data networks and begins amortization of the goodwill arising from the purchase of ChoiceCom on December 31, 1998. Provision for impairment of long-lived assets. For fiscal 1997, provision for impairment of long-lived assets includes the write-down of the Company's investment in StarCom International Optics Corporation, Inc. ("StarCom") ($5.2 million), MCN ($2.9 million) and Nova-Net ($0.9 million) as well as a write-down of other operating assets ($0.3 million). Provision for impairment of long-lived assets was recorded based on management's estimate of the net realizable value of the Company's assets at December 31, 1997. No such provision for impairment was recorded for fiscal 1998. Net loss on disposal of long-lived assets. Net loss on disposal of long-lived assets increased from $0.2 million for fiscal 1997 to $4.1 million for fiscal 1998. Net loss on disposal of long-lived assets for fiscal 1997 primarily relates to losses recorded on the disposal of the Company's investment in its Melbourne network. For fiscal 1998, net loss on disposal of long-lived assets relates to the write-off of certain installation costs of disconnected special access customers ($0.5 million), the write-off of certain costs associated with an abandoned operating support system project ($0.8 million), general disposal of furniture, fixtures and office equipment ($3.5 million) and the loss on the sale of Nova-Net ($0.2 million), offset by the gain on the sale of MCN ($0.9 million). 37 Restructuring costs. For fiscal 1998, restructuring costs of $2.3 million include $0.2 million in costs, primarily severance costs, related to the facility closure of a subsidiary of NikoNET, $0.6 million in costs, primarily severance costs, related to the decentralization of the Company's Network Services subsidiary and $1.5 million related to the combined restructuring of Telecom Services and Corporate Services, designed to support the Company's increased strategic focus on its ISP customer base, as well as to improve the efficiency of operations and general and administrative support functions. Restructuring costs under this plan include severance and other employee benefit costs, of which $0.9 million has been paid as of December 31, 1998. Interest expense. Interest expense increased $52.6 million, from $117.5 million for fiscal 1997, to $170.1 million for fiscal 1998, which includes $158.2 million of non-cash interest. This increase was primarily attributable to an increase in long-term debt, primarily the 10% Notes issued in February 1998 and the 9 7/8% Notes issued in April 1998. In addition, the Company's interest expense increased, and will continue to increase, because the principal amount of its indebtedness increases until the Company's senior indebtedness begins to pay interest in cash. Interest income. Interest income increased $6.5 million, from $21.9 million for fiscal 1997 to $28.4 million for fiscal 1998. The increase is attributable to the increase in cash and invested cash balances from the proceeds from the issuances of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998. Other expense, net. Other expense, net increased from $0.4 million net expense for fiscal 1997 to $4.7 million net expense for fiscal 1998. Other expense, net recorded in fiscal 1997 consists primarily of litigation settlement costs and the loss on disposal of non-operating assets. For fiscal 1998, other expense, net primarily includes $3.2 million in settlement costs paid to the former minority shareholders and warrantholders of MTN, $1.1 million in litigation settlement costs and a write-off of notes receivable of $0.4 million. Income tax expense. Income tax expense of $0.1 million for fiscal 1998 relates to current state income taxes of NikoNET. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses increased $17.1 million, from $38.1 million for fiscal 1997 to $55.2 million for fiscal 1998. The increase is due primarily to the issuances of the 6 3/4% Preferred Securities in September and October 1997. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses recorded during fiscal 1998 consists of the accretion of issuance costs ($1.3 million) and the accrual of the preferred securities dividends ($53.9 million) associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4% Preferred Stock. Loss from continuing operations. Loss from continuing operations increased $29.1 million, or 9%, to $350.3 million due to the increases in operating costs, SG&A expenses, depreciation and amortization, interest expense and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, offset by an increase in revenue, as noted above. 38 Loss from discontinued operations. For fiscal 1997 and 1998, loss from discontinued operations was $39.5 million and $67.7 million, respectively, or 11% and 16%, respectively, of the Company's net loss. Loss from discontinued operations consists of the combined net loss of Zycom and NETCOM for the respective periods and, for fiscal 1998, includes $1.8 million for estimated losses on the disposal of Zycom. The remaining increase in loss from discontinued operations between the comparative periods is due to increases in SG&A expenses and depreciation and amortization incurred by NETCOM and approximately $9.4 million for merger costs incurred by NETCOM relating to NETCOM's merger with ICG in January 1998. Loss from discontinued operations for fiscal 1998 includes the net loss of NETCOM from January 1, 1998 through November 2, 1998. Since the Company expects to record a gain on the disposition of NETCOM, the Company has deferred the net operating losses of NETCOM from November 3, 1998 through December 31, 1998, to be recognized as a component of the gain on the disposition. Fiscal 1997 Compared to 12 Months Ended December 31, 1996 Revenue. Total revenue for fiscal 1997 increased $75.9 million, or 45%, from the 12 months ended December 31, 1996. Telecom Services revenue increased 71% to $149.4 million due to an increase in network usage for both switched and special access services, offset in part by a decline in average unit pricing. Local services revenue was $21.3 million (14% of Telecom Services revenue) for fiscal 1997, but did not generate a material portion of total revenue for the 12 months ended December 31, 1996. Special access revenue increased from $39.3 million (45% of Telecom Services revenue) for the 12 months ended December 31, 1996 to $55.4 million (37% of Telecom Services revenue) for fiscal 1997. Switched access (terminating long distance) revenue increased to approximately $72.7 million for fiscal 1997, compared to $48.1 million for the 12 months ended December 31, 1996. Revenue from long distance and data services did not generate a material portion of total revenue during either period. Network Services revenue increased 9% to $65.7 million for fiscal 1997 compared to $60.4 million for the 12 months ended December 31, 1996. The increase in Network Services revenue is due to a single equipment sale during fiscal 1997 for $3.2 million as well as general increases in business volume from external customers. Satellite Services revenue increased $8.7 million, or 41%, to $30.0 million for fiscal 1997, compared to $21.3 million for the 12 months ended December 31, 1996. This increase is primarily due to the operations of MCN, which comprised $6.3 million of total Satellite Services revenue for fiscal 1997 compared to $1.8 million during the same 12-month period in 1996. The remaining increase can be attributed to the general growth of MTN and its increased sales of C-Band equipment to offshore oil and gas customers. Operating costs. Total operating costs for fiscal 1997 increased $80.0 million, or 58%, from the 12 months ended December 31, 1996. Telecom Services operating costs increased from $81.1 million, or 93% of Telecom Services revenue, for the 12 months ended December 31, 1996 to $147.3 million, or 99% of Telecom Services revenue, for fiscal 1997. The increase in operating costs in absolute dollars is attributable to the increase in local and special access services and the addition of network operating costs which include engineering and operations personnel dedicated to the development and launch of local 39 exchange services. The increase in operating costs as a percentage of Telecom Services revenue is due primarily to the increase in switched access services revenue, and the investment in the development of local exchange services without the benefit of substantial corresponding revenue in the same period. Network Services operating costs increased 16% to $53.9 million and increased as a percentage of Network Services revenue from 77% for the 12 months ended December 31, 1996 to 82% for fiscal 1997. The increase is due to a substantially lower margin earned on equipment sales (which constituted a larger portion of 1997 revenue) relative to other services and certain indirect project costs included in operating costs during fiscal 1997 which were treated as SG&A expenses during the comparable 12-month period in 1996. Satellite Services operating costs increased to $16.7 million for fiscal 1997, from $10.2 million for the 12 months ended December 31, 1996. Satellite Services operating costs as a percentage of Satellite Services revenue also increased from 48% for the 12 months ended December 31, 1996 to 56% for fiscal 1997. This increase is due to an increase in MCN's sales as well the increased volume of equipment sales, both of which provide lower margins than other maritime services. Selling, general and administrative expenses. Total SG&A expenses for fiscal 1997 increased $67.0 million, or 82%, compared to the 12 months ended December 31, 1996. This increase was principally due to the continued rapid expansion of the Company's Telecom Services networks and related significant additions to the Company's management information systems, customer service, marketing and sales staffs dedicated to the expansion of the Company's networks and implementation of the Company's expanded services strategy, primarily the development of local and long distance telephone services. Total SG&A expenses as a percentage of total revenue increased from 48% for the 12 months ended December 31, 1996 to 61% for fiscal 1997. There is typically a period of higher administrative and marketing expense prior to the generation of appreciable revenue from newly developed networks or services. Depreciation and amortization. Depreciation and amortization increased $21.6 million, or 62%, for fiscal 1997, compared to the 12 months ended December 31, 1996, due to increased investment in depreciable assets resulting from the continued expansion of the Company's networks and services. The Company reports high levels of depreciation expense relative to revenue during the early years of operation of a new network because the full cost of a network is depreciated using the straight-line method despite the low rate of capacity utilization in the early stages of network operation. Provision for impairment of long-lived assets. For the 12 months ended December 31, 1996, provision for impairment of long-lived assets includes valuation allowances for the amounts receivable for advances made to the formerly owned Phoenix network joint venture included in long-term note receivable ($5.8 million), the investments in the formerly owned Melbourne network ($2.7 million) and the formerly owned Satellite Services Mexico subsidiary ($0.1 million) and the note receivable from NovoComm, Inc. ($1.3 million). Provision for impairment of long-lived assets for fiscal 1997 includes the write-down of the Company's investment in StarCom ($5.2 million), MCN ($2.9 million) and Nova-Net ($0.9 million) as well as a write-down of other operating 40 assets ($0.3 million). Provision for impairment of long-lived assets was recorded based on management's estimate of the net realizable value of the Company's assets at December 31, 1996 and 1997. Net loss on disposal of long-lived assets. Net loss on disposal of long-lived assets decreased from $3.3 million for the 12 months ended December 31, 1996 to $0.2 million for fiscal 1997. Net loss on disposal of long-lived assets for the 12 months ended December 31, 1996 includes the loss recorded on the sale of four of the Company's teleports used in its Satellite Services operations ($1.1 million), the loss recorded on the disposal of other operating assets ($2.7 million) and a write-off of an investment ($0.3 million), offset by a gain on the sale of the Company's 50% interest in the Phoenix network joint venture ($0.8 million). For fiscal 1997, net loss on disposal of long-lived assets primarily relates to losses recorded on the disposal of the Company's investment in its formerly owned Melbourne network. Interest expense. Interest expense increased $22.6 million, from $95.0 million for the 12 months ended December 31, 1996, to $117.5 million for fiscal 1997, which includes $109.3 million of non-cash interest. This increase was primarily attributable to an increase in long-term debt, primarily the 11 5/8% Notes issued in March 1997. In addition, the Company's interest expense increased, and will continue to increase, because the principal amount of its indebtedness increases until the Company's senior indebtedness begins to pay interest in cash. Interest income. Interest income increased $0.5 million, from $21.4 million for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The increase is attributable to the increase in cash and invested cash balances from the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in March 1997 and the 6 3/4% Preferred Securities in September and October 1997. Other expense, net. Other expense, net decreased from $3.7 million net expense for the 12 months ended December 31, 1996 to $0.4 million net expense for fiscal 1997. Other expense, net recorded for the 12 months ended December 31, 1996 consists primarily of the write-off of deferred financing costs associated with the conversion or repayment of debt and litigation settlement costs. For fiscal 1997, other, net consists primarily of litigation settlement costs and the loss on disposal of non operating assets. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses increased $11.0 million, from $27.1 million for the 12 months ended December 31, 1996 to $38.1 million for fiscal 1997. The increase is due primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6 3/4% Preferred Securities in September and October 1997. Offsetting this increase is $12.3 million recorded during the 12 months ended December 31, 1996 for the excess of the redemption price over the carrying amount of the 12% redeemable preferred stock of Holdings redeemed in April 1996. Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses recorded during fiscal 1997 consists of the accretion of issue costs ($0.9 million) and the accrual of the preferred security dividends ($38.9 million) associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"), offset by minority interest in losses of subsidiaries of $1.7 million. 41 Share of losses of joint venture. Effective October 1, 1996, the Company sold its 50% interest in the Phoenix network joint venture. As a result, no share of losses in joint venture was recorded during fiscal 1997, as compared to the $1.6 million loss recorded during the comparable 12-month period in 1996. Loss from continuing operations. Loss from continuing operations increased $122.2 million, or 61%, to $321.3 million due to the increases in operating costs, SG&A expenses, depreciation and amortization, interest expense and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, offset by an increase in revenue, as noted above. Loss from discontinued operations. For the 12 months ended December 31, 1996 and fiscal 1997, loss from discontinued operations was $50.5 million and $39.5 million, respectively, or 20% and 11%, respectively, of the Company's net loss. Loss from discontinued operations consists of the combined net loss of Zycom and NETCOM for the respective periods. The decrease in loss from discontinued operations between the comparative periods is due to an increase in revenue and a decrease in operating costs as a percentage of revenue incurred by NETCOM. Quarterly Results The following table presents selected unaudited operating results for three-month quarterly periods during fiscal 1997 and 1998. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Annual Report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. ICG's development and expansion activities, including acquisitions, during the periods shown below materially affect the comparability of this data from one period to another. 42
Three Months Ended Three Months Ended ----------------------------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1997 1997 1997 1997 1998 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Statement of Operations Data: Revenue $ 55,450 57,937 60,615 71,020 78,867 90,657 106,467 121,628 Operating loss (39,747) (45,515) (46,045) (55,857) (39,082) (39,649) (27,717) (42,244) Loss from continuing operations (66,039) (75,919) (79,372) (99,922) (81,564) (89,435) (80,082) (99,249) Loss from discontinued operations (9,953) (10,830) (7,502) (11,198) (20,191) (11,401) (16,582) (19,541) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss $ (75,992) (86,749) (86,874) (111,120) (101,755) (100,836) (96,664) (118,790) =========== =========== =========== =========== =========== =========== =========== =========== Loss per share from continuing operations - basic and diluted $ (1.57) (1.80) (1.87) (2.29) (1.84) (1.99) (1.76) (2.16) =========== =========== =========== =========== =========== =========== =========== =========== Weighted average number of shares outstanding - basic and diluted 42,003 42,122 42,359 43,553 44,311 44,865 45,588 46,010 =========== =========== =========== =========== =========== =========== =========== =========== Other Data: Net cash used by operating activities of continuing operations (13,089) (20,755) (30,823) (52,524) (6,539) (30,950) (13,941) (53,928) Net cash (used) provided by investing activities of continuing operations (60,197) (50,554) (193,445) (125,316) 36,681 (70,471) (151,395) (163,897) Net cash provided (used) by financing activities of continuing operations 172,689 (4,418) 110,288 29,577 294,197 238,628 (7,432) 5,522 EBITDA (1) (29,000) (32,581) (32,528) (36,554) (25,479) (16,814) (2,834) (2,020) EBITDA (before nonrecurring charges) (1) (29,319) (32,581) (31,174) (28,085) (24,974) (16,268) (3,648) 4,137 Capital expenditures of continuing operations (2) (58,556) (64,233) (64,347) (81,660) (65,748) (87,166) (107,108) (108,924) Capital expenditures of discontinued operations (5,303) (5,771) (3,259) (3,722) (6,511) (8,696) (5,021) (5,753) Statistical Data (3): Full time employees 2,347 2,623 2,861 3,032 3,050 3,089 3,251 3,415 Telecom services: Access lines in service (4) 5,371 20,108 50,551 141,035 186,156 237,458 290,983 354,482 Buildings connected (5): On-net 545 560 590 626 637 665 684 777 Hybrid (6) 1,550 1,704 1,726 2,527 3,294 3,733 4,217 4,620 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total buildings connected 2,095 2,264 2,316 3,153 3,931 4,398 4,901 5,397 Operational switches: Voice 16 17 18 19 20 20 21 29 Data 10 15 15 15 15 15 15 16 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operational switches 26 32 33 34 35 35 36 45 Fiber route miles (7) : Operational 2,483 2,898 3,021 3,043 3,194 3,812 3,995 4,255 Under construction - - - - - - - 625 Fiber strand miles (8) : Operational 83,334 101,788 109,510 111,435 118,074 124,642 127,756 134,152 Under construction - - - - - - - 15,284 Satellite services: C-Band installations (9) 57 57 54 57 59 66 69 76
(1) EBITDA consists of earnings (loss) from continuing operations before interest, income taxes, depreciation and amortization, other expense, net and accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses, or simply, operating loss plus depreciation and amortization. EBITDA (before nonrecurring charges) represents EBITDA before certain nonrecurring charges such as the net loss (gain) on disposal of long-lived assets, provision for impairment of long-lived assets and restructuring costs. EBITDA and EBITDA (before nonrecurring charges) are provided because they are measures 43 commonly used in the telecommunications industry. EBITDA and EBITDA (before nonrecurring charges) are presented to enhance an understanding of the Company's operating results and are not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA and EBITDA (before nonrecurring charges) are not measurements under GAAP and are not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities of continuing operations as determined using GAAP are also presented in Other Data. (2) Capital expenditures includes assets acquired under capital leases and excludes payments for construction of the Company's corporate headquarters. Capital expenditures of discontinued operations includes the capital expenditures of Zycom and NETCOM combined for all periods presented. (3) Amounts presented are for three-month periods ended, or as of the end of, the period presented. (4) Access lines in service at December 31, 1998 includes 271,928 lines which are provisioned through the Company's switch and 82,554 lines which are provisioned through resale and other agreements with various local exchange carriers. Resale lines typically generate lower margins and are used primarily to obtain customers. Although the Company plans to migrate lines from resale to higher margin on-switch lines, there is no assurance that it will be successful in executing this strategy. (5) Prior to the fourth quarter of 1997, buildings connected includes only special access buildings connected. Beginning December 31, 1997, buildings connected includes both dial tone and special access buildings connected. (6) Hybrid buildings connected represent buildings connected to the Company's network via another carrier's facilities. (7) Fiber route miles refers to the number of miles of fiber optic cable, including leased fiber. As of December 31, 1998, the Company had 4,255 fiber route miles, of which 47 fiber route miles were leased under operating leases. Fiber route miles under construction represents fiber under construction which is expected to be operational within six months. (8) Fiber strand miles refers to the number of fiber route miles, including leased fiber, along a telecommunications path multiplied by the number of fiber strands along that path. As of December 31, 1998, the Company had 134,152 fiber strand miles, of which 1,595 fiber strand miles were leased under operating leases. Fiber strand miles under construction represents fiber under construction which is expected to be operational within six months. (9) C-Band installations service cruise ships, U.S. Navy vessels and offshore oil platform installations. The Company's consolidated revenue has increased every quarter since the first fiscal quarter of 1992, primarily due to the installation and acquisition of new networks, the expansion of existing networks and increased services provided over existing networks. EBITDA, EBITDA (before nonrecurring charges), and operating and net losses have generally increased immediately preceding and during periods of relatively rapid network expansion and development of new services. Since the quarter ended June 30, 1996, EBITDA losses (before nonrecurring charges) have improved for each consecutive quarter, through and including the quarter ended December 31, 1998 for which the Company reported 44 positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other SG&A expenses supporting its operations, any or all of which may not occur, the Company anticipates that EBITDA performance will continue to improve in the near term. Individual operating units may experience variability in quarter to quarter revenue due to (i) the type and mix of services available to customers, (ii) the timing and size of contract orders, (iii) the timing of price changes and associated impact on volume, and (iv) customer usage patterns. Net Operating Loss Carryforwards As of December 31, 1998, the Company had federal and foreign net operating loss carryforwards ("NOLs") of approximately $617.8 million and $35.0 million, respectively, which expire at various times in varying amounts through 2019. However, due to the provisions of Section 382, regulations issued under Section 1502 and certain other provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of a portion of the NOLs may be limited. In addition, the Company is also subject to certain state income tax laws which may also limit the utilization of NOLs for state income tax purposes. Section 382 of the Code limits the use of NOLs, as well as other tax attributes, following significant changes in ownership of a corporation's stock, as defined in the Code. The limitation is expressed as the amount of NOL or other tax attributes arising during a period prior to the change in ownership that may be used by the Company in any tax year subsequent to the change in ownership. Other factors may act to increase or decrease the annual limitation for any year subsequent to a change in ownership. Future events beyond the control of the Company could reduce or eliminate the Company's ability to utilize its NOLs. Future ownership changes under Section 382 will require a new Section 382 computation which could further restrict the use of the NOLs. In addition, the Section 382 limitation could be reduced to zero if the Company fails to satisfy the continuity of business enterprise requirement for the two-year period following an ownership change. Liquidity and Capital Resources The Company's growth has been funded through a combination of equity, debt and lease financing. As of December 31, 1998, the Company had current assets of $422.8 million, including $262.8 million of cash, cash equivalents and short-term investments available for sale which exceeded current liabilities of $127.9 million, providing working capital of $294.9 million. In addition, during the first quarter of 1999, the Company completed the sales of NETCOM's operations for total proceeds of $286.1 million. The Company invests excess funds in short-term, interest-bearing investment-grade securities until such funds are used to fund the capital investments and operating needs of the Company's business. The Company's short term investment objectives are safety, liquidity and yield, in that order. 45 Net Cash Used By Operating Activities of Continuing Operations The Company's operating activities of continuing operations used $39.1 million in fiscal 1996, $4.7 million and $6.4 million for the three months ended December 31, 1995 and 1996, respectively, and $117.2 million and $105.4 million for fiscal 1997 and 1998, respectively. Net cash used by operating activities of continuing operations is primarily due to net losses from continuing operations and increases in receivables, which are partially offset by changes in other working capital items and non-cash expenses, such as depreciation and amortization expense, deferred interest expense, accretion and preferred dividends on subsidiary preferred securities. The Company does not anticipate that cash provided by operations will be sufficient to fund operating activities, the future expansion of existing networks or the construction and acquisition of new networks in the near term. As the Company provides a greater volume of higher margin services, principally local exchange services, carries more traffic on its own facilities rather than ILEC facilities and obtains the right to use unbundled ILEC facilities, while experiencing decelerating increases in personnel and other SG&A expenses supporting its operations, any or all of which may not occur, the Company anticipates that net cash used by operating activities of continuing operations will continue to improve in the near term. Net Cash Used By Investing Activities of Continuing Operations Investing activities of continuing operations used $134.8 million (net of $21.6 million received in connection with the sale of certain satellite equipment, including four teleports) in fiscal 1996, $25.2 million (net of $21.1 million received in connection with the aforementioned equipment sale) and $82.3 million for the three months ended December 31, 1995 and 1996, respectively, and $429.5 million and $349.1 million for fiscal 1997 and 1998, respectively. Net cash used by investing activities of continuing operations includes cash expended for the acquisition of property, equipment and other assets of $121.9 million for fiscal 1996, $26.8 million and $50.8 million for the three months ended December 31, 1995 and 1996, respectively, and $268.8 million and $367.5 million for fiscal 1997 and 1998, respectively. Additionally, net cash used by investing activities of continuing operations includes payments for construction of the Company's corporate headquarters of $1.5 million for fiscal 1996, $7.9 million for the three months ended December 31, 1996, and $29.4 million and $4.9 million for fiscal 1997 and 1998, respectively. The Company used $45.9 million in fiscal 1997 to acquire CBG and $67.8 million in fiscal 1998 for the acquisitions of ChoiceCom, NikoNET and DataChoice combined. During fiscal 1998, the Company used $9.5 million to purchase the minority interest of two of the Company's operating subsidiaries. Offsetting the expenditures for investing activities of continuing operations for fiscal 1998 are the proceeds from the sale of the Company's corporate headquarters of $30.3 million and the sale of short-term investments of $60.3 million. The Company will continue to use cash in 1999 and subsequent periods for the construction of new networks, the expansion of existing networks and, potentially, for acquisitions. The Company acquired assets under capital leases and through the issuance of debt or warrants of $55.0 million in fiscal 1996, $0.1 million and $19.5 million for the three months ended December 31, 1995 and 1996, respectively, and $1.4 million for fiscal 1998. 46 Net Cash Provided (Used) By Financing Activities of Continuing Operations Financing activities of continuing operations provided $355.8 million in fiscal 1996, used $8.4 million and $1.9 million in the three months ended December 31, 1995 and 1996, respectively, and provided $308.1 million and $530.9 million in fiscal 1997 and 1998, respectively. Net cash provided by financing activities of continuing operations for these periods includes cash received in connection with the private placement of the 11 5/8% Notes and the 14% Preferred Stock in March 1997, the 6 3/4% Preferred Securities in September and October 1997 and the 10% Notes and the 9 7/8% Notes in February and April 1998, respectively. Historically, the funds to finance the Company's business acquisitions, capital expenditures, working capital requirements and operating losses have been obtained through public and private offerings of ICG and Holdings-Canada common shares, convertible subordinated notes, convertible preferred shares of Holdings-Canada, capital lease financings and various working capital sources, including credit facilities, in addition to the private placement of the securities previously mentioned and other securities offerings. On February 12, 1998, ICG Services completed a private placement of 10% Notes, with a maturity value of approximately $490.0 million for net proceeds, after underwriting and other offering costs, of approximately $290.9 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable in cash each February 15 and August 15, commencing August 15, 2003. The 10% Notes will be redeemable at the option of ICG Services, in whole or in part, on or after February 15, 2003. On April 27, 1998, ICG Services completed a private placement of 9 7/8% Notes, with a maturity value of approximately $405.3 million, for net proceeds, after underwriting and other offering costs, of approximately $242.1 million. Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes will be redeemable at the option of ICG Services, in whole or in part, on or after May 1, 2003. As of December 31, 1998, the Company had an aggregate of approximately $68.4 million of capital lease obligations of continuing operations and an aggregate accreted value of approximately $1.6 billion was outstanding under the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes"), the 12 1/2% Notes, the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require payments of interest to be made in cash commencing March 15, 2001 and mature on September 15, 2005. The 12 1/2% Notes require payments of interest to be made in cash commencing November 1, 2001 and mature on May 1, 2006. The 11 5/8% Notes require payments of interest to be made in cash commencing September 15, 2002 and mature on March 15, 2007. The 10% Notes require payments of interest in cash commencing August 15, 2003 and mature February 15, 2008. The 9 7/8% Notes require payments of interest in cash commencing November 1, 2003 and mature May 1, 2008. The 6 3/4% Preferred Securities require payments of dividends to be made in cash through November 15, 2000. In addition, the 14% Preferred Stock and the 14 1/4% Preferred Stock require payments of dividends to be made in cash commencing June 15, 2002 and August 1, 2001, respectively. As of December 31, 1998, the Company had $1.1 million of other indebtedness outstanding. With respect to indebtedness outstanding on December 31, 1998, the Company has cash interest payment obligations of approximately $113.3 million in 2001, $158.0 47 million in 2002 and $212.6 million in 2003. With respect to preferred securities currently outstanding, the Company has cash dividend obligations of approximately $6.7 million remaining in 1999 and $8.9 million in 2000, for which the Company has restricted cash balances available for such dividend payments, $21.5 million in 2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly, the Company may have to refinance a substantial amount of indebtedness and obtain substantial additional funds prior to March 2001. The Company's ability to do so will depend on, among other things, its financial condition at the time, restrictions in the instruments governing its indebtedness, and other factors, including market conditions, beyond the control of the Company. There can be no assurance that the Company will be able to refinance such indebtedness, including such capital leases, or obtain such additional funds, and if the Company is unable to effect such refinancings or obtain additional funds, the Company's ability to make principal and interest payments on its indebtedness or make payments of cash dividends on, or the mandatory redemption of, its preferred securities, would be adversely affected. Capital Expenditures The Company's capital expenditures of continuing operations (including assets acquired under capital leases and excluding payments for construction of the Company's corporate headquarters) were $176.9 million for fiscal 1996, $26.9 million and $70.3 million for the three months ended December 31, 1995 and 1996, respectively, and $268.8 million and $368.9 million for fiscal 1997 and 1998, respectively. The Company anticipates that the expansion of existing networks, construction of new networks and further development of the Company's products and services will require capital expenditures of approximately $380.0 million during 1999. To facilitate the expansion of its services and networks, the Company has entered into equipment purchase agreements with various vendors under which the Company has committed to purchase a substantial amount of equipment and other assets, including a full range of switching systems, fiber optic cable, network electronics, software and services. If the Company fails to meet the minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. Actual capital expenditures will depend on numerous factors, including certain factors beyond the Company's control. These factors include the nature of future expansion and acquisition opportunities, economic conditions, competition, regulatory developments and the availability of equity, debt and lease financing. Other Cash Commitments and Capital Requirements The Company's operations have required and will continue to require significant capital expenditures for development, construction, expansion and acquisition of telecommunications assets. Significant amounts of capital are required to be invested before revenue is generated, which results in initial negative cash flows. In addition to the Company's planned capital expenditures, it has other cash commitments as described in the footnotes to the Company's audited consolidated financial statements for the fiscal year ended December 31, 1998 included elsewhere herein. In view of the continuing development of the Company's products and services, the expansion of existing networks and the construction, leasing and licensing of new networks, the Company will require additional amounts of cash in the future from outside sources. Management believes that the Company's cash on hand and amounts expected to be available through asset sales, including the 48 proceeds from the sales of the operations of NETCOM, cash flows from operations, including collection of receivables from transport and termination charges, vendor financing arrangements and credit facilities will provide sufficient funds necessary for the Company to expand its business as currently planned and to fund its operations through 2000. Additional sources of cash may include public and private equity and debt financings, sales of non-strategic assets, capital leases and other financing arrangements. In the past, the Company has been able to secure sufficient amounts of financing to meet its capital needs. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company. The failure to obtain sufficient amounts of financing could result in the delay or abandonment of some or all of the Company's development and expansion plans, which could have a material adverse effect on the Company's business. In addition, the inability to fund operating deficits with the proceeds of financings and sales of non-strategic assets until the Company establishes a sufficient revenue-generating customer base could have a material adverse effect on the Company's liquidity. Transport and Termination Charges The Company has recorded revenue of approximately $4.9 million and $58.3 million for fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the transport and termination of local traffic to ISPs from customers of ILECs pursuant to various interconnection agreements. The ILECs have not paid most of the bills they have received from the Company and have disputed substantially all of these charges based on the belief that such calls are not local traffic as defined by the various agreements and under state and federal laws and public policies. As a result, the Company expects receivables from transport and termination charges will continue to increase until these disputes have been resolved. The resolution of these disputes will be based on rulings by state public utility commissions and/or by the FCC. To date, there have been favorable final rulings from 29 states that ISP traffic is subject to the payment of reciprocal compensation under interconnection agreements. On February 25, 1999, the FCC issued a decision that ISP-bound traffic is largely jurisdictionally interstate traffic. The decision relies on the long-standing federal policy that ISP traffic, although jurisdictionally interstate, is treated as though it is local traffic for pricing purposes. The decision also emphasizes that because there are no federal rules governing intercarrier compensation for ISP traffic, the determination as to whether such traffic is subject to reciprocal compensation under the terms of interconnection agreements properly is made by the state commissions and that carriers are bound by their interconnection agreements and state commission decisions regarding the payment of reciprocal compensation for ISP traffic. The FCC has initiated a rulemaking proceeding regarding the adoption of prospective federal rules for intercarrier compensation for ISP traffic. In its notice of rulemaking, the FCC expresses its preference that compensation rates for this traffic continue to be set by negotiations between carriers, with disputes resolved by arbitrations conducted by state commissions, pursuant to the Telecommunications Act. On March 4, 1999, the Alabama Public Service Commission (the "Alabama PSC") issued a decision that found that reciprocal compensation is owed for Internet traffic under four CLEC interconnection agreements with BellSouth Corporation 49 ("BellSouth"), which agreements were at issue in the proceeding. With respect to the Company's interconnection agreement, which also was at issue, the state commission interpreted certain language in the Company's agreement to exempt ISP-bound traffic from reciprocal compensation under certain conditions. The Company believes that the Alabama PSC failed to consider the intent of the parties in negotiating and executing the Company's interconnection agreement, the specific language of the Company's interconnection agreement and the impact of Alabama PSC and FCC policies, and thereby misinterpreted the agreement. The Company intends to file a request with the Alabama PSC by April 1, 1999 seeking determination that the ruling with respect to the Company's agreement be reconsidered, and that the Company should be treated the same as the other CLECs that participated in the proceeding and for which the Alabama PSC ordered the payment of reciprocal compensation. While the Company intends to pursue vigorously a petition for reconsideration with the Alabama PSC, and if the Company deems it necessary, judicial review, the Company cannot predict the final outcome of this issue. The Company has also recorded revenue of approximately $19.1 million for fiscal 1998, related to other transport and termination charges to the ILECs, pursuant to the Company's interconnection agreements with these ILECs. Included in the Company's trade receivables at December 31, 1997 and 1998 are $4.3 million and $72.8 million, respectively, for all receivables related to transport and termination charges. The receivables balance at December 31, 1998 is net of an allowance of $5.6 million for disputed amounts. Although the Company's interconnection agreement with BellSouth has expired, the Company has received written notification from BellSouth that the Company may continue billing BellSouth under the pricing terms within the expired interconnection agreement, until such agreement is renegotiated or arbitrated by the relevant state commissions. The Company's remaining interconnection agreements expire in 1999 and 2000. While the Company believes that all revenue recorded through December 31, 1998 is collectible and that future revenue from transport and termination charges billed under the Company's current interconnection agreements will be realized, there can be no assurance that future regulatory and judicial rulings will be favorable to the Company, that the Alabama PSC will reconsider its ruling, or that different pricing plans for transport and termination charges between carriers will not be adopted when the Company's interconnection agreements are renegotiated or as a result of the FCC's rulemaking proceeding on future compensation methods. In fact, the Company believes that different pricing plans will be considered and adopted and although the Company expects that revenue from transport and termination charges likely will decrease as a percentage of total revenue from local services in periods subject to future interconnection agreements, the Company's local termination services still will be required by the ILECs and must be provided under the Telecommunications Act, and likely will result in increasing volume in minutes due to the growth of the Internet and related services markets. The Company expects to negotiate reasonable compensation and collection terms for local termination services, although there is no assurance that such compensation will remain consistent with current levels. Additionally, the Company expects to supplement its current operations with revenue, and ultimately EBITDA, from new services offerings such as RAS, EOS and DSL, however, the Company may or may not be successful in its efforts to deploy such services profitably. 50 Year 2000 Compliance Importance Many computer systems, software applications and other electronics currently in use worldwide are programmed to accept only two digits in the portion of the date field which designates the year. The "Year 2000 problem" arises because these systems and products cannot properly distinguish between a year that begins with "20" and the familiar "19." If these systems and products are not modified or replaced, many will fail, create erroneous results and/or may cause interfacing systems to fail. Year 2000 compliance issues are of particular importance to the Company since its operations rely heavily upon computer systems, software applications and other electronics containing date-sensitive embedded technology. Some of these technologies were internally developed and others are standard purchased systems which may or may not have been customized for the Company's particular application. The Company also relies heavily upon various vendors and suppliers that are themselves very reliant on computer systems, software applications and other electronics containing date-sensitive embedded technology. These vendors and suppliers include: (i) ILECs and other local and long distance carriers with which the Company has interconnection or resale agreements; (ii) manufacturers of the hardware and related operating systems that the Company uses directly in its operations; (iii) providers that create custom software applications that the Company uses directly in its operations; and (iv) providers that sell standard or custom equipment or software which allow the Company to provide administrative support to its operations. Strategy The Company's approach to addressing the potential impact of Year 2000 compliance issues is focused upon ensuring, to the extent reasonably possible, the continued, normal operation of its business and supporting systems. Accordingly, the Company has developed a four-phase plan which it is applying to each functional category of the Company's computer systems and components. Each of the Company's computer systems, software applications and other electronics containing date-sensitive embedded technology is included within one of the following four functional categories: o Networks and Products, which consists of all components whether hardware, software or embedded technology used directly in the Company's operations, including components used by the Company's voice and data switches and collocations and telecommunications products; o IT Systems, which consists of all components used to support the Company's operations, including provisioning and billing systems; o Building and Facilities, which consists of all components with embedded technology used at the Company's headquarters building and other leased facilities, including security systems, elevators and internal use telephone systems; 51 o Office Equipment, which consists of all office equipment with date-sensitive embedded technology. For each of the categories described above, the Company will apply the following four-phase approach to identifying and addressing the potential impact of Year 2000 compliance issues: o Phase I - Assessment During this phase, the Company's technology staff will perform an inventory of all components currently in use by the Company. Based upon this inventory, the Company's business executives and technology staff will jointly classify each component as a "high," "medium" or "low" priority item, determined primarily by the relative importance that the particular component has to the Company's normal business operations, the number of people internally and externally which would be affected by any failure of such component and the interdependence of such component with other components used by the Company that may be of higher or lower priority. Based upon such classifications, the Company's business executives and information technology staff will jointly set desired levels of Year 2000 readiness for each component inventoried, using the following criteria, as defined by the Company: - Capable, meaning that such computer system or component will be capable of managing and expressing calendar years in four digits; - Compliant, meaning that the Company will be able to use such component for the purpose for which the Company intended it by adapting to its ability to manage and express calendar years in only two digits; - Certified, meaning that the Company has received testing results to demonstrate, or the vendor or supplier is subject to contractual terms which requires, that such component requires no Year 2000 modifications to manage and express calendar years in four digits; or - Non-critical, meaning that the Company expects to be able to continue to use such component unmodified or has determined that the estimated costs of modification exceed the estimated costs associated with its failure. o Phase II - Remediation During this phase, the Company will develop and execute a remediation plan for each component based upon the priorities set in Phase I. Remediation may include component upgrade, reprogramming, replacement, receipt of vendor and supplier certification or other actions as deemed necessary or appropriate. o Phase III - Testing During this phase, the Company will perform testing sufficient to confirm that the component meets the desired state of Year 2000 readiness. This phase will consist of: (i) testing the component in isolation, or unit testing; (ii) testing the component jointly with 52 other components, or system testing; and (iii) testing interdependent systems, or environment testing. o Phase IV - Implementation During the last phase, the Company will implement each act of remediation developed and tested for each component, as well as implement adequate controls to ensure that future upgrades and changes to the Company's computer systems, for operational reasons other than Year 2000 compliance, do not alter the Company's Year 2000 state of readiness. Current State of Readiness The Company has commenced certain of the phases within its Year 2000 compliance strategy for each of its functional system categories, as shown by the table set forth below. The Company does not intend to wait until the completion of a phase for all functional category components together before commencing the next phase. Accordingly, the information set forth below represents only a general description of the phase status for each functional category.
- ------------------------------- ---------------------------------------------------------------------------------------------- Phase - ------------------------------- ---------------------------------------------------------------------------------------------- I II III IV System and Level of Priority Assessment Remediation Testing Implementation - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Networks and Products - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High Complete In progress In progress To begin Q2 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium Complete In progress To begin Q2 1999 To begin Q2 1999 To complete Q2 1999 To complete Q3 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Low Complete Complete Complete Complete - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- IT Systems - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High Complete In progress In progress In progress To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium Complete In progress In progress In progress To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------------------------------- Low Complete In progress To be determined based on the results of To complete Q2 1999 Phase II - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Building and Facilities - ------------------------------- ---------------------- ----------------------- ----------------------------------------------- High In progress In progress To be determined based on the results of To complete Q2 1999 To complete Q2 1999 Phase II - ------------------------------- ---------------------- ----------------------------------------------------------------------- Medium In progress To be determined based on the results of Phase I To complete Q2 1999 - ------------------------------- ---------------------- ----------------------------------------------------------------------- Low To begin Q2 1999 To be determined based on the results of Phase I To complete Q3 1999 - ------------------------------- ---------------------------------------------------------------------------------------------- Office Equipment - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- High Complete In progress To begin Q2 1999 To begin Q2 1999 To complete Q2 1999 To complete Q2 1999 To complete Q3 1999 - ------------------------------- ---------------------- ----------------------- ----------------------- ----------------------- Medium Complete In progress To begin Q2 1999 To begin Q2 1999 To complete Q2 1999 To complete Q3 1999 To complete Q4 1999 - ------------------------------- ---------------------- ----------------------- ----------------------------------------------- Low Complete In progress To be determined based on the results of To complete Q2 1999 Phase II - ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Separately, the Company is in the process of reviewing the Company's material contracts with contractors and vendors/suppliers and considering the necessity of renegotiating certain existing contracts, to the extent that the contracts fail to address the allocation of potential Year 2000 liabilities 53 between parties. Prior to entering into any new material contracts, the Company will seek to address the allocation of potential Year 2000 liabilities as part of the initial negotiation. Costs The Company expenses all incremental costs to the Company associated with Year 2000 compliance issues as incurred. Through December 31, 1998, such costs incurred were approximately $0.5 million, consisting of approximately $0.4 million of replacement hardware and software and approximately $0.1 million of consulting fees and other miscellaneous costs of Year 2000 compliance reference and planning materials. The Company has also incurred certain internal costs, including salaries and benefits for employees dedicating various portions of their time to Year 2000 compliance issues, of which costs the Company believes has not exceeded $0.5 million through December 31, 1998. The Company expects that total future incremental costs of Year 2000 compliance efforts will be approximately $3.8 million, consisting of $2.3 million in consulting fees, $1.5 million in replacement hardware and software and other miscellaneous costs. These anticipated costs have been included in the Company's fiscal 1999 budget and represent approximately 4% of the Company's budgeted expenses for information technology through fiscal 1999. Such cost estimates are based upon presently available information and may change as the Company continues with its Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000 compliance costs, as necessary. Risk, Contingency Planning and Reasonably Likely Worst Case Scenario While the Company is heavily reliant upon its computer systems, software applications and other electronics containing date-sensitive embedded technology as part of its business operations, such components upon which the Company primarily relies were developed with current state-of-the-art technology and, accordingly, the Company has reasonably assumed that its four-phase approach will demonstrate that many of its high-priority systems do not present material Year 2000 compliance issues. For computer systems, software applications and other electronics containing date-sensitive embedded technology that have met the Company's desired level of Year 2000 readiness, the Company will use its existing contingency plans to mitigate or eliminate problems it may experience if an unanticipated system failure were to occur. For components that have not met the Company's desired level of readiness, the Company will develop a specific contingency plan to determine the actions the Company would take if such component failed. At the present time, the Company is unable to develop a most reasonably likely worst case scenario for failure to achieve adequate Year 2000 compliance. The Company will be better able to develop such a scenario once the status of Year 2000 compliance of the Company's material vendors and suppliers is complete. The Company will monitor its vendors and suppliers, particularly the other telecommunications companies upon which the Company relies, to determine whether they are performing and implementing an adequate Year 2000 compliance plan in a timely manner. The Company acknowledges the possibility that the Company may become subject to potential claims by customers if the Company's operations are interrupted for an extended period of time. However, it is not possible to predict either the probability of such potential litigation, the amount that 54 could be in controversy or upon which party a court would place ultimate responsibility for any such interruption. The Company views Year 2000 compliance as a process that is inherently dynamic and will change in response to changing circumstances. While the Company believes that through execution and satisfactory completion of its Year 2000 compliance strategy its computer systems, software applications and electronics will be Year 2000 compliant, there can be no assurance until the Year 2000 occurs that all systems and all interfacing technology when running jointly will function adequately. Additionally, there can be no assurance that the assumptions made by the Company within its Year 2000 compliance strategy will prove to be correct, that the strategy will succeed or that the remedial actions being implemented will be able to be completed by the time necessary to avoid system or component failures. In addition, disruptions with respect to the computer systems of vendors or customers, which systems are outside the control of the Company, could impair the Company's ability to obtain necessary products or services to sell to its customers. Disruptions of the Company's computer systems, or the computer systems of the Company's vendors or customers, as well as the cost of avoiding such disruption, could have a material adverse effect on the Company's financial condition and results of operations. Accounting Change During fiscal 1996, the Company changed its method of accounting for long-term telecom services contracts. Under the new method, the Company recognizes revenue as services are provided and continues to charge direct selling expenses to operations as incurred. The Company had previously recognized revenue in an amount equal to the noncancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer, to the extent of direct installation and selling expense incurred in obtaining customers during the period in which such revenue was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract had been recognized ratably over the remaining noncancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry. As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995. The Company's results for fiscal 1996 include a charge of $3.5 million ($0.13 per share) relating to the cumulative effect of this change in accounting as of October 1, 1995. The effect of this change in accounting was not significant for fiscal 1996. If the new revenue recognition method had been applied retroactively, Telecom Services revenue would have decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995, respectively. See the Company's Consolidated Financial Statements and the related notes thereto contained elsewhere in this Annual Report. 55 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial position and cash flows are subject to a variety of risks in the normal course of business, which include market risks associated with movements in interest rates and, subsequent to February 17, 1999, equity prices. The Company routinely assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. The Company does not, in the normal course of business, use derivative financial instruments for trading or speculative purposes. Interest Rate Risk The Company's exposure to market risk associated with changes in interest rates relates primarily to the Company's investments in marketable securities and its senior indebtedness. The Company invests primarily in high grade short-term investments which consist of money market instruments, commercial paper, certificates of deposit, government obligations and corporate bonds, all of which are considered to be available for sale and generally have maturities of one year or less. The Company's short-term investment objectives are safety, liquidity and yield, in that order. As of December 31, 1998, the Company had approximately $262.8 million in cash and cash equivalents and short-term investments available for sale, at a weighted average fixed interest rate of 5.12%. A hypothetical 10% fluctuation in market rates of interest would cause a change in the fair value of the Company's investment in marketable securities at December 31, 1998 of approximately $0.7 million, and accordingly, would not cause a material impact on the Company's financial position, results of operations or cash flows. At December 31, 1998, the Company's outstanding indebtedness includes $1.6 billion under the 13 1/2 % Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9 7/8% Notes and $466.4 million under the 14 1/4% Preferred Stock, 14% Preferred Stock and 6 3/4% Preferred Securities. These instruments contain fixed annual interest and dividend rates, respectively, and accordingly, any change in market interest rates would have no impact on the Company's financial position, results of operations or cash flows. Future increases in interest rates could increase the cost of any new borrowings by the Company. The Company does not hedge against future changes in market rates of interest. Equity Price Risk On February 17, 1999, the Company completed the sale of the domestic operations of NETCOM to MindSpring, in exchange for a combination of cash and 376,116 shares of unregistered common stock of MindSpring, valued at approximately $79.76 per share at the time of the transaction. Currently, the Company bears some risk of market price fluctuations in its investment in MindSpring. The common stock of MindSpring is traded on the Nasdaq National Market and has, at March 29, 1999, a fair market value of $92.50 per share. Although changes in the fair market value of MindSpring common stock may affect the fair market value of the Company's investment and cause unrealized gains or losses, such gains or losses will not be realized until the securities are sold. In order to mitigate the risk associated with a decrease in the market value of 56 the Company's investment in MindSpring, the Company has entered into a hedging contract. During the term of the hedging contract, a hypothetical 10% fluctuation in the fair value of the common stock of MindSpring would not cause a material impact on the Company's financial position, results of operations or cash flows. The Company intends to liquidate its investment in MindSpring upon the effectiveness of the registration of common stock of MindSpring with the Securities and Exchange Commission, which is expected to occur in the near future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company appear on page F-1 of this Annual Report. The financial statement schedule required under Regulation S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1 of this Annual Report. Selected quarterly financial data required under this Item is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS The information required under Item 10 with respect to the Company is incorporated by reference from the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the Securities and Exchange Commission not later than April 30, 1999. The Directors and executive officers of each of Holdings-Canada and Holdings are set forth below. Holdings-Canada The Directors of Holdings-Canada are: Harry R. Herbst H. Don Teague The executive officers of Holdings-Canada are: J. Shelby Bryan - President and Chief Executive Officer Harry R. Herbst - Executive Vice President and Chief Financial Officer H. Don Teague - Executive Vice President, General Counsel and Secretary Holdings The Directors of Holdings are: J. Shelby Bryan (Chairman) Douglas I. Falk Harry R. Herbst H. Don Teague The executive officers of Holdings are: J. Shelby Bryan - President and Chief Executive Officer Douglas I. Falk - Executive Vice President - Telecom Harry R. Herbst - Executive Vice President and Chief Financial Officer H. Don Teague - Executive Vice President, General Counsel and Secretary J. Shelby Bryan, 53, was appointed President and Chief Executive Officer of Holdings-Canada and Holdings in May 1995. He has 19 years of experience in the telecommunications industry, primarily in the cellular business. He co-founded Millicom International Cellular S.A., a publicly owned corporation providing cellular service internationally, served as its President and Chief Executive Officer from 1985 to 1994 and has served as a Director through the present. Douglas I. Falk, 49, has been Executive Vice President-Telecom and Director of 58 Holdings since September 1998 and was President of ICG Satellite Services, Inc. from August 1996 to May 1998. Prior to joining the Company, Mr. Falk held several positions in the cruise line industry, including President of Norwegian Cruise Line, Senior Vice President - Marketing and Sales with Holland America Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his work in the cruise line industry, Mr. Falk held executive positions with MTI Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning Associates and The Procter and Gamble Company. Harry R. Herbst, 47, was appointed Executive Vice President, Chief Financial Officer and Director of Holdings-Canada and Holdings in August 1998 and has been a member of the Board of Directors of Holdings-Canada and Holdings since October 1995. Prior to joining the Company, Mr. Herbst was Vice President of Finance and Strategic Planning for Gulf Canada Resources Ltd. from November 1995 to June 1998 and Vice President and Treasurer of Gulf Canada Resources Ltd. from January to November 1995. Previously, Mr. Herbst was Vice President of Taxation for Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp. from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with Coopers & Lybrand. H. Don Teague, 56, joined the Company as Executive Vice President, General Counsel, Secretary and Director of Holdings-Canada and Holdings in May 1997. Prior to this position, Mr. Teague was Senior Vice President, Administration and Legal with Falcon Seaboard Holdings, L.P. and its predecessors from April 1994 through April 1997. From 1974 to April 1994, Mr. Teague was a partner in the law firm of Vinson & Elkins L.L.P. ITEM 11. EXECUTIVE COMPENSATION The information required under Item 11 is incorporated by reference from the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the Securities and Exchange Commission not later than April 30, 1999. Neither Holdings-Canada nor Holdings pays any form of compensation to any of their respective Directors or executive officers. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under Item 12 is incorporated by reference from the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the Securities and Exchange Commission not later than April 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K (A) (1) Financial Statements. The following financial statements are included in Item 8 of Part II: Page Independent Auditors' Report - Report of KPMG LLP . . . . . . . F-2 Independent Auditors' Report - Report of Ernst & Young LLP, as of December 31, 1996 and 1997 and for each of the Two Years in the Period Ended December 31, 1997 . . . . . . . . . . . . F-4 Independent Auditors' Report - Report of Ernst & Young LLP, as of December 31, 1996 and for the Three Months Then Ended. . . F-5 Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . F-6 Consolidated Statements of Operations, Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-8 Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996, and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 Consolidated Statements of Cash Flows, Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-11 Notes to Consolidated Financial Statements, December 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-14 (2) Financial Statement Schedule. The following Financial Statement Schedule is submitted herewith: Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1 Schedule II: Valuation and Qualifying Accounts . . . . . . . . . S-2 (3) List of Exhibits. (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. 2.1: Plan of Arrangement under Section 192 of the Canada Business Corporations Act. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)]. 60 (3) Corporate Organization. 3.1: Certificate of Incorporation of ICG Communications, Inc. dated April 11, 1996. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226]. 3.2: By-laws of ICG Communications, Inc. [Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-4226]. 3.3: Agreement and Plan of Reorganization by and among ICG Communications, Inc., ICG Canadian Acquisition, Inc., ICG Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated November 4, 1998. 3.4: Order of Amalgamation between ICG Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated December 22, 1998. 3.5: Memorandum and Articles of Association of ICG Holdings (Canada) Co. filed with the Registrar of Joint Stock Companies, Halifax, Nova Scotia. (4) Instruments Defining the Rights of Security Holders, Including Indentures. 4.1: Note Purchase Agreement, dated as of July 14, 1995, among the Registrant, IntelCom Group (U.S.A.), Inc., Morgan Stanley Group Inc., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Investments Limited, PGI Sweden AB, and Gregor von Opel and Morgan Stanley Group, Inc., as Agent for the Purchasers [Incorporated by reference to Exhibit 4.1 to Form 8-K of IntelCom Group Inc., dated July 18, 1995]. 4.2: Warrant Agreement, dated as of July 14, 1995, among the Registrant, the Committed Purchasers, and IntelCom Group (U.S.A.), Inc., as Warrant Agent [Incorporated by reference to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated July 18, 1995]. 4.3: First Amended and Restated Articles of Incorporation of ICG Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.), Inc., File No. 333-04569]. 4.4: Indenture, dated August 8, 1995, among IntelCom Group (U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.) Inc., File Number 33-96540]. 4.5: Indenture, dated April 30, 1996, among IntelCom Group (U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank 61 Colorado, National Association [Incorporated by reference to Exhibit 4.14 to Registration Statement on Form S-4 of IntelCom Group (U.S.A.) Inc., File No. 333-04569]. 4.6: Indenture, dated March 11, 1997, among ICG Holdings, Inc., ICG Communications, Inc. and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.15 to Registration Statement on Form S-4 of ICG Communications, Inc., File No. 333-24359]. 4.7: Written Action of the Manager of ICG Funding, LLC, dated as of September 24, 1997, with respect to the terms of the 6 3/4% Exchangeable Limited Liability Company Preferred Securities [Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495]. 4.8: Amended and Restated Limited Liability Company Agreement of ICG Funding, LLC, dated as of September 23, 1997 [Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495]. 4.9: Indenture, between ICG Services, Inc. and Norwest Bank Colorado, National Association, dated as of February 12, 1998 [Incorporated by reference to Exhibit 4.4 to ICG Services, Inc. Registration Statement on Form S-4 File No. 333-51037]. 4.10:Indenture, between ICG Services, Inc. and Norwest Bank Colorado, National Association, dated as of April 27, 1998 [Incorporated by reference to Exhibit 4.4 to ICG Services, Inc. Registration Statement on Form S-4 File No. 333-60653, as amended]. 4.11:Second Amended and Restated Articles of Incorporation of ICG Holdings, Inc., dated March 10, 1997. (9) Voting Trust Agreement. None. (10) Material Contracts. 10.1:Arrangement and Support Agreement dated June 27, 1996 between ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of ICG Communications, Inc. (Commission File No. 333-4226)]. 10.2:Incentive Stock Option Plan #2 [Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 10.3:Form of Stock Option Agreement for Incentive Stock Option Plan #2 [Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 10.4:Incentive Stock Option Plan #3 [Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 62 10.5:Form of Stock Option Agreement for Incentive Stock Option Plan #3 [Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 10.6:1994 Employee Stock Option Plan [Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 10.7:Form of Stock Option Agreement for 1994 Employee Stock Option Plan [Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-8 of IntelCom Group Inc., File No. 33-86346, filed November 14, 1994]. 10.8:Employment Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.5 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995]. 10.9:Stock Option Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.6 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995]. 10.10: Indemnification Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10.7 to Form 8-K of IntelCom Group Inc., as filed on August 2, 1995]. 10.11: Placement Agreement, dated as of August 3, 1995, among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan Stanley & Co. Incorporated [Incorporated by reference to Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on August 9, 1995]. 10.12: Employment Agreement between IntelCom Group Inc. and James D. Grenfell, dated November 1, 1995. [Incorporated by reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1995]. 10.13: Purchase and Sale Agreement, dated as of October 19, 1995, by and among ICG Wireless Services, Inc., IntelCom Group (U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc. [Incorporated by reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report on Form 10-K for the fiscal year ended September 30, 1995]. 10.14: ICG Communications, Inc., 401(k) Wrap Around Deferred Compensation Plan. [Incorporated by reference to Exhibit 10.42 to ICG Communications, Inc.'s Annual Report on Form 10-K/A for the fiscal year ended September 30, 1996.] 10.15: ICG Communications, Inc. 1996 Employee Stock Purchase Plan. [Incorporated by reference to the Registration Statement on Form S-8 of ICG Communications, Inc., File No. 33-14127, filed on October 14, 1996]. 10.16: Consulting Services Agreement, by and between IntelCom 63 Group Inc. and International Communications Consulting, Inc., effective January 1, 1996 [Incorporated by reference to Exhibit 10.44 to ICG Communications, Inc.'s Transition Report on Form 10-K/A for the three months ended December 31, 1996]. 10.17: Confidential General Release and Covenant Not to Sue, by and between ICG Communications, Inc. and John D. Field, dated November 5, 1996 [Incorporated by reference to Exhibit 10.45 to ICG Communications, Inc.'s Transition Report on Form 10-K/A for the three months ended December 31, 1996]. 10.18: Amendment, dated as of March 26, 1997, between ICG Communications, Inc. and J. Shelby Bryan, to Employment Agreement, dated as of May 30, 1995, between IntelCom Group Inc. and J. Shelby Bryan [Incorporated by reference to Exhibit 10 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997]. 10.19: 1996 Stock Option Plan [Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-8 of ICG Communications, Inc., File No. 333-25957, filed on April 28, 1997]. 10.20: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock Option Plan. 10.21: Employment Agreement, dated as of April 22, 1997, between ICG Communications, Inc. and Don Teague [Incorporated by reference to Exhibit 10.2 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997]. 10.22: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock Option Plan [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997]. 10.23a: Purchase Agreement between ICG Holdings, Inc. and TriNet Corporate Realty Trust, Inc., dated December 9, 1997. 10.23a: First Amendment to Purchase Agreement, by and between ICG Holdings, Inc. and TriNet Essential Facilities X, Inc., dated January 15, 1998. 10.23c: Assignment of Purchase Agreement, by and between TriNet Corporate Realty Trust, Inc., dated January 15, 1998. 10.23c: Commercial Lease - Net between TriNet Essential Facilities X, Inc. and ICG Holdings, Inc., dated January 15, 1998. 10.23e: Continuing Lease Guaranty, by ICG Communications, Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998. 10.23f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc. to TriNet Essential Facilities X, Inc., dated January 20, 1998. 10.24: Agreement and Plan of Merger, dated October 12, 1997, by and among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM On-Line Communication Services, Inc. [Incorporated by reference to Exhibit 2.1 to Form 8-K, dated January 21, 1998]. 10.25: Amendment to Agreement and Plan of Merger, dated December 64 15, 1997, by and among ICG Communications, Inc., ICG Acquisition, Inc. and NETCOM On-Line Communication Services, Inc. [Incorporated by reference to Exhibit 2.2 to Form 8-K, dated January 21, 1998]. 10.26: Employment Agreement, dated July 1, 1998, between ICG Communications, Inc. and Harry R. Herbst [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998]. 10.27: Employment Agreement, dated September 23, 1998, between ICG Communications, Inc. and Douglas I. Falk [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998]. 10.28: Asset Purchase Agreement by and between MindSpring Enterprises, Inc. and NETCOM On-Line Communication Services, Inc., dated as of January 5, 1999 [Incorporated by reference to Exhibit 10.1 to ICG Communications, Inc.'s Current Report on Form 8-K, dated March 4, 1999]. 10.29: ICG Communications, Inc. 1998 Stock Option Plan. 10.30: Form of Stock Option Agreement for 1998 Stock Option Plan. 10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock Option Plan, dated December 15, 1998. 10.32: Form of Agreement regarding Gross-Up Payments, by and between ICG Communications, Inc. and each of J. Shelby Bryan, Harry R. Herbst, Douglas I. Falk and H. Don Teague, dated December 16, 1998. (11) Statement re Computation of per Share Earnings. Not Applicable (12) Statement re Computation of Ratios. Not Applicable (13) Annual Report to Security Holders. Not Applicable (21) Subsidiaries of the Registrant. 21.1: Subsidiaries of the Registrant. (22) Published Report re Matters Submitted to Vote of Security Holders Not Applicable (23) Consents. 23.1: Consent of KPMG LLP. 23.2: Consent of Ernst & Young LLP. 65 (24) Power of Attorney. Not Applicable (27) Financial Data Schedule. 27.1:Financial Data Schedule of ICG Communications, Inc. for the Fiscal Year Ended December 31, 1998. (B) Report on Form 8-K. The following report on Form 8-K was filed by the Registrants during the fiscal quarter ended December 31, 1998: ICG Communications, Inc. (i) Current Report on Form 8-K dated ICG Holdings (Canada), Inc. November 4, 1998, regarding the ICG Holdings, Inc.: announcement of the Company's earnings information and results of operations for the quarterended September 30, 1998. (C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3). (D) Financial Statement Schedule. The financial statement schedule required by this Item is listed under Item 14(A)(2). 66 FINANCIAL STATEMENTS Page Independent Auditors' Report - Report of KPMG LLP . . . . . . . . . . . F-2 Independent Auditors' Report - Report of Ernst & Young LLP, as of December 31, 1996 and 1997 and for each of the Two Years in the Period Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-4 Independent Auditors' Report - Report of Ernst & Young LLP, as of December 31, 1996 and for the Three Months Then Ended. . . . . . . . . F-5 Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . . . . . F-6 Consolidated Statements of Operations, Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998. . . . . . . . . . . F-8 Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996, and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-10 Consolidated Statements of Cash Flows, Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-11 Notes to Consolidated Financial Statements, December 31, 1997 and 1998 . F-14 F-1 Independent Auditors' Report - Report of KPMG LLP The Board of Directors and Stockholders ICG Communications, Inc.: We have audited the accompanying consolidated balance sheets of ICG Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the fiscal year ended September 30, 1996, the three-month period ended December 31, 1996, and the fiscal years ended December 31, 1997 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of NETCOM On-Line Communication Services, Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the Company, as of December 31, 1997 or for the fiscal year ended December 31, 1996, the three-month period ended December 31, 1996, or the fiscal year ended December 31, 1997, whose total assets constitute 11.7 percent at December 31, 1997, and whose loss from operations constitutes 100.5 percent in fiscal 1996, 96.0 percent in the three months ended December 31, 1996, and 83.8 percent in fiscal 1997 of the consolidated loss from discontinued operations. Those consolidated financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for NETCOM, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ICG Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the fiscal year ended September 30, 1996, the three-month period ended December 31, 1996, and the fiscal years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. F-2 As explained in note 2 to the consolidated financial statements, during fiscal year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts. KPMG LLP Denver, Colorado February 15, 1999 F-3 Independent Auditors' Report - Report of Ernst & Young LLP The Board of Directors and Stockholders NETCOM On-Line Communication Services, Inc. We have audited the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NETCOM On-Line Communication Services, Inc. at December 31, 1997 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California February 13, 1998 F-4 Independent Auditors' Report - Report of Ernst & Young LLP The Board of Directors and Stockholders NETCOM On-Line Communication Services, Inc. We have audited the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the three months then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NETCOM On-Line Communication Services, Inc. at December 31, 1996 and the consolidated results of its operations and its cash flows for the three months then ended, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California April 16, 1998 F-5 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1998 - ------------------------------------------------------------------------------
December 31, ------------------------------------------------ Assets 1997 1998 - ------ ------------------------ ---------------------- (in thousands) Current assets: Cash and cash equivalents $ 118,569 210,831 Short-term investments available for sale (note 6) 112,281 52,000 Receivables: Trade, net of allowance of $5,254 and $15,473 at December 31, 1997 and 1998, respectively (note 14) 57,163 132,920 Revenue earned, but unbilled 8,599 11,063 Due from affiliate (note 13) 9,384 - Other (note 13) 1,696 1,156 ------------------------ ---------------------- 76,842 145,139 ------------------------ ---------------------- Inventory 3,901 2,821 Prepaid expenses and deposits 10,495 12,036 Net current assets of discontinued operations (note 3) 38,331 - ------------------------ ---------------------- Total current assets 360,419 422,827 ------------------------ ---------------------- Property and equipment (notes 7, 9 and 10) 737,424 1,112,067 Less accumulated depreciation (105,970) (177,933) ------------------------ ---------------------- Net property and equipment 631,454 934,134 ------------------------ ---------------------- Long-term notes receivable from affiliate and others, net (note 13) 10,375 - Restricted cash (note 11) 24,649 16,912 Other assets, net of accumulated amortization: Goodwill (note 4) 75,673 130,503 Deferred financing costs (note 10) 23,196 35,958 Transmission and other licenses 6,031 5,659 Deposits and other (note 8) 9,066 25,189 ------------------------ ---------------------- 113,966 197,309 ------------------------ ---------------------- Net non-current assets of discontinued operations (note 3) 76,577 54,243 ------------------------ ---------------------- Total assets (note 15) $ 1,217,440 1,625,425 ======================== ====================== (Continued)
F-6 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued - ------------------------------------------------------------------------------
December 31, ---------------------------------------------- Liabilities and Stockholders' Deficit 1997 1998 - ------------------------------------- ------------------------ --------------------- (in thousands) Current liabilities: Accounts payable $ 27,458 33,781 Accrued liabilities 56,817 55,816 Deferred revenue 5,049 9,892 Current portion of capital lease obligations (notes 9 and 14) 5,637 5,086 Current portion of long-term debt (note 10) 1,784 46 Net current liabilities of discontinued operations (note 3) - 23,272 ------------------------ --------------------- Total current liabilities 96,745 127,893 ------------------------ --------------------- Capital lease obligations, less current portion (notes 9 and 14) 66,939 63,359 Long-term debt, net of discount, less current portion (note 10) 890,568 1,598,998 ------------------------ --------------------- Total liabilities 1,054,252 1,790,250 ------------------------ --------------------- Redeemable preferred stock of subsidiary ($301.2 million and $346.2 million liquidation value at December 31, 1997 and 1998, respectively) (note 11) 292,442 338,310 Company-obligated mandatorily redeemable preferred securities of subsidiary limited liability company which holds solely Company preferred stock ($133.4 million liquidation value at December 31, 1997 and 1998) (note 11) 127,729 128,042 Stockholders' deficit (note 12): Common stock, $.01 par value, 100,000,000 shares authorized; 43,974,659 and 46,360,185 shares issued and outstanding at December 31, 1997 and 1998, respectively (notes 1 and 12) 749 584 Additional paid-in capital 533,541 577,820 Accumulated deficit (791,417) (1,209,462) Accumulated other comprehensive income (loss) 144 (119) ------------------------ --------------------- Total stockholders' deficit (256,983) (631,177) ------------------------ --------------------- Commitments and contingencies (notes 10, 11, 13 and 14) Total liabilities and stockholders' deficit $ 1,217,440 1,625,425 ======================== =====================
See accompanying notes to consolidated financial statements. F-7 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998 - ------------------------------------------------------------------------------
Fiscal year ended Three months ended Fiscal years ended September 30, December 31, December 31, -------------------------------- ------------------------------ 1996 1995 1996 1997 1998 -------------- --------------- ---------------- ---------------- ------------- (unaudited) (in thousands, except per share data) Revenue (notes 2, 14 and 15) $ 154,143 34,544 49,477 245,022 397,619 Operating costs and expenses: Operating costs 121,983 26,572 42,485 217,927 254,689 Selling, general and administrative expenses 75,646 18,248 23,868 148,254 183,683 Depreciation and amortization (notes 7 and 15) 30,030 4,833 9,691 56,501 101,545 Provision for impairment of long-lived assets (note 16) 9,994 - - 9,261 - Net loss (gain) on disposal of long-lived assets note 5) 5,128 1,030 (772) 243 4,055 Restructuring costs (note 17) - - - - 2,339 -------------- --------------- ---------------- ---------------- ------------- Total operating costs and expenses 242,781 50,683 75,272 432,186 546,311 -------------- --------------- ---------------- ---------------- ------------- Operating loss (88,638) (16,139) (25,795) (187,164) (148,692) Other income (expense): Interest expense (notes 10 and 15) (85,714) (15,215) (24,454) (117,520) (170,127) Interest income 19,212 3,750 5,962 21,907 28,414 Other (expense) income, net (3,627) 7 (64) (358) (4,652) -------------- --------------- ---------------- ---------------- ------------- (70,129) (11,458) (18,556) (95,971) (146,365) -------------- --------------- ---------------- ---------------- ------------- Loss from continuing operations before income taxes, preferred dividends, share of losses and cumulative effect of change in accounting (158,767) (27,597) (44,351) (283,135) (295,057) Income tax benefit (expense) (note 18) 5,131 - - - (90) -------------- --------------- ---------------- ---------------- ------------- Loss from continuing operations before preferred dividends, share of losses and cumulative effect of change in accounting (153,636) (27,597) (44,351) (283,135) (295,147) Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses (note 11) (25,409) (3,294) (4,988) (38,117) (55,183) Share of losses of joint venture (1,814) (228) - - - -------------- --------------- ---------------- ---------------- ------------- Loss from continuing operations before cumulative effect of change in accounting $ (180,859) (31,119) (49,339) (321,252) (350,330) -------------- --------------- ---------------- ---------------- ------------- (Continued)
F-8 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations, Continued - ------------------------------------------------------------------------------
Fiscal year Three months ended Fiscal years ended ended December 31, December 31, September 30, -------------------------------- -------------------------------- 1996 1995 1996 1997 1998 ---------------- --------------- ---------------- ---------------- --------------- (unaudited) (in thousands, except per share data) Discontinued operations (notes 1 and 3): Loss from discontinued operations $ (44,060) (5,516) (11,974) (39,483) (65,938) Loss on disposal of discontinued operations - - - - (1,777) ---------------- --------------- ---------------- ---------------- --------------- (44,060) (5,516) (11,974) (39,483) (67,715) ---------------- --------------- ---------------- ---------------- --------------- Loss before cumulative effect of change in accounting (224,919) (36,635) (61,313) (360,735) (418,045) ---------------- --------------- ---------------- ---------------- --------------- Cumulative effect of change in accounting (note 2) (3,453) (3,453) - - - ---------------- --------------- ---------------- ---------------- --------------- Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045) ================ =============== ================ ================ =============== Other comprehensive income (loss): Foreign currency translation adjustment 699 (28) 544 (527) (263) Unrealized gain (loss) on short-term investments available for sale (note 6) 540 - 540 (540) - ---------------- --------------- ---------------- ---------------- --------------- Other comprehensive income (loss) 1,239 (28) 1,084 (1,067) (263) ---------------- --------------- ---------------- ---------------- --------------- Comprehensive loss $ (227,133) (40,116) (60,229) (361,802) (418,308) ================ =============== ================ ================ =============== Loss per share - basic and diluted: Continuing operations before cumulative effect of change in accounting $ (4.90) (0.96) (1.18) (7.56) (7.75) Discontinued operations (1.20) (0.17) (0.29) (0.93) (1.50) Cumulative effect of change in accounting (0.09) (0.11) - - - ---------------- --------------- ---------------- ---------------- --------------- Net loss per share - basic and diluted $ (6.19) (1.24) (1.47) (8.49) (9.25) ================ =============== ================ ================ =============== Weighted average number of shares outstanding - basic and diluted 36,875 32,343 41,760 42,508 45,194 ================ =============== ================ ================ ===============
See accompanying notes to consolidated financial statements. F-9 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996, and Fiscal Years Ended December 31, 1997 and 1998 - -------------------------------------------------------------------------------
Accumulated Total Common stock Additional other stockholders' ---------------------------- paid-in Accumulated comprehensive equity Shares Amount capital deficit (loss) income (deficit) -------------- -------------- ------------ ------------- --------------- -------------- (in thousands) Balances at October 1, 1995 34,565 $ 190,849 229,667 (152,487) (28) 268,001 Shares issued for cash in connection with the exercise of options and warrants (note 12) 1,983 1,747 2,498 - - 4,245 Shares issued as repayment of debt and related accrued interest 130 687 - - - 687 Shares issued in connection with business combinations (note 4) 64 749 - - - 749 Conversion of ICG Holdings (Canada), Inc. preferred shares 496 3,780 - - - 3,780 Shares issued as contribution to 401(k) plan (note 19) 87 856 300 - - 1,156 Shares issued upon conversion of subordinated notes 4,413 76,336 - - - 76,336 Repurchase of warrants - - (2,671) - - (2,671) Compensation expense related to issuance of common stock options - - 53 - - 53 Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (248,682) 248,682 - - - Unrealized gains on short-term investmentsavailable for sale - - - - 540 540 Cumulative foreign currency translation adjustment - - - - 699 699 Net loss - - - (228,372) - (228,372) -------------- -------------- ------------ ------------- --------------- -------------- Balances at September 30, 1996 41,738 26,322 478,529 (380,859) 1,211 125,203 Shares issued for cash in connection with the exercise of options and warrants (note 12) 132 1,800 284 - - 2,084 Shares issued in connection with business combination (note 4) 18 - 350 - - 350 Shares issued as contribution to 401(k) plan (note 19) 19 - 480 - - 480 Shares issued upon conversion of subordinated notes 23 417 - - - 417 Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (20,350) 20,350 - - - Net loss - - - (61,313) - (61,313) Net loss of NETCOM for the three months ended December 31, 1996 (note 2) - - - 11,490 - 11,490 ------------- -------------- -------------- ------------- --------------- -------------- Balances at December 31, 1996 41,930 8,189 499,993 (430,682) 1,211 78,711 Shares issued for cash in connection with the exercise of options and warrants (note 12) 938 5 4,111 - - 4,116 Shares issued in connection with business combination (note 4) 687 7 15,953 - - 15,960 Shares issued for cash in connection with employee stock purchase plan (note 12) 240 2 3,020 - - 3,022 Shares issued as contribution to 401(k) plan (note 19) 179 2 3,008 - - 3,010 Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (7,456) 7,456 - - - Reversal of unrealized gains on short-term investments available for sale - - - - (540) (540) Cumulative foreign currency translation adjustment - - - - (527) (527) Net loss - - - (360,735) - (360,735) ------------- ------------- ------------- -------------- --------------- -------------- Balances at December 31, 1997 43,974 749 533,541 (791,417) 144 (256,983) Shares issued for cash by subsidiary, net of selling costs 127 1 3,384 - - 3,385 Shares issued for cash in connection with the exercise of options and warrants (note 12) 1,519 15 19,268 - - 19,283 Shares issued in connection with business combinations (note 4) 502 5 15,527 - - 15,532 Shares issued for cash in connection with the employee stock purchase plan (note 12) 111 1 2,249 - - 2,250 Shares issued as contribution to 401(k) plan (note 19) 127 2 3,662 - - 3,664 Exchange of ICG Holdings (Canada), Inc. common shares for ICG common stock - (189) 189 - - - Cumulative foreign currency translation adjustment - - - - (263) (263) Net loss - - - (418,045) - (418,045) ------------- ------------- ------------- -------------- --------------- -------------- Balances at December 31, 1998 46,360 $ 584 577,820 (1,209,462) (119) (631,177) ============= ============= ============= ============== =============== ==============
See accompanying notes to consolidated financial statements. F-10 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1995 (unaudited) and 1996, and Fiscal Years Ended December 31, 1997 and 1998 - ------------------------------------------------------------------------------
Fiscal year Three months ended Fiscal years ended ended December 31, December 31, September 30, ---------------------------- ---------------------------- 1996 1995 1996 1997 1998 --------------- ------------- ------------- ------------- -------------- (unaudited) (in thousands) Cash flows from operating activities: Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045) Loss from discontinued operations 44,060 5,516 11,974 39,483 67,715 Adjustments to reconcile net loss to net cash used by operating activities of continuing operations: Cumulative effect of change in accounting 3,453 3,453 - - - Share of losses of joint venture 1,814 228 - - - Accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses 24,383 2,268 4,988 37,002 55,183 Depreciation and amortization 30,030 4,833 9,691 56,501 101,545 Provision for uncollectible accounts 1,531 977 914 3,985 12,031 Compensation expense related to issuance of common stock options 53 14 - - - Interest expense deferred and included in long-term debt, net of amounts capitalized on assets under construction 63,951 12,004 22,087 102,947 152,601 Interest expense deferred and included in capital lease obligations 4,416 - 1,716 6,345 5,637 Amortization of deferred financing costs included in interest expense 2,573 527 612 2,514 4,478 Write-off of non-operating assets 2,650 - - 200 250 Contribution to 401(k) plan through issuance of common shares 1,156 405 480 3,010 3,664 Deferred income tax benefit (5,329) - - - - Provision for impairment of long-lived assets 9,994 - - 9,261 - Net loss (gain) on disposal of long-lived assets 5,128 1,030 (772) 243 4,055 Change in operating assets and liabilities, excluding the effects of business combinations, dispositions and non-cash transactions: Receivables (14,150) (3,865) (8,632) (28,891) (96,659) Inventory (1,200) (272) 361 (2,822) 1,198 Prepaid expenses and deposits (2,938) (459) (901) (5,405) (1,492) Accounts payable and accrued liabilities 16,244 7,944 9,784 19,541 (2,452) Deferred revenue 1,454 779 2,575 (370) 4,933 --------------- ------------- ------------- ------------- -------------- Net cash used by operating activities of continuing operations $ (39,099) (4,706) (6,436) (117,191) (105,358) --------------- ------------- ------------- ------------- -------------- (Continued)
F-11 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued - ------------------------------------------------------------------------------
Fiscal year Three months ended Fiscal years ended ended December 31, December 31, September 30, --------------------------- -------------------------- 1996 1995 1996 1997 1998 --------------- ------------ ------------ ------------ ------------ (unaudited) (in thousands) Cash flows from investing activities: Decrease (increase) in notes receivable from affiliate and others $ 4 (1,263) 133 (9,552) (4,880) Advances to affiliates (109) (15) - - - Investment in and advances to joint venture (4,308) - - - - Payments for business acquisitions, net of cash acquired (8,441) - - (45,861) (67,841) Acquisition of property, equipment and other assets (121,905) (26,798) (50,818) (268,796) (367,519) Payments for construction of corporate headquarters (1,501) - (7,945) (29,432) (4,944) Proceeds from disposition of property, equipment and other assets 21,593 21,146 2,057 15,125 386 Proceeds from sale of subsidiary, net of selling costs and cash included in sale - - - - 6,874 Proceeds from sale of corporate headquarters, net of selling and other costs - - - - 30,283 (Purchase) sale of short-term investments available for sale (6,832) (4,979) (25,769) (65,580) 60,281 (Increase) decrease in restricted cash (13,333) (13,333) - (25,416) 7,737 Purchase of minority interest in subsidiaries - - - - (9,459) --------------- ------------ ------------ ------------ ------------ Net cash used by investing activities of continuing operations (134,832) (25,242) (82,342) (429,512) (349,082) --------------- ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock: Sale by subsidiary - - - - 3,385 Business combination - - - 15,960 - Exercise of options and warrants 1,894 101 2,084 4,116 19,283 Employee stock purchase plan - - - 1,319 2,250 Proceeds from issuance of redeemable preferred securities of subsidiaries, net of issuance costs 144,000 - - 223,628 - Payments of preferred dividends - - - (1,240) (8,927) Redemption of preferred shares (5,570) (5,570) - - - Repurchase of redeemable preferred stock of subsidiary and payment of accrued dividend (32,629) - - - - Repurchase of redeemable warrants (2,671) - - - - Proceeds from issuance of short-term debt 17,500 17,500 - - - Principal payments on short-term debt (21,192) (3,692) - - - Proceeds from issuance of long-term debt 300,034 - - 99,908 550,574 Deferred long-term debt issuance costs (11,915) - - (3,554) (17,591) Principal payments on capital lease obligations (16,720) (2,991) (3,691) (30,403) (11,195) Principal payments on long-term debt (16,920) (13,761) (279) (1,598) (6,864) --------------- ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities of continuing operations 355,811 (8,413) (1,886) 308,136 530,915 --------------- ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents of continuing operations 181,880 (38,361) (90,664) (238,567) 76,475 Net cash (used) provided by discontinued operations (728) (359) (602) (2,154) 15,787 Cash and cash equivalents, beginning of period 269,404 269,404 450,556 359,290 118,569 --------------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 450,556 230,684 359,290 118,569 210,831 =============== ============ ============ ============ ============ (Continued)
F-12 ICG COMMUNICATIONS, INC. ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued - ------------------------------------------------------------------------------
Fiscal year Three months ended Fiscal years ended ended December 31, December 31, September 30, -------------------------- -------------------------- 1996 1995 1996 1997 1998 ----------------- ------------ ------------ ------------ ----------- (unaudited) (in thousands) Supplemental disclosure of cash flows information of continuing operations: Cash paid for interest $ 14,774 2,684 39 5,714 7,411 ================= ============ ============ ============ ========== Cash paid for income taxes $ - - - - 90 ================= ============ ============ ============ ========== Supplemental schedule of non-cash investing and financing activities of continuing operations: Common stock issued in connection with business combinations, repayment of debt or conversion of liabilities to equity $ 77,772 - 350 - 15,532 ================= ============ ============ ============ ========== Assets acquired under capital leases $ 55,030 84 19,479 - 1,427 ================= ============ ============ ============ ==========
See accompanying notes to consolidated financial statements. F-13 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997 and 1998 - --------------------------------------------------------------------==-------- (1) Organization and Nature of Business ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated on April 11, 1996, for the purpose of becoming the new publicly-traded U.S. parent company of ICG Holdings (Canada), Inc., a Canadian federal corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation ("Holdings"), and its subsidiaries. On September 17, 1997, ICG formed a new special purpose entity, ICG Funding, LLC, a Delaware limited liability company and wholly owned subsidiary of ICG ("ICG Funding"). On January 21, 1998, ICG completed a merger with NETCOM On-Line Communication Services, Inc. ("NETCOM"). At the effective time of the merger, each outstanding share of NETCOM common stock, $.01 par value, was automatically converted into shares of ICG common stock, $.01 par value ("ICG Common Stock"), at an exchange ratio of 0.8628 shares of ICG Common Stock per NETCOM common share. The Company issued approximately 10.2 million shares of ICG Common Stock in connection with the merger, valued at approximately $284.9 million on the date of the merger. The business combination was accounted for as a pooling of interests. Effective November 3, 1998, the Company's board of directors adopted a formal plan to dispose of the operations of NETCOM (see note 3) and, accordingly, the Company's consolidated financial statements reflect the operations and net assets of NETCOM as discontinued for all periods presented. The Company completed the sales of the operations of NETCOM on February 17 and March 16, 1999. In conjunction with the sales, the legal name of the NETCOM subsidiary was changed to ICG PST, Inc. ("PST"). On January 23, 1998, ICG formed ICG Services, Inc., a Delaware corporation and wholly owned subsidiary of ICG ("ICG Services"). ICG Services is the parent company of PST (formerly NETCOM) and ICG Equipment, Inc., a Colorado corporation formed on January 23, 1998 to purchase or lease telecommunications equipment, software, network capacity and related services, and in turn, lease such assets to Holdings' subsidiaries. ICG and its subsidiaries, including ICG Services and its subsidiaries, are collectively referred to as the "Company." Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged their common shares on a one-for-one basis for either (i) shares of ICG Common Stock, or (ii) Class A common shares of Holdings-Canada (the "Class A Shares"), which were exchangeable, F-14 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------ (1) Organization and Nature of Business (continued) prior to January 1, 1999, at any time on a one-for-one basis into shares of ICG Common Stock. On August 2, 1996, 28,795,132, or approximately 98%, of the total issued and outstanding common shares of Holdings-Canada were exchanged for an equal number of shares of Common Stock of ICG. In accordance with generally accepted accounting principles, the Arrangement was accounted for in a manner similar to a pooling of interests since ICG and Holdings-Canada had common shareholders, and the number of shares outstanding and the weighted average number of shares outstanding reflected the equivalent shares outstanding for the combined companies. On November 25, 1998, the shareholders of Holdings-Canada approved the Plan of Reorganization (the "Reorganization") among ICG, Holdings-Canada, ICG Canadian Acquisition, Inc., a newly formed Delaware corporation and wholly owned subsidiary of ICG ("ICG Acquisition"), and ICG Holdings (Canada) Co., a newly formed Nova Scotia unlimited liability company and wholly owned subsidiary of ICG Acquisition. Pursuant to the Reorganization, on December 1, 1998, ICG Acquisition acquired 100% of the issued and outstanding Class A Shares of Holdings-Canada, including those Holdings-Canada common shares owned by ICG, in exchange solely for voting common stock of ICG Acquisition which was contributed to ICG Acquisition as part of the Reorganization. On January 1, 1999, Holdings-Canada merged with and into ICG Holdings (Canada) Co. The merger and Reorganization was accounted for in a manner similar to a pooling of interests since the transactions involved entities under common control. The Company's principal business activity is telecommunications services, including Telecom Services, Network Services and Satellite Services. Telecom Services consists primarily of the Company's competitive local exchange carrier operations which provide services to business end users, Internet service providers ("ISPs") and long distance carriers and resellers. Network Services supplies information technology services and selected networking products, focusing on network design, installation, maintenance and support for a variety of end users, including Fortune 1000 firms and other large businesses and telecommunications companies. Satellite Services consists of satellite voice, data and video services provided to major cruise ship lines, the U.S. Navy, the offshore oil and gas industry and integrated communications providers. F-15 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements give retroactive effect to the merger of ICG and NETCOM on January 21, 1998, which was accounted for as a pooling of interests, and include the accounts of NETCOM and its subsidiaries as of the end of and for the periods presented. Effective November 3, 1998, the Company's board of directors adopted a formal plan to dispose of the operations of NETCOM (see note 3) and, accordingly, the accompanying consolidated financial statements reflect the operations of NETCOM as discontinued for all periods presented. Financial information prior to the completion of the Arrangement on August 2, 1996 represents the combined financial position and results of operations of NETCOM as well as Holdings-Canada and Holdings, which are considered to be predecessor entities to ICG. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Fiscal Year Ends of ICG and NETCOM The Company changed its fiscal year end to December 31 from September 30, effective January 1, 1997. References to fiscal 1996, 1997 and 1998 relate to the years ended September 30, 1996 and December 31, 1997 and 1998, respectively. Unaudited consolidated statements of operations and cash flows for the three months ended December 31, 1995 have been included in the accompanying consolidated financial statements for comparative purposes. Prior to the merger, NETCOM's consolidated financial statements were prepared using a year end of December 31. Accordingly, the consolidated statements of operations for fiscal 1996 reflect the combination of NETCOM's results of operations for the year ended December 31, 1996 with ICG's results of operations for the year ended September 30, 1996. Consequently, NETCOM's results of operations for the three months ended December 31, 1996 have been combined with ICG's results of operations for the same period in the accompanying consolidated statement of operations, although they have been presented as discontinued (see note 3). The F-16 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) net loss of NETCOM for the three months ended December 31, 1996 has been eliminated in the consolidated statement of stockholders' equity (deficit). (c) Cash Equivalents and Short-term Investments Available for Sale The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests primarily in high grade short-term investments which consist of money market instruments, commercial paper, certificates of deposit, government obligations and corporate bonds, all of which are considered to be available for sale and generally have maturities of one year or less. The Company's short-term investment objectives are safety, liquidity and yield, in that order. The Company carries all cash equivalents at cost, which approximates fair value. Short-term investments available for sale are carried at amortized cost, which approximates fair market value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity (deficit). Realized gains and losses and declines in value judged to be other than temporary are included in the statement of operations. (d) Inventory Inventory, consisting of satellite systems equipment and equipment to be utilized in the installation of communications systems, services and networks for customers, is recorded at the lower of cost or market, using the first-in, first-out method of accounting for cost. (e) Investments Investments representing an interest of 20% or more, but less than 50% are accounted for using the equity method of accounting, under which the Company's share of earnings or losses are reflected in operations and dividends are credited against the investment when received. Losses recognized in excess of the Company's investment due to additional investment or financing requirements, or guarantees, are recorded as a liability in the consolidated financial statements. Investments of less than a 20% equity interest are accounted for using the cost method, unless the Company exercises significant influence and/or control over the operations of the F-17 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) investee company, in which case the equity method is used. As of December 31, 1998, the Company held no equity interests in investee companies of 50% or less. (f) Property and Equipment Property and equipment are stated at cost. Costs of construction are capitalized, including interest costs related to construction. Equipment held under capital leases is stated at the lower of the fair value of the asset or the net present value of the minimum lease payments at the inception of the lease. For equipment held under capital leases, depreciation is provided using the straight-line method over the estimated useful lives of the assets owned, or the related lease term, whichever is shorter. Estimated useful lives of major categories of property and equipment are as follows: Furniture, fixtures and office equipment 3 to 7 years Machinery and equipment 3 to 8 years Fiber optic equipment 8 years Switch equipment 10 years Fiber optic network 20 years Buildings and improvements 31.5 years (g) Capitalized Labor Costs Also included in property and equipment are capitalized labor and other costs associated with network development, service installation and internal-use software development. The Company capitalizes costs of direct labor and other employee benefits associated with the development, installation and expansion of the Company's networks. Depreciation begins in the period the network is substantially complete and available for use and is recorded on a straight-line basis over the estimated useful life of the equipment or network, ranging from 8 to 20 years. F-18 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) The Company capitalizes costs of direct labor and other employee benefits associated with installing and provisioning local access lines for new customers and providing new services to existing customers, since these costs are directly associated with multi-period, contractual, revenue-producing activities. Direct labor costs are capitalized only when directly related to the provisioning of customer services with multi-period contracts. Capitalization begins upon the acceptance of the customer order and continues until the installation is complete and the service is operational. Capitalized service installation costs are depreciated on a straight-line basis over 2 years, the average customer contract term. The Company capitalizes costs of direct labor and other employee benefits associated with the development of internal-use computer software in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Internal-use software costs are depreciated over the estimated useful life of the software, typically 2 to 5 years, beginning in the period when the software is substantially complete and ready for use. (h) Other Assets Amounts related to the acquisition of transmission and other licenses are recorded at cost and amortized over 20 years using the straight-line method. Goodwill results from the application of the purchase method of accounting for business combinations and is amortized over a maximum of 20 years using the straight-line method. Rights of way, minutes of use, and non-compete agreements are recorded at cost, and amortized using the straight-line method over the terms of the agreements, ranging from 2 to 12 years. Amortization of deferred financing costs is provided over the life of the related financing agreement, the maximum term of which is 10 years. (i) Foreign Currency Translation Adjustments The functional currency for all foreign operations of NETCOM, which were sold subsequent to December 31, 1998, is the local currency. As such, all assets and liabilities denominated in foreign currencies are translated at the exchange rate on F-19 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) the balance sheet date. Revenue and costs and expenses are translated at weighted average rates of exchange prevailing during the period. Translation adjustments are included in other comprehensive income (loss), which is a separate component of stockholders' equity (deficit). Gains and losses resulting from foreign currency transactions are included in discontinued operations and are not significant for the periods presented. (j) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. (k) Revenue Recognition The Company recognizes Telecom Services and Satellite Services revenue as services are provided and charges direct selling expenses to operations as incurred. Revenue from Network Services contracts for the design and installation of communications systems and networks, which are generally short-term in duration, is recognized using the percentage of completion method of accounting. Maintenance revenue is recognized as services are provided. Uncollectible trade receivables are accounted for using the allowance method. Revenue which has been earned under the percentage of completion method, but has not been billed to the customer, is included in revenue earned, but unbilled in the consolidated financial statements. Deferred revenue includes monthly advance billings to customers for certain services provided by the Company's Telecom Services and Satellite Services, as well as Network Services revenue which has been billed to the customer in compliance with contract terms, but not yet earned under the percentage of completion method. F-20 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) NETCOM recognizes revenue and operating costs on the same basis as Telecom Services and Satellite Services, although such amounts are included in loss from discontinued operations for all periods presented. Prior to January 1, 1996, the Company recognized Telecom Services revenue in an amount equal to the non-cancelable portion of the contract, which is a minimum of one year on a three-year or longer contract, at the inception of the contract and upon activation of service to the customer to the extent of direct installation and selling expenses incurred in obtaining customers during the period in which such revenue was recognized. Revenue recognized in excess of normal monthly billings during the year was limited to an amount which did not exceed such installation and selling expense. The remaining revenue from the contract was recognized ratably over the remaining non-cancelable portion of the contract. The Company believes the new method is preferable because it provides a better matching of revenue and related operating expenses and is more consistent with accounting practices within the telecommunications industry. As required by generally accepted accounting principles, the Company has reflected the effects of the change in accounting as if such change had been adopted as of October 1, 1995, and has included in the results of operations for fiscal 1996 a charge of approximately $3.5 million relating to the cumulative effect of this change in accounting. Other than the cumulative effect of adopting this new method of accounting, the effect of this change in accounting for the periods presented was not significant. (l) Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-21 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) (m) Net Loss Per Share Net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding. Weighted average number of shares outstanding for the three months ended December 31, 1995 represents outstanding Holdings-Canada common shares and ICG Common Stock resulting from the exchange of NETCOM common shares. Weighted average number of shares outstanding for fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998 represents Holdings-Canada common shares outstanding for the period from October 1, 1995 through August 2, 1996, and combined ICG Common Stock and Holdings-Canada Class A common shares outstanding for the periods presented subsequent to August 5, 1996. Net loss per share is determined in accordance with Financial Accounting Standards Board Statement No. 128, Earnings Per Share ("SFAS 128"), which revises the calculation and presentation provisions of Accounting Principles Board Opinion No. 15 and related interpretations. Under SFAS 128, basic loss per share is computed on the basis of weighted average common shares outstanding. Diluted loss per share considers potential common stock instruments in the calculation of weighted average common shares outstanding. Potential common stock instruments, which include options, warrants and convertible subordinated notes and preferred securities, are not included in the net loss per share calculation as their effect is anti-dilutive. (n) Stock-Based Compensation The Company accounts for its stock-based employee and non-employee director compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations ("APB 25"). The Company has provided pro forma disclosures of net loss and net loss per share as if the fair value based method of accounting for these plans, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had been applied. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998. F-22 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (2) Summary of Significant Accounting Policies (continued) (o) Impairment of Long-Lived Assets The Company provides for the impairment of long-lived assets, including goodwill, pursuant to Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to be generated by the asset are less than its carrying value. Measurement of the impairment loss is based on the estimated fair value of the asset, which is generally determined using valuation techniques such as the discounted present value of expected future cash flows. (p) Reclassifications Certain prior period amounts have been reclassified to conform with the current period's presentation. (3) Discontinued Operations Loss from discontinued operations consists of the following:
Three months ended Fiscal years ended Fiscal year ended December 31, December 31, September 30, ------------------------------- ---------------------------- 1996 1995 1996 1997 1998 ------------------- --------------- -------------- ------------ -------------- (unaudited) (in thousands) Zycom (a) $ 205 (70) (484) (6,391) (4,848) NETCOM (b) (44,265) (5,446) (11,490) (33,092) (61,090) ------------------- ---------------- ------------- ------------ -------------- Loss from discontinued operations $ (44,060) (5,516) (11,974) (39,483) (65,938) =================== ================ ============= ============ ==============
F-23 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (3) Discontinued Operations (continued) (a) Zycom The Company owns a 70% interest in Zycom Corporation ("Zycom") which, through its wholly owned subsidiary, Zycom Network Services, Inc. ("ZNSI"), operated an 800/888/900 number services bureau and a switch platform in the United States and supplied information providers and commercial accounts with audiotext and customer support services. In June 1998, Zycom was notified by its largest customer of the customer's intent to transfer its call traffic to another service bureau. In order to minimize the obligation that this loss in call traffic would generate under Zycom's volume discount agreements with AT&T Corp. ("AT&T"), its call transport provider, ZNSI entered into an agreement on July 1, 1998 with an unaffiliated entity, ICN Limited ("ICN"), whereby ZNSI assigned the traffic of its largest audiotext customer and its other 900-number customers to ICN, effective October 1, 1998. As part of this agreement, ICN assumed all minimum call traffic volume obligations to AT&T. The call traffic assigned to ICN represents approximately 86% of Zycom's revenue for the year ended December 31, 1997. The loss of this significant portion of Zycom's business, despite management's best efforts to secure other sources of revenue, raised substantial doubt as to Zycom's ability to operate in a manner which would benefit Zycom's or the Company's shareholders. Accordingly, on August 25, 1998, Zycom's board of directors approved a plan to wind down and ultimately discontinue Zycom's operations. On October 22, 1998, Zycom completed the transfer of all customer traffic to other providers and Zycom anticipates that the disposition of its remaining assets and the discharge of its remaining liabilities will be completed in 1999. The Company's consolidated financial statements reflect the operations of Zycom as discontinued for all periods presented. Zycom incurred net losses from operations of approximately $1.2 million for the period from August 25, 1998 to December 31, 1998. Included in net current assets (liabilities) and net non-current assets of discontinued operations in the Company's consolidated balance sheets are the following accounts of Zycom: F-24 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (3) Discontinued Operations (continued)
December 31, ------------------------------------------- 1997 1998 ------------------- -------------------- (in thousands) Cash and cash equivalents $ 265 47 Receivables 1,879 90 Prepaid expenses and deposits 48 11 Accounts payable and accrued liabilities (2,559) (1,092) ------------------- -------------------- Net current liabilities of Zycom $ (367) (944) =================== ==================== Property and equipment, net $ 1,050 220 Other assets, net 1,890 - ------------------- -------------------- Net non-current assets of Zycom $ 2,940 220 =================== ====================
On January 4, 1999, the Company completed the sale of the remainder of Zycom's operating assets to an unrelated third party for total proceeds of $0.2 million. As Zycom's assets were recorded at estimated fair market value at December 31, 1998, no gain or loss was recorded on the sale. (b) NETCOM Effective November 3, 1998, the Company's board of directors adopted the formal plan to dispose of the operations of NETCOM and, accordingly, the Company's consolidated financial statements reflect the operations of NETCOM as discontinued for all periods presented. Since the Company expects to record a gain on the disposition of NETCOM, the Company has deferred the net operating losses of NETCOM from November 3, 1998 through December 31, 1998, to be recognized as a component of the gain on the disposition. Included in net current assets (liabilities) and net non-current assets of discontinued operations in the Company's consolidated balance sheets are the following accounts of NETCOM: F-25 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (3) Discontinued Operations (continued)
December 31, ------------------------------------------- 1997 1998 ------------------- -------------------- (in thousands) Cash and cash equivalents $ 63,368 - Receivables 2,397 3,936 Inventory 341 423 Prepaid expenses and deposits 3,554 2,436 Deferred losses of NETCOM - 10,847 Accounts payable and accrued liabilities (28,471) (37,009) Current portion of capital lease obligations (2,491) (2,961) ------------------- -------------------- Net current assets (liabilities) of NETCOM $ 38,698 (22,328) =================== ==================== Property and equipment, net $ 72,945 50,394 Other assets, net 4,242 5,703 Capital lease obligations, less current portion (3,550) (2,074) ------------------- -------------------- Net non-current assets of NETCOM $ 73,637 54,023 =================== ====================
On February 17, 1999, the Company sold certain of the operating assets and liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet service provider ("ISP") located in Atlanta, Georgia ("MindSpring"). Total proceeds from the sale were $245.0 million, consisting of $215.0 million in cash and 376,116 shares of unregistered common stock of MindSpring, valued at approximately $79.76 per share at the time of the transaction. Assets and liabilities sold to MindSpring include those directly related to the domestic operations of NETCOM's Internet dial-up, dedicated access and Web site hosting services. On March 16, 1999, the Company sold all of the capital stock of NETCOM's international operations for total proceeds of approximately $41.1 million. MetroNET Communications Corp. ("MetroNET"), a Canadian entity, and Providence Equity Partners ("Providence"), located in Providence, Rhode Island, together purchased the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9 million in cash. Additionally, Providence purchased all of the capital stock of NETCOM Internet Access Services Limited, NETCOM's operations in the United Kingdom, for approximately $12.2 million in cash. The Company expects to record a combined gain on the NETCOM F-26 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (3) Discontinued Operations (continued) transactions of approximately $200 million, net of income taxes of approximately $6.5 million, during the three months ended March 31, 1999. Since the operations sold were acquired by the Company in a transaction accounted for as a pooling of interests, the gain on the NETCOM transactions will be classified in the Company's consolidated statement of operations as an extraordinary item. In conjunction with the sale to MindSpring, the Company entered into an agreement to lease to MindSpring for a one-year period the capacity of certain network operating assets formerly owned by NETCOM and retained by the Company for a minimum of $27.0 million, although subject to increase dependent upon network usage. MindSpring will utilize the capacity to provide Internet access to the dial-up services customers formerly owned by NETCOM. In addition, the Company will receive for a one-year period 50% of the gross revenue earned by MindSpring from the dedicated access customers formerly owned by NETCOM. The Company intends to utilize the retained network operating assets to provide similar wholesale capacity and other enhanced network services to MindSpring and other ISPs and telecommunications providers, beginning in 1999. (4) Purchase Acquisitions and Investments The acquisitions described below have been accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of the acquired businesses are included in the Company's consolidated financial statements from the respective dates of acquisition. Revenue, net loss and net loss per share on a pro forma basis, assuming the acquisitions were completed at the beginning of the periods presented, are not significantly different from the Company's historical results for the periods presented herein. (a) Fiscal 1998 On July 27, 1998, the Company acquired DataChoice Network Services, L.L.C. ("DataChoice") for total consideration of $5.9 million, consisting of 145,997 shares of ICG Common Stock and approximately $1.1 million in cash. The excess of the purchase price over the fair value of the net identifiable assets acquired of $5.7 million has been recorded as goodwill and is being amortized on a straight-line basis F-27 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (4) Purchase Acquisitions and Investments (continued) over five years. DataChoice, a Colorado limited liability company, provides point-to-point data transmission resale services through its long-term agreements with multiple regional carriers and nationwide providers. The Company completed a series of transactions on July 30, 1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced Messaging Services, Inc. (collectively, "NikoNET"). The Company paid approximately $13.8 million in cash, which included dividends payable by NikoNET to its former owners and amounts to satisfy NikoNET's former line of credit, assumed approximately $0.7 million in liabilities and issued 356,318 shares of ICG Common Stock with a fair market value of approximately $10.7 million on the date of the acquisition, for all the capital stock of NikoNET. The excess of the purchase price over the fair value of the net identifiable assets acquired of $22.6 million has been recorded as goodwill and is being amortized on a straight-line basis over five years. Located in Atlanta, Georgia, NikoNET provides broadcast facsimile services and enhanced messaging services to financial institutions, corporate investor and public relations departments and other customers. The Company believes the acquisition of NikoNET enables the Company to offer expanded services to its Telecom Services customers. On August 27, 1998, the Company purchased, for $9.0 million in cash, the remaining 20% equity interest in ICG Ohio LINX, Inc. ("ICG Ohio LINX") which it did not already own. ICG Ohio LINX is a facilities-based competitive local exchange carrier which operates a fiber optic telecommunications network in Cleveland and Dayton, Ohio. The Company's additional investment in ICG Ohio LINX, including incremental costs of obtaining that investment of $0.1 million, is included in goodwill in the accompanying consolidated balance sheet at December 31, 1998. In January 1997, the Company announced a strategic alliance with Central and South West Corporation ("CSW") formed for the purpose of developing and marketing telecommunications services in certain cities in Texas. Based in Austin, Texas, the venture entity was a limited partnership named CSW/ICG ChoiceCom, L.P ("ChoiceCom"). On December 31, 1998, the Company purchased 100% of the partnership interests in ChoiceCom from CSW for approximately $55.7 million in cash and the assumption of certain liabilities of approximately $7.3 million. In F-28 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (4) Purchase Acquisitions and Investments (continued) addition, the Company converted approximately $31.6 million of receivables from prior advances made to ChoiceCom by the Company to its investment in ChoiceCom. The excess of the purchase price over the fair value of the net identifiable assets acquired of $28.9 million has been recorded as goodwill and is being amortized on a straight-line basis over 10 years. The acquired company currently provides local exchange and long distance services in Austin, Corpus Christi, Dallas, Houston and San Antonio, Texas. (b) Fiscal 1997 On October 17, 1997, the Company purchased approximately 91% of the outstanding capital stock of Communications Buying Group, Inc. ("CBG"), an Ohio based local exchange and Centrex reseller. The Company paid total consideration of approximately $46.5 million, plus the assumption of certain liabilities. Separately, on October 17, 1997, the Company sold 687,221 shares of ICG Common Stock for approximately $16.0 million to certain shareholders of CBG. On March 24, 1998, the Company purchased the remaining approximate 9% interest in CBG for approximately $2.9 million in cash. The excess of the purchase price over the fair value of the net identifiable assets acquired in the combined transactions of $48.9 million has been recorded as goodwill and is being amortized on a straight-line basis over six years. (c) Fiscal 1996 In January 1996, the Company purchased the remaining 49% minority interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a wholly owned subsidiary. Consideration for the purchase was approximately $2.0 million in cash and 66,236 common shares of Holdings-Canada valued at approximately $0.8 million, for total consideration of approximately $2.8 million. The Company's Network Services are provided by FOTI. In February 1996, the Company entered into an agreement with Linkatel California, L.P. ("Linkatel") and its other partners, Linkatel Communications, Inc. and The Copley Press, Inc., under which the Company acquired a 60% interest in Linkatel for an aggregate purchase price of $10.0 million in cash and became the general partner F-29 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (4) Purchase Acquisitions and Investments (continued) of Linkatel. In April 1996, the partnership was renamed ICG Telecom of San Diego, L.P. In March 1996, the Company acquired a 90% equity interest in MarineSat Communications Network, Inc. ("MCN"), (formally Maritime Cellular Tele-network, Inc.), a Florida-based provider of cellular and satellite communications for commercial ships, private vessels, offshore oil platforms and land-based mobile units, for approximately $0.7 million in cash and approximately $0.1 million of assumed debt, for total consideration of approximately $0.8 million. In April 1997, the Company received the remaining 10% interest in MCN as partial consideration for the sale of its investment in Mexico. In August 1996, the Company acquired certain Signaling System 7 ("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of Pace Alternative Communications, Inc. SS7 is used by local exchange companies, long-distance carriers, wireless carriers and others to signal between network elements, creating faster call set-up resulting in a more efficient use of network resources. The Company paid cash consideration of $1.6 million as of September 30, 1996 and an additional $1.0 million in January 1997, based on the operating results of the underlying business since the date of acquisition. (5) Dispositions (a) Fiscal 1998 On July 17, 1998, the Company entered into separate definitive agreements to sell the capital stock of MCN and Nova-Net Communications, Inc. ("Nova-Net"), two wholly owned subsidiaries within the Company's Satellite Services operations. The sale of MCN was completed on August 12, 1998 and, accordingly, the Company's consolidated financial statements include the results of operations of MCN through that date. The Company recorded a gain on the sale of MCN of approximately $0.9 million during fiscal 1998. The sale of Nova-Net was completed on November 18, 1998 and, accordingly, the Company's consolidated financial statements include the results of operations of Nova-Net through that date. The Company recorded a loss on the sale of Nova-Net of approximately $0.2 million during the three months F-30 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (5) Dispositions (continued) ended December 31, 1998. The combined revenue, net loss or net loss per share of MCN and Nova-Net do not represent a significant portion of the Company's historical consolidated revenue, net loss or net loss per share. (b) Fiscal 1996 In October 1996, the Company sold its interest in its Phoenix network joint venture to its venture partner, GST Telecommunications, Inc. The Company received approximately $2.1 million in cash, representing $1.3 million of consideration for its 50% interest and $0.8 million for equipment and amounts advanced to the joint venture. In addition, the Company received equipment with a net book value of $2.4 million and assumed liabilities of $0.3 million. A gain on sale of the joint venture of approximately $0.8 million was recorded in the consolidated financial statements during the three months ended December 31, 1996. In December 1995, the Company received approximately $21.1 million as partial payment for the sale of four of its teleports and certain related assets, and entered into a management agreement with the purchaser whereby the purchaser assumed control of the teleport operations. Upon approval of the transaction by the Federal Communications Commission ("FCC"), the Company completed the sale in March 1996 and received an additional $0.4 million due to certain closing adjustments, for total proceeds of $21.5 million. The Company recognized a loss of approximately $1.1 million on the sale. Revenue associated with these operations was approximately $2.5 million for fiscal 1996. The Company has reported results of operations from these assets through December 31, 1995. F-31 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (6) Short-term Investments Available for Sale Short-term investments available for sale are comprised of the following: December 31, ------------------------------------- 1997 1998 ----------------- ---------------- (in thousands) Certificates of deposit $ - 31,000 Commercial paper 4,000 16,000 U.S. Treasury securities 108,281 5,000 ================= ================ $ 112,281 52,000 ================= ================ At December 31, 1997 and 1998, the estimated fair value of the Company's certificates of deposit, commercial paper and U.S. Treasury securities approximated cost. All certificates of deposit, commercial paper and U.S. Treasury securities mature within one year. (7) Property and Equipment Property and equipment, including assets held under capital leases, is comprised of the following: F-32 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (7) Property and Equipment (continued) December 31, ----------------------------------------- 1997 1998 ------------------ ------------------ (in thousands) Land $ 709 709 Buildings and improvements 2,238 2,296 Furniture, fixtures and office equipment 42,295 123,108 Internal-use software costs 3,681 13,655 Machinery and equipment 12,600 20,998 Fiber optic equipment 181,000 259,015 Satellite equipment 29,760 32,418 Switch equipment 85,546 156,313 Fiber optic network 179,705 225,453 Site improvements 13,898 20,029 Service installation costs - 20,679 Construction in progress 185,992 237,394 ------------------ ------------------ 737,424 1,112,067 Less accumulated depreciation (105,970) (177,933) ================== ================== $ 631,454 934,134 ================== ================== Property and equipment includes approximately $237.4 million of equipment which has not been placed in service at December 31, 1998, and accordingly, is not being depreciated. The majority of this amount is related to uninstalled transport and switch equipment and new network construction. For fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and 1998, the Company capitalized interest costs on assets under construction of $4.9 million, $2.0 million, $3.2 million and $10.4 million, respectively. Such costs are included in property and equipment as incurred. The Company recognized interest expense of $85.7 million, $24.5 million, $117.5 million and $170.1 million for fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and 1998, repectively. F-33 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (7) Property and Equipment (continued) Also included in property and equipment at December 31, 1997 and 1998 are unamortized costs associated with the development of internal-use computer software of $2.3 million and $11.5 million, respectively. The Company capitalized $0.7 million, $0.1 million, $2.4 million and $10.0 million of such costs during fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and 1998, respectively. Certain of the assets described above have been pledged as security for long-term debt and are held under capital leases at December 31, 1998. The following is a summary of property and equipment held under capital leases: December 31, --------------------------------------- 1997 1998 ----------------- ------------------ (in thousands) Machinery and equipment $ 3,926 7,072 Fiber optic equipment 6,314 798 Switch equipment 21,380 12,957 Fiber optic network 58,806 77,523 Construction in progress 17,895 - ----------------- ------------------ 108,321 98,350 Less accumulated depreciation (8,409) (7,875) ================= ================== $ 99,912 90,475 ================= ================== Amortization of capital leases is included in depreciation and amortization in the Company's consolidated statements of operations for all periods presented. F-34 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (8) Other Assets Other assets are comprised of the following: December 31, ---------------------------------------- 1997 1998 ----------------- ------------------ (in thousands) Deposits $ 2,429 17,035 Pace customer base 2,805 2,805 Collocation costs 2,998 5,472 Non-compete agreements 1,386 1,050 Right of entry costs 1,984 2,684 Other 588 2,486 ----------------- ------------------ 12,190 31,532 Less accumulated amortization (3,124) (6,343) ================= ================== $ 9,066 25,189 ================= ================== (9) Capital Lease Obligations The Company has payment obligations under various capital lease agreements for equipment. Required payments due each year on or before December 31 under the Company's capital lease obligations are as follows (in thousands): 1999 $ 14,406 2000 15,000 2001 17,098 2002 11,085 2003 11,008 Thereafter 82,607 --------------------- Total minimum lease payments 151,204 Less amounts representing interest (82,759) --------------------- Present value of net minimum lease payments 68,445 Less current portion (5,086) ===================== $ 63,359 ===================== F-35 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt Long-term debt is summarized as follows:
December 31, ----------------------------------- 1997 1998 ---------------- ---------------- (in thousands) 9 7/8% Senior discount notes of ICG Services, net of discount (a) $ - 266,918 10% Senior discount notes of ICG Services, net of discount (b) - 327,699 11 5/8% Senior discount notes of Holdings, net of discount (c) 109,436 122,528 12 1/2% Senior discount notes of Holdings, net of discount (d) 367,494 414,864 13 1/2% Senior discount notes of Holdings, net of discount (e) 407,409 465,886 Note payable with interest at the 90-day commercial paper rate plus 4 3/4%, paid in full on August 19, 1998 4,932 - Note payable with interest at 11%, paid in full on June 12, 1998 1,860 - Mortgage payable with interest at 8 1/2%, due monthly through 2009, secured by building 1,131 1,084 Other 90 65 ---------------- ---------------- 892,352 1,599,044 Less current portion (1,784) (46) ---------------- ---------------- $ 890,568 1,598,998 ================ ================
(a) 9 7/8% Notes On April 27, 1998, ICG Services completed a private placement of 9 7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross proceeds of approximately $250.0 million. Net proceeds from the offering, after underwriting and other offering costs of approximately $7.9 million, were approximately $242.1 million. The 9 7/8% Notes are unsecured senior obligations of ICG Services that mature on May 1, 2008, at a maturity value of $405.3 million. Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable each May 1 and November 1, commencing November 1, 2003. The indenture for the 9 7/8% Notes contains certain covenants which provide limitations on indebtedness, dividends, asset sales and certain other transactions. F-36 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt (continued) The 9 7/8% Notes were originally recorded at approximately $250.0 million. The discount on the 9 7/8% Notes is being accreted through May 1, 2003, the date on which the 9 7/8% Notes may first be redeemed. The accretion of the discount and the amortization of the debt issuance costs are included in interest expense in the accompanying consolidated statements of operations. (b) 10% Notes On February 12, 1998, ICG Services completed a private placement of 10% Senior Discount Notes due 2008 (the "10% Notes") for gross proceeds of approximately $300.6 million. Net proceeds from the offering, after underwriting and other offering costs of approximately $9.7 million, were approximately $290.9 million. The 10% Notes are unsecured senior obligations of ICG Services that mature on February 15, 2008, at a maturity value of $490.0 million. Interest will accrue at 10% per annum, beginning February 15, 2003, and is payable each February 15 and August 15, commencing August 15, 2003. The indenture for the 10% Notes contains certain covenants which provide limitations on indebtedness, dividends, asset sales and certain other transactions. The 10% Notes were originally recorded at approximately $300.6 million. The discount on the 10% Notes is being accreted through February 15, 2003, the date on which the 10% Notes may first be redeemed. The accretion of the discount and the amortization of the debt issuance costs are included in interest expense in the accompanying consolidated statements of operations. (c) 11 5/8% Notes On March 11, 1997, Holdings completed a private placement (the "1997 Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of $99.9 million and $100.0 million, respectively. Net proceeds from the 1997 Private Offering, after costs of approximately $7.5 million, were approximately $192.4 million. F-37 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt (continued) The 11 5/8% Notes are unsecured senior obligations of Holdings (guaranteed by ICG) that mature on March 15, 2007, at a maturity value of $176.0 million. Interest will accrue at 11 5/8% per annum, beginning March 15, 2002, and is payable each March 15 and September 15, commencing September 15, 2002. The indenture for the 11 5/8% Notes contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions and effectively prohibit the payment of cash dividends. The 11 5/8% Notes were originally recorded at approximately $99.9 million. The discount on the 11 5/8% Notes is being accreted through March 15, 2002, the date on which the 11 5/8% Notes may first be redeemed. The accretion of the discount and the amortization of the debt issuance costs are included in interest expense in the accompanying consolidated statements of operations. (d) 12 1/2% Notes On April 30, 1996, Holdings completed a private placement (the "1996 Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12 1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of $300.0 million and $150.0 million, respectively. Net proceeds from the 1996 Private Offering, after issuance costs of approximately $17.0 million, were approximately $433.0 million. The 12 1/2% Notes are unsecured senior obligations of Holdings (guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006, with a maturity value of $550.3 million. Interest will accrue at 12 1/2% per annum, beginning May 1, 2001, and is payable each May 1 and November 1, commencing November 1, 2001. The indenture for the 12 1/2% Notes contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions and effectively prohibit the payment of cash dividends. The 12 1/2% Notes were originally recorded at approximately $300.0 million. The discount on the 12 1/2% Notes is being accreted through May 1, 2001, the date on which the 12 1/2% Notes may first be redeemed. The accretion of the discount and the amortization of the debt issuance costs are included in interest expense in the accompanying consolidated statements of operations. F-38 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt (continued) Approximately $35.3 million of the proceeds from the 1996 Private Offering were used to redeem the 12% redeemable preferred stock of Holdings (the "Redeemable Preferred Stock") issued in August 1995 ($30.0 million), pay accrued preferred dividends ($2.6 million) and to repurchase 916,666 warrants of the Company ($2.7 million) issued in connection with the Redeemable Preferred Stock. The Company recognized a charge to accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses of approximately $12.3 million for the excess of the redemption price of the Redeemable Preferred Stock over the carrying amount at April 30, 1996, and recognized a charge to interest expense of approximately $11.5 million for the payments made to noteholders with respect to consents to amendments to the indenture governing the 13 1/2% Notes to permit the 1996 Private Offering. (e) 13 1/2% Notes On August 8, 1995, Holdings completed a private placement (the "1995 Private Offering") through the issuance of 58,430 units (the "Units"), each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995 Private Offering, after issuance costs of approximately $14.0 million, were approximately $286.0 million. The 13 1/2% Notes are unsecured senior obligations of Holdings (guaranteed by ICG and Holdings-Canada) that mature on September 15, 2005, with a maturity value of $584.3 million. Interest will accrue at the rate of 13 1/2% per annum, beginning September 15, 2000, and is payable in cash each March 15 and September 15, commencing March 15, 2001. The indenture for the 13 1/2% Notes contains certain covenants which provide for limitations on indebtedness, dividends, asset sales and certain other transactions and effectively prohibit the payment of cash dividends. The 13 1/2% Notes were originally recorded at approximately $294.0 million, which represents the $300.0 million in proceeds less the approximate $6.0 million value assigned to the Unit Warrants, which is included in additional paid-in capital. The discount on the 13 1/2% Notes is being accreted over five years until September 15, 2000, the date on which the 13 1/2% Notes may first be redeemed. The value F-39 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt (continued) assigned to the Unit Warrants, representing additional debt discount, is also being accreted over the five-year period. The accretion of the total discount and the amortization of the debt issuance costs are included in interest expense in the accompanying consolidated statements of operations. Holdings may redeem the 13 1/2% Notes on or after September 15, 2000, in whole or in part, at the redemption prices set forth in the agreement, plus unpaid interest, if any, at the date of redemption. The Unit Warrants entitled the holder to purchase one common share of Holdings-Canada, which was exchangeable into one share of ICG Common Stock, through August 8, 2005 at the exercise price of $12.51 per share. In connection with the Reorganization of Holdings-Canada, all Unit Warrants outstanding are exchangeable only for shares of ICG Common Stock on a one-for-one basis and are no longer exchangeable for shares of Holdings-Canada. (f) Subsequent to December 31, 1998 As of December 31, 1998, the Company's corporate headquarters building, land and improvements (collectively, the "Corporate Headquarters") were leased by the Company under an operating lease from an unrelated third party. Subsequent to December 31, 1998, the Company entered into a letter of intent to purchase the Corporate Headquarters for approximately $43.7 million, which amount represents historical cost and approximates fair value. The Company intends to finance the purchase through the conversion of a $10.0 million security deposit previously paid on the existing operating lease and through a mortgage on the Corporate Headquarters' assets. Payments on the mortgage will be due monthly through January 1, 2013, at an initial interest rate of approximately 14% per annum. F-40 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (10) Long-term Debt (continued) Scheduled principal maturities of long-term debt as of December 31, 1998 are as follows (in thousands): Fiscal year: 1999 $ 111 2000 50 2001 50 2002 50 2003 50 Thereafter 2,206,688 ----------------------- 2,206,999 Less unaccreted discount (607,955) Less current portion (46) ======================= $ 1,598,998 ======================= (11) Redeemable Preferred Securities of Subsidiaries Redeemable preferred stock of subsidiary is summarized as follows: December 31, --------------------------------------- 1997 1998 ---------------- ------------------ (in thousands) 14% Exchangeable preferred stock of Holdings, mandatorily redeemable in 2008 (a) $ 108,022 124,867 14 1/4% Exchangeable preferred stock of Holdings, mandatorily redeemable in 2007 (b) 184,420 213,443 ================ ================== $ 292,442 338,310 ================ ================== (a) 14% Preferred Stock In connection with the 1997 Private Offering, Holdings sold 100,000 shares of exchangeable preferred stock that bear a cumulative dividend at the rate of 14% per annum. The dividend is payable quarterly in arrears each March 15, June 15, September 15, and December 15, and commenced June 15, 1997. Through March 15, 2002, the dividend is payable at the option of Holdings in cash or additional shares of 14% Preferred Stock. Holdings may exchange the 14% Preferred Stock F-41 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (11) Redeemable Preferred Securities of Subsidiaries (continued) into 14% Senior Subordinated Exchange Debentures at any time after the exchange is permitted by certain indenture restrictions. The 14% Preferred Stock is subject to mandatory redemption on March 15, 2008. (b) 14 1/4% Preferred Stock In connection with the 1996 Private Offering, Holdings sold 150,000 shares of exchangeable preferred stock that bear a cumulative dividend at the rate of 14 1/4% per annum. The dividend is payable quarterly in arrears each February 1, May 1, August 1 and November 1, and commenced August 1, 1996. Through May 1, 2001, the dividend is payable, at the option of Holdings, in cash or additional shares of 14 1/4% Preferred Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4% Senior Subordinated Exchange Debentures at any time after the exchange is permitted by certain indenture restrictions. The 14 1/4% Preferred Stock is subject to mandatory redemption on May 1, 2007. (c) 6 3/4% Preferred Securities On September 24, 1997 and October 3, 1997, ICG Funding completed a private placement of 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4% Preferred Securities") for gross proceeds of $132.25 million. Net proceeds from the private placement, after offering costs of approximately $4.7 million, were approximately $127.6 million. Restricted cash at December 31, 1998 of $16.9 million consists of the proceeds from the private placement which are designated for the payment of cash dividends on the 6 3/4% Preferred Securities through November 15, 2000. The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable preferred securities of ICG Funding that bear a cumulative dividend at the rate of 6 3/4% per annum. The dividend is paid quarterly in arrears each February 15, May 15, August 15 and November 15, and commenced November 15, 1997. The dividend is payable in cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities are exchangeable, at the option of the holder, at any time prior to November 15, 2009 into shares of ICG Common Stock at an exchange rate of F-42 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (11) Redeemable Preferred Securities of Subsidiaries (continued) 2.0812 shares of ICG Common Stock per preferred security, or $24.025 per share, subject to adjustment. ICG Funding may, at its option, redeem the 6 3/4% Preferred Securities at any time on or after November 18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred Securities if the current market value of ICG Common Stock equals or exceeds, for at least 20 days of any 30-day trading period, 160% of the exchange price prior to November 15, 1999, and 150% of the exchange price from November 16, 1999 through November 15, 2000. The 6 3/4% Preferred Securities are subject to mandatory redemption on November 15, 2009. On February 13, 1998, ICG made a capital contribution of 126,750 shares of ICG Common Stock to ICG Funding. Immediately thereafter, ICG Funding sold the contributed shares to unrelated third parties for proceeds of approximately $3.4 million. ICG Funding recorded the contribution of the ICG Common Stock as additional paid-in capital at the then fair market value and, consequently, no gain or loss was recorded by ICG Funding on the subsequent sale of those shares. Also, on February 13, 1998, ICG Funding used the remaining proceeds from the private placement of the 6 3/4% Preferred Securities, which were not restricted for the payment of cash dividends, along with the proceeds from the sale of the contributed ICG Common Stock to purchase approximately $112.4 million of ICG Communications, Inc. Preferred Stock ("ICG Preferred Stock") which pays dividends each February 15, May 15, August 15 and November 15 in additional shares of ICG Preferred Stock through November 15, 2000. Subsequent to November 15, 2000, dividends on the ICG Preferred Stock are payable in cash or shares of ICG Common Stock, at the option of ICG. The ICG Preferred Stock is exchangeable, at the option of ICG Funding, at any time prior to November 15, 2009 into shares of ICG Common Stock at an exchange rate based on the exchange rate of the 6 3/4% Preferred Securities and is subject to mandatory redemption on November 15, 2009. The ICG Preferred Stock has been eliminated in consolidation of the Company's consolidated financial statements. F-43 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (11) Redeemable Preferred Securities of Subsidiaries (continued) The accreted value of the 6 3/4% Preferred Securities is included in Company-obligated mandatorily redeemable preferred securities of subsidiary limited liability company which holds solely Company preferred stock in the accompanying consolidated balance sheet at December 31, 1998. Included in accretion and preferred dividends on preferred securities of subsidiaries, net of minority interest in share of losses is approximately $27.0 million, $5.8 million, $39.8 million and $55.2 million for fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998, respectively, associated with the accretion of issuance costs, discount and preferred security dividend accruals for the 6 3/4% Preferred Securities, the 14% Preferred Stock, the 14 1/4% Preferred Stock and the Redeemable Preferred Stock (issued in connection with the 1995 Private Offering and redeemed in April 1996). These costs are partially offset by the minority interest share in losses of subsidiaries of approximately $1.6 million, $0.8 million and $1.7 million for fiscal 1996, the three months ended December 31, 1996, and fiscal 1997, respectively. There was no reported minority interest share in losses of subsidiaries for fiscal 1998. (12) Stockholders' Equity (Deficit) (a) Stock Options and Employee Stock Purchase Plan In fiscal years 1991, 1992 and 1993, the Company's Board of Directors approved incentive stock option plans and replenishments to those plans which provide for the granting of options to directors, officers, employees and consultants of the Company to purchase 285,000, 724,400 and 1,692,700 shares, respectively, of the Company's Common Stock, with exercise prices between 80% and 100% of the fair value of the shares at the date of grant. A total of 1,849,600 options have been granted under these plans with exercise prices ranging from approximately $2.92 to $14.03. Compensation expense has been recorded for options granted at an exercise price below the fair market value of the Company's Common Stock at the date of grant, pursuant to the provisions of APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant. F-44 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued) The NETCOM 1993 Stock Option Plan was assumed by ICG at the time of the merger, and approved by ICG's Board of Directors as an incentive and non-qualified stock option plan which provides for the granting of options to certain directors, officers and employees to purchase 2,720,901 shares of ICG Common Stock. A total of 2,224,273 options, net of 2,155,856 cancellations, have been granted under this plan at exercise prices ranging from $0.65 to $92.14, none of which were less than 100% of the fair market value of the shares underlying options on the date of grant, and accordingly, no compensation expense was recorded for these options under APB 25. The options granted under this plan are subject to various vesting requirements, generally three and five years, and expire within ten years from the date of grant. From fiscal 1994 through fiscal 1998, the Company's Board of Directors approved incentive and non-qualified stock option plans and replenishments to those plans which provide for the granting of options to certain directors, officers and employees to purchase 2,536,000 shares of the Company's Common Stock under the 1994 plan, an aggregate of 2,700,000 shares of the Company's Common Stock under the 1995 and 1996 plans and 3,400,000 shares of ICG Common Stock under the 1998 plan. A total of 6,922,696 options, net of 4,587,300 cancellations, have been granted under these plans at original exercise prices ranging from $7.94 to $35.75, none of which were less than 100% of the fair market value of the shares underlying options on the date of grant, and accordingly, no compensation expense was recorded for these options under APB 25. The options granted under these plans are subject to various vesting requirements and expire in five and ten years from the date of grant. In order to continue to provide non-cash incentives and retain key employees, all employee stock options outstanding on April 16, 1997 with exercise prices at or in excess of $15.875 were canceled by the Stock Option Committee of the Company's Board of Directors and regranted with an exercise price of $10.375, the closing price of ICG Common Stock on the Nasdaq National Market on April 16, 1997. Approximately 598,000 options, with original exercise prices ranging from $15.875 to $26.25, were canceled and regranted on April 16, 1997. For the same business purpose, all employee stock options outstanding on September 18, 1998 with exercise prices at or in excess of $22.00 were canceled by the Stock Option Committee of the Company's Board of Directors and regranted with an exercise price of $16.875, the closing price of ICG Common Stock on the Nasdaq National F-45 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued) Market on September 18, 1998. A total of 2,413,260 options, with original exercise prices ranging from $22.00 to $35.75 were canceled and regranted on September 18, 1998. There was no effect on the Company's consolidated financial statements as a result of the cancellation and regranting of options. In October 1996, the Company established an Employee Stock Purchase Plan whereby employees can elect to designate 1% to 30% of their annual salary to be used to purchase shares of ICG Common Stock, up to a limit of $25,000 in ICG Common Stock each year, at a 15% discount to fair market value. Stock purchases occur four times a year on February 1, May 1, August 1 and November 1, with the price per share equaling the lower of 85% of the market price at the beginning or end of the offering period. The Company is authorized to issue a total of 1,000,000 shares of ICG Common Stock to participants in the plan. During fiscal 1997 and 1998, the Company sold 109,213 and 111,390 shares of ICG Common Stock, respectively, to employees under this plan. During fiscal 1994, NETCOM's Board of Directors approved and adopted an Employee Stock Purchase Plan which was dissolved upon NETCOM's merger with ICG. Shares purchased under this plan were converted into an estimated 119,000 shares of ICG Common Stock. The Company recorded compensation expense in connection with its stock-based employee and non-employee director compensation plans of $0.1 million for fiscal 1996 pursuant to the intrinsic value based method of APB 25. Had compensation expense for the Company's plans been determined based on the fair market value of the options at the grant dates for awards under those plans consistent with the provisions of SFAS 123, the Company's pro forma net loss and loss per share would have been as presented below. Pro forma disclosures include the effects of employee and non-employee director stock options granted during fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998. F-46 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued)
Fiscal years ended Fiscal year ended Three months ended December 31, September 30, December 31, ------------------------------------ 1996 1996 1997 1998 ---------------------- --------------------------- --------------- ---------------- (in thousands, except per share amounts) Net loss: As reported $ (228,372) (61,313) (360,735) (418,045) Pro forma (242,974) (64,985) (369,677) (439,362) Net loss per share- basic and diluted: As reported $ (6.19) (1.47) (8.49) (9.25) Pro forma (6.59) (1.56) (8.70) (9.72)
The fair value of each option grant to employees and non-employee directors other than NETCOM employees and non-employee directors was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: an expected option life of three years for directors, officers and other executives, and two years for other employees, for all periods; expected volatility of 50% for fiscal 1996, the three months ended December 31, 1996 and fiscal 1997, and 70% for fiscal 1998; and risk-free interest rates ranging from 5.03% to 7.42% for fiscal 1996 and the three months ended December 31, 1996, 5.61% to 6.74% for fiscal 1997 and 4.09% to 5.77% for fiscal 1998. Risk-free interest rates, as were currently available on the grant date, were assigned to each granted option based on the zero-coupon rate of U.S. Treasury bills to be held for the same period as the assumed option life. Since the Company does not anticipate issuing any dividends on the ICG Common Stock, the dividend yield for all options granted was assumed to be zero. The weighted average fair market value of combined ICG and NETCOM options granted during fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998 was approximately $11.10, $9.48, $10.31 and $13.23 per option, respectively. F-47 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued) As options outstanding at December 31, 1998 will continue to vest in subsequent periods, additional options are expected to be awarded under existing and new plans; accordingly, the above pro forma results are not necessarily indicative of the impact on net loss and net loss per share in future periods. The following table summarizes the status of the Company's stock-based compensation plans:
Shares underlying Weighted average Options options exercise price exercisable ---------------------- ---------------------- --------------------- (in thousands) (in thousands) Outstanding at October 1, 1995 4,828 $ 14.92 1,230 Granted 2,054 18.30 Exercised (415) 7.35 Canceled (631) 24.73 ---------------------- Outstanding at September 30, 1996 5,836 15.49 2,771 Granted 335 18.59 Exercised (31) 8.95 Canceled (56) 12.65 ---------------------- Outstanding at December 31, 1996 6,084 15.68 3,476 Granted 3,377 14.94 Exercised (709) 8.13 Canceled (2,604) 25.32 ---------------------- Outstanding at December 31, 1997 6,148 11.97 3,532 Granted 5,968 23.34 Exercised (1,395) 12.08 Canceled (3,941) 25.62 ---------------------- Outstanding at December 31, 1998 6,780 13.95 3,299 ======================
F-48 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued) The following table summarizes information about options outstanding at December 31, 1998:
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) $2.60 - 7.94 1,558 6.40 $ 7.91 1,558 $ 7.91 8.50 - 14.58 1,714 7.15 11.07 1,099 11.31 14.93 - 16.75 381 8.37 15.67 296 15.67 16.88 - 46.65 3,127 9.37 18.32 346 21.02 ------------------ ------------------- 6,780 3,299 ================== ===================
(b) Warrants Between fiscal 1993 and fiscal 1995, the Company issued a series of warrants at varying prices to purchase common shares of Holdings-Canada which, after August 5, 1996, were exchangeable on a one-for-one basis for Class A Shares of ICG Common Stock. The following table summarizes warrant activity for fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998: F-49 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (12) Stockholders' Equity (Deficit) (continued)
Outstanding Exercise warrants price range ------------------- ------------------------ (in thousands) Outstanding, October 1, 1995 5,502 $ 7.38 - 21.51 Exercised (1,854) 7.94 - 8.73 Repurchased (917) 2.52 - 3.21 -------------------- Outstanding, September 30, 1996 2,731 7.38 - 21.51 Exercised (100) 18.00 Canceled (8) 7.38 - 11.80 -------------------- Outstanding, December 31, 1996 2,623 7.38 - 21.51 Exercised (599) 7.38 - 14.50 Canceled (50) 14.50 -------------------- Outstanding, December 31, 1997 1,974 12.51 - 21.51 Exercised (113) 12.51 - 21.51 Canceled (9) 20.01 - 21.51 ==================== Outstanding, December 31, 1998 1,852 12.51 ====================
All warrants outstanding at December 31, 1998 have an expiration date of August 6, 2005 and, in connection with the Reorganization of Holdings-Canada, are exchangeable only for shares of ICG Common Stock on a one-for-one basis. (c) Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock and 50,000 shares of ICG Preferred Stock. At December 31, 1998, the Company had no shares of preferred stock outstanding. All of the issued and outstanding shares of ICG Preferred Stock at December 31, 1998 are held by ICG Funding. F-50 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (13) Related Party Transactions At December 31, 1997, the Company had $10.0 million outstanding under a promissory note from ChoiceCom, which was payable on demand at LIBOR plus 2% per annum (7.97% at December 31, 1997). During fiscal 1998, the Company advanced another $5.0 million to ChoiceCom under a separate promissory note with similar terms. Additionally, the Company agreed to perform certain administrative services for ChoiceCom and make certain payments to vendors on behalf of ChoiceCom, for which such services and payments were to be conducted on an arm's length basis and reimbursed by ChoiceCom. At December 31, 1997, amounts outstanding under this arrangement and included in notes receivable from affiliate were approximately $9.4 million. All amounts due from ChoiceCom were included in the purchase price of the Company's acquisition of ChoiceCom on December 31, 1998. During fiscal 1996, Holdings-Canada and International Communications Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC will provide various consulting services to the Company through December 1999 for approximately $4.2 million to be paid during the term of the agreement. During fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and 1998, the Company paid approximately $1.3 million, $0.3 million, $1.1 million and $1.0 million, respectively, related to this consulting agreement. William W. Becker, a stockholder and former director of the Company, is President and Chief Executive Officer of ICC. (14) Commitments and Contingencies (a) Network Construction In March 1996, the Company and Southern California Edison Company ("SCE") entered into a 25-year agreement under which the Company will license 1,258 miles of fiber optic cable in Southern California, and can install up to 500 additional miles of fiber optic cable. This network, which will be maintained and operated primarily by the Company, stretches from Los Angeles to southern Orange County. Under the terms of this agreement, SCE will be entitled to receive an annual fee for ten years, certain fixed quarterly payments, a quarterly payment equal to a percentage of certain network revenue, and certain other installation and fiber connection fees. The aggregate fixed payments remaining under the agreement totaled approximately $135.3 million at December 31, 1998. The agreement has been accounted for as a capital lease in the accompanying consolidated balance sheets. F-51 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (14) Commitments and Contingencies (continued) In June 1997, the Company entered into an indefeasible right of use ("IRU") agreement with Qwest Communications Corporation ("Qwest") for approximately 1,800 miles of fiber optic network and additional broadband capacity in California, Colorado, Ohio and the Southeast. Network construction is ongoing and is expected to be completed in 1999. The Company is responsible for payment on the construction as segments of the network are completed and has incurred approximately $19.2 million as of December 31, 1998, with remaining costs anticipated to be approximately $15.8 million. Additionally, the Company has committed to purchase $6.0 million in network capacity from Qwest prior to the end of 1999. (b) Network Capacity Commitments In November 1998, the Company entered into two service agreements with WorldCom Network Services, Inc. ("WorldCom"). Both of the agreements have three-year terms and were effective in September 1998. Under the Telecom Services Agreement, WorldCom provides, at designated rates, switched telecommunications services and other related services to the Company, including termination services, toll-free origination, switched access, dedicated access and travel card services. Under the Carrier Digital Services Agreement, WorldCom provides the Company, at designated rates, with the installation and operation of dedicated digital telecommunications interexchange services, local access and other related services, which the Company believes expedites service availability to its customers. Both agreements require that the Company provide WorldCom with certain minimum monthly revenue, which if not met, would require payment by the Company for the difference between the minimum commitment and the actual monthly revenue. Additionally, both agreements limit the Company's ability to utilize vendors other than WorldCom for certain telecommunications services specified in the agreements. The Company's policy is to accrue and include in operating costs the effect of any shortfall in minimum revenue commitments under these agreements in the period in which the shortfall occurred. The Company has successfully achieved all minimum revenue commitments to WorldCom under these agreements through December 31, 1998. F-52 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (14) Commitments and Contingencies (continued) (c) Other Commitments The Company has entered into various equipment purchase agreements with certain of its vendors. Under these agreements, if the Company does not meet a minimum purchase level in any given year, the vendor may discontinue certain discounts, allowances and incentives otherwise provided to the Company. In addition, the agreements may be terminated by either the Company or the vendor upon prior written notice. Additionally, the Company has entered into certain commitments to purchase capital assets with an aggregate purchase price of approximately $80.6 million at December 31, 1998. (d) Operating Leases The Company leases office space and equipment under non-cancelable operating leases. Lease expense was approximately $4.9 million, $1.2 million, $11.8 million and $27.0 million for fiscal 1996, the three months ended December 31, 1996 and fiscal 1997 and 1998, respectively. Minimum lease payments due each year on or before December 31 under the Company's operating leases are as follows (in thousands): 1999 $ 30,327 2000 28,734 2001 25,509 2002 19,890 2003 16,384 Thereafter 64,802 ========================= $ 185,646 ========================= (e) Transport and Termination Charges The Company has recorded revenue of approximately $4.9 million and $58.3 million for fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the transport and termination of local traffic to ISPs from customers of incumbent local exchange carriers ("ILECs") pursuant to various interconnection agreements. The F-53 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (14) Commitments and Contingencies (continued) ILECs have not paid most of the bills they have received from the Company and have disputed substantially all of these charges based on the belief that such calls are not local traffic as defined by the various agreements and under state and federal laws and public policies. The resolution of these disputes will be based on rulings by state public utility commissions and/or by the Federal Communications Commission ("FCC"). To date, there have been favorable final rulings from 29 states that ISP traffic is subject to the payment of reciprocal compensation under interconnection agreements. On February 25, 1999, the FCC issued a decision that ISP-bound traffic is largely jurisdictionally interstate traffic. The decision relies on the long-standing federal policy that ISP traffic, although jurisdictionally interstate, is treated as though it is local traffic for pricing purposes. The decision also emphasizes that because there are no federal rules governing intercarrier compensation for ISP traffic, the determination as to whether such traffic is subject to reciprocal compensation under the terms of interconnection agreements properly is made by the state commissions and that carriers are bound by their interconnection agreements and state commission decisions regarding the payment of reciprocal compensation for ISP traffic. The FCC has initiated a rulemaking proceeding regarding the adoption of prospective federal rules for intercarrier compensation for ISP traffic. In its notice of rulemaking, the FCC expresses its preference that compensation rates for this traffic continue to be set by negotiations between carriers, with disputes resolved by arbitrations conducted by state commissions pursuant to the Telecommunications Act of 1996 (the "Telecommunications Act"). On March 4, 1999, the Alabama Public Service Commission (the "Alabama PSC") issued a decision that found that reciprocal compensation is owed for Internet traffic under four CLEC interconnection agreements with BellSouth Corporation ("BellSouth"), which agreements were at issue in the proceeding. With respect to the Company's interconnection agreement, which was also at issue, the state commission interpreted certain language in the Company's agreement to exempt ISP-bound traffic from reciprocal compensation under certain conditions. The Company believes that the Alabama PSC failed to consider the intent of the parties in negotiating and executing the Company's interconnection agreement, the specific language of the Company's interconnection agreement and the impact of Alabama F-54 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (14) Commitments and Contingencies (continued) PSC and FCC policies, and thereby misinterpreted the agreement. The Company intends to file a request with the Alabama PSC by April 1, 1999 seeking determination that the ruling with respect to the Company's agreement be reconsidered, and that the Company should be treated the same as the other CLECs that participated in the proceeding and for which the Alabama PSC ordered the payment of reciprocal compensation. While the Company intends to pursue vigorously a petition for reconsideration with the Alabama PSC, and if the Company deems it necessary, judicial review, the Company cannot predict the final outcome of this issue. The Company has also recorded revenue of approximately $19.1 million for fiscal 1998, related to other transport and termination charges to the ILECs, pursuant to the Company's interconnection agreements with these ILECs. Included in the Company's trade receivables at December 31, 1997 and 1998 are $4.3 million and $72.8 million, respectively, for all receivables related to transport and termination charges. The receivables balance at December 31, 1998 is net of an allowance of $5.6 million for disputed amounts. Although the Company's interconnection agreement with BellSouth has expired, the Company has received written notification from BellSouth that the Company may continue billing BellSouth under the pricing terms within the expired interconnection agreement, until such agreement is renegotiated or arbitrated by the relevant state commissions. The Company's remaining interconnection agreements expire in 1999 and 2000. While the Company believes that all revenue recorded through December 31, 1998 is collectible and that future revenue from transport and termination charges billed under the Company's current interconnection agreements will be realized, there can be no assurance that future regulatory and judicial rulings will be favorable to the Company, that the Alabama PSC will reconsider its ruling, or that different pricing plans for transport and termination charges between carriers will not be adopted when the Company's interconnection agreements are renegotiated or as a result of the FCC's rulemaking proceeding on future compensation methods. In fact, the Company believes that different pricing plans will be considered and adopted, and although the Company expects that revenue from transport and termination charges likely will decrease as a percentage of total revenue from local services in periods subject to future interconnection agreements, the Company's local F-55 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (14) Commitments and Contingencies (continued) termination services still will be required by the ILECs and must be provided under the Telecommunications Act, and likely will result in increasing volume in minutes due to the growth of the Internet and related services markets. The Company expects to negotiate reasonable compensation and collection terms for local termination services, although there is no assurance that such compensation will remain consistent with current levels. (f) Litigation On April 4, 1997, certain shareholders of Zycom filed a shareholder derivative suit and class action complaint for unspecified damages, purportedly on behalf of all of the minority shareholders of Zycom, in the District Court of Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain of their subsidiaries. This complaint alleges that the Company and certain of its subsidiaries breached certain duties owed to the plaintiffs. The plaintiffs were denied class certification by the trial court and this decision has been appealed. Trial has been tentatively set for August 1999. The Company is vigorously defending the claims. While it is not possible to predict the outcome of this litigation, management believes these proceedings will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company is a party to certain other litigation which has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. (15) Business Units The Company conducts transactions with external customers through the operations of its Telecom Services, Network Services and Satellite Services business units. Shared administrative services are provided to the business units by Corporate Services. Corporate Services consists of the operating activities of ICG Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada) Co., ICG Holdings, Inc. and ICG Services, Inc., which primarily hold securities and provide certain F-56 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (15) Business Units (continued) legal, accounting and finance, personnel and other administrative support services to the business units. Direct and certain indirect costs incurred by Corporate Services on behalf of the business units are allocated among the business units based on the nature of the underlying costs. Transactions between the business units for services performed in the normal course of business are recorded at amounts which are intended to approximate fair value. Set forth below are revenue, EBITDA (before nonrecurring charges), which represents the measure of operating performance used by management to evaluate operating results, depreciation and amortization, interest expense, total assets and capital expenditures of continuing operations for each of the Company's business units and for Corporate Services. As described in note 3, the operating results of the Company reflect the operations of Zycom and NETCOM as discontinued for all periods presented. F-57 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (15) Business Units (continued)
Fiscal Three months ended Fiscal years ended year ended December 31, December 31, September 30, ----------------------------- -------------------------------- 1996 1995 1996 1997 1998 -------------------- -------------- -------------- -------------- ---------------- (unaudited) (in thousands) Revenue: Telecom Services $ 72,815 12,743 27,307 149,358 305,612 Network Services 61,080 15,826 16,460 69,881 62,535 Satellite Services 21,297 6,168 6,188 29,986 40,451 Elimination of intersegment revenue (1,049) (193) (478) (4,203) (10,979) ================ ============== ============== ============== ================ Total revenue $ 154,143 34,544 49,477 245,022 397,619 ================ ============== ============== ============== ================ EBITDA (before nonrecurring charges) (a): Telecom Services $ (19,902) (4,462) (10,924) (92,053) (19,995) Network Services (2,417) (423) 295 (544) (3,245) Satellite Services (2,999) (1,371) (448) 74 7,088 Corporate Services (17,953) (3,996) (5,682) (27,811) (20,909) Eliminations (215) (24) (117) (825) (3,692) ================ ============== ============== ============== ================ Total EBITDA (before nonrecurring charges) $ (43,486) (10,276) (16,876) (121,159) (40,753) ================ ============== ============== ============== ================ Depreciation and amortization (b): Telecom Services $ 21,295 2,871 7,442 45,798 86,775 Network Services 1,086 145 441 2,110 2,305 Satellite Services 4,809 1,272 1,133 4,462 7,314 Corporate Services 2,447 444 750 3,744 4,286 Eliminations 393 101 (75) 387 865 ================ ============== ============== ============== ================ Total depreciation and amortization $ 30,030 4,833 9,691 56,501 101,545 ================ ============== ============== ============== ================ (Continued)
F-58 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (15) Business Units (continued)
Fiscal Three months ended Fiscal years ended year ended December 31, December 31, September 30, ------------------------------ -------------------------------- 1996 1995 1996 1997 1998 ----------------- -------------- -------------- -------------- --------------- (unaudited) (in thousands) Interest expense (b): Telecom Services $ 6,814 2,432 1,744 11,996 2,693 Network Services 240 148 - 6 23 Satellite Services 175 52 13 - 88 Corporate Services 78,485 12,583 22,697 105,518 167,323 ---------------- -------------- -------------- -------------- --------------- Total interest expense $ 85,714 15,215 24,454 117,520 170,127 ================ ============== ============== ============== =============== Total assets: Telecom Services (c) $ 349,786 218,579 400,003 663,864 1,135,937 Network Services 25,994 23,214 33,308 31,911 34,378 Satellite Services (c) 46,087 56,498 46,212 46,797 46,760 Corporate Services (c) 761,720 307,188 709,412 353,898 376,796 Eliminations (253,478) (28,312) (254,107) 6,062 (22,689) Net current assets of discontinued operations (d) 54,226 131,902 54,481 38,331 - Net non-current assets of discontinued operations 97,561 59,850 97,425 76,577 54,243 ---------------- -------------- -------------- -------------- --------------- Total assets $ 1,081,896 768,919 1,086,734 1,217,440 1,625,425 ================ ============== ============== ============== =============== Capital expenditures of continuing operations (e): Telecom Services $ 159,997 24,036 67,192 252,008 357,991 Network Services 2,983 279 764 1,577 1,804 Satellite Services 11,442 1,484 2,020 5,901 11,107 Corporate Services 2,728 1,108 438 10,384 960 Eliminations (215) (25) (117) (1,074) (2,916) ---------------- -------------- -------------- -------------- --------------- Total capital expenditures of continuing operations $ 176,935 26,882 70,297 268,796 368,946 ================ ============== ============== ============== ===============
F-59 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (15) Business Units (continued) (a) EBITDA (before nonrecurring charges) consists of net loss from continuing operations before interest, income taxes, depreciation and amortization, provision for impairment of long-lived assets, net loss (gain) on disposal of long-lived assets, restructuring costs, other expense, net and accretion and preferred dividends on preferred securities of subsidiaries, or simply, revenue less operating costs and selling, general and administrative expenses. EBITDA (before nonrecurring charges) is presented as the Company's measure of operating performance because it is a measure commonly used in the telecommunications industry. EBITDA (before nonrecurring charges) is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. EBITDA (before nonrecurring charges) is not a measurement under GAAP and is not necessarily comparable with similarly titled measures of other companies. (b) Although not included in EBITDA (before nonrecurring charges), which represents the measure of operating performance used by management to evaluate operating results, the Company has supplementally provided depreciation and amortization and interest expense for each of the Company's business units and Corporate Services. Interest expense excludes amounts charged for interest on outstanding cash advances and expense allocations among the business units and Corporate Services. (c) Total assets of Telecom Services, Satellite Services and Corporate Services excludes investments in consolidated subsidiaries which eliminate in consolidation. (d) At December 31, 1998, the Company had net current liabilities of discontinued operations of $23.3 million, and accordingly, such amount was not included within net current assets of discontinued operations on that date. (e) Capital expenditures include assets acquired under capital leases and excludes payments for construction of the Company's corporate headquarters. F-60 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (16) Provision for Impairment of Long-Lived Assets For fiscal 1997, provision for impairment of long-lived assets includes the impairment of the Company's Corporate Services investments in StarCom International Optics Corporation, Inc. ("StarCom") and Zycom of approximately $5.2 million and $2.7 million, respectively, and the Company's Satellite Services investments in MCN and Nova-Net of approximately $2.9 million and $0.9 million, respectively. The Company recorded its impairment in the investment in StarCom upon notification by a senior secured creditor of StarCom that it intended to foreclose on its collateral in StarCom, which subsequently caused the bankruptcy of StarCom. Based on circumstances of continuing net operating losses and management's assessment of the estimated fair value of related long-lived assets at December 31, 1997, the Company recorded an impairment of its investments in Zycom, MCN and Nova-Net. For fiscal 1996, provision for impairment of long-lived assets includes the Company's Telecom Services investments in the Phoenix and Melbourne networks of approximately $5.8 million and $2.7 million, respectively, and the Company's Satellite Services investment in its subsidiary in Mexico of approximately $0.2 million. The provision for impairment of long-lived assets was based on circumstances of continuing net operating losses and management's assessment of the estimated fair value of related long-lived assets at September 30, 1996. Additionally, the Company provided an allowance for a note receivable from NovoComm, Inc. of approximately $1.3 million based on management's assessment at September 30, 1996 of the collectibility of amounts due. (17) Restructuring Costs During fiscal 1998, the Company completed a decentralization of the Company's Network Services business unit. The Company recorded approximately $0.6 million in restructuring costs, consisting primarily of severance costs, resulting from the decentralization. Also during fiscal 1998, the Company recorded approximately $1.5 million of restructuring costs associated with a combined restructuring plan for Telecom Services and Corporate Services, which was designed to support the Company's increased strategic focus on its ISP customer base, as well as to improve the efficiency of operations and general and administrative support functions. Restructuring costs under this plan include severance and other employee benefit costs. At December 31, 1998, approximately $0.6 million remains in accrued liabilities related to the Telecom Services F-61 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (17) Restructuring Costs (continued) and Corporate Services restructuring plan, which is expected to be paid during the first quarter of 1999. Following the Company's acquisition of NikoNET in July 1998, the Company closed a regional facility of a newly acquired subsidiary of NikoNET. Restructuring costs, consisting primarily of severance costs, of approximately $0.2 million were recorded as a result of the facility closure during fiscal 1998. Approximately $0.2 million remains in accrued liabilities at December 31, 1998 related to the facility closure. (18) Income Taxes The components of income tax benefit for fiscal 1996 are as follows (in thousands): Current income tax expense $ (198) Deferred income tax benefit 5,329 ---------------- Total $ 5,131 ================ Current income tax expense of $0.2 million and $0.1 million for fiscal 1996 and 1998, respectively, represents state income tax relating to operations of a subsidiary company in a state requiring a separate entity tax return. Accordingly, this entity's taxable income cannot be offset by the Company's consolidated net operating loss carryforwards. During fiscal 1996, the deferred tax liability was adjusted for the effects of certain changes in estimated lives of property and equipment as discussed in note 2. As a result, the Company recognized an income tax benefit of $5.3 million. No income tax expense or benefit was recorded in the three months ended December 31, 1996 or fiscal 1997. Income tax benefit differs from the amounts computed by applying the U.S. federal income tax rate to loss before income taxes primarily because the Company has not recognized the income tax benefit of certain of its net operating loss carryforwards and other deferred tax assets due to the uncertainty of realization. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1998 are as follows: F-62 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (18) Income Taxes (continued)
December 31, ------------------------------------------ 1997 1998 ------------------- -------------------- (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 $ 6,254 10,173 ------------------- -------------------- Deferred income tax assets: Net operating loss carryforwards (141,185) (247,126) Accrued interest on high yield debt obligations deductible when paid (72,330) (108,895) Accrued expenses not currently deductible for tax purposes, including deferred revenue (7,968) (9,275) Less valuation allowance 215,229 355,123 ------------------- -------------------- Deferred income tax assets (6,254) (10,173) ------------------- -------------------- Net deferred income tax liability $ - - =================== ====================
As of December 31, 1998, the Company has federal and foreign net operating loss carryforwards ("NOLs") of approximately $617.8 million and $35.0 million, respectively, which expire in varying amounts through 2019. However, due to the provisions of Section 382, Section 1502 and certain other provisions of the Internal Revenue Code (the "Code"), the utilization of these NOLs will be limited. The Company is also subject to certain state income tax laws, which will also limit the utilization of NOLs. As a result of ICG's merger with NETCOM, which created a change in ownership of NETCOM of greater than 50%, the NOLs generated by NETCOM prior to January 21, 1998 that can be used to reduce future taxable income are limited to approximately $15.0 million per year, before realization of unrecognized built-in gains. A valuation allowance has been provided for the deferred tax asset relating to the Company's NOLs, as management is not presently able to determine when the Company will generate future taxable income. F-63 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (19) Employee Benefit Plans The Company has established salary reduction savings plans under Section 401(k) of the Code which the Company administers for participating employees. All full-time employees are covered under the plans after meeting minimum service and age requirements. Under the plan available to NETCOM employees from January 1, 1997 through July 1, 1998, the Company made a matching contribution of 100% of each NETCOM employee's contribution up to a maximum of 3% of the employee's eligible earnings. Prior to 1997, NETCOM's matching contribution was limited to 50% of each NETCOM employee's contribution up to a maximum of 6% of the employee's eligible earnings. Under the plan available to all ICG employees, including NETCOM employees subsequent to July 1, 1998, the Company makes a matching contribution of ICG Common Stock up to a maximum of 6% of the employee's eligible earnings. Aggregate matching contributions under the Company's employee benefit plans were approximately $1.6 million, $0.6 million, $3.6 million and $4.0 million during fiscal 1996, the three months ended December 31, 1996, and fiscal 1997 and 1998, respectively. The portion of this expense which relates directly to employees of NETCOM is included in loss from discontinued operations for all periods presented. (20) Summarized Financial Information of ICG Holdings, Inc. As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997 are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes issued by Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by ICG and Holdings-Canada. The separate complete financial statements of Holdings have not been included herein because such disclosure is not considered to be material to the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes. However, summarized combined financial information for Holdings and subsidiaries and affiliates is as follows: F-64 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (20) Summarized Financial Information of ICG Holdings, Inc. (continued) Summarized Consolidated Balance Sheet Information
December 31, -------------------------------------- 1997 1998 ----------------- ------------------ (in thousands) Current assets $ 213,625 277,098 Property and equipment, net 631,117 636,747 Other non-current assets, net 120,878 170,151 Net non-current assets of discontinued operations 2,940 220 Current liabilities 95,792 81,299 Net current liabilities of discontinued operations 367 944 Long-term debt, less current portion 890,503 1,004,316 Capital lease obligations, less current portion 66,939 63,359 Due to parent 30,970 191,889 Due to ICG Services - 137,762 Redeemable preferred stock 292,442 338,311 Stockholders' deficit (408,453) (733,664)
Summarized Consolidated and Combined Statement of Operations Information
Three months ended Fiscal years ended Fiscal year ended December 31, December 31, September 30, -------------------------------- ------------------------------- 1996 1995 1996 1997 1998 ---------------------- --------------- -------------- --------------- --------------- (unaudited) (in thousands) Total revenue $ 154,143 34,544 49,477 245,022 400,309 Total operating costs and expenses 239,343 50,322 75,199 430,816 546,850 Operating loss (85,200) (15,778) (25,722) (185,794) (146,541) Loss from continuing operations before cumulative effect of change in accounting (169,439) (34,211) (49,266) (321,802) (320,363) Net loss (172,687) (34,281) (49,750) (328,193) (325,211)
F-65 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (21) Condensed Financial Information of ICG Holdings (Canada) Co. Condensed financial information for Holdings-Canada only is as follows: Condensed Balance Sheet Information December 31, ----------------------------------------- 1997 1998 ---------------------- ---------------- (in thousands) Current assets $ 162 162 Advances to subsidiaries 30,970 191,889 Non-current assets, net 2,604 2,414 Current liabilities 107 73 Long-term debt, less current portion 65 65 Due to parent 21,146 182,101 Share of losses of subsidiary 408,453 733,664 Shareholders' deficit (396,035) (721,438) Condensed Statement of Operations Information
Fiscal year ended Three months ended December Fiscal years ended December 31, September 30, 31, ------------------------------- ---------------------------------- 1996 1995 1996 1997 1998 -------------------- --------------- -------------- --------------- ----------------- (unaudited) (in thousands) Total revenue $ - - - - - Total operating costs and expenses 3,438 361 73 195 192 Operating loss (3,438) (361) (73) (195) (192) Losses from subsidiaries (172,687) (34,281) (49,750) (328,193) (325,211) Net loss attributable to common shareholders (184,107) (34,642) (49,823) (328,388) (325,403)
F-66 ICG COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- (22) Condensed Financial Information of ICG Communications, Inc. (Parent company) At December 31, 1998, the primary assets of ICG are its investments in ICG Services, ICG Funding, ICG Acquisition and NikoNET, including advances to those subsidiaries. Certain corporate expenses of the parent company are included in ICG's statement of operations and were approximately $1.2 million and $2.2 million for fiscal 1997 and 1998, respectively. At December 31, 1998, ICG had no operations other than those of ICG Services, ICG Funding, ICG Acquisition and their subsidiaries. F-67 FINANCIAL STATEMENT SCHEDULE ICG Communications, Inc. Page Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . S-1 Schedule II: Valuation and Qualifying Accounts . . . . . . . . . . S-2 Independent Auditors' Report The Board of Directors and Stockholders ICG Communications, Inc.: Under the date of February 15, 1999, we reported on the consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the fiscal years ended September 30, 1996, the three months ended December 31, 1996, and the fiscal years ended December 31, 1997 and 1998 as contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement Schedule II: Valuation and Qualifying Accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. We did not audit the consolidated financial statements and related financial statement schedule of NETCOM On-Line Communication Services, Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the Company, as of December 31, 1997 or for the fiscal year ended December 31, 1996, the three-month period ended December 31, 1996, or the fiscal year ended December 31, 1997, whose total assets constitute 11.7 percent in fiscal 1997, and whose loss from operations constitutes 100.5 percent in fiscal 1996, 96.0 percent in the three months ended December 31, 1996, and 83.8 percent in fiscal 1997 of the consolidated loss from discontinued operations. Those consolidated financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included in the financial statement schedule for NETCOM, is based solely on the reports of the other auditors. In our opinion, based on our audits and the reports of the other auditors, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As explained in note 2 to the consolidated financial statements, during the fiscal year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts. KPMG LLP Denver, Colorado February 15, 1999 S-1 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, 1996 $ 2,142 1,531 - (1,293) 2,380 ------------ ------------- -------------- ------------- ------------- Three months ended December 31, 1996 $ 2,380 914 - (883) 2,411 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1997 $ 2,411 3,985 - (1,142) 5,254 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1998 $ 5,254 12,031 - (1,812) 15,473 ------------ ------------- -------------- ------------- ------------- Allowance for uncollectible note receivable: Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275 ------------ ------------- -------------- ------------- ------------- Three months ended December 31, 1996 $ 7,275 - - - 7,275 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1997 $ 7,275 - - (3,975) 3,300 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1998 $ 3,300 - - (2,000) 1,300 ------------ ------------- -------------- ------------- ------------- Allowance for impairment of long-lived assets: Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000 ------------ ------------- -------------- ------------- ------------- Three months ended December 31, 1996 $ 2,000 - - - 2,000 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1997 $ 2,000 5,170 - (2,000) 5,170 ------------ ------------- -------------- ------------- ------------- Fiscal year ended December 31, 1998 $ 5,170 - - - 5,170 ------------ ------------- -------------- ------------- -------------
See accompanying independent auditors' report. S-2 INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS 3.3: Agreement and Plan of Reorganization by and among ICG Communications, Inc., ICG Canadian Acquisition, Inc., ICG Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated November 4, 1998. 3.4:Order of Amalgamation between ICG Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated December 22, 1998. 3.5: Memorandum and Articles of Association of ICG Holdings (Canada) Co. filed with the Registrar of Joint Stock Companies, Halifax, Nova Scotia. 4.11:Second Amended and Restated Articles of Incorporation of ICG Holdings, Inc., dated March 10, 1997. 10.29: ICG Communications, Inc. 1998 Stock Option Plan. 10.30: Form of Stock Option Agreement for 1998 Stock Option Plan. 10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock Option Plan, dated December 15, 1998. 10.32: Form of Agreement regarding Gross-Up Payments, by and between ICG Communications, Inc. and each of J. Shelby Bryan, Harry R. Herbst, Douglas I. Falk and H. Don Teague, dated December 16, 1998. 21.1: Subsidiaries of the Registrant. 23.1: Consent of KPMG LLP. 23.2: Consent of Ernst & Young LLP. 27.1:Financial Data Schedule of ICG Communications, Inc. for the Fiscal Year Ended December 31, 1998. EXHIBIT 21.1 Subsidiaries of the Registrant
State of Incorporation Doing Business Name of Subsidiary As - ---------------------------------------------------------------------- ------------------------ ---------------------------- Bay Area Teleport, Inc. Delaware -- Communications Buying Group, Inc. Ohio -- DataChoice Network Services, L.L.C. Nevada -- Fiber Optic Technologies of the Northwest, Inc. (formerly known as Fiber Optic Technologies of Oregon, Inc.) Oregon -- ICG Access Services - Southeast, Inc. (formerly known as PrivaCom, Inc.) Delaware -- ICG Canadian Acquisition, Inc. Delaware -- ICG ChoiceCom, L.P. Delaware -- (formerly known as CSW/ICG ChoiceCom, L.P.) ICG ChoiceCom Management, LLC (formerly known as Southwest TeleChoice Management, LLC and CSW/ICG ChoiceCom Management, LLC) Delaware -- ICG Enhanced Services, Inc. Colorado -- ICG Equipment, Inc. Colorado -- ICG Fiber Optic Technologies, Inc. (formerly known as Fiber Optic Technologies, Inc.) Colorado -- ICG Funding, LLC Delaware -- ICG Holdings, Inc. (formerly known as IntelCom Group (U.S.A.), Inc.) Colorado -- ICG Holdings (Canada) Co. Nova Scotia -- ICG Ohio LINX, Inc. (formerly known as Ohio Local Interconnection Network Exchange Co.) Ohio -- ICG PST, Inc. (formerly known as NETCOM On-Line Communication Services, Inc.) Delaware -- ICG Satellite Services, Inc. (formerly known as Commden Ltd. and as ICG Wireless Services, Inc.) Colorado -- ICG Services, Inc. Delaware -- ICG Telecom Canada, Inc. Federal Canadian -- ICG Telecom Group, Inc. (formerly known as ICG Access Services, Inc.) Colorado --
State of Incorporation Doing Business Name of Subsidiary As - ---------------------------------------------------------------------- ------------------------ ---------------------------- ICG Telecom Group of Virginia, Inc. Virginia -- ICG Telecom of San Diego, L.P. California -- (formerly known as Linkatel of California, L.P.) Maritime Telecommunications Network, Inc. Colorado -- NikoNET, LLC Georgia -- PTI Harbor Bay, Inc. Washington -- TransAmerican Cable, Inc. Kentucky MidAmerican Cable UpSouth Corporation Georgia -- Zycom Corporation Alberta, Canada -- (formerly known as Camber Sports, Inc.) Zycom Corporation Texas -- Zycom Network Services, Inc. Texas -- (formerly known as Travel Phone, Inc.)
Consent of KPMG LLP The Board of Directors ICG Communications, Inc.: We consent to incorporation by reference in the registration statements Nos. 33-96660, 333-08729, 333-18839, 333-38823, 333-40495 and 333-40495-01 on Form S-3 of IntelCom Group Inc. and Nos. 33-14127, 333-25957, 333-39737, 333-45213 and 333-56835 on Form S-8 of ICG Communications, Inc. of our reports dated February 15, 1999, relating to the consolidated balance sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the fiscal years ended September 30, 1996, the three-month period ended December 31, 1996, and the fiscal years ended December 31, 1997 and 1998, and the related financial statement schedule, which reports appear in the December 31, 1998 Annual Report on Form 10-K of ICG Communications, Inc. As explained in note 2 to the consolidated financial statements, during the fiscal year ended September 30, 1996, the Company changed its method of accounting for long-term telecom services contracts. KPMG LLP Denver, Colorado March 29, 1999 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statements (Forms S-3 of IntelCom Group Nos. 33-96660 and 333-08729; Forms S-3 of ICG Communications, Inc. Nos. 333-18839, 333-38823, 333-40495 and 333-40495-01; and Forms S-8 of ICG Communications, Inc. Nos. 33-14127, 333-25957, 333-39737, and 333-45213) of our reports (a) dated February 13, 1998 with respect to the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997 (not presented separately herein), and (b) dated April 16, 1998 with respect to the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of December 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the three months then ended (not presented separately herein), included in this Annual Report (Form 10-K) of ICG Communications, Inc., ICG Holdings (Canada) Co. and ICG Holdings, Inc. Ernst & Young LLP San Jose, California March 26, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ICG Communications, Inc. By: /s/J. Shelby Bryan -------------------------------------- J. Shelby Bryan President and Chief Executive Officer Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date /s/William J. Laggett Chairman of the Board of Directors March 30, 1999 - ------------------------------- William J. Laggett President and Chief Executive Officer (Principal /s/J. Shelby Bryan Executive Officer) March 30, 1999 - ------------------------------- J. Shelby Bryan Executive Vice President and Chief Financial Officer (Principal Financial /s/Harry R. Herbst Officer) March 30, 1999 - ------------------------------- Harry R. Herbst Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1999 - ------------------------------- Richard Bambach /s/John U. Moorhead Director March 30, 1999 - ------------------------------- John U. Moorhead /s/Leontis Teryazos Director March 30, 1999 - ------------------------------- Leontis Teryazos /s/Walter Threadgill Director March 30, 1999 - ------------------------------- Walter Threadgill
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ICG Holdings (Canada) Co. By: /s/J. Shelby Bryan ---------------------------------------- J. Shelby Bryan President and Chief Executive Officer Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date President and Chief Executive Officer (Principal /s/J. Shelby Bryan Executive Officer) March 30, 1999 - ------------------------------- J. Shelby Bryan Executive Vice President, Chief Financial Officer /s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999 - ------------------------------- Harry R. Herbst Executive Vice President, General Counsel, /s/H. Don Teague Secretary and Director March 30, 1999 - ------------------------------- H. Don Teague Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1999 - ------------------------------- Richard Bambach
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ICG Holdings, Inc. By: /s/J. Shelby Bryan ------------------------------------- J. Shelby Bryan President, Chief Executive Officer and Director Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive /s/J. Shelby Bryan Officer) March 30, 1999 - ------------------------------ J. Shelby Bryan Executive Vice President, Chief Financial Officer /s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999 - ------------------------------ Harry R. Herbst Executive Vice President, General Counsel, /s/H. Don Teague Secretary and Director March 30, 1999 - ------------------------------ H. Don Teague Vice President and Corporate Controller /s/Richard Bambach (Principal Accounting Officer) March 30, 1999 - ------------------------------ Richard Bambach /s/Douglas I. Falk Executive Vice President - Telecom and Director March 30, 1999 - ------------------------------ Douglas I. Falk
EX-3.(I) 2 3.3 AGREEMENT AND PLAN OF REORGANIZATION among ICG COMMUNICATIONS, INC., ICG CANADIAN ACQUISITION, INC., ICG HOLDINGS (CANADA), INC., and ICG HOLDINGS (CANADA) CO. Dated as of November 4, 1998 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND CONSTRUCTION......................................1 1.1 Certain Definitions...............................................1 1.2 Terms Generally...................................................4 ARTICLE II THE REORGANIZATION AND RELATED MATTERS............................4 2.1 The Reorganization................................................4 (a) Exchange of Class A Shares...............................4 (b) Acquisition of Company Common Shares Owned by ICG........5 (c) Treatment of Warrants....................................5 (d) Continuation of the Company..............................5 2.2 Closing...........................................................6 2.3 Exchange of Shares................................................6 (a) Appointment of Exchange Agent............................6 (b) Letter of Transmittal....................................6 (c) Exchange Procedure.......................................6 (d) Unregistered Transfers of Company Common Shares..........6 (e) Lost, Stolen or Destroyed Certificates...................7 (f) No Dividends Before Surrender of Certificates............7 (g) No Further Ownership Rights in Company Common Shares.....7 (h) Abandoned Property Laws..................................7 ARTICLE III CERTAIN ACTIONS...................................................8 3.1 Shareholder Meeting...............................................8 3.2 Reasonable Efforts................................................8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................9 4.1 Organization and Qualification....................................9 4.2 Authorization and Validity of Agreement...........................9 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ICG, ACQUISITION AND NOVA SCOTIA............................................................9 5.1 Organization......................................................9 5.2 Authorization and Validity of Agreement..........................10 ARTICLE VI TRANSACTIONS PRIOR TO CLOSING....................................10 6.1 Access to Information............................................10 6.2 Expenses.........................................................10 6.3 Notification of Certain Matters..................................10 6.4 Actions by ICG and Acquisition...................................11 ARTICLE VII CONDITIONS PRECEDENT.............................................11 7.1 Conditions Precedent to the Obligations of ICG, Acquisition, Nova Scotia and the Company......................................11 (a) Shareholder Approval....................................11 (b) Absence of Injunctions..................................11 7.2 Conditions Precedent to the Obligations of ICG, Acquisition and Nova Scotia......................................................11 (a) Accuracy of Representations and Warranties..............12 (b) Performance of Agreements...............................12 (c) Officers' Certificates..................................12 (d) No Adverse Enactments...................................12 (e) Receipt of Licenses, Permits and Consents...............12 7.3 Conditions Precedent to the Obligations of the Company...........12 (a) Accuracy of Representations and Warranties..............13 (b) Performance of Agreements...............................13 (c) Officers' Certificates..................................13 (d) No Adverse Enactments...................................13 (e) Receipt of Licenses, Permits and Consents...............13 ARTICLE VIII TERMINATION......................................................13 8.1 Termination and Abandonment......................................13 8.2 Effect of Termination............................................14 ARTICLE IX MISCELLANEOUS....................................................14 9.1 Effectiveness of Representations, Warranties and Agreements......14 9.2 Notices..........................................................14 9.3 Entire Agreement.................................................15 9.4 Assignment; Binding Effect; Benefit..............................15 9.5 Amendment........................................................15 9.6 Extension; Waiver................................................15 9.7 Headings.........................................................16 9.8 Counterparts.....................................................16 9.9 Applicable Law...................................................16 9.10 Limited Liability................................................16 9.11 Severability.....................................................16 Exhibit A Articles of Amendment Exhibit B Sole Shareholder's Resolution AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of the fourth day of November, 1998, by and among ICG Communications, Inc., a Delaware corporation ("ICG"), ICG Canadian Acquisition, Inc., a Delaware corporation ("Acquisition"), ICG Holdings (Canada), Inc., a corporation organized under the Canadian Business Corporations Act (the "Company"), and ICG Holdings (Canada) Co. ("Nova Scotia"), a newly organized unlimited liability company organized under the laws of the Province of Nova Scotia. WHEREAS, ICG is the parent of the Company and beneficially owns approximately 99.93% of the outstanding common shares of the Company; WHEREAS, ICG desires to cause Acquisition to acquire ownership of all of the common shares of the Company not owned by it; WHEREAS, the Boards of Directors of ICG, Acquisition and the Company each have determined that it is advisable and in the best interests of their respective stockholders for ICG to so acquire such shares and, to that end, for Acquisition to acquire all of the outstanding shares of the Company upon the terms and subject to the conditions of this Agreement, and thereafter for the Company to be continued as an unlimited liability company under the laws of Nova Scotia; and WHEREAS, for United States federal income tax purposes, it is intended that the Reorganization (as defined below) qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND CONSTRUCTION I.1 Certain Definitions. As used in this Agreement, the following terms will have the following meanings unless the context otherwise requires: "Acquisition" has the meaning specified in the preamble. "Affiliate" means, with respect to any Person, any Person controlling, controlled by or under common control with such Person. "Agreement" means this Agreement and Plan of Reorganization, including the attached Exhibits. "Articles of Amendment" has the meaning set forth in Section 2.1(a). "Certificates" means certificates evidencing shares of Company Common Shares held by Persons other than ICG or Acquisition. "Closing" means the consummation of the transactions contemplated by this Agreement. "Closing Date" means the date on which the Closing occurs pursuant to Section 2.2. "Code" has the meaning specified in the preamble. "Company" has the meaning specified in the preamble. "Company Board" means the Board of Directors of the Company. "Company Charter" means the Articles of Arrangement of the Company, as amended to the date of this Agreement and as they may be further amended prior to the Closing. "Company Common Shares" means shares of the Company's Class A Shares. "Control" means, with respect to any Person, the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, by contract or otherwise. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Exchange Agent" has the meaning specified in Section 2.3(a). "Exchange Agent Agreement" has the meaning specified in Section 2.3(a). "Governmental Entity" means any court, arbitrator, administrative or other governmental department, agency, commission, authority or instrumentality, domestic or foreign. "ICG" has the meaning specified in the preamble. "ICG Common Stock" means shares of common stock of ICG, par value $.01 per share. "Injunction" has the meaning specified in Section 3.2. 2 "License" means any license, franchise, ordinance, authorization, permit, certificate, variance, exemption, concession, lease, right of way, easement, instrument, order and approval, domestic or foreign. "Material Adverse Effect" means (A) with respect to ICG, a material adverse effect on the business, properties, operations or financial condition of ICG and its subsidiaries (including the Company and its subsidiaries) taken as a whole, other than any such effect arising out of or resulting from general business or economic conditions in the United States, and (B) with respect to the Company, a material adverse effect on the business, properties, operations or financial condition of the Company and its subsidiaries taken as a whole, other than any such effect arising out of or resulting from general business or economic conditions in areas where the Company does business. "Nova Scotia" has the meaning set forth in the preamble. "Person" means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, association, unlimited liability company, or joint venture or a government, agency, political subdivision, or instrumentality thereof. "Reorganization" has the meaning specified in Section 2.1. "Special Meeting" has the meaning specified in Section 3.1. "Subsidiary" when used with respect to any Person, means any other Person, of which (x) in the case of a corporation, at least (A) a majority of the equity and (B) a majority of the voting interests are owned or controlled, directly or indirectly, by such first Person, by any one or more of its subsidiaries, or by such first Person and one or more of its subsidiaries or (y) in the case of any Person other than a corporation, such first Person, one or more of its subsidiaries, or such first Person and one or more of its subsidiaries (A) owns a majority of the equity interests thereof and (B) has the power to elect or direct the election of a majority of the members of the governing body thereof or otherwise has control over such organization or entity; provided that, for purposes of the agreements set forth in Article 3 and Article 6, references to subsidiaries will not include any Person as to which such first Person's voting interests are subject to a voting agreement, proxy, management contract or other arrangement as a result of which such first Person does not control such other Person. For purposes of this Agreement, unless otherwise specified, neither the Company nor any of its subsidiaries will be deemed to be subsidiaries of ICG or any of ICG's subsidiaries, whether or not they otherwise would be subsidiaries of ICG or any of ICG's subsidiaries under the foregoing definition. "Warrant Agreement" means the Warrant Agreement between Intelcom Group Inc. and Norwest Bank Colorado National Association, dated August 8, 1995. 3 "Warrants" means each of the rights to subscribe for shares of Company Common Shares issued and outstanding under the Warrant Agreement. "Wholly-Owned Subsidiary" will mean, as to any Person, a Subsidiary of such Person 100% of the equity and voting interest in which is owned, directly or indirectly, by such Person. I.2 Terms Generally. The definitions in Section 1.1 will apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun will include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" will be deemed to be followed by the phrase "without limitation." The words "herein," "hereof" and "hereunder" and words of similar import refer to this Agreement (including the Exhibits) in its entirety and not to any part hereof unless the context will otherwise require. All references herein to Articles, Sections, and Exhibits will be deemed references to Articles and Sections of, and Exhibits to, this Agreement unless the context otherwise requires. Unless the context otherwise requires, any references to any agreement or other instrument or statute or regulation are to it as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provisions). Any reference in this Agreement to a "day" or number of "days" (without the explicit qualification of "business") will be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a business day, then such action or notice will be deferred until, or may be taken or given on, the next business day. As used herein, the phrase "made available" means that the information referred to has been made available if requested by the party to whom such information is to be made available. ARTICLE II THE REORGANIZATION AND RELATED MATTERS 2.1 The Reorganization. The "Reorganization" will consist of the following transactions, all of which will be considered part of one integrated and mutually interdependent plan undertaken by the parties: (a) Exchange of Class A Shares. The following actions will be undertaken to facilitate the acquisition of Class A Shares held by Persons other than ICG or Acquisition: (i) The Company will prepare and file with the Director appointed under the Canada Business Corporations Act, Articles of Amendment to the provisions of the Company Charter attaching to the Company Shares, in the form attached as Exhibit A (the "Articles of Amendment"). 4 (ii) The Company will declare an Automatic Redemption Date on December 1, 1998 or as soon as possible thereafter. (iii)ICG will assign the Redemption Call Right contained in the Company Charter to Acquisition and Acquisition will exercise the Redemption Call Right in respect of the Automatic Redemption Date declared pursuant to the foregoing clause (ii). (iv) The effect of the foregoing clauses (i), (ii) and (iii) will be to provide for the automatic exchange on the Closing Date of each Company Common Share outstanding and held by Persons other than ICG or Acquisition for an equal number of shares of ICG Common Stock. As a result, on the Closing Date, Acquisition will acquire all of the Company Common Shares held by Persons other than ICG or Acquisition in exchange for an equal number of shares of ICG Common Stock. (b) Acquisition of Company Common Shares Owned by ICG. On or prior to the Closing Date, in addition to the Company Common Shares held by Persons other than ICG or Acquisition acquired by Acquisition pursuant to Section 2.1(a), Acquisition will acquire from ICG, in exchange for 100 newly issued shares of Acquisition common stock (representing all of Acquisition's issued capital stock), all of the Company Common Shares owned by ICG and 22,370 shares of ICG Common Stock. Notwithstanding the prior sentence, the consideration for the Company Common Shares acquired by Acquisition from ICG shall be deemed to be an equal number of shares of ICG Common Stock deemed to have been contributed to the capital of Acquisition by ICG. Thus, to avoid the inconvenience of authorizing, issuing, contributing and returning actual shares of ICG Common Stock, ICG and Acquisition will dispense with this formality, resulting in a constructive contribution of ICG Common Stock by ICG to Acquisition and a constructive issuance of ICG Common Stock by Acquisition to ICG in exchange for the Company Common Shares owned by ICG. (c) Treatment of Warrants. On and after January 1, 1999, as a result of and pursuant to the Reorganization, (i) each of the Warrants will no longer be exercisable for Company Common Shares; (ii) each of the Warrants will become exercisable for ICG Common Stock issuable by ICG (and not issuable by the Company); and (iii) the holders of the Warrants will be entitled to purchase ICG Common Stock solely from ICG (and not from the Company) on the same terms and conditions as are set forth in the Warrant Agreement with respect to the purchase of Company Common Shares. In accordance with this Section 2.1(c), on and after the Closing Date the Warrant Agreement will provide solely for the issuance of ICG Common Stock by ICG upon the exercise of Warrants rather than Company Common Shares. All other terms and conditions of the Warrant Agreement will remain in full force and effect. (d) Continuation of the Company. On or prior to the Closing Date, Acquisition will organize Nova Scotia. Promptly after the Closing, 5 Acquisition will adopt a sole shareholder's resolution (the form of which is attached as Exhibit B) approving the continuation of the Company under the laws of the Province of Nova Scotia. As soon as practicable following such continuance, the Company will be amalgamated with and into Nova Scotia, with Nova Scotia as the survivor, and the Company will continue as an unlimited liability company organized under the laws of the Province of Nova Scotia. 2.2 Closing. Unless this Agreement shall have been terminated pursuant to Section 8.1 and subject to the satisfaction or, when permissible, waiver of the conditions set forth in Article 7, the Closing will take place (a) at 10:00 a.m. (Denver time) at the executive offices of ICG in Denver, Colorado, on the later of (i) December 1, 1998 or (ii) the date on which the last of the conditions set forth in Article 7 (other than any such conditions which by their terms are not capable of being satisfied until the Closing Date or thereafter) is satisfied or, when permissible, waived, or (b) on such other date and/or at such other time and/or place as the parties may mutually agree. 2.3 Exchange of Shares. (a) Appointment of Exchange Agent. On or before the Closing Date, ICG and the Company will enter into an agreement (the "Exchange Agent Agreement") with an exchange agent selected by ICG and reasonably acceptable to the Company (the "Exchange Agent"), authorizing such Exchange Agent to act as Exchange Agent hereunder. (b) Letter of Transmittal. Prior to the Closing, ICG will instruct the Exchange Agent to mail to each holder of record (other than ICG or Acquisition) of a Certificate or Certificates which immediately prior to such mailing evidenced issued and outstanding Company Common Shares: (i) a Management Proxy Circular describing the Articles of Amendment and (ii) a letter of transmittal (which will state that delivery will be effected, and risk of loss and title to the Certificates will pass, only upon proper delivery of the Certificates to the Exchange Agent) with instructions for use in effecting the surrender and exchange of the Certificates. Such notice, letter of transmittal and instructions will contain such provisions and be in such form as ICG and the Company may jointly specify. (c) Exchange Procedure. Promptly following the surrender, in accordance with such instructions, of a Certificate to the Exchange Agent (or such other agent or agents as may be appointed by the Exchange Agent or ICG pursuant to the Exchange Agent Agreement), together with such letter of transmittal (duly executed) and any other documents required by such instructions or letter of transmittal, ICG will, subject to Section 2.3(d), cause to be distributed to the Person in whose name such Certificate shall have been issued a certificate registered in the name of such Person representing the number of shares of ICG Common Stock into which the shares previously represented by the surrendered Certificate will have been exchanged at the Closing pursuant to this Article 2. Each Certificate so surrendered will be canceled. (d) Unregistered Transfers of Company Common Shares. In the event of a transfer of ownership of Company Common Shares which is not registered in 6 the transfer records of the Company, a certificate representing the proper number of shares of ICG Common Stock may be issued to the transferee of such shares if the Certificate evidencing such shares of Company Common Shares surrendered to the Exchange Agent in accordance with Section 2.3(c) is properly endorsed for transfer or is accompanied by appropriate and properly endorsed stock powers and is otherwise in proper form to effect such transfer, if the Person requesting such transfer pays to the Exchange Agent any transfer or other taxes payable by reason of such transfer or establishes to the satisfaction of the Exchange Agent that such taxes have been paid or are not required to be paid and if such Person establishes to the satisfaction of ICG that such transfer would not violate applicable federal or state securities laws. (e) Lost, Stolen or Destroyed Certificates. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed satisfactory to ICG and complying with any other reasonable requirements imposed by ICG, ICG will cause to be delivered to such Person in respect of such lost, stolen or destroyed Certificate the shares of ICG Common Stock or other property deliverable in respect thereof as determined in accordance with this Article 2. ICG may, in its discretion, require the owner of such lost, stolen or destroyed Certificate to give ICG a bond in such sum as it may direct as indemnity against any claim that may be made against ICG or the Company with respect to the Certificate alleged to have been lost, stolen or destroyed. (f) No Dividends Before Surrender of Certificates. No dividends or other distributions declared or made after the Closing with respect to ICG Common Stock with a record date after the Closing Date will be paid to the holder of any unsurrendered Certificate with respect to the shares of ICG Common Stock represented thereby, until the holder of record of such Certificate surrenders such Certificate as provided herein. Subject to the effect of applicable laws, following surrender of any such Certificate, there will be paid to the record holder of the certificates representing whole shares of ICG Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions, if any, with a record date after the Closing theretofore paid by ICG with respect to such whole shares of ICG Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions, if any, with a record date after the Closing but prior to surrender and with a payment date subsequent to surrender payable with respect to such whole shares of ICG Common Stock. (g) No Further Ownership Rights in Company Common Shares. All shares of ICG Common Stock issued to holders of Certificates upon the surrender for exchange of Company Common Shares in accordance with the terms of this Article 2 will be deemed to have been issued in full satisfaction of all rights pertaining to such Company Common Shares, and there will be no further registration of transfers on the stock transfer books of the Company of the Company Common Shares which were outstanding immediately prior to the Closing (other than shares owned by ICG or Acquisition prior to the Closing). Subject to Section 2.3(i), if, after the Closing, Certificates are presented to the Company for any reason, they will be exchanged as provided in this Article 2. 7 (h) Abandoned Property Laws. Payment or delivery of the shares of ICG Common Stock and any dividends or distributions with respect thereto in accordance with the terms hereof will be subject to applicable abandoned property, escheat and similar laws and none of ICG, Acquisition or the Company will be liable to any holder of Company Common Shares or ICG Common Stock for any such shares, for any dividends or distributions with respect thereto or for any cash in lieu of fractional shares which may be delivered to any public official pursuant to any abandoned property, escheat or similar law. ARTICLE III CERTAIN ACTIONS 3.1 Shareholder Meeting. The Company, acting through the Company Board, will, in accordance with applicable law, the Company Charter and the Company's By-laws, duly call, give notice of, convene and hold, as soon as reasonably practicable after the date of this Agreement, a meeting of the Company's shareholders (the "Special Meeting") for the purpose of considering and voting upon the Articles of Amendment, and the Company will, through the Company Board, recommend to its shareholders the adoption of the Articles of Amendment. 3.2 Reasonable Efforts. Subject to the terms and conditions of this Agreement and applicable law, each of the parties hereto will use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations or otherwise to consummate and make effective the Reorganization and the other transactions contemplated by this Agreement as soon as reasonably practicable, including such actions or things as any other party hereto may reasonably request in order to cause any of the conditions to such other party's obligation to consummate such transactions specified in Article 7 to be fully satisfied. Without limiting the generality of the foregoing, the parties will (and will cause their respective directors, officers and subsidiaries, and use their reasonable best efforts to cause their respective affiliates, employees, agents, attorneys, accountants and representatives, to) consult and fully cooperate with and provide reasonable assistance to each other in (i) obtaining all necessary consents, approvals, waivers, licenses, permits, authorizations, registrations, qualifications, or other permission or action by, and giving all necessary notices to and making all necessary filings with and applications and submissions to, any Governmental Entity or other Person; (ii) lifting any permanent or preliminary injunction or restraining order or other similar order issued or entered by any court or Governmental Entity of competent jurisdiction (an "Injunction") of any type referred to in Section 7.1(b); and (iii) in general, consummating and making effective the transactions contemplated hereby; provided, however, that in order to obtain any consent, approval, waiver, license, permit, authorization, registration, qualification, or other permission or action or the lifting of any Injunction referred to in clause (i) or (ii) of this sentence, no party will be required to pay any consideration, to divest itself of any of, or otherwise rearrange the composition of, its assets or to agree to any conditions or requirements which, individually or in the aggregate, would have a Material Adverse Effect on the 8 Company or ICG. Prior to making any application to or filing with any Governmental Entity or other Person in connection with this Agreement, each party will provide the other party with drafts thereof and afford the other party a reasonable opportunity to comment on such drafts. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to ICG and Acquisition as follows: 4.1 Organization and Qualification. The Company (i) is a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (ii) has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and (iii) is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or license necessary, except in such jurisdictions where the failure to be so duly qualified or licensed or in good standing has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Company. The Company has heretofore furnished or made available to ICG a true and complete copy of the Company Charter and the Company's By-laws, each as amended through and in effect on the date hereof. 4.2 Authorization and Validity of Agreement. The Company has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder and consummate the transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Company Board and by all other necessary corporate action on the part of the Company, subject, in the case of the consummation by it of the automatic exchange described in Section 2.1(a), to the approval of the Company's shareholders. This Agreement has been duly executed and delivered by the Company and (assuming the due execution and delivery of this Agreement by the other parties hereto) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, or by principles governing the availability of equitable remedies). ARTICLE V REPRESENTATIONS AND WARRANTIES OF ICG, ACQUISITION AND NOVA SCOTIA 9 ICG, Acquisition and Nova Scotia each hereby represents and warrants, as to itself, to the Company as follows: 5.1 Organization. It (i) is a corporation or unlimited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (ii) has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and (iii) is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or license necessary, except in such jurisdictions where the failure to be so duly qualified or licensed or in good standing has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on ICG, Acquisition or Nova Scotia, as the case may be. 5.2 Authorization and Validity of Agreement. It has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by it of this Agreement and the consummation by it of the transactions contemplated hereby have been approved by its respective Board of Directors and, in the case of Acquisition, by ICG as the sole stockholder of Acquisition, and have been duly authorized by all other necessary corporate action on its part. This Agreement has been duly executed and delivered by it and (assuming the due execution and delivery of this Agreement by the other parties to this Agreement) constitutes a valid and binding agreement of it, enforceable against it in accordance with its terms (except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, or by principles governing the availability of equitable remedies). ARTICLE VI TRANSACTIONS PRIOR TO CLOSING 6.1 Access to Information. From the date hereof to the Closing, upon reasonable notice, each of ICG and the Company will (and will cause each of its subsidiaries, and use its reasonable best efforts to cause its other Affiliates, to) afford to the officers, employees, counsel, accountants and other authorized representatives of the other reasonable access during normal business hours to all its properties, personnel, books and records and furnish promptly to such Persons such information concerning its business, properties, personnel and affairs as such Persons will from time to time reasonably request. 6.2 Expenses. Except as otherwise provided in this Section 6.2, whether or not the Reorganization is consummated, all costs and expenses incurred or to be incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such cost or expense. 10 6.3 Notification of Certain Matters. Between the date hereof and the Closing, each party will give prompt notice in writing to the other party of (i) any information that indicates that any of its representations or warranties contained herein was not true and correct as of the date hereof or will not be true and correct at and as of the Closing with the same force and effect as if made at and as of the Closing (except for changes permitted or contemplated by this Agreement), (ii) the occurrence or non-occurrence of any event which will result, or has a reasonable prospect of resulting, in the failure of any condition, covenant or agreement contained in this Agreement to be complied with or satisfied, (iii) any failure of the Company or ICG (or Acquisition or Nova Scotia), as the case may be, to comply with or satisfy any condition, covenant or agreement to be complied with or satisfied by it hereunder and (iv) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement or that such transactions otherwise may violate the rights of or confer remedies upon such third party. 6VI.4 Actions by ICG and Acquisition. In its capacity as a beneficial owner of Company Common Shares, ICG hereby consents to the adoption of this Agreement and agrees to cause the Company Common Shares beneficially owned by ICG to be voted in favor of the adoption of Articles of Amendment at the Special Meeting. In its capacity as the sole stockholder of Acquisition, ICG will cause Acquisition to take all corporate action necessary on its part to consummate the Reorganization and the transactions contemplated hereby. ARTICLE VII CONDITIONS PRECEDENT 7VII.1 Conditions Precedent to the Obligations of ICG, Acquisition, Nova Scotia and the Company. The respective obligations of ICG, Acquisition, Nova Scotia and the Company to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing of each of the following conditions, any or all of which, to the extent permitted by applicable law, may be waived by ICG, for itself, Acquisition and Nova Scotia (but not for the Company), or by the Company for itself (but not for ICG, Acquisition or Nova Scotia): (a) Shareholder Approval. The Articles of Amendment shall have been duly adopted by the requisite vote of the shareholders of the Company at the Special Meeting, in accordance with the Canadian Business Corporations Act, the Company Charter and the Company's By-laws. (b) Absence of Injunctions. No permanent or preliminary Injunction or restraining order or other order by any court or other Governmental Entity of competent jurisdiction, or other legal restraint or prohibition, preventing consummation of the transactions contemplated by this Agreement shall be in effect, or permitting such consummation only subject to any condition or restriction that has or would have a Material Adverse Effect on ICG or the Company. 11 7.2 Conditions Precedent to the Obligations of ICG, Acquisition and Nova Scotia. The obligations of ICG, Acquisition and Nova Scotia to consummate the transactions contemplated by this Agreement are also subject to the satisfaction at or prior to the Closing Date of each of the following conditions, unless waived by ICG: (a) Accuracy of Representations and Warranties. All representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects in each case as of the date of this Agreement and (except to the extent such representations and warranties speak as of a specified earlier date) on and as of the Closing Date as though made on and as of the Closing Date, except for changes permitted or contemplated by this Agreement. (b) Performance of Agreements. The Company shall have performed in all material respects all obligations and agreements, and complied in all material respects with all covenants and conditions, contained in this Agreement to be performed or complied with by it prior to or on the Closing Date. (c) Officers' Certificates. ICG, Acquisition and Nova Scotia shall have received such certificates of the Company, dated the Closing Date, in each case signed by an executive officer of the Company (but without personal liability thereto), to evidence satisfaction of the conditions set forth in Sections 7.1(a), 7.2(a) and 7.2(b) (insofar as each relates to the Company), as may be reasonably requested by ICG. (d) No Adverse Enactments. There shall not have been any action taken, or any statute, rule, regulation, order, judgment or decree proposed, enacted, promulgated, entered, issued, enforced or deemed applicable by any foreign or United States federal, state or local Governmental Entity, and there shall be no action, suit or proceeding pending or, to the knowledge of the parties, threatened, which (i) makes or may make this Agreement, the Reorganization, or any of the other transactions contemplated by this Agreement illegal or imposes or may impose material damages or penalties in connection therewith; or (ii) otherwise prohibits, restricts, or unreasonably delays consummation of the Reorganization or any of the other transactions contemplated by this Agreement or increases or may increase in any material respect the liabilities or obligations of ICG arising out of this Agreement, the Reorganization, or any of the other transactions contemplated by this Agreement. (e) Receipt of Licenses, Permits and Consents. All consents as are required in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect, and all governmental filings as are required in connection with the consummation of such transactions shall have been made, other than those which, if not obtained, in force or effect, or made (as the case may be) would not, either individually or in the aggregate, (i) have a material adverse effect on the transactions contemplated hereby or (ii) assuming consummation of the Reorganization, have a Material Adverse Effect, as of or after the Closing, on the Company or ICG. 12 7VII.3 Conditions Precedent to the Obligations of the Company. The obligation of the Company to consummate the transactions contemplated by this Agreement is also subject to the satisfaction at or prior to the Closing Date of each of the following conditions, unless waived by the Company: (a) Accuracy of Representations and Warranties. All representations and warranties of ICG, Acquisition and Nova Scotia contained in this Agreement shall be true and correct in all material respects in each case as of the date of this Agreement and (except to the extent such representations and warranties speak of a specified earlier date) on and as of the Closing Date as though made on and as of the Closing Date, except for changes permitted or contemplated by this Agreement. (b) Performance of Agreements. Each of ICG, Acquisition and Nova Scotia shall have performed in all material respects all obligations and agreements, and complied in all material respects with all covenants and conditions, contained in this Agreement to be performed or complied with by each of them prior to or on the Closing Date. (c) Officers' Certificates. The Company shall have received such certificates of ICG, dated the Closing Date, in each case signed by an executive officer of ICG (but without personal liability thereto) to evidence satisfaction of the conditions set forth in Sections 7.1(b), 7.3(a) and 7.3(b) (insofar as each relates to ICG, Acquisition or Nova Scotia), as may be reasonably requested by the Company. (d) No Adverse Enactments. There shall not have been any action taken, or any statute, rule, regulation, order, judgment or decree proposed, enacted, promulgated, entered, issued, enforced or deemed applicable by any foreign or United States federal, state or local Governmental Entity, and there shall be no action, suit or proceeding pending or, to the knowledge of the parties, threatened, which makes or may make this Agreement, the Reorganization, or any of the other transactions contemplated by this Agreement illegal or imposes or may impose material damages or penalties in connection therewith. (e) Receipt of Licenses, Permits and Consents. All consents as are required in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect, and all governmental filings as are required in connection with the consummation of such transactions shall have been made, other than those which, if not obtained, in force or effect, or made (as the case may be), would not, either individually or in the aggregate, assuming consummation of the Reorganization, have a Material Adverse Effect, as of or after the Closing, on ICG or the Company. 13 ARTICLE VIII TERMINATION 8.1 Termination and Abandonment. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing, whether before or after adoption of the Articles of Amendment by the stockholders of the Company: (a) by mutual consent of ICG and the Company; or (b) by either the Company, on the one hand, or ICG, Acquisition and Nova Scotia, on the other hand: (i) if the Reorganization shall not have been consummated before January 1, 1999, provided that the right to terminate this Agreement pursuant to this clause (b)(i) will not be available to any party whose failure to perform any of its obligations under this Agreement required to be performed by it at or prior to the Closing has been the cause of or resulted in the failure of the Reorganization to be consummated before such date, (ii) if there has been a material breach of any representation, warranty, covenant or agreement on the part of the other party contained in this Agreement and such breach is incapable of being cured, (iii) if any court of competent jurisdiction or other competent governmental authority will have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Reorganization and such order, decree, ruling or other action will have become final and nonappealable, or (iv) if the required adoption of the Articles of Amendment by the stockholders of the Company shall not have been duly obtained. 8.2 Effect of Termination. In the event of any termination of this Agreement by the Company or ICG pursuant to Section 8.1, this Agreement forthwith will become void and there will be no liability or obligation on the part of ICG, Acquisition, Nova Scotia, the Company or their respective Affiliates, stockholders, directors, officers, agents or representatives except to the extent such termination results from the willful breach by ICG, Acquisition, Nova Scotia or the Company of any of its representations, warranties, covenants or agreements contained in this Agreement. ARTICLE IX MISCELLANEOUS IX.1 Effectiveness of Representations, Warranties and Agreements. Except as set forth in the next sentence, the respective representations, warranties and agreements of the parties contained in this Agreement or in any certificate or other instrument delivered pursuant hereto prior to or at the Closing will remain operative and in full force and effect, regardless of any investigation made by or on behalf of the other parties hereto, whether prior to or after the execution of this Agreement. The representations, warranties, covenants or agreements contained in this Agreement or in any certificate or other instrument 14 delivered pursuant to this Agreement will terminate at the Closing, except for the agreements contained in Article 2, Section 6.3 and in this Article 9. 9.2 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement will be in writing and will be deemed to have been duly given if delivered to a party personally or mailed, certified or registered mail with postage prepaid, or sent by telegram or confirmed telex or telecopier, addressed as follows: c/o ICG Communications, Inc. 161 Inverness Drive West Englewood, Colorado 80112 Attention: H. Don Teague Executive Vice President, General Counsel and Secretary Facsimile: (303) 414-8839 or to such other Person or address as any party will specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications will be deemed to have been received on the date of delivery or on the third business day after the mailing thereof, except that any notice of a change of address will be effective only upon actual receipt thereof. 9.3 Entire Agreement. This Agreement (including the Exhibits) constitutes the entire agreement of the parties and supersedes all prior agreements and understandings, oral and written, between the parties with respect to the subject matter hereof. 9.4 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, benefits or obligations hereunder may be assigned by any party (whether by operation of law or otherwise) without the prior written consent of each other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer on, or to make enforceable by, any Person other than the parties or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.5 Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time prior to the Closing. This Agreement may not be amended except by an instrument in writing signed by the parties. 9.6 Extension; Waiver. At any time prior to the Closing, any of the parties, by action taken or authorized by such party's Board of Directors, may, to the extent legally allowed, (i) extend the time specified herein for the performance of any of the obligations of any other party, (ii) waive any inaccuracies in the representations and warranties of any other party contained herein or in any document delivered pursuant hereto, (iii) waive compliance by any other party with any of the agreements or covenants of such other party 15 contained herein or (iv) waive any condition to such waiving party's obligation to consummate the transactions contemplated hereby or to any of such waiving party's other obligations hereunder. Any such extension or waiver will be valid only if set forth in a written instrument signed by the party or parties to be bound thereby. Any such extension or waiver by any party will be binding on such party but not on the other party entitled to the benefits of the provision of this Agreement affected unless such other party also has agreed to such extension or waiver. No such waiver will constitute a waiver of, or estoppel with respect to, any subsequent or other breach or failure to strictly comply with the provisions of this Agreement. The failure of any party to exercise any of its rights, powers or remedies hereunder or with respect hereto or to insist on strict compliance with this Agreement will not constitute a waiver by such party of its right to exercise any such or other rights, powers or remedies or to demand such compliance. Whenever this Agreement requires or permits consent or approval by any party, such consent or approval will be effective if given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 9.6. 9.7 Headings. The table of contents and headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. 9.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which together will be deemed to be one and the same instrument. 9.9 Applicable Law. This Agreement and the legal relations between the parties will be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of laws rules thereof. 9.10 Limited Liability. Notwithstanding any other provision of this Agreement, no stockholder, director, officer, Affiliate, agent or representative of any party (other than ICG as the sole stockholder of Acquisition or Acquisition as the sole shareholder of Nova Scotia) will have any liability in respect of or relating to the covenants, obligations, representations or warranties of such party hereunder or in respect of any certificate delivered with respect thereto and, to the fullest extent legally permissible, each party, for itself and its stockholders, directors, officers and Affiliates, waives and agrees not to seek to assert or enforce any such liability which any such Person otherwise might have pursuant to applicable law. 9.11 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any Section or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan of Reorganization as of the date first above written. ICG COMMUNICATIONS, INC. By: /s/ H. Don Teague -------------------------------------------- H. Don Teague Executive Vice President, General Counsel and Secretary ICG CANADIAN ACQUISITION, INC. By: /s/ H. Don Teague -------------------------------------------- H. Don Teague Executive Vice President, General Counsel and Secretary ICG HOLDINGS (CANADA), INC. By: /s/ H. Don Teague -------------------------------------------- H. Don Teague Executive Vice President, General Counsel and Secretary ICG HOLDINGS (CANADA) CO. By: /s/ H. Don Teague -------------------------------------------- H. Don Teague Executive Vice President, General Counsel and Secretary 17 EXHIBIT A Articles of Amendment 18 EXHIBIT B Sole Shareholder's Resolution 19 EX-3.(I) 3 3.4 1998 S.H. No. 152764 IN THE SUPREME COURT OF NOVA SCOTIA IN THE MATTER OF: The Companies Act of Nova Scotia, being Chapter 81 of the Revised Statutes of Nova Scotia, 1989 - and - IN THE MATTER OF: The Amalgamation of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. ORDER OF AMALGAMATION BEFORE THE HONOURABLE JUSTICE GRUCHY IN CHAMBERS. UPON HEARING READ the affidavits of H. Don Teague, each sworn December 23, 1998; AND UPON HEARING READ the amalgamation agreement dated December 22, 1998 between ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. (the Amalgamation Agreement) a copy of which is annexed hereto as Schedule A; AND UPON IT APPEARING that all the shareholders of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. have approved the Amalgamation Agreement and that none of the creditors will be affected by the amalgamation provided for in the Amalgamation Agreement; AND UPON IT APPEARING that ICG Holdings (Canada) Co. has no creditors notice to whom of the time and place of an application for an order of this Court approving the Amalgamation Agreement is required pursuant to subsection (7) of Section 134 of the Companies Act. AND UPON IT APPEARING that the Applicants are private companies and no useful purpose would be served by having the financial statements of the Applicants filed herein produced as public documents after being examined by the Court at the hearing of this Application; AND UPON HEARING Charles S. Reagh, counsel for the applicants; AND UPON MOTION IT IS HEREBY ORDERED that the Amalgamation Agreement be and the same is hereby approved. AND IT IS FURTHER ORDERED that ICG Holdings (Canada), Incorporated not be required to give notice to its creditors, if any, of the time and place of an application for an order of this Court approving the Amalgamation Agreement and that such notice be and the same is hereby dispensed with pursuant to subsection (7) of Section 134 of the Companies Act. IT IS FURTHER ORDERED that the filing with the Registrar of Joint Stock Companies of a copy of this order certified under the hand of the Prothonotary be sufficient compliance with the provisions of subsection (9) of Section 134 of the Companies Act. AND IT IS FURTHER ORDERED that the Affidavit of H. Don Teague, sworn December 23, 1998 filed herein, to which are appended as Exhibits certain financial statements, be sealed by the Prothonotary and not opened except upon further Order of this Honourable Court. DATED at Halifax, Nova Scotia, this _30__ day of December, 1998. /s/ Crystal Yio ----------------------- Deputy Prothonotary 1998 S.H. No. 152764 ----------------------------------------------------- IN THE MATTER OF: The Amalgamation of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. - and - IN THE MATTER OF: The Companies Act of Nova Scotia, being Chapter 81 of the Revised Statutes of Nova Scotia, 1989 as amended ===================================================== ORDER ===================================================== STEWART McKELVEY STIRLING SCALES 1959 Upper Water Street Purdy's Wharf Tower One P. 0. Box 997 Halifax, Nova Scotia B3J 2X2 Schedule A THIS AGREEMENT OF AMALGAMATION dated December 22, 1998. BETWEEN: ICG HOLDINGS (CANADA), INCORPORATED, a body corporate OF THE ONE PART - and - ICG HOLDINGS (CANADA) CO., a body corporate OF THE OTHER PART WHEREAS ICG Holdings (Canada), Incorporated was continued under the laws of Nova Scotia on December 17, 1998 and has an authorized capital consisting of 50,000,000 Class A shares common shares without nominal or par value; AND WHEREAS ICG Holdings (Canada) Co. was incorporated under the laws of Nova Scotia on November 2, 1998 and has an authorized capital consisting of 1,000,000 common shares without nominal or par value; AND WHEREAS the shareholders of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. deem it desirable and in the best interests of each of them that they be amalgamated pursuant to the provisions of Section 134 of the Companies Act of Nova Scotia; NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the premises the parties hereto agree as follows: 1. ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. shall be amalgamated and continue as one company (the Amalgamated Company) pursuant to Section 134 of the Companies Act of Nova Scotia. 2. The attributes and characteristics of the Amalgamated Company shall be as follows: (a) The name of the Amalgamated Company shall be "ICG Holdings (Canada) Co.". (b) The registered office of the Amalgamated Company shall be situate at Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, B3J 3N2. (c) The authorized capital of the Amalgamated Company shall consist of such number and class of shares as set out in Schedule B hereto. (d) The liability of the members of the Amalgamated Company shall be unlimited. -2- (e) The memorandum of association of the Amalgamated Company, including its objects, shall be as set out in Schedule A attached hereto. (f) The names, occupations and places of residence of the first directors of the Amalgamated Company are as follows: Name Occupation Place of Residence Harry R. Herbst Executive 4450 E. Prentice Place, Greenwood Village, CO 80121 H. Don Teague Executive 140 Downing Street, Denver, CO 80218. Such directors are to hold office until the first annual meeting of the shareholders of the Amalgamated Company. (g) Subsequent directors are to be elected at the first annual general meeting of the shareholders of the Amalgamated Company and are to hold office while qualified until their successors are from time to time elected in the manner provided for in the Articles of Association of the Amalgamated Company. (h) The manner of converting the authorized and issued capital of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. into that of the Amalgamated Company shall be as follows: (i) Each registered holder of Class A shares without nominal or par value in the capital stock of ICG Holdings (Canada), Incorporated shall be entitled to one fully paid and non-assessable common share without nominal or par value in the capital stock of the Amalgamated Company for each common share in the capital stock of ICG Holdings (Canada), Incorporated held by such registered shareholder on the date of the Order of the Judge of the Supreme Court of Nova Scotia, in Chambers, approving the amalgamation of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. (ii) Each registered holder of common shares without nominal or par value in the capital stock of ICG Holdings (Canada) Co. shall be entitled to one fully paid and non-assessable common share without nominal or par value in the capital stock of the Amalgamated Company for each common share in the capital stock of ICG Holdings (Canada) Co. held by such registered shareholder on the date of the Order of the Judge of the Supreme Court of Nova Scotia, in Chambers, approving the amalgamation of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. 3. The Articles of Association of the Amalgamated Company shall be those attached and marked Schedule B to this Agreement until repealed, amended, altered or added to. -3- 4. The Amalgamated Company shall possess all the property, rights, privileges and franchises, and shall be subject to all the liabilities, contracts and debts of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co.. 5. All rights of creditors against the property, rights and assets of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. respectively and all mortgages, liens or claims upon their respective properties, rights and assets shall be unimpaired by the proposed amalgamation and all debts, contracts, liabilities and duties of ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. respectively shall thenceforth attach to the Amalgamated Company and may be enforced against it to the same extent as if the said debts, contracts, liabilities and duties had been incurred or contracted by it. 6. No action or proceeding by or against ICG Holdings (Canada), Incorporated or ICG Holdings (Canada) Co. shall abate or be affected by the proposed amalgamation but for all purposes of such action or proceeding by or against ICG Holdings (Canada), Incorporated or ICG Holdings (Canada) Co. as the case may be, they shall be deemed still to exist and the Amalgamated Company may be substituted in such action or proceeding in the place thereof. 8. ICG Holdings (Canada), Incorporated and ICG Holdings (Canada) Co. may by resolution of their Boards of Directors or their shareholders assent to such alterations or modifications of this Agreement as they see fit and the expression "this Agreement" as used herein shall be read and construed to mean and include this Agreement as so altered or modified. IN WITNESS WHEREOF the parties hereto have caused the same to be executed in their names and on their behalf and their corporate seals to be thereunto affixed by their proper officers duly authorized in that behalf. SIGNED, SEALED AND DELIVERED ) ICG HOLDINGS (CANADA), INCORPORATED in the presence of: ) ) ) By: /s/ Don Teague -------------------------------------- /s/ Mary Lynn Biegen ) Witness ) ) ICG HOLDINGS (CANADA) CO. ) ) ) By: /s/Don Teague -------------------------------------- /s/ Mary Lynn Biegen ) Witness ) SCHEDULE A MEMORANDUM OF ASSOCIATION OF ICG HOLDINGS (CANADA) CO. 1. The name of the Company is ICG Holdings (Canada) Co.. 2. There are no restrictions on the objects and powers of the Company and the Company shall expressly have the following powers: (1) to sell or dispose of its undertaking, or a substantial part thereof; (2) to distribute any of its property in specie among its members; and (3) to amalgamate with any company or other body of persons. 3. The liability of the members is unlimited. SCHEDULE B ARTICLES OF ASSOCIATION OF ICG HOLDINGS (CANADA) CO. INTERPRETATION 1. In these Articles, unless there be something in the subject or context inconsistent therewith: (1) "Act" means the Companies Act (Nova Scotia); (2) "Articles" means these Articles of Association of the Company and all amendments hereto; (3) "Company" means the company named above; (4) "director" means a director of the Company; (5) "Memorandum" means the Memorandum of Association of the Company and all amendments thereto; (6) "month" means calendar month; (7) "Office" means the registered office of the Company; (8) "person" includes a body corporate; (9) "proxyholder" includes an alternate proxyholder; (10) "Register" means the register of members kept pursuant to the Act, and where the context permits includes a branch register of members; (11) "Registrar" means the Registrar as defined in the Act; (12) "Secretary" includes any person appointed to perform the duties of the Secretary temporarily; (13) "shareholder" means member as that term is used in the Act in connection with an unlimited company having share capital and as that term is used in the Memorandum; (14) "special resolution" has the meaning assigned by the Act; (15) "in writing" and "written" includes printing, lithography and other modes of representing or reproducing words in visible form; -2- (16) words importing number or gender include all numbers and genders unless the context otherwise requires. 2. The regulations in Table A in the First Schedule to the Act shall not apply to the Company. 3. The directors may enter into and carry into effect or adopt and carry into effect any agreement made by the promoters of the Company on behalf of the Company and may agree to any modification in the terms of any such agreement, either before or after its execution. 4. The directors may, out of the funds of the Company, pay all expenses incurred for the amalgamation and organization of the Company. 5. The Company may commence business on the day of amalgamation or so soon thereafter as the directors think fit, notwithstanding that part only of the shares has been allotted. SHARES 6. The capital of the company shall consist of 100,000,000 common shares without nominal or par value, with the power to divide the shares in the capital for the time being into classes or series and to attach thereto respectively any preferred, deferred or qualified rights, privileges or conditions, including restrictions on voting rights and including redemption, purchase and other acquisition of such shares, subject, however, to the provisions of the Act. 7. The directors shall control the shares and, subject to the provisions of these Articles, may allot or otherwise dispose of them to such person at such times, on such terms and conditions and, if the shares have a par value, either at a premium or at par, as they think fit. 8. The directors may pay on behalf of the Company a reasonable commission to any person in consideration of subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company, or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company. Subject to the Act, the commission may be paid or satisfied in shares of the Company. 9. On the issue of shares the Company may arrange among the holders thereof differences in the calls to be paid and in the times for their payment. 10. If the whole or part of the allotment price of any shares is, by the conditions of their allotment, payable in instalments, every such instalment shall, when due, be payable to the Company by the person who is at such time the registered holder of the shares. 11. Shares may be registered in the names of joint holders not exceeding three in number. 12. Joint holders of a share shall be jointly and severally liable for the payment of all instalments and calls due in respect of such share. On the -3- death of one or more joint holders of shares the survivor or survivors of them shall alone be recognized by the Company as the registered holder or holders of the shares. 13. Save as herein otherwise provided, the Company may treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or required by statute, be bound to recognize any equitable or other claim to or interest in such share on the part of any other person. 14. The Company is a private company, and: (1) no transfer of any share or prescribed security of the Company shall be effective unless or until approved by the directors; (2) the number of holders of issued and outstanding prescribed securities or shares of the Company, exclusive of persons who are in the employment of the Company or in the employment of an affiliate of the Company and exclusive of persons who, having been formerly in the employment of the Company or the employment of an affiliate of the Company, were, while in that employment, and have continued after termination of that employment, to own at least one prescribed security or share of the Company, shall not exceed 50 in number, two or more persons or companies who are the joint registered owners of one or more prescribed securities or shares being counted as one holder; and (3) the Company shall not invite the public to subscribe for any of its securities. In this Article, "private company" and "securities" have the meanings ascribed to those terms in the Securities Act (Nova Scotia), and "prescribed security" means any of the securities prescribed by the Nova Scotia Securities Commission from time to time for the purpose of the definition of "private company" in the Securities Act (Nova Scotia). CERTIFICATES 15. Certificates of title to shares shall comply with the Act and may otherwise be in such form as the directors may from time to time determine. Unless the directors otherwise determine, every certificate of title to shares shall be signed manually by at least one of the Chairman, President, Secretary, Treasurer, a vice-president, an assistant secretary, any other officer of the Company or any director of the Company or by or on behalf of a share registrar transfer agent or branch transfer agent appointed by the Company or by any other person whom the directors may designate. When signatures of more than one person appear on a certificate all but one may be printed or otherwise mechanically reproduced. All such certificates when signed as provided in this Article shall be valid and binding upon the Company. If a certificate contains a printed or mechanically reproduced signature of a person, the Company may issue the certificate, notwithstanding that the person has ceased to be a director or an officer of the Company and the certificate is as valid as if such person were a director or an officer at the date of its issue. -4- 16. Except as the directors may determine, each shareholder's shares may be evidenced by any number of certificates so long as the aggregate of the shares stipulated in such certificates equals the aggregate registered in the name of the shareholder. 17. Where shares are registered in the names of two or more persons, the Company shall not be bound to issue more than one certificate or set of certificates, and such certificate or set of certificates shall be delivered to the person first named on the Register. 18. Any certificate that has become worn, damaged or defaced may, upon its surrender to the directors, be cancelled and replaced by a new certificate. Any certificate that has become lost or destroyed may be replaced by a new certificate upon proof of such loss or destruction to the satisfaction of the directors and the furnishing to the Company of such undertakings of indemnity as the directors deem adequate. 19. The sum of one dollar or such other sum as the directors from time to time determine shall be paid to the Company for every certificate other than the first certificate issued to any holder in respect of any share or shares. 20. The directors may cause one or more branch Registers of shareholders to be kept in any place or places, whether inside or outside of Nova Scotia. CALLS 21. The directors may make such calls upon the shareholders in respect of all amounts unpaid on the shares held by them respectively and not made payable at fixed times by the conditions on which such shares were allotted, and each shareholder shall pay the amount of every call so made to the person and at the times and places appointed by the directors. A call may be made payable by instalments. 22. A call shall be deemed to have been made at the time when the resolution of the directors authorizing such call was passed. 23. At least 14 days' notice of any call shall be given, and such notice shall specify the time and place at which and the person to whom such call shall be paid. 24. If the sum payable in respect of any call or instalment is not paid on or before the day appointed for the payment thereof, the holder for the time being of the share in respect of which the call has been made or the instalment is due shall pay interest on such call or instalment at the rate of 9% per year or such other rate of interest as the directors may determine from the day appointed for the payment thereof up to the time of actual payment. 25. At the trial or hearing of any action for the recovery of any amount due for any call, it shall be sufficient to prove that the name of the shareholder sued is entered on the Register as the holder or one of the holders of the share or shares in respect of which such debt accrued, that the resolution making the call is duly recorded in the minute book and that such notice of such call was duly given to the shareholder sued in -5- pursuance of these Articles. It shall not be necessary to prove the appointment of the directors who made such call or any other matters whatsoever and the proof of the matters stipulated shall be conclusive evidence of the debt. FORFEITURE OF SHARES 26. If any shareholder fails to pay any call or instalment on or before the day appointed for payment, the directors may at any time thereafter while the call or instalment remains unpaid serve a notice on such shareholder requiring payment thereof together with any interest that may have accrued and all expenses that may have been incurred by the Company by reason of such non-payment. 27. The notice shall name a day (not being less than 14 days after the date of the notice) and a place or places on and at which such call or instalment and such interest and expenses are to be paid. The notice shall also state that, in the event of non-payment on or before the day and at the place or one of the places so named, the shares in respect of which the call was made or instalment is payable will be liable to be forfeited. 28. If the requirements of any such notice are not complied with, any shares in respect of which such notice has been given may at any time thereafter, before payment of all calls or instalments, interest and expenses due in respect thereof, be forfeited by a resolution of the directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture. 29. When any share has been so forfeited, notice of the resolution shall be given to the shareholder in whose name it stood immediately prior to the forfeiture and an entry of the forfeiture shall be made in the Register. 30. Any share so forfeited shall be deemed the property of the Company and the directors may sell, re-allot or otherwise dispose of it in such manner as they think fit. 31. The directors may at any time before any share so forfeited has been sold, re-allotted or otherwise disposed of, annul the forfeiture thereof upon such conditions as they think fit. 32. Any shareholder whose shares have been forfeited shall nevertheless be liable to pay and shall forthwith pay to the Company all calls, instalments, interest and expenses owing upon or in respect of such shares at the time of the forfeiture together with interest thereon at the rate of 9% per year or such other rate of interest as the directors may determine from the time of forfeiture until payment. The directors may enforce such payment if they think fit, but are under no obligation to do so. 33. A certificate signed by the Secretary stating that a share has been duly forfeited on a specified date in pursuance of these Articles and the time when it was forfeited shall be conclusive evidence of the facts therein stated as against any person who would have been entitled to the share but for such forfeiture. -6- LIEN ON SHARES 34. The Company shall have a first and paramount lien upon all shares (other than fully paid-up shares) registered in the name of a shareholder (whether solely or jointly with others) and upon the proceeds from the sale thereof for debts, liabilities and other engagements of the shareholder, solely or jointly with any other person, to or with the Company, whether or not the period for the payment, fulfilment or discharge thereof has actually arrived, and such lien shall extend to all dividends declared in respect of such shares. Unless otherwise agreed, the registration of a transfer of shares shall operate as a waiver of any lien of the Company on such shares. 35. For the purpose of enforcing such lien the directors may sell the shares subject to it in such manner as they think fit, but no sale shall be made until the period for the payment, fulfilment or discharge of such debts, liabilities or other engagements has arrived, and until notice in writing of the intention to sell has been given to such shareholder or the shareholder's executors or administrators and default has been made by them in such payment, fulfilment or discharge for seven days after such notice. 36. The net proceeds of any such sale after the payment of all costs shall be applied in or towards the satisfaction of such debts, liabilities or engagements and the residue, if any, paid to such shareholder. VALIDITY OF SALES 37. Upon any sale after forfeiture or to enforce a lien in purported exercise of the powers given by these Articles the directors may cause the purchaser's name to be entered in the Register in respect of the shares sold, and the purchaser shall not be bound to see to the regularity of the proceedings or to the application of the purchase money, and after the purchaser's name has been entered in the Register in respect of such shares the validity of the sale shall not be impeached by any person and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively. TRANSFER OF SHARES 38. The instrument of transfer of any share in the Company shall be signed by the transferor. The transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof and shall be entitled to receive any dividend declared thereon before the registration of the transfer. 39. The instrument of transfer of any share shall be in writing in the following form or to the following effect: For value received, hereby sell, assign, and transfer unto , shares in the capital of the Company represented by the within certificate, and do hereby irrevocably constitute and appoint attorney to transfer such shares on the books of the Company with full power of substitution in the premises. - -7- Dated the day of , Witness: 40. The directors may, without assigning any reason therefor, decline to register any transfer of shares (1) not fully paid-up or upon which the Company has a lien, or (2) the transfer of which is restricted by any agreement to which the Company is a party. 41. Every instrument of transfer shall be left for registration at the Office of the Company, or at any office of its transfer agent where a Register is maintained, together with the certificate of the shares to be transferred and such other evidence as the Company may require to prove title to or the right to transfer the shares. 42. The directors may require that a fee determined by them be paid before or after registration of any transfer. 43. Every instrument of transfer shall, after its registration, remain in the custody of the Company. Any instrument of transfer that the directors decline to register shall, except in case of fraud, be returned to the person who deposited it. TRANSMISSION OF SHARES 44. The executors or administrators of a deceased shareholder (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such shareholder. When a share is registered in the names of two or more joint holders, the survivor or survivors or the executors or administrators of the deceased survivor, shall be the only persons recognized by the Company as having any title to, or interest in, such share. 45. Notwithstanding anything in these Articles, if the Company has only one shareholder (not being one of several joint holders) and that shareholder dies, the executors or administrators of the deceased shareholder shall be entitled to register themselves in the Register as the holders of the shares registered in the name of the deceased shareholder whereupon they shall have all the rights given by these Articles and by law to shareholders. 46. Any person entitled to shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer, upon producing such evidence of entitlement as the directors require, may be registered as a shareholder in respect of such shares, or may, without being registered, transfer such shares subject to the provisions of these Articles respecting the transfer of shares. The directors shall have the same right to refuse registration as if the transferee were named in an ordinary transfer presented for registration. -8- SURRENDER OF SHARES 47. The directors may accept the surrender of any share by way of compromise of any question as to the holder being properly registered in respect thereof. Any share so surrendered may be disposed of in the same manner as a forfeited share. INCREASE AND REDUCTION OF CAPITAL 48. Subject to the Act, the shareholders may by special resolution amend these Articles to increase or alter the share capital of the Company as they think expedient. Without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights, or with such restrictions, whether in regard to dividends, voting, return of share capital or otherwise, as the shareholders may from time to time determine by special resolution. Except as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the provisions herein contained with reference to payment of calls and instalments, transfer and transmission, forfeiture, lien and otherwise. 49. The Company may, by special resolution where required, reduce its share capital in any way and with and subject to any incident authorized and consent required by law. Subject to the Act and any provisions attached to such shares, the Company may redeem, purchase or acquire any of its shares and the directors may determine the manner and the terms for redeeming, purchasing or acquiring such shares and may provide a sinking fund on such terms as they think fit for the redemption, purchase or acquisition of shares of any class or series. MEETINGS AND VOTING BY CLASS OR SERIES 50. Where the holders of shares of a class or series have, under the Act, the terms or conditions attaching to such shares or otherwise, the right to vote separately as a class in respect of any matter then, except as provided in the Act, these Articles or such terms or conditions, all the provisions in these Articles concerning general meetings (including, without limitation, provisions respecting notice, quorum and procedure) shall, mutatis mutandis, apply to every meeting of holders of such class or series of shares convened for the purpose of such vote. 51. Unless the rights, privileges, terms or conditions attached to a class or series of shares provide otherwise, such class or series of shares shall not have the right to vote separately as a class or series upon an amendment to the Memorandum or Articles to: (1) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series; (2) effect an exchange, reclassification or cancellation of all or part of the shares of such class or series; or -9- (3) create a new class or series of shares equal or superior to the shares of such class or series. BORROWING POWERS 52. The directors on behalf of the Company may: (1) raise or borrow money for the purposes of the Company or any of them; (2) secure, subject to the sanction of a special resolution where required by the Act, the repayment of funds so raised or borrowed in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the execution and delivery of mortgages of the Company's real or personal property, or by the issue of bonds, debentures or other securities of the Company secured by mortgage or other charge upon all or any part of the property of the Company, both present and future including its uncalled capital for the time being; (3) sign or endorse bills, notes, acceptances, cheques, contracts, and other evidence of or securities for funds borrowed or to be borrowed for the purposes aforesaid; (4) pledge debentures as security for loans; (5) guarantee obligations of any person. 53. Bonds, debentures and other securities may be made assignable, free from any equities between the Company and the person to whom such securities were issued. 54. Any bonds, debentures and other securities may be issued at a discount, premium or otherwise and with special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of directors and other matters. GENERAL MEETINGS 55. Ordinary general meetings of the Company shall be held at least once in every calendar year at such time and place as may be determined by the directors and not later than 15 months after the preceding ordinary general meeting. All other meetings of the Company shall be called special general meetings. Ordinary or special general meetings may be held either within or without the Province of Nova Scotia. 56. The President, a vice-president or the directors may at any time convene a special general meeting, and the directors, upon the requisition of shareholders in accordance with the Act shall forthwith proceed to convene such meeting or meetings to be held at such time and place or times and places as the directors determine. 57. The requisition shall state the objects of the meeting requested, be signed -10- by the requisitionists and deposited at the Office of the Company. It may consist of several documents in like form each signed by one or more of the requisitionists. 58. At least seven clear days' notice, or such longer period of notice as may be required by the Act, of every general meeting, specifying the place, day and hour of the meeting and, when special business is to be considered, the general nature of such business, shall be given to the shareholders entitled to be present at such meeting by notice given as permitted by these Articles. With the consent in writing of all the shareholders entitled to vote at such meeting, a meeting may be convened by a shorter notice and in any manner they think fit, or notice of the time, place and purpose of the meeting may be waived by all of the shareholders. 59. When it is proposed to pass a special resolution, the two meetings may be convened by the same notice, and it shall be no objection to such notice that it only convenes the second meeting contingently upon the resolution being passed by the requisite majority at the first meeting. 60. The accidental omission to give notice to a shareholder, or non-receipt of notice by a shareholder, shall not invalidate any resolution passed at any general meeting. RECORD DATES 61. (1) The directors may fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend or entitled to receive any distribution; (b) entitled to receive notice of a meeting; or (c) for any other purpose. (2) If no record date is fixed, the record date for the determination of shareholders (a) entitled to receive notice of a meeting shall be the day immediately preceding the day on which the notice is given, or, if no notice is given, the day on which the meeting is held; and (b) for any other purpose shall be the day on which the directors pass the resolution relating to the particular purpose. PROCEEDINGS AT GENERAL MEETINGS 62. The business of an ordinary general meeting shall be to receive and consider the financial statements of the Company and the report of the directors and the report, if any, of the auditors, to elect directors in the place of those retiring and to transact any other business which under these Articles ought to be transacted at an ordinary general meeting. -11- 63. No business shall be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. A corporate shareholder of the Company that has a duly authorized agent or representative present at any such meeting shall for the purpose of this Article be deemed to be personally present at such meeting. 64. One person, being a shareholder, proxyholder or representative of a corporate shareholder, present and entitled to vote shall constitute a quorum for a general meeting, and may hold a meeting. 65. The Chairman shall be entitled to take the chair at every general meeting or, if there be no Chairman, or if the Chairman is not present within fifteen 15 minutes after the time appointed for holding the meeting, the President or, failing the President, a vice-president shall be entitled to take the chair. If the Chairman, the President or a vice-president is not present within 15 minutes after the time appointed for holding the meeting or if all such persons present decline to take the chair, the shareholders present entitled to vote at the meeting shall choose another director as chairman and if no director is present or if all the directors present decline to take the chair, then such shareholders shall choose one of their number to be chairman. 66. If within half an hour from the time appointed for a general meeting a quorum is not present, the meeting, if it was convened pursuant to a requisition of shareholders, shall be dissolved; if it was convened in any other way, it shall stand adjourned to the same day, in the next week, at the same time and place. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may hold the meeting. 67. Subject to the Act, at any general meeting a resolution put to the meeting shall be decided by a show of hands unless, either before or on the declaration of the result of the show of hands, a poll is demanded by the chairman, a shareholder or a proxyholder; and unless a poll is so demanded, a declaration by the chairman that the resolution has been carried, carried by a particular majority, lost or not carried by a particular majority and an entry to that effect in the Company's book of proceedings shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour or against such resolution. 68. When a poll is demanded, it shall be taken in such manner and at such time and place as the chairman directs, and either at once or after an interval or adjournment or otherwise. The result of the poll shall be the resolution of the meeting at which the poll was demanded. The demand of a poll may be withdrawn. When any dispute occurs over the admission or rejection of a vote, it shall be resolved by the chairman and such determination made in good faith shall be final and conclusive. 69. The chairman shall not have a casting vote in addition to any vote or votes that the chairman has as a shareholder. 70. The chairman of a general meeting may with the consent of the meeting -12- adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting that was adjourned. 71. Any poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith without adjournment. 72. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. VOTES OF SHAREHOLDERS 73. Subject to the Act and to any provisions attached to any class or series of shares concerning or restricting voting rights: (1) on a show of hands every shareholder entitled to vote present in person, every duly authorized representative of a corporate shareholder, and, if not prevented from voting by the Act, every proxyholder, shall have one vote; and (2) on a poll every shareholder present in person, every duly authorized representative of a corporate shareholder, and every proxyholder, shall have one vote for every share held; whether or not such representative or proxyholder is a shareholder. 74. Any person entitled to transfer shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer may vote at any general meeting in respect thereof in the same manner as if such person were the registered holder of such shares so long as the directors are satisfied at least 48 hours before the time of holding the meeting of such person's right to transfer such shares. 75. Where there are joint registered holders of any share, any of such holders may vote such share at any meeting, either personally or by proxy, as if solely entitled to it. If more than one joint holder is present at any meeting, personally or by proxy, the one whose name stands first on the Register in respect of such share shall alone be entitled to vote it. Several executors or administrators of a deceased shareholder in whose name any share stands shall for the purpose of this Article be deemed joint holders thereof. 76. Votes may be cast either personally or by proxy or, in the case of a corporate shareholder by a representative duly authorized under the Act. 77. A proxy shall be in writing and executed in the manner provided in the Act. A proxy or other authority of a corporate shareholder does not require its seal. 78. A shareholder of unsound mind in respect of whom an order has been made by any court of competent jurisdiction may vote by guardian or other person in the nature of a guardian appointed by that court, and any such guardian or other person may vote by proxy. -13- 79. A proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority shall be deposited at the Office of the Company or at such other place as the directors may direct. The directors may, by resolution, fix a time not exceeding 48 hours excluding Saturdays and holidays preceding any meeting or adjourned meeting before which time proxies to be used at that meeting must be deposited with the Company at its Office or with an agent of the Company. Notice of the requirement for depositing proxies shall be given in the notice calling the meeting. The chairman of the meeting shall determine all questions as to validity of proxies and other instruments of authority. 80. A vote given in accordance with the terms of a proxy shall be valid notwithstanding the previous death of the principal, the revocation of the proxy, or the transfer of the share in respect of which the vote is given, provided no intimation in writing of the death, revocation or transfer is received at the Office of the Company before the meeting or by the chairman of the meeting before the vote is given. 81. Every form of proxy shall comply with the Act and its regulations and subject thereto may be in the following form: I, of being a shareholder of hereby appoint of (or failing him/her of ) as my proxyholder to attend and to vote for me and on my behalf at the ordinary/special general meeting of the Company, to be held on the day of and at any adjournment thereof, or at any meeting of the Company which may be held prior to [insert specified date or event]. [If the proxy is solicited by or behalf of the management of the Company, insert a statement to that effect.] Dated this day of . ---------------------------- Shareholder 82. Subject to the Act, no shareholder shall be entitled to be present or to vote on any question, either personally or by proxy, at any general meeting or be reckoned in a quorum while any call is due and payable to the Company in respect of any of the shares of such shareholder. 83. Any resolution passed by the directors, notice of which has been given to the shareholders in the manner in which notices are hereinafter directed to be given and which is, within one month after it has been passed, ratified and confirmed in writing by shareholders entitled on a poll to three-fifths of the votes, shall be as valid and effectual as a resolution of a general meeting. This Article shall not apply to a resolution for winding up the Company or to a resolution dealing with any matter that by statute or these Articles ought to be dealt with by a special resolution or other method prescribed by statute. 84. A resolution, including a special resolution, in writing and signed by -14- every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such shareholders at a meeting and satisfies all of the requirements of the Act respecting meetings of shareholders. DIRECTORS 85. Unless otherwise determined by resolution of shareholders, the number of directors shall not be less than one or more than ten. 86. Notwithstanding anything herein contained the persons named in the agreement providing for the formation of the Company by amalgamation shall be the first directors of the Company. 87. The directors may be paid out of the funds of the Company as remuneration for their service such sums, if any, as the Company may by resolution of its shareholders determine, and such remuneration shall be divided among them in such proportions and manner as the directors determine. The directors may also be paid their reasonable travelling, hotel and other expenses incurred in attending meetings of directors and otherwise in the execution of their duties as directors. 88. The continuing directors may act notwithstanding any vacancy in their body, but if their number falls below the minimum permitted, the directors shall not, except in emergencies or for the purpose of filling vacancies, act so long as their number is below the minimum. 89. A director may, in conjunction with the office of director, and on such terms as to remuneration and otherwise as the directors arrange or determine, hold any other office or place of profit under the Company or under any company in which the Company is a shareholder or is otherwise interested. 90. The office of a director shall ipso facto be vacated, if the director: (1) becomes bankrupt or makes an assignment for the benefit of creditors; (2) is, or is found by a court of competent jurisdiction to be, of unsound mind; (3) by notice in writing to the Company, resigns the office of director; or (4) is removed in the manner provided by these Articles. 91. No director shall be disqualified by holding the office of director from contracting with the Company, either as vendor, purchaser, or otherwise, nor shall any such contract, or any contract or arrangement entered into or proposed to be entered into by or on behalf of the Company in which any director is in any way interested, either directly or indirectly, be avoided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realized by any such contract or arrangement by reason only of such director holding that office or of the fiduciary relations thereby established, provided the director -15- makes a declaration or gives a general notice in accordance with the Act. No director shall, as a director, vote in respect of any contract or arrangement in which the director is so interested, and if the director does so vote, such vote shall not be counted. This prohibition may at any time or times be suspended or relaxed to any extent by a resolution of the shareholders and shall not apply to any contract by or on behalf of the Company to give to the directors or any of them any security for advances or by way of indemnity. ELECTION OF DIRECTORS 92. At the dissolution of every ordinary general meeting at which their successors are elected, all the directors shall retire from office and be succeeded by the directors elected at such meeting. Retiring directors shall be eligible for re-election. 93. If at any ordinary general meeting at which an election of directors ought to take place no such election takes place, or if no ordinary general meeting is held in any year or period of years, the retiring directors shall continue in office until their successors are elected. 94. The Company may by resolution of its shareholders elect any number of directors permitted by these Articles and may determine or alter their qualification. 95. The Company may, by special resolution or in any other manner permitted by statute, remove any director before the expiration of such director's period of office and may, if desired, appoint a replacement to hold office during such time only as the director so removed would have held office. 96. The directors may appoint any other person as a director so long as the total number of directors does not at any time exceed the maximum number permitted. No such appointment, except to fill a casual vacancy, shall be effective unless two-thirds of the directors concur in it. Any casual vacancy occurring among the directors may be filled by the directors, but any person so chosen shall retain office only so long as the vacating director would have retained it if the vacating director had continued as director. MANAGING DIRECTOR 97. The directors may appoint one or more of their body to be managing directors of the Company, either for a fixed term or otherwise , and may remove or dismiss them from office and appoint replacements. 98. Subject to the provisions of any contract between a managing director and the Company, a managing director shall be subject to the same provisions as to resignation and removal as the other directors of the Company. A managing director who for any reason ceases to hold the office of director shall ipso facto immediately cease to be a managing director. -16- 99. The remuneration of a managing director shall from time to time be fixed by the directors and may be by way of any or all of salary, commission and participation in profits. 100. The directors may from time to time entrust to and confer upon a managing director such of the powers exercisable under these Articles by the directors as they think fit, and may confer such powers for such time, and to be exercised for such objects and purposes and upon such terms and conditions, and with such restrictions as they think expedient; and they may confer such powers either collaterally with, or to the exclusion of, and in substitution for, all or any of the powers of the directors in that behalf; and may from time to time revoke, withdraw, alter or vary all or any of such powers. CHAIRMAN OF THE BOARD 101. The directors may elect one of their number to be Chairman and may determine the period during which the Chairman is to hold office. The Chairman shall perform such duties and receive such special remuneration as the directors may provide. PRESIDENT AND VICE-PRESIDENTS 102. The directors shall elect the President of the Company, who need not be a director, and may determine the period for which the President is to hold office. The President shall have general supervision of the business of the Company and shall perform such duties as may be assigned from time to time by the directors. 103. The directors may also elect vice-presidents, who need not be directors, and may determine the periods for which they are to hold office. A vice-president shall, at the request of the President or the directors and subject to the directions of the directors, perform the duties of the President during the absence, illness or incapacity of the President, and shall also perform such duties as may be assigned by the President or the directors. SECRETARY AND TREASURER 104. The directors shall appoint a Secretary of the Company to keep minutes of shareholders' and directors' meetings and perform such other duties as may be assigned by the directors. The directors may also appoint a temporary substitute for the Secretary who shall, for the purposes of these Articles, be deemed to be the Secretary. 105. The directors may appoint a treasurer of the Company to carry out such duties as the directors may assign. OFFICERS 106. The directors may elect or appoint such other officers of the Company, having such powers and duties, as they think fit. 107. If the directors so decide the same person may hold more than one of the offices provided for in these Articles. -17- PROCEEDINGS OF DIRECTORS 108. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings and proceedings, as they think fit, and may determine the quorum necessary for the transaction of business. Until otherwise determined, one director shall constitute a quorum and may hold a meeting. 109. If all directors of the Company entitled to attend a meeting either generally or specifically consent, a director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed to be present at that meeting for purposes of these Articles. 110. Meetings of directors may be held either within or without the Province of Nova Scotia and the directors may from time to time make arrangements relating to the time and place of holding directors' meetings, the notices to be given for such meetings and what meetings may be held without notice. Unless otherwise provided by such arrangements: (1) A meeting of directors may be held at the close of every ordinary general meeting of the Company without notice. (2) Notice of every other directors' meeting may be given as permitted by these Articles to each director at least 48 hours before the time fixed for the meeting. (3) A meeting of directors may be held without formal notice if all the directors are present or if those absent have signified their assent to such meeting or their consent to the business transacted at such meeting. 111. The President or any director may at any time, and the Secretary, upon the request of the President or any director, shall summon a meeting of the directors to be held at the Office of the Company. The President, the Chairman or a majority of the directors may at any time, and the Secretary, upon the request of the President, the Chairman or a majority of the directors shall, summon a meeting to be held elsewhere. 112. (1) Questions arising at any meeting of directors shall be decided by a majority of votes. The chairman of the meeting may vote as a director but shall not have a second or casting vote. (2) At any meeting of directors the chairman shall receive and count the vote of any director not present in person at such meeting on any question or matter arising at such meeting whenever such absent director has indicated by telegram, letter or other writing lodged with the chairman of such meeting the manner in which the absent director desires to vote on such question or matter and such question -18- or matter has been specifically mentioned in the notice calling the meeting as a question or matter to be discussed or decided thereat. In respect of any such question or matter so mentioned in such notice any director may give to any other director a proxy authorizing such other director to vote for such first named director at such meeting, and the chairman of such meeting, after such proxy has been so lodged, shall receive and count any vote given in pursuance thereof notwithstanding the absence of the director giving such proxy. 113. If no Chairman is elected, or if at any meeting of directors the Chairman is not present within five minutes after the time appointed for holding the meeting, or declines to take the chair, the President, if a director, shall preside. If the President is not a director, is not present at such time or declines to take the chair, a vice-president who is also a director shall preside. If no person described above is present at such time and willing to take the chair, the directors present shall choose some one of their number to be chairman of the meeting. 114. A meeting of the directors at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the directors generally. 115. The directors may delegate any of their powers to committees consisting of such number of directors as they think fit. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on them by the directors. 116. The meetings and proceedings of any committee of directors shall be governed by the provisions contained in these Articles for regulating the meetings and proceedings of the directors insofar as they are applicable and are not superseded by any regulations made by the directors. 117. All acts done at any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of the director or person so acting, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. 118. A resolution in writing and signed by every director who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such directors at a meeting. 119. If any one or more of the directors is called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the Company or the business thereof, the Company may remunerate the director or directors so doing, either by a fixed sum or by a percentage of profits or otherwise. Such remuneration shall be determined by the directors and may be either in addition to or in substitution for remuneration otherwise authorized by these Articles. -19- REGISTERS 120. The directors shall cause to be kept at the Company's Office in accordance with the provisions of the Act a Register of the shareholders of the Company, a register of the holders of bonds, debentures and other securities of the Company and a register of its directors. Branch registers of the shareholders and of the holders of bonds, debentures and other securities may be kept elsewhere, either within or without the Province of Nova Scotia, in accordance with the Act. MINUTES 121. The directors shall cause minutes to be entered in books designated for the purpose: (1) of all appointments of officers; (2) of the names of directors present at each meeting of directors and of any committees of directors; (3) of all orders made by the directors and committees of directors; and (4) of all resolutions and proceedings of meetings of shareholders and of directors. Any such minutes of any meeting of directors or of any committee of directors or of shareholders, if purporting to be signed by the chairman of such meeting or by the chairman of the next succeeding meeting, shall be receivable as prima facie evidence of the matters stated in such minutes. POWERS OF DIRECTORS 122. The management of the business of the Company is vested in the directors who, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the shareholders, but subject nevertheless to the provisions of any statute, the Memorandum or these Articles. No modification of the Memorandum or these Articles shall invalidate any prior act of the directors that would have been valid if such modification had not been made. 123. Without restricting the generality of the terms of any of these Articles and without prejudice to the powers conferred thereby, the directors may: (1) take such steps as they think fit to carry out any agreement or contract made by or on behalf of the Company; (2) pay costs, charges and expenses preliminary and incidental to the promotion, formation, establishment, and registration of the Company; -20- (3) purchase or otherwise acquire for the Company any property, rights or privileges that the Company is authorized to acquire, at such price and generally on such terms and conditions as they think fit; (4) pay for any property, rights or privileges acquired by, or services rendered to the Company either wholly or partially in cash or in shares (fully paid-up or otherwise), bonds, debentures or other securities of the Company; (5) subject to the Act, secure the fulfilment of any contracts or engagements entered into by the Company by mortgaging or charging all or any of the property of the Company and its unpaid capital for the time being, or in such other manner as they think fit; (6) appoint, remove or suspend at their discretion such experts, managers, secretaries, treasurers, officers, clerks, agents and servants for permanent, temporary or special services, as they from time to time think fit, and determine their powers and duties and fix their salaries or emoluments and require security in such instances and to such amounts as they think fit; (7) accept a surrender of shares from any shareholder insofar as the law permits and on such terms and conditions as may be agreed; (8) appoint any person or persons to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, execute and do all such deeds and things as may be required in relation to such trust, and provide for the remuneration of such trustee or trustees; (9) institute, conduct, defend, compound or abandon any legal proceedings by and against the Company, its directors or its officers or otherwise concerning the affairs of the Company, and also compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company; (10) refer any claims or demands by or against the Company to arbitration and observe and perform the awards; (11) make and give receipts, releases and other discharges for amounts payable to the Company and for claims and demands of the Company; (12) determine who may exercise the borrowing powers of the Company and sign on the Company's behalf bonds, debentures or other securities, bills, notes, receipts, acceptances, assignments, transfers, hypothecations, pledges, endorsements, cheques, drafts, releases, contracts, agreements and all other instruments and documents; (13) provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as may be thought fit; -21- (14) invest and deal with any funds of the Company in such securities and in such manner as they think fit; and vary or realize such investments; (15) subject to the Act, execute in the name and on behalf of the Company in favour of any director or other person who may incur or be about to incur any personal liability for the benefit of the Company such mortgages of the Company's property, present and future, as they think fit; (16) give any officer or employee of the Company a commission on the profits of any particular business or transaction or a share in the general profits of the Company; (17) set aside out of the profits of the Company before declaring any dividend such amounts as they think proper as a reserve fund to meet contingencies or provide for dividends, depreciation, repairing, improving and maintaining any of the property of the Company and such other purposes as the directors may in their absolute discretion think in the interests of the Company; and invest such amounts in such investments as they think fit, and deal with and vary such investments, and dispose of all or any part of them for the benefit of the Company, and divide the reserve fund into such special funds as they think fit, with full power to employ the assets constituting the reserve fund in the business of the Company without being bound to keep them separate from the other assets; (18) make, vary and repeal rules respecting the business of the Company, its officers and employees, the shareholders of the Company or any section or class of them; (19) enter into all such negotiations and contracts, rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the Company; (20) provide for the management of the affairs of the Company in such manner as they think fit. SOLICITORS 124. The Company may employ or retain solicitors any of whom may, at the request or on the instruction of the directors, the Chairman, the President or a managing director, attend meetings of the directors or shareholders, whether or not the solicitor is a shareholder or a director of the Company. A solicitor who is also a director may nevertheless charge for services rendered to the Company as a solicitor. -22- THE SEAL 125. The directors shall arrange for the safe custody of the common seal of the Company (the "Seal"). The Seal may be affixed to any instrument in the presence of and contemporaneously with the attesting signature of (i) any director or officer acting within such person's authority or (ii) any person under the authority of a resolution of the directors or a committee thereof. For the purpose of certifying documents or proceedings the Seal may be affixed by any director or the President, a vice-president, the Secretary, an assistant secretary or any other officer of the Company without the authorization of a resolution of the directors. 126. The Company may have facsimiles of the Seal which may be used interchangeably with the Seal. 127. The Company may have for use at any place outside the Province of Nova Scotia, as to all matters to which the corporate existence and capacity of the Company extends, an official seal that is a facsimile of the Seal of the Company with the addition on its face of the name of the place where it is to be used; and the Company may by writing under its Seal authorize any person to affix such official seal at such place to any document to which the Company is a party. DIVIDENDS 128. The directors may from time to time declare such dividend as they deem proper upon shares of the Company according to the rights and restrictions attached to any class or series of shares, and may determine the date upon which such dividend will be payable and that it will be payable to the persons registered as the holders of the shares on which it is declared at the close of business upon a record date. No transfer of such shares registered after the record date shall pass any right to the dividend so declared. 129. Dividends may be paid as permitted by law and, without limitation, may be paid out of the profits, retained earnings or contributed surplus of the Company. No interest shall be payable on any dividend except insofar as the rights attached to any class or series of shares provide otherwise. 130. The declaration of the directors as to the amount of the profits, retained earnings or contributed surplus of the Company shall be conclusive. 131. The directors may from time to time pay to the shareholders such interim dividends as in their judgment the position of the Company justifies. 132. Subject to these Articles and the rights and restrictions attached to any class or series of shares, dividends may be declared and paid to the shareholders in proportion to the amount of capital paid-up on the shares (not including any capital paid-up bearing interest) held by them respectively. -23- 133. The directors may deduct from the dividends payable to any shareholder amounts due and payable by the shareholder to the Company on account of calls, instalments or otherwise, and may apply the same in or towards satisfaction of such amounts so due and payable. 134. The directors may retain any dividends on which the Company has a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. 135. The directors may retain the dividends payable upon shares to which a person is entitled or entitled to transfer upon the death or bankruptcy of a shareholder or in any way other than by allotment or transfer, until such person has become registered as the holder of such shares or has duly transferred such shares. 136. When the directors declare a dividend on a class or series of shares and also make a call on such shares payable on or before the date on which the dividend is payable, the directors may retain all or part of the dividend and set off the amount retained against the call. 137. The directors may declare that a dividend be paid by the distribution of cash, paid-up shares (at par or at a premium), debentures, bonds or other securities of the Company or of any other company or any other specific assets held or to be acquired by the Company or in any one or more of such ways. 138. The directors may settle any difficulty that may arise in regard to the distribution of a dividend as they think expedient, and in particular without restricting the generality of the foregoing may issue fractional certificates, may fix the value for distribution of any specific assets, may determine that cash payments will be made to any shareholders upon the footing of the value so fixed or that fractions may be disregarded in order to adjust the rights of all parties, and may vest cash or specific assets in trustees upon such trusts for the persons entitled to the dividend as may seem expedient to the directors. 139. Any person registered as a joint holder of any share may give effectual receipts for all dividends and payments on account of dividends in respect of such share. 140. Unless otherwise determined by the directors, any dividend may be paid by a cheque or warrant delivered to or sent through the post to the registered address of the shareholder entitled, or, when there are joint holders, to the registered address of that one whose name stands first on the register for the shares jointly held. Every cheque or warrant so delivered or sent shall be made payable to the order of the person to whom it is delivered or sent. The mailing or other transmission to a shareholder at the shareholder's registered address (or, in the case of joint shareholders at the address of the holder whose name stands first on the register) of a cheque payable to the order of the person to whom it is addressed for the amount of any dividend payable in cash after the deduction of any tax which the Company has properly withheld, shall discharge the Company's liability for the dividend unless the cheque is not paid on due presentation. If any cheque for a dividend payable in cash is not received, the Company shall issue to the shareholder a replacement cheque for the same amount on such terms as to indemnity and evidence of non-receipt as the directors may -24- impose. No shareholder may recover by action or other legal process against the Company any dividend represented by a cheque that has not been duly presented to a banker of the Company for payment or that otherwise remains unclaimed for 6 years from the date on which it was payable. ACCOUNTS 141. The directors shall cause proper books of account to be kept of the amounts received and expended by the Company, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the Company, and the assets, credits and liabilities of the Company. 142. The books of account shall be kept at the head office of the Company or at such other place or places as the directors may direct. 143. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the accounts and books of the Company or any of them shall be open to inspection of the shareholders, and no shareholder shall have any right to inspect any account or book or document of the Company except as conferred by statute or authorized by the directors or a resolution of the shareholders. 144. At the ordinary general meeting in every year the directors shall lay before the Company such financial statements and reports in connection therewith as may be required by the Act or other applicable statute or regulation thereunder and shall distribute copies thereof at such times and to such persons as may be required by statute or regulation. AUDITORS AND AUDIT 145. Except in respect of a financial year for which the Company is exempt from audit requirements in the Act, the Company shall at each ordinary general meeting appoint an auditor or auditors to hold office until the next ordinary general meeting. If at any general meeting at which the appointment of an auditor or auditors is to take place and no such appointment takes place, or if no ordinary general meeting is held in any year or period of years, the directors shall appoint an auditor or auditors to hold office until the next ordinary general meeting. 146. The first auditors of the Company may be appointed by the directors at any time before the first ordinary general meeting and the auditors so appointed shall hold office until such meeting unless previously removed by a resolution of the shareholders, in which event the shareholders may appoint auditors. 147. The directors may fill any casual vacancy in the office of the auditor but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act. -25- 148. The Company may appoint as auditor any person, including a shareholder, not disqualified by statute. 149. An auditor may be removed or replaced in the circumstances and in the manner specified in the Act. 150. The remuneration of the auditors shall be fixed by the shareholders, or by the directors pursuant to authorization given by the shareholders, except that the remuneration of an auditor appointed to fill a casual vacancy may be fixed by the directors. 151. The auditors shall conduct such audit as may be required by the Act and their report, if any, shall be dealt with by the Company as required by the Act. NOTICES 152. A notice (including any communication or document) shall be sufficiently given, delivered or served by the Company upon a shareholder, director, officer or auditor by personal delivery at such person's registered address (or, in the case of a director, officer or auditor, last known address) or by prepaid mail, telegraph, telex, facsimile machine or other electronic means of communication addressed to such person at such address. 153. Shareholders having no registered address shall not be entitled to receive notice. 154. All notices with respect to registered shares to which persons are jointly entitled may be sufficiently given to all joint holders thereof by notice given to whichever of such persons is named first in the Register for such shares. 155. Any notice sent by mail shall be deemed to be given, delivered or served on the earlier of actual receipt and the third business day following that upon which it is mailed, and in proving such service it shall be sufficient to prove that the notice was properly addressed and mailed with the postage prepaid thereon. Any notice given by electronic means of communication shall be deemed to be given when entered into the appropriate transmitting device for transmission. A certificate in writing signed on behalf of the Company that the notice was so addressed and mailed or transmitted shall be conclusive evidence thereof. 156. Every person who by operation of law, transfer or other means whatsoever becomes entitled to any share shall be bound by every notice in respect of such share that prior to such person's name and address being entered on the Register was duly served in the manner hereinbefore provided upon the person from whom such person derived title to such share. 157. Any notice delivered, sent or transmitted to the registered address of any shareholder pursuant to these Articles, shall, notwithstanding that such shareholder is then deceased and that the Company has notice thereof, be deemed to have been served in respect of any registered shares, whether held by such deceased shareholder solely or jointly with other persons, until some other person is registered as the holder or joint holder thereof, and such service shall for all purposes of these Articles be -26- deemed a sufficient service of such notice on the heirs, executors or administrators of the deceased shareholder and all joint holders of such shares. 158. Any notice may bear the name or signature, manual or reproduced, of the person giving the notice written or printed. 159. When a given number of days' notice or notice extending over any other period is required to be given, the day of service and the day upon which such notice expires shall not, unless it is otherwise provided, be counted in such number of days or other period. INDEMNITY 160. Every director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, and the heirs and legal representatives of such person, in the absence of any dishonesty on the part of such person, shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses, including an amount paid to settle an action or claim or satisfy a judgment, that such director, officer or person may incur or become liable to pay in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Company or such body corporate, partnership or other association, whether the Company is a claimant or party to such action or proceeding or otherwise; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the shareholders over all other claims. 161. No director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, in the absence of any dishonesty on such person's part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the Company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or effects are deposited, or for any loss occasioned by error of judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto. -27- REMINDERS 162. The directors shall comply with the following provisions of the Act or the Corporations Registration Act (Nova Scotia) where indicated: (1) Keep a current register of shareholders (Section 42). (2) Keep a current register of directors, officers and managers, send to the Registrar a copy thereof and notice of all changes therein (Section 98). (3) Keep a current register of holders of bonds, debentures and other securities (Section 111 and Third Schedule). (4) Call a general meeting every year within the proper time (Section 83). Meetings must be held not later than 15 months after the preceding general meeting. (5) Send to the Registrar copies of all special resolutions (Section 88). (6) When shares are issued for a consideration other than cash, file a copy of the contract with the Registrar on or before the date on which the shares are issued (Section 109). (7) Send to the Registrar notice of the address of the Company's Office and of all changes in such address (Section 79). (8) Keep proper minutes of all shareholders' meetings and directors' meetings in the Company's minute book kept at the Company's Office (Sections 89 and 90). (9) Obtain a certificate under the Corporations Registration Act (Nova Scotia) as soon as business is commenced. (10) Send notice of recognized agent to the Registrar under the Corporations Registration Act (Nova Scotia). EX-3.(I) 4 3.5 MEMORANDUM AND ARTICLES OF ASSOCIATION OF ICG HOLDINGS (CANADA) Co. STEWART McKELVEY STIRLING SCALES BARRISTERS & SOLICITORS Halifax, Nova Scotia MEMORANDUM OF ASSOCIATION OF ICG HOLDINGS (CANADA) Co. 1. The name of the Company is ICG Holdings (Canada) Co. 2. There are no restrictions on the objects and powers of the Company and the Company shall expressly have the following powers: (1) to sell or dispose of its undertaking, or a substantial part thereof: (2) to distribute any of its property in specie among its members; and (3) to amalgamate with any company or other body of persons. 3. The liability of the members is unlimited. I, the undersigned, whose name, address and occupation are subscribed, am desirous of being formed into a company in pursuance of this Memorandum of Association, and I agree to take the number and kind of shares in the capital stock of the Company written opposite my name.
Address Occupation No. and Kind of Shares Name of the Subscriber of the Subscriber taken by Subscriber - ----------------------------------------------------------------------------------------------------------- 1959 Upper Water Street /s/ Charles S. Reagh Suite 800 Solicitor 1 common share Halifax, Nova Scotia - -----------------------------------------------------------------------------------------------------------
TOTAL SHARES TAKEN: one common share Dated this 2nd day of November 1998 /s/ Dawn Cottreau Witness to the above signature: ------------------------------------- Name of Witness 900-195 Upper Water St., Halifax, Nova Scotia, B3J 2X2 -------------------------------------- Address Manager -------------------------------------- Occupation ARTICLES OF ASSOCIATION OF ICG HOLDINGS (CANADA) Co. INTERPRETATION 1. In these Articles, unless there be something in the subject or context inconsistent therewith: (1) "Act" means the Companies Act (Nova Scotia); (2) "Articles" means these Articles of Association of the Company and all amendments hereto; (3) "Company" means the company named above; (4) "director" means a director of the Company; (5) "Memorandum" means the Memorandum of Association of the Company and all amendments thereto; (6) "month" means calendar month; (7) "Office" means the registered office of the Company; (8) "person" includes a body corporate; (9) "proxyholder" includes an alternate proxyholder; (10) "Register" means the register of members kept pursuant to the Act, and where the context permits includes a branch register of members; (11) "Registrar" means the Registrar as defined in the Act; (12) "Secretary" includes any person appointed to perform the duties of the Secretary temporarily; (13) "shareholder" means member as that term is used in the Act in connection with an unlimited company having share capital and as that term is used in the Memorandum; (14) "special resolution" has the meaning assigned by the Act; (15) "in writing" and "written" includes printing, lithography and other modes of representing or reproducing words in visible form; (16) words importing number or gender include all numbers and genders unless the context otherwise requires. -2- 2. The regulations in Table A in the First Schedule to the Act shall not apply to the Company. 3. The directors may enter into and carry into effect or adopt and carry into effect any agreement made by the promoters of the Company on behalf of the Company and may agree to any modification in the terms of any such agreement, either before or after its execution. 4. The directors may, out of the funds of the Company, pay all expenses incurred for the incorporation and organization of the Company. 5. The Company may commence business on the day following incorporation or so soon thereafter as the directors think fit, notwithstanding that part only of the shares has been allotted. SHARES 6. The capital of the company shall consist of 1,000,000 common shares without nominal or par value, with the power to divide the shares in the capital for the time being into classes or series and to attach thereto respectively any preferred, deferred or qualified rights, privileges or conditions, including restrictions on voting rights and including redemption, purchase and other acquisition of such shares, subject, however, to the provisions of the Act. 7. The directors shall control the shares and, subject to the provisions of these Articles, may allot or otherwise dispose of them to such person at such times, on such terms and conditions and, if the shares have a par value, either at a premium or at par, as they think fit. 8. The directors may pay on behalf of the Company a reasonable commission to any person in consideration of subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company, or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company. Subject to the Act, the commission may be paid or satisfied in shares of the Company. 9. On the issue of shares the Company may arrange among the holders thereof differences in the calls to be paid and in the times for their payment. 10. If the whole or part of the allotment price of any shares is, by the conditions of their allotment, payable in installments, every such installment shall, when due, be payable to the Company by the person who is at such time the registered holder of the shares. 11. Shares may be registered in the names of joint holders not exceeding three in number. 12. Joint holders of a share shall be jointly and severally liable for the payment of all installments and calls due in respect of such share. On the death of one or more joint holders of shares the survivor or survivors of them shall alone be recognized by the Company as the registered holder or holders of the shares. -3- 13. Save as herein otherwise provided, the Company may treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or required by statute, be bound to recognize any equitable or other claim to or interest in such share on the part of any other person. 14. The Company is a private company, and: (1) no transfer of any share or prescribed security of the Company shall be effective unless or until approved by the directors; (2) the number of holders of issued and outstanding prescribed securities or shares of the Company, exclusive of persons who are in the employment of the Company or in the employment of an affiliate of the Company and exclusive of persons who, having been formerly in the employment of the Company or the employment of an affiliate of the Company, were, while in that employment, and have continued after termination of that employment, to own at least one prescribed security or share of the Company, shall not exceed 50 in number, two or more persons or companies who are the joint registered owners of one or more prescribed securities or shares being counted as one holder; and (3) the Company shall not invite the public to subscribe for any of its securities. In this Article, "private company" and "securities" have the meanings ascribed to those terms in the Securities Act (Nova Scotia), and "prescribed security" means any of the securities prescribed by the Nova Scotia Securities Commission from time to time for the purpose of the definition of "private company" in the Securities Act (Nova Scotia). CERTIFICATES 15. Certificates of title to shares shall comply with the Act and may otherwise be in such form as the directors may from time to time determine. Unless the directors otherwise determine, every certificate of title to shares shall be signed manually by at least one of the Chairman, President, Secretary, Treasurer, a vice-president, an assistant secretary, any other officer of the Company or any director of the Company or by or on behalf of a share registrar transfer agent or branch transfer agent appointed by the Company or by any other person whom the directors may designate. When signatures of more than one person appear on a certificate all but one may be printed or otherwise mechanically reproduced. All such certificates when signed as provided in this Article shall be valid and binding upon the Company. If a certificate contains a printed or mechanically reproduced signature of a person, the Company may issue the certificate, notwithstanding that the person has ceased to be a director or an officer of the Company and the certificate is as valid as if such person were a director or an officer at the date of its issue. -4- 16. Except as the directors may determine, each shareholder's shares may be evidenced by any number of certificates so long as the aggregate of the shares stipulated in such certificate equals the aggregate registered in the name of the shareholder. 17. Where shares are registered in the names of two or more persons, the Company shall not be bound to issue more than one certificate or set of certificates, and such certificate or set of certificates shall be delivered to the person first named on the Register. 18. Any certificate that has become worn, damaged or defaced may, upon its surrender to the directors, be cancelled and replaced by a new certificate. Any certificate that has become lost or destroyed may be replaced by a new certificate upon proof of such loss or destruction to the satisfaction of the directors and the furnishing to the Company of such undertakings of indemnity as the directors deem adequate. 19. The sum of one dollar or such other sum as the directors from time to time determine shall be paid to the Company for every certificate other than the first certificate issued to any holder in respect of any share or shares. 20. The directors may cause one or more branch Registers of shareholders to be kept in any place or places, whether inside or outside of Nova Scotia. CALLS 21. The directors may make such calls upon the shareholders in respect of all amounts unpaid on the shares held by them respectively and not made payable at fixed times by the conditions on which such shares were allotted, and each shareholder shall pay the amount of every call so made to the person and at the times and places appointed by the directors. A call may be made payable by installments. 22. A call shall be deemed to have been made at the time when the resolution of the directors authorizing such call was passed. 23. At least 14 days' notice of any call shall be given, and such notice shall specify the time and place at which and the person to whom such call shall be paid. 24. If the sum payable in respect of any call or installment is not paid on or before the day appointed for the payment thereof, the holder for the time being of the share in respect of which the call has been made or the installment is due shall pay interest on such call or installment at the rate of 9% per year or such other rate of interest as the directors may determine from the day appointed for the payment thereof up to the time of actual payment. 25. At the trial or hearing of any action for the recovery of any amount due for any call, it shall sufficient to prove that the name of the shareholder sued is entered on the Register as the holder or one of the holders of the share or shares in respect of which such debt accrued, that the resolution making the call is duly recorded in the minute book and that such notice of such call was duly given to the shareholder sued in pursuance of these Articles. It shall not -5- be necessary to prove the appointment of the directors who made such call or any other matters whatsoever and the proof of the matters stipulated shall be conclusive evidence of the debt. FORFEITURE OF SHARES 26. If any shareholder fails to pay any call or installment on or before the day appointed for payment, the directors may at any time thereafter while the call or installment remains unpaid serve a notice on such shareholder requiring payment thereof together with any interest that may have accrued and all expenses that may have been incurred by the Company by reason of such non-payment. 27. The notice shall name a day (not being less than 14 days after the date of the notice) and a place or places on and at which such call or installment and such interest and expenses are to be paid. The notice shall also state that, in the event of non-payment on or before the day and at the place or one of the places so named, the shares in respect of which the call was made or installment is payable will be liable to be forfeited. 28. If the requirements of any such notice are not complied with, any shares in respect of which such notice has been given may at any time thereafter, before payment of all calls or installments, interest and expenses due in respect thereof, be forfeited by a resolution of the directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture. 29. When any share has been so forfeited, notice of the resolution shall be given to the shareholder in whose name it stood immediately prior to the forfeiture and an entry of the forfeiture shall be made in the Register. 30. Any share so forfeited shall be deemed the property of the Company and the directors may sell, re-allot or otherwise dispose of it in such manner as they think fit. 31. The directors may at any time before any share so forfeited has been sold, re-allotted or otherwise disposed of, annul the forfeiture thereof upon such conditions as they think fit. 32. Any shareholder whose shares have been forfeited shall nevertheless be liable to pay and shall forthwith pay to the Company all calls, installments, interest and expenses owing upon or in respect of such shares at the time of the forfeiture together with interest thereon at the rate of 9% per year or such other rate of interest as the directors may determine from the time of forfeiture until payment. The directors may enforce such payment if they think fit, but are under no obligation to do so. 33. A certificate signed by the Secretary stating that a share has been duly forfeited on a specified date in pursuance of these Articles and the time when it was forfeited shall be conclusive evidence of the facts therein stated as against any person who would have been entitled to the share but for such forfeiture. -6- LIEN ON SHARES 34. The Company shall have a first and paramount lien upon all shares (other than filly paid-up shares) registered in the name of a shareholder (whether solely or jointly with others) and upon the proceeds from the sale thereof for debts, liabilities and other engagements of the shareholder, solely or jointly with any other person, to or with the Company, whether or not the period for the payment, fulfilment or discharge thereof has actually arrived, and such lien shall extend to all dividends declared in respect of such shares. Unless otherwise agreed, the registration of a transfer of shares shall operate as a waiver of any lien of the Company on such shares. 35. For the purpose of enforcing such lien the directors may sell the shares subject to it in such manner as they think fit, but no sale shall be made until the period for the payment, fulfilment or discharge of such debts, liabilities or other engagements has arrived, and until notice in writing of the intention to sell has been given to such shareholder or the shareholder's executors or administrators and default has been made by them in such payment, fulfilment or discharge for seven days after such notice. 36. The net proceeds of any such sale after the payment of all costs shall be applied in or towards the satisfaction of such debts, liabilities or engagements and the residue, if any, paid to such shareholder. VALIDITY OF SALES 37. Upon any sale after forfeiture or to enforce a lien in purported exercise of the powers given by these Articles the directors may cause the purchaser's name to be entered in the Register in respect of the shares sold, and the purchaser shall not be bound to see to the regularity of the proceedings or to the application of the purchase money, and after the purchaser's name has been entered in the Register in respect of such shares the validity of the sale shall not be impeached by any person and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively. TRANSFER OF SHARES 38. The instrument of transfer of any share in the Company shall be signed by the transferor. The transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof and shall be entitled to receive any dividend declared thereon before the registration of the transfer. 39. The instrument of transfer of any share shall be in writing in the following form or to the following effect: For value received, _____ hereby sell, assign, and transfer unto __________ , ______ shares in the capital of the Company represented by the within certificate, and do hereby irrevocably constitute and appoint _________ attorney to transfer such shares on the books of the Company with full power of substitution in the premises. -7- Dated the __ day of ____________, ____ Witness: 40. The directors may, without assigning any reason therefor, decline to register any transfer of shares (1) not fully paid-up or upon which the Company has a lien, or (2) the transfer of which is restricted by any agreement to which the Company is a party. 41. Every instrument of transfer shall be left for registration at the Office of the Company, or at any office of its transfer agent where a Register is maintained, together with the certificate of the shares to be transferred and such other evidence as the Company may require to prove title to or the right to transfer the shares. 42. The directors may require that a fee determined by them be paid before or after registration of any transfer. 43. Every instrument of transfer shall, after its registration, remain in the custody of the Company. Any instrument of transfer that the directors decline to register shall, except in case of fraud, be returned to the person who deposited it. TRANSMISSION OF SHARES 44. The executors or administrators of a deceased shareholder (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such shareholder. When a share is registered in the names of two or more joint holders, the survivor or survivors or the executors or administrators of the deceased survivor, shall be the only persons recognized by the Company as having any title to, or interest in, such share. 45. Notwithstanding anything in these Articles, if the Company has only one shareholder (not being one of several joint holders) and that shareholder dies, the executors or administrators of the deceased shareholder shall be entitled to register themselves in the Register as the holders of the shares registered in the name of the deceased shareholder whereupon they shall have all the rights given by these Articles and by law to shareholders. 46. Any person entitled to shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer, upon producing such evidence of entitlement as the directors require, may be registered as a shareholder in respect of such shares, or may, without being registered, transfer such shares subject to the provisions of these Articles respecting the transfer of shares. The directors shall have the same right to refuse registration as if the transferee were named in an ordinary transfer presented for registration. -8- SURRENDER OF SHARES 47. The directors may accept the surrender of any share by way of compromise of any question as to the holder being properly registered in respect thereof. Any share so surrendered may be disposed of in the same manner as a forfeited share. INCREASE AND REDUCTION OF CAPITAL 48. Subject to the Act, the shareholders may by special resolution amend these Articles to increase or alter the share capital of the Company as they think expedient. Without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights, or with such restrictions, whether in regard to dividends, voting, return of share capital or otherwise, as the shareholders may from time to time determine by special resolution. Except as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the provisions herein contained with reference to payment of calls and installments, transfer and transmission, forfeiture, lien and otherwise. 49. The Company may, by special resolution where required, reduce its share capital in any way and with and subject to any incident authorized and consent required by law. Subject to the Act and any provisions attached to such shares, the Company may redeem, purchase or acquire any of its shares and the directors may determine the manner and the terms for redeeming, purchasing or acquiring such shares and may provide a sinking fund on such terms as they think fit for the redemption, purchase or acquisition of shares of any class or series MEETINGS AND VOTING BY CLASS OR SERIES 50. Where the holders of shares of a class or series have, under the Act, the terms or conditions attaching to such shares or otherwise, the right to vote separately as a class in respect of any matter then, except as provided in the Act, these Articles or such terms or conditions, all the provisions in these Articles concerning general meetings (including, without limitation, provisions respecting notice, quorum and procedure) shall, mutatis mutandis, apply to every meeting of holders of such class or series of shares convened for the purpose of such vote. 51. Unless the rights, privileges, terms or conditions attached to a class or series of shares provide otherwise, such class or eries of shares shall not have the right to vote separately as a class or series upon an amendment to the Memorandum or Articles to: (1) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series; (2) effect an exchange, reclassification or cancellation of all or part of the shares of such class or series; or -9- (3) create a new class or series of shares equal or superior to the shares of such class or series. BORROWING POWERS 52. The directors on behalf of the Company may: (1) raise or borrow money for the purposes of the Company or any of them; (2) secure, subject to the sanction of a special resolution where required by the Act, the repayment of funds so raised or borrowed in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the execution and delivery of mortgages of the Company's real or personal property, or by the issue of bonds, debentures or other securities of the Company secured by mortgage or other charge upon all or any part of the property of the Company, both present and future including its uncalled capital for the time being; (3) sign or endorse bills, notes, acceptances, cheques, contracts, and other evidence of or securities for funds borrowed or to be borrowed for the purposes aforesaid; (4) pledge debentures as security for loans; (5) guarantee obligations of any person. 53. Bonds, debentures and other securities may be made assignable, free from any equities between the Company and the person to whom such securities were issued. 54. Any bonds, debentures and other securities may be issued at a discount, premium or otherwise and with special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of directors and other matters. GENERAL MEETINGS 55 Ordinary general meetings of the Company shall be held at least once in every calendar year at such time and place as may be determined by the directors and not later than 15 months after the preceding ordinary general meeting. All other meetings of the Company shall be called special general meetings. Ordinary or special general meetings may be held either within or without the Province of Nova Scotia. 56. The President, a vice-president or the directors may at any time convene a special general meeting, and the directors, upon the requisition of shareholders in accordance with the Act shall forthwith proceed to convene such meeting or meetings to be held at such time and place or times and places as the directors determine. -10- 57. The requisition shall state the objects of the meeting requested, be signed by the requisitionists and deposited at the Office of the Company. It may Consist of several documents in like form each signed by one or more of the requisitionists. 58. At least seven clear days notice, or such longer period of notice as may be required by the Act, of every general meeting, specifying the place, day and hour of the meeting and, when special business is to be considered, the general nature of such business, shall be given to the shareholders entitled to be present at such meeting by notice given as permitted by these Articles. With the consent in writing of all the shareholders entitled to vote at such meeting, a meeting may be convened by a shorter notice and in any manner they think fit, or notice of the time, place and purpose of the meeting may be waived by all of the shareholders. 59. When it is proposed to pass a special resolution, the two meetings may be convened by the same notice, and it shall be no objection to such notice that it only convenes the second meeting contingently upon the resolution being passed by the requisite majority at the first meeting. 60. The accidental omission to give notice to a shareholder, or non-receipt of notice by a shareholder, shall not invalidate any resolution passed at any general meeting. RECORD DATES 61. (1) The directors may fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend or entitled to receive any distribution; (b) entitled to receive notice of a meeting; or (c) for any other purpose. (2) If no record date is fixed, the record date for the determination of shareholders (a) entitled to receive notice of a meeting shall be the day immediately preceding the day on which the notice is given, or, if no notice is given, the day on which the meeting is held; and (b) for any other purpose shall be the day on which the directors pass the resolution relating to the particular purpose. PROCEEDINGS AT GENERAL MEETINGS 62. The business of an ordinary general meeting shall be to receive and consider the financial statements of the Company and the report of the directors and the report, if any, of the -11- auditors, to elect directors in the place of those retiring and to transact any other business which under these Articles ought to be transacted at an ordinary general meeting. 63. No business shall be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. A corporate shareholder of the Company that has a duly authorized agent or representative present at any such meeting shall for the purpose of his Article be deemed to be personally present at such meeting. 64. One person, being a shareholder, proxyholder or representative of a corporate shareholder, present and entitled to vote shall constitute a quorum for a general meeting, and may hold a meeting. 65. The Chairman shall be entitled to take the chair at every general meeting or, if there be no Chairman, or if the Chairman is not present within fifteen 15 minutes after the time appointed for holding the meeting, the President or, failing the President, a vice-president shall be entitled to take the chair. If the Chairman, the President or a vice-president is not present within 15 minutes after the time appointed for holding the meeting or if all such persons present decline to take the chair, the shareholders present entitled to vote at the meeting shall choose another director as chairman and if no director is present or if all the directors present decline to take the chair, then such shareholders shall choose one of their number to be chairman. 66. If within half an hour from the time appointed for a general meeting a quorum is not present the meeting, if it was convened pursuant to a requisition of shareholders, shall be dissolved; if it was convened in any other way, it shall stand adjourned to the same day, in the next week, at the same time and place. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may hold the meeting. 67. Subject to the Act, at any general meeting a resolution put to the meeting shall be decided by a show of hands unless, either before or on the declaration of the result of the show of hands, a poll is demanded by the chairman, a shareholder or a proxyholder; and unless a poll is so demanded, a declaration by the chairman that the resolution has been carried, carried by a particular majority, lost or not carried by a particular majority and an entry to that effect in the Company's book of proceedings shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor or against such resolution. 68. When a poll is demanded, it shall be taken in such manner and at such time and place as the chairman directs, and either at once or after an interval or adjournment or otherwise. The result of the poll shall be the resolution of the meeting at which the poll was demanded. The demand of a poll may be withdrawn. When any dispute occurs over the admission or rejection of a vote, it shall be resolved by the chairman and such determination made in good faith shall be final and conclusive. 69. The chairman shall not have a casting vote in addition to any vote or votes that the chairman has as a shareholder. -12- 70. The chairman of a general meeting may with the consent of the meeting adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting that was adjourned. 71. Any poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith without adjournment. 72. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. VOTES OF SHAREHOLDERS 73. Subject to the Act and to any provisions attached to any class or series of shares concerning or restricting voting rights: (1) on a show of hands every shareholder entitled to vote present in person, every duly authorized representative of a corporate shareholder, and, if not prevented from voting by the Act, every proxyholder, shall have one vote; and (2) on a poll every shareholder present in person, every duly authorized representative of a corporate shareholder, and every proxyholder, shall have one vote for every share held; whether or not such representative or proxyholder is a shareholder. 74. Any person entitled to transfer shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer may vote at any general meeting in respect thereof in the same manner as if such person were the registered holder of such shares so long as the directors are satisfied at least 48 hours before the time of holding the meeting of such person's right to transfer such shares 75. Where there are joint registered holders of any share, any of such holders may vote such share at any meeting, either personally or by proxy, as if solely entitled to it. If more than one joint holder is present at any meeting, personally or by proxy, the one whose name stands first on the Register in respect of such share shall alone be entitled to vote it. Several executors or administrators of a deceased shareholder in whose name any share stands shall for the purpose of this Article be deemed joint holders thereof. 76. Votes may be cast either personally or by proxy or, in the case of a corporate shareholder by a representative duly authorized under the Act. 77. A proxy shall be in writing and executed in the manner provided in the Act. A proxy or other authority of a corporate shareholder does not require its seal. -13- 78. A shareholder of unsound mind in respect of whom an order has been made by any court of competent jurisdiction may vote by guardian or other person in the nature of a guardian appointed by that court, and any such guardian or other person may vote by proxy. 79. A proxy and the power of attorney or other authority, if any, wider which it is signed or a notarially certified copy of that power or authority shall be deposited at the Office of the Company or at such other place as the directors may direct. The directors may, by resolution, fix a time not exceeding 48 hours excluding Saturdays and holidays preceding any meeting or adjourned meeting before which time proxies to be used at that meeting must be deposited with the Company at its Office or with an agent of the Company. Notice of the requirement for depositing proxies shall be given in the notice calling the meeting. The chairman of the meeting shall determine all questions as to validity of proxies and other instruments of authority. 80. A vote given in accordance with the terms of a proxy shall be valid notwithstanding the previous death of the principal, the revocation of the proxy, or the transfer of the share in respect of which the vote is given, provided no intimation in writing of the death, revocation or transfer is received at the Office of the Company before the meeting or by the chairman of the meeting before the vote is given. 81. Every form of proxy shall comply with the Act and its regulations and subject thereto may be in the following form: I,____________ of___________being a shareholder of____________ hereby appoint_____________of________________(or failing him/her_____________ of-) as my proxyholder to attend and to vote for me and on my behalf at the ordinary/special general meeting of the Company, to be held on the day of and at any adjournment thereof, or at any meeting of the Company which may be held prior to [insert specified date or event]. [If the proxy is solicited by or behalf of the management of the Company, insert a statement to that effect.] Dated this_________ day of_______ _________. ------------------------ Shareholder 82. Subject to the Act, no shareholder shall be entitled to be present or to vote on any question either personally or by proxy, at any general meeting or be reckoned in a quorum while any call is due and payable to the Company in respect of any of the shares of such shareholder. 83. Any resolution passed by the directors, notice of which has been given to the shareholders in the manner in which notices are hereinafter directed to be given and which is, within one month after it has been passed, ratified and confirmed in writing by shareholders entitled on a poll to three-fifths of the votes, shall be as valid and effectual as a resolution of a general meeting. This Article shall not apply to a resolution for winding up the Company or to a -14- resolution dealing with any matter that by statute or these Articles ought to be dealt with by a special resolution or other method prescribed by statute. 84. A resolution, including a special resolution, in writing and signed by every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such shareholders at a meeting and satisfies all of the requirements of the Act respecting meetings of shareholders. DIRECTORS 85. Unless otherwise determined by resolution of shareholders, the number of directors shall not be less than one or more than ten. 86 Notwithstanding anything herein contained the subscribers to the Memorandum shall be the first directors of the Company. 87. The directors may be paid out of the funds of the Company as remuneration for their service such sums, if any, as the Company may by resolution of its shareholders determine, and such remuneration shall be divided among them in such proportions and manner as the directors determine. The directors may also be paid their reasonable traveling, hotel and other expenses incurred in attending meetings of directors and otherwise in the execution of their duties as directors. 88. The continuing directors may act notwithstanding any vacancy in their body, but if their number falls below the minimum permitted, the directors shall not, except in emergencies or for the purpose of filling vacancies, act so long as their number is below the minimum. 89. A director may, in conjunction with the office of director, and on such terms as to remuneration and otherwise as the directors arrange or determine, hold any other office or place of profit under the Company or under any company in which the Company is a shareholder or is otherwise interested. 90. The office of a director shall ipso facto be vacated, if the director: (1) becomes bankrupt or makes an assignment for the benefit of creditors; (2) is, or is found by a court of competent jurisdiction to be, of unsound mind; (3) by notice in writing to the Company, resigns the office of director; or (4) is removed in the manner provided by these Articles. 91. No director shall be disqualified by holding the office of director from contracting with the Company, either as vendor, purchaser, or otherwise, nor shall any such contract, or any contract or arrangement entered into or proposed to be entered into by or on behalf of the Company in which any director is in any way interested, either directly or indirectly, be -15- avoided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realized by any such contract or arrangement by reason only of such director holding that office or of the fiduciary relations thereby established, provided the director makes a declaration or gives a general notice in accordance with the Act. No director shall, as a director, vote in respect of any contract or arrangement in which the director is so interested, and if the director does so vote, such vote shall not be counted. This prohibition may at any time or times be suspended or relaxed to any extent by a resolution of the shareholders and shall not apply to any contract by or on behalf of the Company to give to the directors or any of them any security for advances or by way of indemnity. ELECTION OF DIRECTORS 92. At the dissolution of every ordinary general meeting at which their successors are elected, all the directors shall retire from office and be succeeded by the directors elected at such meeting. Retiring directors shall be eligible for re-election. 93. If at any ordinary general meeting at which an election of directors ought to take place no such election takes place, or if no ordinary general meeting is held in any year or period of years, the retiring directors shall continue in office until their successors are elected. 94. The Company may by resolution of its shareholders elect any number of directors permitted by these Articles and may determine or alter their qualification. 95. The Company may, by special resolution or in any other manner permitted by statute, remove any director before the expiration of such director's period of office and may, if desired, appoint a replacement to hold office during such time only as the director so removed would have held office. 96. The directors may appoint any other person as a director so long as the total number of directors does not at any time exceed the maximum number permitted. No such appointment, except to fill a casual vacancy, shall be effective unless two-thirds of the directors concur in it. Any casual vacancy occurring among the directors may be filled by the directors, but any person so chosen shall retain office only so long as the vacating director would have retained it if the vacating director had continued as director. MANAGING DIRECTOR 97. The directors may appoint one or more of their body to be managing directors of the Company, either for a fixed term or otherwise, and may remove or dismiss them from office and appoint replacements. 98. Subject to the provisions of any contract between a managing director and the Company, a managing director shall be subject to the same provisions as to resignation and removal as the other directors of the Company. A managing director who for any reason ceases to hold the office of director shall ipso facto immediately cease to be a managing director. -16- 99. The remuneration of a managing director shall from time to time be fixed by the directors and may be by way of any or all of salary, commission and participation in profits. 100. The directors may from time to time entrust to and confer upon a managing director such of the powers exercisable under these Articles by the directors as they think fit, and may confer such powers for such time, and to be exercised for such objects and purposes and upon such terms and conditions, and with such restrictions as they think expedient; and they may confer such powers either collaterally with, or to the exclusion of and in substitution for, all or any of the powers of the directors in that behalf; and may from time to time revoke, withdraw, alter or vary all or any of such powers. CHAIRMAN OF THE BOARD 101. The directors may elect one of their number to be Chairman and may determine the period during which the Chairman is to hold office. The Chairman shall perform such duties and receive such special remuneration as the directors may provide. PRESIDENT AND VICE-PRESIDENTS 102. The directors shall elect the President of the Company, who need not be a director, and may determine the period for which the President is to hold office. The President shall have general supervision of the business of the Company and shall perform such duties as may be assigned from time to time by the directors. 103. The directors may also elect vice-presidents, who need not be directors, and may determine the periods for which they are to hold office. A vice-president shall, at the request of the President or the directors and subject to the directions of the directors, perform the duties of the President during the absence, illness or incapacity of the President, and shall also perform such duties as may be assigned by the President or the directors. SECRETARY AND TREASURER 104. The directors shall appoint a Secretary of the Company to keep minutes of shareholders' and directors' meetings and perform such other duties as may be assigned by the directors. The directors may also appoint a temporary substitute for the Secretary who shall, for the purposes of these Articles, be deemed to be the Secretary. 105. The directors may appoint a treasurer of the Company to carry out such duties as the directors may assign. OFFICERS 106. The directors may elect or appoint such other officers of the Company, having such powers and duties, as they think fit. -17- 107. If the directors so decide the same person may hold more than one of the offices provided for in these Articles. PROCEEDINGS OF DIRECTORS 108. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings and proceedings, as they think fit, and may determine the quorum necessary for the transaction of business. Until otherwise determined, one director shall constitute a quorum and may hold a meeting. 109. If all directors of the Company entitled to attend a meeting either generally or specifically consent, a director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed to be present at that meeting for purposes of these Articles. 110. Meetings of directors may be held either within or without the Province of Nova Scotia and the directors may from time to time make arrangements relating to the time and place of holding directors meetings, the notices to be given for such meetings and what meetings may be held without notice. Unless otherwise provided by such arrangements: (1) A meeting of directors may be held at the close of every ordinary general meeting of the Company without notice. (2) Notice of every other directors' meeting may be given as permitted by these Articles to each director at least 48 hours before the time fixed for the meeting. (3) A meeting of directors may be held without formal notice if all the directors are present or if those absent have signified their assent to such meeting or their consent to the business transacted at such meeting. 1ll. The President or any director may at any time, and the Secretary, upon the request of the President or any director, shall summon a meeting of the directors to be held at the Office of the Company. The President, the Chairman or a majority of the directors may at any time, and the Secretary, upon the request of the President, the Chairman or a majority of the directors shall, summon a meeting to be held elsewhere. 112. (1) Questions arising at any meeting of directors shall be decided by a majority of votes. The chairman of the meeting may vote as a director but shall not have a second or casting vote. (2) At any meeting of directors the chairman shall receive and count the vote of any director not present in person at such meeting on any question or matter arising at such meeting whenever such absent director has indicated by telegram, letter or other writing lodged with the chairman of such meeting the manner in which the absent director desires to vote on such question or matter and such question or matter has -18- been specifically mentioned in the notice calling the meeting as a question or matter to be discussed or decided thereat. In respect of any such question or matter so mentioned in such notice any director may give to any other director a proxy authorizing such other director to vote for such first named director at such meeting, and the chairman of such meeting, after such proxy has been so lodged, shall receive and count any vote given in pursuance thereof notwithstanding the absence of the director giving such proxy. 113. If no Chairman is elected, or if at any meeting of directors the Chairman is not present within five minutes after the time appointed for holding the meeting, or declines to take the chair, the President, if a director, shall preside. If the President is not a director, is not present at such time or declines to take the chair, a vice-president who is also a director shall preside. If no person described above is present at such time and willing to take the chair, the directors present shall choose some one of their number to be chairman of the meeting. 114. A meeting of the directors at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the directors generally. 115. The directors may delegate any of their powers to committees consisting of such number of directors as they think fit. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on them by the directors. 116. The meetings and proceedings of any committee of directors shall be governed by the provisions contained in these Articles for regulating the meetings and proceedings of the directors insofar as they are applicable and are not superseded by any regulations made by the directors. 117. All acts done at any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of the director or person so acting, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. 118. A resolution in writing and signed by every director who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such directors at a meeting. 119. If any one or more of the directors is called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the Company or the business thereof, the Company may remunerate the director or directors so doing, either by a fixed sum or by a percentage of profits or otherwise. Such remuneration shall be determined by the directors and may be either in addition to or in substitution for remuneration otherwise authorized by these Articles. -19- REGISTERS 120. The directors shall cause to be kept at the Company's Office in accordance with the provisions of the Act a Register of the shareholders of the Company, a register of the holders of bonds, debentures and other securities of the Company and a register of its directors. Branch registers of the shareholders and of the holders of bonds, debentures and other securities may be kept elsewhere, either within or without the Province of Nova Scotia, in accordance with the Act. MINUTES 121. The directors shall cause minutes to be entered in books designated for the purpose: (1) of all appointments of officers; (2) of the names of directors present at each meeting of directors and of any committees of directors; (3) of all orders made by the directors and committees of directors; and (4) of all resolutions and proceedings of meetings of shareholders and of directors. Any such minutes of any meeting of directors or of any committee of directors or of shareholders, if purporting to be signed by the chairman of such meeting or by the chairman of the next succeeding meeting, shall be receivable as prima facie evidence of the matters stated in such minutes. POWERS OF DIRECTORS 122. The management of the business of the Company is vested in the directors who, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the shareholders, but subject nevertheless to the provisions of any statute, the Memorandum or these Articles. No modification of the Memorandum or these Articles shall invalidate any prior act of the directors that would have been valid if such modification had not been made. 123. Without restricting the generality of the terms of any of these Articles and without prejudice to the powers conferred thereby, the directors may: (1) take such steps as they think fit to carry out any agreement or contract made by or on behalf of the Company; (2) pay costs, charges and expenses preliminary and incidental to the promotion, formation, establishment, and registration of the Company; -20- (3) purchase or otherwise acquire for the Company any property, rights or privileges that the Company is authorized to acquire, at such price and generally on such terms and conditions as they think fit; (4) pay for any property, rights or privileges acquired by, or services rendered to the Company either wholly or partially in cash or in shares (fully paid-up or otherwise), bonds, debentures or other securities of the Company; (5) subject to the Act, secure the fulfilment of any contracts or engagements entered into by the Company by mortgaging or charging all or any of the property of the Company and its unpaid capital for the time being, or in such other manner as they think fit; (6) appoint, remove or suspend at their discretion such experts, managers, Secretaries, treasurers, officers, clerks, agents and servants for permanent, temporary or special services, as they from time to time think fit, and determine their powers and duties and fix their salaries or emoluments and require security in such instances and to such amounts as they think fit; (7) accept a surrender of shares from any shareholder insofar as the law permits and on such terms and conditions as may be agreed; (8) appoint any person or persons to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, execute and do all such deeds and things as may be required in relation to such trust, and provide for the remuneration of such trustee or trustees; (9) institute, conduct, defend, compound or abandon any legal proceedings by and against the Company, its directors or its officers or otherwise concerning the affairs of the Company, and also compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company; (10) refer any claims or demands by or against the Company to arbitration and observe and perform the awards; (11) make and give receipts, releases and other discharges for amounts payable to the Company and for claims and demands of the Company; (12) determine who may exercise the borrowing powers of the Company and sign on the Company's behalf bonds, debentures or other securities, bills, notes, receipts, acceptances, assignments, transfers, hypothecations, pledges, endorsements, cheques, drafis, releases, contracts, agreements and all other instruments and documents; (13) provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as may be thought fit; -21- (14) invest and deal with any finds of the Company in such securities and in such manner as they think fit; and vary or realize such investments; (15) subject to the Act, execute in the name and on behalf of the Company in favour of any director or other person who may incur or be about to incur any personal liability for the benefit of the Company such mortgages of the Company's property, present and future, as they think fit; (16) give any officer or employee of the Company a commission on the profits of any particular business or transaction or a share in the general profits of the Company; (17) set aside out of the profits of the Company before declaring any dividend such amounts as they think proper as a reserve find to meet contingencies or provide for dividends, depreciation, repairing, improving and maintaining any of the property of the Company and such other purposes as the directors may in their absolute discretion think in the interests of the Company; and invest such amounts in such investments as they think fit, and deal with and vary such investments, and dispose of all or any part of them for the benefit of the Company, and divide the reserve find into such special finds as they think fit, with fill power to employ the assets constituting the reserve find in the business of the Company without being bound to keep them separate from the other assets; (18) make, vary and repeal rules respecting the business of the Company, its officers and employees, the shareholders of the Company or any section or class of them; (19) enter into all such negotiations and contracts, rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the Company; (20) provide for the management of the affairs of the Company in such manner as they think fit. SOLICITORS 124. The Company may employ or retain solicitors any of whom may, at the request or on the instruction of the directors, the Chairman, the President or a managing director, attend meetings of the directors or shareholders, whether or not the solicitor is a shareholder or a director of the Company. A solicitor who is also a director may nevertheless charge for services rendered to the Company as a solicitor. -22- THE SEAL 125. The directors shall arrange for the safe custody of the common seal of the Company (the ("Seal"). The Seal may be affixed to any instrument in the presence of and contemporaneously with the attesting signature of (i) any director or officer acting within such person's authority or (ii) any person under the authority of a resolution of the directors or a committee thereof. For the purpose of certifying documents or proceedings the Seal may be affixed by any director or the President, a vice-president, the Secretary, an assistant secretary or any other officer of the Company without the authorization of a resolution of the directors 126. The Company may have facsimiles of the Seal which may be used interchangeably with the Seal 127 The Company may have for use at any place outside the Province of Nova Scotia, as to all matters to which the corporate existence and capacity of the Company extends, an official seal that is a facsimile of the Seal of the Company with the addition on its face of the name of the place where it is to be used; and the Company may by writing under its Seal authorize any person to affix such official seal at such place to any document to which the Company is a party. DIVIDENDS 128. The directors may from time to time declare such dividend as they deem proper upon shares of the Company according to the rights and restrictions attached to any class or series of shares, and may determine the date upon which such dividend will be payable and that it will be payable to the persons registered as the holders of the shares on which it is declared at the close of business upon a record date. No transfer of such shares registered after the record date shall pass any right to the dividend so declared. 129. Dividends may be paid as permitted by law and, without limitation, may be paid out of the profits, retained earnings or contributed surplus of the Company. No interest shall be payable on any dividend except insofar as the rights attached to any class or series of shares provide otherwise. 130. The declaration of the directors as to the amount of the profits, retained earnings or contributed surplus of the Company shall be conclusive. 131. The directors may from time to time pay to the shareholders such interim dividends as in their judgment the position of the Company justifies 132. Subject to these Articles and the rights and restrictions attached to any class or series of shares, dividends may be declared and paid to the shareholders in proportion to the amount of capital paid-up on the shares (not including any capital paid-up bearing interest) held by them respectively. -23- 133. The directors may deduct from the dividends payable to any shareholder amounts due and payable by the shareholder to the Company on account of calls, installments or otherwise, and may apply the same in or towards satisfaction of such amounts so due and payable. 134. The directors may retain any dividends on which the Company has a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. 135. The directors may retain the dividends payable upon shares to which a person is entitled or entitled to transfer upon the death or bankruptcy of a shareholder or in any way other than by allotment or transfer, until such person has become registered as the holder of such shares or has duly transferred such shares. 136. When the directors declare a dividend on a class or series of shares and also make a call on such shares payable on or before the date on which the dividend is payable, the directors may retain all or part of the dividend and set off the amount retained against the call. 137. The directors may declare that a dividend be paid by the distribution of cash, paid-up shares (at par or at a premium), debentures, bonds or other securities of the Company or of any other company or any other specific assets held or to be acquired by the Company or in any one or more of such ways. 138. The directors may settle any difficulty that may arise in regard to the distribution of a dividend as they think expedient, and in particular without restricting the generality of the foregoing may issue fractional certificates, may fix the value for distribution of any specific assets, may determine that cash payments will be made to any shareholders upon the footing of the value so fixed or that fractions may be disregarded in order to adjust the rights of all parties, and may vest cash or specific assets in trustees upon such trusts for the persons entitled to the dividend as may seem expedient to the directors. 139. Any person registered as a joint holder of any share may give effectual receipts for all dividends and payments on account of dividends in respect of such share. 140. Unless otherwise determined by the directors, any dividend may be paid by a cheque or warrant delivered to or sent through the post to the registered address of the shareholder entitled, or, when there are joint holders, to the registered address of that one whose name stands first on the register for the shares jointly held. Every cheque or warrant so delivered or sent shall be made payable to the order of the person to whom it is delivered or sent. The mailing or other transmission to a shareholder at the shareholders registered address (or, in the case of joint shareholders at the address of the holder whose name stands first on the register) of a cheque payable to the order of the person to whom it is addressed for the amount of any dividend payable in cash after the deduction of any tax which the Company has properly withheld, shall discharge the Company's liability for the dividend unless the cheque is not paid on due presentation. If any cheque for a dividend payable in cash is not received, the Company shall issue to the shareholder a replacement cheque for the same amount on such terms as to indemnity and evidence of non-receipt as the directors may -24- impose. No shareholder may recover by action or other legal process against the Company any dividend represented by a cheque that has not been duly presented to a banker of the Company for payment or that otherwise remains unclaimed for 6 years from the date on which it was payable. ACCOUNTS 141. The directors shall cause proper books of account to be kept of the amounts received and expended by the Company, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the Company, and the assets, credits and liabilities of the Company 142. The books of account shall be kept at the head office of the Company or at such other place or places as the directors may direct. 143. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the accounts and books of the Company or any of them shall be open to inspection of the shareholders, and no shareholder shall have any right to inspect any account or book or document of the Company except as conferred by statute or authorized by the directors or a resolution of the shareholders. 144. At the ordinary general meeting in every year the directors shall lay before the Company such financial statements and reports in connection therewith as may be required by the Act or other applicable statute or regulation thereunder and shall distribute copies thereof at such times and to such persons as may be required by statute or regulation. AUDITORS AND AUDIT 145. Except in respect of a financial year for which the Company is exempt from audit requirements in the Act, the Company shall at each ordinary general meeting appoint an auditor or auditors to hold office until the next ordinary general meeting. If at any general meeting at which the appointment of an auditor or auditors is to take place and no such appointment takes place, or if no ordinary general meeting is held in any year or period of years, the directors shall appoint an auditor or auditors to hold office until the next ordinary general meeting. 146. The first auditors of the Company may be appointed by the directors at any time before the first ordinary general meeting and the auditors so appointed shall hold office until such meeting unless previously removed by a resolution of the shareholders, in which event the shareholders may appoint auditors. 147. The directors may fill any casual vacancy in the office of the auditor but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act. -25- 148. The Company may appoint as auditor any person, including a shareholder, not disqualified by statute. 149. An auditor may be removed or replaced in the circumstances and in the manner specified in the Act. 150. The remuneration of the auditors shall be fixed by the shareholders, or by the directors pursuant to authorization given by the shareholders, except that the remuneration of an auditor appointed to fill a casual vacancy may be fixed by the directors. 151. The auditors shall conduct such audit as may be required by the Act and their report, if any, shall be dealt with by the Company as required by the Act. NOTICES 152. A notice (including any communication or document) shall be sufficiently given, delivered or served by the Company upon a shareholder, director, officer or auditor by personal delivery at such person's registered address (or, in the case of a director, officer or auditor, last known address) or by prepaid mail, telegraph, telex, facsimile machine or other electronic means of communication addressed to such person at such address. 153. Shareholders having no registered address shall not be entitled to receive notice. 154. All notices with respect to registered shares to which persons are jointly entitled may be sufficiently given to all joint holders thereof by notice given to whichever of such persons is named first in the Register for such shares. 155. Any notice sent by mail shall be deemed to be given, delivered or served on the earlier of actual receipt and the third business day following that upon which it is mailed, and in proving such service it shall be sufficient to prove that the notice was properly addressed and mailed with the postage prepaid thereon. Any notice given by electronic means of communication shall be deemed to be given when entered into the appropriate transmitting device for transmission. A certificate in writing signed on behalf of the Company that the notice was so addressed and mailed or transmitted shall be conclusive evidence thereof. 156. Every person who by operation of law, transfer or other means whatsoever becomes entitled to any share shall be bound by every notice in respect of such share that prior to such person's name and address being entered on the Register was duly served in the manner hereinbefore provided upon the person from whom such person derived title to such share. 157. Any notice delivered, sent or transmitted to the registered address of any shareholder pursuant to these Articles, shall, notwithstanding that such shareholder is then deceased and that the Company has notice thereof, be deemed to have been served in respect of any registered shares, whether held by such deceased shareholder solely or jointly with other persons, until some other person is registered as the holder or joint holder thereof, and such service shall for all purposes of these Articles be deemed a sufficient service of such notice -26- on the heirs, executors or administrators of the deceased shareholder and all joint holders of such shares. 158. Any notice may bear the name or signature, manual or reproduced, of the person giving the notice written or printed. 159. When a given number of days notice or notice extending over any other period is required to be given, the day of service and the day upon which such notice expires shall not, unless it is otherwise provided, be counted in such number of days or other period. INDEMNITY 160. Every director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, and the heirs and legal representatives of such person, in the absence of any dishonesty on the part of such person, shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses, including an amount paid to settle an action or claim or satisfy a judgment, that such director, officer or person may incur or become liable to pay in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Company or such body corporate, partnership or other association, whether the Company is a claimant or party to such action or proceeding or otherwise; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the shareholders over all other claims. 161. No director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, in the absence of any dishonesty on such person's part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the Company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or effects are deposited, or for any loss occasioned by error o judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto. -27- REMINDERS 162. The directors shall comply with the following provisions of the Act or the Corporations Registration Act (Nova Scotia) where indicated: (1) Keep a current register of shareholders (Section 42). (2) Keep a current register of directors, officers and managers, send to the Registrar a copy thereof and notice of all changes therein (Section 98). (3) Keep a current register of holders of bonds, debentures and other securities (Section 11l and Third Schedule). (4) Call a general meeting every year within the proper time (Section 83). Meetings must be held not later than 15 months after the preceding general meeting. (5) Send to the Registrar copies of all special resolutions (Section 88). (6) When shares are issued for a consideration other than cash, file a copy of the contract with the Registrar on or before the date on which the shares are issued (Section 109). (7) Send to the Registrar notice of the address of the Company's Office and of all changes in such address (Section 79). (8) Keep proper minutes of all shareholders' meetings and directors meetings in the Company's minute book kept at the Company's Office (Sections 89 and 90). (9) Obtain a certificate under the Corporations Registration Act (Nova Scotia) as soon as business is commenced. (10) Send notice of recognized agent to the Registrar under the Corporations Registration Act (Nova Scotia). Name of Subscriber Dated at Halifax, Nova Scotia the 2nd day of November, 1998. Witness to above signature _____________________ Halifax, Nova Scotia EX-4 5 4.11 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ICG HOLDINGS, INC. Pursuant to the provisions of the Colorado Business Corporation Act, ICG Holdings, Inc. (the "Corporation") adopts the following Second Amended and Restated Articles of Incorporation. These articles correctly set forth the provisions of the Articles of Incorporation, as amended, and supersede the original Articles of Incorporation and all amendments thereto. ARTICLE I The name of the Corporation is ICG Holdings, Inc. ARTICLE II The period of its duration is perpetual. ARTICLE III 3.1 Purposes. The nature, objects and purposes of the business to be transacted shall be as follows: (a) To own and operate. To own and operate domestic and international telecommunications companies and telecommunications facilities, including, but not limited to, earth satellite stations, channels of communications, orbital satellite stations, satellite transponders, very small aperture satellite terminals ("VSAT") and systems, microwave radio transmission systems, fiber optic transmission systems, telecommunications cable, telecommunications conduits, telephone systems, and telecommunications systems of any kind. (b) To acquire business. To acquire (whether for cash or in exchange for its assets or securities, or otherwise), operate and deal in other businesses of all types and interests therein. (c) To engage in other lawful business. To engage in any other lawful business or activity for which corporations may be incorporated under the laws of Colorado. ARTICLE IV The aggregate number of shares of stock the Corporation is authorized to issue is 40,000 shares of a class designated as common stock, no par value per share, and -1- 1,000,000 shares of a class designated as preferred stock, no par value per share, and the relative rights of the shares of each class are as follows: 4.1 Common Stock. (a) The holders of common stock shall have and possess all rights as shareholders of the Corporation except as such rights may be limited by the preferences, privileges and voting powers, and the restrictions and limitations of the preferred stock. All common stock, when duly issued, shall be fully paid and nonassessable. The holders of common stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. The holders of the common stock shall also be entitled to receive their pro rata share of the net assets of the Corporation upon dissolution. (b) The shares of such class of common stock shall have unlimited voting rights and shall constitute the sole voting group of the Corporation, except to the extent that any additional voting group or groups have been or may hereafter be established in accordance with the Colorado Business Corporation Act and except to the extent of the voting rights of the holders of preferred stock under Article IV. (c) Each shareholder of record shall have one vote for each share of common stock standing in his name on the books of the Corporation and entitled to vote, except that in the election of directors each shareholder shall have as many votes for each share held by him as there are directors to be elected and for whose election the shareholder has a right to vote. Cumulative voting shall not be permitted in the election of directors or otherwise. 4.2 Preferred Stock, Generally. The Corporation may divide and issue the preferred stock in series. The preferred shares of each series when issued shall be designated to distinguish them from the shares of all other series. The Board of Directors hereby is expressly vested with authority to divide the class of preferred stock into one or more series and to fix and determine by resolution the relative rights, limitations and preferences of the shares of any such series so established to the full extent permitted by these Second Amended and Restated Articles of Incorporation and the laws of the State of Colorado in respect of the following: (a) The number of shares to constitute such series, and the distinctive designations thereof; (b) The rate and preference of any dividends and the time of payment of any dividends, whether dividends are cumulative or noncumulative and the date from which any dividend shall accrue; -2- (c) Whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption; (d) The amount payable with respect to shares in the event of involuntary liquidation; (e) The amount payable with respect to shares in the event of voluntary liquidation; (f) Sinking fund or other provisions, if any, for the redemption or purchase of shares; (g) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion; (h) Voting rights, if any; and (i) Any other relative rights and preferences of shares of such series, including without limitation any restriction on an increase in the number of shares of any series theretofore authorized and any limitations or restrictions of rights or powers to which shares of any future series shall be subject. 4.2.1 Cumulative Exchangeable Redeemable Preferred Stock; Statement of Designation of Preferences and Rights. A series of preferred stock of the Corporation has been created with the designation and amount thereof and the voting powers, preferences and relative, optional and other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, as follows: 1. Certain Definitions: Set forth below are certain defined terms used in this Section 4.2.1. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Corporation and its Restricted Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person (other than net income attributable to a Restricted Subsidiary) in which any Person (other than the Corporation or any of its Restricted Subsidiaries) has a joint interest and the net income of any Unrestricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Corporation or any of its Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to paragraph 11(b)(i)(3) of this Section 4.2.1 (and in such case, except to the extent includable pursuant to -3- clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Corporation or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Corporation or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to paragraph 11(b)(i)(3) of this Section 4.2.1, any amount paid or accrued as dividends on preferred stock of the Corporation or any Restricted Subsidiary owned by Persons other than the Corporation and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; provided that, with respect to the Corporation and any of its Subsidiaries, the term "Affiliate" shall be deemed to include Mr. William Becker, Mr. Lawrence Becker and any person related by blood or marriage to either of them. "Asset Acquisition" means (i) an investment by the Corporation or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Corporation or shall be merged into or consolidated with the Corporation or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Corporation and its Restricted Subsidiaries on the date of such investment or (ii) an acquisition by the Corporation or any of its Restricted Subsidiaries of the property and assets of any Person other than the Corporation or any of its Restricted Subsidiaries that constitute substantially all of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Corporation and its Restricted Subsidiaries on the date of such acquisition. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transactions) in one transaction or a series of related transactions by the Corporation or any of its Restricted Subsidiaries to any Person other than the Corporation or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Corporation or any of its Restricted Subsidiaries or (iii) any other property and assets of the Corporation or any of its Restricted Subsidiaries outside the ordinary course of business of the Corporation or such Restricted Subsidiary and, in each case, that is not -4- governed by the provisions of paragraph 11(g) of this Section 4.2.1; provided that the meaning of "Asset Sale" shall not include (A) sales or other dispositions of inventory, receivables and other current assets, and (B) dispositions of assets of the Corporation or any of its Restricted Subsidiaries, in substantially simultaneous exchanges for consideration consisting of any combination of cash, Temporary Cash Investments and assets that are used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries, if such consideration has an aggregate fair market value substantially equal to the fair market value of the assets so disposed of; provided, however, that fair market value shall be determined in good faith by the Board of Directors of the Corporation, whose determination shall be conclusive and evidenced by a resolution of the Board of Directors delivered to the Transfer Agent. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Business Day" means any day except a Saturday, Sunday, or other day on which commercial banks in the City of New York, or in the city of the Transfer Agent Office, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether now outstanding or issued after April 29, 1996, including, without limitation, all common stock and preferred stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligations" means the discounted present value of the rental obligations under any such Capitalized Lease. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock having more than 40% of the voting power of the total Voting Stock of Holdings on a fully diluted basis; (ii) individuals who on the Closing Date constitute the Board of Directors of Holdings (together with any new directors whose election by the Board of Directors or whose nomination for election by Holdings' stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; or (iii) all of the common stock of the Corporation is not beneficially owned by Holdings; -5- provided, however, that a Change of Control shall be deemed not to occur solely as a result of a Reorganization. "Closing Date" means the date on which the Exchangeable Preferred is originally issued. "Consolidated EBITDA" means, for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) income taxes, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses on sales of assets), (iv) depreciation expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, (v) amortization expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for the Corporation and its Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding common stock of such Restricted Subsidiary not owned on the last day of such period by the Corporation or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding common stock of such Restricted Subsidiary on the last day of such period. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Corporation or any of its Restricted Subsidiaries) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Corporation and its Restricted Subsidiaries during such period; excluding, however, without duplication, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the 132% Notes and the warrants issued therewith, the Senior Discount Notes and/or the Exchangeable Preferred, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. -6- "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Corporation and its Restricted Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall not take into account Unrestricted Subsidiaries), less any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Corporation or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Corporation or any of its Restricted Subsidiaries against fluctuations in currency values to or under which the Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party or a beneficiary thereafter. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Event of Default" means a Voting Rights Triggering Event as defined in paragraph 10(b) of this Section 4.2.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "FOTI" means Fiber Optic Technologies Inc., a Colorado corporation. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of August 8, 1995, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained in this Section 4.2.1 shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Section 4.2.1 shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the 132% Notes and the warrants issued therewith, the Senior Discount Notes and/or the Exchangeable Preferred and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. -7- "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holders" means the registered holders of shares of Exchangeable Preferred. "Holdings," as used in this Section 4.2.1, means IntelCom Group, Inc., a Canadian federal corporation, or any successor thereto, and, if a Reorganization is completed, shall be deemed to refer also to "Newco" as defined in the definition of Reorganization. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an Incurrence of Indebtedness by reason of the acquisition of more than 50% of the Capital Stock of any Person; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except trade payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon -8- the occurrence of the contingency giving rise to the obligation, provided (i) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the original issue price of such Indebtedness and (ii) that Indebtedness shall not include any liability for federal, state, local or other taxes. "Indebtedness to EBITDA Ratio" means, as at any date of determination, the ratio of (i) the aggregate amount of Indebtedness of the Corporation and its Restricted Subsidiaries on a consolidated basis as at the date of determination (the "Determination Date") to (ii) the Consolidated EBITDA of the Corporation for the then most recent four full fiscal quarters for which reports have been filed pursuant to paragraph 11(i) of this Section 4.2.1 (such four full fiscal quarter period being referred to herein as the "Four Quarter Period"); provided that (x) pro forma effect shall be given to any Indebtedness Incurred from the beginning of the Four Quarter Period through the Determination Date (including any Indebtedness Incurred on the Determination Date), to the extent outstanding on the Determination Date, (y) if during the period commencing on the first day of such Four Quarter Period through the Determination Date (the "Reference Period"), the Corporation or any of the Restricted Subsidiaries shall have engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale and any related retirement of Indebtedness as if such Asset Sale and related retirement of Indebtedness had occurred on the first day of such Reference Period or (z) if during such Reference Period the Corporation or any of the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated EBITDA of the Corporation shall be calculated on a pro forma basis as if such Asset Acquisition and any related financing had occurred on the first day of such Reference Period. In calculating this ratio for purposes hereof, the amount of outstanding Indebtedness shall be deemed to include the liquidation preference of any preferred stock then outstanding. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Corporation or any of its Restricted Subsidiaries against fluctuations in interest rates in respect of Indebtedness to or under which the Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party or a beneficiary thereafter; provided that the notional principal amount thereof does not exceed the principal amount of the Indebtedness of the Corporation and its Restricted Subsidiaries that bears interest at floating rates. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Corporation or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, -9- debentures or other similar instruments issued by, such Person and shall include the designation of a Restricted Subsidiary as an Unrestricted Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and paragraph 11(b) of this Section 4.2.1, (i) "Investment" shall include the fair market value of the assets (net of liabilities) of any Restricted Subsidiary of the Corporation at the time that such Restricted Subsidiary of the Corporation is designated an Unrestricted Subsidiary and shall exclude the fair market value of the assets (net of liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Corporation and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller, or any agreement to give any security interest). "MTN" means Maritime Telecommunications Network, Inc., a Colorado corporation, and its successors. "Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Corporation or any Restricted Subsidiary of the Corporation) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Corporation and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Corporation or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Corporation or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorneys' fees, accountants' fees, underwriters' or -10- placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Offer to Purchase" means an offer to purchase shares of Exchangeable Preferred by the Corporation from the Holders commenced by mailing a notice to the Transfer Agent and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all shares of Exchangeable Preferred validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any shares of Exchangeable Preferred not tendered will continue to accrue dividends pursuant to its terms; (iv) that, unless the Corporation defaults in the payment of the purchase price, any shares of Exchangeable Preferred accepted for payment pursuant to the Offer to Purchase shall cease to accrue dividends on and after the Payment Date; (v) that Holders electing to have any shares of Exchangeable Preferred purchased pursuant to the Offer to Purchase will be required to surrender the shares of Exchangeable Preferred together with a form entitled "Option of the Holder to Elect Purchase" (the form of which will be mailed with such notice) completed, to the paying agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the paying agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the liquidation preference of the shares of Exchangeable Preferred delivered for purchase and a statement that such Holder is withdrawing his election to have such shares of Exchangeable Preferred purchased; and (vii) that Holders whose shares of Exchangeable Preferred are being purchased only in part will be issued new shares of Exchangeable Preferred equal in liquidation preference to the unpurchased portion of the shares of Exchangeable Preferred surrendered; provided that each share of Exchangeable Preferred purchased and each new share of Exchangeable Preferred issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Corporation shall (i) accept for payment on a pro rata basis shares of Exchangeable Preferred or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the paying agent money sufficient to pay the purchase price of all shares of Exchangeable Preferred or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Transfer Agent all shares of Exchangeable Preferred or portions thereof so accepted together with an Officers' Certificate specifying the shares of Exchangeable Preferred or portions thereof accepted for payment by the Corporation. The paying agent shall promptly mail to the Holders of shares of Exchangeable Preferred so accepted, payment in an amount equal to the purchase price, and the Transfer Agent shall promptly authenticate and mail to such Holders new shares of Exchangeable Preferred equal in liquidation preference to any unpurchased portion of the shares of Exchangeable Preferred surrendered; provided that each share of Exchangeable Preferred purchased and each new share of Exchangeable Preferred issued shall be in a principal amount of $1,000 or integral multiples thereof. The Corporation will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Transfer Agent shall act as the paying agent for an Offer to Purchase. The Corporation will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations -11- thereunder, to the extent such laws and regulations are applicable, in the event that the Corporation is required to repurchase shares of Exchangeable Preferred pursuant to an Offer to Purchase. "Ohio LINX" means ICG Ohio LINX, Inc., an Ohio corporation. "Permitted Investment" means (i) an Investment in a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Corporation or a Restricted Subsidiary; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Corporation and its Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash Investment; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) loans or advances to employees made in the ordinary course of business in accordance with past practice of the Corporation or its Restricted Subsidiaries and that do not in the aggregate exceed $2 million at any time outstanding; (v) stock, obligations or securities received in satisfaction of judgments; and (vi) Indebtedness of Holdings owed to the Corporation, in an amount not to exceed the reasonable expenses of Holdings as a holding company that are actually incurred, and paid, by Holdings; provided that such Indebtedness of Holdings is evidenced by an unsubordinated promissory note that provides that it will be paid prior to any mandatory redemption of the Exchangeable Preferred if such payment would be necessary to effectuate such redemption. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights of way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Corporation or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with paragraph 11(a) of this Section 4.2.1, (1) to finance the cost (including the -12- cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Corporation and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Corporation or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Corporation or any Restricted Subsidiary other than the property or assets acquired; (xii) Liens in favor of the Corporation or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Corporation or any Restricted Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed to protect the Corporation or any of its Restricted Subsidiaries from fluctuations in the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Corporation or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Corporation and its Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales of receivables. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Preferred stock" or "preferred stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued after April 29, 1996, including, without limitation, all series and classes of such preferred or preference stock. -13- "Public Equity Offering" means a bona fide underwritten primary public offering of common stock of Holdings or the Corporation pursuant to an effective registration statement under the Securities Act. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the mandatory redemption date of the shares of Exchangeable Preferred, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the mandatory redemption date of the shares of Exchangeable Preferred, or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the mandatory redemption date of the shares of Exchangeable Preferred; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of a "change of control" occurring prior to the mandatory redemption date of the shares of Exchangeable Preferred shall not constitute Redeemable Stock if the "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the "Change of Control" provisions contained in paragraph 7(b) of this Section 4.2.1 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Corporation's repurchase of Exchangeable Preferred as provided in paragraph 7(b) of this Section 4.2.1. "Reorganization" means the transaction or series of transactions in which the Voting Stock of Holdings is changed into or exchanged for Voting Stock of a corporation organized under the laws of any State in the United States ("Newco"). "Restricted Subsidiary" means any Subsidiary of the Corporation other than an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended. "Senior Discount Notes," as used in this Section 4.2.1, means the Senior Discount Notes Due 2006 of the Corporation, Guaranteed by Holdings on a senior unsecured basis and issued on the Closing Date. "Senior Discount Notes Indenture," as used in this Section 4.2.1, means the Indenture dated as of the Closing Date among the Corporation, Holdings and the Trustee pursuant to which the Senior Discount Notes are issued. "StarCom" means StarCom International Optics Corporation, a British Columbia corporation, and its Subsidiaries. "Strategic Investor" means any Person engaged in the telecommunications business which has a net worth or equity market capitalization of at least $1 billion. -14- "Strategic Investor Subordinated Indebtedness" means all Indebtedness of the Corporation owed to a Strategic Investor that is contractually subordinate in right of payment to the shares of Exchangeable Preferred to at least the following extent: no payment of principal (or premium, if any) or interest on or otherwise payable in respect of such Indebtedness may be made (whether as a result of a default or otherwise) prior to the payment in full of all of the Corporation's obligations under the shares of Exchangeable Preferred; provided, however, that prior to the payment of such obligations, interest on Strategic Investor Subordinated Indebtedness may be payable solely in kind or in common stock (other than Redeemable Stock) of Holdings or the Corporation. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 270 days of the date of acquisition thereof, bankers' acceptances with maturities not exceeding 270 days, and overnight bank deposits, in each case issued by or with a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $100 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of Holdings) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service, Inc. "13 1/2% Notes" means the 13 1/2% Senior Discount Notes Due 2005 of the Corporation Guaranteed by Holdings on a senior unsecured basis. -15- "13 1/2% Notes Indenture" means the Indenture dated as of August 8, 1995 among the Corporation, Holdings and the Trustee pursuant to which the Corporation issued the 13 1/2% Notes. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Corporation or any of its Restricted Subsidiaries or the issuance of any Redeemable Stock of the Corporation, the date such Indebtedness is to be Incurred or such issuance is to be made and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Transfer Agent" means American Stock Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005, or such other Person as may become the transfer agent with respect to the Exchangeable Preferred. "Transfer Agent Office" means the principal office of the Transfer Agent at any particular time, which office is, at the date hereof, located at 40 Wall Street, 46th Floor, New York, New York 10005. "Trustee" means Norwest Bank Colorado, National Association, or such other Person as may become the trustee under the Indenture, the Senior Discount Notes Indenture, or the 132% Notes Indenture, as the context requires. "Unrestricted Subsidiary" means (i) any Subsidiary of the Corporation that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Corporation (including any newly acquired or newly formed Subsidiary of the Corporation), to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Corporation or any Restricted Subsidiary; provided that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, that such designation would be permitted under paragraph 11(b) of this Section 4.2.1. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Corporation; provided that immediately after giving effect to such designation (x) the Corporation could Incur $1.00 of additional Indebtedness under paragraph 11(a)(i) of this Section 4.2.1 and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Transfer Agent by promptly filing with the Transfer Agent a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. -16- "Wholly Owned" means, with respect to any Subsidiary of any Person, such Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned by such Person or one or more Wholly Owned Subsidiaries of such Person. "Zycom" means Zycom Corporation, an Alberta, Canada corporation. 2. Designation Amount. The distinctive serial designation of this series shall be "Cumulative Exchangeable Redeemable Preferred Stock" (as used in this Section 4.2.1, "Exchangeable Preferred"). The number of shares of Exchangeable Preferred shall initially be 150,000, which number may from time to time be increased (but not above the number that would cause the aggregate number of all shares of preferred stock of all series to exceed 1,000,000 shares) or decreased (but not below the number then outstanding) by the Board of Directors. Shares of Exchangeable Preferred redeemed, purchased by the Corporation or exchanged for Exchange Debentures (as defined in paragraph 8(a) of this Section 4.2.1) shall be canceled and shall revert to authorized but unissued shares of preferred stock undesignated as to series; provided, however, that no such issued and reacquired shares of such series shall be reissued or sold as shares of Exchangeable Preferred unless reissued as a stock dividend on outstanding shares of Exchangeable Preferred. 3. Rank. The Exchangeable Preferred shall, with respect to dividend rights and distribution rights on liquidation, winding-up and dissolution of the Corporation, rank (i) senior to all classes of common stock of the Corporation and to each other class of Capital Stock or series of preferred stock established after April 25, 1996, by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to with the common stock of the Corporation as "Junior Securities"); (ii) on a parity with any class of Capital Stock or series of preferred stock issued by the Corporation established after April 25, 1996, by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Parity Securities"); and (iii) subject to certain conditions described below, junior to each class of Capital Stock or series of preferred stock issued by the Corporation established after April 25, 1996, by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Senior Securities"). The Exchangeable Preferred will be subject to the issuance of series of Junior Securities, Parity Securities and Senior Securities; provided that the Corporation may not issue any new class of Senior Securities without the approval of the Holders of at least a majority of the shares of Exchangeable Preferred then outstanding, voting or consenting, as the case may be, separately as one class, except that without such approval of Holders of the Exchangeable Preferred, the Corporation may issue shares of Senior Securities (1) in exchange -17- for, or the proceeds of which are used to redeem or repurchase, all, but not less than all, shares of Exchangeable Preferred then outstanding, or (2) in exchange for, or the proceeds of which are used to repay, any outstanding Indebtedness of the Corporation. 4. Dividends. (a) The Holders of shares of the Exchangeable Preferred shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefor, dividends at the annual rate of 143% of the liquidation preference per share, subject to the provisions of paragraph 4(e) below. Such dividends shall be cumulative, whether or not earned or declared, on a daily basis from the date of issuance of the Exchangeable Preferred, and shall be payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year commencing on August 1, 1996 (each of such dates being a "dividend payment date"), with respect to the period commencing with the date of issuance of the particular shares of Exchangeable Preferred or the immediately preceding dividend payment date and ending on the day preceding such respective dividend payment date (each of such periods being a "dividend period"), to shareholders of record on the preceding January 15, April 15, July 15, and October 15, respectively (each, a "regular record date"). Any dividend payments made with respect to shares of Exchangeable Preferred on or before May 1, 2001, may be made, in the sole discretion of the Board of Directors, in cash or in such number of additional fully paid and nonassessable shares of Exchangeable Preferred having an aggregate liquidation preference equal to the amount of such dividends, and the issuance of such additional shares of Exchangeable Preferred shall constitute full payment of such dividend. All dividends paid with respect to shares of Exchangeable Preferred pursuant to this paragraph 4(a) shall be paid pro rata to the Holders entitled thereto. The Corporation may, at the option of the Board of Directors, elect not to issue fractions of a share of Exchangeable Preferred ("Fractional Shares") in payment of any dividend in additional shares of Exchangeable Preferred. In such event, in lieu of any Fractional Shares, each record Holder of Exchangeable Preferred otherwise entitled to receive a Fractional Share shall receive a payment in cash equal to such Holder's proportionate interest in the net proceeds from the sale or sales in the open market by the Transfer Agent or other agent selected by the Corporation, on behalf of all such Holders of the aggregate of all Fractional Shares otherwise payable as a dividend. Such sale shall be effected promptly after the record date fixed for determining the Holders entitled to payment of the dividend. All shares of Exchangeable Preferred issued as a dividend with respect to the Exchangeable Preferred will thereupon be duly authorized, validly issued, fully paid and nonassessable and free of all liens and charges. After May 1, 2001, dividends on the Exchangeable Preferred shall be paid only in cash to the Holders of record at the close of business on the regular record date with respect to the applicable dividend payment date. (b) Accumulated unpaid dividends for any past dividend periods may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, whether or not a regular dividend payment date, to Holders of record on the books of the Corporation on such record date as may be fixed by the Board of Directors. Holders of Exchangeable Preferred will not be -18- entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. If any dividend (or portion thereof) payable on any dividend payment date on or before May 1, 2001, is not declared or paid in full in cash or in shares of Exchangeable Preferred as described in paragraph 4(a) above on such dividend payment date, the amount of the accrued and unpaid dividend will bear interest at the dividend rate on the Exchangeable Preferred, compounding quarterly from such dividend payment date until paid in full. If any dividend (or portion thereof) payable on any dividend payment date after May 1, 2001, is not declared or paid in full in cash on such dividend payment date, the amount of the accrued and unpaid dividend will bear interest at the dividend rate on the Exchangeable Preferred, compounding quarterly from such dividend payment date until paid in full. (c) So long as any shares of the Exchangeable Preferred are outstanding, the Corporation shall not (i) declare, pay or set apart for payment any dividend on any shares of Junior Securities or Parity Securities or (ii) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption, retirement or other acquisition for value of any of, or redeem, purchase, retire or otherwise acquire for value any of, the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities or (iii) make any distribution in respect of the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities, in any such case either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property (other than distributions or dividends of a particular class or series of Junior Securities to holders of such Junior Securities or distributions or dividends of a particular class or series of Parity Securities to holders of such Parity Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase, redeem or otherwise acquire for value any of the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities, unless, as to any of the actions described in clauses (i), (ii) or (iii) above, prior to or concurrently with such declaration, payment, setting apart for payment, purchase, redemption, other acquisition for value or distribution, as the case may be, all accrued and unpaid dividends, if any, on shares of the Exchangeable Preferred not paid on the dates provided for in paragraphs 4(a) or 4(b) hereof (including accrued dividends, if any, not paid by reason of the terms and conditions of paragraph 4(d) hereof) shall have been paid or shall have been declared and, if payable in cash, a sum in cash set apart for such payment. If full cumulative dividends on the Exchangeable Preferred are not so paid, the Exchangeable Preferred will share dividends pro rata with the Parity Securities. If full cumulative dividends on the Exchangeable Preferred have not been so paid, the Exchangeable Preferred may not be optionally redeemed in part as provided in paragraph 6(d) of this Section 4.2.1. (d) Notwithstanding anything contained herein to the contrary, no cash dividends on shares of Exchangeable Preferred, or any other shares of Junior Securities or Parity Securities, or other series of the Corporation's preferred stock, shall be declared by the Board of Directors or paid or set apart for payment by the Corporation at such time as the -19- terms and provisions of any contract or other agreement of the Corporation or any of its Restricted Subsidiaries entered into or assumed prior to, on, or after the Closing Date specifically prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder; provided, however, that nothing contained in this paragraph 4(d) shall be construed or deemed to require the Board of Directors to declare, or the Corporation to pay or set apart for payment, any cash dividends on shares of the Exchangeable Preferred, whether permitted by any of such agreements or not. (e) If, on or prior to November 1, 1996, the Corporation does not, as more fully provided in the Registration Rights Agreement with respect to the Exchangeable Preferred dated the Closing Date, either (i) consummate an offer by the Corporation to such Holders to exchange the Exchangeable Preferred for an issue of preferred stock of the Corporation with terms identical to the Exchangeable Preferred pursuant to an effective registration statement under the Securities Act with respect to such exchange offer, or (ii) file and cause to become effective under the Securities Act a shelf registration statement with respect to resales of the Exchangeable Preferred, then dividends, in addition to the dividends described in paragraph 4(a) of this Section 4.2.1, will accrue at the annual rate of 0.5% of the liquidation preference per share on the Exchangeable Preferred from November 1, 1996, payable in additional shares of Exchangeable Preferred quarterly in arrears on February 1, May 1, August 1, and November 1 of each year commencing on February 1, 1997. 5. Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation, then, before any distribution or payment shall be made to the holders of any Junior Securities, including common stock of the Corporation, the Holders of Exchangeable Preferred then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its shareholders, an amount in cash equal to $1,000 for each share outstanding (which amount is hereinafter referred to as the "liquidation preference"), plus an amount in cash equal to all accrued and unpaid dividends and interest thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the dividend payment date immediately preceding the date fixed for liquidation, dissolution or winding-up to the date fixed for liquidation, dissolution or winding-up). Except as provided in the preceding sentence, Holders of Exchangeable Preferred shall not be entitled to any distribution in the event of liquidation, dissolution or winding-up of the affairs of the Corporation. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Exchangeable Preferred and all other Parity Securities, then the holders of all such shares shall share ratably in any distribution of assets of the Corporation with respect to the Exchangeable Preferred and -20- Parity Securities in accordance with the amount that would be payable on such distribution if the amounts to which the holders of outstanding shares of Exchangeable Preferred and all other Parity Securities are entitled were paid in full. After payment of the full amount of the liquidation preference and accrued and unpaid dividends or interest to which each Holder is entitled, such Holders of shares of Exchangeable Preferred will not be entitled to any further participation in any distribution of the assets of the Corporation. (b) For purposes of this paragraph 5, a merger, consolidation or sale of substantially all of the Corporation's assets that complies with the provisions of paragraph 11(g) of this Section 4.2.1 shall not be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Corporation. 6. Optional Redemption. (a) Subject to subparagraph (d) of this paragraph 6, and subject to the legal availability of funds therefor and to any contractual and other restrictions with respect thereto, at any time on or after May 1, 2001, the Corporation, at the option of the Board of Directors, may redeem, in whole or in part, the shares of Exchangeable Preferred at the time outstanding, at any time or from time to time, upon notice given as provided in paragraph 9 of this Section 4.2.1, at the redemption prices (expressed as a percentage of the liquidation preference thereof) set forth below, plus an amount in cash equal to all accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date, subject to the right of holders of preferred stock on a record date to receive dividends on a dividend payment date) if redeemed during the 12-month period beginning May 1 of each of the years set forth below: Year Percentage 2001 ................................... 107.125% 2002 ................................... 104.750% 2003 ................................... 102.375% 2004 and thereafter......................... 100.000% (b)......In addition, but subject to subparagraph (d) of this paragraph 6, on or prior to May 1, 1999, the Corporation may, at the option of the Board of Directors from time to time, subject to the legal availability of funds therefor and to any contractual and other restrictions with respect thereto, redeem shares of Exchangeable Preferred having an aggregate liquidation preference of up to 35% of the aggregate liquidation preference of all shares of Exchangeable Preferred issued on the Closing Date, at a redemption price equal to 1143% of the liquidation preference thereof (subject to the right of Holders of Exchangeable Preferred on relevant record dates to receive dividends due on relevant dividend payment dates), plus an amount in cash equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date, with proceeds of one or more -21- Public Equity Offerings of common stock of (A) the Corporation or (B) Holdings, provided that (i) with respect to a Public Equity Offering referred to in clause (B) above, cash proceeds of such Public Equity Offering in an amount sufficient to effect the redemption of Exchangeable Preferred to be so redeemed are contributed by Holdings to the Corporation prior to such redemption and used by the Corporation to effect such redemption and (ii) such redemption occurs within 180 days after consummation of such Public Equity Offering. (c) In the event of partial redemptions of Exchangeable Preferred, the shares to be redeemed will be determined pro rata, except that the Corporation may redeem such shares held by any Holder of fewer than 100 shares without regard to such pro rata redemption requirement. (d) Notwithstanding the foregoing provisions of paragraph 6(a) or (b) of this Section 4.2.1, unless the full cumulative dividends for all past dividend periods on all outstanding shares of Exchangeable Preferred shall have been paid or contemporaneously are declared and paid or set apart for payment (whether in cash or additional shares of Exchangeable Preferred, as permitted under paragraph 4(a) of this Section 4.2.1), none of the shares of Exchangeable Preferred shall be redeemed pursuant to paragraph 6(a) or (b) of this Section 4.2.1 unless all outstanding shares of Exchangeable Preferred are simultaneously redeemed and all such cumulative dividends are paid in cash contemporaneously with such redemption. 7. Mandatory Redemption. (a) The Exchangeable Preferred will be subject to mandatory redemption (subject to the legal availability of funds therefor but without regard to any contractual or other restriction with respect thereto) in whole on May 1, 2007, at a price, payable in cash, equal to the liquidation preference thereof, plus all accumulated and unpaid dividends to the date of redemption. (b)Upon the occurrence of a Change of Control, the Corporation will (subject to any contractual and other restrictions with respect thereto and to the legal availability of funds therefor) offer (the "Change of Control Offer") to each Holder of Exchangeable Preferred to repurchase all or any part of such Holder's Exchangeable Preferred at a cash purchase price equal to 101% of the liquidation preference thereof, plus an amount in cash equal to all accumulated and unpaid dividends per share to the date of purchase (including an amount in cash equal to a prorated dividend from the dividend payment date immediately preceding the date of purchase to the date of purchase). The Change of Control Offer will be made within 30 days following a Change of Control, will remain open for at least 30 and not more than 40 days, and will be made in compliance with the requirements of Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations. Notwithstanding the foregoing, the Corporation will not make a Change of Control Offer if any of the Senior Discount Notes or 13 1/2% Notes are outstanding upon the occurrence of a Change of Control unless all of the Senior Discount Notes and 13 1/2% Notes tendered pursuant to the "change of control offers" with respect thereto are repurchased as a -22- result of such Change of Control, in which case the date on which all Senior Discount Notes and 13 1/2% Notes (and any other Indebtedness or Senior Securities of the Corporation having provisions similar to Section 4.04(x) of the Senior Discount Notes Indenture) are so repurchased will be deemed to be the date on which such Change of Control shall have occurred. (c)If the Corporation shall fail to discharge its obligation to redeem all outstanding shares of Exchangeable Preferred pursuant to paragraph 7(a) or (b) of this Section 4.2.1 (the "Mandatory Redemption Obligation"), the Corporation shall discharge the Mandatory Redemption Obligation as soon as the Corporation is able to do so. If and so long as any Mandatory Redemption Obligation with respect to the Exchangeable Preferred shall not be fully discharged, the Corporation shall not declare or pay any dividend or make any distribution on, or, directly or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking fund or other similar obligations in respect of, Junior Securities or Parity Securities (other than as a result of a reclassification of Junior Securities or Parity Securities, or the exchange or conversion of one class or series of Junior Securities for or into another class or series of Junior Securities, or the exchange or conversion of one class or series of Parity Securities for or into another class or series of Parity Securities, or other than through the use of the proceeds of a substantially contemporaneous sale of other Junior Securities or Parity Securities and in any case not involving the payment of cash to holders of such securities) or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities. 8. Exchange. (a) The Corporation may, at the sole option of the Board of Directors (subject to the legal availability of funds therefor), exchange all, but not less than all, of the shares of Exchangeable Preferred then outstanding, including any shares of Exchangeable Preferred issued as payment for dividends, for a new series of 14 1/4% Exchange Debentures due May 1, 2007, of the Corporation (the "Exchange Debentures") to be issued pursuant to the indenture (the "Indenture") qualified under the Trust Indenture Act of 1939, as amended, substantially in the form agreed to on the Closing Date, a copy of which is on file with and can be obtained from the Secretary of the Corporation on request, at any time following the date on which such exchange is permitted by the terms of the Senior Discount Notes Indenture, the 13 1/2% Notes Indenture, and the terms of all other then-existing Indebtedness of the Corporation and subject to the conditions contained in paragraph 8(b) below. The Exchange Debentures will be issued in registered form, without coupons, be duly executed, authenticated as of the date on which the exchange is effective and dated the date of exchange. In the event of an exchange, Holders of Exchangeable Preferred shall be entitled to receive on the date of exchange Exchange Debentures having an aggregate principal amount equal to (i) the total of the liquidation preference for each share of Exchangeable Preferred exchanged, plus (ii) an amount equal to all accrued but unpaid dividends payable on such share (including a prorated dividend for the period from the immediately preceding dividend payment date to the date of exchange). In the event such exchange would result in the issuance of Exchange Debentures in a principal -23- amount which is less than $1,000 or which is not an integral multiple of $1,000 (such principal amount less than $1,000 or the difference between such principal amount and the highest integral of $1,000 which is less than such principal amount, as the case may be, is hereinafter referred to as the "Fractional Principal Amount"), the Corporation may, subject to any restrictions in the Senior Discount Notes Indenture, the 132% Notes Indenture, and the terms of all other then-existing Indebtedness of the Corporation, at the option of the Board of Directors, pay cash to each Holder of Exchangeable Preferred in lieu of Fractional Principal Amounts of Exchange Debentures otherwise issuable upon exchange of the Exchangeable Preferred. The Person entitled to receive the Exchange Debentures issuable upon exchange shall be treated for all purposes as the registered holder of such Exchange Debentures as of the date of exchange. In accordance with paragraph 9 of this Section 4.2.1, the Corporation will mail to each Holder of Exchangeable Preferred written notice of its intention to exchange no less than 15 nor more than 60 days prior to the date of exchange. (b)As a condition of the right of the Corporation to issue Exchange Debentures in exchange for the Exchangeable Preferred under paragraph 8(a) of this Section 4.2.1 on the date of exchange, (A) there shall be legally available funds sufficient therefor (including, without limitation, legally available funds sufficient therefor under Section 7-106-401 (or any successor provision) of the Colorado Business Corporation Act); (B) a registration statement relating to the Exchange Debentures shall have been declared effective under the Securities Act prior to such exchange and shall continue to be effective on the date of exchange, or the Corporation shall have obtained a written opinion of its counsel that an exemption from the registration requirements of the Securities Act is available for such exchange and that upon receipt of such Exchange Debentures pursuant to such an exchange made in accordance with such exemption, each holder of an Exchange Debenture that is not an Affiliate of the Corporation will not be subject to any restrictions imposed by the Securities Act upon the resale of such Exchange Debenture, and such exemption is relied upon by the Corporation for such exchange; (C) the Indenture and the Trustee thereunder shall have been qualified under the Trust Indenture Act of 1939, as amended; (D) immediately after giving effect to such exchange, no Default or Event of Default would exist; and (E) the Corporation shall have delivered to the Trustee under the Indenture a written opinion of counsel, dated the date of exchange, regarding the satisfaction of the conditions set forth in clauses (A), (B) and (C). In the event that (i) the issuance of the Exchange Debentures is not permitted on the exchange date or (ii) any of the conditions set forth in clauses (A) through (E) of the preceding sentence are not satisfied on the exchange date, the Corporation shall use its best efforts to satisfy such conditions and effect such exchange as soon as practicable. Prior to initiating the exchange referred to in paragraph (a) above, the Corporation shall certify, to the satisfaction of the trustees under the 132% Notes Indenture and the Senior Discount Notes Indenture, that such exchange is permitted under such respective Indentures. The Corporation shall also provide such trustees with an Officer's Certificate setting forth with specificity the basis for the Corporation's conclusion that such exchange is so permitted. -24- 9. Procedures for Redemption or Exchange. (a) In the event that fewer than all the outstanding shares of Exchangeable Preferred are to be redeemed, the number of shares to be redeemed shall be determined pro rata, except that in any redemption of fewer than all the outstanding shares of Exchangeable Preferred, the Corporation may redeem all shares held by any Holder of a number of shares of Exchangeable Preferred not to exceed 100 as may be specified by the Corporation. In the event of partial redemptions of Exchangeable Preferred, new shares of Exchangeable Preferred having an aggregate liquidation preference equal to the unredeemed portion will be issued in the name of the Holder thereof upon cancellation of the original share certificate of Exchangeable Preferred without cost to such Holder. On and after a redemption date, unless the Corporation defaults in the payment of the redemption price, dividends will cease to accrue on shares of Exchangeable Preferred called for redemption and all rights of Holders of such shares will terminate except for the right to receive the redemption price. On the date fixed for exchange, the rights of Holders of the shares of Exchangeable Preferred exchanged shall cease, except the right to receive Exchange Debentures in exchange for their Exchangeable Preferred and cash or additional Exchange Debentures in payment of accrued but unpaid dividends on such shares to the date of exchange. (b) In the event that the Corporation shall redeem or exchange shares of Exchangeable Preferred, notice of every redemption or exchange of shares of Exchangeable Preferred shall be mailed by first class mail, postage prepaid, and mailed, in the case of exchange, not less than 15 nor more than 60 days prior to the exchange date, and, in the case of redemption, not less than 30 days nor more than 60 days prior to the redemption date, addressed to the Holders of record of the shares to be redeemed or exchanged at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption or exchange of any shares so to be redeemed or exchanged except as to the Holder to whom the Corporation has failed to give such notice or to whom notice was defective. Each such notice shall state: (i) the redemption or exchange date; (ii) the number of shares of Exchangeable Preferred to be redeemed or exchanged and, if less than all the shares held by such Holder are to be redeemed, the number of such shares or portion of the liquidation preference to be redeemed; (iii) the redemption price or exchange rate; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price or exchanged for the Exchange Debentures; and (v) that dividends on the shares to be redeemed or exchanged will cease to accrue on such redemption date or exchange date. (c) Notice having been mailed as aforesaid and provided that, on or before the redemption date or exchange date, as the case may be, specified in such notice, all duly authenticated and valid Exchange Debentures necessary for any such exchange shall have been provided by the Corporation and all funds necessary for such redemption or exchange shall have been set -25- aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the Holders of the shares so called for redemption or exchange, so as to be and to continue to be available therefor, then, from and after the redemption date or exchange date, as the case may be, dividends on the shares of Exchangeable Preferred so called for redemption or exchange, as the case may be, shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Exchangeable Preferred, and all rights of the Holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the redemption price or the Exchange Debentures upon exchange and any accrued and unpaid dividends or the right to receive cash payments in lieu of fractional securities from the exchange agent or other agent selected by the Corporation) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed or exchanged (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed or exchanged by the Corporation at the redemption price or exchange rate aforesaid. (d) If such notice of redemption shall have been duly given and if, prior to the redemption date, the Corporation shall have irrevocably deposited the funds by the Corporation with such bank or trust company in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, Holders of the shares of Exchangeable Preferred called for redemption shall cease to be shareholders with respect to such shares and thereafter such shares shall no longer be transferable on the books of the Corporation and such holders shall have no interest in or claim against the Corporation with respect to such shares (including dividends thereon accrued after such redemption date) except the right to receive payment of the redemption price (including all dividends accrued and unpaid to the date fixed for redemption) upon surrender of their certificates. Any funds deposited and unclaimed at the end of two years from the date fixed for redemption shall be repaid to the Corporation upon its request, after which repayment the Holders of shares called for redemption shall look only to the Corporation for payment of the redemption price. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or of the State of Colorado shall have capital, surplus and undivided profits aggregating at least $100,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. 10. Voting Rights. (a) Except as otherwise provided in this paragraph 10 or as otherwise from time to time provided by law, the Holders of shares of Exchangeable Preferred shall have no voting rights. (b) (i) If and whenever (A) (1) dividends on the Exchangeable Preferred are in arrears and remain unpaid (or if after May 1, 2001, such dividends have not been paid in cash) with respect to four quarterly periods (whether or not consecutive), (2) the Corporation fails to discharge any redemption obligation with respect to the Exchangeable Preferred, (3) a breach or violation by the Corporation of the provisions -26- of paragraph 8 of this Section 4.2.1 occurs, or the Corporation fails to exchange Debentures for the Exchangeable Preferred tendered for exchange on the exchange date, whether or not the Corporation satisfies the conditions to permit such exchange, (4) the Corporation fails to make a Change of Control Offer or cash payment with respect thereto if required by the provisions of paragraph 7(b) of this Section 4.2.1, (5) a breach or violation of any provision of paragraph 11 of this Section 4.2.1 occurs and is not remedied within 30 days after notice thereof to the Corporation by Holders of 25% or more of the liquidation preference of the Exchangeable Preferred then outstanding, or (6) a default occurs in the obligation to pay principal of, interest on or any other payment obligation when due (a "Payment Default") at final maturity, on one or more classes of Indebtedness of the Corporation or any Subsidiary of the Corporation, whether such Indebtedness exists on the Closing Date or is Incurred thereafter, having individually or in the aggregate an outstanding principal amount of $10 million or more, or any other Payment Default occurs on one or more such classes of Indebtedness and such class or classes of Indebtedness are declared due and payable prior to their respective maturities, and (B) in the case of clauses (A)(5) and (6) above, such event continues for a period of 180 days or more (each such event referred to as a "Voting Rights Triggering Event"), then the number of directors then constituting the Board of Directors of the Corporation shall be increased by two directors and the Holders of the majority of the then outstanding shares of Exchangeable Preferred, voting separately as a class, shall be entitled to elect the two additional directors at any annual meeting of shareholders or special meeting held in place thereof, or at a special meeting of the Holders of such shares of Exchangeable Preferred called as hereinafter provided. For the purpose of determining the number of quarterly periods for which accrued dividends have not been paid, any accrued and unpaid dividend that is subsequently paid shall not be treated as unpaid. Within 15 days of the time the Corporation becomes aware of the occurrence of any default referred to in clause (A)(6) above, the Corporation shall give notice thereof to Holders of the Exchangeable Preferred at their addresses as they appear on the records of the Transfer Agent. (ii) Whenever a Voting Rights Triggering Event shall have occurred, voting rights of the Holders of shares of the Exchangeable Preferred may be exercised initially either at a special meeting of the Holders of Exchangeable Preferred, called as hereinafter provided, or at any annual meeting of shareholders held for the purpose of electing directors, and thereafter at each such annual meeting or by the written consent of the Holders of Exchangeable Preferred pursuant to Section 7-107-104 of the Colorado Business Corporation Act. The term of office of any such elected directors shall expire at the next annual meeting of shareholders held for the purpose of electing directors, subject to a new election of two directors by the Holders of shares of Exchangeable Preferred at each successive annual meeting, but such voting right and the term of office of any such elected directors shall expire at such time as (A) all dividends accumulated on Exchangeable Preferred shall have been paid in full (and in the case of dividends payable with respect to any period after May 1, 2001, shall have been paid in full in cash) and (B) each failure, breach or default referred to in paragraph 10(b)(i)(A)(2), (3), (4), (5), and (6) above is remedied. -27- (iii) At any time after a Voting Rights Triggering Event shall have occurred and such voting rights shall not already have been initially exercised, a proper officer of the Corporation may, and upon the written request of any Holder of shares of Exchangeable Preferred (addressed to the Secretary at the principal office of the Corporation) shall, call a special meeting of the Holders of shares of Exchangeable Preferred for the election of the two directors to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws for a special meeting of the shareholders or as required by law. (iv) Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of shareholders at the place for holding annual meetings of shareholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by a proper officer of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the Holders of record of 10% of the shares of Exchangeable Preferred then outstanding may designate in writing a Holder of Exchangeable Preferred to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of shareholders and shall be held at the same place as is elsewhere provided in this paragraph (10)(b)(iv) or at such other place as is selected by such person so designated. Any Holder of Exchangeable Preferred that would be entitled to vote at any such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of shareholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of shareholders. (v) At any meeting held for the purpose of electing directors at which the Holders of Exchangeable Preferred shall have the right to elect directors as provided herein, the presence in person or by proxy of the Holders of the lesser of (A) a majority of the then outstanding shares of Exchangeable Preferred or (B) a percentage of the then outstanding shares of Exchangeable Preferred, which percentage is equal to the percentage of then outstanding shares of common stock then required to constitute a quorum for the election of directors by holders of common stock, shall be required and be sufficient to constitute a quorum of such class for the election of directors by such class. At any such meeting or adjournment thereof (x) the absence of a quorum of the Holders of Exchangeable Preferred shall not prevent the election of directors other than those to be elected by the Holders of stock of such class and the absence of a quorum or quorums of the holders of Capital Stock entitled to elect such other directors shall not prevent the election of directors to be elected by the Holders of Exchangeable Preferred and (y) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time, without notice (except as required by law) -28- other than announcement at the meeting, until a quorum shall be present. (vi) The term of office of all directors elected by the Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this Section 4.2.1 in office at any time when the aforesaid voting rights are vested in the Holders of Exchangeable Preferred shall terminate upon the election of their successors at any meeting of shareholders for the purpose of electing directors. Upon any termination of the aforesaid voting rights in accordance with paragraph (10)(b)(ii) of this Section 4.2.1, the term of office of all directors elected by the Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this Section 4.2.1 then in office thereupon shall terminate and upon such termination the number of directors constituting the Board of Directors shall, without further action, be reduced by two, subject always to the increase of the number of directors pursuant to paragraph (10)(b)(i) of this Section 4.2.1 in case of the future right of the Holders of Exchangeable Preferred to elect directors as provided herein. (vii) In case of any vacancy occurring among the directors so elected, the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose place shall be vacant unless and until such vacancy shall be filled by vote of the Holders entitled to elect the directors in accordance with paragraph 10(b) of this Section 4.2.1. If all directors so elected by the Holders of Exchangeable Preferred shall cease to serve as directors before their terms shall expire, the Holders of Exchangeable Preferred then outstanding may, at a special meeting of the Holders called as provided above, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. (c) In addition to any vote or consent of shareholders required by law, the consent of the Holders of at least a majority of the shares of Exchangeable Preferred at the time outstanding, voting or consenting, as the case may be, separately as one class given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Except as provided in paragraph 13 of this Section 4.2.1, any amendment, alteration or repeal of any of the provisions of the Second Amended and Restated Articles of Incorporation, or of the Bylaws of the Corporation, which affects adversely the voting rights, rights, privileges, or preferences of the Holders of shares of Exchangeable Preferred or authorizes the issuance of any additional shares of Exchangeable Preferred (other than to pay dividends in kind on Exchangeable Preferred); provided, however, that the amendment of the provisions of the Second Amended and Restated Articles of Incorporation so as to authorize or create, or to increase the authorized amount of, any of the Corporation's Junior Securities or to authorize the issuance of or to authorize or create any Parity Securities (up to the amount of authorized preferred stock) shall not be deemed to affect adversely the voting rights, rights, privileges, or preferences of the Holders of shares of Exchangeable Preferred; -29- (ii) Any amendment, alteration or repeal of any of the provisions of the Indenture; provided, however, that no such consent of the Holders of Exchangeable Preferred shall be required for such amendments as would be permitted under the terms of the Indenture without the consent of any of the holders of the Exchange Debentures; or (iii) The authorization or creation of, or the increase in the authorized amount of, any Senior Securities or shares of any class of any security convertible into shares of any Senior Securities; provided, however, that on or after May 1, 2001, no such consent of the Holders of Exchangeable Preferred shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect or when the issuance of any such Senior Securities or convertible security is to be made, as the case may be, provision is made, and funds are set aside, for the redemption of all shares of Exchangeable Preferred at the time outstanding. 11. Certain Covenants. (a) Incurrence of Indebtedness and Issuance of Preferred Stock. (i) The Corporation will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Senior Discount Notes, the Exchange Debentures and Indebtedness existing on the Closing Date) or issue any Redeemable Stock; provided that the Corporation may Incur Indebtedness or issue Redeemable Stock if, after giving effect to the Incurrence of such Indebtedness or the issuance of such Redeemable Stock and the receipt and application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than zero and less than 5:1. (ii) Notwithstanding the provisions of paragraph 11(a)(i) above, the Corporation and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (A) Indebtedness of the Corporation or any Restricted Subsidiary or Redeemable Stock of the Corporation outstanding at any time, which Indebtedness or Redeemable Stock generates gross proceeds to the Corporation of up to $900 million, less (without duplication) the gross proceeds of Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant contained in the 132% Notes Indenture and the Senior Discount Notes Indenture; (B) Indebtedness to Holdings, the Corporation or any of the Corporation's Wholly Owned Restricted Subsidiaries; provided that any subsequent issuance or transfer of any Capital Stock which results in any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to Holdings, the Corporation or another Wholly Owned Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (B); (C) Indebtedness or Redeemable Stock issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness or Redeemable Stock, other than Indebtedness Incurred or Redeemable Stock issued under clause (A), (B), (E), (F), (H), (I), (J) or (K) of this paragraph 11(a)(ii), and any refinancings thereof in an amount not to -30- exceed the amount so refinanced or refunded (plus premiums, accrued interest, accrued dividends, fees and expenses); provided that such new Indebtedness or Redeemable Stock, determined as of the date of Incurrence of such new Indebtedness or issuance of Redeemable Stock, does not mature prior to the stated maturity of the Indebtedness or have a mandatory redemption date prior to the Redeemable Stock to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness or Redeemable Stock of the Corporation be refinanced by means of any Indebtedness or Redeemable Stock of any Restricted Subsidiary of the Corporation pursuant to this clause (C); (D) Indebtedness (1) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (2) under Currency Agreements and Interest Rate Agreements; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (3) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Corporation or any of its Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary of the Corporation (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary of the Corporation for the purpose of financing such acquisition), in a principal amount at maturity not to exceed the gross proceeds actually received by the Corporation or any Restricted Subsidiary in connection with such disposition; (E) Indebtedness or Redeemable Stock of the Corporation, to the extent the proceeds referred to below are contributed to the Corporation, not to exceed, at any one time outstanding, twice the amount of Net Cash Proceeds received by Holdings after the Closing Date from the issuance and sale of its Capital Stock (other than Redeemable Stock or preferred stock); provided that such Indebtedness does not mature prior to the final mandatory redemption date of the Exchangeable Preferred; (F) Strategic Investor Subordinated Indebtedness; (G) Indebtedness or Redeemable Stock of the Corporation, to the extent the proceeds thereof are immediately used after the Incurrence or issuance thereof to purchase Exchangeable Preferred tendered in a Change of Control Offer; (H) Indebtedness of any Restricted Subsidiary of the Corporation Incurred pursuant to any credit agreement of such Restricted Subsidiary in effect on August 8, 1995 (or any agreement refinancing Indebtedness under such credit agreement), up to the amount of the commitment under such credit agreement (including equipment leasing or financing agreements) on August 8, 1995; (I) Indebtedness of the Corporation, in an amount not to exceed $100 million at any one time outstanding, consisting of Capitalized Lease Obligations with respect to assets that are used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries; (J) Indebtedness or Redeemable Stock of any Person that becomes a Restricted Subsidiary of the Corporation after the Closing Date, which Indebtedness exists or, with respect to such Indebtedness for which there is a commitment to lend, at the time such Person becomes a Restricted Subsidiary and, with respect to such Indebtedness, the subsequent Incurrence thereof ("Acquired Indebtedness"), in an accreted amount not to exceed $50 million at any one time outstanding in the aggregate for all such -31- Restricted Subsidiaries; provided that such Acquired Indebtedness does not exceed 65% of the consideration (calculated by including such Acquired Indebtedness as a part of such consideration) paid by the Corporation and its Restricted Subsidiaries for the acquisition of such Person; and (K) Indebtedness of the Corporation, in an amount not to exceed $30 million at any one time outstanding, consisting of letters of credit and similar arrangements used to support obligations of the Corporation or any of its Restricted Subsidiaries with respect to the acquisition of (by purchase, lease or otherwise), construction of, or improvements on, assets that will be used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries. (iii) For purposes of determining any particular amount of Indebtedness under paragraphs 11(a)(i) or (ii) above, (A) Indebtedness of any Restricted Subsidiary of the Corporation incurred on or prior to the Closing Date pursuant to any credit agreement (including equipment leasing or financing agreements) of such Restricted Subsidiary in effect on August 8, 1995, shall be treated as Incurred pursuant to paragraph 11(a)(ii)(H) of this Section 4.2.1, and (B) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with the covenants contained in paragraphs 11(a)(i) and (ii) above, in the event that an item of Indebtedness or Redeemable Stock meets the criteria of more than one of the types of Indebtedness or Redeemable Stock described in such clauses, the Corporation, in its sole discretion, shall classify such item of Indebtedness or Redeemable Stock and only be required to include the amount and type of such Indebtedness or Redeemable Stock in one of such clauses. (b) Limitation on Restricted Payments. (i) So long as any shares of the Exchangeable Preferred are outstanding, the Corporation will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (A) declare or pay any dividend or make any distribution on Junior Securities held by Persons other than the Corporation or any of its Restricted Subsidiaries (other than dividends or distributions payable solely in shares of its or such Restricted Subsidiary's Junior Securities (other than Redeemable Stock) of the same class held by such holders or in options, warrants or other rights to acquire such shares of Junior Securities and other than pro rata dividends or distributions on common stock of Restricted Subsidiaries); (B) purchase, redeem, retire or otherwise acquire for value any shares of Junior Securities of the Corporation or any Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Junior Securities) held by Persons other than the Corporation or any of its Wholly Owned Restricted Subsidiaries (except for Junior Securities of MTN, StarCom, Ohio LINX, FOTI and Zycom to the extent the consideration therefor consists solely of common stock (other than Redeemable Stock) of Holdings or Junior Securities of the Corporation, in each case transferred in compliance with the Securities Act); or (C) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i)(A) through (C) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (1) an event referred to in clauses (1) through (6) of paragraph 10(b)(i)(A) of -32- this Section 4.2.1 shall have occurred and be continuing, (2) the Corporation could not Incur at least $1.00 of Indebtedness under paragraph 11(a)(i) of this Section 4.2.1, (3) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a board resolution) after April 29, 1996 shall exceed the sum of (aa) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount) (determined by excluding income resulting from transfers of assets by the Corporation or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed pursuant to paragraph 11(i) of this Section 4.2.1 plus (bb) the aggregate Net Cash Proceeds received by the Corporation after the Closing Date (x) from the issuance and sale, permitted hereunder, of Junior Securities (other than Redeemable Stock) to a Person who is not a Subsidiary of the Corporation, or from the issuance to a Person who is not a Subsidiary of the Corporation of any options, warrants or other rights to acquire Junior Securities of the Corporation (in each case, exclusive of any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the stated maturity of the Exchangeable Preferred) or (y) as a capital contribution from Holdings plus (cc) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Corporation or any Restricted Subsidiary (except to the extent any such payment is included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed the amount of Investments previously made by the Corporation and its Restricted Subsidiaries in such Person or (4) dividends on the Exchangeable Preferred shall not have been paid in full as provided in paragraph 4 of this Section 4.2.1. (ii) The provisions of paragraph 11(b)(i) above shall not be violated by reason of: (A) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with paragraph 11(b)(i) above; (B) the repurchase, redemption or other acquisition of Junior Securities of the Corporation (or options, warrants or other rights to acquire such Junior Securities) and with respect to any Junior Securities, the payment of accrued dividends thereon, in exchange for, or out of the proceeds of a substantially concurrent issuance or sale of, shares of Junior Securities (other than Redeemable Stock) of the Corporation; provided that the redemption of any preferred stock pursuant to any mandatory redemption feature thereof and any redemption of any other Junior Securities and, in each case, the payment of accrued dividends thereon (or options, warrants or other rights to acquire such Junior Securities) and with respect to any Junior Securities, the payment of accrued dividends thereon, shall be deemed to be "substantially concurrent" with such issuance and sale if the required notice with respect to such redemption is irrevocably given by a date which is no later than five Business Days after receipt of the proceeds of such -33- issuance and sale and such redemption and payment is consummated within the period provided for in the document governing such preferred stock or the documents governing the redemption of such other Junior Securities, as the case may be; (C) payments or distributions, in the nature of satisfaction of dissenters' rights, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of paragraph 11(g) of this Section 4.2.1; (D) Investments, not to exceed $10 million in the aggregate, each evidenced by a senior promissory note payable to the Corporation that provides that it will become due and payable prior to any required repurchase (including pursuant to an Offer to Purchase in connection with a Change of Control) of the Exchangeable Preferred; (E) Investments, not to exceed $5 million in the aggregate, that meet the requirements of clause (D) above; provided that the Board of Directors of the Corporation shall have determined, in good faith, that each such Investment under this clause (E) will enable the Corporation or one of its Restricted Subsidiaries to obtain additional business that it might not be able to obtain without the making of such Investment; (F) with respect to Junior Securities permitted to be issued and sold by the provisions of paragraph 11(d) of this Section 4.2.1, the payment (1) of dividends on such Junior Securities in additional shares of Junior Securities and (2) of cash dividends on such Junior Securities in an amount not to exceed the dividend rate thereon and accrued interest on unpaid dividends, in each case after May 1, 2001; (G) the repurchase, in the event of a Change of Control, of Junior Securities of the Corporation and Indebtedness of the Corporation into which such Junior Securities have been exchanged; provided that prior to repurchasing such Junior Securities or Indebtedness, the Corporation shall have made a Change of Control Offer to repurchase the shares of Exchangeable Preferred in accordance with the terms of paragraph 7(b) of this Section 4.2.1 (and an offer to repurchase other Indebtedness, if required by the terms thereof, in accordance with the indenture or other document governing such other Indebtedness) and shall have accepted and paid for any shares of Exchangeable Preferred (and other Indebtedness) properly tendered in connection with such Change of Control Offer for the shares of Exchangeable Preferred or change of control offer for such other Indebtedness; (H) the issuance of Junior Securities permitted to be issued hereunder in exchange for Indebtedness; provided that the Incurrence of such Indebtedness complies with the provisions of paragraph 11(a) of this Section 4.2.1; and (I) (1) the payment of a dividend or other transfer of funds to Holdings with a portion of the proceeds of the issuance of the Exchangeable Preferred, in an amount not to exceed the amount required to repurchase 916,666 warrants to purchase common stock of Holdings and (2) the redemption of the 12% Redeemable Preferred Stock of Holdings, in each case, in accordance with the provisions of the documents governing such repurchase or redemption, provided that, except in the case of clause (A), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth in this paragraph 11(b)(ii). (iii) Each Restricted Payment permitted pursuant to paragraph 11(b)(ii) above (other than the Restricted Payments referred to in clauses (F)(1) and (H) thereof), and the Net Cash Proceeds from any issuance of Junior Securities referred to in clause (B) thereof, shall be included in calculating whether the conditions of clause (3) of paragraph 11(b)(i) of this Section 4.2.1 have been met with respect to any subsequent Restricted Payments. Notwithstanding the foregoing, in the event the proceeds of an issuance of Junior Securities are used -34- for the redemption, repurchase or other acquisition of the Exchangeable Preferred, or Parity Securities, then the Net Cash Proceeds of such issuance shall be included in clause (3) of paragraph 11(b)(i) of this Section 4.2.1 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Exchangeable Preferred or Parity Securities. (c) Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. So long as any shares of Exchangeable Preferred are outstanding, the Corporation will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Corporation or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Corporation or any other Restricted Subsidiary, (iii) make loans or advances to the Corporation or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Corporation or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in any agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders of the Exchangeable Preferred than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Corporation or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first sentence of this paragraph 11(c), (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Corporation or any Restricted Subsidiary not otherwise prohibited hereunder or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Corporation or any Restricted Subsidiary in any manner material to the Corporation or any Restricted Subsidiary; or (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this paragraph 11(c) shall prevent the Corporation or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted pursuant to paragraph 11(f) of this Section 4.2.1 or (2) restricting the sale or other disposition of property or assets of the Corporation or any of its Restricted Subsidiaries that secure Indebtedness of the Corporation or any of its Restricted Subsidiaries. -35- (d) Limitation on Issuances and Sale of Capital Stock of Restricted Subsidiaries. The Corporation will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Corporation or a Wholly Owned Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary; (iv) with respect to common stock of MTN, StarCom and Zycom; provided that the proceeds of any such sale under this clause (iv) shall be reinvested in the business of the Corporation and its Restricted Subsidiaries or used to repay Indebtedness of the Corporation or any of its Restricted Subsidiaries or Senior Securities; and (v) with respect to common stock of FOTI; provided that FOTI shall not retain any net proceeds from such sales or issuances in excess of $10 million in the aggregate and any net proceeds in excess of such $10 million shall be received by, or paid promptly by FOTI to, the Corporation or any Wholly Owned Restricted Subsidiary of the Corporation. (e) Limitation on Transactions with Shareholders and Affiliates. The Corporation will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Corporation or with any Affiliate of the Corporation or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Corporation or such Restricted Subsidiary than could be obtained, at the time of such transaction or at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors of the Corporation or (B) for which the Corporation or a Restricted Subsidiary delivers to the Transfer Agent a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Corporation or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Corporation and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Corporation who are not employees of the Corporation; (iv) any payments or other transactions pursuant to any tax-sharing agreement (or a similar agreement that is not materially adverse to the interests of Holders of the Exchangeable Preferred) between the Corporation and any other Person with which the Corporation files a consolidated tax return or with which the Corporation is part of a consolidated group for tax purposes; or (v) any Restricted Payments not prohibited by paragraph 11(b) of this Section 4.2.1. Notwithstanding the foregoing, any transaction covered by the first sentence of this paragraph 11(e) and not covered by clauses (ii) through (iv) of the preceding sentence, the aggregate amount of which exceeds $2 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) of the preceding sentence. -36- (f) Limitation on Liens. The Corporation will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties, now or hereafter acquired, or any shares of Capital Stock of or Indebtedness of any Restricted Subsidiary. The foregoing limitation does not apply to (i) Liens existing on the Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Corporation or its Restricted Subsidiaries created in favor of the Holders of the Exchangeable Preferred; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Corporation or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Corporation or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under paragraph 11(a)(ii)(C) of this Section 4.2.1; provided that such Liens do not extend to or cover any property or assets of the Corporation or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens with respect to assets or properties of any Person that becomes a Restricted Subsidiary after the Closing Date; provided that such Liens do not extend to or cover any assets or properties of the Corporation or any of its Restricted Subsidiaries other than the assets or properties of such Person subject to such Lien on the date such Person becomes a Restricted Subsidiary; and provided further that such Liens are not incurred in contemplation of, or in connection with, such Person becoming a Restricted Subsidiary; (vi) Permitted Liens; and (vii) Liens securing Indebtedness. (g) Merger, Consolidation and Sale of Assets. The Corporation shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person (other than a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than common stock in the surviving Person or the Corporation) shall be issued or distributed to the shareholders of the Corporation) or permit any Person to merge with or into the Corporation unless: (i) the Corporation shall be the continuing Person, or the Person (if other than the Corporation) formed by such consolidation or into which the Corporation is merged or that acquired or leased such property and assets of the Corporation shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and the Exchangeable Preferred shall be converted into or exchanged for and shall become shares of such successor company, having in respect of such successor or resulting company substantially the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon that the Exchangeable Preferred had immediately prior to such transaction; (ii) immediately after giving effect to such transaction, no event referred to under paragraph 10(b)(i)(A)(1) through (5) of this Section 4.2.1 or any default, breach or violation that would become such an event after the giving of notice, the passage of time or both, shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Corporation or any Person becoming the successor issuer of the Exchangeable Preferred, as the case may be, shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth -37- of the Corporation immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis the Corporation, or any Person becoming the successor issuer of the Exchangeable Preferred, as the case may be, could Incur at least $1.00 of Indebtedness under paragraph 11(a)(i) of this Section 4.2.1; and (v) the Corporation delivers to the Transfer Agent an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv) above) and an opinion of counsel, in each case stating that such consolidation, merger or transfer complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided, however, that clauses (iii) and (iv) above shall not apply if, in the good faith determination of the Board of Directors of the Corporation evidenced by a board resolution, the principal purpose of such transaction is part of a plan to change the jurisdiction of incorporation of the Corporation to a different state of the United States; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. (h) Senior Subordinated Indebtedness. So long as any shares of Exchangeable Preferred are outstanding, the Corporation will not Incur any Indebtedness, other than the Exchange Debentures, that is expressly made subordinated in right of payment to any Senior Indebtedness (as defined in the Indenture) unless such Indebtedness, by its terms and by the terms of any agreement or instrument pursuant to which such Indebtedness is outstanding is expressly made pari passu with, or subordinate in right of payment to, the Exchange Debentures pursuant to provisions substantially similar to those contained in Article Eleven of the Indenture; provided that the foregoing limitations shall not apply to distinctions between categories of Senior Indebtedness that exist by reason of any Liens or Guarantees arising or created in respect of some but not all Senior Indebtedness. (i) Reports. So long as any shares of Exchangeable Preferred are outstanding, the Corporation shall file with the Securities and Exchange Commission (the "Commission") the annual reports, quarterly reports and the information, documents and other reports required to be filed by the Corporation with the Commission pursuant to Sections 13 or 15 of the Exchange Act, whether or not the Corporation has or is required to have a class of securities registered under the Exchange Act, at the time it is or would be required to file the same with the Commission and, within 15 days after the Corporation is or would be required to file such reports, information or documents with the Commission, shall mail such reports, information and documents to the Transfer Agent and to each Holder, or shall supply such reports to the Transfer Agent for forwarding to each Holder, at such Holder's address set forth on the register maintained by the Transfer Agent. 12. Transfer and Legending of Shares. No transfer of shares of the Exchangeable Preferred shall be effective until such transfer is registered on the books of the Corporation. Until registered under the Securities Act or the expiration of the time period referred to in Rule 144(k) (as then in effect) under the Securities Act, all shares of Exchangeable Preferred will bear the following legend: -38- THIS PREFERRED STOCK HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS PREFERRED STOCK IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS PREFERRED STOCK, RESELL OR OTHERWISE TRANSFER THIS PREFERRED STOCK EXCEPT (A) TO INTELCOM GROUP (U.S.A.), INC. (THE "CORPORATION") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS PREFERRED STOCK (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) OR (F) AFTER REGISTRATION UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS PREFERRED STOCK IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS PREFERRED STOCK WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST EXECUTE A LETTER (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRANSFER AGENT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY -39- REGULATION S UNDER THE SECURITIES ACT. THE [FIRST] AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE CORPORATION CONTAINS A PROVISION REQUIRING THE TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS PREFERRED STOCK IN VIOLATION OF THE FOREGOING RESTRICTIONS. The Corporation shall refuse to register any attempted transfer of shares of Exchangeable Preferred not in compliance with this paragraph 12. 13. Amendments and Waivers. Notwithstanding any other provisions hereof and to the extent allowable from time to time by applicable law, the Board of Directors may, by duly adopted resolution, amend any of the provisions of the Second Amended and Restated Articles of Incorporation, without notice to or any consent or approval of any of the Holders of Exchangeable Preferred, for the following purposes: (1) to cure any ambiguity, defect or inconsistency in the Second Amended and Restated Articles of Incorporation; provided that such amendment does not and will not adversely affect the interests of the Holders of Exchangeable Preferred in any material respect; or (2) to make any change that the Board of Directors determines in good faith does not materially and adversely affect the rights of any Holder of Exchangeable Preferred. Except as provided in the preceding sentence, any right, preference, privilege or power of, or restriction provided for the benefit of, the Exchangeable Preferred set forth herein may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Corporation and the affirmative vote or written consent of the Holders of at least a majority of the shares of Exchangeable Preferred then outstanding, and any amendment or waiver so effected shall be binding upon the Corporation and all Holders of the Exchangeable Preferred. 14. Rules of Construction. The descriptive headings in this Section 4.2.1 are inserted for convenience of reference only and are not intended to be part of or affect the meaning or interpretation of any provision of this Section 4.2.1. Words used in this Section 4.2.1, regardless of the gender and number specifically used, shall be deemed and construed to include any other gender, masculine, feminine, or neuter, and any other number, singular or plural, as the context requires. As used in this Section 4.2.1, the word "including" is not limiting, and the word "or" is not exclusive. 4.2.2 Cumulative Exchangeable Redeemable Preferred Stock; Statement of Designation of Preferences and Rights. A series of preferred stock of the Corporation has been created with the designation and amount thereof and the voting powers, preferences and relative, -40- optional and other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, as follows: 1. Certain Definitions: Set forth below are certain defined terms used in this Section 4.2.2. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Corporation and its Restricted Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person (other than net income attributable to a Restricted Subsidiary) in which any Person (other than the Corporation or any of its Restricted Subsidiaries) has a joint interest and the net income of any Unrestricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Corporation or any of its Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to paragraph 11(b)(i)(3) of this Section 4.2.2 (and in such case, except to the extent includable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Corporation or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Corporation or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to paragraph 11(b)(i)(C)(3) of this Section 4.2.2, any amount paid or accrued as dividends on preferred stock of the Corporation or any Restricted Subsidiary owned by Persons other than the Corporation and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Acquisition" means (i) an investment by the Corporation or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Corporation or shall be merged into or consolidated with the Corporation or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Corporation and its Restricted -41- Subsidiaries on the date of such investment or (ii) an acquisition by the Corporation or any of its Restricted Subsidiaries of the property and assets of any Person other than the Corporation or any of its Restricted Subsidiaries that constitutes substantially all of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Corporation and its Restricted Subsidiaries on the date of such acquisition. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transactions) in one transaction or a series of related transactions by the Corporation or any of its Restricted Subsidiaries to any Person other than the Corporation or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Corporation or any of its Restricted Subsidiaries or (iii) any other property and assets of the Corporation or any of its Restricted Subsidiaries outside the ordinary course of business of the Corporation or such Restricted Subsidiary and, in each case, that is not governed by the provisions of paragraph 11(g) of this Section 4.2.2; provided that the meaning of "Asset Sale" shall not include (A) sales or other dispositions of inventory, receivables and other current assets, and (B) dispositions of assets of the Corporation or any of its Restricted Subsidiaries, in substantially simultaneous exchanges for consideration consisting of any combination of cash, Temporary Cash Investments and assets that are used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries, if such consideration has an aggregate fair market value substantially equal to the fair market value of the assets so disposed of; provided, however, that fair market value shall be determined in good faith by the Board of Directors of the Corporation, whose determination shall be conclusive and evidenced by a resolution of the Board of Directors delivered to the Transfer Agent. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Business Day" means any day except a Saturday, Sunday, or other day on which commercial banks in the City of New York, or in the city of the Transfer Agent Office, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether now outstanding or issued after the date hereof, including, without limitation, all common stock and preferred stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized -42- Lease Obligations" means the discounted present value of the rental obligations under any such Capitalized Lease. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock having more than 40% of the voting power of the total Voting Stock of ICG on a fully diluted basis; (ii) individuals who on the Closing Date constitute the Board of Directors of ICG (together with any new directors whose election by the Board of Directors or whose nomination for election by ICG's stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; or (iii) all of the common stock of the Corporation is not beneficially owned, directly or indirectly, by ICG. "ChoiceCom" means CSW/ICG ChoiceCom, L.P., a Delaware limited partnership. "Closing Date" means the date on which the Exchangeable Preferred is originally issued. "Consolidated EBITDA" means, for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) income taxes, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iv) depreciation expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, (v) amortization expense, to the extent such amount was deducted in calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for the Corporation and its Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding common stock of such Restricted Subsidiary not owned on the last day of such period by the Corporation or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding common stock of such Restricted Subsidiary on the last day of such period. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with -43- respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Corporation or any of its Restricted Subsidiaries) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Corporation and its Restricted Subsidiaries during such period; excluding, however, without duplication, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the 13 1/2% Notes and the warrants issued therewith, the 12 1/2% Notes, the 14 1/4% Exchangeable Preferred, the Senior Discount Notes and/or the Exchangeable Preferred, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Corporation and its Restricted Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall not take into account Unrestricted Subsidiaries), less any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Corporation or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Corporation or any of its Restricted Subsidiaries against fluctuations in currency values to or under which the Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party or a beneficiary thereafter. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Event of Default" means a Voting Rights Triggering Event as defined in paragraph 10(b) of this Section 4.2.2. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "FOTI" means Fiber Optic Technologies Inc., a Colorado corporation. -44- "14 1/4% Exchangeable Preferred" means the 14 1/4% Cumulative Exchangeable Redeemable Preferred Stock mandatorily redeemable May 1, 2007 of the Corporation, and any shares of preferred stock issued as payment in kind dividends thereon. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of August 8, 1995, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained in this Section 4.2.2 shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Section 4.2.2 shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the 13 1/2% Notes and the warrants issued therewith, the 12 1/2% Notes, the 14 1/4% Exchangeable Preferred, the Senior Discount Notes and/or the Exchangeable Preferred and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holders" means the registered holders of shares of Exchangeable Preferred. "Holdings (Canada)" means ICG Holdings (Canada), Inc. and its successors and assigns. "ICG" means ICG Communications, Inc. and its successors and assigns. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an Incurrence of Indebtedness by reason of the acquisition of more than 50% of the Capital Stock of any Person; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. -45- "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided (i) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the original issue price of such Indebtedness and (ii) that Indebtedness shall not include (A) any amount of money borrowed, at the time of the Incurrence of the related Indebtedness, for the purpose of prefunding any interest payable on such related Indebtedness or (B) any liability for federal, state, local or other taxes. "Indebtedness to EBITDA Ratio" means, as at any date of determination, the ratio of (i) the aggregate amount of Indebtedness of the Corporation and its Restricted Subsidiaries on a consolidated basis as at the date of determination (the "Determination Date") to (ii) the Consolidated EBITDA of the Corporation for the then most recent four full fiscal quarters for which reports have been filed pursuant to paragraph 11(i) of this Section 4.2.2 (such four full fiscal quarter period being referred to herein as the "Four Quarter Period"); provided that (x) pro forma effect shall be given to any Indebtedness Incurred from the beginning of the Four Quarter Period through the Determination Date (including any Indebtedness Incurred on the Determination Date), to the extent outstanding on the Determination Date, (y) if during the period commencing on the first day of such Four Quarter Period through the Determination Date (the "Reference Period"), the Corporation or any of the Restricted Subsidiaries shall have engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale and any related retirement of Indebtedness as if such Asset Sale and related retirement of Indebtedness had occurred on the first day of such Reference Period or (z) if during such Reference Period the Corporation or any of the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated EBITDA of the Corporation shall be calculated on a pro forma basis as if such Asset Acquisition and any related financing had occurred on the first day of such Reference Period. In calculating this ratio for purposes hereof, the -46- amount of outstanding Indebtedness shall be deemed to include the liquidation preference of any preferred stock then outstanding. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Corporation or any of its Restricted Subsidiaries against fluctuations in interest rates in respect of Indebtedness to or under which the Corporation or any of its Restricted Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party or a beneficiary thereafter; provided that the notional principal amount thereof does not exceed the principal amount of the Indebtedness of the Corporation and its Restricted Subsidiaries that bears interest at floating rates. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Corporation or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include the designation of a Restricted Subsidiary as an Unrestricted Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and paragraph 11(b) of this Section 4.2.2, (i) "Investment" shall include the fair market value of the assets (net of liabilities) of any Restricted Subsidiary of the Corporation at the time that such Restricted Subsidiary of the Corporation is designated an Unrestricted Subsidiary and shall exclude the fair market value of the assets (net of liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Corporation and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller, or any agreement to give any security interest). "MTN" means Maritime Telecommunications Network, Inc., a Colorado corporation, and its successors. "Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Corporation or any Restricted Subsidiary of the Corporation) and proceeds from the conversion of other property received when -47- converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Corporation and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Corporation or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Corporation or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Offer to Purchase" means an offer to purchase shares of Exchangeable Preferred by the Corporation from the Holders commenced by mailing a notice to the Transfer Agent and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all shares of Exchangeable Preferred validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any shares of Exchangeable Preferred not tendered will continue to accrue dividends pursuant to its terms; (iv) that, unless the Corporation defaults in the payment of the purchase price, any shares of Exchangeable Preferred accepted for payment pursuant to the Offer to Purchase shall cease to accrue dividends on and after the Payment Date; (v) that Holders electing to have any shares of Exchangeable Preferred purchased pursuant to the Offer to Purchase will be required to surrender the shares of Exchangeable Preferred together with a form entitled "Option of the Holder to Elect Purchase" (the form of which will be mailed with such notice) completed, to the paying agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the paying agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the liquidation preference of the shares of Exchangeable Preferred delivered for purchase and a statement that such Holder is withdrawing his election to have such shares of Exchangeable Preferred purchased; and (vii) that Holders whose shares of Exchangeable Preferred are being purchased only in part will be issued new shares of Exchangeable Preferred equal to the liquidation preference of the unpurchased portion of the shares of Exchangeable -48- Preferred surrendered; provided that each share of Exchangeable Preferred purchased and each new share of Exchangeable Preferred issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Corporation shall (i) accept for payment on a pro rata basis shares of Exchangeable Preferred or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the paying agent money sufficient to pay the purchase price of all shares of Exchangeable Preferred or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Transfer Agent all shares of Exchangeable Preferred or portions thereof so accepted together with an Officers' Certificate specifying the shares of Exchangeable Preferred or portions thereof accepted for payment by the Corporation. The paying agent shall promptly mail to the Holders of shares of Exchangeable Preferred so accepted, payment in an amount equal to the purchase price, and the Transfer Agent shall promptly authenticate and mail to such Holders new shares of Exchangeable Preferred equal in liquidation preference to any unpurchased portion of the shares of Exchangeable Preferred surrendered; provided that each share of Exchangeable Preferred purchased and each new share of Exchangeable Preferred issued shall be in a principal amount of $1,000 or integral multiples thereof. The Corporation will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Transfer Agent shall act as the paying agent for an Offer to Purchase. The Corporation will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, to the extent such laws and regulations are applicable, in the event that the Corporation is required to repurchase shares of Exchangeable Preferred pursuant to an Offer to Purchase. "Ohio LINX" means ICG Ohio LINX, Inc., an Ohio corporation. "Permitted Investment" means (i) an Investment in a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Corporation or a Restricted Subsidiary; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Corporation and its Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash Investment; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) loans or advances to employees made in the ordinary course of business in accordance with past practice of the Corporation or its Restricted Subsidiaries and that do not in the aggregate exceed $2 million at any time outstanding; (v) stock, obligations or securities received in satisfaction of judgments; (vi) Indebtedness of ICG or Holdings (Canada) owed to the Corporation, in an amount not to exceed the reasonable expenses of ICG or Holdings (Canada), as the case may be, as a holding company that are actually incurred, and paid, by ICG or Holdings (Canada); provided that such Indebtedness of ICG or Holdings (Canada), as the case may be, is evidenced by an unsubordinated promissory note that provides that it will be paid prior to any mandatory redemption of the Exchangeable Preferred if such payment would be necessary to effectuate such redemption; and (vii) Investments in an amount not to exceed, at any one time outstanding, all of the Net Cash Proceeds received by the Corporation from the sale of common stock of ICG (to a person other than one of ICG's Subsidiaries) after the Closing Date. -49- "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights of way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Corporation or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with paragraph 11(a) of this Section 4.2.2, (1) to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Corporation and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Corporation or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Corporation or any Restricted Subsidiary other than the property or assets acquired; (xii) Liens in favor of the Corporation or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Corporation or any Restricted Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities -50- arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed to protect the Corporation or any of its Restricted Subsidiaries from fluctuations in the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Corporation or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Corporation and its Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales of receivables. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Preferred stock" or "preferred stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued after the date hereof, including, without limitation, all series and classes of such preferred or preference stock. "Public Equity Offering" means a bona fide underwritten primary public offering of common stock of ICG or the Corporation pursuant to an effective registration statement under the Securities Act. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the mandatory redemption date of the shares of Exchangeable Preferred, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the mandatory redemption date of the shares of Exchangeable Preferred, or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the mandatory redemption date of the shares of Exchangeable Preferred; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of a "change of control" occurring prior to the mandatory redemption date of the shares of Exchangeable Preferred shall not constitute Redeemable Stock if the "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the "Change of Control" provisions contained in paragraph 7(b) of this Section 4.2.2 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Corporation's repurchase of Exchangeable Preferred as provided in paragraph 7(b) of this Section 4.2.2. -51- "Restricted Subsidiary" means any Subsidiary of the Corporation other than an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended. "Senior Discount Notes," as used in this Section 4.2.2, means the Senior Discount Notes Due 2007 of the Corporation, Guaranteed by ICG on a senior unsecured basis and issued on the Closing Date. "Senior Discount Notes Indenture," as used in this Section 4.2.2, means the Indenture dated as of the Closing Date among the Corporation, ICG and the Trustee pursuant to which the Senior Discount Notes are issued. "StarCom" means StarCom International Optics Corporation, a British Columbia corporation, and its Subsidiaries. "Strategic Investor" means any Person engaged in the telecommunications business which has a net worth or equity market capitalization of at least $1 billion. "Strategic Investor Subordinated Indebtedness" means all Indebtedness of the Corporation owed to a Strategic Investor that is contractually subordinate in right of payment to the shares of Exchangeable Preferred to at least the following extent: no payment of principal (or premium, if any) or interest on or otherwise payable in respect of such Indebtedness may be made (whether as a result of a default or otherwise) prior to the payment in full of all of the Corporation's obligations under the shares of Exchangeable Preferred; provided, however, that prior to the payment of such obligations, interest on Strategic Investor Subordinated Indebtedness may be payable solely in kind or in common stock (other than Redeemable Stock) of ICG or the Corporation. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 270 days of the date of acquisition thereof, bankers' acceptances with maturities not exceeding 270 days, and overnight bank deposits, in each case issued by or with a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $100 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one -52- nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of ICG) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group, and (v) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service, Inc. "13 1/2% Notes" means the 13 1/2% Senior Discount Notes Due 2005 of the Corporation Guaranteed by ICG and Holdings (Canada) on a senior unsecured basis. "13 1/2% Notes Indenture" means the Indenture dated as of August 8, 1995, as amended, among the Corporation, Holdings (Canada) and the Trustee pursuant to which the Corporation issued the 13 1/2% Notes. "Trade Payables" means, with respect to any Person, any accounts payable or any other debt or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Corporation or any of its Restricted Subsidiaries or the issuance of any Redeemable Stock of the Corporation, the date such Indebtedness is to be Incurred or such issuance is to be made and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Transfer Agent" means American Stock Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005, or such other Person as may become the transfer agent with respect to the Exchangeable Preferred. "Transfer Agent Office" means the principal office of the Transfer Agent at any particular time, which office is, at the date hereof, located at 40 Wall Street, 46th Floor, New York, New York 10005. "Trustee" means Norwest Bank Colorado, National Association, or such other Person as may become the trustee under the Indenture, the Senior Discount Notes Indenture, the 12 1/2% Notes Indenture or the 13 1/2% Notes Indenture, as the context requires. -53- "12 1/2% Notes" means the 12 1/2% Senior Discount Notes due 2006 of the Corporation guaranteed by ICG and Holdings (Canada) on a senior unsecured basis. "12 1/2% Notes Indenture" means the Indenture dated as of April 30, 1996, as amended, among the Corporation, Holdings (Canada) and the Trustee pursuant to which the Corporation issued the 12 1/2% Notes. "Unrestricted Subsidiary" means (i) any Subsidiary of the Corporation that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary of the Corporation (including any newly acquired or newly formed Subsidiary of the Corporation), other than the Corporation or a Subsidiary that has given a Subsidiary Guarantee, to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Corporation or any Restricted Subsidiary; provided that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, that such designation would be permitted under paragraph 11(b) of this Section 4.2.2. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Corporation; provided that immediately after giving effect to such designation (x) the Corporation could Incur $1.00 of additional Indebtedness under paragraph 11(a)(i) of this Section 4.2.2 and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Transfer Agent by promptly filing with the Transfer Agent a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, such Subsidiary if 98% or more of the outstanding Capital Stock in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned by such Person or one or more Wholly Owned Subsidiaries of such Person. "Zycom" means Zycom Corporation, an Alberta, Canada corporation. 2. Designation Amount. The distinctive serial designation of this series shall be "Cumulative Exchangeable Redeemable Preferred Stock" (as used in this Section 4.2.2, "Exchangeable Preferred"). The number of shares of Exchangeable Preferred shall initially be 200,000, which number may from time to time be increased (but not above the number that would cause the aggregate number of all shares of preferred stock of all series to exceed 1,000,000 -54- shares) or decreased (but not below the number then outstanding) by the Board of Directors. Shares of Exchangeable Preferred redeemed, purchased by the Corporation or exchanged for Exchange Debentures (as defined in paragraph 8(a) of this Section 4.2.2) shall be canceled and shall revert to authorized but unissued shares of preferred stock undesignated as to series; provided, however, that no such issued and reacquired shares of such series shall be reissued or sold as shares of Exchangeable Preferred unless reissued as a stock dividend on outstanding shares of Exchangeable Preferred. 3. Rank. The Exchangeable Preferred shall, with respect to dividend rights and distribution rights on liquidation, winding-up and dissolution of the Corporation, rank (i) senior to all classes of common stock of the Corporation and to each other class of Capital Stock or series of preferred stock established after March 6, 1997, by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to with the common stock of the Corporation as "Junior Securities"); (ii) on a parity with the 14 1/4% Exchangeable Preferred and any class of Capital Stock or series of preferred stock issued by the Corporation established after March 6, 1997 by the Corporation's Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Parity Securities"); and (iii) subject to certain conditions described below, junior to each class of Capital Stock or series of preferred stock issued by the Corporation established after March 6, 1997 by the Corporation's Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Exchangeable Preferred as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Senior Securities"). The Exchangeable Preferred will be subject to the issuance of series of Junior Securities, Parity Securities and Senior Securities; provided that the Corporation may not issue any new class of Senior Securities without the approval of the Holders of at least a majority of the shares of Exchangeable Preferred then outstanding, voting or consenting, as the case may be, separately as one class, except that without such approval of Holders of the Exchangeable Preferred, the Corporation may issue shares of Senior Securities (1) in exchange for, or the proceeds of which are used to redeem or repurchase, all, but not less than all, shares of Exchangeable Preferred then outstanding, or (2) in exchange for, or the proceeds of which are used to repay, any outstanding Indebtedness of the Corporation. -55- 4. Dividends. (a) The Holders of shares of the Exchangeable Preferred shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefor, dividends at the annual rate of 14% of the liquidation preference per share, subject to the provisions of paragraph 4(e) below. Such dividends shall be cumulative, whether or not earned or declared, on a daily basis from the date of issuance of the Exchangeable Preferred, and shall be payable quarterly in arrears on March 15, June 15, September 15, and December 15 of each year commencing on June 15, 1997 (each of such dates being a "dividend payment date"), with respect to the period commencing with the date of issuance of the particular shares of Exchangeable Preferred or the immediately preceding dividend payment date and ending on the day preceding such respective dividend payment date (each of such periods being a "dividend period"), to shareholders of record on the preceding March 1, June 1, September 1, and December 1, respectively (each, a "regular record date"). Any dividend payments made with respect to shares of Exchangeable Preferred on or before March 15, 2002, may be made, in the sole discretion of the Board of Directors of the Corporation, in cash or in such number of additional fully paid and nonassessable shares of Exchangeable Preferred having an aggregate liquidation preference equal to the amount of such dividends, and the issuance of such additional shares of Exchangeable Preferred shall constitute full payment of such dividend. All dividends paid with respect to shares of Exchangeable Preferred pursuant to this paragraph 4(a) shall be paid pro rata to the Holders entitled thereto. The Corporation may, at the option of the Board of Directors, elect not to issue fractions of a share of Exchangeable Preferred ("Fractional Shares") in payment of any dividend in additional shares of Exchangeable Preferred. In such event, in lieu of any Fractional Shares, each record Holder of Exchangeable Preferred otherwise entitled to receive a Fractional Share shall receive a payment in cash equal to such Holder's proportionate interest in the net proceeds from the sale or sales in the open market by the Transfer Agent or other agent selected by the Corporation, on behalf of all such Holders of the aggregate of all Fractional Shares otherwise payable as a dividend. Such sale shall be effected promptly after the record date fixed for determining the Holders entitled to payment of the dividend. All shares of Exchangeable Preferred issued as a dividend with respect to the Exchangeable Preferred will thereupon be duly authorized, validly issued, fully paid and nonassessable and free of all liens and charges. After March 15, 2002, dividends on the Exchangeable Preferred shall be paid only in cash to the Holders of record at the close of business on the regular record date with respect to the applicable dividend payment date. (b) Accumulated unpaid dividends for any past dividend periods may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, whether or not a regular dividend payment date, to Holders of record on the books of the Corporation on such record date as may be fixed by the Board of Directors. Holders of Exchangeable Preferred will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends. If any dividend (or portion thereof) payable on any dividend payment date on or before March 15, 2002, is not declared or paid in full in cash or in shares of Exchangeable Preferred as described in paragraph 4(a) above on such dividend payment date, the amount -56- of the accrued and unpaid dividend will bear interest at the dividend rate on the Exchangeable Preferred, compounding quarterly from such dividend payment date until paid in full. If any dividend (or portion thereof) payable on any dividend payment date after March 15, 2002, is not declared or paid in full in cash on such dividend payment date, the amount of the accrued and unpaid dividend will bear interest at the dividend rate on the Exchangeable Preferred, compounding quarterly from such dividend payment date until paid in full. (c) So long as any shares of the Exchangeable Preferred are outstanding, the Corporation shall not (i) declare, pay or set apart for payment any dividend on any shares of Junior Securities or Parity Securities or (ii) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption, retirement or other acquisition for value of any of, or redeem, purchase, retire or otherwise acquire for value any of, the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities or (iii) make any distribution in respect of the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities, in any such case either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property (other than distributions or dividends of a particular class or series of Junior Securities to holders of such Junior Securities or distributions or dividends of a particular class or series of Parity Securities to holders of such Parity Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase, redeem or otherwise acquire for value any of the Junior Securities or Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities or Parity Securities, unless, as to any of the actions described in clauses (i), (ii) or (iii) above, prior to or concurrently with such declaration, payment, setting apart for payment, purchase, redemption, other acquisition for value or distribution, as the case may be, all accrued and unpaid dividends, if any, on shares of the Exchangeable Preferred not paid on the dates provided for in paragraphs 4(a) or 4(b) hereof (including accrued dividends, if any, not paid by reason of the terms and conditions of paragraph 4(d) hereof) shall have been paid or shall have been declared and, if payable in cash, a sum in cash set apart for such payment. If full cumulative dividends on the Exchangeable Preferred are not so paid, the Exchangeable Preferred will share dividends pro rata with the Parity Securities. If full cumulative dividends on the Exchangeable Preferred have not been so paid, the Exchangeable Preferred may not be optionally redeemed in part as provided in paragraph 6(d) of this Section 4.2.2. (d) Notwithstanding anything contained herein to the contrary, no cash dividends on shares of Exchangeable Preferred, or any other shares of Junior Securities or Parity Securities, or other series of the Corporation's preferred stock, shall be declared by the Board of Directors or paid or set apart for payment by the Corporation at such time as the terms and provisions of any contract or other agreement of the Corporation or any of its Restricted Subsidiaries entered into or assumed prior to, on, or after the Closing Date specifically prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default -57- thereunder; provided, however, that nothing contained in this paragraph 4(d) shall be construed or deemed to require the Board of Directors to declare, or the Corporation to pay or set apart for payment, any cash dividends on shares of the Exchangeable Preferred, whether permitted by any of such agreements or not. (e) If, on or prior to September 11, 1997, the Corporation does not, as more fully provided in the Registration Rights Agreement with respect to the Exchangeable Preferred dated the Closing Date, either (i) consummate an offer by the Corporation to such Holders to exchange the Exchangeable Preferred for an issue of preferred stock of the Corporation with terms identical to the Exchangeable Preferred pursuant to an effective registration statement under the Securities Act with respect to such exchange offer, or (ii) file and cause to become effective under the Securities Act a shelf registration statement with respect to resales of the Exchangeable Preferred, then dividends, in addition to the dividends described in paragraph 4(a) of this Section 4.2.2, will accrue at the annual rate of 0.5% of the liquidation preference per share on the Exchangeable Preferred from September 11, 1997, payable in additional shares of Exchangeable Preferred quarterly in arrears on March 15, June 15, September 15, and December 15 of each year commencing on December 15, 1997. 5. Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation, then, before any distribution or payment shall be made to the holders of any Junior Securities, including common stock of the Corporation, the Holders of Exchangeable Preferred then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its shareholders, an amount in cash equal to $1,000 for each share outstanding (which amount is hereinafter referred to as the "liquidation preference"), plus an amount in cash equal to all accrued and unpaid dividends and interest thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the dividend payment date immediately preceding the date fixed for liquidation, dissolution or winding-up to the date fixed for liquidation, dissolution or winding-up). Except as provided in the preceding sentence, Holders of Exchangeable Preferred shall not be entitled to any distribution in the event of liquidation, dissolution or winding-up of the affairs of the Corporation. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Exchangeable Preferred and all other Parity Securities, then the holders of all such shares shall share ratably in any distribution of assets of the Corporation with respect to the Exchangeable Preferred and Parity Securities in accordance with the amount that would be payable on such distribution if the amounts to which the holders of outstanding shares of Exchangeable Preferred and all other Parity Securities are entitled were paid in full. After payment of the full amount of the liquidation preference and accrued and unpaid dividends or interest to which each Holder is entitled, such Holders of shares of Exchangeable Preferred will not be entitled to any further participation in any distribution of the assets of the Corporation. -58- (b) For purposes of this paragraph 5, a merger, consolidation or sale of substantially all of the Corporation's assets that complies with the provisions of paragraph 11(g) of this Section 4.2.2 shall not be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Corporation. 6. Optional Redemption. (a) Subject to subparagraph (d) of this paragraph 6, and subject to the legal availability of funds therefor and to any contractual and other restrictions with respect thereto, at any time on or after March 15, 2002, the Corporation, at the option of the Board of Directors, may redeem, in whole or in part, the shares of Exchangeable Preferred at the time outstanding, at any time or from time to time, upon notice given as provided in paragraph 9 of this Section 4.2.2, at the redemption prices (expressed as a percentage of the liquidation preference thereof) set forth below, plus an amount in cash equal to all accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date, subject to the right of holders of preferred stock on a record date to receive dividends on a dividend payment date) if redeemed during the 12-month period beginning March 15 of each of the years set forth below: Year Percentage 2002 ................................ 107.0000% 2003 ................................ 104.6667% 2004 ................................ 102.3333% 2005 and thereafter...................... 100.0000% (b) In addition, but subject to subparagraph (d) of this paragraph 6, on or prior to March 15, 2000, the Corporation may, at the option of the Board of Directors from time to time, subject to the legal availability of funds therefor and to any contractual and other restrictions with respect thereto, redeem shares of Exchangeable Preferred having an aggregate liquidation preference of up to 35% of the aggregate liquidation preference of all shares of Exchangeable Preferred issued on the Closing Date, at a redemption price equal to 114% of the liquidation preference thereof (subject to the right of Holders of Exchangeable Preferred on relevant record dates to receive dividends due on relevant dividend payment dates), plus an amount in cash equal to a prorated dividend for the period from the dividend payment date immediately prior to the redemption date to the redemption date, with proceeds of one or more Public Equity Offerings of common stock of (A) the Corporation or (B) ICG, provided that (i) with respect to a Public Equity Offering referred to in clause (B) above, cash proceeds of such Public Equity Offering in an amount sufficient to effect the redemption of Exchangeable Preferred to be so redeemed are contributed by ICG to the Corporation prior to such redemption and used by the Corporation to effect such redemption and (ii) such redemption occurs within 180 days after consummation of such Public Equity Offering. -59- (c) In the event of partial redemptions of Exchangeable Preferred, the shares to be redeemed will be determined pro rata, except that the Corporation may redeem such shares held by any Holder of fewer than 100 shares without regard to such pro rata redemption requirement. (d) Notwithstanding the foregoing provisions of paragraph 6(a) or (b) of this Section 4.2.2, unless the full cumulative dividends for all past dividend periods on all outstanding shares of Exchangeable Preferred shall have been paid or contemporaneously are declared and paid or set apart for payment (whether in cash or additional shares of Exchangeable Preferred, as permitted under paragraph 4(a) of this Section 4.2.2), none of the shares of Exchangeable Preferred shall be redeemed pursuant to paragraph 6(a) or (b) of this Section 4.2.2 unless all outstanding shares of Exchangeable Preferred are simultaneously redeemed and all such cumulative dividends are paid in cash contemporaneously with such redemption. 7. Mandatory Redemption. (a) The Exchangeable Preferred will be subject to mandatory redemption (subject to the legal availability of funds therefor but without regard to any contractual or other restriction with respect thereto) in whole on March 15, 2008, at a price, payable in cash, equal to the liquidation preference thereof, plus all accumulated and unpaid dividends to the date of redemption. (b) Upon the occurrence of a Change of Control, the Corporation will (subject to any contractual and other restrictions with respect thereto and to the legal availability of funds therefor) offer (the "Change of Control Offer") to each Holder of Exchangeable Preferred to repurchase all or any part of such Holder's Exchangeable Preferred at a cash purchase price equal to 101% of the liquidation preference thereof, plus an amount in cash equal to all accumulated and unpaid dividends per share to the date of purchase (including an amount in cash equal to a prorated dividend from the dividend payment date immediately preceding the date of purchase to the date of purchase). The Change of Control Offer will be made within 30 days following a Change of Control, will remain open for at least 30 and not more than 40 days, and will be made in compliance with the requirements of Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations. Notwithstanding the foregoing, the Corporation will not be required to make a Change of Control Offer if any of the Senior Discount Notes, 122% Notes or 132% Notes are outstanding upon the occurrence of a Change of Control unless all of the Senior Discount Notes, 122% Notes and 132% Notes tendered pursuant to the "change of control offers" with respect thereto are repurchased as a result of such Change of Control, in which case the date on which all Senior Discount Notes, 122% Notes and 132% Notes (and any other Indebtedness or Senior Securities of the Corporation having provisions similar to Section 4.04(x) of the Senior Discount Notes Indenture) are so repurchased will be deemed to be the date on which such Change of Control shall have occurred. -60- (c) If the Corporation shall fail to discharge its obligation to redeem all outstanding shares of Exchangeable Preferred pursuant to paragraph 7(a) or (b) of this Section 4.2.2 (the "Mandatory Redemption Obligation"), the Corporation shall discharge the Mandatory Redemption Obligation as soon as the Corporation is able to do so. If and so long as any Mandatory Redemption Obligation with respect to the Exchangeable Preferred shall not be fully discharged, the Corporation shall not declare or pay any dividend or make any distribution on, or, directly or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking fund or other similar obligations in respect of, Junior Securities or Parity Securities (other than as a result of a reclassification of Junior Securities or Parity Securities, or the exchange or conversion of one class or series of Junior Securities for or into another class or series of Junior Securities, or the exchange or conversion of one class or series of Parity Securities for or into another class or series of Parity Securities, or other than through the use of the proceeds of a substantially contemporaneous sale of other Junior Securities or Parity Securities and in any case not involving the payment of cash to holders of such securities) or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities. 8. Exchange. (a) The Corporation may, at the sole option of the Board of Directors (subject to the legal availability of funds therefor), exchange all, but not less than all, of the shares of Exchangeable Preferred then outstanding, including any shares of Exchangeable Preferred issued as payment for dividends, for a new series of 14% Exchange Debentures due March 15, 2008, of the Corporation (the "Exchange Debentures") to be issued pursuant to the indenture (the "Indenture") qualified under the Trust Indenture Act of 1939, as amended, substantially in the form agreed to on the Closing Date, a copy of which is on file with and can be obtained from the Secretary of the Corporation on request, at any time following the date on which such exchange is permitted by the terms of the Senior Discount Notes Indenture, the 122% Notes Indenture, the 132% Notes Indenture, and the terms of all other then-existing Indebtedness of the Corporation and subject to the conditions contained in paragraph 8(b) below. The Exchange Debentures will be issued in registered form, without coupons, be duly executed, authenticated as of the date on which the exchange is effective and be dated the date of exchange. In the event of an exchange, Holders of Exchangeable Preferred shall be entitled to receive on the date of exchange Exchange Debentures having an aggregate principal amount equal to (i) the total of the liquidation preference for each share of Exchangeable Preferred exchanged, plus (ii) an amount equal to all accrued but unpaid dividends payable on such share (including a prorated dividend for the period from the immediately preceding dividend payment date to the date of exchange). In the event such exchange would result in the issuance of Exchange Debentures in a principal amount which is less than $1,000 or which is not an integral multiple of $1,000 (such principal amount less than $1,000 or the difference between such principal amount and the highest integral of $1,000 which is less than such principal amount, as the case may be, is hereinafter referred to as the "Fractional Principal Amount"), the Corporation may, subject to any restrictions in the Senior Discount Notes Indenture, the 12 1/2% Notes Indenture, the 13 1/2% Notes Indenture, and the terms of all other then-existing Indebtedness of the Corporation, at -61- the option of the Board of Directors, pay cash to each Holder of Exchangeable Preferred in lieu of Fractional Principal Amounts of Exchange Debentures otherwise issuable upon exchange of the Exchangeable Preferred. The Person entitled to receive the Exchange Debentures issuable upon exchange shall be treated for all purposes as the registered holder of such Exchange Debentures as of the date of exchange. In accordance with paragraph 9 of this Section 4.2.2, the Corporation will mail to each Holder of Exchangeable Preferred written notice of its intention to exchange no less than 15 nor more than 60 days prior to the date of exchange. (b) As a condition of the right of the Corporation to issue Exchange Debentures in exchange for the Exchangeable Preferred under paragraph 8(a) of this Section 4.2.2 on the date of exchange, (A) there shall be legally available funds sufficient therefor (including, without limitation, legally available funds sufficient therefor under Section 7-106-401 (or any successor provision) of the Colorado Business Corporation Act); (B) a registration statement relating to the Exchange Debentures shall have been declared effective under the Securities Act prior to such exchange and shall continue to be effective on the date of exchange, or the Corporation shall have obtained a written opinion of its counsel that an exemption from the registration requirements of the Securities Act is available for such exchange and that upon receipt of such Exchange Debentures pursuant to such an exchange made in accordance with such exemption, each holder of an Exchange Debenture that is not an Affiliate of the Corporation will not be subject to any restrictions imposed by the Securities Act upon the resale of such Exchange Debenture, and such exemption is relied upon by the Corporation for such exchange; (C) the Indenture and the Trustee thereunder shall have been qualified under the Trust Indenture Act of 1939, as amended; (D) immediately after giving effect to such exchange, no Default or Event of Default would exist; and (E) the Corporation shall have delivered to the Trustee under the Indenture a written opinion of counsel, dated the date of exchange, regarding the satisfaction of the conditions set forth in clauses (A), (B) and (C). In the event that (i) the issuance of the Exchange Debentures is not permitted on the exchange date or (ii) any of the conditions set forth in clauses (A) through (E) of the preceding sentence are not satisfied on the exchange date, the Corporation shall use its best efforts to satisfy such conditions and effect such exchange as soon as practicable. Prior to initiating the exchange referred to in paragraph (a) above, the Corporation shall certify, to the satisfaction of the trustees under the 13 1/2% Notes Indenture, the 12 1/2% Notes Indenture and the Senior Discount Notes Indenture, that such exchange is permitted under such respective Indentures. The Corporation shall also provide such trustees with an Officer's Certificate setting forth with specificity the basis for the Corporation's conclusion that such exchange is so permitted. -62- 9. Procedures for Redemption or Exchange. (a) In the event that fewer than all the outstanding shares of Exchangeable Preferred are to be redeemed, the number of shares to be redeemed shall be determined pro rata, except that in any redemption of fewer than all the outstanding shares of Exchangeable Preferred, the Corporation may redeem all shares held by any Holder of a number of shares of Exchangeable Preferred not to exceed 100 as may be specified by the Corporation. In the event of partial redemptions of Exchangeable Preferred, new shares of Exchangeable Preferred having an aggregate liquidation preference equal to the unredeemed portion will be issued in the name of the Holder thereof upon cancellation of the original share certificate of Exchangeable Preferred without cost to such Holder. On and after a redemption date, unless the Corporation defaults in the payment of the redemption price, dividends will cease to accrue on shares of Exchangeable Preferred called for redemption and all rights of Holders of such shares will terminate except for the right to receive the redemption price. On the date fixed for exchange, the rights of Holders of the shares of Exchangeable Preferred exchanged shall cease, except the right to receive Exchange Debentures in exchange for their Exchangeable Preferred and cash or additional Exchange Debentures in payment of accrued but unpaid dividends on such shares to the date of exchange. (b) In the event that the Corporation shall redeem or exchange shares of Exchangeable Preferred, notice of every redemption or exchange of shares of Exchangeable Preferred shall be mailed by first class mail, postage prepaid, and mailed, in the case of exchange, not less than 15 nor more than 60 days prior to the exchange date, and, in the case of redemption, not less than 30 days nor more than 60 days prior to the redemption date, addressed to the Holders of record of the shares to be redeemed or exchanged at their respective last addresses as they shall appear on the books of the Corporation; provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption or exchange of any shares so to be redeemed or exchanged except as to the Holder to whom the Corporation has failed to give such notice or to whom notice was defective. Each such notice shall state: (i) the redemption or exchange date; (ii) the number of shares of Exchangeable Preferred to be redeemed or exchanged and, if less than all the shares held by such Holder are to be redeemed, the number of such shares or portion of the liquidation preference to be redeemed; (iii) the redemption price or exchange rate; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price or exchanged for the Exchange Debentures; and (v) that dividends on the shares to be redeemed or exchanged will cease to accrue on such redemption date or exchange date. (c) Notice having been mailed as aforesaid and provided that, on or before the redemption date or exchange date, as the case may be, specified in such notice, all duly authenticated and valid Exchange Debentures necessary for any such exchange shall have been provided by the Corporation and all funds necessary for such redemption or exchange shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the Holders of the shares so called for redemption or exchange, so as to be and to continue to be available -63- therefor, then, from and after the redemption date or exchange date, as the case may be, dividends on the shares of Exchangeable Preferred so called for redemption or exchange, as the case may be, shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Exchangeable Preferred, and all rights of the Holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the redemption price or the Exchange Debentures upon exchange and any accrued and unpaid dividends or the right to receive cash payments in lieu of fractional securities from the exchange agent or other agent selected by the Corporation) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed or exchanged (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed or exchanged by the Corporation at the redemption price or exchange rate aforesaid. (d) If such notice of redemption shall have been duly given and if, prior to the redemption date, the Corporation shall have irrevocably deposited the funds by the Corporation with such bank or trust company in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, Holders of the shares of Exchangeable Preferred called for redemption shall cease to be shareholders with respect to such shares and thereafter such shares shall no longer be transferable on the books of the Corporation and such holders shall have no interest in or claim against the Corporation with respect to such shares (including dividends thereon accrued after such redemption date) except the right to receive payment of the redemption price (including all dividends accrued and unpaid to the date fixed for redemption) upon surrender of their certificates. Any funds deposited and unclaimed at the end of two years from the date fixed for redemption shall be repaid to the Corporation upon its request, after which repayment the Holders of shares called for redemption shall look only to the Corporation for payment of the redemption price. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or of the State of Colorado shall have capital, surplus and undivided profits aggregating at least $100,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. 10. Voting Rights. (a) Except as otherwise provided in this paragraph 10 or as otherwise from time to time provided by law, the Holders of shares of Exchangeable Preferred shall have no voting rights. (b) (i) If and whenever (A) (1) dividends on the Exchangeable Preferred are in arrears and remain unpaid (or if after March 15, 2002, such dividends have not been paid in cash) with respect to four quarterly periods (whether or not consecutive), (2) the Corporation fails to discharge any redemption obligation with respect to the -64- Exchangeable Preferred, (3) a breach or violation by the Corporation of the provisions of paragraph 8 of this Section 4.2.2 occurs, or the Corporation fails to exchange Debentures for the Exchangeable Preferred tendered for exchange on the exchange date, whether or not the Corporation satisfies the conditions to permit such exchange, (4) the Corporation fails to make a Change of Control Offer or cash payment with respect thereto if required by the provisions of paragraph 7(b) of this Section 4.2.2, (5) a breach or violation of any provision of paragraph 11 of this Section 4.2.2 occurs and is not remedied within 30 days after notice thereof to the Corporation by Holders of 25% or more of the liquidation preference of the Exchangeable Preferred then outstanding, or (6) a default occurs in the obligation to pay principal of, interest on or any other payment obligation when due (a "Payment Default") at final maturity, on one or more classes of Indebtedness of the Corporation or any Subsidiary of the Corporation, whether such Indebtedness exists on the Closing Date or is Incurred thereafter, having individually or in the aggregate an outstanding principal amount of $10 million or more, or any other Payment Default occurs on one or more such classes of Indebtedness and such class or classes of Indebtedness are declared due and payable prior to their respective maturities, and (B) in the case of clauses (A)(5) and (6) above, such event continues for a period of 180 days or more (each such event referred to as a "Voting Rights Triggering Event"), then the number of directors then constituting the Board of Directors of the Corporation shall be increased by two directors and the Holders of the majority of the then outstanding shares of Exchangeable Preferred, voting separately as a class, shall be entitled to elect the two additional directors at any annual meeting of shareholders or special meeting held in place thereof, or at a special meeting of the Holders of such shares of Exchangeable Preferred called as hereinafter provided. For the purpose of determining the number of quarterly periods for which accrued dividends have not been paid, any accrued and unpaid dividend that is subsequently paid shall not be treated as unpaid. Within 15 days of the time the Corporation becomes aware of the occurrence of any default referred to in clause (A)(6) above, the Corporation shall give notice thereof to Holders of the Exchangeable Preferred at their addresses as they appear on the records of the Transfer Agent. (ii) Whenever a Voting Rights Triggering Event shall have occurred, voting rights of the Holders of shares of the Exchangeable Preferred may be exercised initially either at a special meeting of the Holders of Exchangeable Preferred, called as hereinafter provided, or at any annual meeting of shareholders held for the purpose of electing directors, and thereafter at each such annual meeting or by the written consent of the Holders of Exchangeable Preferred pursuant to Section 7-107-104 of the Colorado Business Corporation Act. The term of office of any such elected directors shall expire at the next annual meeting of shareholders held for the purpose of electing directors, subject to a new election of two directors by the Holders of shares of Exchangeable Preferred at each successive annual meeting, but such voting right and the term of office of any such elected directors shall expire at such time as (A) all dividends accumulated on Exchangeable Preferred shall have been paid in full (and in the case of dividends payable with respect to any period after March 15, 2002, shall have been paid in full in cash) and (B) each failure, breach or default referred to in paragraph 10(b)(i)(A)(2), (3), (4), (5), and (6) above is remedied. -65- (iii) At any time after a Voting Rights Triggering Event shall have occurred and such voting rights shall not already have been initially exercised, a proper officer of the Corporation may, and upon the written request of any Holder of shares of Exchangeable Preferred (addressed to the Secretary at the principal office of the Corporation) shall, call a special meeting of the Holders of shares of Exchangeable Preferred for the election of the two directors to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws for a special meeting of the shareholders or as required by law. (iv) Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of shareholders at the place for holding annual meetings of shareholders of the Corporation or, if none, at a place designated by the Secretary of the Corporation. If such meeting shall not be called by a proper officer of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the Holders of record of 10% of the shares of Exchangeable Preferred then outstanding may designate in writing a Holder of Exchangeable Preferred to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of shareholders and shall be held at the same place as is elsewhere provided in this paragraph (10)(b)(iv) or at such other place as is selected by such person so designated. Any Holder of Exchangeable Preferred that would be entitled to vote at any such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of shareholders to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of shareholders. (v) At any meeting held for the purpose of electing directors at which the Holders of Exchangeable Preferred shall have the right to elect directors as provided herein, the presence in person or by proxy of the Holders of the lesser of (A) a majority of the then outstanding shares of Exchangeable Preferred or (B) a percentage of the then outstanding shares of Exchangeable Preferred, which percentage is equal to the percentage of then outstanding shares of common stock then required to constitute a quorum for the election of directors by holders of common stock, shall be required and be sufficient to constitute a quorum of such class for the election of directors by such class. At any such meeting or adjournment thereof (x) the absence of a quorum of the Holders of Exchangeable Preferred shall not prevent the election of directors other than those to be elected by the Holders of stock of such class and the absence of a quorum or quorums of the holders of Capital Stock entitled to elect such other directors shall not prevent the election of directors to be elected by the Holders of Exchangeable Preferred and (y) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time, without notice (except as required by law) -66- other than announcement at the meeting, until a quorum shall be present. (vi) The term of office of all directors elected by the Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this Section 4.2.2 in office at any time when the aforesaid voting rights are vested in the Holders of Exchangeable Preferred shall terminate upon the election of their successors at any meeting of shareholders for the purpose of electing directors. Upon any termination of the aforesaid voting rights in accordance with paragraph (10)(b)(ii) of this Section 4.2.2, the term of office of all directors elected by the Holders of Exchangeable Preferred pursuant to paragraph (10)(b)(i) of this Section 4.2.2 then in office thereupon shall terminate and upon such termination the number of directors constituting the Board of Directors shall, without further action, be reduced by two, subject always to the increase of the number of directors pursuant to paragraph (10)(b)(i) of this Section 4.2.2 in case of the future right of the Holders of Exchangeable Preferred to elect directors as provided herein. (vii) In case of any vacancy occurring among the directors so elected, the remaining director who shall have been so elected may appoint a successor to hold office for the unexpired term of the director whose place shall be vacant unless and until such vacancy shall be filled by vote of the Holders entitled to elect the directors in accordance with paragraph 10(b) of this Section 4.2.2. If all directors so elected by the Holders of Exchangeable Preferred shall cease to serve as directors before their terms shall expire, the Holders of Exchangeable Preferred then outstanding may, at a special meeting of the Holders called as provided above, elect successors to hold office for the unexpired terms of the directors whose places shall be vacant. (c) In addition to any vote or consent of shareholders required by law, the consent of the Holders of at least a majority of the shares of Exchangeable Preferred at the time outstanding, voting or consenting, as the case may be, separately as one class given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (i) Except as provided in paragraph 13 of this Section 4.2.2, any amendment, alteration or repeal of any of the provisions of the Second Amended and Restated Articles of Incorporation, or of the Bylaws of the Corporation, which affects adversely the voting rights, rights, privileges, or preferences of the Holders of shares of Exchangeable Preferred or authorizes the issuance of any additional shares of Exchangeable Preferred (other than to pay dividends in kind on Exchangeable Preferred); provided, however, that the amendment of the provisions of the Second Amended and Restated Articles of Incorporation so as to authorize or create, or to increase the authorized amount of, any of the Corporation's Junior Securities or to authorize the issuance of or to authorize or create any Parity Securities (up to the amount of authorized preferred stock) shall not be deemed to affect adversely the voting rights, rights, privileges, or preferences of the Holders of shares of Exchangeable Preferred; -67- (ii) Any amendment, alteration or repeal of any of the provisions of the Indenture; provided, however, that no such consent of the Holders of Exchangeable Preferred shall be required for such amendments as would be permitted under the terms of the Indenture without the consent of any of the holders of the Exchange Debentures; or (iii) The authorization or creation of, or the increase in the authorized amount of, any Senior Securities or shares of any class of any security convertible into shares of any Senior Securities; provided, however, that on or after March 15, 2002, no such consent of the Holders of Exchangeable Preferred shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect or when the issuance of any such Senior Securities or convertible security is to be made, as the case may be, provision is made, and funds are set aside, for the redemption of all shares of Exchangeable Preferred at the time outstanding. 11. Certain Covenants. (a) Incurrence of Indebtedness and Issuance of Preferred Stock. (i) The Corporation will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Senior Discount Notes, the Exchange Debentures and Indebtedness existing on the Closing Date) or issue any Redeemable Stock; provided that the Corporation may Incur Indebtedness or issue Redeemable Stock if, after giving effect to the Incurrence of such Indebtedness or the issuance of such Redeemable Stock and the receipt and application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than zero and less than 5:1. (ii) Notwithstanding the provisions of paragraph 11(a)(i) above, the Corporation and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (A) Indebtedness of the Corporation or any Restricted Subsidiary or Redeemable Stock of the Corporation outstanding at any time, which Indebtedness or Redeemable Stock generates gross proceeds to the Corporation of up to $900 million, less (without duplication) the gross proceeds of Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant contained in the 13 1/2% Notes Indenture, the 12 1/2% Notes Indenture and the Senior Discount Notes Indenture; (B) Indebtedness to ICG, the Corporation or any of the Corporation's Wholly Owned Restricted Subsidiaries; provided that any subsequent issuance or transfer of any Capital Stock which results in any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to ICG, the Corporation or another Wholly Owned Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (B); (C) Indebtedness or Redeemable Stock issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness or Redeemable Stock, other than Indebtedness Incurred or Redeemable Stock issued under clause (A), (B), (E), (F), (H), (I), (J) or (K) of this paragraph 11(a)(ii), and any refinancings thereof in an -68- amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, accrued dividends, fees and expenses); provided that such new Indebtedness or Redeemable Stock, determined as of the date of Incurrence of such new Indebtedness or issuance of Redeemable Stock, does not mature prior to the stated maturity of the Indebtedness or have a mandatory redemption date prior to the Redeemable Stock to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness or Redeemable Stock of the Corporation be refinanced by means of any Indebtedness or Redeemable Stock of any Restricted Subsidiary of the Corporation pursuant to this clause (C); (D) Indebtedness (1) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (2) under Currency Agreements and Interest Rate Agreements; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (3) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Corporation or any of its Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary of the Corporation (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary of the Corporation for the purpose of financing such acquisition), in a principal amount at maturity not to exceed the gross proceeds actually received by the Corporation or any Restricted Subsidiary in connection with such disposition; (E) Indebtedness or Redeemable Stock of the Corporation, to the extent the proceeds referred to below are contributed to the Corporation, not to exceed, at any one time outstanding, twice the amount of Net Cash Proceeds received by ICG after the Closing Date from the issuance and sale of its Capital Stock (other than Redeemable Stock or preferred stock); provided that such Indebtedness does not mature prior to the final mandatory redemption date of the Exchangeable Preferred; (F) Strategic Investor Subordinated Indebtedness; (G) Indebtedness or Redeemable Stock of the Corporation, to the extent the proceeds thereof are immediately used after the Incurrence or issuance thereof to purchase Exchangeable Preferred or preferred stock, as the case may be, tendered in a Change of Control Offer or a change of control offer, as the case may be; (H) Indebtedness of any Restricted Subsidiary of the Corporation Incurred pursuant to any credit agreement of such Restricted Subsidiary in effect on August 8, 1995 (or any agreement refinancing Indebtedness under such credit agreement), up to the amount of the commitment under such credit agreement (including equipment leasing or financing agreements) on August 8, 1995; (I) Indebtedness of the Corporation, in an amount not to exceed $100 million at any one time outstanding, consisting of Capitalized Lease Obligations with respect to assets that are used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries; (J) Indebtedness or Redeemable Stock of any Person that becomes a Restricted Subsidiary of the Corporation after the Closing Date, which Indebtedness exists or, with respect to such Indebtedness for which there is a commitment to lend, at the time such Person becomes a Restricted Subsidiary and, with respect to such Indebtedness, the subsequent Incurrence thereof ("Acquired Indebtedness"), in an accreted amount not to exceed $50 -69- million at any one time outstanding in the aggregate for all such Restricted Subsidiaries; provided that such Acquired Indebtedness does not exceed 65% of the consideration (calculated by including such Acquired Indebtedness as a part of such consideration) paid by the Corporation and its Restricted Subsidiaries for the acquisition of such Person; (K) Indebtedness of the Corporation, in an amount not to exceed $30 million at any one time outstanding, consisting of letters of credit and similar arrangements used to support obligations of the Corporation or any of its Restricted Subsidiaries with respect to the acquisition of (by purchase, lease or otherwise), construction of, or improvements on, assets that will be used or useful in the telecommunications business of the Corporation or its Restricted Subsidiaries; and (L) Indebtedness Incurred to finance the cost (including the cost of design, development, construction, installation or integration) of assets, equipment or inventory used or useful in the telecommunications business of ICG or any of the Restricted Subsidiaries that is acquired by ICG or any of its Restricted Subsidiaries after the Closing Date. (iii) For purposes of determining any particular amount of Indebtedness under paragraphs 11(a)(i) or (ii) above, (A) Indebtedness of any Restricted Subsidiary of the Corporation incurred on or prior to the Closing Date pursuant to any credit agreement (including equipment leasing or financing agreements) of such Restricted Subsidiary in effect on August 8, 1995, shall be treated as Incurred pursuant to paragraph 11(a)(ii)(H) of this Section 4.2.2, and (B) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with the covenants contained in paragraphs 11(a)(i) and (ii) above, in the event that an item of Indebtedness or Redeemable Stock meets the criteria of more than one of the types of Indebtedness or Redeemable Stock described in such clauses, the Corporation, in its sole discretion, shall classify such item of Indebtedness or Redeemable Stock and only be required to include the amount and type of such Indebtedness or Redeemable Stock in one of such clauses. (b) Limitation on Restricted Payments. (i) So long as any shares of the Exchangeable Preferred are outstanding, the Corporation will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (A) declare or pay any dividend or make any distribution on Junior Securities held by Persons other than the Corporation or any of its Restricted Subsidiaries (other than dividends or distributions payable solely in shares of its or such Restricted Subsidiary's Junior Securities (other than Redeemable Stock) of the same class held by such holders or in options, warrants or other rights to acquire such shares of Junior Securities and other than pro rata dividends or distributions on common stock of Restricted Subsidiaries); (B) purchase, redeem, retire or otherwise acquire for value any shares of Junior Securities of the Corporation or any Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Junior Securities) held by Persons other than the Corporation or any of its Wholly Owned Restricted Subsidiaries (except for Junior Securities of ChoiceCom, MTN, StarCom, Ohio LINX, FOTI and Zycom to the extent the consideration therefor consists solely of common stock (other than -70- Redeemable Stock) of ICG or Junior Securities of the Corporation, in each case transferred in compliance with the Securities Act); or (C) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i)(A) through (C) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (1) an event referred to in clauses (1) through (6) of paragraph 10(b)(i)(A) of this Section 4.2.2 shall have occurred and be continuing, (2) the Corporation could not Incur at least $1.00 of Indebtedness under paragraph 11(a)(i) of this Section 4.2.2, (3) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a board resolution) after the date hereof shall exceed the sum of (aa) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount) (determined by excluding income resulting from transfers of assets by the Corporation or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed pursuant to paragraph 11(i) of this Section 4.2.2 plus (bb) the aggregate Net Cash Proceeds received by the Corporation after the Closing Date (x) from the issuance and sale, permitted hereunder, of Junior Securities (other than Redeemable Stock) to a Person who is not a Subsidiary of the Corporation, or from the issuance to a Person who is not a Subsidiary of the Corporation of any options, warrants or other rights to acquire Junior Securities of the Corporation (in each case, exclusive of any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the stated maturity of the Exchangeable Preferred) or (y) as a capital contribution from ICG plus (cc) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Corporation or any Restricted Subsidiary (except to the extent any such payment is included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed the amount of Investments previously made by the Corporation and its Restricted Subsidiaries in such Person or (4) dividends on the Exchangeable Preferred shall not have been paid in full as provided in paragraph 4 of this Section 4.2.2. (ii) The provisions of paragraph 11(b)(i) above shall not be violated by reason of: (A) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with paragraph 11(b)(i) above; (B) the repurchase, redemption or other acquisition of Junior Securities of the Corporation (or options, warrants or other rights to acquire such Junior Securities) and with respect to any Junior Securities, the payment of accrued dividends thereon, in exchange for, or out of the proceeds of a substantially concurrent issuance or sale of, shares of Junior Securities (other than Redeemable Stock) of the Corporation; provided that the redemption of any preferred stock pursuant to any mandatory redemption feature thereof and any redemption of any other -71- Junior Securities and, in each case, the payment of accrued dividends thereon (or options, warrants or other rights to acquire such Junior Securities) and with respect to any Junior Securities, the payment of accrued dividends thereon, shall be deemed to be "substantially concurrent" with such issuance and sale if the required notice with respect to such redemption is irrevocably given by a date which is no later than five Business Days after receipt of the proceeds of such issuance and sale and such redemption and payment is consummated within the period provided for in the document governing such preferred stock or the documents governing the redemption of such other Junior Securities, as the case may be; (C) payments or distributions, in the nature of satisfaction of dissenters' rights, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of paragraph 11(g) of this Section 4.2.2; (D) Investments, not to exceed $10 million in the aggregate, each evidenced by a senior promissory note payable to the Corporation that provides that it will become due and payable prior to any required repurchase (including pursuant to an Offer to Purchase in connection with a Change of Control) of the Exchangeable Preferred; (E) Investments, not to exceed $5 million in the aggregate, that meet the requirements of clause (D) above; provided that the Board of Directors of the Corporation shall have determined, in good faith, that each such Investment under this clause (E) will enable the Corporation or one of its Restricted Subsidiaries to obtain additional business that it might not be able to obtain without the making of such Investment; (F) with respect to Junior Securities permitted to be issued and sold by the provisions of paragraph 11(d) of this Section 4.2.2, the payment (1) of dividends on such Junior Securities in additional shares of Junior Securities and (2) of cash dividends on such Junior Securities in an amount not to exceed the dividend rate thereon and accrued interest on unpaid dividends, in each case after May 1, 2001; (G) the repurchase, in the event of a Change of Control, of Junior Securities of the Corporation and Indebtedness of the Corporation into which such Junior Securities have been exchanged; provided that prior to repurchasing such Junior Securities or Indebtedness, the Corporation shall have made a Change of Control Offer to repurchase the shares of Exchangeable Preferred in accordance with the terms of paragraph 7(b) of this Section 4.2.2 (and an offer to repurchase other Indebtedness, if required by the terms thereof, in accordance with the indenture or other document governing such other Indebtedness) and shall have accepted and paid for any shares of Exchangeable Preferred (and other Indebtedness) properly tendered in connection with such Change of Control Offer for the shares of Exchangeable Preferred or change of control offer for such other Indebtedness; and (H) the issuance of Indebtedness permitted to be issued hereunder in exchange for preferred stock; provided that the Incurrence of such Indebtedness complies with the provisions of paragraph 11(a) of this Section 4.2.2; provided that, except in the case of clause (A), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth in this paragraph 11(b)(ii). (iii) Each Restricted Payment permitted pursuant to paragraph 11(b)(ii) above (other than the Restricted Payments referred to in clauses (F)(1) and (H) thereof), and the Net Cash Proceeds from any issuance of Junior Securities referred to in clause (B) thereof, shall be included in calculating whether the conditions of clause (3) of paragraph 11(b)(i) of this Section 4.2.2 have been met with respect to any subsequent Restricted Payments. Notwithstanding the foregoing, in the event the proceeds of an issuance of Junior Securities are used -72- for the redemption, repurchase or other acquisition of the Exchangeable Preferred, or Parity Securities, then the Net Cash Proceeds of such issuance shall be included in clause (3) of paragraph 11(b)(i)(C) of this Section 4.2.2 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Exchangeable Preferred or Parity Securities. (c) Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. So long as any shares of Exchangeable Preferred are outstanding, the Corporation will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Corporation or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Corporation or any other Restricted Subsidiary, (iii) make loans or advances to the Corporation or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Corporation or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in any agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders of the Exchangeable Preferred than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Corporation or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first sentence of this paragraph 11(c), (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Corporation or any Restricted Subsidiary not otherwise prohibited hereunder or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Corporation or any Restricted Subsidiary in any manner material to the Corporation or any Restricted Subsidiary; or (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this paragraph 11(c) shall prevent the Corporation or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted pursuant to paragraph 11(f) of this Section 4.2.2 or (2) restricting the sale or other disposition of property or assets of the Corporation or any of its Restricted Subsidiaries that secure Indebtedness of the Corporation or any of its Restricted Subsidiaries. -73- (d) Limitation on Issuances and Sale of Capital Stock of Restricted Subsidiaries. The Corporation will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Corporation or a Wholly Owned Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary; (iv) with respect to common stock of ChoiceCom, MTN, StarCom and Zycom; provided that the proceeds of any such sale under this clause (iv) shall be reinvested in the business of the Corporation and its Restricted Subsidiaries or used to repay Indebtedness of the Corporation or any of its Restricted Subsidiaries or Senior Securities; and (v) with respect to common stock of FOTI; provided that FOTI shall not retain any net proceeds from such sales or issuances in excess of $10 million in the aggregate and any net proceeds in excess of such $10 million shall be received by, or paid promptly by FOTI to, the Corporation or any Wholly Owned Restricted Subsidiary of the Corporation. (e) Limitation on Transactions with Shareholders and Affiliates. The Corporation will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Corporation or with any Affiliate of the Corporation or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Corporation or such Restricted Subsidiary than could be obtained, at the time of such transaction or at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors of the Corporation or (B) for which the Corporation or a Restricted Subsidiary delivers to the Transfer Agent a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Corporation or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Corporation and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Corporation who are not employees of the Corporation; (iv) any payments or other transactions pursuant to any tax-sharing agreement (or a similar agreement that is not materially adverse to the interests of Holders of the Exchangeable Preferred) between the Corporation and any other Person with which the Corporation files a consolidated tax return or with which the Corporation is part of a consolidated group for tax purposes; or (v) any Restricted Payments not prohibited by paragraph 11(b) of this Section 4.2.2. Notwithstanding the foregoing, any transaction covered by the first sentence of this paragraph 11(e) and not covered by clauses (ii) through (iv) of the preceding sentence, the aggregate amount of which exceeds $2 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) of the preceding sentence. -74- (f) Limitation on Liens. The Corporation will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties, now or hereafter acquired, or any shares of Capital Stock of or Indebtedness of any Restricted Subsidiary. The foregoing limitation does not apply to (i) Liens existing on the Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Corporation or its Restricted Subsidiaries created in favor of the Holders of the Exchangeable Preferred; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Corporation or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Corporation or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under paragraph 11(a)(ii)(C) of this Section 4.2.2; provided that such Liens do not extend to or cover any property or assets of the Corporation or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens with respect to assets or properties of any Person that becomes a Restricted Subsidiary after the Closing Date; provided that such Liens do not extend to or cover any assets or properties of the Corporation or any of its Restricted Subsidiaries other than the assets or properties of such Person subject to such Lien on the date such Person becomes a Restricted Subsidiary; and provided further that such Liens are not incurred in contemplation of, or in connection with, such Person becoming a Restricted Subsidiary; (vi) Permitted Liens; and (vii) Liens securing Indebtedness. (g) Merger, Consolidation and Sale of Assets. The Corporation shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person (other than a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than common stock in the surviving Person or the Corporation) shall be issued or distributed to the shareholders of the Corporation) or permit any Person to merge with or into the Corporation unless: (i) the Corporation shall be the continuing Person, or the Person (if other than the Corporation) formed by such consolidation or into which the Corporation is merged or that acquired or leased such property and assets of the Corporation shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and the Exchangeable Preferred shall be converted into or exchanged for and shall become shares of such successor company, having in respect of such successor or resulting company substantially the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon that the Exchangeable Preferred had immediately prior to such transaction; (ii) immediately after giving effect to such transaction, no event referred to under paragraph 10(b)(i)(A)(1) through (5) of this Section 4.2.2 or any default, breach or violation that would become such an event after the giving of notice, the passage of time or both, shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Corporation or any Person becoming the successor issuer of the Exchangeable Preferred, as the case may be, shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth -75- of the Corporation immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis the Corporation, or any Person becoming the successor issuer of the Exchangeable Preferred, as the case may be, could Incur at least $1.00 of Indebtedness under paragraph 11(a)(i) of this Section 4.2.2; and (v) the Corporation delivers to the Transfer Agent an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv) above) and an opinion of counsel, in each case stating that such consolidation, merger or transfer complies with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided, however, that clauses (iii) and (iv) above shall not apply if, in the good faith determination of the Board of Directors of the Corporation evidenced by a board resolution, the principal purpose of such transaction is part of a plan to change the jurisdiction of incorporation of the Corporation to a different state of the United States; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. (h) Senior Subordinated Indebtedness. So long as any shares of Exchangeable Preferred are outstanding, the Corporation will not Incur any Indebtedness, other than the Exchange Debentures, that is expressly made subordinated in right of payment to any Senior Indebtedness (as defined in the Indenture) unless such Indebtedness, by its terms and by the terms of any agreement or instrument pursuant to which such Indebtedness is outstanding is expressly made pari passu with, or subordinate in right of payment to, the Exchange Debentures pursuant to provisions substantially similar to those contained in Article Eleven of the Indenture; provided that the foregoing limitations shall not apply to distinctions between categories of Senior Indebtedness that exist by reason of any Liens or Guarantees arising or created in respect of some but not all Senior Indebtedness. (i) Reports. So long as any shares of Exchangeable Preferred are outstanding, the Corporation shall file with the Securities and Exchange Commission (the "Commission") the annual reports, quarterly reports and the information, documents and other reports required to be filed by the Corporation with the Commission pursuant to Sections 13 or 15 of the Exchange Act, whether or not the Corporation has or is required to have a class of securities registered under the Exchange Act, at the time it is or would be required to file the same with the Commission and, within 15 days after the Corporation is or would be required to file such reports, information or documents with the Commission, shall mail such reports, information and documents to the Transfer Agent and to each Holder, or shall supply such reports to the Transfer Agent for forwarding to each Holder, at such Holder's address set forth on the register maintained by the Transfer Agent. 12. Transfer and Legending of Shares. No transfer of shares of the Exchangeable Preferred shall be effective until such transfer is registered on the books of the Corporation. Until registered under the Securities Act or the expiration of the time period referred to in Rule 144(k) (as then in effect) under the Securities Act, all shares of Exchangeable Preferred will bear the following legend: -76- THIS PREFERRED STOCK HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS PREFERRED STOCK IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS PREFERRED STOCK, RESELL OR OTHERWISE TRANSFER THIS PREFERRED STOCK EXCEPT (A) TO ICG HOLDINGS, INC. (THE "CORPORATION") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS PREFERRED STOCK (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) OR (F) AFTER REGISTRATION UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS PREFERRED STOCK IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS PREFERRED STOCK WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST EXECUTE A LETTER (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRANSFER AGENT) RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRANSFER AGENT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE -77- SECURITIES ACT. THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE CORPORATION CONTAINS A PROVISION REQUIRING THE TRANSFER AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THIS PREFERRED STOCK IN VIOLATION OF THE FOREGOING RESTRICTIONS. The Corporation shall refuse to register any attempted transfer of shares of Exchangeable Preferred not in compliance with this paragraph 12. 13. Amendments and Waivers. Notwithstanding any other provisions hereof and to the extent allowable from time to time by applicable law, the Board of Directors may, by duly adopted resolution, amend any of the provisions of the Second Amended and Restated Articles of Incorporation, without notice to or any consent or approval of any of the Holders of Exchangeable Preferred, for the following purposes: (1) to cure any ambiguity, defect or inconsistency in the First Amended and Restated Articles of Incorporation; provided that such amendment does not and will not adversely affect the interests of the Holders of Exchangeable Preferred in any material respect; or (2) to make any change that the Board of Directors determines in good faith does not materially and adversely affect the rights of any Holder of Exchangeable Preferred. Except as provided in the preceding sentence, any right, preference, privilege or power of, or restriction provided for the benefit of, the Exchangeable Preferred set forth herein may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Corporation and the affirmative vote or written consent of the Holders of at least a majority of the shares of Exchangeable Preferred then outstanding, and any amendment or waiver so effected shall be binding upon the Corporation and all Holders of the Exchangeable Preferred. 14. Rules of Construction. The descriptive headings in this Section 4.2.2 are inserted for convenience of reference only and are not intended to be part of or affect the meaning or interpretation of any provision of this Section 4.2.2. Words used in this Section 4.2.2, regardless of the gender and number specifically used, shall be deemed and construed to include any other gender, masculine, feminine, or neuter, and any other number, singular or plural, as the context requires. As used in this Section 4.2.2, the word "including" is not limiting, and the word "or" is not exclusive. ARTICLE V Cumulative voting of shares of stock is not permitted. Shareholders shall not have preemptive rights to acquire additional unissued or treasury shares of the Corporation. The Corporation may issue and -78- sell shares of its stock to its officers, directors or employees without first offering such shares to its shareholders for such consideration and upon such terms and conditions as shall be approved by the Board of Directors and without approval by the shareholders of the Corporation. ARTICLE VI The Board of Directors may cause any shares issued by the Corporation to be issued subject to such lawful restrictions, qualifications, limitations or special rights as they deem fit, which restrictions, qualifications, limitations or special rights shall be created by provisions in the Bylaws of the Corporation or in the duly adopted resolutions of the Board of Directors; provided that notice of such special restrictions, qualifications, limitations or special rights must appear on the certificate evidencing ownership of such shares. ARTICLE VII Subject to the provisions of Sections 4.2.1 and 4.2.2 of Article IV, meetings of shareholders may be held at such time and place as the Bylaws shall provide. A majority of the shares entitled to vote represented in person or by proxy shall constitute a quorum at any meeting of the shareholders. ARTICLE VIII Subject to the provisions of Sections 4.2.1 and 4.2.2 of Article IV, the number of directors to be elected at the annual meeting of shareholders or at a special meeting called for the election of directors shall not be less than three, nor more than nine, the exact number to be fixed by the Bylaws; provided, however, that there need be only as many directors as there are shareholders in the event that the outstanding shares are held of record by fewer than three shareholders. ARTICLE IX A director of this Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director except that this provision shall not limit the liability of a director to the Corporation or to its shareholders for monetary damages for: (i) any breach of the director's duty of loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts specified in Section 7-108-403 of the Colorado Business Corporation Act as the same may be amended from time to time; or (iv) any transaction from which the director derived an improper personal benefit. If the Colorado Business Corporation Act is amended to authorize corporate actions further limiting or eliminating the personal liability of directors, then the liability of a director of the Corporation shall be limited or eliminated to the fullest extent permitted by the Colorado Business Corporation Act, as so amended. -79- Any repeal or modification of the foregoing Article IX by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE X The officers, directors and other members of management of this Corporation shall be subject to the doctrine of corporate opportunities only insofar as it applies to business opportunities in which this Corporation has expressed an interest as determined from time to time by the Corporation's Board of Directors as evidenced by resolutions appearing in the Corporation's Minutes. When such areas of interest are delineated, all such business opportunities within such areas of interest which come to the attention of the officers, directors and other members of management of this Corporation shall be disclosed promptly to this Corporation and made available to it. The Board of Directors may reject any business opportunity presented to it and thereafter any officer, director or other member of management may avail himself/herself of such opportunity. Until such time as this Corporation, through its Board of Directors, has designated an area of interest, the officers, directors and other members of management of this Corporation shall be free to engage in such areas of interest on their own and this doctrine shall not limit the rights of any officer, director or other member of management of this Corporation to continue a business existing prior to the time that such area of interest is designated by this Corporation. This provision shall not be construed to release any employee of the Corporation (other than an officer, director or member of management) from any duties which he/she may have to the Corporation. ARTICLE XI Any of the directors or officers of this Corporation shall not, in the absence of fraud, be disqualified by his/her office from dealing or contracting with this Corporation whether as vendor, purchaser or otherwise, nor shall any firm, association, or Corporation of which he/she shall be a member, or in which he/she may be pecuniarily interested in any manner be disqualified. No director or officer, nor any firm, association or corporation with which he/she is connected as aforesaid shall be liable to account to this Corporation or its shareholders for any profit realized by him/her from or through any such transaction or contract; it being the express purpose and intent of this Article to permit this Corporation to buy from, sell to, or otherwise deal with partnerships, firms or corporations of which the directors and officers of this Corporation, or any one or more of them, may be members, directors, or officers, or in which they or any of them have pecuniary interests; and the contracts of this Corporation, in the absence of fraud, shall not be void or voidable or affected in any manner by reason of any such membership. The interested director or directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof authorizing, approving, or ratifying any such contract or transaction. Further, the vote of any such interested director at a meeting of the Board of Directors or committee thereof authorizing, approving or ratifying any such contract or transaction may be counted if his/her relationship or interest with respect to any such contract or -80- transaction (i) is disclosed and such transaction or contract is authorized, approved or ratified by a majority of the directors without counting the vote or consent of such interested director, or (ii) is disclosed to the shareholders of the Corporation and authorized, approved or ratified by the shareholders by vote or written consent, or (iii) such contract or transaction is fair and reasonable to the Corporation. ARTICLE XII When with respect to any action to be taken by shareholders of this Corporation, the Colorado Business Corporation Act requires the vote or concurrence of the holders of two-thirds of the outstanding shares entitled to vote thereon, or of any class or series, such action may be taken by the vote or concurrence of a majority of such shares or class or series thereof. ARTICLE XIII Subject to repeal by action of the shareholders, the Board of Directors of this Corporation is authorized to adopt, confirm, ratify, alter, amend, rescind and repeal Bylaws or any portion thereof from time to time. ARTICLE XIV The address of the Corporation's registered office is 9605 E. Maroon Circle, Englewood, Colorado 80112 and the name of the registered agent at such address is James D. Grenfell. -81- EX-10 6 10.29 ICG COMMUNICATIONS, INC. 1998 STOCK OPTION PLAN -------------------- Effective as of January 1, 1998 ICG Communications, Inc. 1998 Stock Option Plan INTRODUCTION ICG Communications, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), hereby establishes an incentive compensation plan to be known as the "ICG Communications, Inc. 1998 Stock Option Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Non-Qualified Stock Options and Incentive Stock Options. The purpose of the Plan is to promote the success and enhance the value of the Corporation by linking the personal interests of Participants to those of the Corporation's stockholders by providing Participants with an incentive for outstanding performance. The Plan is further intended to assist the Corporation in its ability to motivate, and retain the services of, Participants upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. DEFINITIONS For purposes of this Plan, the following terms shall be defined as follows unless the context clearly indicates otherwise: A. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder. B. "Committee" shall mean the Stock Option Committee of the Board of Directors of the Corporation. C. "Common Stock" shall mean the common stock, $.01 par value, of the Corporation. D. "Corporation" shall mean ICG Communications, Inc., a Delaware corporation. E. "Director Participant" shall mean a director of the Corporation or of any Parent or Subsidiary on the date of a grant of Options under Section V(B) hereof who is not a common law employee of the Corporation, any Parent or any Subsidiary. F. "Disability" shall have the same meaning as the term "permanent and total disability" under Section 22(e)(3) of the Code. G. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. H. "Executive" shall mean an employee of the Corporation or of any Parent or Subsidiary whose compensation is subject to the deduction limitations set forth under Code Section 162(m). I. "Fair Market Value" of the Corporation's Common Stock on a Trading Day shall mean the last reported sale price for Common Stock or, in case no such reported sale takes place on such Trading Day, the average of the closing bid and asked prices for the Common Stock for such Trading Day, in either case on the principal securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any securities exchange, but is traded in the over-the-counter market, the closing sale price of the Common Stock or, if no sale is publicly reported, the 2 average of the closing bid and asked quotations for the Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any comparable system or, if the Common Stock is not listed on NASDAQ or a comparable system, the closing sale price of the Common Stock or, if no sale is publicly reported, the average of the closing bid and asked prices, as furnished by two members of the National Association of Securities Dealers, Inc. who make a market in the Common Stock selected from time to time by the Corporation for that purpose. In addition, for purposes of this definition, a "Trading Day" shall mean, if the Common Stock is listed on any securities exchange, a business day during which such exchange was open for trading and at least one trade of Common Stock was effected on such exchange on such business day, or, if the Common Stock is not listed on any national securities exchange but is traded in the over-the-counter market, a business day during which the over-the-counter market was open for trading and at least one "eligible dealer" quoted both a bid and asked price for the Common Stock. An "eligible dealer" for any day shall include any broker-dealer who quoted both a bid and asked price for such day, but shall not include any broker-dealer who quoted only a bid or only an asked price for such day. In the event the Corporation's Common Stock is not publicly traded, the Fair Market Value of such Common Stock shall be determined by the Committee in good faith. J. "Good Cause" shall mean (i) a Participant's willful or gross misconduct or willful or gross negligence in the performance of his duties for the Corporation or for any Parent or Subsidiary after prior written notice of such misconduct or negligence and the continuance thereof for a period of 30 days after receipt by such Participant of such notice, (ii) a Participant's intentional or habitual neglect of his duties for the Corporation or for any Parent or Subsidiary after prior written notice of such neglect, or (iii) a Participant's theft or misappropriation of funds of the Corporation or of any Parent or Subsidiary or commission of a felony. K. "Incentive Stock Option" shall mean a stock option satisfying the requirements for tax-favored treatment under Section 422 of the Code. L. "Non-Qualified Option" shall mean a stock option which does not satisfy the requirements for, or which is not intended to qualify for, tax-favored treatment under Section 422 of the Code. M. "Option" or "Plan Award" shall mean an Incentive Stock Option or a Non-Qualified Stock Option granted pursuant to the provisions of Section V hereof. N. "Optionee" shall mean a Participant who is granted an Option under the terms of this Plan. O. "Outside Directors" shall mean members of the Board of Directors of the Corporation who are classified as "outside directors" under Section 162(m) of the Code. P. "Parent" shall mean a parent corporation of the Corporation within the meaning of Section 424(e) of the Code. Q. "Participant" shall mean any employee of the Corporation or any Parent or Subsidiary, or a Director Participant, participating under the Plan. 3 R. "Plan Quarter" shall mean the three calendar month periods beginning January 1st, April 1st, July 1st and October 1st. S. "Retirement" shall mean the termination of employment by a Participant in the Plan from the Corporation or from any Parent or Subsidiary, who at the time of such termination is at least fifty-five (55) years of age and who has completed at least ten (10) years of service (at least 1,000 hours in any fiscal year) with the Corporation or any Parent or Subsidiary, or any combination thereof. T. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder. U. "Subsidiary" shall mean a subsidiary corporation of the Corporation within the meaning of Section 424(f) of the Code. 4 SECTION I. ADMINISTRATION The Plan shall be administered by the Committee, which shall be composed solely of at least two Non-Employee Directors, as defined in Rule 16b-3(b)(3) promulgated under the Exchange Act, and who also qualify as Outside Directors. Subject to the provisions of the Plan, the Committee may establish from time to time such regulations, provisions, proceedings and conditions of awards which, in its opinion, may be advisable in the administration of the Plan. A majority of the Committee shall constitute a quorum, and, subject to the provisions of Section IV of the Plan, the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be the acts of the Committee. SECTION II. SHARES AVAILABLE Subject to the adjustments provided in Section VI of the Plan, the aggregate number of shares of the Common Stock which may be granted for all purposes under the Plan shall be 3,400,000 shares. Shares of Common Stock underlying awards of Options shall be counted against the limitation set forth in the immediately preceding sentence and may be reused to the extent that (i) an Option expires, is terminated unexercised, or is forfeited or (ii) shares of Common Stock are returned to the Corporation's treasury as a result of any form of "cashless" exercise of Options or tax withholding of shares permitted by the Committee under Section IV hereof. Incentive and Non-Qualified Stock Options awarded under the Plan may be fulfilled in accordance with the terms of the Plan with either authorized and unissued shares of the Common Stock, issued shares of such Common Stock held in the Corporation's treasury or shares of Common Stock acquired on the open market. SECTION III. ELIGIBILITY Officers and employees (including officers or employees who are also directors) of the Corporation, or of any Parent or Subsidiary, who are regularly employed on a salaried basis as common law employees shall be eligible to participate in the Plan. Directors of the Corporation, or of any Parent or Subsidiary, who are not common law employees of the Corporation or of any Parent or Subsidiary shall also be eligible to participate in the Plan, but only to the extent provided under Section V(B) hereof and, where appropriate under this Plan, shall be referred to as "employees" and their service as directors as "employment". 5 SECTION IV. AUTHORITY OF COMMITTEE The Plan shall be administered by, or under the direction of, the Committee, which shall administer the Plan so as to comply at all times with Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, to the extent such compliance is required, and shall otherwise have plenary authority to interpret the Plan and to make all determinations specified in or permitted by the Plan or deemed necessary or desirable for its administration or for the conduct of the Committee's business. Subject to the provisions of Section X hereof, all interpretations and determinations of the Committee may be made on an individual or group basis and shall be final, conclusive and binding on all interested parties. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the persons to whom Plan Awards shall be granted, the times when such Plan Awards shall be granted, the number of Plan Awards, the exercise price of each Plan Award, the period(s) during which such Plan Award shall be exercisable (whether in whole or in part), the restrictions to be applicable to Plan Awards and the other terms and provisions thereof (which need not be identical). In addition, the authority of the Committee shall include, without limitation, the following: A. Financing. The arrangement of temporary financing for an Optionee by registered broker-dealers, under the rules and regulations of the Federal Reserve Board, for the purpose of assisting the Optionee in the exercise of an Option, such authority to include the payment by the Corporation of the commissions of the broker-dealer; B. Procedures for Exercise of Option. The establishment of procedures for an Optionee (i) to exercise an Option by payment of cash or any other property acceptable to the Committee, (ii) to have withheld from the total number of shares of Common Stock to be acquired upon the exercise of an Option that number of shares having a Fair Market Value, which, together with such cash as shall be paid in respect of fractional shares, shall equal the option exercise price of the total number of shares of Common Stock to be acquired, (iii) to exercise all or a portion of an Option by delivering that number of shares of Common Stock already owned by him having a Fair Market Value which shall equal the Option exercise price for the portion exercised and, in cases where an Option is not exercised in its entirety, to permit the Optionee to deliver the shares of Common Stock thus acquired by him in payment of shares of Common Stock to be received pursuant to the exercise of additional portions of such Option, the effect of which shall be that an Optionee can in sequence utilize such newly acquired shares of Common Stock in payment of the exercise price of the entire Option, together with such cash as shall be paid in respect of fractional shares and (iv) to engage in any form of "cashless" exercise. C. Withholding. The establishment of a procedure whereby a number of shares of Common Stock or other securities may be withheld from the total number of shares of Common Stock or other securities to be issued upon exercise of an Option, or for the tender of cash or shares of Common Stock owned by any 6 Participant to meet any obligation of withholding for taxes incurred by the Optionee upon such exercise. D. Types of Plan Awards. The Committee may grant awards in the form of Incentive Stock Options and Non-Qualified Stock Options. SECTION V. STOCK OPTIONS A. For Employees. The Committee shall have the authority, in its discretion, to grant Incentive Stock Options or to grant Non-Qualified Stock Options or to grant both types of Options. No Option shall be granted for a term of more than ten (10) years. Notwithstanding anything contained herein to the contrary, an Incentive Stock Option may be granted only to common law employees of the Corporation or of any Parent or Subsidiary now existing or hereafter formed or acquired, and not to any director or officer who is not also such a common law employee. In order to satisfy the "performance-based" exception to the deduction limitation under Code Section 162(m), the maximum number of shares of Common Stock subject to Options which may be granted to any single Executive during any one calendar year is 300,000. The terms and conditions of the Options shall be determined from time to time by the Committee; provided, however, that the Options granted under the Plan shall be subject to the following: I. Exercise Price. The Committee shall establish the exercise price at the time any Option is granted at such amount as the Committee shall determine; provided, however, that the exercise price for each share of Common Stock purchasable under any Option which is intended to satisfy the performance-based exception to the deduction limitation under Section 162(m) of the Code or any Incentive Stock Option granted hereunder shall be such amount as the Committee shall, in its best judgment, determine to be not less than one hundred percent (100%) of the Fair Market Value per share of Common Stock at the date the Option is granted; and provided, further, that in the case of an Incentive Stock Option granted to a person who, at the time such Incentive Stock Option is granted, owns shares of stock of the Corporation or of any Parent or Subsidiary which possess more than ten percent (10%) of the total combined voting power of all classes of shares of stock of the Corporation or of any Parent or Subsidiary, the exercise price for each share of Common Stock shall be such amount as the Committee, in its best judgment, shall determine to be not less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock at the date the Option is granted. The exercise price will be subject to adjustment in accordance with the provisions of Section VI of the Plan. (ii) Payment of Exercise Price. The price per share of Common Stock with respect to each Option shall be payable at the time the Option is exercised. Such price shall be payable in cash or pursuant to any of the methods set forth in Sections IV(A) or (B) hereof. Shares of Common Stock delivered to the Corporation in payment of the exercise price shall be 7 valued at the Fair Market Value of the Common Stock on the date preceding the date of the exercise of the Option. (iii) Employment Requirement. Notwithstanding anything else contained herein, each Option by its terms shall require the Optionee to remain in the continuous full-time employ of the Corporation, or of any Parent or Subsidiary, for at least six (6) months from the date of grant of the Option before the right to exercise any part of the Option (by him or any other person) will accrue. (iv) Exercisability of Options. Each Option shall be exercisable in whole or in installments, and at such time(s), and subject to the fulfillment of any conditions on exercisability as may be determined by the Committee at the time of the grant of such Options. The right to purchase shares of Common Stock shall be cumulative so that when the right to purchase any shares of Common Stock has accrued such shares of Common Stock or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. Unless otherwise determined by the Committee in its sole discretion, each Option granted hereunder shall be exercisable, on a cumulative basis, as to twenty-five percent (25%) of the shares of Common Stock set forth thereunder on each of the first, second, third and fourth anniversaries of the date such Option is granted. (v) Expiration of Options. No Option by its terms shall be exercisable after the expiration of ten (10) years from the date of grant of the Option; provided, however, in the case of an Incentive Stock Option granted to a person who, at the time such Option is granted, owns shares of stock of the Corporation or of any Parent or Subsidiary possessing more than ten percent (10%) of the total combined voting power of all classes of shares of stock of the Corporation or of any Parent or Subsidiary, such Option shall not be exercisable after the expiration of five (5) years from the date such Option is granted. (vi) Exercise Upon Death of Optionee. Subject to the provisions of Sections V(A)(iii) and V(A)(ix) hereof, in the event of the death of the Optionee prior to his termination of employment with the Corporation or with any Parent or Subsidiary, or within 3 (three) months following his Retirement, his estate (or other beneficiary, if so designated in writing by the Participant) shall have the right, within one (1) year after the date of death (but in no case after the expiration date of the Option(s)), to exercise his Option(s) with respect to all or any part of the shares of Common Stock as to which the deceased Optionee had not exercised his Option at the time of his death, but only to the extent the Option or Options were exercisable as of the earlier of the date of his Retirement or the date of his death. (vii) Exercise Upon Disability of Optionee. Subject to the provisions of Sections V(A)(iii) and V(A)(ix) hereof, if the employment by the Corporation or by any Parent or Subsidiary of an Optionee is terminated because of Disability, he shall have the right, within one (1) year after the date of such termination (but in no case after the expiration of the Option(s)), to exercise his Option(s) with respect to all or any part of 8 the shares of Common Stock as to which he had not exercised his Option at the time of such termination, but only to the extent such Option or Options were exercisable as of the date of his termination of employment due to Disability. (viii) Exercise Upon Optionee's Termination of Employment. Except as provided in the following sentence, if the employment of an Optionee by the Corporation or by any Parent or Subsidiary is terminated for any reason other than those specified in Sections V(A)(vi) and V(A)(vii) above, he shall have the right, within three (3) months after the date of such termination (but in no case after the expiration date of the Option(s)), to exercise his Option(s) only with respect to that number of shares of Common Stock that he was entitled to purchase pursuant to Options that were exercisable immediately prior to such termination. Notwithstanding the provisions of the immediately preceding sentence, if an Optionee's employment is terminated by the Corporation or by any Parent or Subsidiary for Good Cause, the Optionee shall, at the time of such termination of employment, forfeit his rights to exercise all of such Option(s). (ix) Maximum Amount of Incentive Stock Options. Each Plan Award under which Incentive Stock Options are granted shall provide that to the extent the aggregate of the (a) Fair Market Value of the shares of Common Stock (determined as of the time of the grant of the Option) subject to such Incentive Stock Option and (b) the Fair Market Values (determined as of the date(s) of grant of the options) of all other shares of Common Stock subject to incentive stock options granted to an Optionee by the Corporation or any Parent or Subsidiary, which are exercisable for the first time by any person during any calendar year, exceed(s) one hundred thousand dollars ($100,000), such excess shares of Common Stock shall not be deemed to be purchased pursuant to Incentive Stock Options. The terms of the immediately preceding sentence shall be applied by taking options into account in the order in which they are granted. B. For Director Participants. (i) General Provisions - Formula Grant Options. Subject to the terms and conditions of this Section V(B), as of January 1, 1998, and as of January 1 of each succeeding calendar year through and including January 1, 2007, each individual who is serving as a Director on such date shall automatically be granted Options to purchase twenty thousand (20,000) shares of Common Stock, subject to availability under the Plan. Notwithstanding the foregoing, each individual who is serving as a Director and receives formula grant options under Section V(B)(i) of the Corporation's 1996 Stock Option Plan, as amended, shall not be eligible to receive grants of Options under Section V(B)(i) of this Plan covering the same periods. In the event that an individual becomes a Director during any Plan Quarter, but did not serve as a Director on January 1, such individual shall automatically be granted, as of the date of election of such individual as a Director, Options to purchase that pro rata number of shares of Common Stock for such calendar year as a Director would otherwise be entitled to receive under this Section V(B)(i) (at the rate of 5,000 shares per Plan Quarter, subject to the last sentence of this Section V(B)(i)). Subject to the provisions of Section VI hereunder, the option 9 price of the shares of Common Stock covered by each Option shall be the Fair Market Value of such shares on the date of the grant. Each Option granted under this Section V(B)(i) by its terms shall expire ten (10) years from the date of its grant. Furthermore, an Option granted pursuant to this Section V(B)(i) shall become exercisable as to 5,000 shares of Common Stock covered thereby on the last day of the Plan Quarter during which the date of grant occurs and as to 5,000 shares on the last day of each of the next succeeding Plan Quarters during such year, respectively, but only if, with regard to the shares of Common Stock with respect to which the Option becomes exercisable at the end of any Plan Quarter, the Director has served in such capacity on an uninterrupted basis for more than fifty percent (50%) of the business days contained in such Plan Quarter. (ii) General Provisions - Discretionary Option Grants. The Committee shall have the authority, in its discretion, to grant to one or more Directors from time to time Non-Qualified Stock Options. No Option shall be granted for a term of more than ten (10) years. The Committee shall establish the exercise price at the time any Option is granted at such amount as the Committee shall determine. The exercise price will be subject to adjustment in accordance with the provisions of Section VI of the Plan. Except as otherwise expressly provided in this Section V, the terms and conditions of the Options shall be determined by the Committee. (iii)Payment of Exercise Price. The price per share of Common Stock with respect to each Option shall be payable at the time the Option is exercised. Such price shall be payable in cash or pursuant to any of the methods set forth in Sections IV(A) or (B) hereof. Shares of Common Stock delivered to the Corporation in payment of the exercise price shall be valued at the Fair Market Value of the Common Stock on the date preceding the date of the exercise of the Option. (iv) Exercisability of Options. Each Option shall be exercisable in whole or in installments, and at such time(s), and subject to the fulfillment of any conditions on exercisability as may be determined by the Committee at the time of the grant of such Options. The right to purchase shares of Common Stock shall be cumulative so that when the right to purchase any shares of Common Stock has accrued such shares of Common Stock or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. (v) Director's Termination. If a Director's service as a director of the Corporation is terminated by reason of (1) his Disability, (2) the failure of the Corporation to retain, or nominate for re-election, such Director (who is otherwise eligible) other than for Good Cause, (3) his ineligibility for re-election pursuant to the Corporation's By-laws, or (4) his voluntary termination of such directorship, such termination shall be considered a "Qualifying Termination" and each Option granted to such Director, to the extent exercisable (and not exercised) on the date of such Qualifying Termination, shall remain so exercisable by him until the end of the exercise period under such Option. If a Director's service as a director of the Corporation or of any Parent or Subsidiary is terminated for Good Cause, such termination shall be considered a "Non-Qualifying Termination." In the event of a Non-Qualifying Termination, all outstanding unexercised stock options granted pursuant to this Section V(B) shall be forfeited or canceled, as the case may be. 10 (vi) Director's Death. If a Director dies while holding an outstanding Option, such Option, to the extent exercisable (and not exercised) on the date of his death, shall remain so exercisable by his estate (or other beneficiaries, as designated in writing by such Director) until the end of the exercise period under the Option. SECTION VI. ADJUSTMENT OF SHARES; MERGER OR CONSOLIDATION, ETC. OF THE CORPORATION A. Recapitalization, Etc. In the event there is any change in the Common Stock of the Corporation by reason of any reorganization, recapitalization, stock split, stock dividend or otherwise, there shall be substituted for or added to each share of Common Stock theretofore appropriated or thereafter subject, or which may become subject, to any Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, or to which each such share be entitled, as the case may be, and the per share price thereof also shall be appropriately adjusted. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Stock Option shall comply with the rules of Section 424(a) of the Code and (ii) in no event shall any adjustment be made which would render any Incentive Stock Option granted hereunder to be other than an incentive stock option for purposes of Section 422 of the Code. B. Merger, Consolidation or Change in Control of Corporation. Upon (i) the merger or consolidation of the Corporation with or into another corporation (pursuant to which the stockholders of the Corporation immediately prior to such merger or consolidation will not, as of the date of such merger or consolidation, own a beneficial interest in shares of voting securities of the corporation surviving such merger or consolidation having at least a majority of the combined voting power of such corporation's then outstanding securities), if the agreement of merger or consolidation does not provide for (1) the continuance of the Options granted hereunder or (2) the substitution of new options for Options granted hereunder, or for the assumption of such Options by the surviving corporation, (ii) the dissolution, liquidation or sale of substantially all the assets of the Corporation or (iii) the Change in Control of the Corporation, the holder of any such Option theretofore granted and still outstanding (and not otherwise expired) shall have the right immediately prior to the effective date of such merger, consolidation, dissolution, liquidation, sale of assets or Change in Control of the Corporation to exercise such Option(s) in whole or in part without regard to any installment provision that may have been made part of the terms and conditions of such Option(s). The Corporation, to the extent practicable, shall give advance notice to affected Optionees of any such merger, consolidation, dissolution, liquidation, sale of 11 assets or Change in Control of the Corporation. All such Options which vest on an accelerated basis in accordance with this Section VI(B) and are not so exercised shall be forfeited as of the effective time of any merger, consolidation, dissolution, liquidation or sale of assets (but not in the case of a Change in Control of the Corporation). C. Definition of Change in Control of the Corporation. As used herein, a "Change in Control of the Corporation" shall be deemed to have occurred if any person (including any individual, firm, partnership or other entity) together with all Affiliates and Associates (as defined under Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act) of such person, but excluding (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, (ii) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation, (iii) the Corporation or any subsidiary of the Corporation or (iv) only as provided in the immediately following sentence, a Participant together with all Affiliates and Associates of a Participant, is or becomes the Beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% of more of the combined voting power of the Corporation's then outstanding securities, such person being hereinafter referred to as an Acquiring Person. The provisions of clause (iv) of the immediately preceding sentence shall apply only with respect to the Option(s) held by the Participant who, together with his Affiliates or Associates, if any, is or becomes the direct or indirect Beneficial Owner of the percentage of securities set forth in such clause. SECTION VII. MISCELLANEOUS PROVISIONS A. Administrative Procedures. The Committee may establish any procedures determined by it to be appropriate in discharging its responsibilities under the Plan. Subject to the provisions of Section X hereof, all actions and decisions of the Committee shall be final. B. Assignment or Transfer. No grant or award of any Incentive Stock Option or any other "derivative security" (as defined by Rule 16a-l(c) promulgated under the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable by a Participant except by will or the laws of descent and distribution or pursuant to a domestic relations order. During the lifetime of a Participant, Options granted hereunder shall be exercisable only by the Participant. C. Investment Representation. Upon the exercise of an Option, the Committee may require, as a condition of receiving such securities, that the Participant furnish to the Corporation such written representations and information as the Committee deems appropriate to permit the Corporation, in light of the existence or nonexistence of an effective registration statement under the Securities Act to deliver such securities in compliance with the provisions of the Securities Act. D. Withholding Taxes. The Corporation shall have the right to deduct from 12 all cash payments hereunder any federal, state, local or foreign taxes required by law to be withheld with respect to such payments. In the case of the issuance or distribution of Common Stock or other securities hereunder, the Corporation, as a condition of such issuance or distribution, may require the payment (through withholding from the Participant's salary, reduction of the number of shares of Common Stock or other securities to be issued, or otherwise) of any such taxes. The Participant may satisfy the withholding obligations by paying to the Corporation a cash amount equal to the amount required to be withheld or by tendering to the Corporation a number of shares of Common Stock having a value equivalent to such cash amount, or by use of any available procedure as described under Section IV(C) hereof. E. Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Corporation and shall not be charged against any award nor to any employee receiving a Plan Award. F. Funding of Plan. The Plan shall be unfunded. The Corporation shall not be required to segregate any of its assets to assure the payment of any Plan Award under the Plan. Neither the Participants nor any other persons shall have any interest in any fund or in any specific asset or assets of the Corporation or any other entity by reason of any Plan Award, except to the extent expressly provided hereunder. The interests of each Participant and former Participant hereunder are unsecured and shall be subject to the general creditors of the Corporation. G. Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. H. Plurals and Gender. Where appearing in the Plan, masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates a different meaning. I. Headings. The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof. J. Severability. In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein. K. Payments Due Missing Persons. The Corporation shall make a reasonable effort to locate all persons entitled to benefits under the Plan; however, notwithstanding any provisions of this Plan to the contrary, if, after a period of one (1) year from the date such benefits shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Corporation shall send a certified letter to all such persons at their last known addresses 13 advising them that their rights under the Plan shall be suspended. Subject to all applicable state laws, any such suspended amounts shall be held by the Corporation for a period of one (1) additional year and thereafter such amounts shall be forfeited and thereafter remain the property of the Corporation. L. Liability and Indemnification. (i) Neither the Corporation nor any Parent or Subsidiary shall be responsible in any way for any action or omission of the Committee, or any other fiduciaries in the performance of their duties and obligations as set forth in this Plan. Furthermore, neither the Corporation nor any Parent or Subsidiary shall be responsible for any act or omission of any of their agents, or with respect to reliance upon advice of their counsel provided that the Corporation and/or the appropriate Parent or Subsidiary relied in good faith upon the action of such agent or the advice of such counsel. (ii) Except for their own gross negligence or willful misconduct regarding the performance of the duties specifically assigned to them under, or their willful breach of the terms of, this Plan, the Corporation, each Parent and Subsidiary and the Committee shall be held harmless by the Participants, former Participants, beneficiaries and their representatives against liability or losses occurring by reason of any act or omission. Neither the Corporation, any Parent or Subsidiary, the Committee, nor any agents, employees, officers, directors or shareholders of any of them, nor any other person shall have any liability or responsibility with respect to this Plan, except as expressly provided herein. M. Incapacity. If the Committee shall receive evidence satisfactory to it that a person entitled to receive payment of any Plan Award is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such Plan Award and to give a valid release thereof, and that another person or an institution is then maintaining or has custody of such person and that no guardian, committee or other representative of the estate of such person shall have been duly appointed, the Committee may make payment of such Plan Award otherwise payable to such person to such other person or institution, including a custodian under a Uniform Gifts to Minors Act, or corresponding legislation (who shall be an adult, a guardian of the minor or a trust company), and the release by such other person or institution shall be a valid and complete discharge for the payment of such Plan Award. N. Cooperation of Parties. All parties to this Plan and any person claiming any interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary or desirable for carrying out this Plan or any of its provisions. O. Governing Law. All questions pertaining to the validity, construction and administration of the Plan shall be determined in accordance with the laws of the State of Delaware. P. Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Corporation (or any Parent or Subsidiary), and any employee or Participant, as a right of any employee or Participant to be continued in the employment of the Corporation (or any Parent 14 or Subsidiary), or as a limitation on the right of the Corporation or any Parent or Subsidiary to discharge any of its employees, with or without cause. Q. Notices. Each notice relating to this Plan shall be in writing and delivered in person or by certified mail to the proper address. All notices to the Corporation or the Committee shall be addressed to it at ICG Communications, Inc., 161 Inverness Drive West, Englewood, Colorado 80112, Attn: Secretary. All notices to Participants, former Participants, beneficiaries or other persons acting for or on behalf of such persons shall be addressed to such person at the last address for such person maintained in the Committee's records. R. Written Agreements. Each Plan Award shall be evidenced by a signed written agreement between the Corporation and the Participant containing the terms and conditions of the award. SECTION VIII. AMENDMENT OR TERMINATION OF PLAN The Board of Directors of the Corporation shall have the right to amend, suspend or terminate the Plan and the Options granted hereunder at any time and for any purpose (including, without limitation, an amendment necessary for an Option to maintain its qualification as an "incentive stock option" within the meaning of Section 422 of the Code, if applicable, or to comply with Rule 16b-3 (or any successor rule) promulgated under the Exchange Act); provided, however, that no amendment shall be made which shall increase the total number of shares of the Common Stock of the Corporation which may be issued and sold pursuant to Options or reduce the minimum exercise price in the case of an Incentive Stock Option, unless such amendment is made by or with the approval of the stockholders (such approval being granted within 12 months of the effective date of such amendment), but only if such approval is required by any applicable provisions of the Code. Such stockholder approval shall be effected by the affirmative vote of a majority of the votes cast by the holders of the outstanding shares of Common Stock present, by person or proxy, and voting on such amendment. Except as otherwise provided herein, no amendment, suspension or termination of the Plan shall alter or impair any Plan Awards previously granted under the Plan, without the consent of the holder thereof. SECTION IX. TERM OF PLAN The Plan shall remain in effect until December 31, 2007, which is the day prior to the tenth anniversary of the effective date of the Plan, unless sooner terminated by the Board of Directors of the Corporation. No Plan Awards may be granted under the Plan subsequent to the termination of the Plan. 15 SECTION X. CLAIMS PROCEDURES A. Denial. If any Participant, former Participant or beneficiary is denied any vested benefit to which he is, or reasonably believes he is, entitled under this Plan, either in total or in an amount less than the full vested benefit to which he would normally be entitled, the Committee shall advise such person in writing the specific reasons for the denial. The Committee shall also furnish such person at the time with a written notice containing (i) a specific reference to pertinent Plan provisions, (ii) a description of any additional material or information necessary for such person to perfect his claim, if possible, and an explanation of why such material or information is needed and (iii) an explanation of the Plan's claim review procedure. B. Written Request for Review. Within 60 days of receipt of the information stated in subsection (a) above, such person shall, if he desires further review, file a written request for reconsideration with the Committee. C. Review of Document. So long as such person's request for review is pending (including the 60 day period in subsection (b) above), such person or his duly authorized representative may review pertinent Plan documents and may submit issues and comments in writing to the Committee. D. Committee's Final and Binding Decision. A final and binding decision shall be made by the Committee within 60 days of the filing by such person of this request for reconsideration; provided, however, that if the Committee, in its discretion, feels that a hearing with such person or his representative is necessary or desirable, this period shall be extended for an additional 60 days. E. Transmittal of Decision. The Committee's decision shall be conveyed to such person in writing and shall (i) include specific reasons for the decision, (ii) be written in a manner calculated to be understood by such person and (iii) set forth the specific references to the pertinent Plan provisions on which the decision is based. F. Limitation on Claims. Notwithstanding any provisions of this Plan to the contrary, no Participant (nor the estate or other beneficiary of a Participant) shall be entitled to assert a claim against the Corporation (or against any Parent or Subsidiary) more than three years after the date the Participant (or his estate or other beneficiary) initially is entitled to receive benefits hereunder. 16 EX-10 7 10.30 Please sign and return within 30 days to: ICG Netcom, Attn: T. Corral, 161 Inverness Drive West, Englewood CO 80112 - ------------------------------------------------------------------------------- ICG Communications, Inc. 161 Inverness Drive West Stock Option Agreement Englewood, Colorado 80112 - ------------------------------------------------------------------------------- (Name) Option Number: 0000XXX (Address) Plan: 98A Reports to: ________________ ID: XXXXXXXXX - ------------------------------------------------------------------------------- Effective 6/3/98, the Date of Grant, you have been granted an Incentive Stock Option to buy XXX shares of ICG Communications, Inc. (the Company) stock an exercise price of $30.0000 per share, subject to vesting. Subject to your continued employment, the Incentive Stock Option will become vested as to the shares on the dates shown. Shares Vest Type Full Vest Expiration -------- --------- --------- ---------- XXX Annually 6/3/99 6/3/08 XXX Annually 6/3/00 6/3/08 - ------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that this Incentive Stock Option is granted under and governed by the terms and conditions of the Company's 1998 Stock Option Plan, as amended, and the Terms of Incentive Stock Option, all of which are made a part of this document and are available from the ICG Intranet or the Treasury Department. - ------------------------------------------------------------------------------- ICG Communications, Inc. /s/ Harry R. Herbst ----------------------------- By: Harry R. Herbst, Executive Vice President Date ------------------------------------------ ----------------------------- (Name) Date EX-10 8 10.31 AMENDMENT NO. 1 TO THE ICG COMMUNICATIONS, INC. 1998 STOCK OPTION PLAN Effective as of December 15, 1998, the ICG Communications, Inc. 1998 Stock Option Plan (the "Plan") is hereby amended as follows (all capitalized terms used herein shall have the meanings given to them in the Plan): Section V(B)(i) of the Plan is hereby amended by replacing such subsection in its entirety by the following Section V(B)(i): B. For Director Participants. I. General Provisions - Formula Grant Options. (a) Subject to the terms and conditions of this Section V(B), as of January 1, 1998 each individual who is serving as a Director Participant on such date shall automatically be granted Options to purchase twenty thousand (20,000) shares of Common Stock, subject to availability under the Plan. Notwithstanding the foregoing, each individual who is serving as a Director Participant and receives formula grant options under Section V(B)(i) of the Corporation's 1996 Stock Option Plan, as amended, shall not be eligible to receive grants of Options under Section V(B)(i) of this Plan covering the same periods. In the event that an individual becomes a Director Participant during any Plan Quarter during the 1998 calendar year, but did not serve as a Director Participant on January 1, 1998, such individual shall automatically be granted, as of the date of election of such individual as a Director Participant, Options to purchase that pro rata number of shares of Common Stock for such calendar year as a Director Participant would otherwise be entitled to receive under this Section V(B)(i) (at the rate of 5,000 shares per Plan Quarter, subject to the last sentence of subparagraph (c) below). (b) Subject to the terms and conditions of this Section V(B), as of December 15, 1998, and as of December 15 of each succeeding calendar year through and including December 15, 2006, each individual who is serving as a Director Participant on such date shall automatically be granted Options to purchase twenty thousand (20,000) shares of Common Stock, subject to availability under the Plan. Except as set forth in the following sentence, in the event that an individual becomes a Director Participant during any Plan Quarter subsequent to January 1, 1999, such individual shall automatically be granted, as of the date of election of such individual as a Director Participant, Options to purchase that pro rata number of shares of Common Stock for such calendar year as a Director Participant would otherwise be entitled to receive under this Section V(B)(i) (at the rate of 5,000 per Plan Quarter, subject to the following sentence and to the last sentence of subparagraph (c) below). In the event that an individual becomes a Director Participant during the period from December 16 through December 31 of any calendar year subsequent to January 1, 1999, the Director Participant shall automatically be granted Options to purchase the same number of shares as the other Director Participants were granted on the immediately preceding December 15, which Options shall vest over the course of the following calendar year as set forth in subparagraph (c) herein. (c) Subject to the provisions of Section VI hereunder, the option price of the shares of Common Stock covered by each Option shall be the Fair Market Value of such shares on the date of the grant. Each Option granted under this Section V(B)(i) by its terms shall expire ten (10) years from the date of its grant. Furthermore, an Option granted pursuant to this Section V(B)(i) shall become exercisable as to 5,000 shares of Common Stock covered thereby on the last day of the Plan Quarter during which the date of grant occurs (except with respect to Options granted on December 15 pursuant to subparagraph (b) above, which shall vest on March 31 of the following year) and, thereafter, as to 5,000 shares on the last day of each of the next succeeding Plan Quarters during such year, respectively, but only if, with regard to the shares of Common Stock with respect to which the Option becomes exercisable at the end of any Plan Quarter, the Director Participant has served in such capacity on an uninterrupted basis for more than fifty percent (50%) of the business days contained in such Plan Quarter. EX-10 9 10.32 December 16, 1998 (Name) ICG Communications, Inc. 161 Inverness Drive West Englewood, Colorado 80112 Dear (Name): ICG Communications, Inc. (the "Company") recognizes that your contribution to the growth and success of the Company as an executive officer of the Company has been and continues to be significant. Accordingly, the Company is entering into this Agreement (the "Agreement") with you in recognition of your past and continuing efforts as a valuable executive employee of the Company. 1. Effective Date of Agreement This Agreement shall become effective as of the date indicated above. 2. "Gross-Up Payment" (a) In the event any payments paid or payable to you by the Company or any benefits received or receivable by you from the Company are the type encompassed within Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (collectively, the "Executive Payments") and are subject to the tax imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed by the Internal Revenue Service), and/or any comparable or similar tax imposed by any state or local taxing authority, including, without limitation, any interest or penalties due thereon (collectively, the "Excise Tax"), the Company shall pay to you in cash an additional amount (the "Gross-Up Payment") such that the net amount retained by you after deduction of the Excise Tax on the Gross-Up Payment, as well as any other taxes (including without limitation Federal, state and local income taxes) due solely as a result of payment of the Gross-Up Payment, shall be equal to the full amount of the Executive Payments. (b) Nothing in this Section 2 shall be construed to require the Company to pay any amounts due by you in respect of Federal, state and local income taxes on the Executive Payments (other than the Excise Tax and the other taxes, interest and penalties, if any, referred to in Section 2(a)). (c) The Gross-Up Payment shall be made promptly upon the Company's receipt of notice from you and/or your tax advisor, which advisor shall be selected by you and reasonably satisfactory to the Company, of the reasonable determination that the Excise Tax is due and payable as a result of the Executive Payments. The Company shall make the Gross-Up Payment at the time such determination has been made that the Excise Tax is due and payable, whether or not you are still employed by the Company at such time. 3. Successors This Agreement will inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 4. Governing Law This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Colorado. 5. Additional Compensation This Agreement and the payments provided for herein are in addition to, and not in lieu of, any and all compensation arrangements, including without limitation, existing employment, stock option and other benefit plans and agreements, as applicable, now existing or hereinafter entered into, between you and the Company and its subsidiaries. 6. Survival This Agreement and the rights and obligations hereunder shall survive the termination of your employment with the Company and shall continue to be binding on the Company and its successors and assigns until all obligations hereunder have been satisfied in full. Kindly indicate your agreement with, and acknowledgement of, the terms of this Agreement by signing this letter where indicated below. Sincerely, ICG COMMUNICATIONS, INC. By:________________________ Name: (Name) Title: (Title) Acknowledged and agreed to as of the 16th day of December, 1998. - ------------------------ (Name) EX-27 10 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ICG COMMUNICATIONS, INC. AND SUBSIDIARIES FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 210,831 52,000 160,612 15,473 2,821 422,827 1,112,067 177,933 1,625,425 127,893 1,662,357 466,352 0 584 (631,761) 1,625,425 0 397,619 0 254,689 291,622 12,031 170,127 (295,057) (90) (350,330) (67,715) 0 0 (418,045) (9.25) 0
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