PROSPECTUS FILED PURSUANT TO RULE 424(B)(3)
RELATED TO REGISTRATION STATEMENT ON FORM S-3,
FILE NOS. 333-40495, 333-40495-01
-----------------------------
2,645,000 6 3/4% EXCHANGEABLE PREFERRED SECURITIES
MANDATORILY REDEEMABLE 2009
(LIQUIDATION AMOUNT $50 PER PREFERRED SECURITY)
ICG FUNDING, LLC
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
AND EXCHANGEABLE INTO THE COMMON STOCK,
$.01 PAR VALUE, OF
ICG COMMUNICATIONS, INC.
200,000 SHARES OF COMMON STOCK OF
ICG COMMUNICATIONS, INC.
-------------------------------
This Prospectus relates to the resale by the holders thereof of
the 6 3/4% Exchangeable Limited Liability Company Preferred Securities
(the "Preferred Securities"), liquidation amount $50 per Preferred
Security, which represent preferred undivided beneficial interests in
the assets of ICG Funding, LLC, a limited liability company formed
under the laws of the State of Delaware ("Funding"), and the shares of
common stock, par value $.01 per share (the "Common Stock"), of ICG
Communications, Inc., a Delaware corporation ("ICG" and, together with
its subsidiaries, "ICG" or the "Company"), issuable upon exchange of
the Preferred Securities. This Prospectus also relates to the resale
by Funding of up to 200,000 shares of Common Stock. The Preferred
Securities were issued and sold (the "Original Offering") on September
24, 1997 (the "Original Closing Date") and October 3, 1997 to the
Initial Purchasers (as defined herein) and were simultaneously resold
by the Initial Purchasers in transactions exempt from the Securities
Act of 1933, as amended (the "Securities Act"), in the United States
to persons reasonably believed by the Initial Purchasers to be
qualified institutional buyers as defined in Rule 144A under the
Securities Act. The Preferred Securities are traded in the Private
Offering, Resales and Trading through Automated Linkages ("PORTAL")
Market. All of the beneficial interests in the assets of Funding
represented by common securities of Funding (the "Common Securities"
and, together with the Preferred Securities, the "Funding Securities")
are owned directly by ICG. Funding exists for the exclusive purposes
of issuing the Funding Securities and investing the proceeds of the
sale thereof in the preferred stock of ICG mandatorily redeemable
2009, par value $.01 per share (the "ICG Preferred Stock"), and
certain U.S. government securities. The ICG Preferred Stock ranks on a
parity with all outstanding preferred stock of ICG, senior to the
common stock of ICG and subordinate to all indebtedness and other
liabilities of ICG. In the event of a liquidation, dissolution,
winding-up or termination of Funding, the then holders of the
Preferred Securities will have a preference over the holders of the
Common Securities with respect to payments in respect of distributions
and payments upon liquidation, redemption and otherwise. See
"Description of the Preferred Securities - Ranking." (Continued on
next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 9, 1998
<PAGE>
Each Preferred Security is exchangeable in the manner described
herein at the option of the holder, at any time prior to the Mandatory
Redemption Date (as defined herein), into shares of Common Stock, at
an initial exchange rate of 2.0811 shares of Common Stock per $50
liquidation preference per Preferred Security (equivalent to an
exchange price of $24.025 per share of Common Stock), subject to
adjustment in certain circumstances. See "Description of the Preferred
Securities - Exchange Rights - Exchange Rate Adjustments." The Common
Stock is quoted on the Nasdaq National Market under the symbol "ICGX."
On January 8, 1998, the last reported sale price of Common Stock was
$27.75 per share.
The Preferred Securities and the Common Stock issuable upon
exchange of the Preferred Securities (the "Offered Securities") may be
offered and sold from time to time by the holders named herein or by
their transferees, pledgees, donees or their successors (collectively,
the "Selling Holders") pursuant to this Prospectus. The Offered
Securities may be sold by the Selling Holders from time to time
directly to purchasers or through agents, underwriters or dealers. See
"Plan of Distribution" and "Selling Holders." If required, the names
of any such agents or underwriters involved in the sale of the Offered
Securities and the applicable agent's commission, dealer's purchaser
price or underwriter's discount, if any, will be set forth in an
accompanying supplement to this Prospectus (the "Prospectus
Supplement"). The Selling Holders will receive all of the net proceeds
from the sale of the Offered Securities and will pay all underwriting
discounts and selling commissions, if any, applicable to any such
sale. No portion of the net proceeds of this offering will be received
by ICG or Funding. ICG is responsible for payment of all other
expenses incident to the offer and sale of the Offered Securities. The
Selling Holders and any broker-dealers, agents or underwriters which
participate in the distribution of the Offered Securities may be
deemed to be "underwriters" within the meaning of the Securities Act,
and any commission received by them and any profit on the resale of
the Offered Securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See
"Plan of Distribution" for a description of indemnification
arrangements.
Holders of Preferred Securities are entitled to receive dividends
on the Preferred Securities at the rate of 6 3/4% per annum of the
liquidation preference of Preferred Securities, payable quarterly. All
dividends will be cumulative, whether or not earned or declared, on a
daily basis from the Original Closing Date and will be payable
quarterly in arrears on February 15, May 15, August 15 and November 15
of each year (each, a "Dividend Payment Date"), commencing on November
15, 1997 (to holders of record at the close of business on February 1,
May 1, August 1 and November 1 immediately preceding the Dividend
Payment Date). Through and including November 15, 2000, dividends on
the Preferred Securities will be paid in cash. Thereafter, dividends
on the Preferred Securities may be paid at Funding's option, in (i)
cash, (ii) Common Stock, based upon 90% of the Average Market Value of
the Common Stock or (iii) any combination of cash or Common Stock;
provided that any dividend payment must be made in cash to the extent
ICG shall have provided Funding with cash (whether through dividends
on the ICG Preferred Stock or otherwise) to make all or any portion of
such dividend payment with respect to the Preferred Securities. The
Indentures (as defined herein) effectively prohibit ICG from providing
cash to Funding (except as a result of Funding selling Common Stock).
If any dividend (or portion thereof) payable in cash on any Dividend
Payment Date is not declared or paid in full in cash on such Dividend
Payment Date, the amount of such dividend that is payable and that is
not paid in cash on such date will cumulate at the dividend rate,
compounding quarterly, until declared and paid in full. See
"Description of the Preferred Securities - The Guarantee; Lack of
Practical Benefit to Holders from the Guarantee."
Dividends on the Preferred Securities will be paid to the extent
that Funding has funds legally available for the payment of such
dividends. Amounts available to Funding for dividends to the holders
of the Preferred Securities will be limited to shares of Common Stock
received by Funding from ICG as dividends on the ICG Preferred Stock
(and proceeds from any sales of such Common Stock by Funding) and the
interest on and principal of the U.S. Treasury strips ("Treasury
Strips") that are held in the Escrow Account (as defined herein). See
"Description of the Preferred Securities -- Escrow." The ICG Preferred
Stock provides that ICG shall pay dividends to Funding, payable in
Common Stock, in an amount sufficient to allow Funding to pay
dividends on the Preferred Securities in full. Any such Common Stock
received by Funding may be paid as a dividend to the holders of the
Preferred Securities or sold in the open market and the cash proceeds
of sale would be used to pay cash dividends on the Preferred
Securities. The payment of dividends out of moneys held by Funding,
and payments on liquidation of Funding or the redemption of Preferred
Securities, as set forth below, are guaranteed by ICG (the
"Guarantee") to the extent described herein and under "Description of
the Preferred Securities - The Guarantee; Lack of Practical Benefit to
Holders from the Guarantee." The Guarantee covers payments of
dividends and other payments on the Preferred Securities only if and
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<PAGE>
to the extent Funding has funds available therefor, which will not be
the case unless ICG has made a dividend payment or other payments on
the ICG Preferred Stock held by Funding as its sole asset. ICG's
obligations under Guarantee, taken together with its obligations under
the ICG Preferred Stock and the Written Action (as defined herein) and
Certificate of Designation relating to the ICG Preferred Stock (as
defined herein), including its liabilities to pay costs, expenses,
debts and obligations of Funding (other than with respect to the
Funding Securities), constitute a full and unconditional guarantee by
ICG of amounts due on the Preferred Securities. See "Description of
the Preferred Securities - The Guarantee; Lack of Practical Benefit to
Holders from the Guarantee."
The obligations of ICG under the Guarantee are subordinate and
junior in right of payment to all other liabilities of ICG. If ICG
does not make dividend payments on the ICG Preferred Stock, Funding
will not have sufficient funds to redeem or make distributions on the
Preferred Securities, in which event holders of the Preferred
Securities would not be able to rely on the Guarantee for payment of
such amounts until Funding has sufficient funds available therefor.
The obligations of ICG under the ICG Preferred Stock are subordinate
and junior in right of payment to all present and future Senior
Indebtedness (as defined herein) of ICG.
Unless earlier redeemed or exchanged, the Preferred Securities
must be redeemed on November 15, 2009, out of funds legally available
therefor, by Funding at redemption prices set forth herein. See
"Description of the Preferred Securities - Provisional Redemption by
Funding."
The Preferred Securities will also be subject to optional
redemption by Funding on or after November 18, 2000 (the "Initial
Redemption Date"). At any time and from time to time on or after the
Initial Redemption Date and until the Mandatory Redemption Date,
Funding will have the right to redeem, in whole or in part, the
Preferred Securities at the redemption prices set forth herein. See
"Description of the Preferred Securities - Optional Redemption by
Funding."
The ICG Preferred Stock is exchangeable into Common Stock at the
option of Funding (upon request by a holder of the Preferred
Securities) at any time prior to the business day immediately
preceding the date of repayment of such ICG Preferred Stock at an
exchange rate based on the exchange rate of the Preferred Securities.
See "Description of the Preferred Securities - Exchange Rights."
In the event of any voluntary or involuntary liquidation,
dissolution, winding-up or termination of Funding (each a
"Liquidation"), the then holders of the Preferred Securities will be
entitled to receive out of the assets of Funding (which will include
the ICG Preferred Stock, any interest on and principal of the Treasury
Strips that are held in the Escrow Account, any Common Stock that
Funding received from ICG as a dividend (or otherwise) and has not
distributed as a dividend on the Preferred Securities or sold in the
open market, and any other assets of Funding), after satisfaction of
liabilities to creditors, if any, distributions in an amount equal to
the aggregate of the stated liquidation preference of $50 of Preferred
Security plus accrued and unpaid dividends thereon to the date of
payment (the "Liquidation Distribution"). See "Description of the
Preferred Securities - Liquidation Distribution Upon Dissolution."
If, upon any such Liquidation, the Liquidation Distribution can
be paid only in part because Funding has insufficient assets available
to pay in full the aggregate Liquidation Distribution, then the
amounts payable by Funding on the Preferred Securities shall be paid
on a pro rata basis. ICG will be obligated to pay dividends,
consisting of ICG Preferred Stock, to Funding so that it will be able
to make the Liquidation Distribution in full.
3
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
THE REGISTRANTS..............................................................5
AVAILABLE INFORMATION .......................................................5
INFORMATION INCORPORATED BY REFERENCE........................................5
PROSPECTUS SUMMARY...........................................................7
RISK FACTORS................................................................12
USE OF PROCEEDS.............................................................25
FINANCIAL INFORMATION REGARDING FUNDING.....................................25
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS.....................................25
DESCRIPTION OF THE PREFERRED SECURITIES ....................................26
DESCRIPTION OF ICG PREFERRED STOCK..........................................35
SELLING HOLDERS.............................................................37
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS.................................................39
PLAN OF DISTRIBUTION........................................................46
LEGAL MATTERS...............................................................47
EXPERTS.....................................................................47
4
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THE REGISTRANTS
ICG and Funding have their principal executive offices at 9605
East Maroon Circle, P.O. Box 6742, Englewood, Colorado 80155-6742, and
their telephone number is (303) 572-5960.
AVAILABLE INFORMATION
ICG is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance with the Exchange Act files periodic reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company with the Commission can be
inspected and copied (at prescribed rates) at the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
ICG and Funding have filed with the Commission a registration
statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits
and schedules thereto, certain items of which are omitted in
accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities
offered hereby, reference is hereby made to the Registration Statement
and such exhibits and schedules. The Registration Statement, including
the exhibits and schedules thereto, may be inspected at, and copies
thereof may be obtained at prescribed rates from, the public reference
facilities of the Commission set forth above.
No separate financial statements of Funding are included herein.
ICG and Funding do not consider that such financial statements would
be material to holders of the Offered Securities because Funding is a
newly created special purpose entity, has no operating history and no
independent operations and is not engaged in, and does not propose to
engage in, any activity other than as set forth below. See "Summary -
Funding."
The terms "fiscal" and "fiscal year" refer to ICG's fiscal year
ending September 30; and all dollar amounts are in U.S. dollars.
Effective January 1, 1997, ICG changed its fiscal year end to December
31 from September 30. Industry figures were obtained from reports
published by the Federal Communications Commission (the "FCC"), the
U.S. Department of Commerce, Connecticut Research (an industry
research organization) and other industry sources, which the Company
has not independently verified.
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the
Commission (File No. 1-11965) and are hereby incorporated by reference
and made a part of this Prospectus:
1. Proxy Statement on Schedule 14A filed May 16, 1997.
2. Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
3. Transition Report on Form 10-K/A for the transition period
from October 1, 1996 to December 31, 1996.
4. Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997.
5. Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997.
6. Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.
7. Current Report on Form 8-K dated February 20, 1997.
8. Current Report on Form 8-K dated February 24, 1997.
9. Current Report on Form 8-K dated September 18, 1997.
10. Current Report on Form 8-K dated September 29, 1997.
11. Current Report on Form 8-K dated October 21, 1997.
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<PAGE>
12. The description of the Company's Common Stock set forth in
the Company's Registration Statement on Form 8-A filed
pursuant to Section 12 of the Exchange Act and any amendment
or report filed for the purpose of updating such
description.
All documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the shares made hereby, shall be deemed
to be incorporated by reference into the Registration Statement of
which this Prospectus is a part and to be a part hereof from the date
of such filing. Any statement contained in a document incorporated or
deemed to be incorporated by reference in this Prospectus shall be
deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference in this Prospectus modifies or supersedes
such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company hereby undertakes to provide without charge to each
person to whom this Prospectus is delivered, upon oral or written
request of such person, a copy of any and all information that has
been incorporated by reference into this Prospectus (not including
exhibits to the information unless such exhibits are specifically
incorporated by reference into such information). Requests for
information should be addressed to: ICG Communications, Inc., 9605
East Maroon Circle, P.O. Box 6742, Englewood, Colorado 80155-6742,
Attention: Investor Relations (telephone number (800) 408-4253).
6
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements, and notes
thereto, appearing in the documents incorporated by reference herein.
Unless the context otherwise requires, the term "Company" means the
combined business operations of ICG and its subsidiaries, including
ICG Holdings (Canada), Inc. ("Holdings-Canada") and ICG Holdings, Inc.
("Holdings"). Certain statements contained in this Prospectus with
respect to the Company's plans and strategy for its business and
related financing are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act). Such
statements are subject to risks and uncertainties and, as a result,
actual results may differ materially from those expressed in or
implied by such forward-looking statements. For a discussion of
important risks of an investment in the Offered Securities, including
factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see "Risk
Factors." Investors should carefully consider the information set
forth under the caption "Risk Factors," including the risks relating
to historical and anticipated operating losses and negative cash
flows.
THE COMPANY
The Company is one of the largest independent providers of
competitive local telephone services in the United States, based on
estimates of the industry's 1996 revenue. Competitive local exchange
carriers ("CLECs") seek to provide an alternative to the incumbent
local exchange carriers ("ILECs") for a full range of
telecommunications services in the increasingly deregulated
telecommunications industry. As a CLEC, the Company operates networks
in four regional clusters covering major metropolitan statistical
areas in California, Colorado, Ohio and the Southeast. The Company
also provides a wide range of network systems integration services and
maritime and international satellite transmission services. As a
leading participant in the rapidly growing competitive local
telecommunications industry, the Company has experienced significant
growth, with total revenue increasing from $59.1 million for fiscal
1994 to $252.5 million for the 12-month period ended September 30,
1997.
The Federal Telecommunications Act of 1996 (the
"Telecommunications Act") and procompetitive state regulatory
initiatives have substantially changed the telecommunications
regulatory environment in the United States. Due to these regulatory
changes, the Company is now permitted to offer all interstate and
intrastate telephone services, including competitive local dial tone.
The Company is marketing and selling local dial tone services in major
metropolitan areas in the following regions: California, which began
service in late January 1997, followed by Ohio in February 1997,
Colorado in March 1997 and the Southeast in May 1997. During the nine
months ended September 30, 1997, the Company sold approximately 92,000
local access lines, of which approximately 51,000 were in service at
that date. As a complement to its local exchange services, the Company
has begun marketing bundled service offerings which include long
distance, enhanced telecommunications services and data services. The
Company has 18 operating high capacity digital voice switches and 15
data communications switches, and plans to install additional switches
as demand warrants. To facilitate the expansion of its services, the
Company has entered into agreements with Lucent Technologies, Inc.
("Lucent"), Northern Telecom Inc. ("Nortel") and Cascade
Communications, Inc. ("Cascade") to purchase a full range of switching
systems, fiber optic cable, network electronics, software and
services. The Company has signed an Agreement and Plan of Merger (the
"Merger Agreement") with NETCOM On-Line Communication Services, Inc.
("NETCOM"), an Internet service provider, in order to broaden the
Company's product and service offerings. See "--Recent Developments."
In developing its telecommunications service offerings, the
Company continues to invest significant resources to expand its
network. This expansion is being undertaken through a combination of
constructing owned facilities, entering into long-term agreements with
other telecommunications carriers, establishing strategic alliances
with utility companies and potentially through acquisitions.
TELECOM SERVICES
The Company operates local exchange networks in the following
markets within its four regional clusters: California (Sacramento, San
Diego and portions of the Los Angeles and San Francisco metropolitan
areas); Colorado (Denver, Colorado Springs and Boulder); Ohio (Akron,
Cleveland, Columbus and Dayton) and the Southeast (Birmingham,
Charlotte, Louisville and Nashville). The Company plans to build a
network in Atlanta in conjunction with The Southern Company
("Southern"). Through its strategic alliance with Central and South
West Corporation ("CSW"), service is expected to be offered in Austin,
Corpus Christi, Dallas, Houston and San Antonio, Texas. See "--Recent
Developments." The Company will continue to expand its network through
construction, leased facilities, strategic joint ventures and
potentially through acquisitions. The Company's operating networks
have grown from 780 fiber route miles at the end of fiscal 1994 to
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3,021 fiber route miles as of September 30, 1997. Telecom Services
revenue has increased from $14.9 million for fiscal 1994 to $158.0
million for the 12-month period ended September 30, 1997.
Strategy
The Company's objective is to become the dominant alternative to
the ILEC in the markets it serves. In furtherance of this objective,
the Company has developed strategies to aggressively market its broad
range of telecommunications services to business end users and to
leverage its extensive network footprint and its expertise in the
provision of switched telecommunications services. The key elements of
this strategy are:
Expand Service Offerings. The Company's focus is to provide a
wide range of local, long distance and data communications services to
business end users and wholesale customers within its service areas,
with an emphasis on local exchange services. The Company believes that
customers are increasingly demanding a broad, full service approach to
providing telecommunications services. By offering a wide array of
services bundled into customized packages, management believes the
Company will be better able to capture business from
telecommunications-intensive commercial accounts. To this end, the
Company is complementing its core competitive local exchange services
with local toll and long distance services tailored to the needs of
its customers and expects to also provide tailored data services.
Market Services to End Users. Management believes an end user
strategy can accelerate its penetration of the local services market
and better leverage the Company's network investment. In support of
this strategy, the Company has substantially increased its direct
sales and marketing staff. The Company's sales force has grown from 81
and 143 people at September 30, 1996 and December 31, 1996,
respectively, to approximately 400 people (including sales management,
technical sales support and administrative support) at September 30,
1997.
Concentrate Markets 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. As a result, the Company has
concentrated its networks in regional clusters serving major
metropolitan areas in California, Colorado, Ohio and the Southeast.
The Company also intends to expand its network footprint to include
Texas (and may also expand to Arkansas, Louisiana and Oklahoma)
through a strategic alliance with CSW. See "--Recent Developments."
Network Connectivity. Significant amounts of telecommunications
traffic are carried within the Company's regional clusters. Management
believes that integrating these clusters through the connection of
individual networks will provide significant benefits, including cost
advantages. These cost advantages would result from the Company's
ability to carry regional traffic on-net, thereby improving operating
margins by reducing payments to other carriers for the use of their
facilities. Accordingly, the Company is in the process of connecting
networks within each of its California, Colorado and Ohio clusters
with inter-city fiber optic cable.
Expand Alliances with Utilities. The Company has established and
is actively pursuing strategic alliances with utility companies to
take advantage of their existing fiber optic infrastructures and
customer relationships. This approach affords the Company the
opportunity to license or lease fiber optic facilities on a long-term
basis, which is more timely and cost effective than constructing
facilities. In addition, utilities possess conduit and other
facilities that enable the Company to more easily install additional
fiber to extend existing networks in a given market. Finally,
management expects these strategic alliances to combine the Company's
expertise in providing high quality telecommunications services with
the utility's name recognition and customer relationships in marketing
telecommunications products and services to the utility's customer
base.
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 operations
was $66.0 million for the 12-month period ended September 30, 1997.
SATELLITE SERVICES
The Company's Satellite Services operations provide satellite
voice and data services to major cruise lines, commercial shipping
vessels, yachts, the U.S. Navy and offshore oil platforms. The Company
8
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also owns a teleport facility which provides international voice and
data transmission services. Revenue for Satellite Services operations
was $28.5 million for the 12-month period ended September 30, 1997.
The Company has been considering the disposition of its Satellite
Services operations for some time to better focus its efforts on its
core Telecom Services unit, although it has not approved or adopted a
formal plan for such disposition.
RECENT DEVELOPMENTS
Network Expansion. The Company continues to expand its network
footprint through several strategic initiatives with utility companies
and other telecommunications carriers. In January 1997, the Company
announced an agreement with a subsidiary of Southern that will permit
the Company to construct a 100-mile fiber optic network in the Atlanta
metropolitan area. In June 1997, the Company entered into an
indefeasible right of use ("IRU") agreement with Qwest Communications
Corporation for approximately 1,800 miles of fiber optic network and
additional broadband capacity in California, Colorado, Ohio and the
Southeast. The Company expects this new capacity will be used for the
transmission of local, long distance and data communications services
in and between the Company's markets.
CSW Strategic Alliance. In January 1997, the Company announced a
strategic alliance with CSW which is expected to develop and market
telecommunications services in Austin, Corpus Christi, Dallas, Houston
and San Antonio, Texas. The venture entity, a limited partnership
named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based in Austin,
Texas. CSW holds 100% of the interest in ChoiceCom and the Company has
an option to purchase a 50% interest at any time prior to July 1,
2003. Subsequent to July 1, 1999, if the Company has not exercised its
purchase option, CSW will have the right to sell either 51% or 100% of
the partnership interest in ChoiceCom to the Company. CSW and the
Company each have two representatives on the Management Committee of
the general partner of ChoiceCom. ChoiceCom may eventually offer local
exchange, data communications, long haul and other services in other
cities in Arkansas, Louisiana, Oklahoma and Texas.
Cascade Agreement. In April 1997, the Company entered into an
agreement with Cascade for the purchase of high- speed frame relay and
asynchronous transfer mode ("ATM") switching products that will enable
the Company to provide high-speed data connectivity to its customers.
In addition, the Company has obtained turnkey services from Cascade
for product planning and deployment of the product, including program
management, network design, onsite operations support and training.
Acquisition of Communications Buying Group, Inc. On October 17,
1997, the Company purchased approximately 91% of the outstanding
capital stock of Communications Buying Group, Inc. ("CBG"), an Ohio
based local exchange and Centrex reseller (the "CBG Acquisition"). The
remaining approximately 9% will be purchased on or before March 24,
1998, pursuant to the terms of the Stock Purchase Agreement governing
the CBG Acquisition. The Company paid total consideration of
approximately $46.5 million, plus the assumption of certain
liabilities, and expects to pay approximately $2.9 million for the
purchase of the remaining approximately 9% interest. Separately, on
October 17, 1997, the Company sold approximately $16.0 million of
Common Stock to certain shareholders of CBG.
CBG currently serves customers in Cleveland, Columbus and Akron,
Ohio as well as in surrounding areas. CBG currently has approximately
27,000 Centrex lines in service and over 30,000 business lines in
service, principally pursuant to various resale and other agreements
with Ameritech Corp. ("Ameritech"), the ILEC in the markets it serves.
CBG focuses its sales and marketing efforts on small to medium-sized
businesses and provides a one-stop solution for the local and long
distance needs of its customers. For the calendar year 1996 and the
nine months ended September 30, 1997, CBG's revenue was approximately
$21.4 million and $24.1 million, respectively, and EBITDA losses were
approximately $(1.0) million and $(1.3) million, respectively.
The Company believes that the business strategy of CBG is closely
aligned with that of the Company and that it can successfully leverage
the services offered by CBG to enhance the Company's offering of
similar services in its existing Ohio markets, including all those
currently served by CBG. The acquisition of CBG has doubled the
Company's current sales presence in Ohio to approximately 60 people.
In addition, the Company believes that its ability to migrate, over
time, a portion of CBG's existing customer base to its fiber optic
facilities offers significant cost savings. The Company believes that
the transaction has significantly furthered its goal of becoming the
dominant alternative to the ILEC in Ohio.
Merger Agreement with NETCOM On-Line Communication Services, Inc.
On October 12, 1997, the Company announced that it had signed the
Merger Agreement with NETCOM. NETCOM is a provider of Internet
connectivity and Web-hosting services and a suite of software
applications. For calendar years 1995, 1996 and the nine months ended
September 30, 1997, NETCOM reported revenue of $52.4 million, $120.5
million and $120.1 million, respectively, and EBITDA of $(5.8)
million, $(5.1) million and $(2.4) million, respectively. The Company
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intends to account for the business combination under the
pooling-of-interests method of accounting. Subject to the approval of
the shareholders of ICG and NETCOM and satisfaction of certain other
conditions, the Company anticipates the merger between ICG and NETCOM
(the "NETCOM Merger") to close during the first quarter of 1998.
At the effective time of the NETCOM Merger (the "Effective
Time"), each outstanding share of NETCOM common stock, $.01 par value,
will be automatically converted into and represent the right to
receive a number of shares of Common Stock equal to the Exchange
Ratio. The Exchange Ratio will equal 0.8628 shares of Common Stock if
the closing price of a share of Common Stock (the "Closing Price") is
greater than or equal to $22.125; provided, however, that if the
Closing Price is greater than or equal to $19.00 but less than
$22.125, the Exchange Ratio will equal a fraction (rounded to the
nearest ten-thousandth) determined by dividing $19.0625 by the Closing
Price; and provided further, that if the Closing Price is less than
$19.00, the Exchange Ratio will equal 1.0078. Cash will be paid in
lieu of fractional shares.
The Company believes that the NETCOM Merger will create a
full-service business communications company providing a single source
for a complete range of voice, data, Internet, Web-hosting and other
communications services over an extensive fiber optic network.
Currently, approximately one-half of NETCOM's customers are located in
the Company's existing network territory. It is anticipated that the
NETCOM Merger will enable the combined entity to better utilize ICG's
fiber and frame relay networks.
Financings. In March 1997, the Company raised net proceeds of
$192.4 million from the sale of 11 5/8% Senior Discount Notes due 2007
(the "11 5/8% Notes") of Holdings and 14% Exchangeable Preferred Stock
Mandatorily Redeemable 2008 (the "14% Preferred Stock") of Holdings.
Cash interest on the 11 5/8% Notes accrues at 11 5/8% per annum
beginning March 15, 2002 and is payable quarterly, commencing
September 15, 2002. The 14% Preferred Stock accrues dividends
quarterly at an annual rate of 14% per annum. Dividends are payable
quarterly in cash or, on or prior to March 15, 2002, at the sole
option of Holdings, in additional shares of 14% Preferred Stock. The
Company believes that its liquidity was improved because the 11 5/8%
Notes and the 14% Preferred Stock do not require the payment of cash
interest or cash dividends prior to 2002. The 11 5/8% Notes and the 14%
Preferred Stock have been registered under the Securities Act.
In September and October 1997, Funding, the Company's new
wholly-owned subsidiary, completed a private placement of $132.25
million of Preferred Securities. The Preferred Securities are
mandatorily redeemable November 15, 2009 at the liquidation preference
of $50.00, plus accrued and unpaid dividends. Dividends on the
Preferred Securities will be cumulative at the rate of 6 3/4% per
annum and will be paid in cash through November 15, 2000 and,
thereafter, will be paid in cash and/or shares of Common Stock. The
Preferred Securities are exchangeable, at the option of the holder,
into Common Stock at an exchange price of $24.025 per share. Funding
may, at its option, redeem the Preferred Securities any time on or
after November 18, 2000. Prior to that time, Funding may redeem the
Preferred Securities if the current market value of Common Stock
equals or exceeds the exchange price, for at least 20 days of any
consecutive 30-day trading period, by 170 percent prior to November
16, 1998; by 160 percent from November 16, 1998 through November 16,
1999; and by 150 percent from November 16, 1999 through November 16,
2000.
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FUNDING
Funding is a special purpose limited liability company formed
under the laws of the State of Delaware pursuant to the filing of a
Certificate of Formation with the Delaware Secretary of State on
September 17, 1997 and the entering into of an Agreement of Limited
Liability Company of ICG Funding, LLC, dated as of September 17, 1997.
Funding's purpose is defined in an Amended and Restated Limited
Liability Company Agreement of ICG Funding, LLC (the "Operating
Agreement"), dated as of September 23, 1997. ICG has acquired all of
the Common Securities of Funding in an aggregate liquidation amount
equal to .01% of all interests in the capital, income, gain, loss,
deduction and credit of Funding at all times. Funding exists for the
exclusive purposes of (i) issuing the Funding Securities, representing
undivided beneficial interests in the assets of Funding, (ii)
investing the proceeds of the sale thereof in the ICG Preferred Stock
and certain U.S. government securities and (iii) engaging in those
other activities necessary or incidental thereto. The term of Funding
will continue until December 31, 2050, unless dissolved before such
date in accordance with the provisions of the Operating Agreement.
The business and affairs of Funding are conducted by ICG, in its
capacity as manager (the "Manager"). The duties and obligations of the
Manager are governed by the Operating Agreement. Funding holds title
to the ICG Preferred Stock for the benefit of the holders of the
Funding Securities and has the power to exercise all rights, powers
and privileges under the ICG Preferred Stock. ICG will pay all fees
and expenses related to the offering of the Preferred Securities. The
rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are as set forth in
the Operating Agreement and the Delaware Limited Liability Company
Act, as amended (the "LLC Act").
RISK FACTORS
SEE "RISK FACTORS," IMMEDIATELY FOLLOWING THIS SUMMARY, FOR A
DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONJUNCTION
WITH AN INVESTMENT IN THE OFFERED SECURITIES, INCLUDING RISKS RELATED
TO HISTORICAL AND ANTICIPATED OPERATING LOSSES, NEGATIVE CASH FLOWS
AND SUBSTANTIAL INDEBTEDNESS.
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RISK FACTORS
An investment in the Offered Securities offered hereby involves a
high degree of risk. The following risk factors, together with the
other information set forth in this Prospectus should be considered
when evaluating an investment in the Company. This Prospectus includes
certain forward-looking statements. The discussion set forth below
contains cautionary statements identifying important factors
including, but not limited to, dependence on increased traffic on the
Company's facilities, the successful implementation of the Company's
strategy of offering an integrated telecommunications package of
local, long distance, data communications and value added services,
continued development of the Company's network infrastructure and
actions of competitors and regulatory authorities, that could cause
actual results to differ materially from the forward-looking
statements.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES, NET LOSSES AND
NEGATIVE CASH FLOWS
The Company has incurred and expects to continue to incur
significant operating and net losses. For the 12 months ended
September 30, 1997, the Company had revenue of approximately $252.5
million, an operating loss of approximately $161.2 million, negative
EBITDA of approximately $112.6 million, cash used by operating
activities of approximately $80.0 million, interest expense of
approximately $106.8 million and a net loss of approximately $274.2
million. In conjunction with the increase in its service offerings,
the Company will need to spend significant amounts on sales,
marketing, customer service, engineering and corporate personnel prior
to the generation of appreciable revenue. The Company expects to
continue to generate significant negative cash flows from operating
activities while it emphasizes development, construction and expansion
of its Telecom Services business and until the Company establishes a
sufficient revenue generating customer base. As the Company's customer
base grows, the Company anticipates that operating margins and cash
flows will improve as incremental revenue will exceed incremental
operating expenses. This is dependent upon the successful
implementation of the Company's local dial tone, local toll, data
communications and long distance service strategies, continued
development of the Company's network infrastructure, increased traffic
on the Company's facilities, any or all of which may not occur, and
upon actions of competitors and regulatory authorities. The Company
had an accumulated deficit and stockholders' deficit of approximately
$593.0 million and $284.5 million, respectively, at September 30,
1997. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flows in the future or at any
time have sufficient resources to meet its obligations, including
funding the mandatory redemption price of the Offered Securities by
redeeming the ICG Preferred Stock for cash. The Company will be
adversely affected if it does not make substantial progress toward
achieving profitability.
RISKS RELATED TO LOCAL SERVICES AND SWITCHED SERVICES STRATEGIES
The Company is a recent entrant in the competitive local
telecommunications services industry. The local telecommunications
services market has only recently opened to competition due to the
passage of the Telecommunications Act, state and federal regulatory
rulings designed to implement the Telecommunications Act, and
negotiations with ILECs under the terms of the Telecommunications Act
and state rulings. The Company is initiating the provision of long
distance and data communications services. The Company believes that
offering a full-service portfolio of local, long distance and data
products is the best method for gaining market share among business
customers and reducing customer churn. However, the Company has only
recently begun to offer long distance services and has not yet
generated any revenue from data services, despite its offering of
these services since the first quarter of 1997. The Company is making
significant operating and capital investments and will have to address
numerous operating complexities associated primarily with providing
local services. The Company will be required to develop new
provisioning and technical support systems and will need to develop
new marketing initiatives and hire and train a new sales force
responsible for selling its services. The Company will also need to
supplement the necessary billing and collection systems for local
services and integrate these systems with those of its long distance
and other services, including data services. There can be no assurance
that the Company can design and install, and coordinate with ILECs
regarding, necessary provisioning, billing and customer management
systems in a timely manner to permit the Company to provision local
exchange, local toll, long distance or data communications services as
planned.
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The Company expects to face significant competition from ILECs,
whose core business is providing local dial tone service. The ILECs
which currently are the dominant providers of services in their
markets, are expected to mount a significant competitive response to
new entrants in their market, such as the Company. The Company expects
to face significant competitive product and pricing pressures from the
ILECs in these markets, as well as from other CLECs.
The Company began generating switched services revenue in the
fourth quarter of fiscal 1994, and substantially all of the Company's
current switched revenue is from wholesale customers. The Company is
experiencing 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
expects overall operating margins from switched services to improve as
local dial tone, local toll, long distance and data communications
services become a relatively larger portion of its business mix and
the Company deemphasizes its wholesale switched services.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The terms governing certain of Holdings' senior indebtedness and
preferred stock impose significant operating and financial
restrictions on the Company. Such restrictions affect, and in certain
cases significantly limit or prohibit, among other things, the ability
of the Company and its subsidiaries to incur additional indebtedness,
create liens on its assets, pay dividends, sell assets, engage in
mergers or acquisitions or make investments. Failure to comply with
such covenants would result in a default thereunder, in which case the
lenders will be able to accelerate the maturity of the applicable
indebtedness. Moreover, the instruments governing the Company's
material indebtedness contain cross-default provisions which provide
that a default under other indebtedness will be considered a default
under the indebtedness in question. In the event that a cross-default
were triggered, the maturity of substantially all of the Company's
approximately $940.9 million of indebtedness at September 30, 1997
would be accelerated and become immediately due and payable. As a
result, the Company would not be able to satisfy all of its debt
obligations, which would have a substantial material adverse effect on
the value of the Offered Securities and the Company's ability to
continue as a going concern. There can be no assurance that the
Company will be able to comply with such covenants in the future or
that such compliance would not cause the Company to forego
opportunities that might otherwise be beneficial to the Company.
SUBSTANTIAL INDEBTEDNESS
As of September 30, 1997, the Company had, on a consolidated
basis, aggregate accreted indebtedness, including capitalized lease
obligations, of approximately $940.9 million. With respect to
indebtedness currently outstanding, the Company has interest payment
obligations of approximately $113.3 million in 2001, $158.0 million in
2002 and $168.1 million in 2003. In addition, with respect to the
Preferred Securities and Holdings' preferred stock currently
outstanding, the Company has cash dividend obligations of
approximately $8.9 million in each of 1998, 1999 and 2000, $21.5
million in 2001, $57.0 million in 2002 and $70.9 million in 2003.
Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to March
2001, when Holdings is required to commence cash interest payments
under its senior indebtedness. The Company's ability to obtain
additional sources of cash will depend on, among other things, its
financial condition at the time, the restrictions in the instruments
governing its indebtedness and other factors, including market
conditions, beyond the control of the Company. Additional sources of
cash may include public and private equity and debt financings by ICG,
Holdings and their subsidiaries, sales of non-strategic assets,
capitalized leases and other financing arrangements. There can be no
assurance that the Company will be able to refinance such
indebtedness, including such capitalized leases, or obtain such
additional funds, and if the Company is unable to effect such
refinancings or obtain additional funds, the Company's ability to make
principal and interest payments on its indebtedness, including payment
of cash dividends on, or the mandatory redemption price of, the
Preferred Securities, its ability to continue as a going concern and
the price of the Offered Securities will be substantially materially
adversely affected.
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RISKS RELATED TO RAPID EXPANSION OF BUSINESS; INTEGRATION OF ACQUIRED
BUSINESSES
The continued rapid expansion and development of the Company's
business will depend on, among other things, the Company's ability to
successfully implement its sales and marketing strategy, evaluate
markets, lease fiber, design and build fiber backbone routes, secure
financing, install facilities, acquire rights of way and building
access, obtain any required government authorizations, implement
interconnection to, and collocation with, facilities owned by ILECs
and obtain appropriately priced unbundled network elements from the
ILECs, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions. In addition, such expansion may involve
acquisitions which, if made, could divert the resources and management
time of the Company and require integration with the Company's
existing networks and service offerings. See "--Risks Related to Local
Services and Switched Services Strategies."
The Company has experienced rapid growth. The Company intends to
continue to grow through further expansion of its existing operations,
through acquisitions including the CBG Acquisition and the NETCOM
Merger, and through the establishment of new operations. The Company
constantly evaluates acquisition opportunities. The Company's ability
to manage its anticipated future growth will depend on its ability to
evaluate new markets and investment vehicles, monitor operations,
control costs, maintain effective quality controls, and significantly
expand the Company's internal management, technical and accounting
systems. The Company's rapid growth has placed, and its planned future
growth will continue to place, a significant strain on the Company's
financial, management and operational resources, including the
identification of acquisition targets and the negotiation of
acquisition agreements. In addition, acquisitions and the
establishment of new operations will entail considerable expenses in
advance of anticipated revenues and may cause fluctuations in the
Company's operating results.
In addition, the Company's acquired and new businesses will need
to be integrated with its existing operations. For acquired
businesses, including CBG and NETCOM, this may entail, among other
things, integration of switching, transmission, technical, sales,
marketing, billing, accounting, quality control, management,
personnel, payroll, regulatory compliance and other systems and
operating hardware and software, some or all of which may be
incompatible. The failure to effectively integrate acquired businesses
could have a material adverse effect on the Company's business,
growth, financial condition and results of operations and the price of
the Offered Securities.
COMPETITION
The Company operates in an increasingly competitive environment
dominated by ILECs such as the Regional Bell Operating Companies
("RBOCs") and GTE Corporation ("GTE"). The Company's current
competitors include RBOCs, GTE, other independent ILECs, other CLECs,
network systems integration service providers, microwave and satellite
service providers, teleport operators, wireless telecommunications
providers and private networks of large end users. Potential
competitors include cable television companies, utilities, ILECs
outside their current local service areas and the local access
operations of long distance carriers. Consolidation of
telecommunications companies, including mergers between certain of the
RBOCs, and the formation of strategic alliances within the
telecommunications industry, as well as the development of new
technologies, could give rise to increased competition. One of the
primary purposes of the Telecommunications Act is to promote
competition, particularly in the local telephone market. Since 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. For example, AT&T Corp., MCI Communications Corp., Time
Warner Communications, Inc., Texas Utilities Company and other large
companies are entering the local markets as competitors of the
Company. This may result in more participants than can ultimately be
successful in a given market.
As a recent entrant in the telecom services industry, the
Company, like other CLECs, has not achieved a significant market
share. The ILECs have long-standing relationships with their
customers, have the potential to subsidize services with revenue from
a variety of businesses and have benefitted from certain state and
federal regulations that, until recently, favored the incumbent
operator over potential competitors. The Telecommunications Act, other
recent state legislative actions, and current federal and state
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regulatory initiatives provide increased business opportunities for
the Company and others by removing or substantially reducing barriers
to local exchange competition. However, these new competitive
opportunities are accompanied by potential new competitive
opportunities for the ILECs, as the Telecommunications Act provides
the conditions for the removal of previous restrictions on the
provision of long distance services by the RBOCs. It is also expected
that increased local competition will result in increased pricing
flexibility for, and relaxation of regulatory oversight of, the ILECs.
If the ILECs are permitted to engage in increased volume and discount
pricing practices or charge CLECs increased fees for interconnection
to their networks, or if the ILECs seek to delay implementation of
interconnection to their networks, the Company's results of operations
and financial condition could be adversely affected. In addition, the
Company has experienced declining access unit prices and increasing
price competition for access services which to date have been more
than offset by increasing network usage. The Company expects to
continue to experience declining prices for the foreseeable future.
There can be no assurance that the Company will be able to achieve or
maintain adequate market share or revenue, or compete effectively in
any of its markets. Any of the foregoing factors could have a material
adverse effect on the Company and on the price of the Offered
Securities.
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.
Finally, with respect to the NETCOM Merger, when completed, the
Company will experience substantial competition in providing Internet
services.
REGULATION
The Company operates in an industry that is undergoing
substantial regulatory change as a result of the passage of the
Telecommunications Act. The Company's Telecom Services activities are
regulated by the FCC, state regulatory agencies and municipalities.
The Company's Satellite Service activities are regulated by the FCC
and international regulatory bodies.
The FCC regulates the Company's provision of interstate common
carrier services, including long distance and data services, and the
Company's provision of international services. The Company currently
files and maintains tariffs with the FCC. In addition, the FCC and
state regulatory bodies are charged with implementing the
Telecommunications Act, which has a substantial impact on the
development of the Company's local exchange business. The
Telecommunications Act is also subject to actions of the federal
courts, while state regulatory actions are subject to review and
actions of both state and federal courts. State regulatory agencies
regulate the Company's provision of local dial tone and other
intrastate common carrier services. In general, the Company is
required to obtain certification from the relevant state public
utilities commissions prior to the initiation of intrastate service
and is also required to file tariffs listing the rates, terms and
conditions of intrastate services provided. Several states also impose
operating restrictions on the CLEC industry, covering the ability to
raise and lower prices and restrictions on marketing and sales
activities. In addition, local authorities control the Company's
access to municipal rights of way. Any failure to maintain proper
federal and state tariffing or state certification, or noncompliance
with federal, state or local laws or regulations, could have a
material adverse effect on the Company.
The Telecommunications Act generally requires ILECs to provide
interconnection, nondiscriminatory access to ILEC networks, unbundling
of ILEC networks and access to ILEC operational support systems and
network portability. The Telecommunications Act imposes a variety of
new duties on the ILECs in order to promote network competition in the
markets for local exchange and access services, including the duty to
negotiate in good faith with competitors requesting interconnection to
the ILEC networks. However, negotiations with each ILEC have sometimes
involved considerable delays and the resulting negotiated agreements
may not necessarily be obtained on terms and conditions that are
desirable to the Company. In such instances, the Company has
petitioned the proper state regulatory agency to arbitrate disputed
issues. In addition, following state review either party in the
negotiations can appeal to the federal courts. There can be no
assurance that the Company will be able to negotiate acceptable new
interconnection agreements with ILECs or that, if state regulatory
authorities impose terms and conditions on the parties in arbitration,
such terms will be acceptable to the Company.
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On August 8, 1996, the FCC adopted rules and policies
implementing the interconnection provisions of the Telecommunications
Act, which rules, in general, are favorable to new competitive
entrants. The FCC's rules were challenged in the federal courts of
appeals by GTE, the RBOCs, other large independent ILECs and state
regulatory commissions. On July 18, 1997, the U.S. Court of Appeals
for the Eighth Circuit (the "Eighth Circuit Court") issued a ruling
that vacated certain of the FCC's rules and upheld the FCC's rules on
other issues.
In the July 18, 1997 decision, the Eighth Circuit Court ruled
that state commissions, not the FCC, have jurisdiction over the
pricing of interconnection, unbundled network elements and resale
services. The Eighth Circuit Court also ruled that the FCC's
interpretation of Section 252(i) of the Telecommunications Act, the
so-called "pick and choose" provision, was incorrect. The Eighth
Circuit Court held that the Telecommunications Act allows CLECs to
adopt whole interconnection agreements negotiated by other competitors
but not to "pick and choose" pieces of existing agreements.
Because the Eighth Circuit Court held that CLECs cannot "pick and
choose" pieces of other interconnectors' negotiated interconnection
agreements, the Company may be subject to the risk that other CLECs
negotiate more favorable prices, terms or conditions with the ILECS.
The Company's only recourse under such circumstances may be to adopt
other interconnectors' agreements with an ILEC in whole, though these
agreements may include terms and conditions the Company finds
unacceptable. The Eighth Circuit Court upheld certain of the FCC's
rules regarding unbundled network elements. Moreover, the Eighth
Circuit Court's decision does not alter most of the basic statutory
requirements of the Telecommunications Act, including the statutory
requirements that the ILECs conduct negotiations and enter into
interconnection agreements with competitive carriers.
Separate petitions for rehearing of the July 18 decision were
filed with the Eighth Circuit Court by a group of interexchange carriers
("IXCs"), two groups of ILECs and a group of CLECs. On October 14, 1997
the Eighth Circuit Court granted the ILEC petitions for rehearing, and
denied the CLEC and IXC petitions. The Court's decision on rehearing
vacated an additional FCC rule that addressed the ability of new
entrants to purchase ILEC network elements at cost-based rates on a
bundled rather than an unbundled basis. Management believes the
Company could benefit from a reversal in whole, or in part, of the
Eighth Circuit Court's decision.
The FCC (and other parties) have sought review by the U.S. Supreme
Court of the Eighth Circuit Court's decision. Separate petitions for
certiorari have been filed by the FCC, a group of ILECs, and a group
of CLECs, including the Company. A conditional cross-petition for
certiorari also has been filed by the RBOCs.
On December 31, 1997, the United States District Court for the
Northern District of Texas, in a case brought by SBC Communications, Inc.,
issued a decision holding that Sections 271 through 275 of the
Telecommunications Act are unconstitutional under the U.S. Constitution.
These sections of the Telecommunications Act impose restrictions on the
lines of business in which the RBOCs may engage, including establishing
the conditions the RBOCs must satisfy before they may provide inter-LATA
long distance telecommunications services within their local telephone
service areas. A group of IXCs, and the Department of Justice, have filed
a request for a stay of the decision with the District Court, and have
indicated their intention to immediately appeal the decision to the U.S.
Court of Appeals for the Fifth Circuit.
Although the Company believes that the Telecommunications Act and
other state and federal regulatory initiatives that favor increased
competition are advantageous to the Company, there can be no assurance
that changes in current or future state or federal regulations,
including changes that may result from further court review of the
FCC's interconnection rules and the provisions of the Telecommunications
Act, or increased competitive opportunities resulting from such changes,
will not have a material adverse effect on the Company and on the price
of the Offered Securities.
The Company must obtain and maintain certain FCC authorizations
for its satellite and wireless services. The Company currently
provides maritime communication services pursuant to an experimental
license and a grant of Special Temporary Authority ("STA"). The
Company's experimental license has been renewed by the FCC on several
occasions. In January 1997, the Company submitted an application for
the modification and renewal of the experimental license, which was
due to expire on February 1, 1997. Under the FCC's procedures, the
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experimental license remained valid pending FCC action on the
renewal and modification. On November 21, 1997, the FCC granted a
renewal of the experimental license, although not all of the requested
modifications were granted at that time. On January 30, 1997, the
Company was granted the STA for which the Company filed for a six-month
extension on July 25, 1997. The Company has received a verbal grant of
the extension. Although the Company expects that the FCC will issue a
permanent license, there can be no assurance the Company will be granted
a permanent license, that the experimental license and STA currently
being used to provide maritime services will be renewed for a further
term or that any license granted by the FCC will not require substantial
payments by the Company.
The FCC and relevant state public utilities commissions have the
authority to regulate interstate and intrastate telephone rates,
respectively, ownership of transmission facilities and the terms and
conditions under which certain of the Company's services are provided.
Federal and state regulations and regulatory trends have had, and in
the future are likely to have, both positive and negative effects on
the Company and its ability to compete. The recent trend in both
federal and state regulation of telecommunications service providers
has been in the direction of reduced regulation. In general, neither
the FCC nor the relevant state public utilities commission currently
regulate the Company's long distance rates or profit levels, although
either or both may do so in the future. There can be no assurance that
changes in current or future federal or state regulations or future
judicial changes would not have a material adverse effect on the
Company.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's current plans for expansion of existing networks,
the development of new networks, the further development of the
Company's products and services and the continued funding of operating
losses may require additional cash from outside sources. The Company's
arrangements with utilities require it to make significant cash
payments and the development of the Company's networks requires
significant capital expenditures for transmission equipment, switching
and network build-out from the utilities' fiber backbone to end user
locations. The Company must also purchase a substantial amount of
equipment and other assets from vendors. The Company anticipates that
the expansion of existing networks, construction of new networks and
further development of the Company's products and services will
require capital expenditures of approximately $410.0 million in 1998,
and continued significant capital expenditures thereafter. Further, the
Company has significant personnel expenses related to increasing its
marketing efforts and offering new long distance and planned data
transmission services in anticipation of revenue growth. The Company
also plans to make strategic acquisitions from time to time. The
Company anticipates that its substantial cash requirements will
continue into the foreseeable future. Due to the number of opportunities
arising from changes in the telecommunications regulatory environment
and the cash required to take advantage of these opportunities, the
Company believes that cash on hand and amounts expected to be available
through vendor financing arrangements will provide sufficient funds
necessary for the Company to expand its telecom services business as
currently planned and to fund its operating deficits into the third
quarter of 1998. Additional sources of cash may include public and
private equity and debt financings of ICG, Holdings or their subsidiaries,
sales of non-strategic assets, capitalized leases and other financing
arrangements. There can be no assurance that additional financing
will be available to the Company or, if available, that it can be
obtained on terms acceptable to the Company. Failure to obtain such
financing could result in the delay or abandonment of some or all
of the Company's acquisition, development and expansion plans and
expenditures, which could have a material adverse effect on its
business prospects and limit the Company's ability to fund the
mandatory redemption price of the Preferred Securities by redeeming
the ICG Preferred Stock for cash.
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest customers accounted for approximately
28%, 30% and 28% of the Company's consolidated revenue in fiscal 1996,
the three months ended December 31, 1996 and the nine months ended
September 30, 1997, respectively. The loss of, or decrease of business
from, one or more of these customers could have a material adverse
effect on the business, financial condition and results of operations
17
<PAGE>
of the Company. While the Company actively markets its products and
services, there can be no assurance that the Company will be able to
attract new customers or retain its existing customers.
RISKS OF ENTRY INTO LONG DISTANCE BUSINESS
In order to offer its end user customers a complete package of
telecommunications services, the Company recently began offering long
distance services. Although the Company has extensive experience in
the telecommunications business, including an executive team with
sales, marketing and long distance management expertise, the Company
has limited experience providing long distance services. The long
distance business is extremely competitive and prices have declined
substantially in recent years and are expected to continue to decline.
The Company does not expect long distance services to generate a
material portion of its revenues over the near term.
The Company relies on other carriers to provide transmission and
termination services for a majority of its long distance traffic and
will therefore be dependent on such carriers. The Company has entered
into agreements with long distance carriers to provide it with long
distance transmission services. Such agreements typically provide for
the resale of long distance services on a per minute basis (some with
minimum volume commitments). Where the Company anticipates higher
volumes of traffic, it may lease point-to-point circuits on a monthly
or longer term fixed cost basis. The negotiation of these agreements
involves estimates of future supply and demand for long distance
telecommunications transmission capacity. Should the Company fail to
meet its minimum volume commitments, if any, pursuant to these
agreements, it may be obligated to pay underutilization charges.
Likewise, the Company may underestimate its need for long distance
facilities and therefore be required to obtain the necessary
transmission capacity through more expensive means. There can be no
assurance that the Company will acquire long distance capacity on
favorable terms or that the Company can accurately predict long
distance prices and volumes so that it can generate positive gross
margins. The success of the Company's entry into the long distance
business will be dependent upon, among other things, the Company's
ability to select new equipment and software and integrate these into
its networks, hire and train qualified personnel, enhance its billing,
back-office and information systems to accommodate long distance
services and the acceptance of potential customers of the Company's
long distance service offerings. If the Company's long distance
transmission business fails to generate positive gross margins or if
the Company fails in any of the foregoing respects, such failure may
have a material adverse effect on the Company's business and the price
of the Offered Securities. In addition, a majority of the Company's
Telecom Services revenue is derived from long distance carrier
customers. The Company is subject to the risk that its entry into the
long distance business will adversely affect its relationship with its
long distance carrier customers.
RISKS OF ENTRY INTO DATA TRANSMISSION BUSINESS
To complement its telecommunications services offerings the
Company began offering frame relay services in California, Colorado
and Ohio during the first quarter of 1997. These services are targeted
at the Company's existing customers and other businesses with
substantial data communications requirements. To date, the Company has
not generated any revenue from these services, despite having offered
these services since the first quarter of 1997. Based on this market
experience, the Company is reevaluating its previous product and
customer strategies, and expects to generate low or negative gross
margins and substantial start-up expenses as it develops and rolls out
its data services. The Company does not expect data transmission
services to generate a material portion of its revenue over the near
term.
Although the Company has extensive experience in the
telecommunications business, the Company has no direct experience
providing data transmission services. Additionally, the data
transmission business is extremely competitive and prices have
declined substantially in recent years and are expected to continue to
decline. In providing these services, the Company will be dependent
upon vendors for assistance in the planning and deployment of its
initial data product offerings as well as ongoing training and
support. The success of the Company's entry into the data transmission
business will be dependent upon, among other things, the Company's
ability to select new equipment and software and integrate these into
its networks, hire and train qualified personnel, enhance its billing,
18
<PAGE>
back-office and information systems to accommodate data transmission
services and customer acceptance of the Company's data services. No
assurance can be given that the Company will be successful with
respect to these matters. If the Company is not successful with
respect to these matters, there may be a material adverse effect on
the Company's business and the price of the Offered Securities.
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the
Company's growth and its ability to monitor costs, bill customers,
provision customer orders and achieve operating efficiencies. Billing
and information systems for the Company's historical lines of business
have been produced largely in-house with partial reliance on third
party vendors. These systems have generally met the Company's needs
due in part to the Company's low volume of bills and orders. As the
Company commences providing local, long distance and data transmission
services, the need for sophisticated billing and information systems
is increasing significantly. The Company's current local billing
platform plans rely on products and services provided by third party
vendors. Additionally, the Company is developing automated systems and
customer service centers to provision orders. Information systems are
vital to the success of these centers, and the information systems for
these centers are largely being developed by third party vendors.
San Francisco Consulting Group ("SFCG") has been engaged by the
Company to recommend a long-term customer care and billing solution,
to provide support in development of short to long-term information
systems planning and to facilitate and improve the provisioning
process. The services provided by SFCG focus primarily on further
development of the Company's abilities to ensure that back-office
processes and functions operate at maximum effectiveness. The
failure of (i) the Company's vendors to deliver proposed products
and services in a timely and effective manner, (ii) the Company
to adequately identify all of its information and processing needs
or (iii) the Company to upgrade systems as necessary, could have a
material adverse impact on the ability of the Company to reach its
objectives, and on its financial condition and results of operations.
While the Company believes that its software applications are
year 2000 compliant, there can be no assurance until the year 2000
occurs that all systems will then function adequately. Further, if the
software applications of local exchange carriers, long distance
carriers or others on whose services the Company depends are not year
2000 compliant, it could have a material adverse effect on the
Company's financial condition and results of operations and the price
of the Offered Securities.
RISKS RELATED TO JOINT VENTURES AND STRATEGIC ALLIANCES
The Company has formed a strategic alliance with CSW for the
purpose of providing services, through ChoiceCom, in Austin, Corpus
Christi, Dallas, Houston and San Antonio, Texas. Under the terms of
this arrangement, CSW holds a 100% interest in ChoiceCom and the
Company has an option to purchase a 50% interest. Under the terms of
certain of its indebtedness, the Company is currently prohibited from
making any investment in ChoiceCom (other than a $15.0 million debt
investment that the Company has committed to make, of which
approximately $6.4 million was advanced as of September 30, 1997) and
from purchasing less than a majority interest in any venture. Unless
the terms of certain of the Company's indebtedness are revised (which
could entail substantial costs), the Company may not be able to
exploit opportunities for joint ventures, which could have an adverse
effect on the Company and the price of the Offered Securities. The
Company has also formed strategic alliances with utility companies
to lease fiber optic facilities. The Company expects to continue to
enter into strategic alliances, joint ventures and other similar
arrangements in the future.
The other parties to such existing arrangements, and to arrangements
in which the Company may subsequently participate, may at any time have
economic, business or legal interests or goals that are inconsistent with
those of the strategic alliance, joint venture or similar arrangement or
those of the Company. In addition, a joint venture partner may be unable
to meet its economic or other obligations to the venture, which,
depending upon the nature of such obligations, could adversely affect
the Company and the price of the Offered Securities.
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<PAGE>
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and
significant changes in technology. The effect of technological
changes, including changes relating to emerging wireline and wireless
transmission technologies, on the business of the Company cannot be
predicted.
DEPENDENCE ON RIGHTS OF WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights of way, franchises and
licenses from various private parties, including actual and potential
competitors, and local governments in order to construct and maintain
fiber optic networks. There can be no assurance that the Company will
obtain rights of way and franchise agreements to expand its networks
or that these agreements will be on terms acceptable to the Company,
or that current or potential competitors will not obtain similar
rights of way and franchise agreements. Because certain of these
agreements are short-term or are terminable at will, there can be no
assurance that the Company will continue to have access to existing
rights of way and franchises after the expiration of such agreements.
An important element of the Company's strategy is to enter into
long-term agreements with utilities to take advantage of their
existing facilities and to license or lease their excess fiber
capacity. The Company has entered into contracts and is negotiating
agreements with other utilities. However, other CLECs are seeking to
enter into similar arrangements and have bid and are expected to
continue to bid against the Company for future licenses or leases.
Furthermore, utilities are required by state or local regulators to
retain the right to "reclaim" fiber licensed or leased to the Company
if such fiber is needed for the utility's core business. There can be
no assurance that the Company will be able to obtain additional
licenses or leases on satisfactory terms or that such arrangements
will not be subject to reclamation. If a franchise, license or lease
agreement was terminated and the Company was forced to remove or
abandon a significant portion of its network, such termination could
have a material adverse effect on the Company and the price of the
Offered Securities.
KEY PERSONNEL
The efforts of a small number of key management and operating
personnel will largely determine the Company's success. The success of
the Company also depends in part upon its ability to hire and retain
highly skilled and qualified operating, marketing, financial and
technical personnel. The competition for qualified personnel in the
telecommunications and Internet access services industries is intense
and, accordingly, there can be no assurance that the Company will be
able to hire or retain necessary personnel. The loss of certain key
personnel could adversely affect the Company and the price of the
Offered Securities.
NO DIVIDENDS
The Company does not expect to generate net income in the near
future and, therefore, does not anticipate paying cash dividends on
the Common Stock. The payment of any future dividends on the Common
Stock is effectively prohibited by the indentures for certain of
Holdings' senior indebtedness.
POSSIBLE STOCK PRICE VOLATILITY
The price of the Common Stock has been, and is expected to
continue to be, highly volatile. Factors such as legislation or
regulation, variations in the Company's revenue, earnings and cash
flow, the difference between the Company's actual results and the
results expected by investors and analysts and announcements of new
service offerings, marketing plans or price reductions by the Company
or its competitors, technological innovations, mergers or strategic
alliances, may cause the price of Common Stock to fluctuate
substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that have
20
<PAGE>
affected growth companies such as telecommunications concerns. The
fluctuations in the market prices of the stocks of many companies have
not been directly related to the operating performance of those
companies. Such market fluctuations may materially adversely affect
the price of the Common Stock and the Preferred Securities.
NO OPERATIONS OF FUNDING
The issuer of the Preferred Securities, Funding, is a special
purpose subsidiary of ICG which is a newly formed Delaware limited
liability company with no operations or assets other than the
agreement to purchase ICG Preferred Stock, Treasury Strips and other
government securities purchased with the proceeds of the Original
Offering. Funding will have no other funds to pay cash dividends. In
order to pay subsequent dividends, Funding will be dependent on ICG to
provide it with cash (which is currently prohibited by the terms of
ICG's indebtedness) or to issue it Common Stock (which is required by
the terms of the ICG Preferred Stock). Funding's assets will consist
almost entirely of its interest in the ICG Preferred Stock and the
Treasury Strips.
NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
ICG will guarantee the payment in full to the holders of the
Preferred Securities of (i) accrued and unpaid dividends on the
Preferred Securities, if and only to the extent Funding has funds
sufficient to make such payment therefor, (ii) the redemption price
with respect to the Preferred Securities redeemed, if and only to the
extent Funding has funds sufficient to make such payment and (iii)
upon a voluntary termination or involuntary dissolution, winding-up or
termination of Funding (other than in connection with a redemption of
all of the Preferred Securities), the lesser of (a) the aggregate of
the liquidation preference and all accrued and unpaid dividends on the
Preferred Securities to the date of payment, to the extent Funding has
funds sufficient to make such payment, and (b) the amount of assets of
Funding remaining available for distribution to holders of the
Preferred Securities upon liquidation of Funding. Such guarantee will
also be subject to the contractual restrictions contained in the
indentures (the "Indentures") for ICG's outstanding high yield notes.
The Indentures currently effectively prohibit any cash payment on the
Guarantee.
Because the Guarantee is limited to the amount of the funds held
by Funding and is currently limited by the provisions of the
Indentures, the Guarantee is of no practical benefit to holders of the
Preferred Securities.
RANKING OF ICG PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF ICG
The ICG Preferred Stock will be subordinated to all existing and
future indebtedness and other liabilities of ICG and its subsidiaries,
and will, with respect to dividend distributions and distributions
upon the liquidation, winding-up or dissolution of ICG, rank senior to
all Common Stock and senior to or pari passu with all other capital
stock of ICG. There are no terms in the ICG Preferred Stock, the
Preferred Securities or the Guarantee that limit ICG's ability to
incur additional indebtedness or issue pari passu or junior preferred
stock. As of September 30, 1997, the Company had approximately $940.9
million of accreted indebtedness outstanding and approximately $281.9
million of preferred stock of Holdings outstanding. The outstanding
preferred stock of Holdings is effectively senior to the ICG Preferred
Stock. All of such indebtedness and preferred stock must be repaid or
refinanced prior to the mandatory redemption of the Preferred
Securities. Any securities issued to refinance such indebtedness and
preferred stock may prohibit the redemption of the ICG Preferred Stock
for cash, thus effectively prohibiting the redemption of the Preferred
Securities for cash. See "Substantial Indebtedness."
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED SECURITIES; VOLATILITY OF
COMMON STOCK PRICE
The Preferred Securities are a new issue of securities for which
there is currently no active trading market. If the Preferred
Securities are traded after their initial issuance, they may trade at
a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, the
market price of Common Stock and other factors, including general
economic conditions and the financial condition, performance of, and
21
<PAGE>
prospects for the Company. Because the Preferred Securities are being
sold pursuant to an exemption from registration under applicable
securities laws and, therefore, may not be publicly offered, sold or
otherwise transferred in any jurisdiction where such registration may
be required, no public market for such securities will develop. If an
active market for the Preferred Securities fails to develop or be
sustained, the trading price of such Preferred Securities could be
materially adversely affected. If such a market were to develop, the
Preferred Securities could trade at prices that may be higher or lower
than the initial offering price depending on many factors, including
prevailing interest rates, the price of the Common Stock, the
Company's operating results, and the market for similar securities.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Partnership Status
Funding's ability to pay dividends on Preferred Securities
depends, in part, on the classification of Funding as a partnership
for federal income tax purposes. Assuming the accuracy of certain
factual matters as to which Funding has made representations, counsel
is of the opinion that, under current law, Funding will be classified
as a partnership for federal income tax purposes. No ruling from the
Internal Revenue Service (the "IRS") as to classification has been or
is expected to be requested. Instead, Funding intends to rely on such
opinion of counsel (which is not binding on the IRS).
If Funding were classified as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on
its income at corporate rates (currently a 35% federal rate),
distributions would generally be taxed again to the holders of
Preferred Securities as corporate distributions, and no income, gains,
losses or deductions would flow through to the holders of Preferred
Securities. Because a tax would be imposed upon Funding as an entity,
the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Treatment of Funding as an
association taxable as a corporation or otherwise as a taxable entity
would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would
likely result in a substantial reduction in the value of Preferred
Securities.
Funding Allocations
It is possible that a holder may receive allocations of income
resulting from deemed distributions to Funding without matching cash
distributions. Furthermore, a holder who disposes of Preferred
Securities between record dates for dividends will be required
pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the
month that such disposition occurs in income (and to add such amount
to the adjusted tax basis in the holder's Preferred Securities)
without receiving the dividend for the quarter in which such
disposition occurs. Furthermore, certain allocation methods of Funding
may be challenged by the IRS, which may result in greater tax
liability to holders of Preferred Securities during their period of
ownership or upon disposition.
Disposition of Preferred Securities
A holder who sells Preferred Securities will recognize gain or
loss equal to the difference between the amount realized and his
adjusted tax basis in such Preferred Securities. Thus, prior Funding
distributions in excess of cumulative net taxable income in respect of
Preferred Securities which decreased a holder's tax basis in such
Preferred Securities will, in effect, become taxable income if the
Preferred Securities are sold at a price greater than the holder's tax
basis in such Preferred Securities, even if the price is less than his
original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a capital loss.
Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax
purposes.
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<PAGE>
LIMITED VOTING RIGHTS
Generally, holders of the Preferred Securities do not have any
voting rights. However, the vote of a majority of the Preferred
Securities is required to approve any amendment to the Operating
Agreement or any proposed action by Funding that would (i) have a
material adverse effect on the powers, preferences or special rights
of the holders of the Preferred Securities or (ii) cause the
dissolution, winding-up or termination of Funding. The approval of the
holders of a majority of the ICG Preferred Stock is required to
approve any change to ICG's charter or any proposed action by ICG that
would (i) have a material adverse effect on the powers, preferences or
special rights of the holder of the ICG Preferred Stock or (ii) cause
the dissolution, winding-up or termination of Funding. Funding is
expected to be the sole holder of the ICG Preferred Stock. Funding has
agreed not to grant such approval without the consent of the holders
of a majority of the Offered Securities then outstanding.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
As of September 30, 1997, there were 32,413,010 shares of Common
Stock outstanding, all of which are transferable without restriction
or further registration under the Securities Act, except for any
shares of Common Stock held by affiliates of ICG, which will be
subject to the resale limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). In addition, ICG has reserved and
registered under the Securities Act the following 9,219,802 shares of
Common Stock for future issuance: (i) 1,981,914 shares of Common Stock
issuable pursuant to Holdings-Canada warrants; (ii) 3,373 shares of
Common Stock issuable upon conversion of the remaining interest on the
Company's 7% Convertible Subordinated Notes; (iii) 4,923,011 shares of
Common Stock issuable pursuant to outstanding options, with exercise
prices ranging from $2.92 to $25.00 per share; (iv) 424,511 shares of
Common Stock reserved for issuance under ICG's 401(k) Plan; (v)
250,000 shares of Common Stock reserved for issuance upon the exercise
of Series A Warrants, with an exercise price of $7.94 per share; (vi)
250,000 Shares of Common Stock reserved for issuance upon the exercise
of the Series B Warrants, with an exercise price of $8.73 per share;
(vii) 949,911 shares of Common Stock reserved for issuance pursuant to
ICG's 1996 Employee Stock Purchase Plan, (viii) 405,382 shares of
Common Stock reserved for issuance under the 1996 Stock Option Plan;
and (ix) 31,700 shares of Common Stock which may be issued upon the
exchange of an equal number of shares of Class A Common Shares of
Holdings-Canada. On October 17, 1997, the Company sold 687,221 shares
of Common Stock to certain shareholders of CBG. In addition, Funding
may sell Common Stock to fund dividends on the Preferred Securities.
Further, upon the completion of the NETCOM Merger, approximately 10.1
million shares of Common Stock, subject to adjustment and subject to
the exercise of options for NETCOM common stock prior to the effective
time of the NETCOM Merger, and assuming a share exchange ratio of
0.8628, will be issued to the holders of NETCOM common stock in
exchange for their shares. As of September 30, 1997, NETCOM had
outstanding employee and director stock options, which if outstanding
upon consummation of the NETCOM Merger, and assuming a share exchange
ratio of 0.8628, will convert to options to purchase 1,564,599 shares
of Common Stock. Sales or the expectation of sales of substantial
numbers of Common Stock in the public market could adversely affect
the prevailing market prices for the Offered Securities.
ANTI-TAKEOVER PROVISIONS
Certain provisions of ICG's Certificate of Incorporation and the
corporate charters and debt instruments of its subsidiaries may have
the effect of deterring transactions involving a change in control of
ICG, including transactions in which stockholders might receive a
premium for their shares. ICG's Certificate of Incorporation provides
that directors serve staggered three-year terms and authorizes the
issuance of up to 1,000,000 shares of preferred stock with such
designations, rights and preferences as may be determined from time to
time by ICG's Board of Directors. In addition, the corporate
charter(s) of Holdings and Holdings-Canada authorize the issuance of
up to 1,000,000 and 30,000,000 shares of preferred stock,
respectively, with such designations, rights and preferences as may be
determined by the Board of Directors of Holdings and Holdings-Canada,
respectively. The staggered board provision increases the likelihood
that, in the event of a takeover of ICG, incumbent directors would
retain their positions and, consequently, may have the effect of
discouraging, delaying or preventing a change in control or management
of ICG. The authorization of preferred shares empowers the Board of
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<PAGE>
Directors, without further shareholder approval, to issue preferred
shares with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of issuance, the preferred
shares could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of ICG. In
addition, the Company is, and will continue to be, subject to the
anti- takeover provisions of the Delaware General Corporation Law,
which could have the effect of delaying or preventing a change of
control of the Company. Furthermore, upon a change of control, the
holders of substantially all of the Company's outstanding indebtedness
are entitled, at their option, to be repaid in cash and the holders of
Holdings' preferred stock may, at their option, require Holdings to
redeem their shares for cash. Such provisions may have the effect of
delaying or preventing changes in control or management of the
Company. All of these factors could materially adversely affect the
price of the Offered Securities.
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<PAGE>
USE OF PROCEEDS
The Selling Holders will receive all of the proceeds from any
sale of the Offered Securities. Neither ICG nor Funding will receive
any proceeds from the sale of the Offered Securities.
FINANCIAL INFORMATION REGARDING FUNDING
Funding's financial statements have been consolidated with the
Company's unaudited consolidated financial statements for the nine
months ended September 30, 1997, which are incorporated by reference
herein. The Preferred Securities are included in the Company's
unaudited consolidated balance sheet as redeemable preferred
securities of subsidiaries. Funding has no liabilities or operations
and its sole assets are the net proceeds from the offering of the
Preferred Securities, which have been invested entirely in Treasury
Strips and U.S. government securities. The terms of the Preferred
Securities require Funding to use the principal and earnings on the
Treasury Strips for the payment of the first 13 cash dividends on the
Preferred Securities and to use the principal and earnings on the U.S.
government securities to purchase the ICG Preferred Stock on the
Funding Date (as defined herein). See "Description of the Preferred
Securities - Provisional Redemption by Funding."
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to
combined fixed charges and preferred stock dividends on a historical
basis for each fiscal year in the five-year period ended September 30,
1996, the three-month period ended December 31, 1996 and the
nine-month periods ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
ENDED ENDED
DECEMBER SEPTEMBER
YEARS ENDED SEPTEMBER 30, 31, 30,
--------------------------------------------- -------------
1992 1993 1994 1995 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined
fixed charges and preferred
stock dividends(1). -- -- -- -- -- -- -- --
</TABLE>
(1) For fiscal 1992, 1993, 1994, 1995 and 1996, the three months
ended December 31, 1996, and the nine months ended September 30,
1996 and 1997, earnings were insufficient to cover combined fixed
charges and preferred stock dividends by $3.9 million, $5.9
million, $23.8 million, $75.4 million, $166.3 million, $47.6
million, $138.4 million and $230.5 million, respectively.
Combined fixed charges and preferred stock dividends consist of
interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized,
that portion of rental expense the Company believes to be
representative of interest (i.e., one-third of rental expense)
and preferred stock dividends.
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DESCRIPTION OF THE PREFERRED SECURITIES
The following summary of certain material terms and provisions of
the Preferred Securities does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the
Certificate of Formation, the Operating Agreement and the Written
Action of the Manager of ICG Funding, LLC, dated as of September 24,
1997 (the "Written Action"), with respect to the terms of the
Preferred Securities, copies of which are available upon request to
ICG. Capitalized terms not otherwise defined herein have the meanings
assigned to them in the Operating Agreement of Funding.
GENERAL
Funding has issued 2.645 million Preferred Securities. The
Preferred Securities do not have any subscription or preemptive rights
related thereto. American Stock Transfer and Trust Company, 40 Wall
Street, 46th floor, New York, New York 10005, is transfer agent and
registrar (the "Transfer Agent") for the Preferred Securities.
RANKING
The Preferred Securities, with respect to dividend distributions
and distributions upon the liquidation, winding-up or dissolution of
Funding, rank senior to all classes of common securities of Funding
and to each other class of capital securities or series of preferred
securities of Funding. The Operating Agreement of Funding does not
permit Funding to incur any indebtedness or liabilities or issue any
securities except for the issuance of the Preferred Securities and
obligations to the holders thereof.
ESCROW
Pursuant to an Escrow Agreement dated as of the Original Closing
Date (the "Escrow Agreement"), among Funding, ICG and Norwest Bank
Colorado, National Association, as escrow agent (the "Escrow Agent"),
on the Original Closing Date, Funding used a portion of the proceeds
from the Original Offering to purchase Treasury Strips in an amount
sufficient to fund the cash payment of the first 13 dividends. The
Treasury Strips were pledged to the Escrow Agent for the benefit of
the holders of the Preferred Securities pursuant to the Escrow
Agreement and will be held by the Escrow Agent in the Escrow Account
(as defined below). Pursuant to the Escrow Agreement, immediately
prior to a Dividend Payment Date (through and including November 15,
2000) the Escrow Agent will release from the Escrow Account amounts
sufficient to pay the dividend then due on the Preferred Securities.
Under the Escrow Agreement, once Funding makes the dividend
payments on the Preferred Securities through and including November
15, 2000 (or, in the event of a Provisional Redemption, upon the
making of the Dividend Make-Whole Payment), all of the remaining
Treasury Strips, if any, will be released from the Escrow Account.
"Escrow Account" means the account established with the Escrow Agent
pursuant to the terms of the Escrow Agreement for the deposit of the
Treasury Strips (and earnings thereon and proceeds thereof) purchased
by Funding with a portion of the net proceeds from the sale by Funding
of the Preferred Securities. The summary does not purport to be
complete and is subject in all respects to, and is qualified in its
entirety by reference to, the Escrow Agreement, a copy of which is
available from ICG upon request.
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<PAGE>
DIVIDENDS
Holders of Preferred Securities will be entitled to receive
dividends on the Preferred Securities at the rate of 6 3/4% per annum
of the liquidation preference of Preferred Securities, payable
quarterly. All dividends will be cumulative, whether or not earned or
declared, on a daily basis from the Original Closing Date and will be
payable quarterly in arrears on February 15, May 15, August 15 and
November 15 of each year, commencing on November 15, 1997 (to holders
of record at the close of business on February 1, May 1, August 1 and
November 1 immediately preceding the Dividend Payment Date). Through
and including November 15, 2000, dividends on the Preferred Securities
will be paid in cash. Thereafter, dividends on the Preferred
Securities may be paid at Funding's option, in (i) cash, (ii) Common
Stock, based upon 90% of the Average Market Value of the Common Stock
or (iii) any combination of cash or Common Stock; provided that any
dividend payment must be made in cash to the extent ICG shall have
provided Funding with cash (whether through dividends on the ICG
Preferred Stock or otherwise) to make all or any portion of such
dividend payment with respect to the Preferred Securities. The
Indentures effectively prohibit ICG from providing cash to Funding
(except as a result of Funding selling Common Stock). If any dividend
(or portion thereof) payable in cash on any Dividend Payment Date is
not declared or paid in full in cash on such Dividend Payment Date,
the amount of such dividend that is payable and that is not paid in
cash on such date will cumulate at the dividend rate, compounding
quarterly, until declared and paid in full.
Dividends on the Preferred Securities will be paid to the extent
that Funding has funds legally available for the payment of such
dividends. Amounts available to Funding for dividends to the holders
of the Preferred Securities will be limited to shares of Common Stock
received by Funding from ICG as dividends on the ICG Preferred Stock
(and proceeds from any sales of such Common Stock by Funding) and the
interest on and principal of the Treasury Strips that are held in the
Escrow Account. The ICG Preferred Stock provides that ICG shall pay
dividends to Funding, payable in Common Stock, in an amount sufficient
to allow Funding to pay dividends on the Preferred Securities in full.
Any such Common Stock received by Funding may be paid as a dividend to
the holders of the Preferred Securities or sold in the open market and
the cash proceeds of sale would be used to pay cash dividends on the
Preferred Securities.
EXCHANGE RIGHTS
General. The Preferred Securities are exchangeable at any time,
in whole or in part, prior to the Mandatory Redemption Date (unless
earlier redeemed), at the option of the holder thereof and in the
manner described below, into shares of Common Stock at an initial
exchange rate of 2.0811 shares of Common Stock for each Preferred
Security (equivalent to an exchange price of $24.025 per share of
Common Stock), subject to adjustment as described under "--Exchange
Rights--Exchange Rate Adjustments" below, or an aggregate of 4,786,680
shares of Common Stock (based on the exchange rate on the Original
Closing Date).
A holder of a Preferred Security wishing to exercise its exchange
right shall (i) deliver an exchange notice to the Exchange Agent, (ii)
if required, furnish appropriate endorsements and transfer documents
and (iii) if required, pay all transfer or similar taxes, and the
Exchange Agent shall, on behalf of such holder, exchange such
Preferred Securities with Funding for shares of Common Stock and
deliver such shares of Common Stock to such holder. Generally, such
exchange with Funding, in whole or in part, should not be a taxable
event to the holder. ICG will initially act as Exchange Agent. Holders
may obtain copies of the required form of the exchange notice from the
Exchange Agent.
Holders of Preferred Securities at the close of business on a
dividend record date will be entitled to receive the dividends payable
on such Preferred Securities on the corresponding Dividend Payment
Date notwithstanding the exchange of such Preferred Securities
following such dividend record date but prior to such Dividend Payment
Date. Except as provided in the immediately preceding sentence,
neither Funding nor ICG will make, or be required to make, any
payment, allowance or adjustment for accumulated and unpaid dividends,
whether or not in arrears, on exchanged Preferred Securities. Each
exchange will be deemed to have been effected immediately prior to the
close of business on the day on which the related exchange notice was
received by the Exchange Agent.
No fractional shares of Common Stock will be issued as a result
of exchange, but in lieu thereof such fractional interest will be paid
by Funding in cash based on the last reported sale price of Common
Stock on the date Preferred Securities are surrendered for exchange.
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From time to time, Funding will sell shares of Common Stock in the
open market and will use proceeds from such sales to pay cash on the
fractional interests described in the prior sentence.
Exchange Rate Adjustments. The exchange rate is subject to
adjustment upon certain events occurring after the Original Closing
Date, including (i) the issuance of Common Stock as a dividend or
distribution on the Common Stock; (ii) certain subdivisions and
combinations of the Common Stock; (iii) the issuance to holders of
Common Stock of certain rights or warrants entitling them to subscribe
for or purchase Common Stock at less than the Average Market Value;
(iv) the distribution to all holders of Common Stock of capital stock
(other than Common Stock) or evidences of indebtedness of ICG or of
assets (other than cash distributions covered by clause (v) below) or
rights or warrants to subscribe for or purchase any of its securities
(excluding rights or warrants to purchase Common Stock referred to in
clause (iii) above); (v) distributions consisting of cash, excluding
any quarterly cash dividend on the Common Stock to the extent that the
aggregate cash dividend per share of Common Stock in any quarter does
not exceed the greater of (x) the amount per share of Common Stock of
the next preceding quarterly dividend on the Common Stock to the
extent that such preceding quarterly dividend did not require an
adjustment of the exchange rate pursuant to this clause (v) (as
adjusted to reflect subdivisions or combinations of the Common Stock),
and (y) 3.75 percent of the average of the last reported sales price
of the Common Stock during the ten trading days immediately prior to
the date for declaration of such dividend, and excluding any dividend
or distribution in connection with the liquidation, dissolution or
winding up of ICG; (vi) payment in respect of a tender or exchange
offer by ICG or any subsidiary of ICG for the Common Stock to the
extent that the cash and value of any other consideration included in
such payment per share of Common Stock exceeds the Average Market
Value per share of Common Stock on the Trading Day next succeeding the
last date on which tenders or exchanges may be made pursuant to such
tender or exchange offer; and (vii) payment in respect of a tender
offer or exchange offer by a person other than ICG or any subsidiary
of ICG in which, as of the closing date of the offer, the Board of
Directors is not recommending rejection of the offer. If any
adjustment is required to be made as set forth in clause (v) above as
a result of a distribution that is a quarterly dividend, such
adjustment would be based upon the amount by which such distribution
exceeds the amount of the quarterly cash dividend permitted to be
excluded pursuant to such clause (v). If an adjustment is required to
be made as set forth in clause (v) above as a result of a distribution
that is not a quarterly dividend, such adjustment would be based upon
the full amount of the distribution. The adjustment referred to in
clause (vii) above will only be made if the tender offer or exchange
offer is for an amount which causes that person's ownership of Common
Stock to exceed 25% of the total shares of Common Stock outstanding
and, if the cash and value of any other consideration included in such
payment per share of Common Stock, exceeds the Average Market Value
per share of Common Stock on the business day next succeeding the last
date on which tenders or exchanges may be made pursuant to such tender
or exchange offer. The adjustment referred to in clause (vii) above
will not be made, however, if, as of the closing of the offer, the
offering documents with respect to such offer disclose a plan or an
intention to cause ICG to engage in a consolidation or merger of ICG
or a sale of all or substantially all of ICG's assets. Notwithstanding
the foregoing, no adjustment will be required as a result of (a) the
issuance of shares of Common Stock as a result of any of the following
(i) the grant or exercise of employee or director stock options, (ii)
the exercise of outstanding warrants or conversion or exchange of
existing notes and securities (including exchange of Class A Common
Shares of Holdings--Canada), (iii) a contribution to ICG's 401(k) plan
or ICG's 401(k) Wrap Around Deferred Compensation Plan and (iv) in
satisfaction of ICG's obligations under its Employee Stock Purchase
Plan or (b) the issuance of Common Stock as a dividend on or upon
exchange of the Preferred Securities. Common Stock issued in
connection with acquisitions of businesses or assets from persons that
are not Affiliates of ICG will be deemed to have been issued for a
price at least equal to Average Market Value.
The Certificate of Designation, Rights and Preferences with
respect to the ICG Preferred Stock (the "Certificate of Designation")
provides that if ICG implements a stockholders' rights plan, such
rights plan must provide that upon exchange of the Preferred
Securities into Common Stock the holders will receive, in addition to
the Common Stock issuable upon such exchange, such rights whether or
not such rights have separated from the Common Stock at the time of
such exchange.
No adjustment in the exchange rate will be required unless such
adjustment would require a change of at least one percent in the
exchange rate then in effect; provided that any adjustment that would
otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment. ICG reserves the right to
make such increase in the exchange rate in addition to those required
in the foregoing provisions as ICG in its discretion shall determine
to be advisable in order that certain stock-related distributions
hereafter made by ICG to its stockholders shall not be taxable. Except
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as stated above, the exchange rate will not be adjusted for the
issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of
the foregoing.
In the case of (i) any reclassification of the Common Stock
(other than changes in par value or resulting from a subdivision or
combination) or (ii) a consolidation or merger involving ICG or a sale
or conveyance to another corporation of the property and assets of ICG
as an entirety or substantially as an entirety, in each case as a
result of which holders of Common Stock shall be entitled to receive
stock, securities, other property or assets (including cash) with
respect to or in exchange for such Common Stock, the holders of the
Preferred Securities then outstanding will be entitled thereafter to
exchange such Preferred Securities into the kind and amount of shares
of stock, other securities or other property or assets which they
would have owned or been entitled to receive upon such
reclassification, consolidation, merger, sale or conveyance had such
Preferred Securities been exchanged immediately prior to such
reclassification, consolidation, merger, sale or conveyance, assuming
that a holder of Preferred Securities would not have exercised any
rights of election as to the stock, other securities or other property
or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock
or in certain other circumstances requiring an adjustment to the
exchange rate, the holders of Preferred Securities may, in certain
circumstances, be deemed to have received a distribution subject to
United States income tax as a dividend.
ICG from time to time may, to the extent permitted by law,
increase the exchange rate (thus increasing the number of shares of
Common Stock that would be issued in exchange for each Preferred
Security) by any amount for any period of at least 20 days, in which
case ICG shall give at least 15 days' notice of such if ICG's Board of
Directors has made a determination that such increase would be in the
best interests of ICG, which determination shall be conclusive. ICG
may, at its option, make such increases in the exchange rate, in
addition to those set forth above, as the Board of Directors deems
advisable to avoid or diminish any income tax to holders of Common
Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for income tax
purposes. ICG does not intend to reduce the exchange price to an
amount below the fair market value of the Common Stock.
MANDATORY REDEMPTION BY FUNDING
Unless earlier redeemed or exchanged, the Preferred Securities
must be redeemed, out of funds legally available therefor, by Funding
at a redemption price of 100% of the liquidation preference of the
Preferred Securities plus accrued and unpaid dividends, if any, on the
Mandatory Redemption Date.
PROVISIONAL REDEMPTION BY FUNDING
The Preferred Securities are subject to redemption by Funding, in
whole or in part, at any time after a date no more than six months
after the Original Closing Date (the "Funding Date"), and on or prior
to November 15, 2000, at a redemption price of 103% of the liquidation
preference of the Preferred Securities to be redeemed plus accrued and
unpaid dividends, if any, to the date of redemption, in the event that
the Current Market Value of the Common Stock equals or exceeds the
following Trigger Percentages of the exchange price then in effect for
at least 20 trading days in any consecutive 30-day trading period
ending on the trading day prior to the date of mailing of the notice
of Provisional Redemption, if called for redemption in the 12-month
period ending on November 15 of the indicated year:
YEAR TRIGGER PERCENTAGES
---- -------------------
1998 170%
1999 160
2000 150
Upon any Provisional Redemption, Funding will make a Dividend
Make-Whole Payment with respect to the Preferred Securities called for
redemption in an amount equal to the pro rata portion of the
liquidation proceeds of any remaining Treasury Strips held by Funding.
Funding will be obligated to make the Dividend Make-Whole Payment on
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all Preferred Securities called for Provisional Redemption, regardless
of whether such Preferred Security is exchanged prior to the
Provisional Redemption Date. The Dividend Make-Whole Payment must be
paid in cash.
OPTIONAL REDEMPTION BY FUNDING
The Preferred Securities are also subject to optional redemption
by Funding on or after November 18, 2000 (the "Initial Redemption
Date"). At any time and from time to time on or after the Initial
Redemption Date and until the Mandatory Redemption Date, Funding will
have the right to redeem, in whole or in part, the Preferred
Securities at a redemption price equal to the percentage of the
liquidation preference set forth below, together with accrued and
unpaid dividends, if any, to the Optional Redemption Date, if redeemed
in the 12-month period beginning on November 15 of the indicated year:
YEAR REDEMPTION PRICE
---- ----------------
2000 102%
2001 101
2002 and thereafter 100
METHOD OF PAYMENT OF REDEMPTION PRICE
The redemption price pursuant to a Provisional Redemption, an
Optional Redemption or the Mandatory Redemption may be paid, in each
case at Funding's option, in (i) cash, (ii) Common Stock, based upon
90% of the Average Market Value of the Common Stock in the case of the
Provisional Redemption or the Optional Redemption and 100% of the
Average Market Value of the Common Stock in the case of the Mandatory
Redemption, or (iii) any combination of cash or Common Stock; provided
that Funding, in its notice of such redemption, must state whether the
redemption price will be paid in cash, Common Stock or both, and
provided that any payment must be made in cash to the extent ICG shall
have provided Funding with cash (whether through dividends on the ICG
Preferred Stock or otherwise) to make all or any portion of such
payment with respect to such redemption.
FUNDAMENTAL CHANGE EXCHANGE RATE ADJUSTMENT
If ICG or Funding makes an announcement of the occurrence or an
imminent occurrence of a Fundamental Change (as defined below) at any
time prior to the Mandatory Redemption Date, there will be an
adjustment to the exchange rate of the Preferred Securities (the
"Fundamental Change Exchange Rate") such that such exchange rate will
thereafter equal the liquidation preference of the Preferred
Securities, divided by the Fundamental Change Average Market Price (as
defined below), unless the Fundamental Change Exchange Rate is lower
than the then current exchange rate of the Preferred Securities as
calculated in the manner described in "--Exchange Rights" (in which
case there will be no such adjustment to the exchange rate).
The term "Fundamental Change" means the occurrence of any
transaction or event in connection with which all or substantially all
of the outstanding Common Stock shall be exchanged for, converted
into, acquired for or constitute the right to receive stock,
securities, other property or assets (including cash) of another
entity or person (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise). "Fundamental Change Average Market
Price" of the Common Stock means the arithmetic average of the Current
Market Value for the ten trading days ending on the fifth business day
prior to the date of the closing of the Fundamental Change.
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LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation,
dissolution, winding-up or termination of Funding (each a
"Liquidation"), the then holders of the Preferred Securities will be
entitled to receive out of the assets of Funding (which will include
the ICG Preferred Stock, any interest on and principal of the Treasury
Strips that are held in the Escrow Account, any Common Stock that
Funding received from ICG as a dividend (or otherwise) and has not
distributed as a dividend on the Preferred Securities or sold in the
open market, and any other assets of Funding), after satisfaction of
liabilities to creditors, if any, distributions in an amount equal to
the aggregate of the stated liquidation preference of $50 of Preferred
Security plus accrued and unpaid dividends thereon to the date of
payment (the "Liquidation Distribution").
If, upon any such Liquidation, the Liquidation Distribution can
be paid only in part because Funding has insufficient assets available
to pay in full the aggregate Liquidation Distribution, then the
amounts payable by Funding on the Preferred Securities shall be paid
on a pro rata basis. ICG will be obligated to pay dividends,
consisting of ICG Preferred Stock, to Funding so that it will be able
to make the Liquidation Distribution in full.
VOTING RIGHTS
The holders of Preferred Securities have no voting rights, except
as otherwise required by law and except as set forth below. The
Operating Agreement provides that Funding may not amend the Operating
Agreement so as to affect adversely the specific rights, preferences,
privileges or voting rights of holders of Preferred Securities, cause
the dissolution, winding- up or termination of Funding, issue any
additional securities or increase the authorized number of Preferred
Securities, without the affirmative vote or consent of the holders of
at least a majority of the outstanding Preferred Securities, voting or
consenting, as the case may be, separately as one class. Furthermore,
the Certificate of Designation provides that ICG may not, without the
approval of the holders of a majority of the ICG Preferred Stock,
amend the Certificate of Incorporation of ICG so as to have a material
adverse effect on the specific rights, preferences, privileges or
voting rights of the holders of the ICG Preferred Stock with respect
to the ICG Preferred Stock, or cause the dissolution, winding-up or
termination of Funding. Funding will initially be the sole holder of
the ICG Preferred Stock. Funding has agreed not to grant such approval
without the consent of the holders of a majority of the Preferred
Securities then outstanding.
THE GUARANTEE; LACK OF PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
Set forth below is a summary of information concerning the
guarantee of the Preferred Securities (the "Guarantee") by ICG for the
benefit of the holders of Preferred Securities. The summary does not
purport to be complete and is subject in all respects to the
respective provisions of, and is qualified in its entirety by
reference to, the Guarantee Agreement between ICG and Funding, a copy
of which is available from ICG upon request.
General. Pursuant to and to the extent set forth in the
Guarantee, ICG has agreed to pay in full to the holders of the
Preferred Securities (except to the extent paid by Funding), as and
when due, regardless of any defense, right of set off or counterclaim
which Funding may have or assert, the following payments (the
"Guarantee Payments"), without duplication: (i) any accrued and unpaid
distributions that are required to be paid on the Preferred
Securities, to the extent Funding has funds available therefor, (ii)
the redemption price, with respect to any Preferred Securities called
for redemption by Funding, to the extent Funding has funds available
therefor and (iii) upon a voluntary or involuntary dissolution,
winding-up or termination of Funding, the lesser of (a) the aggregate
of the liquidation preference and all accrued and unpaid dividends on
the Preferred Securities to the date of payment to the extent Funding
has funds available therefor and (b) the amount of assets of Funding
remaining available for distribution to holders of Preferred
Securities upon the liquidation of Funding. The Guarantee is also
subject to the contractual restrictions contained in the Indentures.
The Indentures effectively prohibit any cash payment on the Guarantee.
Because the Guarantee is limited by the amount of the funds held
by Funding and is limited by the provision of the Indentures, the
Guarantee is of no practical benefit to holders of the Preferred
Securities.
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Amendments and Assignment. Except with respect to any changes
that do not materially adversely affect the rights of holders of
Preferred Securities (in which case no vote will be required), the
Guarantee may be amended only with the prior approval of the holders
of at least a majority in liquidation preference of all the
outstanding Preferred Securities. All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of ICG and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.
Except in connection with any permitted merger or consolidation of ICG
with or into another entity or any permitted sale, transfer or lease
of ICG's assets to another entity, ICG may not assign its rights or
delegate its obligations under the Guarantee without the prior
approval of the holders of at least a majority in liquidation
preference of the Preferred Securities then outstanding.
Termination of the Guarantee. The Guarantee will terminate as to
each holder of the Preferred Securities upon (i) full payment of the
redemption price of all Preferred Securities, (ii) distribution to the
holders of the Preferred Securities of all of the assets of Funding,
including the ICG Preferred Stock, any interest on and principal of
the Treasury Strips that are held in the Escrow Account and any Common
Stock that Funding received from ICG as dividend (or otherwise) and
has not distributed as dividend on the Preferred Securities or sold in
the open market or (iii) the exchange of all of such holder's
Preferred Securities into Common Stock.
Status of the Guarantee; Subordination. The Guarantee constitutes
an unsecured obligation of ICG and ranks subordinate and junior to all
other liabilities of ICG and senior to the Common Stock.
Because the Guarantee is limited by the amount of the funds in
Funding, if ICG were to default on its obligation to pay amounts
payable on the ICG Preferred Stock, Funding would lack available funds
for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the
Preferred Securities would not be able to rely upon the Guarantee for
payment of such amounts. Instead, holders of the Preferred Securities
would rely upon the enforcement of Funding's rights as registered
holder of the ICG Preferred Stock against ICG pursuant to the terms of
the ICG Preferred Stock.
PREFERRED SECURITIES BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Preferred Securities were
issued in fully registered form. Preferred Securities sold in reliance
on Rule 144A are represented by a single, permanent global Preferred
Securities certificate, in definitive, fully registered form (the
"Restricted Global Preferred Securities Certificate") and are
deposited with a custodian for DTC and registered in the name of a
nominee of DTC. The Restricted Global Preferred Securities Certificate
is subject to certain restrictions on transfer set forth therein and
bears the legend regarding such restrictions set forth under "Transfer
Restrictions." Owners of beneficial interests in Restricted Global
Preferred Securities Certificate will generally not be entitled to
receive physical delivery of a physical certificate for their
Preferred Securities ("Certificated Preferred Securities"). The
Preferred Securities are not issuable in bearer form.
Upon the issuance of the Restricted Global Preferred Securities
Certificate, DTC or its custodian credited, on its internal system,
the respective liquidation preference of the individual beneficial
interests represented by Restricted Global Preferred Securities
Certificate, to the accounts of persons who have accounts with such
depositary. Such accounts initially are designated by or on behalf of
Morgan Stanley & Co. Incorporated ("Morgan Stanley") and Deutsche
Morgan Grenfell Inc. ("DMG," and together with Morgan Stanley, the
"Initial Purchasers"). Ownership of beneficial interests in the
Restricted Global Preferred Securities Certificate are limited to
persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests
in the Restricted Global Preferred Securities Certificate is shown on,
and the transferor of that ownership is effected only through, records
maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to
interests of persons other than participants). "Qualified
institutional buyers," as defined in Rule 144A under the Securities
Act, may hold their interests in the Restricted Global Preferred
Securities Certificate directly through DTC if they are participants
in such system, or indirectly through organizations that are
participants in such system.
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So long as DTC, or its nominee, is the registered owner or holder
of the Restricted Global Preferred Securities Certificate, DTC or such
nominee, as the case may be, will be considered the sole owner or
holder of the Preferred Securities represented by the Restricted
Global Preferred Securities Certificate for all purposes under the
Operating Agreement of Funding and the Preferred Securities. No
beneficial owner of an interest in a Global Preferred Securities
Certificate will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those
provided for under the Operating Agreement of Funding.
Payments made with respect to the Restricted Global Preferred
Securities Certificate will be made to DTC or its nominee, as the case
may be, as the registered owner thereof. Neither Funding, ICG nor the
Initial Purchasers will have any responsibility or liability for any
aspect of the records relating to or payments made on account of
beneficial ownership interests in the Restricted Global Preferred
Securities Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Funding and ICG expect that DTC or its nominee, upon receipt of
any payments made with respect to the Restricted Global Preferred
Securities Certificate, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial
interests in the amount of the Restricted Global Preferred Securities
Certificate as shown on the records of DTC or its nominee. Funding and
ICG also expect that payments by participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in
same-day funds.
Funding and ICG understand that DTC will take any action
permitted to be taken by a holder of Preferred Securities only at the
direction of one or more participants to whose account the DTC
interests in the Restricted Global Preferred Securities Certificate
are credited and only in respect of such portion of the aggregate
liquidation preference of Preferred Securities as to which such
participant or participants has or have given such direction.
Funding and ICG understand: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "Clearing Agency"
registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transaction
between participants through electronic book entry changes in accounts
of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect
access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in
order to facilitate transfers of interest in the Restricted Global
Preferred Securities Certificate among participants of DTC, it is
under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither ICG,
Funding nor the Initial Purchasers will have any responsibility for
the performance by DTC or its respective participants or indirect
participants of its respective obligations under the rules and
procedures governing their operations.
MERGER, CONSOLIDATION OR SALE OF ASSETS OF FUNDING
Funding may not consolidate with, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets as
an entirety or substantially as an entirety to, any entity, except as
described below. Funding may, in order to avoid federal income tax or
Investment Company Act of 1940 (the "1940 Act") considerations adverse
to ICG or Funding or the holders of the Preferred Securities, without
the consent of the holders of the Preferred Securities, consolidate
with, merge with or into, or be replaced by a limited partnership or
trust organized as such under the laws of any state of the United
States of America, provided that (i) such successor entity either (x)
expressly assumes all of the obligations of Funding under the
Preferred Securities or (y) substitutes for the Preferred Securities
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other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor
Securities rank, with respect to participation in the profits or
assets of the successor entity, at least as high as the Preferred
Securities rank with respect to payment of dividends and distribution
of assets upon the liquidation, dissolution or winding-up of Funding,
(ii) ICG expressly acknowledges such successor entity as the holder of
the ICG Preferred Stock and its obligations under the Guarantee with
respect to the Successor Securities, (iii) such merger, consolidation
or replacement does not cause the Preferred Securities (or any
Successor Securities) to be delisted by any national securities
exchange or other organization on which the Preferred Securities are
then listed, (iv) such merger, consolidation or replacement does not
cause the Preferred Securities (or any Successor Securities) to be
downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation or replacement does not
adversely affect the powers, preferences and other special rights of
the holders of the Preferred Securities (or any Successor Securities)
in any material respect (other than with respect to any dilution of
the holders' interest in the new entity), and (vi) prior to such
merger, consolidation or replacement, ICG has received an opinion of
nationally recognized independent counsel to Funding experienced in
such matters to the effect that (x) such successor entity will be
treated as a partnership or as a trust, as appropriate, for federal
income tax purposes, (y) following such merger, consolidation or
replacement, ICG and such successor entity will be in compliance with
the 1940 Act without registering thereunder as an investment company
and (z) such merger, consolidation or replacement will not adversely
affect the limited liability of the holders of the Preferred
Securities or Successor Securities.
MISCELLANEOUS
The manager of Funding is authorized and directed to conduct its
affairs and to operate in such a way that Funding will not be deemed
to be an "investment company" required to be registered under the 1940
Act or taxed as a corporation for federal income tax purposes. In this
connection, the manager of Funding is authorized to take any action
not inconsistent with applicable law or the Operating Agreement that
does not adversely affect the interests of the holders of the
Preferred Securities and that the manager of Funding determines in its
discretion to be necessary or desirable for such purposes.
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DESCRIPTION OF ICG PREFERRED STOCK
General. ICG is authorized to issue 1,000,000 shares of preferred
stock, $.01 par value per share. On the date of this Prospectus, no
shares of preferred stock are outstanding. The board of directors of
ICG has authorized the issuance of up to 50,000 shares of a series of
exchangeable preferred stock (the "Exchangeable Preferred Stock") and
ICG has filed a Certificate of Designation with the Secretary of State
of Delaware as required by Delaware law reflecting the authorization
of such series of preferred stock. The Exchangeable Preferred Stock
will be issued by ICG on or before February 15, 1998 and, when so
issued and paid for by Funding, will be fully paid and nonassessable,
and the holders thereof will not have any subscription or preemptive
rights related thereto. The Exchangeable Preferred Stock will be
issued without coupons, in denominations of $10,000 liquidation
preference and any integral multiple thereof. Each share of
Exchangeable Preferred Stock will have a liquidation preference at
maturity of $10,000.
Ranking. The Exchangeable Preferred Stock will rank, with respect
to dividend distributions and distributions upon the liquidation,
winding-up and dissolution of ICG, (i) senior to all classes of common
stock of ICG and to each other class of capital stock or series of
preferred stock established after September 24, 1997 by ICG's board of
directors, the terms of which do not expressly provide that it ranks
senior to or on a parity with the Exchangeable Preferred Stock as to
dividend distributions and distributions upon the liquidation,
winding-up and dissolution of ICG (collectively referred to with the
common stock of ICG as "ICG Junior Securities"); (ii) on a parity with
any class of capital stock or series of preferred stock issued by ICG
established after September 24, 1997 by ICG's board of directors, the
terms of which expressly provide that such class or series will rank
on a parity with the Exchangeable Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of ICG (collectively referred to as "ICG Parity
Securities") and (iii) junior to each class of capital stock or series
of preferred stock issued by ICG established after September 24, 1997
by ICG's board of directors, the terms of which expressly provide that
such class or series will rank senior to the Exchangeable Preferred
Stock as to dividend distributions and distributions upon liquidation,
winding-up and dissolution of ICG (collectively referred to as "ICG
Senior Securities"). The Exchangeable Preferred Stock will be subject
to the issuance of series of ICG Junior Securities, ICG Parity
Securities and ICG Senior Securities; provided that ICG may not issue
any new class of ICG Senior Securities without the approval of the
holders of at least a majority of the shares of Exchangeable Preferred
Stock then outstanding, voting or consenting, as the case may be,
separately as one class.
Dividends. Dividends on the Exchangeable Preferred Stock will be
payable quarterly. Until November 15, 2000, the dividends will be
payable in additional shares of Exchangeable Preferred Stock. From
November 15, 2000, the dividends will be payable in shares of Common
Stock (or in cash or any combination of cash and Common Stock) such
that the number of shares of Common Stock (plus any cash) paid as
dividends will (i) enable Funding to transfer such shares to the
holders of the Preferred Securities in payment of dividends on the
Preferred Securities or (ii) be sufficient, when sold in the open
market by Funding, for Funding to make its dividend payments on the
Preferred Securities on the relevant Dividend Payment Date, which is
February 15, May 15, August 15 and November 15 of each year (each, a
"Dividend Payment Date"). However, the indentures for ICG's
outstanding high yield notes (the "Indentures") effectively prohibit
the payment of cash dividends by ICG, and future agreements may
provide for restrictions on the payment of cash dividends.
Voting Rights. The holders of shares of Exchangeable Preferred
Stock will have no voting rights, except as otherwise required by law
and except as set forth below. The Certificate of Designation
governing the Exchangeable Preferred Stock provides that ICG may not,
without the approval of the holders of a majority of the Exchangeable
Preferred Stock, amend the Certificate of Designation or the
Certificate of Incorporation of ICG so as to have a material adverse
effect on the specific rights, preferences, privileges or voting
rights of holders of shares of Exchangeable Preferred Stock, or cause
the dissolution, winding-up or termination of Funding. Funding is
expected to be the sole holder of the Exchangeable Preferred Stock.
Funding will not grant such approval without the consent of the
holders of a majority of the shares of the Preferred Securities then
outstanding.
Exchange of the Exchangeable Preferred Stock. The Exchangeable
Preferred Stock will be exchangeable into Common Stock at the option
of Funding (upon request by a holder of the Preferred Securities) at
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any time prior to the business day immediately preceding the date of
repayment of such Exchangeable Preferred Stock at an initial exchange
rate of 416.22 shares of Common Stock for each Exchangeable Preferred
Stock, subject to certain adjustments.
Liquidation Preference. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of ICG, holders of Exchangeable
Preferred Stock will be entitled to be paid, out of the assets of ICG
available for distribution, $10,000 per share of Exchangeable
Preferred Stock, plus an amount in cash equal to accumulated and
unpaid dividends thereon to the date fixed for liquidation,
dissolution or winding-up (including an amount equal to a prorated
dividend for the period from the last dividend payment date to the
date fixed for liquidation, dissolution or winding-up), before any
distribution is made on any ICG Junior Securities, including, without
limitation, Common Stock. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of ICG, the amounts payable
with respect to the Exchangeable Preferred Stock and all other ICG
Parity Securities are not paid in full, the holders of the
Exchangeable Preferred Stock and the ICG Parity Securities will share
equally and ratably in any distribution of assets of ICG with respect
to the Exchangeable Preferred Stock and ICG Parity Securities, in
proportion to the full liquidation preference and accumulated and
unpaid dividends to which is entitled. After payment of the full
amount of the liquidation preferences and accumulated and unpaid
dividends to which they are entitled, the holders of shares of
Exchangeable Preferred Stock will not be entitled to any further
participation in any distribution of assets of ICG.
Mandatory Redemption by ICG. The Exchangeable Preferred Stock
must be redeemed by ICG at a redemption price of 100% of the
liquidation preference of the Exchangeable Preferred Stock plus
accrued and unpaid dividends, if any, two business days prior to
November 15, 2009, which is the Mandatory Redemption Date for the
Exchangeable Preferred Stock.
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SELLING HOLDERS
SELLING PREFERRED SECURITYHOLDERS
The Selling Holders may from time to time offer and sell pursuant
to this Prospectus any or all of the Preferred Securities and shares
of Common Stock issued upon exchange thereof. The term "Selling
Preferred Securityholder" includes the holders listed below and the
beneficial owners of the Preferred Securities and their transferees,
pledgees, donees or other successors.
The following table sets forth information with respect to the
Selling Preferred Securityholders of the Preferred Securities and the
respective number of Preferred Securities beneficially owned by each
Selling Preferred Securityholder that may be offered pursuant to this
Prospectus. Such information has been obtained from the Selling
Preferred Securityholders.
Number of
Selling Preferred Securityholders Preferred Securities
--------------------------------- --------------------
Bear Stearns Securities Corp. 113,000
BNP Arbitrage SNC 15,000
Capital Markets Transactions, Inc. 125,000
Christian Science Trustees for Gifts and Endowments 2,600
Chrysler Corporation Master Retirement Trust 53,400
Combined Insurance Company of America 12,400
Declaration of Trust for the Defined Benefit Plan of ICI 10,800
American Holdings Inc.
Declaration of Trust for the Defined Benefit Plan of 7,400
ZENECA Holdings, Inc.
Delaware State Employees Retirement Fund 35,400
Delta Air Lines Master Trust 41,700
Deutsche Morgan Grenfell Inc. (1) 20,000
Donaldson, Lufkin, & Jenrette Securities Corp. 3,400
First Church of Christ Scientist-Endowment 2,600
General Motors Employees Domestic Group Trust 121,450
GPZ Trading 33,000
Highbridge Capital Corporation 120,000
Hillside Capital Incorporated Corporate Account 3,000
Hughes Aircraft Company Master Retirement Trust 28,100
LB Series Fund, Inc., High Yield Portfolio 150,000
Lutheran Brotherhood High Yield Fund, a Series of the 100,000
Lutheran Brotherhood Family of Funds
Merrill Lynch Pierce Fenner & Smith, Inc. 59,000
MFS Convertible Securities Fund 100
MFS Total Return Fund 24,900
Millennium Trading Co., L.P. 20,000
Natwest Securities Limited 15,000
Northwestern Mutual Life Insurance Company (2) 20,000
OCM Convertible Limited Partnership 2,800
OCM Convertible Trust 79,800
R2 Investments, LDC 5,000
Sound Shore Partners, L.P. 25,000
State of Connecticut Combined Investment Funds 68,900
State Employees' Retirement Fund of the State of Delaware 22,100
Summer Hill Global Partners, L.P. 800
The J.W. McConnell Family Foundation 6,550
Thermo Electron Balanced Investment Fund 9,400
Triton Capital Investments, Ltd. 51,000
Vanguard Convertible Securities Fund, Inc. 49,300
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Number of
Selling Preferred Securityholders Preferred Securities
- --------------------------------- --------------------
WG Trading Company Limited Partnership 17,000
---------
TOTAL 1,474,900
- -------------------------
(1) Deutsche Morgan Grenfell Inc. and its affiliated companies and/or
individuals may, from time to time, own, have positions in, or
options in ICG securities and may also perform advisory services,
and/or lending or other credit relationships with ICG.
Specifically, Deutsche Morgan Grenfell Inc. was a co-manager in
the offering of the Preferred Securities.
(2) In the ordinary course of business, Northwestern Mutual
Investment Services, Inc., Robert W. Baird & Co. Incorporated,
Baird/Mark Capital Group, and MGIC Mortgage Securities
Corporation, each of which is a broker-dealer and affiliated
with The Northwestern Mutual Life Insurance Company, may, from
time to time, have acquired or disposed of, or may in the future
acquire or dispose of, securities of ICG, Funding or their
affiliates, for such broker-dealers' own accounts or for the
accounts of others. Other affiliates of The Northwestern Mutual
Life Insurance Company may, in the ordinary course of business,
effect transactions in the securities of ICG, Funding or their
affiliates. The Northwestern Mutual Life Insurance Company and
its affiliates may, in the ordinary course of business, take part
in transactions involving the real property of ICG
Communications, Inc., ICG Funding, LLC or their affiliates.
SELLING STOCKHOLDER
The Selling Stockholder of the Common Stock is Funding, a
Delaware limited liability company. ICG owns all of the common limited
liability company securities of Funding, and ICG is the manager of
Funding. Funding is offering up to an aggregate of 200,000 shares of
Common Stock, all of which may be offered pursuant to this Prospectus.
The Selling Preferred Securityholders and the Selling Stockholder
may be referred to herein individually and collectively, as the case
may be, as the "Selling Holders." Except as set forth above and in the
following sentence, none of the Selling Holders has, or within the
past three years has had, any position, office or other material
relationship with Funding or ICG or any of their predecessors or
affiliates. From time to time, certain broker-dealers and their
affiliates in the ordinary course of business may have acquired or
disposed of, or may in the future acquire or dispose of, certain
securities of ICG and Funding or their affiliates, for their own
accounts or for the accounts of others. Because the Selling Holders
may, pursuant to this Prospectus, offer all or some portion of the
Preferred Securities, the ICG Preferred Stock or the Common Stock
issuable upon exchange of the Preferred Securities, no estimate can be
given as to the amount of the Preferred Securities, the ICG Preferred
Stock or the Common Stock issuable upon exchange of Preferred
Securities that will be held by the Selling Holders upon termination
of any such sales. In addition, the Selling Holders identified above
may have sold, transferred or otherwise disposed of all or a portion
of their Preferred Securities since the date on which they provided
the information regarding their Preferred Securities included herein
in transactions exempt from the registration requirements of the
Securities Act. See "Plan of Distribution."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material anticipated United
States federal income tax consequences of the purchase, ownership and
disposition of the Preferred Securities. Except where noted, it deals
only with Preferred Securities held as capital assets by United States
Holders and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, life
insurance companies, foreign corporations, persons who are not
citizens or residents of the United States or persons who hold
Preferred Securities as a part of a hedging or conversion transaction
or a straddle. In addition, the following discussion does not address
the tax consequences of the laws of any state, locality or foreign
jurisdiction. Furthermore, the discussion below is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions thereunder as
of the date hereof, and such authorities may be repealed, revoked or
modified so as to result in federal income tax consequences different
from those discussed below. In addition, the discussion below includes
certain matters as to which ICG has made determinations which it
believes are accurate. ALL PROSPECTIVE PURCHASERS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE PREFERRED SECURITIES.
As used herein, a "United States Holder" means a beneficial owner
of Preferred Securities that is a citizen or resident of the United
States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, or a
trust the administration of which is subject to the primary
supervision of a court within the United States and for which one or
more United States fiduciaries have the authority to control all
substantial decisions. A foreign individual may, subject to certain
exceptions, be deemed to be a resident (as opposed to a non-resident
alien) of the United States by virtue of being present in the United
States on at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately
preceding year, and one-sixth of the days present in the second
preceding year).
PARTNERSHIP STATUS OF FUNDING
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner is required to take into
account its allocable share of items of income, gain, loss and
deduction of the partnership in computing the partner's federal income
tax liability, regardless of whether cash distributions are made.
Distributions by a partnership to a partner are generally not taxable
unless the amount of any cash distributed is in excess of the
partner's adjusted tax basis in its partnership interest.
No ruling has been or will be sought from the IRS as to the
status of Funding as a partnership for federal income tax purposes.
Instead Funding has relied on the opinion of Reid & Priest LLP that it
will be classified as a partnership for United States federal income
tax purposes. Such opinion is based upon the Code, the regulations
thereunder, published revenue rulings and court decisions and upon
Funding's representations that (i) it will not earn income other than
from the ICG Preferred Stock and from the Treasury Strips and (ii) it
will not elect to be treated as a corporation.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
Flow-through of Taxable Income
No federal income tax will be paid by Funding. Instead, each
Preferred Securityholder will be required to report on its income tax
return its allocable share of the income, gains, losses and deductions
of Funding without regard to whether corresponding cash distributions
are received by such Preferred Securityholder. Consequently, a
Preferred Securityholder may be allocated income from Funding even if
such Preferred Securityholder has not received a cash distribution.
Each Preferred Securityholder will be required to include in income
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its allocable share of income, gains, losses and deduction of Funding
for the taxable year of Funding ending with or within the taxable year
of the Preferred Securityholder. The taxable income of Funding will
generally be dividend income from, and capital gains recognized with
respect to, the ICG Preferred Stock and interest income on, and
capital gain recognized with respect to, the Treasury Strips.
The Preferred Securityholders will first be allocated income and
gain of Funding in an amount so that all cumulative allocations of
taxable income and gain equals all cumulative dividend distributions
to the Preferred Securityholders. Any remaining taxable income and
gain generally will then be allocated to ICG (except for deemed
dividends resulting from the optional redemption or because of the
adjustment in the exchange rate, which dividends will generally be
allocated to the Preferred Securityholders). These allocation
provisions are designed to reconcile tax allocations to economic
allocations. However, these allocations do not comply with the
technical requirements set forth in the Treasury regulations.
Consequently, no assurance can be given that the IRS will not
challenge these allocations. If theses allocations are successfully
challenged by the IRS, the amount of taxable income or loss allocated
to Preferred Securityholders for federal income tax purposes may be
increased and/or reduced or the character of such income may be
modified.
Funding does not presently intend to make an election under
Section 754 of the Code. As a result, a purchaser of Preferred
Securities will not be permitted to adjust its taxable income from
Funding to reflect any difference between its purchase price for the
Preferred Securities and Funding's underlying tax basis for its
assets.
Treatment of Distributions by Funding
Distributions by Funding to a Preferred Securityholder generally
will not be taxable to the Preferred Securityholder for federal income
tax purposes to the extent of such Preferred Securityholder's tax
basis in its Preferred Securities immediately before the distribution.
Cash distributions in excess of a Preferred Securityholder's tax basis
in its Preferred Securities generally will be considered to be gain
from the sale or exchange of the Preferred Securities, taxable in
accordance with the rules described under "--Disposition of Preferred
Securities" below. To the extent Funding distributes Common Stock
other than in liquidation of such Preferred Securities, the Preferred
Securityholder will recognize no gain or loss and will have a tax
basis in such stock equal to the lesser of (i) tax basis of such stock
in the hands of Funding or (ii) such Preferred Securityholder's tax
basis in its Preferred Securities reduced by the amount of any cash
distributed in the non-liquidating distribution. If the Common Stock
distribution is in liquidation of such Preferred Securities, the
Preferred Securityholder will recognize no gain or loss and will have
a tax basis in the Common Stock received equal to its tax basis in its
Preferred Securities reduced by the amount of any cash distributed in
liquidation of its Preferred Securities.
Tax Basis of Preferred Securities
A Preferred Securityholder's initial tax basis for its Preferred
Securities will be the amount it paid for the Preferred Securities.
That basis generally will be increased by its share of Funding's
income and generally will be decreased (but not below zero) by
distributions from Funding and by the Preferred Securityholder's share
of Funding's losses, if any. Non-liquidating distributions of Common
Stock by Funding will reduce the Preferred Securityholder's tax basis
in the Preferred Securities (but not below zero) by the amount of
Funding's tax basis in such distributed stock. In addition, pursuant
to Section 1059 of the Code, a Preferred Securityholder's tax basis in
its Preferred Securities may be reduced by its share of any
"extraordinary" dividends received by Funding. See "--Dividends on the
ICG Preferred Stock" below.
Interest on Treasury Strips
Funding will purchase interest portions of stripped United States
Treasury Obligations which are treated as bonds that were originally
issued at a discount ("original issue discount"). Original issue
discount represents interest for federal income tax purposes and can
generally be defined as the difference between the price at which a
bond was issued and its stated redemption price at maturity. For
purposes of the preceding sentence, stripped obligations, such as the
Treasury Strips, which consist of a right to receive interest, will be
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treated by Funding as originally issued on their purchase date at an
issue price equal to their respective purchase prices thereof.
Original issue discount on stripped Treasury Obligations (which were
issued or treated as issued on or after July 2, 1982) is deemed earned
based on a compounded, constant yield to maturity over the life of
such obligation, taking into account the compounding of accrued
interest at least annually, resulting in an increasing amount of
original issue discount includible in income each year. If the
stripped Treasury Obligation has a maturity of one year or less, the
original issue discount may, in certain circumstances, be treated as
interest income upon maturity or disposition rather than over the term
of the obligation. Each Preferred Securityholder is required to
include in income its allocable share of original issue discount which
accrues each year.
Dividends on the ICG Preferred Stock
Distributions of cash or of additional ICG Preferred Stock or
Common Stock on the ICG Preferred Stock will be treated as dividends
to Funding (and, in turn, to the Preferred Securityholders) to the
extent of ICG's current and accumulated earnings and profits as
determined under United States federal income tax principles. The
amount of ICG's earnings and profits at any time will depend upon the
future actions and financial performance of ICG. The amount of a
distribution of additional ICG Preferred Stock or Common Stock will
equal the fair market value of the additional ICG Preferred Stock or
Common Stock distribution on the date of the distribution.
ICG believes that it does not presently have any current or
accumulated earnings and profits. Consequently, unless ICG generates
earnings and profits in the future, distributions with respect to the
ICG Preferred Stock will exceed ICG's current and accumulated earnings
and profits. Such distributions will be treated as a nontaxable return
of capital and will be applied against and reduce (by the then fair
market value of the distributed ICG Preferred Stock or Common Stock)
the tax basis of the ICG Preferred Stock in the hands of Funding with
respect to which such distributions are made (but not below zero),
thus increasing the amount of any gain or reducing any loss which
would otherwise be realized by Funding upon a redemption or other
disposition of such ICG Preferred Stock. The amount of any such
distribution which exceeds the tax basis of the ICG Preferred Stock in
the hands of Funding will be treated as capital gain to Funding (and,
in turn, to the Preferred Securityholders) and should be either
long-term or short-term capital gain depending on Funding's holding
period in the ICG Preferred Stock. The ICG Preferred Stock or Common
Stock received by Funding as a dividend will have a tax basis to
Funding equal to its fair market value on the date of distribution.
Under Section 243 of the Code, corporate Preferred
Securityholders generally will be able to deduct 70% of the amount of
their pro-rata share of any dividends received by Funding. There are,
however, many exceptions and restrictions relating to the availability
of such dividends-received deduction. Section 246A of the Code reduces
the dividends-received deduction allowed to a corporate stockholder
that has incurred indebtedness "directly attributable" to its
investment in portfolio stock. Section 246(c) of the Code requires
that, in order to be eligible for the dividends- received deduction, a
corporate stockholder must generally hold the share of stock for a
46-day minimum holding period or a 91-day period in certain
circumstances. A taxpayer's holding period for these purposes is
suspended during any period in which a stockholder has certain options
or contractual obligations with respect to substantially identical
stock or holds one or more other positions with respect to
substantially identical stock that diminishes the risk of loss from
holding the stock. The IRS may take the position that these
restrictions relating to the availability of the dividends- received
deduction apply to a Preferred Securityholder who indirectly owns the
ICG Preferred Stock held by Funding by applying these restrictions
based on the Preferred Securityholder's holding period in the
Preferred Securities (rather than upon Funding's holding period in the
ICG Preferred Stock).
Under Section 1059 of the Code, a corporate stockholder is
required to reduce its tax basis (but not below zero) in stock by the
nontaxed portion of any "extraordinary dividend" if such stock has not
been held for more than two years before the earliest of the date such
dividend is declared, announced or agreed to. Generally, the nontaxed
portion of an extraordinary dividend is the amount excluded from
income by operation of the dividends-received deduction provisions of
Section 243 of the Code. A dividend on the ICG Preferred Stock
generally would be an extraordinary dividend if it (i) equals or
exceeds 5% of the corporate stockholder's adjusted tax basis in the
ICG Preferred Stock, treating all dividends having ex-dividend dates
within an 85-day period as one dividend or (ii) exceeds 20% of the
corporate stockholder's adjusted tax basis in such stock, treating all
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dividends having ex-dividend dates within a 365-day period as one
dividend. In determining whether a dividend paid on preferred stock is
an extraordinary dividend, a corporate stockholder may elect to
substitute the fair market value of the preferred stock for such
stockholder's tax basis for purposes of applying these tests, provided
that such fair market value is established to the satisfaction of the
Secretary of Treasury as of the day before the ex-dividend date. An
extraordinary dividend also currently includes any amount treated as a
dividend in the case of a redemption that is either non-pro-rata as to
all stockholders or in partial liquidation of ICG, regardless of the
stockholder's holding period and regardless of the size of the
dividend. Section 1059, if applicable, is applied to Funding by
treating each Preferred Securityholder as the owner of its share of
the ICG Preferred Stock held by Funding and thereby having Funding
adjust its tax basis in the ICG Preferred Stock and having each
Preferred Securityholder make a corresponding adjustment to its tax
basis in the Preferred Securities. If any part of the nontaxed portion
of an extraordinary dividend is not applied to reduce the corporate
Preferred Securityholder's tax basis as a result of the limitation on
reducing such basis below zero, such part will be treated as gain at
the time when the extraordinary dividend is paid.
Special rules exist with respect to extraordinary dividends for
"qualified preferred dividends." A qualified preferred dividend is any
fixed dividend payable with respect to any share of stock which (i)
provides for fixed preferred dividends payable not less frequently
than annually and (ii) is not in arrears as to dividends at the time
the United States Holder acquires such stock. A qualified preferred
dividend does not include any dividend payable with respect to any
share of stock if the actual rate of return on such stock exceeds 15%.
Section 1059 does not apply to qualified preferred dividend if the
corporate stockholder holds such stock for more than five years. If
the stockholder disposes of such stock before it has been held for
more than five years, the amount subject to extraordinary dividend
treatment with respect to qualified preferred dividends is limited to
the excess of the actual rate of return over the stated rate of
return. Actual or stated rates of return are the actual or stated
dividends expressed as a percentage of the lesser of (1) the
stockholder's tax basis in such stock or (2) the liquidation
preference of such stock. CORPORATE PREFERRED SECURITYHOLDERS ARE
URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE
APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES.
A corporate Preferred Securityholder's liability for alternative
minimum tax may be affected by the portion of the dividends received
which such corporate Preferred Securityholder deducts in computing
taxable income. This results from the fact that corporate stockholders
are required to increase alternative minimum taxable income by 75% of
the excess of current earnings and profits (with certain adjustments)
over alternative minimum taxable income (determined without regard to
earnings and profits adjustments or the alternative tax net operating
loss deduction).
Redemption Premium
Under Section 305(c) of the Code and the applicable Treasury
regulations thereunder, if the redemption price of ICG Preferred Stock
exceeds its issue price, the difference ("redemption premium") may be
taxable as a constructive distribution of additional ICG Preferred
Stock to Funding (treated as a dividend to the extent of ICG's current
and accumulated earnings and profits and otherwise subject to the
treatment described above for distributions) over a certain period.
Because the ICG Preferred Stock provides for an optional right of
redemption by ICG at a price in excess of the issue price, Funding
could be required to recognize such redemption premium under a
constant interest rate method if, based on all of the facts and
circumstances, the optional redemption is more likely than not to
occur. If stock may be redeemed at more than one time, the time and
price at which such redemption is most likely to occur must be
determined based on all of the facts and circumstances. Applicable
Treasury regulations provide a "safe harbor" under which a right to
redeem will not be treated as more likely than not to occur if (i) the
issuer (i.e., ICG) and the stockholder (i.e., Funding) are not related
within the meaning of the Treasury regulations; (ii) there are no
plans, arrangements or agreements that effectively require, or are
intended to compel, the issuer to redeem the stock (disregarding, for
this purpose, a separate mandatory redemption) and (iii) exercise of
the right to redeem would not reduce the yield of the stock, as
determined under the Treasury regulations. Further, the Treasury
regulations provide that such redemption premium is not taxable as a
constructive distribution if it is solely in the nature of a penalty
for premature redemption. A redemption premium is solely in the nature
of a penalty for premature redemption if it is paid as a result of
changes in economic or market conditions over which neither the issuer
nor the holder has control. Regardless of whether the optional
redemption is more likely than not to occur or whether the redemption
premium is solely in the nature of a penalty for premature redemption,
constructive dividend treatment will not result if the redemption
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premium does not exceed a de minimis amount. Based on the Treasury
regulations, ICG intends to take the position that the existence of
ICG's optional redemption right will not result in a constructive
distribution to Funding. If the IRS were to successfully assert that a
constructive distribution occurred, any resulting income would be
allocated to the Preferred Securityholders without the receipt of any
cash related thereto.
Adjustment of Exchange Rate
Treasury Regulations promulgated under Section 305 of the Code
would treat Funding as having received a constructive distribution
from ICG in the event the exchange ratio for the ICG Preferred Stock
is adjusted if (i) as a result of such adjustment, the proportionate
interest (measured by the quantum of Common Stock into which the ICG
Preferred Stock is exchangeable) of Funding in the assets or earnings
and profits of ICG is increased, and (ii) the adjustment is not made
pursuant to a bona fide and reasonable antidilution formula. An
adjustment in the exchange rate would not be considered made pursuant
to such formula if the adjustment is made to compensate for certain
taxable distributions with respect to the Common Stock. Thus, under
certain circumstances, an adjustment in the exchange rate of the ICG
Preferred Stock, may result in deemed dividend income to Funding to
the extent of the current or accumulated earnings and profits of ICG.
Funding (and, in turn, the Preferred Securityholders) would be
required to include such deemed dividend income in gross income but
would not receive any cash related thereto.
Redemption of ICG Preferred Stock
A redemption of the ICG Preferred Stock, in whole or in part, for
cash will be a taxable transaction on which Funding (and, in turn, the
Preferred Securityholders) will generally recognize capital gain or
loss equal to the difference between the cash received and its
adjusted tax basis in the redeemed stock (except to the extent of
amounts received on the exchange that are attributable to declared
dividends, which will be treated in the same manner as distributions
described above). Such gain or loss will be long term if Funding's
holding period in the ICG Preferred Stock exceeds one year. To the
extent that ICG redeems the ICG Preferred Stock, in whole or in part,
utilizing Common Stock plus cash, Funding (and, in turn, the Preferred
Securityholders) should recognize gain equal to the lesser of (i) the
gain that would have been recognized if only cash had been utilized in
the redemption (as described above) and (ii) the amount of cash
actually utilized in such redemption. If only Common Stock is utilized
by ICG in the redemption, no gain or loss should be recognized by
Funding. Funding should have a tax basis in the Common Stock received
equal to its tax basis in the ICG Preferred Stock redeemed increased
by any gain recognized as a result of any cash given in the redemption
and decreased by the amount of cash received. The holding period in
the ICG Preferred Stock should be tacked to the Common Stock received.
The tax effect of the resulting redemption of the Preferred Securities
is discussed below under "--Disposition of Preferred Securities."
To the extent that either ICG exercises its right to redeem the
ICG Preferred Stock, in whole or in part, pursuant to a Provisional
Redemption, or a holder of Preferred Securities exercises its Exchange
Right, ICG will redeem from Funding ICG Preferred Stock in exchange
for Common Stock and exchange Common Stock for a portion of the
Treasury Strips held by Funding. The tax consequences associated with
the redemption of ICG Preferred Stock for Common Stock are described
above. The tax consequences associated with liquidating distribution
by Funding of Common Stock to a Preferred Securityholder are described
above. See "--Treatment of Distributions by Funding." The exchange by
Funding of Treasury Strips for Common Stock should constitute a
taxable purchase of such shares by Funding. Funding and, in turn, the
Preferred Securityholders should recognize gain on such purchase to
the extent that the fair market value of the Treasury Strips exceeds
the tax basis allocable to that portion of the Treasury Strips being
redeemed and should recognize loss to the extent the tax basis
allocable to that portion of the Treasury Strips exceeds the fair
market value of the Treasury Strips being redeemed. In addition, the
Common Stock acquired through the exchange of Treasury Strips should
have a tax basis equal to its fair market value on the date of such
exchange.
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Disposition of Preferred Securities
Gain or loss will be recognized on a sale of Preferred
Securities, including a redemption for cash (but not including an
exchange with Funding of Preferred Securities for Common Stock), equal
to the difference between the amount realized and the Preferred
Securityholder's tax basis for the Preferred Securities sold. The
Preferred Securityholder's adjusted tax basis in its Preferred
Securities will be adjusted prior to the sale to reflect such holder's
pro-rata share of Funding's income, gains, losses or deductions that
flowed through prior to such disposition (including gain or loss
resulting from a redemption of the ICG Preferred Stock). Gain or loss
recognized by a Preferred Securityholder on the sale or exchange of
Preferred Securities held for more than one year will generally be
taxable as long-term capital gain or loss. Generally, the maximum
effective United States federal corporate income tax rate for all
types of income, including dividends (after the application of the
dividends-received deduction), interest income and capital gains, is
35%. The maximum effective United States federal individual income tax
rate applicable (i) to interest and dividend income is 39.6% and (ii)
to gains resulting from the sale of capital assets held for longer
than one year but less than 18 months is 28%. The maximum effective
United States federal individual income tax rate on long-term capital
gains will decrease to 20% if the Preferred Securities are held for
more than 18 months. Beginning in the year 2006, capital assets held
for more than five years will qualify for an 18% maximum effective
United States federal individual income tax rate.
A Preferred Securityholder should not recognize gain or loss upon
the exchange with Funding of Preferred Securities for Common Stock
(whether pursuant to an exchange initiated by the holder or following
redemption by ICG of the ICG Preferred Stock) except to the extent the
holder receives cash or to the extent of a gain or loss realized by
Funding on its resulting exchange of its Treasury Strips for Common
Stock. A Preferred Securityholder should only recognize gain upon the
receipt of cash to the extent such cash received exceeds the Preferred
Securityholder's tax basis in its Preferred Securities. See
"--Treatment of Distributions by Funding." A Preferred
Securityholder's tax basis in the Common Stock received upon exchange
would be equal to such holder's tax basis in the Preferred Securities
delivered for exchange reduced by any cash which is received upon such
exchange. Inasmuch as a Preferred Securityholder who exchanges its
Preferred Securities prior to a redemption remains entitled to receive
a Dividend Make-Whole Payment (to the extent of a subsequent
Provisional Redemption by Funding on or before November 15, 2000) it
is unclear how such holder should allocate its tax basis in the
Preferred Security exchanged to the Common Stock received. Funding
intends to take the position that the contingent right to receive
Dividend Make-Whole Payments does not affect the calculation of its
tax basis in the Common Stock (as described above). Consequently,
based on this position, to the extent such exchanging holder
subsequently receives a Dividend Make-Whole Payment, such payment
should result in capital gain of an equal amount. A Preferred
Securityholder's holding period in the Common Stock received upon
exchange should include the Preferred Securityholder's holding period
in the Preferred Securities delivered.
Preferred Securityholders should be aware that the tax treatment
of the exchange feature of the Preferred Securities is not entirely
clear and that the IRS might argue that, for tax purposes, Funding's
exchange of ICG Preferred Stock into Common Stock (and Funding's
subsequent distribution of such stock to a holder) should be treated
as an exchange by the Preferred Securityholder of its Preferred
Securities against ICG directly for Common Stock. While unlikely, if
this argument were asserted and sustained, the conversion of the
Preferred Securities by a Preferred Securityholder for Common Stock
would be a taxable transaction in which a Preferred Securityholder
would recognize capital gain or loss.
Allocations Between Transferors and Transferees
In general, Funding's taxable income and losses will be
determined annually, will be prorated on a monthly basis and will be
subsequently apportioned among the holders of the Preferred Securities
in proportion to the number of Preferred Securities owned by each of
them as of the first business day of such month. As a result, a holder
of Preferred Securities may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this method may not be permitted under existing
Treasury Regulations. Accordingly, counsel is unable to opine on the
validly of this method of allocating income and deductions between the
transferors and the transferees of Preferred Securities. If this
method is not allowed under the Treasury Regulations (or only applies
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to transfers of less than all of the holder's interest), taxable
income or losses of Funding might be reallocated among the holders of
the Preferred Securities (including transferors and transferees).
Funding is authorized to revise its method of allocation between
transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A holder who owns Preferred Securities at any time during a
quarter and who disposes of such Preferred Securities prior to the
record date set for a cash distribution with respect to such quarter
will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to
receive that cash distribution.
INFORMATION TO SECURITYHOLDERS AND AUDIT REQUIREMENTS
Funding will furnish each Preferred Securityholder with an
information statement each year setting forth such Preferred
Securityholder's allocable share of income for the prior calendar
year. Funding is required to furnish this statement as soon as
practicable following the end of the year, but in any event prior to
March 31.
Any person who holds Preferred Securities as a nominee for
another person is required to furnish to Funding (a) the name, address
and taxpayer identification number of the beneficial owner and the
nominee; (b) information as to whether the beneficial owner is (i) a
person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or
instrumentality of either of the foregoing or (iii) a tax-exempt
entity; (c) the amount and description of Preferred Securities held,
acquired or transferred for the beneficial owner; and (d) certain
information including the dates of acquisitions and transfers, means
of acquisitions and transfers and acquisition cost for purchases, as
well as the amount of net proceeds from sales. Brokers and financial
institutions are required to furnish additional information, including
whether they are United States person and certain information on
Preferred Securities they acquire, hold or transfer for their own
accounts. A penalty of $50 per failure (up to a maximum of $100,000
per calendar year) is imposed by the Code for the failure to report
such information to Funding. The nominee is required to supply the
beneficial owners of the Preferred Securities with the information
furnished to Funding.
ICG, as the tax matters partner, will be responsible for
representing the Preferred Securityholders in any dispute with the
IRS. The Code provides for administrative examination of a partnership
as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not
expire before three years since the later of the filing or the last
date for filing of the partnership information return. Any adverse
determination following an audit of the return of Funding by the
appropriate tax authorities could result in an adjustment of the
returns of the Preferred Securityholders, and, under certain
circumstances, a Preferred Securityholder may be precluded from
separately litigating a proposed adjustment to the items of Funding.
An adjustment could also result in an audit of a Preferred
Securityholder's return and adjustments of items not related to the
income and losses of Funding.
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PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to
purchasers directly by the Selling Holders. Alternatively, the Selling
Holders may from time to time offer the Offered Securities to or
through underwriters, broker-dealers or agents, which may receive
compensation in the form of underwriting discounts, concessions or
commissions from the Selling Holders or the purchasers of such
securities for whom they may act as agents. The Selling Holders, and
any underwriters, broker-dealers or agents that participate in the
distribution of Offered Securities, may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profit on the sale
of such securities and any discounts, concessions, commissions or
other compensation received by any such underwriter, broker-dealer or
agent may be deemed to be underwriting discounts and commissions under
the Securities Act.
The Offered Securities may be sold from time to time in one or
more transactions at fixed prices, at prevailing market prices at the
time of sale, at varying prices determined at the time of sale or at
negotiated prices. The sale of the Offered Securities may be effected
in transactions (which may involve crosses or block transactions) (i)
on any national securities exchange or quotation service on which the
Offered Securities may be listed or quoted at the time of sale, (ii)
in the over-the-counter market, (iii) in transactions otherwise than
on such exchanges or in the over-the- counter market or (iv) through
the writing of options. At the time a particular offering of the
Offered Securities is made, a Prospectus Supplement, if required, will
be distributed which will set forth the aggregate amount and type of
Offered Securities being offered and the terms of the offering,
including the name or names of any underwriters, broker-dealers or
agents, any discounts, commissions and other terms constituting
compensation from the Selling Holders and any discounts, commissions,
or concessions allowed or reallowed or paid to broker-dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the Offered Securities will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers.
In addition, in certain jurisdictions the Offered Securities may not
be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
The Selling Holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of any of the
Offered Securities by the Selling Holders. The foregoing may affect
the marketability of such securities.
Pursuant to the Registration Rights Agreement, the Company shall
bear all reasonable fees and expenses customarily borne by issuers in
a non-underwritten secondary offering by selling security holders or
in an underwritten offering, as the case may be, incurred in
connection with the performance of its obligations under the
Registration Rights Agreement; provided, however, that the Selling
Holders will pay all underwriting discounts and selling commissions,
if any. The Selling Holders will be indemnified by the Company and
Funding, jointly and severally, against certain civil liabilities,
including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
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LEGAL MATTERS
The validity of the Preferred Securities, the ICG Preferred
Stock, the Guarantee and the Common Stock offered hereby and certain
tax matters will be passed upon for the Company by Reid & Priest LLP,
New York, New York.
EXPERTS
The consolidated financial statements of the Company as of
September 30, 1995 and 1996, and December 31, 1996 and for each of the
years in the three-year period ended September 30, 1996, and the
three-month period ended December 31, 1996, and the related schedule,
have been incorporated by reference herein and in the registration
statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference
herein, and upon authority of said firm as experts in accounting and
auditing.
The reports of KPMG Peat Marwick LLP covering the September 30,
1996 consolidated financial statements and schedule refer to a change
in the method of accounting for long-term telecom services contracts.
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