ITEM 1. BUSINESS
Overview
ICG Funding, LLC (the "Company") is a special purpose limited liability company formed on September 17, 1997 under the laws of the State of Delaware. The Company's principal executive offices are located at 161 Inverness Drive West, Englewood, Colorado 80112.
Pursuant to the terms of the Limited Liability Company Agreement of the Company, as amended and restated, dated as of September 23, 1997 (the "LLC Agreement"), the Company was formed solely for the purposes of: (i) issuing common and preferred interests in the Company; (ii) using at least 85% of the net proceeds of such issuances and related capital contributions (the "Net Proceeds") to purchase shares of preferred stock of ICG Communications, Inc. ("ICG") ("ICG Preferred Stock") in a private placement; (iii) investing a portion of the remaining Net Proceeds in U.S. Treasury securities, to be held in escrow in an amount sufficient to fund the cash payments of the first thirteen quarterly dividends on the Company's preferred interests (the "Redeemable Preferred Securities"); and (iv) purchasing U.S. Treasury securities pending the purchase of shares of ICG Preferred Stock. Unless previously dissolved, the Company's term will continue until December 31, 2050.
ICG is the sole common member of the Company. ICG is also the manager of the Company pursuant to the LLC Agreement and as such, manages the business and affairs of the Company. ICG does not receive any compensation for performing such management services. Additionally, all of the Company's administrative expenses, which are insignificant, are paid by ICG.
The Company does not manufacture or sell any products, does not provide any services to any party and does not intend to enter into any business, other than complying with its obligations under the Redeemable Preferred Securities and effecting the purposes as set forth in the LLC Agreement. The Company does not have any employees.
For financial information about the Company, see the financial statements included in response to Items 6 and 8 of Part II of this Annual Report on Form 10-K.
Key Transactions During Fiscal 1998
On February 13, 1998, ICG made a capital contribution of 126,750 shares of common stock of ICG, $0.01 par value ("ICG Common Stock"), to the Company. Immediately thereafter, the Company sold the contributed shares to unrelated third parties for proceeds of approximately $3.4 million. The Company recorded the contribution of the ICG Common Stock as additional paid-in capital at the then fair market value and, consequently, no gain or loss was recorded by the Company on the subsequent sale of those shares.
Also on February 13, 1998, the Company used the remaining proceeds from the private placement of the Redeemable Preferred Securities, which were not restricted for the payment of cash dividends, along with the proceeds from the sale of the contributed ICG Common Stock to purchase approximately $112.4 million of ICG Preferred Stock. The ICG Preferred Stock pays dividends each February 15, May 15, August 15 and November 15 in additional shares of ICG Preferred Stock through November 15, 2000. Subsequent to November 15, 2000, dividends on the ICG Preferred Stock are payable in cash or shares of ICG Common Stock, at the option of ICG. The ICG Preferred Stock is exchangeable, at the option of the Company, at any time prior to November 15, 2009 into shares of ICG Common Stock at an exchange rate based on the exchange rate of the Redeemable Preferred Securities. The ICG Preferred Stock is subject to mandatory redemption on November 15, 2009.
ITEM 2.
ITEM 2. PROPERTIES
At December 31, 1998, the Company's property consisted of: (i) U.S. Treasury securities in the amount of approximately $16.9 million held in escrow to pay quarterly cash dividends on the Redeemable Preferred Securities; and (ii) a receivable for preferred dividends earned on the ICG Preferred Stock of approximately $0.9 million. The Company does not own any real or tangible property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective October 19, 1998, ICG, Sole Common Member and Manager of the Company, caused the Company to declare a cash dividend in the amount of $0.47 per Redeemable Preferred Security to holders of record at the close of business on November 1, 1998, which was paid on November 15, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITYHOLDER MATTERS
To date, the one issued and outstanding common security of the Company is held by ICG. There exists no established public trading market for the Company's common securities ("Common Securities"). ICG purchased one share of Common Securities on September 17, 1997 in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). No underwriters were involved in the placement and the Company did not offer to or solicit offers from any other parties to purchase the Common Securities. Since the formation of the Company and ICG's initial capital investment for the Common Securities, there have been no sales or transfers of Common Securities of the Company. No cash dividends have been declared on the Common Securities of the Company.
On September 24 and October 3, 1997, the Company completed a private placement of 2,645,000 shares of Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "Redeemable Preferred Securities") for an aggregate gross cash offering price of $132.25 million. All of the Redeemable Preferred Securities were sold to Morgan Stanley Dean Witter and Deutsche Morgan Grenfell (collectively, the "Placement Agents") pursuant to Section 4(2) of the 1933 Act in a negotiated, private placement. For a discussion of the use of proceeds from the offering, see "Business."
The Placement Agents thereafter resold the Redeemable Preferred Securities pursuant to Rule 144A promulgated under the 1933 Act to Qualified Institutional Buyers (as that term is defined in Rule 144A) and Institutional Accredited Investors. Each purchaser of the Redeemable Preferred Securities from the Placement Agents made certain representations and warranties to the Placement Agents that they were qualified to purchase the unregistered Redeemable Preferred Securities. The Company did not receive any of the proceeds from the resale of the Redeemable Preferred Securities by the Placement Agents.
The Redeemable Preferred Securities are mandatorily redeemable by the Company on November 15, 2009 at the liquidation preference of $50.00 per security, plus accrued and unpaid dividends. Dividends on the Redeemable 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 the Company. The Redeemable 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. The Company may, at its option, redeem the Redeemable Preferred Securities at any time on or after November 18, 2000. Prior to that time, the Company may redeem the Redeemable Preferred Securities if the current market value of ICG Common Stock equals or exceeds the exchange price, for at least 20 days of any consecutive 30-day trading period, by 160% prior to November 15, 1999 and by 150% from November 16, 1999 through November 15, 2000.
Effective January 10, 1998, all of the shares of the Redeemable Preferred Securities and the ICG Common Stock issuable upon exchange of such securities were registered for resale under the 1933 Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the period from September 17, 1997 (inception) to December 31, 1997 and fiscal year ended December 31, 1998 has been derived from and should be read in conjunction with the audited financial statements of the Company and the notes thereto included elsewhere in this Annual Report. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
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, market conditions affecting the price of ICG Common Stock, redemption of the Redeemable Preferred Securities by ICG, exchange into ICG Common Stock by the Redeemable Preferred Securityholders, the declaration and payment of preferred stock dividends to the Company by ICG and the ability of ICG to pay the administrative expenses of the Company, that could cause actual results to differ materially from the forward-looking statements. The results for the period from September 17, 1997 (inception) to December 31, 1997 and the fiscal year ended December 31, 1998 have been derived from the Company's audited financial statements included elsewhere herein.
Company Overview and Description of Significant Transactions
The Company was formed on September 17, 1997 as a special purpose limited liability company existing for the exclusive purposes of: (i) issuing common and preferred interests in the Company; (ii) using at least 85% of the Net Proceeds of such issuances and related capital contributions to purchase shares of ICG Preferred Stock in a private placement; (iii) investing a portion of the remaining Net Proceeds in U.S. Treasury securities, to be held in escrow in an amount sufficient to fund the cash payments of the first thirteen quarterly dividends on the Company's Redeemable Preferred Securities; and (iv) purchasing U.S. Treasury securities pending the purchase of shares of ICG Preferred Stock.
On September 24 and October 3, 1997, the Company completed a private placement of 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 for gross proceeds of $132.25 million. Net proceeds from the private placement, after offering costs of approximately $4.7 million advanced by ICG, were approximately $127.6 million. Restricted cash at December 31, 1998 of $16.9 million consists of the proceeds from the private placement which are designated for the payment of cash dividends on the Redeemable Preferred Securities through November 15, 2000.
The Redeemable Preferred Securities consist of 2,645,000 exchangeable preferred securities of the Company that bear a cumulative dividend at the rate of 6 3/4% per annum. The dividend is paid quarterly in arrears each February 15, May 15, August 15 and November 15, and commenced November 15, 1997. The dividend is payable in cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common Stock, at the option of the Company. The Redeemable Preferred Securities are exchangeable, at the option of the holder, at any time prior to November 15, 2009 into shares of ICG Common Stock at a rate of 2.0812 shares of ICG Common Stock per preferred security, or $24.025 per share, subject to adjustment. The Company may, at its option, redeem the Redeemable Preferred Securities at any time on or after November 18, 2000. Prior to that time, the Company may redeem the Redeemable Preferred Securities if the current market value of ICG Common Stock equals or exceeds the exchange price, for at least 20 days of any consecutive 30-day trading period, by 160% prior to November 15, 1999 and by 150% from November 16, 1999 through November 15, 2000. The Redeemable Preferred Securities are subject to mandatory redemption on November 15, 2009.
On February 13, 1998, ICG made a capital contribution of 126,750 shares of ICG Common Stock to the Company. Immediately thereafter, the Company sold the contributed shares to unrelated third parties for proceeds of approximately $3.4 million. The Company recorded the contribution of the ICG Common Stock as additional paid-in capital at the then fair market value and, consequently, no gain or loss was recorded by the Company on the subsequent sale of those shares.
Also, on February 13, 1998, the Company used the remaining proceeds from the private placement of the Redeemable Preferred Securities, which were not restricted for the payment of cash dividends, along with the proceeds from the sale of the contributed ICG Common Stock to purchase approximately $112.4 million of ICG Preferred Stock which pays dividends each February 15, May 15, August 15 and November 15 in additional shares of ICG Preferred Stock through November 15, 2000. Subsequent to November 15, 2000, dividends on the ICG Preferred Stock are payable in cash or shares of ICG Common Stock, at the option of ICG. The ICG Preferred Stock is exchangeable, at the option of the Company, at any time prior to November 15, 2009 into shares of ICG Common Stock at an exchange rate based on the exchange rate of the Redeemable Preferred Securities. The ICG Preferred Stock is subject to mandatory redemption on November 15, 2009.
Results of Operations
The following table presents the components of the Company's net income and net loss available to common member for the period from September 17, 1997 (inception) to December 31, 1997 and fiscal year ended December 31, 1998.
Period from September 17, 1997 (inception) Fiscal Year to December 31, Ended December 31, 1997 1998 --------------- ------------------ (in thousands)
Statement of Operations Data: Interest Income, net $ 1,949 1,908 Dividend income -- 5,969 --------- --------- Net income 1,949 7,877 --------- --------- Preferred dividends on redeemable preferred securities, including accretion of offering costs (2,460) (9,314) --------- --------- Net loss available to common member (511) (1,437) ========= =========
Other Data: Net cash provided by operating activities $ 1,949 1,908 Net cash (used in) provided by investing activities (132,959) 3,634 Net cash provided by (used in) financing activities 131,010 (5,542)
Fiscal Year Ended December 31, 1998 Compared to the Period from September 17, 1997 (inception) to December 31, 1997
Interest income, net. Interest income, net was $1.9 million for both the fiscal year ended December 31, 1998 and the period from September 17, 1997 (inception) through December 31, 1997 and consists of income earned on invested cash proceeds from the issuance of the Redeemable Preferred Securities in September and October 1997. Interest income, net has and will continue to decrease each period through November 15, 2000 due to the decrease in average balances held in short-term investments as restricted cash balances are used to pay cash dividends on the Redeemable Preferred Securities. On November, 15, 2000, the Company's restricted cash balances will be depleted.
Dividend income. Dividend income of $6.0 million for the fiscal year ended December 31, 1998 consists of preferred dividends earned on the ICG Preferred Stock from February 13, 1998 through December 31, 1998, which dividends were paid with additional shares of ICG Preferred Stock.
Net income. The Company's net income of $7.9 million and $1.9 million for the fiscal year ended December 31, 1998 and the period from September 17, 1997 (inception) through December 31, 1997, respectively, consists of interest income, net, and dividend income, as noted above.
Preferred dividends on redeemable preferred securities, including accretion of offering costs. Preferred dividends on redeemable preferred securities, including accretion of offering costs was $9.3 million for the fiscal year ended December 31, 1998 and includes approximately $8.9 million of preferred security dividends paid and accrued during the fiscal year ended December 31, 1998 and the accretion of offering costs from the private placement of the Redeemable Preferred Securities of approximately $0.4 million for the fiscal year ended December 31, 1998. Preferred dividends on redeemable preferred securities, including accretion of offering costs was $2.5 million for the period from September 17, 1997 (inception) to December 31, 1997 and includes approximately $1.3 million of preferred security dividends paid on November 15, 1997, the accrual of the preferred security dividends for the period from November 16, 1997 through December 31, 1997 of approximately $1.1 million and the accretion of offering costs from the private placement of the Redeemable Preferred Securities of approximately $0.1 million.
Net loss available to common member. Net loss available to common member of $1.4 million and $0.5 million for the fiscal year ended December 31, 1998 and the period from September 17, 1997 (inception) to December 31, 1997, respectively, is a result of preferred dividends on redeemable preferred securities, offset by net income, as noted above.
Quarterly Results
The following table presents selected unaudited operating results for three-month quarterly periods, beginning with the inception of the Company at September 17, 1997 and through December 31, 1998. The Company believes that the amounts stated below present fairly the quarterly results when read in conjunction with the Company's audited financial statements and related notes included elsewhere in this Annual Report. Results of operations are not necessarily indicative of results of operations for a full year or predictive of future periods.
Liquidity and Capital Resources
The Company's operations consist entirely of effecting the transactions required by the terms of the Redeemable Preferred Securities issued in September and October 1997. To date, the Company's operations have been funded through the proceeds from the issuance of the Redeemable Preferred Securities and the sale of ICG Common Stock which was contributed to the Company by ICG. As of December 31, 1998, the Company has assets of approximately $135.3 million which consist of the Company's investment in ICG Preferred Stock of approximately $117.5 million, restricted cash invested in U.S. Treasury securities of approximately $16.9 million for the payment of cash dividends through November 15, 2000 on the Redeemable Preferred Securities and a receivable for preferred dividends earned on the ICG Preferred Stock of approximately $0.9 million. The Company's liabilities at December 31, 1998 include approximately $1.1 million in preferred dividends accrued on the Redeemable Preferred Securities and approximately $4.7 million due to ICG for advances for the offering costs associated with the issuance of the Redeemable Preferred Securities.
The Company is dependent upon ICG to declare and pay preferred dividends on the ICG Preferred Stock in order to pay dividends on, and the redemption price of, the Redeemable Preferred Securities. ICG is a Delaware corporation that files annual, quarterly and current reports with the Securities and Exchange Commission. Its Commission File Number is 1-11965.
Net Cash Provided By Operating Activities
Net cash provided by operating activities was approximately $1.9 million for the period from September 17, 1997 (inception) to December 31, 1997 and fiscal year ended December 31, 1998 and consists of interest income earned on restricted cash invested in U.S. Treasury securities.
Net Cash (Used In) Provided By Investing Activities
The Company's investing activities used approximately $133.0 million for the period from September 17, 1997 (inception) to December 31, 1997 and provided approximately $3.6 million for the fiscal year ended December 31, 1998. Net cash used in investing activities for the period from September 17, 1997 (inception) to December 31, 1998 consists of the establishment of restricted cash balances for cash dividends payable through November 15, 2000 on the Redeemable Preferred Securities and also consists of the purchase of short-term investments. Net cash provided by investing activities for the fiscal year ended December 31, 1998 consists of the purchase of the ICG Preferred Stock for approximately $112.4 million, offset by the proceeds from the sale of U.S. Treasury securities of approximately $108.3 million and the decrease in restricted cash of approximately $7.7 million.
Net Cash Provided By (Used In) Financing Activities
Financing activities provided approximately $131.0 million for the period from September 17, 1997 (inception) to December 31, 1997 and used approximately $5.5 million for the fiscal year ended December 31, 1998. Net cash provided by financing activities for the period from September 17, 1997 (inception) to December 31, 1997 includes the net proceeds from the issuance of the Redeemable Preferred Securities of approximately $127.6 million and approximately $4.7 million advanced from ICG for the offering costs associated with the issuance of the Redeemable Preferred Securities, offset by payments of cash dividends on the Redeemable Preferred Securities of approximately $1.3 million. Net cash used in financing activities for the fiscal year ended December 31, 1998 includes the payments of cash dividends on the Redeemable Preferred Securities of approximately $8.9 million, offset by the proceeds from the sale of the contributed ICG Common Stock of $3.4 million. The Company expects cash used by financing activities in future periods to include only payments of cash dividends on, and the redemption price of, the Redeemable Preferred Securities.
Cash Commitments
The Redeemable Preferred Securities require payments of dividends to be made in cash and are being paid on a current basis through November 15, 2000. At December 31, 1998, the Company has cash dividend obligations on the Redeemable Preferred Securities of approximately $8.9 million in both 1999 and 2000. The Redeemable Preferred Securities have a liquidation preference of $50 per security, plus accrued and unpaid dividends, and are mandatorily redeemable in 2009. The Company's management believes it has sufficient resources to meet these future cash requirements.
Year 2000 Compliance
As a wholly owned subsidiary of ICG, the Company's Year 2000 compliance plan is embedded within ICG's Year 2000 compliance plan for its consolidated operations. It is not practicable for ICG to address the state of Year 2000 readiness, compliance costs, risks or contingency plans of the Company, or for any other legal entity on a stand-alone basis, as ICG's plan was designed to resolve Year 2000 compliance issues for all entities combined, which is the most cost-effective manner. Moreover, as a result of the Company's and ICG's shared management and administrative personnel and the Company's dependence upon the successful operations of ICG in order that ICG's Board of Directors will continue to declare and pay dividends on the ICG Preferred Stock, evaluating the Company's plan for Year 2000 compliance on a stand-alone basis is not meaningful. ICG is a Delaware corporation that files annual, quarterly and current reports with the Securities and Exchange Commission. Its Commission File Number is 1-11965.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's restricted cash balances are invested in fixed income U.S. Treasury securities having staggered maturities matching the dividend payment dates of the Redeemable Preferred Securities. Accordingly, changes in market interest rates have no effect on the Company's liquidity, financial condition or results of operations.
At December 31, 1998, the Company had $117.5 million of ICG Preferred Stock, which is exchangeable into shares of ICG Common Stock, at an exchange rate based on the exchange rate of the Redeemable Preferred Securities. There exists no established public trading market for the ICG Preferred Stock. The risk of changes in the fair market value of the underlying ICG Common Stock, which is listed and trades on the Nasdaq National Market, is eliminated by the adjustable rate of exchange of shares of ICG Preferred Stock. The ICG Preferred Stock pays dividends in cash or additional shares of ICG Preferred Stock sufficient to meet the dividend requirements on the Redeemable Preferred Securities. Although changes in the fair market value of ICG Common Stock have no effect on the Company's financial condition or results of operations, such changes may influence the Company's decision to redeem the Redeemable Preferred Securities or a Redeemable Preferred Security holder's decision to exchange those securities for ICG Common Stock.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company appear on page of this Annual Report. Selected quarterly financial data required under this Item is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company has no directors or executive officers. Its business affairs are managed by ICG, as the manager of the Company, pursuant to the LLC Agreement. ICG is a Delaware corporation that files annual, quarterly and current reports with the Securities and Exchange Commission. Its Commission File Number is 1-11965.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no executive officers. It business affairs are managed by ICG, as the manager of the Company, pursuant to the LLC Agreement. ICG does not receive any fees or compensation as manager of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Name and Address Amount and Nature Percent Title of Class of Beneficial Owner of Beneficial Ownership of Class - -------------- ------------------------ ----------------------- --------
Common ICG Communications, Inc. 1 Common Security Securities 161 Inverness Drive West owned beneficially 100% Englewood, Colorado 80112 with sole voting power
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 13, 1998, ICG made a capital contribution of 126,750 shares of ICG Common Stock to the Company. Immediately thereafter, the Company sold the contributed shares to unrelated third parties for proceeds of approximately $3.4 million. The Company recorded the contribution of the ICG Common Stock as additional paid-in capital at the then fair market value and, consequently, no gain or loss was recorded by the Company on the subsequent sale of those shares.
Also on February 13, 1998, the Company used the remaining proceeds from the private placement of the Redeemable Preferred Securities, which were not restricted for the payment of cash dividends, along with the proceeds from the sale of the contributed ICG Common Stock to purchase approximately $112.4 million of ICG Preferred Stock.
All of the Company's administrative expenses, which are insignificant, are paid by ICG. Additionally, ICG advanced approximately $4.7 million to the Company during the period from September 17, 1997 (inception) through December 31, 1997 for the offering costs associated with the issuance of the Redeemable Preferred Securities.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) (1) Financial Statements. The following financial statements are included in Item 8 of Part II: Page Independent Auditors' Report . . . . . . . . . . . . . . . . Balance Sheets, December 31, 1997 and 1998 . . . . . . . . . Statements of Operations, Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998. . . . . . . . . . . . . . . . . . . . . Statements of Member's (Deficit) Equity, Period from September 17, 1997 (inception)to December 31, 1997 and Fiscal Year Ended December 31, 1998 . . . . . . . . . . . Statements of Cash Flows, Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . Notes to Financial Statements, December 31, 1997 and 1998. .
(2) Financial Statement Schedule. Not Applicable.
(3) List of Exhibits.
(3) Corporate Organization.
3.1: Certificate of Formation of ICG Funding, LLC filed September 17, 1997 with the Secretary of State of the State of Delaware [Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3, File Number 333-40495].
3.2: Amended and Restated Limited Liability Company Agreement of ICG Funding, LLC, dated September 23, 1997 [Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3, File Number 333-40495].
(4) Instruments Defining the Rights of Security Holders, Including Indentures.
4.1: Registration Rights Agreement, dated September 24, 1997, among ICG Communications, Inc., ICG Funding, LLC, Morgan Stanley & Co. Incorporated and Deutsche Morgan Grenfell, Inc. with respect to the 6 3/4 % Exchangeable Limited Liability Company Preferred Securities [Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3, File Number 333-40495].
4.2: Guarantee Agreement, dated September 24, 1997, between ICG Communications, Inc. and ICG Funding, LLC [Incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-3, File Number 333-40495].
4.3: Written Action of the Manager of ICG Funding, LLC, dated as of September 24, 1997, with respect to the terms of the 6 3/4% Exchangeable Limited Liability Company Preferred Securities [Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-3, File Number 333-40495].
4.4: Escrow and Security Agreement, dated September 24, 1997, among ICG Communications Inc., ICG Funding, LLC and Norwest Bank Colorado, National Association [Incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-3, File Number 333-40495].
(10) Material Contracts.
10.1:Certificate of Designation, Rights and Preferences of the Preferred Stock Mandatorily Redeemable 2009 of ICG Communications, Inc., filed with the Secretary of State of the State of Delaware on September 25, 1997 [Incorporated by reference to Exhibit 4.9 to Registration Statement on Form S-3, File Number 333-40495].
(23) Consent.
23.1: Consent of Independent Auditors.
(27) Financial Data Schedule.
27.1:Financial Data Schedule of ICG Funding, LLC for the Fiscal Year Ended December 31, 1998.
(B) Reports on Form 8-K.
None.
(C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3).
FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . .
Balance Sheets, December 31, 1997 and 1998 . . . . . . . . . . . . .
Statements of Operations, Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998 . . .
Statements of Member's (Deficit) Equity, Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows, Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998 . . .
Notes to Financial Statements, December 31, 1997 and 1998. . . . . .
F - 1
Independent Auditors' Report
The Common Member and Manager ICG Funding, LLC:
We have audited the accompanying balance sheets of ICG Funding, LLC as of December 31, 1997 and 1998 and the related statements of operations, member's (deficit) equity, and cash flows for the period from September 17, 1997 (inception) to December 31, 1997 and for the fiscal year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICG Funding, LLC as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from September 17, 1997 (inception) to December 31, 1997 and for the fiscal year ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado February 15, 1999
F - 2
ICG FUNDING, LLC
Balance Sheets December 31, 1997 and 1998
- -------------------------------------------------------------------------------
December 31, ---------------------- 1997 1998 --------- --------- (in thousands) Assets
Current assets: Short-term investments available for sale $ 108,310 - Dividends receivable - 875 Restricted cash (note 3) 8,693 8,693 --------- ---------
Total current assets 117,003 9,568 --------- ---------
Investment in ICG Preferred Stock (note 4) -- 117,507 Restricted cash (note 3) 15,956 8,219 --------- ---------
Total assets $ 132,959 135,294 ========= =========
Liabilities and Member's (Deficit) Equity
Current liability - dividends payable $ 1,116 1,116
Due to ICG (note 3) 4,699 4,699 --------- ---------
Total liabilities 5,815 5,815 --------- ---------
Redeemable preferred securities ($133.4 million liquidation value at December31, 1997 and 1998) (note 3) 127,655 128,042
Member's (deficit) equity: Additional paid-in capital (note 4) -- 3,385 Accumulated deficit (511) (1,948) --------- --------- Total member's (deficit) equity (511) 1,437 --------- ---------
Commitments and contingencies (notes 3 and 4)
Total liabilities and member's (deficit) equity $ 132,959 135,294 ========= =========
See accompanying notes to financial statements.
F - 3
ICG FUNDING, LLC
Statements of Operations Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F - 4
ICG FUNDING, LLC
Statements of Member's (Deficit) Equity Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F - 5
ICG FUNDING, LLC
Statements of Cash Flows Period from September 17, 1997 (inception) to December 31, 1997 and Fiscal Year Ended December 31, 1998
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F - 6
ICG FUNDING, LLC
Notes to Financial Statements December 31, 1997 and 1998 - ----------------------------------------------------------------------------
(1) Organization and Nature of Business
ICG Funding, LLC, a Delaware limited liability company (the "Company"), was formed on September 17, 1997 as a special purpose limited liability company existing for the exclusive purposes of: (i) issuing common and preferred interests in the Company; (ii) using at least 85% of the net proceeds of such issuances and related capital contributions (the "Net Proceeds") to purchase shares of preferred stock of ICG Communications, Inc. ("ICG") ("ICG Preferred Stock") in a private placement; (iii) investing a portion of the remaining Net Proceeds in U.S. Treasury securities, to be held in escrow in an amount sufficient to fund the cash payments of the first thirteen quarterly dividends on the Company's preferred interests (the "Redeemable Preferred Securities"); and (iv) purchasing U.S. Treasury securities pending the purchase of shares of ICG Preferred Stock. Unless previously dissolved, the Company's term will continue until December 31, 2050.
ICG is the sole common member of the Company. The business and affairs of the Company are conducted by ICG and ICG pays all of the Company's administrative expenses, which are insignificant.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles.
(b) Short-term Investments Available for Sale
The Company invested the net proceeds from the private placement of the Redeemable Preferred Securities in high grade short-term investments which consisted entirely of U.S. Treasury securities. All short-term investments were considered to be available for sale and matured on February 13, 1998. At December 31, 1997, the Company carried short-term investments at cost, which approximated fair value.
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ICG FUNDING, LLC
Notes to Financial Statements, Continued - ----------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (continued)
(c) Investment in ICG Preferred Stock
The Company carries its investment in ICG Preferred Stock at cost plus dividends received. Income from dividends on the ICG Preferred Stock is recorded in the Company's statement of operations when earned.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates.
(e) Income Taxes
The Company is a U.S. limited liability company which is treated as a partnership for U.S. federal and state income tax purposes. Accordingly, the Company is not subject to U.S. federal and state income taxes. The Company's results of operations are allocated and included in the individual income tax returns of the securityholders.
(f) Net Loss Per Share
The Company's one issued and outstanding common limited liability company security is owned directly by ICG. Accordingly, the Company does not present net loss per share in its financial statements as such disclosure is not considered to be meaningful.
(3) Redeemable Preferred Securities
On September 24 and October 3, 1997, the Company completed a private placement of 6 3/4% Exchangeable Limited Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "Redeemable Preferred Securities") for gross proceeds of $132.25 million. Net proceeds from the private placement, after offering costs of approximately $4.7 million advanced by ICG, were approximately $127.6 million. Restricted cash at December 31, 1998 of $16.9 million consists of the proceeds from the private placement
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ICG FUNDING, LLC
Notes to Financial Statements, Continued - ----------------------------------------------------------------------------
(3) Redeemable Preferred Securities (continued)
which are designated for the payment of cash dividends on the Redeemable Preferred Securities through November 15, 2000.
The Redeemable Preferred Securities consist of 2,645,000 exchangeable preferred securities of the Company that bear a cumulative dividend at the rate of 6 3/4% per annum. The dividend is paid quarterly in arrears each February 15, May 15, August 15 and November 15, and commenced November 15, 1997. The dividend is payable in cash through November 15, 2000 and, thereafter, in cash or shares of common stock of ICG ("ICG Common Stock"), at the option of the Company. The Redeemable Preferred Securities are exchangeable, at the option of the holder, at any time prior to November 15, 2009 into shares of ICG Common Stock at a rate of 2.0812 shares of ICG Common Stock per preferred security, or $24.025 per share, subject to adjustment. The Company may, at its option, redeem the Redeemable Preferred Securities at any time on or after November 18, 2000. Prior to that time, the Company may redeem the Redeemable Preferred Securities if the current market value of ICG Common Stock equals or exceeds the exchange price, for at least 20 days of any consecutive 30-day trading period, by 160% prior to November 15, 1999 and by 150% from November 16, 1999 through November 15, 2000. The Redeemable Preferred Securities are subject to mandatory redemption on November 15, 2009.
Included in preferred dividends on redeemable preferred securities is approximately $0.1 million and $0.4 million for the period from September 17, 1997 (inception) to December 31, 1997 and the fiscal year ended December 31, 1998, respectively, associated with the accretion of offering costs from the private placement of the Redeemable Preferred Securities.
(4) Contribution and Sale of ICG Common Stock and Purchase of ICG Preferred Stock
On February 13, 1998, ICG made a capital contribution of 126,750 shares of ICG Common Stock to the Company. Immediately thereafter, the Company sold the contributed shares to unrelated third parties for proceeds of approximately $3.4 million. The Company recorded the contribution of the ICG Common Stock as additional paid-in capital at the then fair market value and, consequently, no gain or loss was recorded by the Company on the subsequent sale of those shares.
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ICG FUNDING, LLC
Notes to Financial Statements, Continued - ----------------------------------------------------------------------------
(4) Contribution and Sale of ICG Common Stock and Purchase of ICG Preferred Stock (continued)
Also on February 13, 1998, the Company used the remaining proceeds from the private placement of the Redeemable Preferred Securities, which were not restricted for the payment of cash dividends, along with the proceeds from the sale of the contributed ICG Common Stock to purchase approximately $112.4 million of ICG Communications, Inc. Preferred Stock ("ICG Preferred Stock") which pays dividends each February 15, May 15, August 15 and November 15 in additional shares of ICG Preferred Stock through November 15, 2000. Subsequent to November 15, 2000, dividends on the ICG Preferred Stock are payable in cash or shares of ICG Common Stock, at the option of ICG. The ICG Preferred Stock is exchangeable, at the option of the Company, at any time prior to November 15, 2009 into shares of ICG Common Stock at an exchange rate based on the exchange rate of the Redeemable Preferred Securities. The ICG Preferred Stock is subject to mandatory redemption on November 15, 2009.
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INDEX TO EXHIBITS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS
23.1: Consent of Independent Auditors.
27.1:Financial Data Schedule of ICG Funding, LLC for the Fiscal Year Ended December 31, 1998.
EXHIBIT 23.1
Consent of Independent Auditors.
Consent of Independent Auditors
The Common Member and Manager ICG Funding, LLC:
We consent to incorporation by reference in the registration statements Nos. 333-40495 and 333-40495-01 on Form S-3 of ICG Funding, LLC of our report dated February 15, 1999, relating to the consolidated balance sheets of ICG Funding, LLC as of December 31, 1997 and 1998, and the related statements of operations, member's (deficit) equity, and cash flows for the period from September 17, 1997 (inception) to December 31, 1997 and for the fiscal year ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of ICG Funding, LLC.
KPMG LLP
Denver, Colorado February 24, 1999
EXHIBIT 27.1
Financial Data Schedule of ICG Funding, LLC for the Fiscal Year Ended December 31, 1998.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICG Funding, LLC
By: ICG Communications, Inc. Common Member and Manager
By: /s/ Harry R. Herbst --------------------------------------------- Harry R. Herbst Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: February 25, 1999