ICG COMMUNICATIONS INC /DE/ - 10-K Annual Report

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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)

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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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:
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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

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Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Financial Statement Schedule . . . . . . . . . . . . . . . . 66

FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . S-1

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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.

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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.

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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

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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

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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

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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

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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 provid