<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-22801
PROSPECTUS
1,450,000 SHARES
[COMPANY LOGO]
COMMON STOCK
All of the 1,450,000 shares of Common Stock offered hereby are being sold by
IWL Communications, Incorporated ("IWL" or the "Company"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock of the Company
has been approved for quotation on the Nasdaq National Market under the symbol
"IWLC."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THE PROSPECTUS FOR A DISCUSSION OF
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................... $6.00 $0.42 $5.58
Total(3)................................................ $8,700,000 $609,000 $8,091,000
</TABLE>
(1) Excludes the value of warrants to purchase up to 145,000 shares of Common
Stock to be granted to Cruttenden Roth Incorporated, the representative for
the several Underwriters (the "Representative"). The Company has also agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $811,000, including the Representative's nonaccountable expense allowance
of $261,000.
(3) The Underwriters have been granted 45-day options to purchase up to an
additional 217,500 shares, solely to cover over-allotments, if any, of which
an option to purchase up to 117,500 shares has been granted by the Company
and an option to purchase up to 100,000 shares has been granted by the
Selling Shareholder. The Company will not receive any proceeds from the sale
of shares by the Selling Shareholder. See "Principal and Selling
Shareholders" and "Underwriting." If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholder will be $10,005,000, $700,350,
$8,746,650 and $558,000, respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to the right of the Underwriters to reject any order in
whole or in part and certain other conditions. It is expected that delivery of
the certificates for the Common Stock will be made against payment therefor at
the offices of Cruttenden Roth Incorporated, Irvine, California, on or about
June 18, 1997.
------------------------
[LOGO]
THE DATE OF THIS PROSPECTUS IS JUNE 12, 1997
<PAGE>
INSIDE FRONT COVER PAGE 1.
[PICTURES OF INSTALLATIONS OF IWL'S EQUIPMENT IN
CERTAIN LOCATIONS AROUND THE WORLD]
<PAGE>
INSIDE FRONT COVER PAGE 2.
[PICTURES OF INSTALLATIONS OF IWL'S EQUIPMENT IN
CERTAIN LOCATIONS AROUND THE WORLD]
<PAGE>
[PICTURES OF INSTALLATIONS OF IWL'S EQUIPMENT IN
CERTAIN LOCATIONS AROUND THE WORLD]
IWL-TM-, IWL Connect-TM-, IWL ODDS-TM-, IntelliVox-TM-, Sight OnSite-TM-,
IWL Net-TM- and The Power of Synergy-TM-, among other marks, are trademarks of
the Company. Other trademarks appearing herein are trademarks of their
respective owners.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO "IWL" OR THE "COMPANY" ARE TO
IWL COMMUNICATIONS, INCORPORATED, ITS CONSOLIDATED SUBSIDIARIES AND ITS
PREDECESSOR. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO
NUMBERS AND PERCENTAGES OF SHARES OF COMMON STOCK ASSUME NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTIONS (INCLUDING THOSE GRANTED BY THE SELLING
SHAREHOLDER).
THE COMPANY
The Company provides advanced communications solutions to customers with
operations in remote, difficult-access regions and in areas around the world
where government deregulation has created new market opportunities. The Company
delivers comprehensive communications services to its customers by utilizing a
broad range of analog and digital technologies, including satellite, microwave
radio, conventional two-way radio and fiber optic cable. The Company's core
business to date has focused on the provision of communications solutions for
customers in the oil and gas industry, such as AMOCO, British Gas, Chevron,
Conoco, Exxon and Shell. Such customers exemplify users with unique
communications needs related to the remote, difficult-access nature of their
operating locations. By providing a wide range of communications solutions to
its oil and gas customers, the Company has developed a high level of expertise
and a unique skill set in planning, designing and implementing total
communications solutions for multi-site customers with operations located in
remote regions or underdeveloped areas where the existing communications
infrastructure is insufficient to meet advanced telecommunications needs. The
Company intends to leverage this skill set and expertise by supplying
communications services to multi-site customers outside of the oil and gas
industry, particularly customers with operations located near the Company's
existing and planned telecommunications infrastructure. Potential additional
customers include health care providers, financial institutions and other
multi-location communication-intensive companies, such as large publishing
companies.
The Company recently has installed a tandem switch and a value-added
services platform in Houston, Texas. This switch and platform enable the Company
to connect its digital network with the networks of other carriers, thereby
permitting the routing of phone calls in a cost-competitive manner. As the
Company's communications network in the U.S. Gulf Coast region expands, the
Company intends to install additional switches in other strategic locations. The
Company recently has received approval to serve as a competitive local exchange
carrier ("CLEC") in select locations in Texas and has applied for CLEC status in
Louisiana. As a result, the Company believes that it is well positioned to use
the full capacity of its existing and planned infrastructure by providing call
routing to other carriers and, in select locations, by providing call completion
services at profit margins that the Company believes will be higher than those
achievable without CLEC status. As a CLEC offering competitive rates for call
completion services, the Company believes that providers of cellular and
personal communications services ("PCS") and other long distance carriers will
become additional customers.
The telecom services industry is being transformed by the deregulation of
telecommunications markets around the world. In the United States, efforts at
deregulating the telecommunications industry resulted in the separation of the
long distance market from the local exchange services market, with the outcome
being an opening of the long distance market to competition. The enactment of
the Telecommunications Act of 1996 (the "1996 Telecommunications Act")
established an expansive framework for greater competition, including within the
local exchange services market. Under the 1996 Telecommunications Act, state
laws prohibiting competition are preempted and CLECs, such as the Company, have
legal rights to interconnect with the facilities of the Bell Operating Companies
("BOCs") and GTE Operating Companies ("GTOCs"), resell local services that were
previously provided only by the BOCs and GTOCs and deliver CLEC-provided local
services as well as long distance services. Telecommunications revenues of CLECs
grew almost 80% in 1996 to $2.1 billion, compared with nearly $1.2 billion in
1995, according to
3
<PAGE>
the 8th Edition of the ANNUAL REPORT ON THE COMPETITIVE TELECOMMUNICATIONS
INDUSTRY. International deregulation has also gained momentum, as demonstrated
by the recent 69-nation World Trade Organization agreement on communications
services, which reflects efforts to eliminate barriers to competition in basic
telecommunications services throughout Europe, Asia and India.
The introduction and proliferation of new communications technologies,
together with global socioeconomic development, are also contributing to
significant increases in demand for telecommunications services throughout the
world. Advances in communications delivery technology, including those achieved
through the deployment of satellite systems and the development of data
compression technologies, have expanded the variety of information that can be
digitized as well as the geographic scope of where such data may be transmitted
or received. Political and economic changes in many regions of the world have
contributed to the emergence of additional global market opportunities in a
variety of industries and an increased rate of adoption of Western business
practices in previously non-Westernized areas. The Company believes that these
changes have escalated the demand for Western telecommunications services,
particularly in remote regions of the world or in regions where the
telecommunications infrastructure is underdeveloped.
While the demand for telecommunications services is increasing worldwide,
the Company believes that the exploration and development activities
characteristic of the oil and gas industry have placed that industry, in
particular, at the forefront in applying modern communications technologies in
remote regions of the world or regions that lack a developed telecommunications
infrastructure. The Company also believes that numerous other industries are
taking advantage of technological advances and socioeconomic development by
pursuing opportunities to expand their operations into remote regions or areas
with an underdeveloped telecommunications infrastructure. Following the
installation of additional infrastructure in these regions, the local
communities in such regions may be able to make use of the available extra
carrier capacity, even though the additional infrastructure might have been
installed originally as a specific communications solution for a particular
company or end user. The Company believes that a significant opportunity exists
to provide advanced communications services to end users outside the oil and gas
industry by delivering effective temporary or permanent solutions at competitive
rates and, in doing so, the Company intends to position itself to serve the
telecommunications carrier service needs of neighboring communities and
businesses.
The Company's goal is to become a leading provider of total communications
solutions to end users with operations in remote, difficult-access regions or in
areas around the world where government deregulation has created new market
opportunities and to leverage this position by providing carrier services to
additional customers located in these same regions. To reach this goal, the
Company intends to pursue the following strategies: (i) develop additional
Company-owned infrastructure; (ii) vertically integrate its service offerings;
(iii) diversify its customer base; (iv) capitalize on opportunities created by
government deregulation and globalization trends in various industries; and (v)
expand existing strategic alliances and establish new alliances.
The Company commenced doing business as IWL Communications in 1981 and was
incorporated as a Texas corporation in 1983. The Company currently has domestic
branch offices in Houston and Friendswood, Texas and Lafayette and New Orleans,
Louisiana and an international office in Moscow, Russia. The Company's principal
executive office is located at 12000 Aerospace Avenue, Suite 200, Houston,
Texas, 77034 and its telephone number is (281) 482-0289. The Company's Internet
addresses are www.iwlcom.com and www.iwl.net.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered........................ 1,450,000 shares
Common Stock Outstanding after the
Offering................................... 3,677,816 shares(1)
Use of Proceeds............................. To acquire equipment for the continued
development of communications infrastructure,
to repay a term note under its bank credit
facility and for working capital and general
corporate purposes.
Nasdaq National Market symbol............... IWLC
</TABLE>
- ------------------------
(1) Excludes 160,614 shares of Common Stock, par value $.01 per share (the
"Common Stock"), reserved for issuance upon exercise of options outstanding
as of the date of this Prospectus under the Company's Employee Incentive
Stock Option Plan at a weighted average exercise price of $3.62 per share,
130,000 shares of Common Stock reserved for issuance upon exercise of
options outstanding as of the date of this Prospectus under the Company's
1997 Stock Option Plan at an average exercise price per share equal to the
initial price of the Common Stock being offered hereby to the public, and
145,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant at an exercise price equal to 120% of the initial
price of the Common Stock being offered hereby to the public. See
"Management--Benefit Plans," "Description of Capital Stock--
Representative's Warrant," "Shares Eligible for Future Sale" and
"Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales:
Telecom and carrier...................................... $ 13,642 $ 14,566 $ 15,683 $ 11,600 $ 14,151
Land mobile.............................................. 1,218 1,228 1,559 1,298 2,256
Product resales(1)....................................... -- -- 10,554 3,450 7,202
--------- --------- --------- --------- ---------
Total sales............................................ 14,860 15,794 27,796 16,348 23,609
Cost of sales.............................................. 10,071 9,639 10,743 7,915 10,742
Cost of sales--product resales............................. -- -- 9,672 3,104 6,616
--------- --------- --------- --------- ---------
Gross profit............................................... 4,789 6,155 7,381 5,329 6,251
Selling expenses........................................... 892 862 842 628 832
General and administrative expenses........................ 3,178 3,537 4,257 3,015 3,514
Depreciation and amortization.............................. 571 820 1,003 733 982
--------- --------- --------- --------- ---------
Income from operations..................................... 148 936 1,279 953 923
--------- --------- --------- --------- ---------
Net income................................................. $ 144 $ 536 $ 734 $ 541 $ 488
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share....................................... $ 0.07 $ 0.24 $ 0.33 $ 0.24 $ 0.22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding(2)..................... 2,011 2,233 2,233 2,233 2,233
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 340 $ 7,620
Working capital........................................................................... 1,984 9,264
Total assets.............................................................................. 16,318 23,463
Notes payable, noncurrent portion......................................................... 6,151 6,151
Shareholders' equity...................................................................... 4,197 11,477
</TABLE>
- ------------------------
(1) Comprised of the resale of Alcatel products and other equipment and hardware
to Shell Offshore Services Oil Company.
(2) Weighted average shares outstanding have been restated to reflect a
200-for-one stock split of the Common Stock effected in November 1995.
(3) Adjusted to reflect the sale of 1,450,000 shares of Common Stock offered by
the Company hereby at the initial public offering price of $6.00 per share
and the receipt of the estimated net proceeds therefrom as if the Offering
had occurred at March 31, 1997. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS.
INDUSTRY CONCENTRATION AND DEPENDENCE ON MAJOR CUSTOMERS
Customers in the oil and gas industry accounted for substantially all of the
Company's sales in its fiscal years ended June 30, 1995 and 1996 and nine months
ended March 31, 1997. The Company's business and results of operations are
substantially dependent on sales to oil and gas customers, and the loss of one
or more of these customers, or a significant reduction in sales to them, could
have a material adverse effect on the Company's financial condition, results of
operations and cash flow. The Company currently is attempting to broaden its
customer base into other industries besides the oil and gas industry; however,
there can be no assurance that the Company will be successful in doing so.
Currently, the Company's operations could be significantly impacted by market
forces affecting the the oil and gas industry as a whole. There can be no
assurance that the oil and gas industry will not suffer a significant downturn,
nor can there be any assurance that the Company will remain profitable when
operating under such conditions. Product resales by the Company to Shell
Offshore Services Company ("Shell"), a subsidiary of Shell Oil Company, were
approximately $10.6 million, $3.5 million and $7.2 million for the year ended
June 30, 1996 and for the nine months ended March 31, 1996 and 1997,
representing approximately 38%, 21.1% and 30.5%, respectively, of total sales
during such periods. These resales were made in connection with a one-time
project for Shell, which includes a significant equipment resale component, that
the Company expects will be substantially completed in fiscal 1997 and,
therefore, is not expected to contribute in a material manner to the Company's
total sales in future periods. While the Company performs other services for
Shell and its affiliates from time-to-time on a project-by-project basis, the
Company expects that future sales to Shell and its affiliates will be less than
sales made to them in fiscal 1996. If sales to Shell and its affiliates decline
and are not replaced by additional sales to other customers, then the Company's
sales will be materially reduced. A loss of Shell and its affiliates as a
customer, or a significant reduction in sales to Shell and its affiliates, could
have a material adverse effect on the Company's financial condition, results of
operation and cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--IWL Strategy" and
"--Selected Customers."
COMPETITION
The nature of the Company's competition is diverse due to the breadth of the
services offered by the Company and the geographic regions in which such
services are provided. The Company is subject to intense competition with
respect to each of its individual service offerings. Many of the Company's
competitors have significantly greater financial, technical, manufacturing,
personnel and marketing resources than the Company. To date, however, the
Company believes that these large competitors generally have not made it a
priority to provide telecommunications services in remote, difficult-access
regions. Should one or more of such companies focus on such services, it likely
would have a material adverse effect on the financial condition, results of
operations and cash flow of the Company. Currently, the Company believes it
competes directly with Autocomm Communications Engineering Corp., Sola
Communications, Inc. and Datacom for the sale of telecommunications services to
oil and gas companies in the Gulf of Mexico. Shell Oil Company, whose subsidiary
is a customer of the Company, also competes with the Company through services
provided over Shell Oil Company's microwave network in the Gulf of Mexico area.
Shell Oil Company has announced plans to become a full service
telecommunications
6
<PAGE>
provider to the oil and gas industry including in the Gulf Coast region
currently served by the Company. The Company believes that its ability to
compete in the markets in which it operates depends on such factors as
reputation, technical expertise, quality, customer service, knowledge of the
business, ease of use, reliability, marketing and distribution channels and the
array of services and products that it can provide. Although the Company
believes that it competes favorably with respect to these factors, there can be
no assurance that the Company will be able to compete successfully in the
future. As the Company pursues new markets, the Company likely will encounter
new competitors. While the recent World Trade Organization agreement on
communications services may result in regulatory changes that could benefit the
Company as it competes in existing markets or seeks to enter new markets, there
can be no assurance that the agreement will be implemented in a manner that
would benefit the Company or that the pro-competitive effects of the agreement
will not increase the amount of competition encountered by the Company.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. The Company has provided long
distance carrier services which originate in the United States and which
terminate both domestically and internationally as a switchless reseller since
1994. The Company intends to begin offering these services as a switch-based
carrier by the end of the fourth quarter of its 1997 fiscal year. The long
distance markets are characterized by intense competition with a number of
companies, including very large companies such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"), that have
greater name recognition and greater financial, technical, network and marketing
resources than the Company. In addition, as a result of the Telecommunications
Act of 1996 (the "1996 Telecommunications Act"), the Bell Operating Companies
("BOCs") and the GTE Operating Companies ("GTOCs") are able or will be able in
the future to enter the long distance market.
LOCAL EXCHANGE SERVICE. The Company is expanding its operations to provide
local exchange services typically provided by local exchange carriers ("LECs").
The local service market only recently has been opened to new service providers
following enactment of the 1996 Telecommunications Act; however, competition
within this market likely will be as intense as competition within the long
distance market. The services offered by the Company will compete with those
offered by LECs, such as BellSouth and Southwestern Bell, which currently
dominate the provision of local services in their respective markets. If LECs
lower their rates, other telecommunications providers may be forced by market
conditions to charge less for their services in order to compete, which could
have a material adverse effect on the Company's financial condition, results of
operations and cash flow. The Company also may face competition in the provision
of local telecommunications services from cable companies, electric utilities,
LECs operating outside their current local service areas, long distance carriers
and start-up telecommunications ventures. There can be no assurance that the
Company will be able to compete effectively in the local service markets.
INTERNATIONAL AND FOREIGN MARKET SERVICES. The Company offers
telecommunications service to and from remote and difficult-access locations
outside of the United States for its customers. Such services include the
provision of telecommunications services between domestic corporate offices and
remote sites. Therefore, the Company has not competed in a full range of
services with the incumbent telecommunications providers in a particular country
and has faced competition from international telecommunications providers
generally and others who provide telecommunications services to remote and
difficult-access locations. The Company provides private-line telecommunications
services in Russia. In Russia, the major competitors for networks are SOVAMTEL,
ROSTELECOM, AMRUSCOM and Global One. Additionally, to the extent other foreign
markets are identified by the Company, they also may be identified by other
companies with significantly greater financial and other resources than the
Company. As a result, there can be no assurance that the Company will be able to
compete effectively in these markets. See "Business--Strategic Relationships and
Alliances" and "--Competition."
7
<PAGE>
RISKS ASSOCIATED WITH ENTRY INTO LOCAL PHONE SERVICE MARKET AND OTHER NEW
MARKETS
The Company's strategy includes developing new service offerings for
specific new markets and pursuing new markets for its existing services. Entry
into new markets entails a number of risks, including those associated with the
state of development of the market, intense competition from companies already
operating in those markets, potential competition from companies that may have
greater resources than the Company and increased selling and marketing expenses.
In addition, to the extent the markets are outside the United States, the
Company will be subject to risks associated with international operations.
The Company currently is developing a telecommunications network to provide
an alternative to the resale of long distance service and to provide LEC
services in selected areas along the Louisiana and Texas Gulf Coast region,
which may involve, among other things, acquiring or leasing switches and
dedicated transmission lines. The network will enable the Company, as a
switched-based carrier, to provide long distance service to its customers
directly instead of reselling other carriers' services. Notwithstanding the
Company's development of its network, the Company will remain dependent to a
large degree on the transmission networks of other carriers for long distance
services; however, operation of a switch will enable the Company to route its
customers' calls in a more cost-effective manner. There can be no assurance that
the Company's development of a telecommunications network in the Gulf Coast
region will be completed or, if completed, will be profitable. In acquiring or
leasing the switches, dedicated transmission lines and microwave radios needed
to develop a telecommunications network, the Company may incur high levels of
indebtedness and fixed operating costs. The Company has no prior experience
operating as a switch-based carrier.
The Company, which recently has been approved as a competitive local
exchange carrier ("CLEC") in Texas and has applied for CLEC status in Louisiana,
intends to offer LEC services in selected markets. Competition for local
services is at an early stage. It is difficult to determine how this market will
develop due to many factors including regulatory changes, resistance from
incumbent LECs, its market acceptance as a CLEC and competition from other
CLECs. In entering the local services market, the Company initially intends to
serve as a reseller of LEC services as permitted under the 1996
Telecommunications Act, which allows it to purchase such services from the
incumbent LECs at a discount and then resell them to the public. However, the
Company intends to reduce its reliance on LECs for those services by developing
its own network and installing one or more end-office switches. Other than its
experience in the Gulf of Mexico, the Company has no experience operating as a
CLEC. The Company's success will depend, in part, on its ability to manage and
integrate the operations of a telecommunications network into the Company's
existing operations, including the development of the Company's management
information systems. Such success also will depend upon the Company's ability to
resell the additional capacity that will be available on its network. There can
be no assurance that the Company's provision of CLEC services will receive
market acceptance in a timely manner, or at all, or that the Company's CLEC
services will be profitable. The Company's success in the provision of CLEC
services is also highly dependent on the pace and phase of implementation of the
pro-competitive provisions of the 1996 Telecommunications Act by federal and
state regulatory authorities. The Company's entry into the local phone service
market, and the Company's operation as a switch-based carrier, could have a
material adverse effect on the Company's financial condition, results of
operations and cash flow. There can be no assurance that the Company will be
successful in operating as a CLEC nor can any assurance be given with respect to
its operation as a switch-based long distance carrier if and when it develops
its own network. See "--Risks Associated with International Operations" and
"Business--IWL Strategy" and "--Service Offerings."
GOVERNMENT REGULATION
The Company and the equipment it installs are subject to varying degrees of
federal, state and local regulation relating to wireless, long distance and
local telecommunications services. In the United States, the provision of the
Company's services is subject to the provisions of the Communications Act of
1934, as
8
<PAGE>
amended (the "1934 Communications Act"), the 1996 Telecommunications Act and the
regulations of the Federal Communications Commission (the "FCC") thereunder, as
well as the applicable laws and regulations of the various states administered
by the relevant state public service commissions ("PSCs"). The Company holds
various radio station authorizations that are subject to licensing, operational
and technical requirements imposed on commercial and private mobile radio
services, fixed microwave services and satellite radio earth station services.
In addition to detailed licensing, tariffing and operational requirements, the
FCC and the PSCs impose reporting obligations, annual fees, and other ongoing
regulatory obligations on the Company. These agencies also regulate certain
corporate matters and transactions including transfers of control of the
Company. The recent trend in the United States, for both federal and state
regulation of telecommunications services providers, has been in the direction
of reduced regulation. Although this trend facilitates market entry and
competition by multiple providers, it has also given AT&T, the largest
international and domestic long distance carrier in the United States, as well
as other large long distance providers, increased pricing and market entry
flexibility that has permitted them to compete more effectively with smaller
carriers such as the Company, as well as the opportunity to re-enter the local
telephone service market. Changes in regulatory rules also have permitted
increased competition in land mobile, microwave and satellite radio services
from existing providers and new entrants. There can be no assurance that future
regulatory, judicial and legislative changes in the United States will not have
a material adverse effect on the financial condition, results of operations and
cash flow of the Company. Further, any failure by the Company to maintain proper
federal and state tariffs or certification or any finding by federal or state
agencies that the Company is not or has not been operating under permissible
terms and conditions or in compliance with applicable requirements may result in
an enforcement action or investigation by the FCC or a PSC, which may consist of
a range of penalties including, but not limited to, fines and license
revocation, which could have a material adverse effect on the financial
condition, results of operations and cash flow of the Company.
The 1996 Telecommunications Act has significantly altered regulation of the
telecommunications industry by preempting a number of state and local laws
inhibiting competition and by imposing a variety of new duties on incumbent LECs
in order to promote competition for local exchange and access services. The 1996
Telecommunications Act also eliminates previous prohibitions on the provision of
inter-LATA (which is a Local Access and Transport Area) long distance services
by the BOCs and GTOCs and opens up local telephone service to long distance
companies and other competitors. Although the Company believes that the
enactment of the 1996 Telecommunications Act and other trends in federal and
state legislation and regulation that favor increased competition create new
opportunities for the Company, there can be no assurance that the resulting
increased competitive opportunities or other changes in current or future
regulations at the federal or state level will not have a material adverse
effect on the financial condition, results of operations and cash flow of the
Company. Furthermore, there can be no assurance of how the 1996
Telecommunications Act will be implemented or enforced or the effect it will
have on competition within the telecommunications industry generally or on the
competitive position of the Company specifically.
The Company also holds authority from the FCC to provide international
services. The FCC's rules applicable to the provision of international services
may limit, under certain conditions, the size of investments in the Company by,
and affiliations with, foreign telecommunications carriers. In addition, because
the Company holds several common carrier radio licenses, the 1934 Communications
Act currently limits ownership of the Company by non-U.S. citizens, foreign
governments and corporations organized under the laws of a foreign country. If
the Company's foreign ownership were to exceed the limit set forth in the 1934
Communications Act, the FCC could impose a range of penalties on the Company,
including, but not limited to, fines or revocation or divestiture of its
licenses. The recently signed World Trade Organization ("WTO") agreement
committed 69 countries, including the United States, to eliminating barriers to
competition in basic telecommunications services, including foreign ownership
limitations. Thus, on January 1, 1998, the effective date of the WTO agreement,
the United States is expected to eliminate limits on foreign ownership. There
can be no assurance that the WTO agreement will be
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implemented in the U.S. in such a manner that eliminates entirely the current
foreign ownership limitations or that legislation will not be passed that
imposes ownership limitations. The Company's operations also will be affected by
introduction of new cellular, PCS and other radio services and the future
allocations and auctions of the radio frequency spectrum for such services,
which may increase competition as well as affect the type of services or
products that can be installed or offered. Regulatory changes, whether domestic
or international, may be affected by political, economic and technical factors
and could significantly impact the Company's operations in numerous ways,
including by creating greater competition, imposing new limits on services,
making current communications systems obsolete and increasing the opportunities
for competition.
In addition, each country where the Company provides telecommunications
services has its own laws and regulations. In certain locations, disputes may
arise as to which country's laws and regulations apply. In many instances,
foreign jurisdictions require governmental or other regulatory approval for the
equipment that the Company intends to install and the services that it intends
to provide. There can be no assurance that the Company will be able to obtain
such approvals or that it will obtain such approvals without significant delay
or expense. The delays inherent in this approval process may cause the
cancellation, postponement or rescheduling of the installation of communications
systems for the Company's customers, which in turn may have a material adverse
effect on the financial condition, results of operations and cash flow of the
Company. See "Business--Government Regulation."
VARIABILITY IN OPERATING RESULTS
The Company's annual and quarterly operating results have varied
significantly in the past and are expected to vary significantly in the future.
These fluctuations in operating results generally are caused by a number of
factors, including changes in the Company's services and product mix, levels of
product resales, adverse weather conditions in customer locations, the degree to
which the Company encounters competition in its existing or target markets,
general economic conditions, the volume and timing of orders received during the
period, sales and marketing expenses related to entering new markets, the timing
of new product or service introductions by the Company or its competitors and
changes in billing rates by the Company or its competitors. Any of these factors
could cause future quarterly or fiscal year operating results to vary
significantly from the prior period and, because of the possibility of these
fluctuations, results for any particular quarter or fiscal year should not be
relied upon as being indicative of future performance. In addition, the
Company's total sales increased to $27.8 million in fiscal 1996 from $15.8
million in fiscal 1995, due primarily to product resales that were made as part
of a one-time project for Shell. The Company expects that this project will be
substantially completed in fiscal 1997. As a result, while the Company performs
other services for Shell and its affiliates from time to time on a project-by-
project basis, the Company expects that future sales to Shell and its affiliates
will be less than the fiscal 1996 level. See "--Industry Concentration and
Dependence on Major Customers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RELIANCE ON THIRD PARTIES
The Company purchases substantially all of its telecommunications equipment
for use in the oil and gas industry from Alcatel Network Systems, Inc.
("Alcatel") pursuant to an agreement that generally requires the Company to use
Alcatel equipment in sales to customers in the U.S. oil and gas industry. This
requirement may limit the ability of the Company to effectively compete for
certain sales or reduce the profitability that could otherwise be obtained by
the Company from such sales. The original Alcatel agreement provided in its
terms for its expiration in December 1996; however, the parties continued to
abide by the terms of the original Alcatel agreement until a new agreement,
which renewed and extended the original Alcatel agreement, was entered into. The
renewed Alcatel agreement expires on December 31,
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1999. The Company does not manufacture, nor does it have the ability to
manufacture, the telecommunications equipment used by the Company in performing
its services. Therefore, any reduction or interruption in the supply of
equipment from Alcatel, or any increase in pricing by Alcatel that cannot be
passed through to customers, could have a material adverse effect on the
Company's financial condition, results of operations and cash flow until
sufficient alternative supply sources are established. Although there are other
manufacturers who have, or are developing, equipment that would satisfy the
Company's needs, there can be no assurance that the Company would be able to
replace its current primary supplier on commercially reasonable terms or on
terms as favorable as those contained in the Alcatel agreement or without a
significant disruption of its services or business. See "Business--Strategic
Relationships and Alliances."
In an attempt to make its services more accessible to potential customers,
the Company has entered into contracts with the owners of over 50 drilling rigs
in the Gulf of Mexico whereby the Company's equipment is installed on the
drilling rigs regardless of who leases such rigs for exploration and drilling
purposes. Although such arrangements support the selection of the Company for
the rig's telecommunications services, such arrangements make the Company
dependent upon the drilling rig owner to keep the drilling rig fully leased. If
the drilling rig is not in operation, such equipment will generate limited
revenue for the Company and will not be available for use with other customers.
The failure of such rigs to operate could have a material adverse effect upon
the Company's financial condition, results of operations and cash flow.
SIGNIFICANT CAPITAL REQUIREMENTS
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses has required and is expected to continue
to require substantial capital investment. Additionally, as part of its
strategy, the Company may seek to acquire complementary assets or businesses,
including additional spectrum licenses, which also could require substantial
capital investment. The Company's decision to accelerate the development of its
carrier services in response to the 1996 Telecommunications Act has
substantially increased the Company's capital expenditure requirements. The
Company anticipates that, based on current plans and assumptions relating to its
operations, upon completion of the Offering its financial resources and
equipment financing arrangements will be sufficient to fund the Company's growth
and operations for approximately 12 months from the date of this Prospectus. The
Company believes that its capital needs at the end of such period will continue
to be significant and thus the Company will continue to seek additional sources
of capital. Further, in the event the Company's plans or assumptions change or
prove to be inaccurate, or if the Company consummates any unplanned acquisitions
of businesses or assets, the Company may be required to seek additional sources
of capital sooner than currently anticipated. There can be no assurance that the
Company will be able to obtain additional financing or, if such financing is
available, that the Company will be able to obtain it on acceptable terms.
Failure to obtain additional financing, if needed, could result in the delay or
abandonment of some or all of the Company's development and expansion plans,
which would have a material adverse effect on the Company's financial condition,
results of operations and cash flow. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "--Liquidity and Capital Resources."
MANAGING CHANGE
The Company recently has experienced a period of significant growth and
expansion that has placed, and if sustained would continue to place, a
significant strain on its resources. This growth has resulted in an increase in
the level of responsibility for management personnel. The Company's officers
have had limited experience in managing companies as large and rapidly changing
as the Company. The Company's ability to manage change successfully will require
such personnel to work together effectively and will require the Company to
improve its operational, management, financial and information systems and
controls. If the
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Company's management is unable to manage change effectively, the Company's
financial condition, results of operations and cash flow could be materially and
adversely affected. See "Management."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon certain of its officers,
including Ignatius W. Leonards, its Chairman and Chief Executive Officer, Byron
M. Allen, its President, and Richard H. Roberson, its Chief Financial Officer.
The Company's future success depends on the continued contributions of such
officers, including the maintenance, enhancement and establishment of key
customer relationships and the management of operations and financial control.
The loss of any of these officers by the Company could have a material adverse
effect on the Company's financial condition, results of operations and cash
flow. The Company is dependent in large part on its ability to attract and
retain management, engineering, marketing and other technical personnel.
Competition for engineering and other technical personnel is intense, and the
inability to attract and retain highly qualified technical personnel to
coordinate the Company's operations could adversely affect the Company's
operations and prospects in related markets. There can be no assurance that the
Company will be able to attract and retain the qualified personnel necessary for
its business. See "Business--Employees" and "Management--Directors and Executive
Officers."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A portion of the Company's sales to date have been made to customers located
outside of the United States, including customers located in Moscow, Russia and
Quito, Ecuador. See Note 7 of Notes to the Company's Consolidated Financial
Statements. International sales may account for a larger portion of the
Company's sales in the foreseeable future. Risks inherent in the Company's
international business activities include changes in regulatory requirements,
costs and risks of localizing systems in foreign countries, availability of
suitable export financing, timing and availability of export licenses, tariffs
and other trade barriers, customs matters, longer payment cycles, higher tax
rates or additional withholding requirements, difficulty in enforcing
agreements, military, political and transportation obstacles, political,
economic and religious instability, difficulties in staffing and managing
foreign operations, the burden of complying with a wide variety of complex
foreign laws and treaties and difficulty in accounts receivable collections. In
addition, foreign operations involve uncertainties arising from local business
practices, language differences, cultural considerations and international
political and trade tensions. Some of the Company's agreements with customers
and suppliers are governed by foreign laws, which may differ significantly from
U.S. laws. Therefore, the Company may be limited in its ability to enforce its
rights under such agreements and to collect damages, if awarded. The provision
of service in foreign countries will subject the Company to a variety of laws
and regulations. These laws and regulations vary from country to country and are
subject to change. Foreign laws could prohibit, limit, impose conditions on or
create competition for the Company's services. While the recent 69-nation WTO
agreement on communications services may lessen regulatory restrictions on the
Company's ability to compete in foreign countries, it also may increase the
opportunities in these countries available to the Company's competitors. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's financial condition, results of operations and cash
flow. Currently, the Company's international sales are denominated in United
States currency. The Company does not currently engage in foreign currency
hedging transactions. The Company may be required in the future to denominate
international sales in foreign currencies. In such event, a decrease in the
value of foreign currencies relative to the United States dollar could result in
losses from transactions denominated in foreign currencies and, with respect to
the Company's international sales that are United States dollar-denominated,
such a decrease could make the Company's services less price-competitive. In the
future, the Company may seek to implement hedging techniques with respect to
foreign currency transactions. There can be no assurance, however, that such
hedging activities would successfully protect against foreign currency exchange
losses or against other international sales risks such as exchange limitations,
price controls or other foreign currency restrictions.
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The Company's headquarters and administrative offices are in Houston, Texas.
In addition, as of March 31, 1997, the Company maintained an office in Moscow,
Russia with approximately 10 employees. The geographical distance between
Houston, Texas and Moscow, Russia, as well as time-zone differences, can isolate
management from operational issues, delay communications and require a
significant amount of time, effort and expense for international travel. There
can be no assurance that the Company will not face significant management
demands associated with its international operations in the future. Any
significant disruption in the management of the Company's international
operations could have a material adverse effect on the Company's financial
condition, results of operations and cash flow. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON OTHER TELECOMMUNICATIONS CARRIERS
The Company depends primarily on other long distance carriers for the
transmission of long distance telephone calls. Although the Company believes its
relations with its carriers are good, the termination of the Company's contracts
with its carriers or a reduction in their services could have a material adverse
effect on the Company's financial condition, results of operations and cash
flow. In addition, the accurate and prompt billing of the Company's subscribers
is dependent upon such carriers providing accurate and timely call detail
records to third-party billing companies who bill the Company's services. There
can be no assurance that the Company's current long distance carriers will
provide accurate information on a timely basis, or that the third-party billing
companies will accurately bill the Company's customers, the failure of which
could have a material adverse effect on the Company's financial condition,
results of operations and cash flow. Upon commencing service as a reseller of
LEC services, the Company will be dependent upon the LEC for such service and
the rates which will be charged. The 1996 Telecommunications Act provides that
incumbent LECs will be required to sell their service at a discount to CLECs as
established by federal and state regulatory authority. The Company's dependence
upon the LECs will be impacted by a number of factors including regulatory
changes, resistance from incumbent LECs, its market acceptance as a CLEC and
competition from other CLECs. See "Business--Government Regulation."
CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate and adapt to such
changes and to offer, on a timely basis, services that meet these evolving
industry standards. There can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future and render the
Company's systems less competitive or less viable. There can be no assurance
that the Company will have sufficient resources to make the investments
necessary to acquire new technologies or to introduce new services that could
compete with future technologies or that equipment held by the Company in
inventory will not be rendered obsolete, any of which factors could have a
material adverse effect on the Company's financial condition, results of
operations and cash flow.
DEPENDENCE ON INFORMATION SYSTEMS
The Company currently depends upon third-party billing companies to bill the
Company's customers for their long distance usage. As the Company implements its
strategy to develop a network and to provide LEC services, the Company may begin
to bill its customers itself. In such case, the Company's information systems
will become more important in order to maintain sophisticated and reliable
transaction processing systems that produce accurate and complete billing
statements. To promptly and accurately bill its customers, the Company must
record and process massive amounts of data quickly and accurately. The Company
is in the process of evaluating and updating its information systems. However,
the Company does not have extensive experience in implementing and operating
such systems. The Company believes that the continued enhancement of its
information systems is important to its continued growth and its
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ability to monitor and control costs, but there can be no assurance that the
Company will not encounter delays or suffer adverse consequences in implementing
the enhanced systems. Any such delay or other malfunction of the Company's
management information systems could have a material adverse effect on the
Company's financial condition, results of operations and cash flow.
POSSIBLE SERVICE INTERRUPTIONS; NATURAL DISASTERS
The Company's operations are dependent on its ability to protect the
equipment it owns, and the ability of third parties to protect the equipment the
Company leases from them, against damage that may be caused by fire, equipment
failures, weather, power loss, telecommunications failures, failure or loss of
satellites, human error, unauthorized intrusion, natural disasters or
occurrences, acts of sabotage and other similar events. The Company's operations
in remote and underdeveloped areas of the world make the Company's operations,
equipment and employees susceptible to environmental extremes and political
instability. There can be no assurance that fire, equipment failure or other
events would not disable the Company's equipment, which could have a material
adverse effect on the Company's financial condition, results of operations and
cash flow. Also, networks and switching facilities experience periodic service
interruptions and equipment failures, and the operation of such networks will be
subject to international, national and regional telecommunications outages from
time to time. It is therefore possible that the networks and facilities utilized
by the Company may from time to time experience service interruptions or
equipment failures that could have a material adverse effect on the Company's
financial condition, results of operations and cash flow. Additionally, many of
the Company's customers with offshore locations will abandon facilities during
the pendency of severe weather, such as hurricanes, tropical storms and other
dangerous natural forces, which results in a cessation in the provision of
services by the Company until normal operations are resumed. Similarly, the
Company's pay telephones located on customers' drilling rigs and production
platforms may experience interruptions or cessation of use due to weather
conditions or other natural occurrences, such as earthquakes or floods, which
are beyond the Company's control. A significant portion of the Company's
facilities, as well as a significant portion of its customers, are located in
the Louisiana and Texas Gulf Coast region, which is particularly susceptible to
hurricanes. Although the Company has taken precautions to protect itself and its
customers from events that could interrupt the delivery of the Company's
services, there can be no assurance that a fire, telecommunications failure,
human error, natural disaster, act of sabotage or other similar event would not
cause a disruption in the Company's services and that such events will not have
a material adverse effect on the Company's financial condition, results of
operations and cash flow.
CONCENTRATION OF OWNERSHIP
Upon consummation of the Offering, Ignatius W. Leonards, the Company's Chief
Executive Officer and Chairman of the Board of Directors, will beneficially own
an aggregate of approximately 54% of the outstanding shares of Common Stock (or
approximately 50% if the Underwriters' over-allotment options are exercised in
full) and Mr. Leonards, together with Byron M. Allen, the President of the
Company, will beneficially own an aggregate of approximately 60% of the
outstanding shares of Common Stock (or approximately 56% if the Underwriters'
over-allotment options are exercised in full). As a result of this stock
ownership and their respective positions with the Company, Mr. Leonards, acting
alone, and Messrs. Leonards and Allen, acting together, will be in a position to
control the affairs of the Company through the ability to influence the outcome
of matters submitted to a vote of the shareholders of the Company, including the
election of directors, and matters on which the Board of Directors may act. See
"Principal and Selling Shareholders."
PROPRIETARY RIGHTS
The Company believes that the future success of its business will depend
more on the technical competence, creativity and marketing abilities of its
employees than on patents, trademarks and other intellectual property rights.
Nevertheless, the Company attempts to protect its intellectual property rights
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through patents, trademarks, trade secrets and other measures. The Company
currently does not own any patents, but has one patent application on file with
the U.S. Patent and Trademark Office. There can be no assurance that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. In addition, there can be
no assurance that foreign intellectual property laws will adequately protect the
Company's intellectual property rights, if any, in other countries. Litigation
may be necessary to protect the Company's intellectual property rights and trade
secrets, which could result in substantial costs and diversion of resources and
ultimately may prove unsuccessful. The failure of the Company to protect its
proprietary rights could have a material adverse effect on its financial
condition, results of operations and cash flow. If any claims or actions are
asserted against the Company, the Company may seek to obtain a license under a
third party's intellectual property rights; however, there can be no assurance
that a license will be available on commercially reasonable terms or at all.
CERTAIN ANTI-TAKEOVER MATTERS
Upon the consummation of the Offering, there will be 96,322,184 authorized
and unissued shares of Common Stock and 10,000,000 authorized and unissued
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). The
existence of authorized but unissued Common Stock and Preferred Stock may enable
the Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a merger, tender offer, proxy
solicitation or otherwise. In this regard, the Company's Amended and Restated
Articles of Incorporation (the "Restated Articles of Incorporation") grant the
Board of Directors of the Company broad power to establish the rights,
preferences and privileges of authorized and unissued Preferred Stock without
shareholder approval. The issuance of shares of Preferred Stock pursuant to the
Board of Director's authority described above could decrease the amount of
earnings and assets available for distribution to holders of Common Stock or
adversely affect the rights and powers, including voting rights, of such
holders. The issuance of Common Stock or Preferred Stock also could have the
effect of delaying, deferring or preventing a change in control of the Company,
including transactions in which the shareholders might otherwise receive a
premium for their shares over the then current market price, and adversely may
affect the market price of the Common Stock. The Board of Directors does not
currently intend to seek shareholder approval prior to any issuance of Common
Stock or Preferred Stock, unless otherwise required by law. The Company is also
subject to prior regulatory approval by the FCC and various state regulatory
agencies for a transfer of control of the Company or for the assignment of the
Company's intrastate certification authority and its international authority.
The 1934 Communications Act provides that non-U.S. citizens, foreign governments
or their representatives or corporations organized under the laws of a foreign
country may not own in the aggregate more than 20% of a company that owns common
carrier radio licenses such as the Company. In addition, because the Company
holds FCC authority to provide international service, the FCC will scrutinize an
ownership interest in the Company of greater than 25%, or a controlling interest
at any level, by a dominant foreign carrier. International carriers, such as the
Company, must notify the FCC 60 days in advance of an acquisition of a 10% or
greater interest by a foreign carrier in such carriers. Furthermore, the
Company's bank loan agreement provides that an event of default thereunder will
occur if all or a controlling interest in the Company's capital stock is sold,
assigned or otherwise transferred. Any of the foregoing factors could have the
effect of delaying, deferring or preventing a change of control of the Company.
See "--Shares Eligible for Future Sale," "Business--Government Regulation" and
"Description of Capital Stock--Preferred Stock" and "--Certain Anti-Takeover
Matters."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for shares of Common
Stock and there can be no assurance that an active market will develop or be
sustained following the Offering. The initial public offering price for the
shares of Common Stock sold in the Offering has been determined through
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negotiations between the Company and the Representative and does not necessarily
reflect the market price for the Common Stock following the Offering. The market
price for the Common Stock following the Offering will be influenced by a number
of factors, including the depth and liquidity of the market for the Common
Stock, investor perceptions of the Company's and competitors' operating results
and general economic and other conditions. The stock market has experienced
volatility, particularly with respect to the market prices of equity securities
of many technology and telecommunications companies. This volatility often has
been unrelated to the operating performance of the affected companies. There can
no assurance that market fluctuations will not adversely affect the price of the
Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of such shares for future sales, will have on the
market price of the Common Stock of the Company. Sales of a substantial number
of shares of Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the market price
for the Common Stock. Upon completion of the Offering, the Company will have
outstanding 3,677,816 shares of Common Stock (3,795,316 shares if the
Underwriters' over-allotment options are exercised in full), assuming no
exercise of options or warrants after the date of this Prospectus. Of these
shares, the 1,450,000 shares offered hereby (1,667,500 shares if the
Underwriters' over-allotment options are exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144"). The remaining 2,227,816 shares of
Common Stock outstanding upon completion of the Offering are "restricted
securities," as that term is defined in Rule 144. Upon expiration of certain
Lock-Up Agreements (as defined below) one year after the effective date of the
Offering, approximately 2,225,008 shares will be eligible for sale subject to
the timing, volume and manner of sale restrictions of Rule 144. The 2,808
remaining shares held by an existing shareholder will become eligible for sale
over a period of less than one year. In addition, 13,919 shares subject to
outstanding vested stock options under the Company's Employee Incentive Stock
Option Plan (the "Incentive Stock Option Plan"), if exercised, will become
eligible for sale 90 days after the effective date of the Offering and, upon
expiration of certain Lock-Up Agreements, an additional 146,695 shares subject
to outstanding stock options under the Incentive Stock Option Plan (including
unvested stock options the vesting of which will be automatically accelerated
upon completion of the Offering), along with 130,000 shares subject to
outstanding stock options under the Company's 1997 Stock Option Plan (the "1997
Stock Option Plan") (which are not subject to Lock-Up Agreements), if exercised
once vested, will be eligible for sale, in each case subject to the restrictions
of Rule 701 under the Securities Act, unless sold pursuant to an effective
registration statement under the Securities Act. See "-- Significant Capital
Requirements" and "Shares Eligible for Future Sale."
DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in the Offering will experience
immediate and substantial dilution in net tangible book value of approximately
$2.97 per share of Common Stock (based on the initial public offering price of
$6.00 per share). To the extent outstanding options to purchase the Company's
Common Stock are exercised, there will be further dilution. See "Dilution."
LACK OF DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future and, in certain circumstances, is prohibited from doing so under the
terms of its bank credit facility. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,450,000 shares of
Common Stock offered by the Company hereby are estimated to be $7.3 million
($7.9 million if the over-allotment option granted to the Underwriters by the
Company is exercised in full), at the initial public offering price of $6.00 per
share and after deducting estimated offering expenses and underwriting discounts
and commissions payable by the Company. The Company intends to use the estimated
net proceeds as follows: (i) approximately $6.6 million will be applied to
acquire equipment for the continued development of communications infrastructure
for the Company's network, including microwave and fiber optic equipment to
expand the Company's carrier services; (ii) approximately $500,000 will be used
to repay a CAPEX Term Note under its bank credit agreement with Marine Midland
Business Loans, Inc. ("Marine Midland"); and (iii) approximately $200,000 will
be used for working capital and general corporate purposes. Pending application
of the proceeds as described above, the Company intends to invest the net
proceeds of the Offering in short-term, investment-grade, interest-bearing
securities. The Company anticipates that, based on current plans and assumptions
relating to its operations, upon completion of the Offering its financial
resources and equipment financing arrangements will be sufficient to fund the
Company's growth and operations for approximately 12 months from the date of
this Prospectus, including the development of its network. The Company believes
that its capital needs at the end of such period will continue to be significant
and thus the Company will continue to seek additional sources of capital. There
can be no assurance that the Company will be able to obtain additional financing
or, if such financing is available, that the Company will be able to obtain it
on acceptable terms. Failure to obtain additional financing, if needed, could
result in the delay or abandonment of some or all of the Company's development
and expansion plans, including the development of its network, which would have
a material adverse effect on the Company's financial condition, results of
operations and cash flow. See "Risk Factors--Significant Capital Requirements."
The Company intends to use approximately $500,000 of the estimated net
proceeds of the Offering to pay in full the outstanding balance of the CAPEX
Term Note dated December 20, 1995 in the original principal amount of $500,000
as executed and delivered by the Company pursuant to the Company's bank credit
agreement with Marine Midland. The CAPEX Term Note bears interest at a rate
equal to the prime rate plus .75% and is due on December 31, 1998 (subject to
renewals).
In the event the Underwriters exercise the over-allotment option granted to
them by the Selling Shareholder, the Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholder.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
anticipate paying dividends on the Common Stock in the foreseeable future. In
addition, under the terms of the Company's bank line of credit, the Company may
not pay dividends without the prior consent of the lending bank. The Company
expects that it will retain all available earnings generated by the Company's
operations for the development and growth of its business. Any future
determination as to the payment of dividends will be made in the discretion of
the Board of Directors of the Company and will depend upon the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant.
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DILUTION
The net tangible book value of the Company as of March 31, 1997 was
$3,880,449, or $1.74 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's total tangible assets reduced by
the amount of its total liabilities, divided by the total number of outstanding
shares of Common Stock. After giving effect to the sale of the shares of Common
Stock offered hereby and the receipt and application of the proceeds therefrom
at the initial public offering price of $6.00 and after deducting underwriting
discounts and commissions and estimated expenses of the Offering, the adjusted
net tangible book value of the Company at March 31, 1997 would have been
$11,160,449 or $3.03 per share. This represents an immediate increase in the net
tangible book value of $1.29 per share to existing shareholders and an immediate
dilution in net tangible book value of $2.97 per share to new investors
purchasing Common Stock in the Offering. The following table illustrates the per
share dilution to new investors:
<TABLE>
<S> <C> <C>
Public offering price per share.............................................. $ 6.00
Net tangible book value per share as of March 31, 1997..................... $ 1.74
Increase per share attributable to new investors........................... 1.29
---------
As adjusted net tangible book value per share after the Offering............. 3.03
---------
Dilution per share to new investors.......................................... $ 2.97
---------
---------
</TABLE>
The following table sets forth as of March 31, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid therefor
and the average price per share paid by existing shareholders and by new
investors (assuming the sale of the shares of Common Stock offered hereby at the
initial public offering price of $6.00 before deducting underwriting discounts
and commissions and estimated expenses of the Offering):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................................. 2,227,816 60.6% $ 291,873 3.2% $ 0.13
New investors.......................................... 1,450,000 39.4 8,700,000 96.8 6.00
---------- --------- ------------- -----
Total.............................................. 3,677,816 100.0% $ 8,991,873 100.0%
---------- --------- ------------- -----
---------- --------- ------------- -----
</TABLE>
The above computations assume no issuance after March 31, 1997 of any of (i)
the 258,600 shares of Common Stock reserved for issuance under the Incentive
Stock Option Plan, of which 160,614 shares were subject to options outstanding
as of March 31, 1997, with a weighted average exercise price of $3.62 per share,
(ii) the 300,000 shares of Common Stock reserved for issuance under the 1997
Stock Option Plan, (iii) the 100,000 shares of Common Stock reserved for
issuance under the Company's 1997 Director Option Plan (the "1997 Director
Option Plan"), and (iv) the 145,000 shares subject to the Representative's
Warrant. A total of 130,000 shares are subject to options that were granted
under the 1997 Stock Option Plan in May 1997 at an average exercise price equal
to the initial price of the Common Stock being offered to the public hereby. The
issuance of additional shares of Common Stock upon the exercise of any of the
options outstanding as of March 31, 1997 under the Incentive Stock Option Plan
will result in additional dilution. See "Management--Benefit Plans,"
"Description of Capital Stock--Representative's Warrant," "Shares Eligible for
Future Sale" and "Underwriting."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 (i) on a historical basis and (ii) as adjusted to give effect to the
sale by the Company of the 1,450,000 shares of Common Stock offered hereby at
the initial public offering price of $6.00 per share and the anticipated receipt
and application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Notes payable--current portion............................................................ $ 1,111 $ 611
--------- -----------
--------- -----------
Notes payable, noncurrent portion......................................................... 6,151 6,151
Shareholders' equity:
Preferred Stock, $.01 par value: 10,000,000 shares authorized, no shares issued and
outstanding (actual and as adjusted): -- --
Common Stock, $.01 par value: 100,000,000 shares authorized (actual and as adjusted);
2,227,816 shares issued and outstanding (actual); 3,677,816 shares issued and
outstanding (as adjusted)(1)(2)....................................................... 22 37
Additional paid-in capital.............................................................. 270 7,535
Retained earnings....................................................................... 3,905 3,905
--------- -----------
Total shareholders' equity.............................................................. 4,197 11,477
--------- -----------
Total capitalization.................................................................... $ 10,348 $ 17,628
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) In March 1997, the Company adopted its Restated Articles of Incorporation,
which restated the Common Stock authorized, issued and outstanding from no
par value to a par value of $0.01 per share.
(2) Excludes (i) 258,600 shares of Common Stock reserved for issuance under the
Incentive Stock Option Plan, of which 160,614 shares were subject to options
outstanding as of March 31, 1997 with a weighted average exercise price of
$3.62 per share, (ii) 300,000 shares of Common Stock reserved for issuance
under the 1997 Stock Option Plan, (iii) 100,000 shares of Common Stock
reserved for issuance under the 1997 Director Option Plan, and (iv) 145,000
shares subject to the Representative's Warrant. A total of 130,000 shares
are subject to options that were granted under the 1997 Stock Option Plan in
May 1997 at an average exercise price equal to the initial price of the
Common Stock being offered to the public hereby. See "Management--Benefit
Plans," "Description of Capital Stock--Representative's Warrant," "Shares
Eligible for Future Sale" and "Underwriting."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data for each of the three
fiscal years ended June 30, 1996 and for the nine months ended March 31, 1997,
are derived from the Company's Consolidated Financial Statements for those years
and for the nine months ended March 31, 1997 which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere herein. The following Selected Consolidated Financial Data for
the fiscal years ended June 30, 1992 and 1993 are derived from the Company's
unaudited Consolidated Financial Statements. The following Selected Consolidated
Financial Data for the nine months ended March 31, 1996 are derived from
unaudited Consolidated Financial Statements of the Company which, in the opinion
of the Company's management, contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation thereof. Results for
the nine months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the full 1997 fiscal year. The Selected
Consolidated Financial Data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto and the other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales:
Telecom and carrier(1)......................... $ 13,642 $ 14,566 $ 15,683 $ 11,600 $ 14,151
Land mobile(1)................................. 1,218 1,228 1,559 1,298 2,256
Product resales(1)(2).......................... -- -- 10,554 3,450 7,202
--------- --------- --------- --------- --------- --------- ---------
Total sales(1)............................... 8,121 12,960 14,860 15,794 27,796 16,348 23,609
Cost of sales.................................... 5,272 8,641 10,071 9,639 10,743 7,915 10,742
Cost of sales--product resales................... -- -- -- -- 9,672 3,104 6,616
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 2,849 4,319 4,789 6,155 7,381 5,329 6,251
Selling expenses................................. 429 724 892 862 842 628 832
General and administrative expenses.............. 1,398 2,408 3,178 3,537 4,257 3,015 3,514
Depreciation and amortization.................... 364 359 571 820 1,003 733 982
--------- --------- --------- --------- --------- --------- ---------
Income from operations........................... 658 828 148 936 1,279 953 923
Net interest expense............................. 149 10 215 244 270 207 338
Other expense (income)........................... 277 86 (252) (138) (41) (80) (132)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes....................... 232 732 185 830 1,050 826 717
Income tax expense............................... 101 249 41 294 316 285 229
--------- --------- --------- --------- --------- --------- ---------
Net income....................................... $ 131 $ 483 $ 144 $ 536 $ 734 $ 541 $ 488
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share............................. $ 0.07 $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.24 $ 0.22
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares outstanding(3)........... 2,011 2,011 2,011 2,233 2,233 2,233 2,233
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
MARCH 31, 1997
JUNE 30, --------------------
----------------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(4)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ -- $ 72 $ -- $ 291 $ 361 $ 340 $ 7,620
Working capital.................................. 1,081 709 (367) (265) 1,811 1,984 9,264
Total assets..................................... 4,130 5,748 7,437 8,232 12,409 16,318 23,463
Notes payable, noncurrent portion................ 739 533 1,108 1,329 2,944 6,151 6,151
Shareholders' equity............................. 2,045 1,511 2,419 2,955 3,698 4,197 11,477
</TABLE>
- --------------------------
(1) The breakdown of sales between telecom and carrier, land mobile, and product
resales for fiscal years 1992 and 1993 is not available.
(2) Comprised of the resale of Alcatel products and other equipment and hardware
to Shell.
(3) Weighted average shares outstanding have been restated to reflect a
200-for-one stock split of the Common Stock effected in November 1995.
(4) Adjusted to reflect the sale of 1,450,000 shares of Common Stock offered by
the Company hereby at the initial public offering price of $6.00 per share
and the receipt of the estimated net proceeds therefrom as if the Offering
had occurred at March 31, 1997.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED FINANCIAL DATA, CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO AND THE OTHER FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. MOREOVER, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
OVERVIEW
The Company's total sales are derived from the provision of a variety of
services, including telecom and carrier services, land mobile services and
product resales. Telecom and carrier services include the resale of long
distance telecommunications services, the provision of private leased lines, the
resale of equipment and the provision of related services to furnish and install
telecommunications systems. The Company recently has installed a tandem switch
at its facility in Houston, Texas and when such switch is fully operational
(which the Company expects to occur by the end of the fourth quarter of fiscal
1997), the Company expects to provide services as a switch-based long distance
carrier. Land mobile services consist of the rental, sale, service and
maintenance of two-way radio communications systems.
In connection with product resales, the Company serves as the exclusive
manufacturer's representative of Alcatel products to the U.S. oil and gas
industry. In fiscal 1996, the Company provided services to Shell, which included
the resale of a significant amount of Alcatel products. For the year ended June
30, 1996 and for the nine months ended March 31, 1997, Shell purchased from the
Company approximately $10.6 million and $7.2 million of Alcatel products and
other equipment and hardware, representing approximately 38.0% and 30.5%,
respectively, of total sales during such periods. Although profitable, the sale
of Alcatel products to Shell significantly reduced the Company's gross margin in
these periods. The Shell project is expected to be substantially completed in
fiscal 1997 and, therefore, is not expected to contribute in a material manner
to the Company's total sales in future periods. See "Risk Factors-- Industry
Concentration and Dependence on Major Customers."
The Company was founded in 1981 as a contract supplier of communications
technology installation and equipment leasing services, and over the ensuing
years broadened the scope of its service offerings to include microwave, two-way
radio and related wireless services and technologies for an expanded customer
base, primarily comprised of major oil and gas companies operating in the Gulf
of Mexico region. During this period, the Company began to provide an increasing
variety of services to its oil and gas customers in other remote and
underdeveloped regions around the world, including communications services for
special projects with critical timing and other extreme or unusual challenges.
To support its international expansion, in 1994 the Company began providing
telecommunications services and network support inside the former Soviet Union
to United States oil and gas customers. As the Company expanded its service
offerings and developed greater infrastructure, it commenced service as a
switchless reseller of long distance services in the United States in 1994. The
Company is continuing to expand its network through a recently-acquired tandem
switch and the installation of fiber optic cable and microwave radios in
targeted service areas. In connection with such expansion, the Company has also
received CLEC status in Texas and has applied for CLEC status in Louisiana. See
"Risk Factors--Risks Associated with Entry into Local Phone Service Market and
Other New Markets."
While annual growth rates of the Company's total sales since 1992 have
ranged from 6.3% to 76.0%, the Company's quarterly operating results have varied
significantly in the past, and can be expected to vary in the future. These
fluctuations in operating results generally are caused by a number of factors,
including changes in the Company's services and product mix, levels of product
resales, adverse weather conditions in customer locations, the degree to which
the Company encounters competition in its existing or target
21
<PAGE>
markets, general economic conditions, the volume and timing of orders received
during the period, sales and marketing expenses related to entering new markets,
the timing of new product or service introductions by the Company or its
competitors and changes in billing rates by the Company or its competitors. See
"Risk Factors--Variability in Operating Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total sales represented by certain items included in the Company's Consolidated
Statements of Income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
FISCAL YEAR ENDED JUNE 30, 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Telecom and carrier............................. 91.8% 92.2% 56.4% 71.0% 60.0%
Land mobile..................................... 8.2 7.8 5.6 7.9 9.5
Product resales................................. -- -- 38.0 21.1 30.5
----- ----- ----- ----- -----
Total sales................................... 100.0 100.0 100.0 100.0 100.0
Cost of sales..................................... 67.8 61.0 38.7 48.4 45.5
Cost of sale--product resales..................... -- -- 34.8 19.0 28.0
Gross margin...................................... 32.2 39.0 26.5 32.6 26.5
Selling expenses.................................. 6.0 5.5 3.0 3.8 3.5
General and administrative expenses............... 21.4 22.4 15.3 18.4 14.9
Depreciation and amortization..................... 3.8 5.2 3.6 4.5 4.2
----- ----- ----- ----- -----
Total operating expenses.......................... 31.2 33.1 21.9 26.7 22.6
----- ----- ----- ----- -----
Income from operations............................ 1.0 5.9 4.6 5.9 3.9
Net interest expense.............................. 1.5 1.5 1.1 1.3 1.4
Other income, net................................. 1.7 0.9 0.2 0.5 0.5
----- ----- ----- ----- -----
Income before income taxes........................ 1.2 5.3 3.7 5.1 3.0
Income tax expense................................ 0.2 1.9 1.1 1.7 1.0
----- ----- ----- ----- -----
Net income........................................ 1.0% 3.4% 2.6% 3.4% 2.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND 1996
TOTAL SALES. Total sales increased $7.3 million or 44.4% to $23.6 million
for the nine months ended March 31, 1997 from $16.3 million for the comparable
period in the prior fiscal year. Of this increase, $2.6 million, or 35.0%,
resulted from increases in the Company's telecom and carrier services, $959,000,
or 13.2%, resulted from increases in the Company's land mobile services, while
$3.8 million, or 51.8%, resulted in part from product resales to a single
customer. The increase in telecom and carrier revenues was largely attributable
to increased network traffic on the Company's telecom network in the Gulf of
Mexico, an increase in the number of ODDS units in the Gulf of Mexico, and
expansion of the Company's business outside the Gulf of Mexico. The increase in
land mobile sales was largely due to increased demand which may have been
favorably impacted by increased marketing activities. The product resales are
expected to be substantially completed in fiscal 1997 and, therefore, are not
expected to contribute in a material manner to the Company's total sales in
future periods.
GROSS MARGIN. Gross profit increased $922,000 or 17.3% to $6.3 million for
the nine months ended March 31, 1997 from $5.3 million for the comparable period
in the prior fiscal year, representing gross margins of 26.5% and 32.6%,
respectively. The decrease in margin was due in principal part to the lower
margin on product resales in 1997. In addition, the Company completed a large
critical-timing project in
22
<PAGE>
Bosnia in the third quarter of fiscal 1996 that generated telecom and carrier
sales of $1.3 million and contributed a gross margin of 38.2% to the nine months
ended March 31, 1996. Excluding product resales, gross profit for the nine
months ended March 31, 1997 and 1996 would have been approximately $5.7 million
and $5.0 million, respectively, representing a gross margin of 34.5% and 38.6%,
respectively, and, excluding the Bosnia project, the gross margin would have
been 27.8% for the nine months ended March 31, 1996.
SELLING EXPENSES. Selling expenses increased $204,000 or 32.5% to $832,000
for the nine months ended March 31, 1997 from $628,000 for the comparable period
in the prior fiscal year. Selling expenses as a percentage of total sales
decreased to 3.5% from 3.8% during these respective periods. The increase in
selling expenses resulted from the addition of sales personnel and from
increases in travel and advertising.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $500,000 or 16.5% to $3.5 million for the nine months ended March 31,
1997 from $3.0 million for the comparable period in the prior fiscal year. As a
percentage of total sales, general and administrative expenses decreased to
14.9% for the nine months ended March 31, 1997 from 18.4% for the comparable
period in the prior fiscal year. The decrease in general and administrative
expenses as a percentage of sales was primarily due to product resales that
required little or no incremental administrative expense. The increases in the
dollar amount of general and administrative expenses over these periods were due
in principal part to increased telephone expense, insurance expense, rent
expense and legal expense relating to facilities and personnel additions in
Houston, Texas and Lafayette, Louisiana. Exclusive of product resales, general
and administrative expenses for the nine months ended March 31, 1997 and 1996
would have been approximately 21.4% and 23.4%, respectively, of total sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$250,000 or 34.0% to $983,000 for the nine months ended March 31, 1997 from
$733,000 in the comparable period in the prior fiscal year. This increase was
primarily attributable to the acquisition of an additional $3.0 million of
property, plant and equipment, comprised of $2.5 million in equipment for
satellite, microwave and other equipment and $500,000 for computers, furniture
and fixtures, service vehicles and test equipment.
NET INTEREST EXPENSE. Net interest expense increased $131,000 or 63.5% to
$338,000 for the nine months ended March 31, 1997 from $207,000 for the
comparable period in the prior fiscal year. The Company's borrowings increased
to $7.5 million for the nine months ended March 31, 1997 from $2.7 million for
the comparable period in the prior fiscal year. Borrowings were reduced in
fiscal 1996 due to the receipt of $2.0 million from Shell as a deposit under a
product resale contract. The increase in borrowings was used to fund
acquisitions of property, plant and equipment.
OTHER INCOME, NET. Other income for the nine months ended March 31, 1997
and 1996 resulted from the Company's 50% ownership interest in Kenwood, as well
as certain asset dispositions effected in such periods. Such items were not
material to the Company's operating results for the nine months ended March 31,
1997 and 1996.
INCOME TAX EXPENSE. Provision for income taxes decreased $56,000 or 19.8%
to $229,000 for the nine months ended March 31, 1997 from $285,000 for the
comparable period in the prior fiscal year, which represents an effective tax
rate of 31.9% and 34.5% for each period, respectively.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
TOTAL SALES. Total sales increased by $12.0 million or 75.9% to $27.8
million for fiscal 1996 from $15.8 million for fiscal 1995. Of this increase,
$1.1 million or 9.3% resulted from increases in the Company's telecom and
carrier services. Land mobile services accounted for $300,000 or 2.7% of this
increase while $10.6 million, or 88%, resulted in part from product resales to a
single customer. While revenues related to land mobile services were relatively
constant, the increase in sales of telecom and
23
<PAGE>
carrier services reflected continued growth of the Company's core business.
Excluding product resales, total sales for fiscal 1996 would have been $17.3
million. Since such product resales are expected to be substantially completed
in fiscal 1997, they are not expected to contribute in a material manner to the
Company's total sales in future periods.
GROSS MARGIN. Gross profit increased $1.2 million or 19.7% to $7.3 million
in fiscal 1996 from $6.1 million in fiscal 1995, representing gross margins of
26.5% and 39.0%, respectively. The decrease in gross margin primarily was due to
the lower profit margin from product resales. Excluding product resales, gross
profit would have been approximately $6.5 million in fiscal 1996, representing a
gross margin of 37.7%.
SELLING EXPENSES. Selling expenses decreased $20,000 or 2.4% to $842,000,
or 3.0% of total sales, in fiscal 1996 from $862,000, or 5.5% of total sales, in
fiscal 1995. Advertising and promotion expenditures increased $81,000, travel
increased $21,000 and salaries and employee benefits decreased $110,000, which
reflected the reassignment of certain employees to other departments.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $720,000 or 20.4% to $4.2 million in fiscal 1996 from $3.5 million in
fiscal 1995. As a percentage of total sales, general and administrative expenses
decreased to 15.3% for fiscal 1996 from 22.4% for fiscal 1995. The increase in
general and administrative expenses was primarily due to a higher level of
expenses in fiscal 1996 associated with the expansion of the Company's
international operations and related travel, including increased activity in
Russia and South America as well as a project in Bosnia that was started and
completed in fiscal 1996. In addition, general and administrative expenses were
higher in fiscal 1996 due to increased development of the Company's
infrastructure to accommodate growth, which resulted in increases in insurance
costs and employee compensation through an increased number of employees,
increased telephone expenses relating to increased activity in the Company's
international operations and costs associated with opening offices in Lafayette
and New Orleans, Louisiana.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$183,000 or 22.3% to $1.0 million in fiscal 1996 from $820,000 in fiscal 1995.
This increase was principally attributable to an additional $1.2 million of
property, plant and equipment, comprised of $621,000 for satellite, microwave
and other telecommunications equipment, and $579,000 for computers, furniture
and fixtures, service vehicles and test equipment.
NET INTEREST EXPENSE. Net interest expense increased $26,000 or 10.6% to
$270,000 in fiscal 1996 from $244,000 in fiscal 1995. The increase in interest
expense was due to an increase of $350,000 in borrowings under the Company's
credit lines. Interest expense was minimized during fiscal 1996 as a result of a
$2.0 million deposit received from Shell under a product resale contract.
OTHER INCOME, NET. Other income in fiscal 1996 and fiscal 1995 resulted
from the Company's 50% ownership interest in Kenwood, as well as certain asset
dispositions effected in such periods. Such items were not material to the
Company's operating results in fiscal 1996 or fiscal 1995.
INCOME TAX EXPENSE. Provision for income taxes increased $23,000 or 7.8% to
$316,000 in fiscal 1996, representing an effective income tax rate of 30.0%,
from $293,000 in fiscal 1995, representing an effective tax rate of 35.4%. The
decrease in the effective tax rate in fiscal 1996 primarily was due to the
availability of foreign tax credits in such year.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1995 AND 1994
TOTAL SALES. Total sales increased $935,000 or 6.3% to $15.8 million for
fiscal 1995 from $14.9 million for fiscal 1994. This increase resulted from a
general increase in sales of the Company's telecom and carrier services,
including the establishment of the Company's long distance carrier services.
Land mobile sales were relatively constant in fiscal 1995 and 1994.
24
<PAGE>
GROSS MARGIN. Gross profit increased $1.3 million or 28.5% to $6.1 million
in fiscal 1995 from $4.8 million in fiscal 1994, representing gross margins of
39.0% and 32.2%, respectively. The increase in gross margin in fiscal 1995
resulted, in principal part, from reductions in the cost of direct labor and
materials.
SELLING EXPENSES. Selling expenses decreased $30,000 or 3.4% to $862,000 in
fiscal 1995 from $892,000 in fiscal 1994. The decrease in selling expenses was
attributable to the focusing of marketing resources on activities that yielded
higher returns.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $358,000 or 11.3% to $3.5 million in fiscal 1995 from $3.2 million in
fiscal 1994. As a percentage of total sales, general and administrative expenses
increased to 22.4% for fiscal 1995 from 21.4% for fiscal 1994. The increase for
1995 was minimized by reduced expenditures made in areas such as contract
services, bad debts, which included a write off of $84,500 in fiscal 1994, data
processing expenses and telephone expenses. Items increasing in fiscal 1995
included expenditures on foreign ventures due to increased activity in Russia,
accounting and legal expenses and training and consulting resulting from the
installation of new accounting software.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$249,000 or 43.6% to $820,000 in fiscal 1995 from $571,000 in fiscal 1994. The
increase was principally attributable to an additional $1.5 million of property,
plant and equipment comprised of $1.1 million for satellite, microwave and other
equipment and $420,000 for computers, furniture and fixtures, service vehicles
and test equipment.
NET INTEREST EXPENSE. Interest expense increased $244,000 or 13.5% in
fiscal 1995 from $215,000 in fiscal 1994. Outstanding debt increased $3.6
million or 31.0% in fiscal 1995 from $2.7 million in fiscal 1994. This increased
financing was used primarily to fund the Company's increased investment in
property, plant and equipment.
OTHER INCOME, NET. Other income decreased to $138,000 in fiscal 1995 from
$253,000 in fiscal 1994. Other income was composed of earnings from Kenwood and
a gain incurred on the disposition of certain assets.
INCOME TAX EXPENSE. The Company's fiscal 1995 provision for income taxes
was $293,000, representing an effective rate of 35.0%. In fiscal 1994, the tax
provision amounted to $41,000, representing an effective tax rate of 22.3%.
QUARTERLY RESULTS
The following table presents selected quarterly financial information for
the periods indicated. This information has been derived from unaudited
Consolidated Financial Statements which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period.
The Company's quarterly operating results have varied significantly in the
past and can be expected to vary in the future. These fluctuations in operating
results generally are caused by a number of factors, including changes in the
Company's services and product mix, levels of product resales, adverse weather
conditions in customer locations, the degree to which the Company encounters
competition in its existing or target markets, general economic conditions, the
volume and timing of orders received during the period, sales and marketing
expenses related to entering new markets, the timing of new product or service
introductions by the Company or its competitors and changes in billing rates by
the Company or its competitors. For example, the Company's product resales to
Shell in fiscal 1996 and the nine months ended March 31, 1997 increased total
sales by $10.6 million and $7.2 million, respectively, while decreasing
25
<PAGE>
gross margins from 37.7% to 26.5% in the fiscal year ended June 30, 1996 and
from 34.5% to 26.5% for the nine months ended March 31, 1997. Similarly, the
Company completed a special project in Bosnia in the third quarter of fiscal
1996 that generated telecom and carrier sales of $1.3 million and gross margins
of 38.2%, which are higher than the Company typically realizes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1996 1996 1996
--------------- --------------- ----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales:
Telecom, carrier and land mobile....... $ 3,459 $ 3,738 $ 5,674 $ 4,371 $ 5,105
Product resales........................ -- -- 3,477 7,077 1,801
------ ------ ----------- ----------- ------
Total sales.......................... 3,459 3,738 9,151 11,448 6,906
Cost of sales............................ 1,936 2,290 6,793 9,396 5,052
------ ------ ----------- ----------- ------
Gross profit............................. 1,523 1,448 2,358 2,052 1,854
Selling expenses......................... 222 173 233 214 220
General and administrative expenses...... 963 967 1,085 1,242 1,192
Depreciation and amortization............ 236 247 250 270 293
------ ------ ----------- ----------- ------
Income from operations................... 102 61 790 326 149
Net income............................... $ 48 $ 37 $ 456 $ 193 $ 54
------ ------ ----------- ----------- ------
------ ------ ----------- ----------- ------
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
--------------- -----------
<S> <C> <C>
Sales:
Telecom, carrier and land mobile....... $ 5,844 $ 5,458
Product resales........................ 2,894 2,507
------ -----------
Total sales.......................... 8,738 7,965
Cost of sales............................ 6,633 5,673
------ -----------
Gross profit............................. 2,105 2,292
Selling expenses......................... 274 338
General and administrative expenses...... 1,049 1,273
Depreciation and amortization............ 342 347
------ -----------
Income from operations................... 440 334
Net income............................... $ 207 $ 227
------ -----------
------ -----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 1997, the Company generated $701,000
of cash from operating activities, borrowed an additional net amount of $2.5
million from credit facilities, received payment of $192,000 from collections on
outstanding notes receivable and received $10,000 from the sale and issuance of
Common Stock to an employee. The Company invested $3.4 million on property and
equipment (net of proceeds of $89,000 from certain dispositions of assets) and
increased its investment in an unconsolidated subsidiary by $50,000. These
activities provided a decrease in the Company's cash balance of $21,000 to a
balance of $340,000 at March 31, 1997.
The Company's working capital increased to $2.1 million at March 31, 1997
from $1.8 million at June 30, 1996. Accounts receivable decreased from $5.5
million at June 30, 1996 to $4.4 million at March 31, 1997, while inventory
increased from $851,000 at June 30, 1996 to $2.1 million at March 31, 1997. The
increase long-term contracts, which include work-in-process and increased
inventory stock levels to support increased sales. In addition, the current
portion of notes payable increased from $1.0 million at June 30, 1996 to $1.1
million at March 31, 1997, while deferred revenue and customer deposits
decreased from $614,000 at June 30, 1996 to $238,000 at March 31, 1997.
During fiscal 1996, the Company generated $737,000 of cash from operating
activities, borrowed an additional net amount of $350,000 from credit
facilities, received payment of $264,000 from collections on outstanding notes
receivable (net of new notes issued for $396,000), and received $10,000 from the
sale and issuance of Common Stock to an employee. The Company also invested $1.3
million on property, plant and equipment (net of proceeds of $202,000 from
certain dispositions of assets). These activities provided an increase in the
Company's cash balance of $70,000 at June 30, 1995 to a balance of $361,000 at
June 30, 1996.
The Company's working capital increased to $1.8 million at June 30, 1996,
representing an increase of $2.1 million from the negative working capital
position of $265,000 at June 30, 1995. The Company restructured its credit
facility to reclassify some borrowings as long term in fiscal 1996 that were
considered current obligations in fiscal 1995. The increased working capital was
used to support growth in the Company's core business as well as an increase in
accounts receivable from $2.0 million in fiscal 1995 to $5.5 million in fiscal
1996 and an increase in inventory from $601,000 at June 30, 1995 to $987,000 at
June 30, 1996. Offsetting these increases was a higher balance of accounts
payable and accrued liabilities to
26
<PAGE>
$3.9 million in fiscal 1996 from $1.1 million in fiscal 1995. The current
portion of notes payable for this period decreased to $1.0 million in fiscal
1996 from $2.3 million in fiscal 1995.
The Company recently amended its credit agreement with its bank lender,
which increased the bank line of credit by $2.0 million for a total borrowing
capacity of $4.5 million, of which $2.8 million was advanced at March 31, 1997.
Line of credit availability is based upon eligible accounts receivable and
inventory with interest on borrowed funds at prime plus 0.75% and a fee equal to
0.50% is charged on any unused portion of the facility. See Note 8 of Notes to
Consolidated Financial Statements. The bank line is collateralized by
substantially all of the Company's assets and expires in December 1998 (subject
to renewal), although it may be terminated earlier by the Company through
December 20, 1997 for a prepayment premium of 1% of the maximum amount of
credit. Thereafter through December 1998, it may be terminated for a fee of
0.50% of the maximum amount of credit. The Company has other credit facilities
with its bank lender for specific items of equipment which are collateralized by
those items. The revolving credit facility and the term credit facilities are
cross-collateralized and cross-defaulted. The credit agreement prohibits the
payment of dividends without prior approval of the lender and requires the
Company to maintain certain covenants and financial ratios including working
capital and net worth ratios. In December 1996, the Company violated a financial
covenant under the credit agreement. The bank lender did not declare the Company
in default and waived the violation. In addition, the bank lender has amended
the financial covenant at issue, such that the Company does not expect to be in
violation of such covenant in the future. In May 1997, the Company and the bank
lender entered into a Second Amendment to Loan and Security Agreement further
amending the agreement to allow for the Offering and to amend other covenants
that were or would have been in default upon completion of the Offering. In
addition, the bank lender waived any such defaults existing at the effective
date of such Second Amendment.
The Company is currently negotiating for additional facilities to refinance
its current credit facility, provide working capital and finance equipment to be
leased by the Company to its customers. In May 1997, the Company entered into a
commitment to obtain a secured revolving line of credit (the "Working Capital
Loan") and a secured guidance line of credit (the "Guidance Line" and, together
with the Working Capital Loan, the "Loans") from Bank One, Texas, N.A. The
commitment from Bank One, Texas, N.A. will expire on June 30, 1997, if the Loans
have not been funded by such time pursuant to a definitive credit agreement to
be entered into between the Company and Bank One, Texas, N.A. containing the
terms provided for in the commitment letter. The commitment letter provides that
it constitutes a basic outline and does not include all details of the facility.
The Company expects to negotiate usual and customary exceptions to various
covenants outlined in the commitment letter. See Note 15 of Notes to
Consolidated Financial Statements.
The maximum amount of the Working Capital Loan will be $5.0 million subject
to a borrowing base based on accounts receivables and inventory. The proceeds of
the Working Capital Loan are to be used for working capital needs and general
corporate purposes. Proceeds of the Working Capital Loan will be used initially
to extinguish the Company's current revolving credit facility with Marine
Midland Business Loans, Inc., which will require a prepayment penalty payable by
the Company in the amount of 1% of the maximum amount of the Marine Midland line
of credit facility. The maximum amount of the Guidance Line will be $5.0 million
and the proceeds will be used to finance the Company's purchase and subsequent
lease of communications equipment. The interest rate on both lines will be, at
the Company's option, Bank One's base rate or 30, 60 or 90 day adjusted LIBOR
plus 2.40%. The interest rate will be subject to downward adjustment in certain
circumstances as specified in the definitive credit agreement. The entire unpaid
principal balance and accrued but unpaid interest for the Working Capital Loan
will be due on October 31, 1998 and for the Guidance Loan will be due on May 1,
1998. The Loans will be guaranteed by Ignatius W. Leonards, the Company's Chief
Executive Officer, up to $500,000 until completion of the Offering.
Borrowing availability under the Working Capital Loan will be based upon
eligible accounts receivable and inventory, and a fee equal to 0.25% will be
charged on any unused portion of the Working Capital
27
<PAGE>
Loan. In addition, fundings under the Guidance Line will only be permitted with
respect to communications equipment and installation pursuant to leases which
(a) have a term of not more than 60 months or the estimated useful life of the
leased equipment, (b) have been assigned to the lender as collateral for the
Loans and (c) have as lessees companies formed and with principal offices in the
United States. The Loans will be collateralized by substantially all of the
Company's assets. The Company will be able to reduce the commitment under the
Working Capital Loan and will be able to make voluntary prepayments on the
Guidance Line without prepayment penalty. The Loans will be cross-defaulted and
cross-collateralized. The commitment letter provides that the definitive credit
agreement that the Company will be required to enter into will prohibit the
payment of dividends without prior approval of the lender and will require the
Company to maintain certain covenants and financial ratios including working
capital and net worth ratios. The commitment letter also provides that the
definitive credit agreement will also prohibit certain changes in the Company's
basic business or in its Chief Executive Officer, Chief Financial Officer and
President positions, without prior lender approval.
The Company currently expects that capital expenditures for the continued
development of infrastructure and associated growth will be approximately $7.0
million in fiscal 1997. The Company entered into an agreement in December 1996
to acquire microwave radios from a customer. The purchase price for the radios
was $1.1 million, of which $25,000 was paid by the Company upon execution of the
agreement, $225,000 was paid on April 1, 1997, and the balance due is evidenced
by a note payable by the Company. The balance will be carried in a note payable
to the customer bearing interest at 6.75% with monthly principal and interest
payments to begin in July 1997, with a final payment of principal and interest
to be made in June 2007. The Company anticipates that, based on current plans
and assumptions relating to its operations, upon completion of the Offering its
financial resources and equipment financing arrangements will be sufficient to
fund the Company's growth and operations for approximately 12 months from the
date of this Prospectus. The Company believes that its capital needs at the end
of such period will continue to be significant and, therefore, the Company will
continue to seek additional sources of capital. Further, in the event the
Company's plans or assumptions change or prove to be inaccurate, or if the
Company consummates any unplanned acquisitions of businesses or assets, the
Company may be required to seek additional sources of capital sooner than
currently anticipated. Sources of additional capital may include public and
private equity and debt financings, sales of nonstrategic assets and other
financing arrangements. See "Risk Factors--Significant Capital Requirements" and
"Use of Proceeds."
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." As a result of this statement,
the Company will begin to provide additional disclosures related to its
stock-based compensation plans in its fiscal 1997 financial statements. Adoption
of SFAS No. 123 will not have a material effect on the Company's financial
position or results of operations. The Financial Accounting Standards Board
issued SFAS No. 128 "Earnings Per Share" in February 1997, which will not have a
material effect on the Company's calculation of primary and fully diluted
earnings per share.
28
<PAGE>
BUSINESS
BUSINESS OVERVIEW
The Company provides advanced communications solutions to customers with
operations in remote, difficult-access regions and in areas around the world
where government deregulation has created new market opportunities. The Company
delivers comprehensive communications services to its customers by utilizing a
broad range of analog and digital technologies, including satellite, microwave
radio, conventional two-way radio and fiber optic cable. The Company's core
business to date has focused on the provision of communications solutions for
customers in the oil and gas industry, such as AMOCO, British Gas, Chevron,
Conoco, Exxon and Shell. Such customers exemplify users with unique
communications needs related to the remote, difficult-access nature of their
operating locations. By providing a wide range of communications solutions to
its oil and gas customers, the Company has developed a high level of expertise
and a unique skill set in planning, designing and implementing total
communications solutions for multi-site customers with operations located in
remote regions or underdeveloped areas where the existing communications
infrastructure is insufficient to meet advanced telecommunications needs. The
Company intends to leverage this skill set and expertise by supplying
communications services to multi-site customers outside of the oil and gas
industry, particularly customers with operations located near the Company's
existing and planned telecommunications infrastructure. Potential additional
customers include health care providers, financial institutions and other
multi-location communication-intensive companies, such as large publishing
companies.
The Company recently has installed a tandem switch and a value-added
services platform in Houston, Texas. This switch and platform enable the Company
to connect its digital network with the networks of other carriers, thereby
permitting the routing of phone calls in a cost-competitive manner. As the
Company's communications network in the Gulf Coast expands, the Company intends
to install additional switches in other strategic locations. The Company
recently has received approval to serve as a CLEC in select locations in Texas
and has applied for CLEC status in Louisiana, although no assurances can be made
that such authority will be received. As a result, the Company believes that it
is well positioned to use the full capacity of its existing and planned
infrastructure by providing call routing to other carriers and, in select
locations, by providing call completion services at profit margins that the
Company believes will be higher than those achievable without CLEC status. As a
CLEC offering competitive rates for call completion services, the Company
believes that providers of cellular and PCS and other long distance carriers
will become additional customers.
The Company provides or will shortly provide its telecommunications services
through a satellite network, a microwave network, two-way radio licenses and
carrier agreements for long distance service combined with a switch-based
network. The IWL satellite network includes Very Small Aperture Terminal
("VSAT") networks, including two 5.6 meter Ku band hub earth stations and access
agreements for Orion and GTE Spacenet satellites. The Company's microwave
network includes a system that has been built by the Company onshore in the
Texas Gulf Coast region and extends offshore into the Gulf of Mexico. Through
various agreements, the Company has access to capacity from other microwave
systems owned by carriers throughout the Texas and Louisiana Gulf Coast region.
In order to provide its wireless mobile services, the Company owns various radio
systems that provide two-way voice communications and has obtained 30 FCC
licenses with approximately 250 frequency pairs. The Company's long distance
services are provided through the recently-installed tandem switch as well as
through agreements with other long distance carriers. The CLEC services that the
Company intends to provide will be obtained from (i) existing LECs on a reseller
basis and (ii) the Company's provision of such services through the use of its
own end-office switch and through leased or owned transmission facilities,
including fiber optic cable. The Company's relationship with international oil
and gas company customers has created an opportunity to expand its operations
globally by providing communications solutions for these customers' other
facilities located in remote or underdeveloped locations around the world. The
Company currently has domestic offices in Houston and Friendswood, Texas and
Lafayette and New Orleans, Louisiana and an international office in Moscow,
Russia.
29
<PAGE>
MARKET OPPORTUNITY
The introduction and proliferation of new communications technologies,
together with global socioeconomic development, are contributing to significant
increases in demand for telecommunications services throughout the world.
Advances in communications delivery technology, including those achieved through
the deployment of satellite systems and the development of data compression
technologies, have expanded the variety of information that can be digitized as
well as the geographic scope of where such data may be transmitted or received.
Businesses in numerous industries around the world increasingly depend upon
their ability to effectively and quickly transmit larger quantities and more
varied types of data, including voice and video. As each technological advance
creates a new service or product, or enhances the quality or reduces the cost of
existing services and products, the demand for telecommunications services
increases. In addition, political and economic changes in many regions of the
world have contributed to the emergence of additional global market
opportunities in a variety of industries and an increased rate of adoption of
Western business practices in previously non-Westernized areas. Examples of such
changes include the spread of multi-party governments and free market economies
in Eastern Europe, the unification effort in Western Europe, the North American
Free Trade Agreement, the privatization of government-operated industries in
South America, and the WTO agreement. The Company believes that these changes
have escalated the demand for Western telecommunications services, particularly
in remote regions of the world or in regions where the telecommunications
infrastructure is underdeveloped.
The telecom services industry is being transformed further by the
deregulation of telecommunications markets around the world. In the United
States, a court decree in 1984 required AT&T to divest its local systems into
seven independent Regional Bell Holding Companies, which own the BOCs that
provide local services. This action resulted in the separation of the long
distance market from the local exchange services market, with the outcome being
an opening of the long distance market to competition. The enactment of the 1996
Telecommunications Act established an expansive framework for greater
competition, including within the local exchange services market. Under the 1996
Telecommunications Act, state laws prohibiting competition are preempted and
CLECs, such as the Company, have legal rights to interconnect with the
facilities of the incumbent LECs, including the BOCs and GTOCs, resell local
services that were previously provided only by the BOCs and GTOCs and deliver
CLEC-provided local services as well as long distance services.
Telecommunications revenues of CLECs grew almost 80% in 1996 to $2.1 billion,
compared with nearly $1.2 billion in 1995, according to the 8th Edition of the
ANNUAL REPORT ON THE COMPETITIVE TELECOMMUNICATIONS INDUSTRY. Whereas the CLEC
industry in 1995 derived 42% of its service revenues from private line and
dedicated access services and only 20% from local and switched access services,
in 1996 switched services constituted 36% of total CLEC telecom revenues.
Deregulation of telecommunications markets is occurring at the international
level as well, as demonstrated by the recent 69-nation WTO agreement on
communications services, which reflects efforts to eliminate barriers to
competition in basic telecommunications services throughout Europe, Asia and
India. The Company believes that deregulation efforts, both domestically and
internationally, will continue to create opportunities for new entrants in the
telecom services industry, particularly companies capable of meeting the
challenges presented by remote or underdeveloped geographies.
While the demand for telecommunications services is increasing worldwide,
the Company believes that the exploration and development activities
characteristic of the oil and gas industry have placed that industry, in
particular, at the forefront in applying modern communications technologies in
remote regions of the world or regions that lack a developed telecommunications
infrastructure. The oil and gas industry is characterized by companies with
global operations that require reliable data and voice communications. Companies
engaged in oil and gas exploration operate sophisticated seismic and drilling
equipment in areas that are often uninhabited or otherwise present logistical
adversity, such as offshore platforms that operate in the Gulf of Mexico or the
North Sea and remote areas of Russia or South America. Information gathered by
an oil and gas company at such locations often must be transmitted to that
company's main office for evaluation with subsequent communications between the
remote and main office locations being
30
<PAGE>
necessary to manage the conduct of such operations. Furthermore, the Company
believes that oil and gas companies are increasingly outsourcing their
telecommunications services needs. Because each active drilling rig or seismic
unit typically requires communications services, the Company believes that
growth in the demand for telecom services within the oil and gas industry
generally relates to the overall level of activity in the petroleum industry.
According to the OIL INDUSTRY OUTLOOK published by PennWell Publishing Company
in August 1996, worldwide petroleum industry capital expenditures were
approximately $73.9 billion in 1995, up from $65.6 billion in 1990, and are
expected to grow to approximately $94.6 billion in the year 2000, for an
increase of approximately 28%. The OIL INDUSTRY OUTLOOK also reports that, at
the end of 1995, there were approximately 723 active drilling rigs in the U.S.,
and this number is expected to grow to approximately 920 active drilling rigs by
the year 2000, for an increase of approximately 27%.
The Company also believes that numerous other industries are taking
advantage of technological advances and socioeconomic development by pursuing
opportunities to expand their operations into remote regions or areas with an
underdeveloped telecommunications infrastructure. In some cases, such areas
include highly populated communities in developed and lesser developed
countries. Following the installation of additional infrastructure in such
regions, these communities may be able to make use of the available extra
carrier capacity, even though such additional infrastructure might have been
installed originally as a specific communications solution for a particular
company or end user. One example of a type of end user, other than an oil and
gas company, that may experience unique communications challenges requiring
additional infrastructure would be a large publisher. Publication companies
often need to transmit large quantities of news information and other data to
numerous remote locations but may not have access to sufficient or
cost-effective wire or fiber connections. Similarly, health care providers,
financial institutions and other multi-location companies, including other
telecommunications carriers, throughout the world require specialized telecom
solutions. The Company believes that significant opportunities exist to provide
advanced communications services to end users outside the oil and gas industry
by delivering effective temporary or permanent solutions at competitive rates
and, in doing so, the Company intends to position itself to serve the
telecommunications carrier service needs of neighboring communities and
businesses.
IWL STRATEGY
The Company's goal is to become a leading provider of total communications
solutions to end users with operations in remote, difficult-access regions or in
areas around the world where government deregulation has created new market
opportunities and to leverage this position by providing carrier services to
additional customers located in these same regions. To reach this goal, the
Company intends to pursue the following strategies:
DEVELOP ADDITIONAL COMPANY-OWNED INFRASTRUCTURE. The Company intends to
develop additional Company-owned infrastructure and plans to leverage that
infrastructure to provide expanded and better quality services to existing and
new customers. By maintaining an ownership interest in the communications
infrastructure installed by the Company for specific customers, the Company can
establish a lasting presence in the regions within which those customers
operate. The Company may then sell communications carrier services to additional
customers by utilizing that same infrastructure. For example, the Company
intends to invest in additional infrastructure, including fiber optic cable, in
certain selected areas of the Texas and Louisiana Gulf Coast region.
VERTICALLY INTEGRATE SERVICE OFFERINGS. The Company believes that it has
the capability to be a single-source provider of total communications solutions,
including long distance services and local carrier services, and a variety of
complementary services such as two-way radio, paging and Internet access. The
Company intends to aggressively market its existing and new services to
customers through its single-source approach. The Company believes that this
single-source strategy will enable it to increase sales to its existing and
future customers.
31
<PAGE>
DIVERSIFY CUSTOMER BASE. By providing a wide range of communications
solutions to its oil and gas customers, the Company has developed a high level
of expertise and a unique skill set in planning, designing and implementing
total communications solutions for multi-site customers with operations in
remote regions or underdeveloped areas where the existing communications
infrastructure is insufficient to meet advanced telecommunications needs. The
Company intends to leverage this skill set and expertise by supplying
communications services to multi-site customers outside of the oil and gas
industry, particularly customers with operations located near the Company's
existing and planned telecommunications infrastructure. Potential additional
customers include health care providers, financial institutions and other
multi-location companies, such as large publishing companies. In particular,
cellular, PCS and other long distance carriers have become significant potential
additional customers because, as a CLEC, the Company will be able to complete
phone calls at cost-effective rates.
CAPITALIZE ON OPPORTUNITIES CREATED BY GOVERNMENT DEREGULATION AND
GLOBALIZATION TRENDS IN VARIOUS INDUSTRIES. The Company intends to explore new
markets that have opened as a result of the recent trend toward worldwide
government deregulation in the telecommunications industry. Recent U.S.
legislation has opened the domestic local exchange market to competition, and
the Company intends to provide a combination of long distance services and basic
local phone services to domestic customers. To capitalize on opportunities
presented by the changing international regulatory environment and the size of
the international market, the Company intends to target customers who have
international telecommunication needs. In addition, the Company intends to take
advantage of opportunities created by the movement towards a free market economy
in certain parts of the world by providing communications services to companies
in a variety of industries as those companies and industries pursue
international expansion.
EXPAND EXISTING STRATEGIC ALLIANCES AND ESTABLISH NEW ALLIANCES. The
Company intends to expand its existing strategic alliances and intends to enter
into new strategic alliances that will enable the Company to broaden its
customer base or expand its service offerings. The Company intends to focus on
strategic alliances with suppliers, major customers and long distance carriers
and other telecommunications carriers. The Company believes that such strategic
alliances are an important means of achieving economies of scale and full
utilization of its infrastructure.
SERVICE OFFERINGS
The Company's service offerings consist of telecom and carrier services,
land mobile services and product resales. The table set forth below provides a
summary of the Company's sales contributed by these various services as a
percent of the Company's total sales for the fiscal years ended June 30, 1994,
1995 and 1996 and the nine months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
FISCAL YEAR ENDED JUNE 30, 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Telecom and carrier services............ 91.8% 92.2% 56.4% 71.0% 60.0%
Land mobile services.................... 8.2 7.8 5.6 7.9 9.5
Product resales......................... -- -- 38.0 21.1 30.5
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
TELECOM AND CARRIER SERVICES
The Company currently offers its customers a single source for voice, data
and Internet communications services. The Company provides telecommunications
services in remote, difficult-access regions and in areas around the world where
government deregulation has created new market opportunities. The Company,
utilizing a broad range of analog and digital technologies, provides or will
shortly provide its telecom and carrier services through a satellite network, a
microwave network, two-way radio licenses, and carrier agreements for long
distance service combined with a switch-based network. The Company's
32
<PAGE>
satellite network includes VSAT networks with two 5.6 meter Ku band hub earth
stations and access agreements for Orion and GTE Spacenet satellites. The
Company's microwave network includes a system that has been built by the Company
onshore in the Texas Gulf Coast region and extends offshore into the Gulf of
Mexico. Through various agreements, the Company has access to capacity from
other microwave systems owned by carriers throughout the Texas and Louisiana
Gulf Coast region. In order to provide its wireless mobile services, the Company
owns various radio systems that provide two-way voice communications and has
obtained 30 FCC licenses with approximately 250 frequency pairs. The Company's
long distance services are provided through the recently-installed tandem switch
as well as through agreements with other long distance carriers. The CLEC
services that the Company intends to provide will be obtained from (i) existing
LECs on a reseller basis and (ii) the Company's provision of such services
through the use of its own end-office switch and through leased or owned
transmission facilities, including fiber optic cable.
Related services provided by the Company include project engineering,
telecom installation and maintenance, network management and telecom product
sales and equipment rentals. To provide its customers with total, integrated
communications services, IWL performs many functions, including system
specification, engineering, integration, test and installation. IWL's dedicated
project management and engineering staff has experience in network design and
implementation and has the expertise to engineer, design and install systems
that meet its customers' requirements.
The Company's expertise and unique skill set in planning, designing and
implementing total communications solutions for customers with operations in
remote regions or underdeveloped areas allow the Company, from time to time, to
provide communications services for special projects with critical-timing
requirements or other extreme and unusual challenges. These special projects
offer the Company opportunities to realize higher than its usual gross margins.
The Company's telecom services also provide the connection between other
carriers' network and a customer's location. Although this connection can span
large distances, it is commonly referred to as last-mile connectivity. The
Company's Offshore Dedicated Digital Services Program ("ODDS"), which delivers
connectivity to offshore locations, exemplifies the Company's last-mile
connectivity services in the Gulf of Mexico. ODDS is a fully digital
communications system that is flexible enough to be reconfigured to a new
location after the customer's drilling rig changes locations.
In order to provide last-mile connectivity in remote locations, the Company
utilizes a variety of equipment and services. Satellite services are used where
access to the public switched network is not available on other transmission
media and other means of connectivity, such as microwave or fiber optic cable,
are cost prohibitive based on the volume of the data being transmitted. The
public switched network is a direct distance dialing telephone network available
for public use, which consists of an integrated system of transmission and
switching facilities, signaling processors and associated operations support
systems, that is shared by customers. The Company owns and operates two
satellite earth stations in Friendswood, Texas and has space segment agreements
with Orion and GTE Spacenet to use their respective satellites. The Company's
earth stations receive signals from and transmit signals to orbital satellites,
which have footprints covering parts of the U.S. and Europe.
The Company-owned digital microwave network in the Gulf of Mexico consists
of five microwave repeaters that cover over 40 drilling sites in a 100 mile
radius. The Company has installed microwave infrastructure where capacity is
required for data transmissions and there is no existing infrastructure or, if
there is such infrastructure, it cannot be used cost effectively. In areas not
served by the Company's microwave network, the Company leases the right to
install microwave repeaters on other companies' digital microwave networks. In
addition, for onshore remote communications, radio telephone is used between the
microwave backbone (such as microwave radios) and destinations within the line
of sight of such backbone.
In addition to providing its customers with project-specific communications
solutions, in recent years the Company has expanded the provision of its long
distance carrier services, including international services, through its IWL
Connect-TM- division to provide long distance carrier services. The Company
33
<PAGE>
recently installed a tandem switch and a value-added services platform in
Houston, Texas, thus enabling the Company to operate as a switch-based reseller,
rather than a switchless reseller. The Company's domestic and international
switched access services include a full range of services with enhanced
features, including: direct dial switched domestic service, which enables the
Company to originate and terminate long distance service in all equal access
locations in the U.S. and in the Gulf of Mexico; direct dial switched
international service, which enables the Company to originate calls into the
U.S. and to terminate calls in virtually every country in the world; dedicated
access services which connect a customer's location to the Company's facilities
and other high speed dedicated access; 800/888 switched and dedicated service,
which is provided from the U.S. and Canada and allows phone calls to terminate
to switched access facilities or over DS1 connections; calling card service,
which allows phone calls to originate in the North American Numbering Plan Area
and terminate worldwide, and which is provided via 800/888 access using
authorization codes; and debit card service, which is provided via 800/888
access providing online services including voice mail, follow-me-number
portability and 1+ dialing. The Company expects to add additional value-added
switched access services in the future, including ISDN (integrated services
digital network), ATM (asynchronous transfer mode) and frame relay services,
which the Company believes will allow it to leverage its infrastructure
investment through a larger customer base. The Company intends to commence
providing long distance services through its own network by the end of the
fourth quarter of fiscal 1997. See "Risk Factors--Competition," "--Risks
Associated with Entry into Local Phone Service Market and Other New Markets" and
"--Reliance on Other Telecommunications Carriers."
Because many of the Company's customers require connectivity to locations
along the Texas and Louisiana Gulf Coast region, the Company currently is
installing additional Company-owned infrastructure in that region, which
includes microwave towers, fiber optic cable and leased capacity. The Company
intends to use this installed network to offer long distance and local exchange
services throughout the Texas and Louisiana Gulf Coast region.
The Company intends to begin providing CLEC services in the Texas and
Louisiana Gulf Coast region through the resale of incumbent LEC local services
and through its transition to arrangements that utilize the Company's own
switched and leased facilities. The Company currently is providing similar
services in the Gulf of Mexico. CLEC services will include dial tone service and
call termination, which will allow customers to obtain new or additional phone
lines under a basic service plan. In addition, the Company will be able to
provide value-added services such as: DS3 connectivity for large corporations
with heavy traffic, which need a 45 megabyte DS3 line; DS1 services for WAN
connections or interconnections to other carriers at a 1.544 megabyte rate; and
DS0, or 64 kilobyte, connections for specific voice and data uses over FX
(foreign exchange) lines, tie lines and PBXs (private branch exchanges). Before
it can provide CLEC services, the Company will need to obtain the appropriate
authority from the PSC in each state in which it intends to provide service.
Currently, the Company has obtained authority to provide dedicated access
services in Louisiana and CLEC and long distance service in Texas. The Company
has applied to provide CLEC and long distance service in Louisiana, which it
expects to receive by the end of the fourth quarter of fiscal 1997, although no
assurances can be made that such authority will be received. See "Risk
Factors--Risks Associated with Entry into Local Phone Service Market and Other
New Markets."
LAND MOBILE SERVICES
The Company provides two-way radio sales and maintenance services to oil and
gas companies, governmental agencies and petrochemical plants located on the
Texas and Louisiana Gulf Coast through its land mobile radio division ("LMR
Division"). IWL offers a broad line of two-way and trunking radios, paging
products and wireless systems for both voice and data applications. The Company
resells these products, which include: portables; mobiles; two-way repeaters
(repeaters repeat the signal so it can be carried over greater distances); base
stations (which are used to communicate to mobile and portable units); RF (radio
frequency) data modules (which are used for transmitting remote data to a
central site); customized radio consoles; single side band, high-frequency
radios (which are used for long distances that
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are not in the line of sight); paging networks; and trunking systems (which
allow individual communications over radios). The Company also engineers and
designs new systems and modifies existing systems to meet its customers'
specifications. In addition, the Company provides complete turnkey design and
implementation of conventional and trunking radio networks, integrates new
equipment into existing networks, and engineers and designs new systems or
updates existing systems to meet new FCC regulations as they are adopted.
The Company maintains a fleet of rental radio equipment for short- or
long-term rentals. Customers rent this equipment from the Company to support
temporary communication needs for plant maintenance, shutdowns, disaster
recovery, sporting events and conventions. The Company's inventory of radio
equipment includes intrinsically safe ("IS") portables, which are important to
oil and gas companies because they require the use of IS-rated radio products in
the hazardous or explosive atmospheres typically found in petrochemical plants.
The Company employs factory-trained licensed technicians on call 24-hours a day,
seven days a week. These personnel are trained in safety procedures for on-site
service in petrochemical plants. The Company's Land Mobile facility located in
Friendswood, Texas has special approval certification from Factory Mutual System
to repair any IS-rated radio products manufactured by Motorola, EF Johnson or
Ericsson-GE.
PRODUCT RESALES
Product resales currently consist of sales of telecom products to Shell.
Shell has a purchasing contract with the Company for Alcatel radios and other
related equipment and hardware. Sales to Shell under the contract were
approximately $10.6 million and $7.2 million for the year ended June 30, 1996
and for the nine months ended March 31, 1997, respectively. The Shell project is
expected to be substantially completed in fiscal 1997 and, therefore, is not
expected to contribute in a material manner to the Company's total sales in
future periods. It is possible that the Company may have other large projects
consisting primarily of product resales that will be included in product resales
in the future. See "Risk Factors-- Industry Concentration and Dependence on
Major Customers" and "--Variability in Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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SELECTED CUSTOMERS
The following table sets forth a representative sample of the types of
communications solutions that IWL has provided to selected customers in the
past.
<TABLE>
<CAPTION>
CUSTOMER LOCATION SOLUTION PROVIDED
<S> <C> <C>
A.I.O.C. Baku, Azerbaijan Installed telecommunications equipment, including microwave and
satellite links and a land mobile radio system, to cover local
Baku and adjacent Chirag offshore areas.
ABB Lummus Global Venezuela Engineered and designed nine digital microwave links, two
comprehensive telecom control centers and a wide-area data
network.
Amoco Moscow, Russia/ Installed a digital link and related equipment between Amoco's
Tulsa, Oklahoma master earth station in Tulsa, Oklahoma and its office in Moscow,
Russia.
Banco de Prestamos Quito, Ecuador Installed a satellite hub and four remote earth stations with
voice and data multiplexers.
Brazos River Waco, Texas Installed microwave links to interconnect two project offices.
Authority
British Gas Tunisia Installed microwave and two-way radio telecommunications
equipment for an offshore platform to provide communications to
an onshore facility.
Brown & Root Bosnia Installed an extensive network covering seven sites and nine
earth stations in Bosnia and Hungary to provide interconnection
via satellite in-country and to provide interconnection to the
United States.
Centennial Louisiana/Texas Provided large capacity bandwidth between Beaumont, Texas, Lake
Communications Charles, Louisiana and Lafayette, Louisiana.
Chevron Nigeria Installed a microwave system and associated telecommunications
equipment.
Columbia Gulf Gulf of Mexico, Project covered 80 sites (52 offshore in the Gulf of Mexico and
Texas and 28 onshore in Texas and Louisiana) through microwave data
Louisiana systems.
Conoco/Polar Lights Moscow, Russia Installed an INTELSAT hub earth station with cable facilities
between Petushkee and Moscow, Russia and related interconnections
for communications to Moscow, Russia and Houston, Texas.
Electrospace, C.A. Venezuela Installed ten satellite earth stations and a satellite network
for banks and military applications.
Exxon Co. U.S.A. Houston, Texas Provided an emergency response communications system.
Exxon Co. U.S.A. Moscow, Russia Installed a satellite circuit and related equipment between
Houston, Texas and Moscow, Russia.
Freeport MacMoran Indonesia Installed an UHF radio network, including digital microwave.
ITAR-TASS Russia Installed a T1 Network (Washington/Moscow), which provides
connectivity, and provided support and electronics for two
INTELSAT standard hub stations in Petushkee, Russia.
Maxus Energy Bogota, Colombia Installed a voice data multiplexor and subsystem equipment for
telecommunications between Bogota, Colombia and Dallas, Texas.
MCI Ecuador Installed an INTELSAT earth station for satellite communications.
Mobil Oil Co. Lima, Peru Installed a satellite earth station at Mobil's office in Lima,
Peru.
Shell Gulf of Mexico Provided contract service personnel to assist in the installation
of a digital microwave network for the Gulf of Mexico.
Transco Houston, Texas Installed a nationwide (Virginia to Texas) point-multipoint
microwave radio system consisting of 700 remote sites.
</TABLE>
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SALES AND MARKETING
Since its inception, the Company has utilized a direct sales approach in
marketing its services to its customers. The Company currently has a sales force
of approximately 20 sales representatives, with sales offices located in
Houston, Texas, New Orleans, Louisiana and Moscow, Russia. The Company's direct
sales approach enables it to provide a high level of customer service. To
complement the Company's direct sales efforts, the Company often participates in
various domestic and international industry trade shows and conducts advertising
campaigns in trade publications. The Company plans to expand its existing sales
force and develop new market areas as opportunities for projects arise and as
its infrastructure grows.
The Company targets domestic and international customers that require
turnkey system solutions and other telecommunications services. The Company's
sales force sells frequency bandwidth and call completion and system solutions,
which allows the Company to further develop its own telecommunications
infrastructure. Current and prospective customers are assigned to account
managers, who are principally responsible for providing high levels of contact
and customer service. In addition, the Company utilizes business development
managers to focus on specific customer requirements and opportunities. The
business development manager typically is involved in major projects and the
installation of infrastructure domestically or internationally.
STRATEGIC RELATIONSHIPS AND ALLIANCES
Recognizing the importance of strategic alliances in the telecom services
industry, IWL has negotiated several agreements with various manufacturers to
resell their products or to combine their facilities and relationships with the
Company's expertise. Certain of these key alliances are described below:
ALCATEL. The Company has entered into an agreement with Alcatel under which
the Company serves as the exclusive representative for the sale of Alcatel's
fiber and radio system products to companies in the U.S. oil and gas industry.
In return for Alcatel's agreement not to accept orders directly from such
companies, the Company has agreed to actively pursue purchase orders for
Alcatel's products and to propose only Alcatel's products to its prospective
customers in the U.S. oil and gas industry, except where the Alcatel products do
not meet the technical requirements of the prospective customers. Although the
Company is an exclusive sales representative for such products, Alcatel has
other authorized distributors that are not part of the Alcatel agreement, and
those distributors may or may not provide quotations and accept orders from oil
and gas industry companies. Furthermore, in international transactions, other
divisions of Alcatel or its affiliates and other resellers of Alcatel products
outside of the U.S. have been in the past, and in the future may be, competitive
with the Company using Alcatel or non-Alcatel products. The original Alcatel
agreement provided in its terms for its expiration in December 1996; however,
the parties continued to abide by the terms of the original Alcatel agreement
until a new agreement, which renewed and extended the original Alcatel
agreement, was entered into. The renewed Alcatel agreement expires on December
31, 1999.
ITAR-TASS. The Company has established a strategic relationship with
ITAR-TASS, the Russian News Agency, in order to provide information and
communications services using INTELSAT satellite capacity and other facilities.
Under its agreement with ITAR-TASS, the Company has agreed to provide marketing
services, develop proposals for customers, engineer, purchase, ship, install and
test equipment, and provide monitoring and maintenance services on systems owned
or leased by customers. In return, ITAR-TASS has agreed to provide marketing and
sales support and to implement, monitor and maintain a communications backbone
network in the Russian Federation (including purchasing or leasing from the
Company equipment associated with earth stations, cable systems and the
network). Through their collaborative efforts, the Company and ITAR-TASS provide
services to major Western oil companies with operations in Russia such as Amoco,
Conoco/Polar Lights and Exxon.
The ITAR-TASS agreement further provides that the Company will have a right
of first refusal on 6.0 MHz of bandwidth on the Atlantic Ocean Region, 4.5 MHz
of bandwidth on the Indian Ocean Region
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and 3.0 MHz of bandwidth on the Asia-Pacific Region INTELSAT satellites. These
bandwidths enable the Company to provide international access to space segments
as required. ITAR-TASS has a right of first refusal on all contracts for
communications services to the Russian Federation that are proposed by the
Company. Each party has agreed that it will not compete for projects proposed by
the other party and will coordinate with the other party to provide
communications services to customers. However, the agreement is not exclusive,
and either party can work with other entities if, in the opinion of such party,
financial or technical considerations dictate a different working arrangement.
The agreement provides that it will terminate in May 1999, unless either party
terminates it sooner. Either party may end the agreement by giving 60 days
written notice if, in the opinion of that party, business or political
conditions call for an earlier termination. No early termination will affect any
existing agreements that the Company has entered into, and notwithstanding such
termination, ITAR-TASS will be required to provide marketing support and other
services with respect to existing agreements for the remainder of their
respective terms.
ENTERGY. In July 1996, the Company entered into a Memorandum of
Understanding ("MOU") with Interstate FiberNet operating on its behalf and on
behalf of Entergy Technology Corporation for the purpose of defining a
contractual relationship between the parties for the interconnection,
co-location, and leasing capacity of each of the parties' fiber optic cable
networks in Louisiana. The MOU reflects the parties' mutual intent to provide
each other with transport capacity on a leased basis at prevailing carriers'
rates. The MOU also provides that the parties will mutually agree to a formal
set of policies to be provided to customers and that they will move forward
expeditiously to conclude a final agreement embodying the intent set forth in
the MOU. The MOU provides that such final agreement will be for an initial term
of five years, with two additional five-year option terms. There can be no
assurance that the parties will enter into a definitive agreement. See "Risk
Factors--Reliance on Third Parties."
CUSTOMER SERVICE
The Company provides customer support for products and services through its
full-service support teams in Friendswood, Texas, Lafayette and New Orleans,
Louisiana, and Moscow, Russia. Support services include: (i) on-site
maintenance, with over 50 technical specialists on call for immediate dispatch
when customers' communications systems require maintenance; (ii) a Network
Operations Center where IWL professionals remotely monitor customers'
communications systems throughout the Gulf of Mexico and around the world seven
days a week, 24 hours a day; (iii) customer support through its LMR Division,
which includes rental packages of portable microwave and satellite systems,
two-way radios, fax machines and cellular phones for customers whose
communications needs are temporary or do not justify the purchase of such
equipment; (iv) training programs designed to maximize the customers'
communications investment, classroom training at customers' sites and multimedia
video training tools; and (v) research and development for unique applications
where the Company's engineers can custom design or modify hardware to improve
its performance within a particular system.
COMPETITION
The nature of the Company's competition is diverse due to the breadth of the
services offered by the Company and the geographic regions in which such
services are provided. The Company is subject to intense competition with
respect to each of its individual service offerings. Many of the Company's
competitors have significantly greater financial, technical, manufacturing,
personnel and marketing resources than the Company. To date, however, the
Company believes that these large competitors generally have not made it a
priority to provide telecommunications services in remote, difficult-access
regions. Should one or more of such companies focus on such services, it likely
would have a material adverse effect on the financial condition, results of
operations and cash flow of the Company. Currently, the Company believes it
competes directly with Autocomm Communications Engineering Corp., Sola
Communications, Inc. and Datacom for the sale of telecommunications services to
oil and gas companies in the Gulf of Mexico. Shell Oil Company, whose subsidiary
is a customer of the Company, also competes
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<PAGE>
with the Company through services provided over Shell Oil Company's microwave
network in the Gulf of Mexico region. Shell Oil Company has announced plans to
become a full service telecommunications provider to the oil and gas industry,
including in the Gulf Coast region currently served by the Company. The Company
believes that its ability to compete in the markets in which it operates depends
on such factors as reputation, technical expertise, quality, customer service,
knowledge of the business, ease of use, reliability, marketing and distribution
channels and the array of services and products that it can provide. Although
the Company believes that it competes favorably with respect to these factors,
there can be no assurance that the Company will be able to compete successfully
in the future. As the Company pursues new markets, the Company likely will
encounter new competitors. While the recent WTO agreement may result in
regulatory changes that could benefit the Company as it competes in existing
markets, or seeks to enter new markets, there can be no assurance that the
agreement will be implemented in a manner that would benefit the Company or that
the pro-competitive effects of the agreement will not increase the amount of
competition encountered by the Company.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. The Company has provided long
distance carrier services which originate in the United States and which
terminate both domestically and internationally. It has been providing these
services as a switchless reseller since 1994. The Company intends to begin
offering these services as a switch-based carrier by the end of the fourth
quarter of its 1997 fiscal year. The Company resells long distance service
provided by other long distance carriers and is in the process of developing a
switch-based network from New Orleans, Louisiana to Corpus Christi, Texas,
which, if completed, will deliver long distance service between the various
cities and communities on the network. The long distance markets are
characterized by intense competition with a number of companies, including very
large companies such as AT&T, MCI and Sprint, that have greater name recognition
and greater financial, technical, network and marketing resources than the
Company. In addition, as a result of the 1996 Telecommunications Act, the BOCs
and GTOCs are able to enter the long distance market. The Company's strategy is
to expand its long distance service only as part of a complete
telecommunications solution or where, due to the establishment of a network, the
Company can offer service at rates less than those currently being offered in
the particular market. There can be no assurance that the Company will not
encounter intense competition in the provision of such services or that it will
be successful in attracting customers for its new services.
LOCAL EXCHANGE SERVICE. The Company is expanding its operations to provide
local exchange services typically provided by LECs. The local service market
only recently has been opened to new service providers following enactment of
the 1996 Telecommunications Act; however, competition within this market likely
will be as intense as competition within the long distance market. The services
offered by the Company will compete with those offered by LECs, such as
BellSouth and Southwestern Bell, who currently dominate the provision of local
services in their respective markets. In entering the local services market, the
Company initially intends to serve as a reseller of LEC services as permitted
under the 1996 Telecommunications Act, which allows it to purchase such services
at a discount and then resell them to the public. However, the Company believes
that LECs have long-standing relationships with their customers, have the
ability to subsidize competitive services with revenues from a variety of other
services and benefit from existing state and federal regulations that currently
favor LECs over new service providers such as the Company in certain respects.
While legislative and regulatory changes have provided increased business
opportunities for competitive telecommunications providers such as the Company,
these same changes have given LECs increased flexibility in the pricing of their
services, which may allow LECs to offer special discounts to the Company's
customers and potential customers. Further, as competition increases in the
local telecommunications market, the Company anticipates that general pricing
competition and pressures will increase significantly. If LECs lower their
rates, other telecommunications providers may be forced by market conditions to
charge less for their services in order to compete, which could have a material
adverse effect on the Company's financial condition, results of operations and
cash flow.
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<PAGE>
The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities, LECs
operating outside their current local service areas, long distance carriers and
start-up telecommunications ventures. The great majority of these entities
provide transmission services primarily over fiber-optic, copper-based or
microwave networks, which enjoy proven market acceptance for the transmission of
telecommunications traffic. Moreover, the consolidation of telecommunications
companies and the formation of strategic alliances within the telecommunications
industry, which are expected to accelerate as a result of the enactment of the
1996 Telecommunications Act, could give rise to significant new or stronger
competitors. The 1996 Telecommunications Act contains several provisions that
bear directly on wireless service providers such as the Company including
provisions that entitle wireless carriers to obtain interconnection from LECs,
eliminate equal access obligations with respect to wireless services, limit the
ability of state and local governments to discriminate against or prohibit
certain wireless services and allow BOC affiliates and large long distance
carriers to bundle local and long distance services with wireless offerings.
Currently, the FCC is implementing the provisions of the 1996 Telecommunications
Act and several of the FCC's decisions already are being challenged, thus the
Company cannot at this time predict the extent to or manner in which the 1996
Telecommunications Act will affect the Company's business. The Company's
strategy is to provide local carrier services only where such services are part
of a complete telecommunications solution or where, because of the Company's
early market acceptance, it can offer services at competitive rates. There can
be no assurance that the Company will be able to compete effectively in the
local service markets. See "Risk Factors--Risks Associated with Entry into Local
Phone Service Market and Other New Markets."
INTERNATIONAL AND FOREIGN MARKET SERVICES. The Company offers
telecommunications service to and from remote and difficult-access locations
outside of the United States for its customers. Such services include the
provision of telecommunications services between domestic corporate offices and
remote sites. Therefore, the Company has not competed in a full range of
services with the incumbent telecommunications providers in a particular country
and has faced competition from international telecommunications providers
generally and others who provide telecommunications services to remote and
difficult-access locations. The Company provides private-line telecommunications
services in Russia. In Russia, the major competitors for networks are SOVAMTEL,
ROSTELECOM, AMRUSCOM and Global One. Although the Company believes that its
alliance with ITAR-TASS will allow it to compete favorably in Russia, there can
be no assurance that such alliance will continue on favorable terms to the
Company, if at all. In Russia, as well as in each other country where the
Company elects to compete, the Company may have to compete with the incumbent
service providers, which may have substantially greater financial resources,
governmental support both financially and otherwise, greater installed
infrastructure, long-standing relationships with their customers, favorable
governmental regulations, better understanding of local business practices and
customers and no foreign currency risks. Additionally, to the extent these
foreign markets are identified by the Company, they may be identified by other
companies that have significantly greater financial and other resources than the
Company. As a result, there can be no assurance that the Company will be able to
compete effectively in these markets. See "--Strategic Relationships and
Alliances" and "Risk Factors-- Competition" and "--Risks Associated with
International Operations."
GOVERNMENT REGULATION
UNITED STATES. In the United States, the Company's services are subject to
the 1934 Communications Act, the 1996 Telecommunications Act and the FCC
regulations thereunder, as well as the applicable laws and regulations of the
various states and state PSCs. Generally, the FCC exercises jurisdiction over
all facilities of, and services offered by, telecommunications common carriers
to the extent such services involve interstate or international communications,
while state regulatory authorities retain jurisdiction over intrastate
communications. The FCC also regulates the licensing and use of the
electromagnetic spectrum (I.E., wireless services) pursuant to Title III of the
1934 Communications Act.
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FEDERAL REGULATION
FCC REGULATION OF WIRELESS LICENSES: The Company holds numerous radio
station licenses which are subject to FCC regulation pursuant to Title III of
the 1934 Communications Act. The FCC regulates the licensing, construction,
operation, acquisition and sale of the Company's wireless facilities and
services, including the Company's microwave, satellite earth station and land
mobile systems. In recent years, Congress and the FCC have made significant
changes in the regulation of the wireless industry in order to promote
competition and expand the scope of services that wireless service providers can
offer.
Facilities licensed by the FCC to provide microwave, satellite earth station
and land mobile service are subject to a variety of detailed licensing,
operational and technical requirements specific to each service. Among other
requirements, licensees seeking to continue operating beyond the expiration date
of the licenses must renew their authority. FCC rules also impose prior approval
requirements on proposed transfers of control or license assignments. The FCC
continues to refine its wireless rules for each service area to accommodate
advances in technology, developing markets and new service arrangements, and to
eliminate confusing, outdated, redundant or otherwise burdensome regulation. The
outcome of FCC regulatory activities or decisions affecting wireless services
cannot be predicted and, therefore, there can be no assurances that FCC actions
or decisions in this area will not limit the Company's services or operating
plans or have a material adverse effect upon the Company's financial condition,
results of operations and cash flow.
The 1996 Telecommunications Act contains several provisions that bear
directly on wireless service providers including provisions that entitle
wireless carriers to obtain interconnection from LECs, eliminate equal access
obligations with respect to wireless services, limit the ability of state and
local governments to discriminate against or prohibit certain wireless services
and allow BOC affiliates and long distance carriers, including the Company, to
bundle local and inter-LATA services with wireless offerings. Currently, the FCC
is implementing the provisions of the 1996 Telecommunications Act and several of
the FCC's decisions already are being challenged. Thus, the Company cannot at
this time predict the extent to which the 1996 Telecommunications Act will
affect the Company's wireless business.
TWO-WAY RADIO: The FCC regulates the Company's two-way business radio
systems under Part 90 of the FCC's rules and regulations. Business radio service
providers traditionally have been regulated by the FCC as private carriers
subject to minimal regulation in comparison to other wireless common carriers,
such as cellular service providers. However, the Omnibus Budget Reconciliation
Act of 1993, which amended the 1934 Communications Act, mandated regulatory
parity for "commercial mobile radio services" ("CMRS"), later defined by the FCC
to include business radio services that offer customers for-profit
interconnected service. Accordingly, the FCC reclassified for-profit business
radio systems that are interconnected to the public switched network as a common
carrier service, thereby imposing certain common carrier obligations on the
providers. In addition, effective in October 1996, the FCC's rules permitted
CMRS providers, such as the Company, including for-profit interconnected
business radio services, to provide fixed wireless service in their assigned
spectrum blocks on a co-primary basis with mobile services. The Company's
licenses are also subject to various operational, technical and filing
requirements, including requirements that the Company renew its licenses and
seek prior approval of transfers of control and frequency assignments.
MICROWAVE SERVICES: The Company holds various common carrier and private
microwave licenses. The FCC regulates private fixed microwave services under
Part 101 of its rules and regulations. Generally, a private carrier's provision
of telecommunications services is limited to the transmission of its own
internal communications or its customers' private communications, while a common
carrier microwave service provider offers services indifferently to all
potential users. Under the FCC's rules, private microwave carriers are not
permitted to transmit common carrier services over their network. IWL's
microwave licenses are subject to various operational, technical and filing
requirements, including requirements that the Company renew its licenses prior
to their expiration and seek prior approval of transfers of control or frequency
assignments.
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SATELLITE EARTH STATIONS: The Company holds various earth station licenses.
The FCC regulates earth stations including VSAT facilities and services under
Part 25 of the FCC's rules and regulations, which includes detailed requirements
regarding licensing, operation, technical standards, renewals and restrictions
on transfers of control for earth station facilities and services. The Company's
earth station and VSAT authorizations permit the Company to provide both
domestic and international voice and data services. Under this authority, the
Company provides service between the U.S. and Bosnia pursuant to its private
carrier earth station license. The FCC continues to refine its satellite service
rules to accommodate advances in technology and new market developments.
Effective April 1996, the FCC revised its "Separate Satellite Systems" and
"Transborder Policies" governing U.S.-licensed domestic and international
satellites. As a part of its change in policy for satellite space stations, the
FCC eliminated certain licensing restrictions on earth stations making it easier
for U.S. earth stations to communicate both with U.S. domestic satellites and
certain international satellites such as PanAmSat, Orion and Columbia
Communication's TDRSS satellites. The FCC also recently amended the VSAT
licensing and other satellite service rules in an effort to clarify and
streamline satellite service regulations. These rule changes and other
regulatory actions and decisions may permit earth station licensees such as the
Company greater flexibility in providing satellite earth station services.
DOMESTIC WIRELINE SERVICE REGULATION: As a common carrier offering
interstate long distance telephone service to the public, the Company is subject
to additional FCC regulation. Specifically, the Company is subject to the common
carrier obligations to offer service on a non-discriminatory basis at just and
reasonable rates. The FCC generally has sought to minimize regulations that
apply to nondominant carriers such as the Company, and thus domestic regulation
of such carriers' long distance service occurs primarily through the FCC's
complaint procedures. Until recently, carriers such as the Company have been
required to file tariffs with the FCC containing the rates, terms and conditions
of interstate service. Pursuant to a recent FCC order, as of December 1997,
nondominant carriers will no longer be able to file tariffs with the FCC with
respect to their long distance services. Such carriers will, however, be
required to maintain at their offices, and to provide to customers or regulators
upon request, information concerning their long distance services. An appeal of
the FCC order eliminating tariffs has been submitted to the U.S. Court of
Appeals for the District of Columbia and a motion to that Court requesting stay
of the FCC's detariffing order has been granted. There can be no assurance of
whether the appeal or stay will be successful, or if successful, what effect
such decisions may have on the Company. However, if detariffing ultimately takes
effect, the Company, like other long distance companies, would likely incur
additional costs in establishing legally binding relationships with customers.
The 1996 Telecommunications Act is intended to remove and minimize many of
the formal barriers between the long distance and local telecommunications
services markets allowing service providers from each market (as well as
providers of cable television and other services) to compete in all
telecommunications markets. LECs are now required to permit interconnection to
their networks and satisfy obligations with respect to unbundled access, resale,
number portability, dialing parity, access to rights-of-way, mutual compensation
and other matters. In addition, the legislation codifies the LECs' equal access
and nondiscrimination obligations and preempts inconsistent state regulation. As
required by the legislation, the FCC is conducting a large number of proceedings
to adopt rules and regulations to implement the new statutory provisions and
requirements. In August 1996, the FCC adopted new rules implementing certain
provisions of the 1996 Telecommunications Act (the "Interconnection Orders").
These rules are designed to implement the pro-competitive, deregulatory national
policy framework of the new statute by removing or minimizing the regulatory,
economic and operational impediments to competition for facilities-based and
resold local services, including switched local exchange service.
Among other things, the Interconnection Orders establish rules requiring
incumbent LECs to interconnect with new entrants such as the Company at
specified network points; require incumbent LECs to provide carriers with
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point at rates that are just, reasonable and
nondiscriminatory; establish rules requiring incumbent LECs to allow
interconnection via physical and virtual co-location; require the states to set
42
<PAGE>
prices for interconnection, unbundled elements, and termination of local calls
that are nondiscriminatory and cost-based using a forward-looking methodology
which excludes embedded costs but allows a reasonable cost-of-capital profit;
require incumbent LECs to offer for resale any telecommunication service that
the carrier provides at retail to end users at prices to be established by the
states but which generally are at retail prices less reasonably avoidable costs;
and require LECs and utilities to provide new entrants with nondiscriminatory
access to poles, ducts, conduit and rights-of-way owned or controlled by LECs or
utilities. Exemptions to some of these rules are available to LECs which qualify
as rural LECs under the 1996 Telecommunications Act. The Interconnection Orders
also require that intra-LATA presubscription (pursuant to which LECs must allow
customers to choose different carriers for intra-LATA toll service without
having to dial extra digits) be implemented no later than February 1999; that
LECs provide new entrants with nondiscriminatory access to directory assistance
services, directory listings, telephone numbers and operator services; and that
LECs comply with certain network disclosure rules designed to ensure
interoperability of multiple local switched networks.
Petitions seeking reconsideration of one or more aspects of the
Interconnection Orders have been filed with the FCC and are pending and various
appeals of the Interconnection Orders have been consolidated into proceedings
currently pending before the U.S. Eighth Circuit Court of Appeals. Certain of
the rules adopted in the Interconnection Orders, including rules that concern
the pricing of interconnection, have been stayed by the Court. There can be no
assurance as to how the Interconnection Orders will be implemented or enforced
or the effect that such orders will have on competition within the
telecommunications industry generally or on the competitive position of the
Company specifically.
Other matters addressed by the 1996 Telecommunications Act may affect the
Company's operations. For example, as required by the 1996 Telecommunications
Act, a joint board of federal and state regulators was convened to consider
possible changes to the FCC's existing universal service support mechanisms
designed to ensure that affordable telephone service is available to all
consumers. In November 1996, the FCC initiated a proceeding to examine universal
service issues, and has received comment on the proposals set forth by the joint
board. Access charge reform also may significantly affect the Company. Access
charges are charges imposed by LECs on long distance providers for access to the
local exchange network, and were designed to compensate the LEC for its
investment in the local network. As required by the 1996 Telecommunications Act,
in December 1996 the FCC issued an order which, among other things, requests
comment on a number of interstate access charge reform issues designed to foster
efficient pricing of access, competition for access services, and to reflect the
development for local services prompted by the 1996 Telecommunications Act. The
FCC also has sought comment on whether Internet service providers and other
information service providers should be subject to access charges.
The legislation also contains special provisions that eliminate the
restrictions on the BOCs and GTOCs from providing long distance services. These
new provisions permit a BOC to enter the "out-of-region" long distance market
immediately upon the receipt of any state or federal regulatory approvals
otherwise applicable to the provision of long distance service. These new
provisions also permit a BOC to enter the "in-region" long distance market if it
satisfies procedural and substantive requirements, including obtaining FCC
approval upon a showing that in certain situations facilities-based competition
is present in its market, and that it has entered into interconnection
agreements which satisfy a 14-point "checklist" of competitive requirements. The
GTOCs are permitted to enter the long distance market immediately without regard
to limitations by region, although necessary regulatory approvals to provide
long distance services must be obtained, and the GTOCs are subject to the
provisions of the 1996 Telecommunications Act that impose interconnection and
other requirements on LECs. The 1996 Telecommunications Act also imposes certain
restrictions on the BOCs' entry into long distance services, including a
separate subsidiary requirement and joint marketing restrictions.
There can be no assurance as to how the 1996 Telecommunications Act will be
implemented or enforced or the effect that it will have on competition within
the telecommunications industry generally or on the competitive position of the
Company specifically.
43
<PAGE>
INTERNATIONAL SERVICE REGULATION: International common carriers, such as
the Company, are required to obtain authority under Section 214 of the 1934
Communications Act and file a tariff containing the rates, terms and conditions
applicable to their services prior to initiating their international
telecommunications services. The Company has obtained authorization from the FCC
to resell the switched capacity of several underlying carriers to provide
international message telecommunications services. Under recently-revised FCC
rules, the Company has sought broader global authority from the FCC to provide
resold and facilities-based international private line and switched service to
virtually every foreign point in the world. This application will be processed
under streamlined procedures at the FCC. The Company intends to file an
application for authority to use foreign-licensed facilities that are not
covered by the streamlined application for global authority.
Under current tariff rules applicable to international carriers, nondominant
international carriers such as the Company must file their international tariffs
and any revisions thereto with one day's notice. The Company has filed an
international tariff for switched services with the FCC. Additionally,
international telecommunications service providers are required to file copies
of their contracts with other carriers, including correspondent agreements, with
the FCC within 30 days of execution. The FCC's rules also require the Company to
file periodically a variety of reports regarding its international traffic flows
and use of international facilities.
The Company also must conduct its international business in compliance with
the FCC's international settlements policy, which establishes the permissible
boundaries for U.S. facilities-based carriers and their foreign correspondents
to settle the cost of terminating each other's traffic over their respective
networks. The amount of payments (the "settlement rate") is determined by the
negotiated accounting rate specified in the correspondent agreement. Under the
FCC's international settlements policy, unless prior approval is obtained, the
settlement rate generally must be one-half of the accounting rate. Carriers must
obtain waivers of the FCC's rules if they wish to use an accounting rate that
differs from the prevailing rate or vary the settlement rate from one-half of
the accounting rate. As a result of the FCC's pro-competition policies, the
recent trend has been toward reduction in the accounting rate.
The FCC recently revised its rules to permit more flexibility in its
international settlements policy as a method of achieving lower cost-based
accounting rates as more competition is introduced in foreign markets and
proposed new rules to lower the price of providing international services. These
and other changes may provide more flexibility to the Company and its
competitors to respond more rapidly to changes in the global telecommunications
market. The Company intends, where possible, to take advantage of lowered
accounting rates and flexible arrangements. The Company cannot predict how the
FCC will resolve pending international policy issues or how such resolution will
affect its international business.
With respect to foreign ownership limitations, the 1934 Communications Act
limits the ownership of an entity holding a common carrier radio license by
non-U.S. citizens, foreign corporations and foreign governments. The 1934
Communications Act provides that non-U.S. citizens, foreign governments or their
representatives or corporations organized under the laws of a foreign country
may not own in the aggregate more than 20% of a company holding common carrier
radio licenses or no more than 25% of the parent of a common carrier radio
licensee if the FCC determines that the public interest would be served by
prohibiting such ownership. If the Company's foreign ownership was to exceed the
limits set forth in the 1934 Communications Act, the FCC could impose a range of
penalties on the Company, including fines and/or revocation or divestiture of
its licenses.
The FCC recently adopted new rules relating to the entry and participation
of foreign entities in the U.S. telecommunications market. The Company holds FCC
authority to provide international services and therefore is subject to the
FCC's rules on foreign affiliations. Under those rules, the FCC will scrutinize
an ownership interest greater than 25%, or a controlling interest at any level,
in a U.S. carrier by a dominant foreign carrier, to determine whether the
destination market of the foreign carrier offers "effective, competitive
opportunities" ("ECO"). The FCC imposes the same ECO test and affiliation
standard on U.S.-based carriers that invest in dominant foreign carriers. The
FCC may impose restrictions on affiliated
44
<PAGE>
carriers not meeting the ECO test. The new rules also require international
carriers to notify the FCC 60 days in advance of an acquisition of a 10% or
greater interest by a foreign carrier in that U.S. carrier. The FCC has
discretion to determine that unique factors require application of the ECO test
or a change in regulatory status of the U.S. carrier even though the foreign
carrier's interest is less than 25%.
Regulation of the telecommunications industry is changing rapidly. In
February 1997, 69 nations, including the United States, entered into the WTO
agreement whereby participating countries agreed to eliminate barriers to
competition in basic telecommunications by January 1, 1998. The current U.S
foreign ownership limitations and FCC policies that assess the reciprocity of
foreign markets (which currently apply to the Company) may be eliminated or
changed dramatically when the WTO agreement becomes effective and as the FCC
establishes new policies to implement the WTO agreement. In addition, pending
legislation could implement the WTO agreement by imposing ownership requirements
different from the current requirements. There can be no assurance that the WTO
agreement and its implementation will eliminate all restrictions currently
applicable to the Company or will not result in increased competition in the
Company's markets. The FCC also is considering a number of international service
issues in the context of several policy rulemaking proceedings and in response
to specific petitions and applications filed by other international carriers.
The FCC's resolution of some of these issues in other proceedings may adversely
affect the Company's international business (by, for example, permitting larger
carriers to take advantage of accounting rate discounts for high traffic
volumes). The Company is unable to predict how the FCC will resolve the pending
international policy issues or how such resolution will affect its international
business. There can be no assurance that future regulatory changes will not have
a material adverse impact on the Company's financial condition, results of
operations and cash flow.
REGULATORY OVERSIGHT: The FCC imposes a variety of reporting and annual fee
requirements. The FCC and the state regulatory agencies with jurisdiction over
the Company and its services have discretion to, among other things, impose
fines, conditions or revoke the Company's authority to the extent that such
agencies find that the Company has violated regulatory requirements, including
the requirement to pay the required fees, the FCC's restrictions on the use of
international private lines for providing switched services, or the failure of
the Company to meet relevant certification, licensing and tariffing
requirements. The FCC also has authority to address violations of the foreign
ownership limitation by, among other things, requiring divestiture or
restructuring of the Company's radio station licenses.
STATE REGULATION
Some of the Company's services may be classified as intrastate and therefore
subject to state regulation. Such services are regulated by the applicable
individual state PSCs. Governing regulations at the state level differ from
state to state and, sometimes, by the telecommunications service provided. The
majority of states require carriers to apply for certification to provide CLEC
and intrastate telecommunications service. The Company has sought and obtained
authority to provide long distance service in Texas and to provide high capacity
dedicated services in Louisiana. An application to provide CLEC and long
distance services in Louisiana is pending, although no assurances can be made
that such authority will be received. To the extent that such services can be
interpreted to be intrastate in nature, the Company would be required to obtain
the appropriate certification or other authority from the relevant PSC. If any
state PSC were to conclude that the Company is or was providing intrastate
service without the appropriate authority, the PSC could initiate enforcement
actions, which could include, but need not be limited to, the imposition of
fines or the refusal to grant the regulatory authority necessary for the future
provision of intrastate telecommunications services. Although the Company
intends to obtain operating authority in each jurisdiction in which such
authority is required, there can be no assurance that one or more jurisdictions
will not deny the Company's request for operating authority. It is possible that
any adverse PSC action would have a material adverse effect on the Company.
PSCs also regulate access charges and other pricing for telecommunications
services within each state. The BOCs and other local exchange carriers have been
seeking reduction of state regulatory requirements, including greater pricing
flexibility. If regulations are changed to allow variable pricing of access
charges
45
<PAGE>
based on volume, the Company could be placed at a competitive disadvantage over
larger long distance carriers. The Company also could face increased price
competition from the BOCs and other local exchange carriers for local and long
distance services, which competition may be increased by the removal of former
restrictions on long distance service offerings by the BOCs as a result of the
1996 Telecommunications Act. The impact of such rule changes on the Company
cannot be predicted.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 124 people,
including approximately 15 in sales and marketing, 78 in engineering and
technical services and 31 in management, administration and finance. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
FACILITIES
The Company owns an office building in Friendswood, Texas and Lafayette,
Louisiana and leases additional space in Friendswood and Houston, Texas, New
Orleans, Louisiana and Moscow, Russia. The Company considers its current
facilities adequate for its current needs and believes that suitable additional
space will be available, as needed, to accommodate further physical expansion of
corporate operations and for additional sales and service.
COMPANY LICENSES AND CERTIFICATIONS
The Company has owned and maintained a variety of telecommunications
infrastructures and holds many FCC and international licenses to transmit voice
and data. FCC radio licenses issued to the Company allow it to provide land
mobile, microwave and satellite communications services. The Company currently
holds 30 FCC licenses, with approximately 250 frequency pairs, for commercial
mobile radio service. These licenses have varying terms which expire and will
require renewal between July 1997 and March 2001. These licenses allow the
Company to provide two-way wireless radio services along the Texas and Louisiana
Gulf Coast region and offshore to oil and gas-related companies. Each frequency
pair allows two-way transmission and reception. The Company holds five microwave
FCC licenses providing voice and data services along the Texas and Louisiana
Gulf Coast region and offshore to drilling, production and related companies.
The Company holds and operates seven Ku band and two C band fixed earth stations
and holds FCC licenses that allow the Company to locate earth stations in Texas
and other U.S. locations.
The Company operates as a FCC licensed 214 carrier to provide resold
switched telecommunications services. The Company has sought broader common
carrier authority from the FCC to provide global resale of switched and private
line services as well as global facilities-based service. The Company currently
provides international facilities-based private line service on a private
carrier basis into Bolivia, Bosnia, Croatia, Ecuador, Hungary and Russia. The
Company recently installed a Class 4 tandem switch and value-added services
platform at its facility in Houston, Texas as part of its new point-of-presence
for its IWL Connect-TM- division. As part of the Company's plans to increase its
service offerings, the Company has obtained authority to provide dedicated
services in Louisiana and CLEC and long distance services in Texas. An
application to provide CLEC and long distance service in Louisiana is pending.
The Company expects to receive this additional Louisiana authority by the end of
the fourth quarter of fiscal 1997, although no assurances can be made that such
authority will be received. In addition, the Company has been approved to have
pole attachment rights to existing or future facilities of Entergy, BellSouth
and the State of Louisiana. Pole attachment rights allow the Company to attach
its own fiber optic cable to such parties' respective utility poles.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding the directors and
executive officers of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ignatius W. Leonards.................... 43 Chairman, Chief Executive Officer and Director
Byron M. Allen.......................... 49 President and Director
Richard H. Roberson..................... 37 Chief Financial Officer, Secretary and Director
James T. Gordon......................... 59 Vice President--Telecom Operations
J. Keith Johnson........................ 35 Vice President--Marketing
Bryan L. Olivier........................ 35 Vice President--IWL Connect Division
Errol J. Olivier........................ 34 Vice President--Telecom Sales
Christopher J. Amenson.................. 46 Nominated Director
Myron J. Goins.......................... 37 Nominated Director
</TABLE>
- ------------------------
MR. IGNATIUS W. LEONARDS has served as Chairman of the Board, Chief
Executive Officer and a director of the Company since founding the Company in
1981 and served as President from 1981 until February 1997. Mr. Leonards was
employed by Bibbins & Rice Electronics as Telecom Service Manager until 1981.
Mr. Leonards has an industrial electronics degree from the T.H. Harris Technical
Institute in Opelousas, Louisiana.
MR. BYRON M. ALLEN has served as President and a director of the Company
since February 1997 and served as a Vice President of the Company from December
1993 until February 1997. From 1986 to 1993, Mr. Allen served as Executive Vice
President of SBS Technologies, Inc., a manufacturer of computer components. Mr.
Allen was a co-founder of SBS Technologies, Inc. In 1985 and 1986, Mr. Allen
served as a senior principal staff member at BDM Corporation, a defense
consulting firm. In 1984 and 1985, he served as manager of Navy New Business
Development for the Singer Link Corporation. From 1983 to 1984, Mr. Allen served
as the managing director of European operations of Intermetrics, Inc. He served
as manager of Houston operations of Intermetrics, Inc. from 1977 to 1983. Mr.
Allen graduated from the University of Alabama with a degree in Mathematics. He
attended graduate school at Wright State University in Dayton, Ohio where he
studied systems engineering.
MR. RICHARD H. ROBERSON has served as Chief Financial Officer of the Company
since joining the Company in October 1996 and has served as a director of the
Company since February 1997. From November 1995 until October 1996, Mr. Roberson
was Director of Administration at Weaver and Tidwell, LLP., a certified public
accounting firm. From May 1989 until October 1995, Mr. Roberson was Chief
Financial Officer and Controller of Local and Western of Texas, Inc., a
wholesaler of meat and other food products. Mr. Roberson has a BBA in Accounting
from the University of Texas at Austin and is also a certified public
accountant.
MR. JAMES T. GORDON has served as Vice President--Telecom Operations of the
Company since October 1996. Prior to joining the Company, he was an independent
telecommunications consultant. From September 1992 through December 1994, Mr.
Gordon was Director--Installation and Test Engineering Services for Alcatel
Network Systems, Inc. and, from April 1991 to September 1992, he served as
Manager--Customer Account Services--Independent Operating Cos. for Alcatel
Network Systems, Inc. Mr. Gordon was employed by Rockwell International
Corporation in various capacities from 1970 until 1991. Mr. Gordon received a
BBA in Production Management from the University of North Texas.
47
<PAGE>
MR. J. KEITH JOHNSON has served as Vice President of Marketing since
December 1992 and was Director of Sales and Marketing of the Company from
December 1986 to December 1992. From June 1985 to December 1986, Mr. Johnson was
an Account Executive with ARGO Communications, Inc., a long distance carrier,
where he sold long-distance voice and data lines to medium and large commercial
users. Mr. Johnson worked for AT&T from May 1983 until June 1985, where he sold
telephone systems to small and medium-sized companies. Mr. Johnson graduated
from Houston Baptist University with a double major in marketing and management.
MR. BRYAN L. OLIVIER has served as a Vice President of the Company's IWL
Connect-TM- division since January 1996. Prior thereto, he served as Director of
Engineering for Spacelink Systems, Inc. from May 1992 to December 1995. From
January 1992 to March 1992, he was a member of the strategic planning group of
Wiltel Communications, a long distance carrier. From May 1981 to December 1988,
he was the manager of the International Telecommunications Group of Tenneco Oil
E&P/Operators Inc. Mr. Olivier graduated with a B.S. Degree in Electrical
Engineering from the University of Southwest Louisiana with a concentration in
telecommunications management and from T.H. Harris Technical Institute in
Opelousas, Louisiana in the field of industrial engineering.
MR. ERROL J. OLIVIER has served as Vice President of Telecom Sales since
September 1996 and served as Vice President of Telecom Services from July 1995
until September 1996. From February 1995 until July 1995, Mr. Olivier served as
Director of Telecom Services and was responsible for the opening of the
Company's Lafayette and New Orleans offices. Mr. Olivier joined the Company in
March 1990 and served as an Account Manager from March 1990 until January 1992
and as the Regional Manager of the Company's New Orleans office from January
1992 until February 1995. Mr. Olivier has an electronics technology degree from
T.H. Harris Technical Institute in Opelousas, Louisiana.
MR. CHRISTOPHER J. AMENSON has agreed to become a director of the Company
upon completion of the Offering. Mr. Amenson has served as President and Chief
Operating Officer of SBS Technologies, Inc. since April 1992 and as a director
since August 1992. In October 1996, he became the Chief Executive Officer of SBS
Technologies, Inc. For five years prior to joining SBS Technologies, Inc., Mr.
Amenson was President of Industrial Analytics, Inc., a Boston-based investment
banking firm. Mr. Amenson holds a B.A. Degree in Government from the University
of Notre Dame and a Master's Degree in Business Management from the Sloan
Fellows Program at the Massachusetts Institute of Technology.
MR. MYRON J. GOINS has agreed to become a director of the Company upon
completion of the Offering. Mr. Goins has served as a Managing Director of
Seruus Ventures LLC, an investment firm specializing in
telecommunications-related investments, since September 1996. From September
1995 until the founding of Seruus, Mr. Goins was employed by National
Telemanagement Corporation, a diversified telecom company, as its Chief
Financial Officer. From April 1994 until Corporate Telemanagement Group's sale
to LCI International in September of 1995, Mr. Goins was Vice President of
Corporate Development for Corporate Telemanagement Group, a long distance
company. From 1988 to April 1994, Mr. Goins was Director of Financial Analysis
at Sprint Corp. where he was involved in numerous merger and acquisition
transactions including the $3.5 billion merger of Sprint and Centel and various
local, long distance, satellite and other infrastructure investments. Mr. Goins
received his BBA degree from the University of Memphis and his MBA from
Vanderbilt University's Owen Graduate School of Management.
Each director serves until the next annual meeting of shareholders and until
his successor is duly elected and qualified. The Company's Board of Directors is
currently composed of five directors with three existing directors and two
persons nominated as a director. Officers serve at the discretion of the Board
of Directors. There are no family relationships among any of the directors or
named executive officers of the Company.
48
<PAGE>
BOARD COMMITTEES
Effective upon the consummation of the Offering, the Board of Directors will
have two standing committees: the Audit Committee and the Compensation
Committee. The functions of the Audit Committee, of which Mr. Amenson and Mr.
Goins will be the initial members, will be to make recommendations regarding the
engagement of the Company's independent auditors and to review with management
and the independent auditors the Company's financial statements, basic
accounting and financial policies and practices, audit scope and competency of
control personnel. The functions of the Compensation Committee, of which Mr.
Amenson and Mr. Goins will be the initial members, will be to review and
recommend to the Board of Directors the compensation of executive officers of
the Company and to administer and make awards and take all other action as
prescribed under the employee benefit plans of the Company (other than the 1997
Director Option Plan, which will be administered by the entire Board of
Directors of the Company). All members of the Compensation Committee will be
"non-employee directors" within the meaning of Rule 16b-3(b) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
"outside directors" as contemplated by Section 162(m)(4)(C)(i) of the Internal
Revenue Code of 1986, as amended (the "Code").
DIRECTOR COMPENSATION
Non-employee directors of the Board of Directors of the Company will be paid
$1,000 per meeting for attending or participating in meetings of the Board of
Directors or any committee thereof, and will receive reimbursement for
out-of-pocket expenses incurred for attendance at meetings. Non-employee
directors will also receive non-statutory stock options under the 1997 Director
Option Plan. The Company has agreed to grant 10,000 options under the 1997
Director Option Plan to each of Messrs. Amenson and Goins effective upon their
commencing to serve as directors of the Company, which will occur upon the
completion of the Offering. See "--Benefit Plans--1997 Director Stock Option
Plan." The Company's policy is not to pay any additional compensation to
employees of the Company for their services as a director.
LIMITATION OF LIABILITY
As permitted by the Texas Business Corporation Act, the Company's Restated
Articles of Incorporation provide that the directors of the Company shall not be
liable to the Company or its shareholders for monetary damages for an act or
omission in the director's capacity as a director, except that such provision
does not authorize the elimination or limitation of liability of a director to
the extent the director is found liable for (i) a breach of the director's duty
of loyalty to the Company or its shareholders, (ii) any act or omission not in
good faith or that constitutes a breach of duty of the director to the Company
or an act or omission that involves intentional misconduct or a knowing
violation of law, (iii) any transaction from which the director derived any
improper personal benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office or (iv) any act or omission for
which the liability of the director is expressly provided by statute.
As a result of this provision, the Company and its shareholders may be
unable to obtain monetary damages from a director for breach of the duty of
care. Although shareholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a director, shareholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.
In addition, the Company's Restated Articles of Incorporation and Amended
and Restated Bylaws provide certain rights of indemnification for all officers
and directors.
49
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation awarded or paid by the Company to its Chairman of the Board and
Chief Executive Officer and the other executive officer of the Company whose
total annual salary and bonus for services to the Company exceeded $100,000 in
the fiscal year ended June 30, 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
--------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (SHARES) COMPENSATION
- ------------------------------------------------------------ ---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Ignatius W. Leonards ....................................... $ 150,000 -- -- $ 29,214(1)
Chairman of the Board and
Chief Executive Officer
J. Keith Johnson ........................................... 100,604 $ 12,250 36,141(2) 1,655(3)
Vice President--Marketing
</TABLE>
- --------------------------
(1) Represents (i) $9,000 earned by Mr. Leonards pursuant to an agreement
between the Company and Kenwood Americas Corporation ("KAC") whereby Mr.
Leonards is paid 10% of the net profits of Kenwood Systems Group, Inc. (the
Company owns 50% of the outstanding capital stock of Kenwood Systems Group,
Inc., with the other 50% owned by KAC); (ii) $2,214 of matching payments
made by the Company to Mr. Leonards' account under the Company's Retirement
and Savings Plan (the "401(k) Plan"); and (iii) $18,000 in management fees
paid to Mr. Leonards by the Company for management rights granted by Mr.
Leonards to the Company with respect to one of Mr. Leonards' properties.
(2) Represents stock options granted pursuant to the Incentive Stock Option
Plan, which have an exercise price of $3.56 per share and are subject to
vesting requirements.
(3) Represents matching payments made by the Company to Mr. Johnson's account
under the Company's 401(k) Plan.
OPTION GRANTS TABLE. The following table provides information on grants of
stock options pursuant to the Incentive Stock Option Plan during the fiscal year
ended June 30, 1996 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM (2)
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION --------------------
NAME (1) FISCAL YEAR PRICE (PER SHARE) DATE 5% 10%
- --------------------------- --------------- ----------------- ------------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Keith Johnson........... 36,141 23.6% $ 3.56(3) 6/30/06(3) $ 80,915 $ 205,054
</TABLE>
- --------------------------
(1) Mr. Johnson received option grants on November 10, 1995, February 28, 1996
and June 30, 1996. The options granted vest in five installments of 20% each
and become fully vested five years after the date of grant. The Board of
Directors has accelerated the vesting of all outstanding options granted
under the Incentive Stock Option Plan effective upon completion of the
Offering.
(2) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Securities and Exchange Commission (the "SEC")
and do not represent the Company's estimate or projection of future Common
Stock prices. The actual value realized may be greater or less than the
potential realizable value set forth in the table.
(3) All options were granted at a price at least equal to the fair market value
of the Common Stock on the date of grant, as determined by the Board of
Directors of the Company. The expiration date of the options granted to Mr.
Johnson range from November 10, 2005 to June 30, 2006.
50
<PAGE>
FISCAL YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL
FISCAL YEAR-END YEAR-END (1)
----------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
J. Keith Johnson.......................................... 9,265 26,876 (2) $ -- $ --
</TABLE>
- ------------------------
(1) The fair market value of the Common Stock on June 30, 1996 was not more than
$3.56 per share, as determined by the Board of Directors, which was also the
exercise price payable for such shares.
(2) The Board of Directors has accelerated the vesting of all outstanding
options granted under the Incentive Stock Option Plan effective upon
completion of the Offering.
BENEFIT PLANS
EMPLOYEE INCENTIVE STOCK OPTION PLAN. Adopted on November 1, 1996 by the
Board of Directors and approved by the shareholders on December 8, 1996, the
Company's Incentive Stock Option Plan is intended to be an incentive for key
employees to continue to promote the best interests of the Company and enhance
its long-term performance and to provide an incentive for key employees to join
or remain with the Company. Options may be granted under the Incentive Stock
Option Plan to any person who is an officer or other executive personnel of the
Company.
Options granted under the Incentive Stock Option Plan may be granted in the
form of options that qualify for treatment as "incentive stock options" (the
"Incentive Stock Options") under Section 422 of the Code and applicable
regulations and rulings promulgated thereunder. A total of 258,600 shares of
Common Stock have been reserved for issuance upon the exercise of options
granted under the Incentive Stock Option Plan. A total of 160,614 shares are
subject to options that have been granted under the Incentive Stock Option Plan
as of the date of this Prospectus at a weighted average exercise price of $3.62
per share. The Company does not intend to grant any more options under the
Incentive Stock Option Plan due to the adoption of the 1997 Stock Option Plan.
The Incentive Stock Option Plan has terms substantially similar to the 1997
Stock Option Plan described below.
In February 1997, the Board of Directors determined that, effective upon
completion of the Offering, the vesting of all unvested options granted under
the Incentive Stock Option Plan would be automatically accelerated, without the
need for further action by the Board, so that all such options would become
fully vested and presently exercisable at such time.
1997 STOCK OPTION PLAN. Adopted in February 1997 by the Board of Directors
and the shareholders of the Company, the Company's 1997 Stock Option Plan is
intended to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentives to employees and
consultants of the Company and any affiliates thereof and to promote the success
of the Company's business.
Options to be granted under the 1997 Stock Option Plan may be either
Incentive Stock Options or non-statutory stock options under the Code. Incentive
Stock Options may be granted under the 1997 Stock Option Plan to any person who
is an officer or other employee (including officers and employees who are also
directors) of the Company or any of its subsidiaries. The exercise price of
Incentive Stock Options must be at least the fair market value of a share of the
Common Stock on the date of grant (and not less than 110% of the fair market
value in the case of an Incentive Stock Option granted to an optionee owning 10%
or more of the Company's Common Stock). A total of 300,000 shares of Common
Stock have been reserved for issuance upon the exercise of options which may be
granted under the 1997 Stock Option Plan.
The 1997 Stock Option Plan is administered by the Company's Board of
Directors or a committee of the Board of Directors (the "Administrators"). Upon
completion of the Offering, the members of the
51
<PAGE>
Compensation Committee of the Board of Directors will administer the 1997 Stock
Option Plan. The Administrators have full and final authority in their
discretion, subject to the 1997 Stock Option Plan's provisions (a) to determine
the individuals to whom, and the time or times at which, options shall be
granted and the number of shares of Common Stock covered by each option and (b)
to construe and interpret the 1997 Stock Option Plan.
Generally, options granted under the 1997 Stock Option Plan will be
exercisable at any time, and from time to time, throughout a five-year period
commencing on or after the date of grant in cumulative installments of 20% per
each year, or as otherwise specified by the Administrators and ending upon the
earliest of the expiration, cancellation, surrender or termination of the option
as provided in the 1997 Stock Option Plan. The Board of Directors may at any
time amend, alter, suspend or discontinue the 1997 Stock Option Plan, but no
amendment, alteration, suspension or discontinuation will be made that would
impair the rights of any optionee under any outstanding option grants without
the optionee's consent. In addition, to the extent necessary to comply with Rule
16b-3 or with Section 422 of the Code (or any other applicable law or
regulation, including the requirements of the Nasdaq National Market), the
Company will obtain shareholder approval of any plan amendment as required. The
term of an option may not exceed ten years. Upon dissolution or liquidation of
the Company, each outstanding option will terminate. In the event of a proposed
sale of all or substantially all of the assets of the Company or upon certain
mergers where the shareholders of the Company receive cash or securities of
another issuer, or any combination thereof, each option either will be assumed
by the successor entity or substituted with an equivalent option.
A total of 130,000 shares are subject to options that have been granted
under the 1997 Stock Option Plan as of the date of this Prospectus at an average
exercise price equal to the initial price of the Common Stock being offered to
the public hereby. These options, which were granted in May 1997, begin vesting
one year from the consummation of the Offering and have varying vesting
schedules, ranging from options that vest in equal, cumulative installments over
a two-year period from the consummation of the Offering to options that vest in
equal, cumulative installments over a five-year period from the consummation of
the Offering.
1997 DIRECTOR STOCK OPTION PLAN. The Company's 1997 Director Option Plan
was adopted in February 1997 by the Board of Directors and the shareholders of
the Company to encourage ownership of the Company by eligible non-employee
directors of the Company whose continued services are considered essential to
the Company's future progress and to provide them with a further incentive to
remain as directors of the Company. All options to be granted under the 1997
Director Option Plan will be non-qualified and not eligible for treatment as
Incentive Stock Options under Section 422 of the Code. A total of 100,000 shares
of Common Stock have been reserved for issuance under the 1997 Director Option
Plan.
The 1997 Director Option Plan is administered by the Company's Board of
Directors. The Board of Directors has full and final authority in its
discretion, subject to the 1997 Director Option Plan's provisions (a) to
determine the individuals to whom, and the time or times at which, options shall
be granted and the number of shares of Common Stock covered by each option and
(b) to construe and interpret the 1997 Director Option Plan. The Company expects
that each new non-employee director of the Company, upon becoming a director,
will receive option grants that generally will vest one-third on the day
preceding the first annual meeting of shareholders of the Company held after the
date of grant and one-third on each of the two following anniversaries of that
date, so long as the director continues to serve as a director of the Company.
The Board of Directors will also have the authority to make additional option
grants to existing non-employee directors. The Company has agreed to grant
10,000 options under the 1997 Director Option Plan to each of Messrs. Amenson
and Goins effective upon their commencing to serve as directors of the Company,
which will occur upon completion of the Offering, at an average exercise price
per share equal to the initial price of the Common Stock being offered to the
public hereby.
Each option will expire ten years from the date of grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the first ten-year term. If an optionee terminates service as
a director for any reason including disability or death, the option will
automatically
52
<PAGE>
expire 12 months after the date of termination, but in no event after the
ten-year term. Options are not assignable and may not be transferred other than
by will or the laws of descent and distribution. Upon a dissolution or
liquidation of the Company, each outstanding Option will terminate unless
otherwise provided by the Board of Directors. In the event of a proposed sale of
all or substantially all of the assets of the Company or upon certain mergers
where the shareholders of the Company receive cash or securities of another
issuer, each option either will be assumed by the successor entity or
substituted with an equivalent option.
The 1997 Director Option Plan provides that the Board of Directors may
suspend or discontinue the 1997 Director Option Plan or review or amend it in
any respect whatsoever. If required by the applicable provisions, rules or
regulations of the Exchange Act, the Code or the Nasdaq National Market, the
Board of Directors will not amend or terminate the 1997 Director Option Plan
without shareholder approval. No such termination will affect the terms of any
options outstanding at that time.
401(K) PLAN. Effective November 1, 1991, the Company established its 401(k)
Plan. The 401(k) Plan is a defined contribution plan qualified under Section
401(a) of the Code that provides for employee pre-tax contributions pursuant to
Section 401(k) of the Code and both matching and profit-sharing contributions by
the Company. Eligible participants may contribute, on a pre-tax basis through
payroll deduction, between 1% and 15% of their salary to a maximum of $9,500 in
1997. The Company has reserved the right to amend or terminate the 401(k) Plan
at any time. The Company matches 25% of the first 6% of the employee's
contribution, up to a maximum 1 1/2% of the employee's contribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its fiscal year ended June 30, 1996, the Company had no Compensation
Committee or other committee of the Board of Directors performing similar
functions, and accordingly, the Board of Directors determined the compensation
for the executive officers and related matters. Ignatius W. Leonards, as the
sole director of the Company during the last fiscal year, conducted all
deliberations of the Board of Directors concerning executive officer
compensation. However, Mr. Leonards, with respect to determinations regarding
his own compensation, relied on recommendations made by Byron M. Allen, the
Company's President. During such fiscal year, no executive officer of the
Company served as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of the
Company's Board of Directors. Effective upon consummation of the Offering, the
Board of Directors will have a Compensation Committee, of which Mr. Amenson and
Mr. Goins will be the initial members.
Byron M. Allen, the Company's President and a director, lent the Company
$150,000 in September 1994 evidenced by a promissory note payable to Mr. Allen
bearing interest at the rate of 10% per annum. During the fiscal year ended June
30, 1995, Mr. Allen lent the Company an additional $100,000 evidenced by a
promissory note payable to Mr. Allen bearing interest at the rate of 2% per
annum in excess of Mr. Allen's cost of funds in his margin account at his
brokerage firm. The full amount of the notes, together with interest thereon,
was repaid by the Company in December 1995.
Caroline Fontenot, the sister of Mr. Leonards, the Company's Chairman of the
Board and Chief Executive Officer, lent the Company $75,000 on June 1, 1992, of
which a balance of $45,716, bearing interest at the rate of 12% per annum,
remained outstanding as of March 31, 1997.
53
<PAGE>
CERTAIN TRANSACTIONS
Since the beginning of the Company's 1994 fiscal year, the Company has
entered into the various transactions with officers, directors and affiliates of
the Company described below.
Byron M. Allen, the Company's President and a director, lent the Company
$150,000 in September 1994 evidenced by a promissory note payable to Mr. Allen
bearing interest at the rate of 10% per annum. During the fiscal year ending
June 30, 1995, Mr. Allen lent the Company an additional $100,000 evidenced by a
promissory note payable to Mr. Allen bearing interest at the rate of 2% per
annum in excess of Mr. Allen's cost of funds in his margin account at his
brokerage firm. The full amount of the notes, together with interest thereon,
was repaid by the Company in December 1995.
Caroline Fontenot, the sister of Mr. Leonards, the Company's Chairman of the
Board and Chief Executive Officer, lent the Company $75,000 on June 1, 1992, of
which a balance of $45,716, bearing interest at the rate of 12% per annum,
remained outstanding as of March 31, 1997.
54
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1997 and as adjusted to
reflect the sale of the Common Stock offered by this Prospectus, by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) each of the Company's Named Executive
Officers, directors and director nominees, and (iii) all of the current
executive officers and directors of the Company as a group. The information
contained in this table with respect to beneficial ownership reflects
"beneficial ownership" as defined in Rule 13d-3 under the Exchange Act. Shares
of Common Stock not outstanding but deemed beneficially owned by virtue of the
right of an individual or group to acquire shares within 60 days after March 31,
1997 are treated as outstanding only when determining the amount and percentage
of Common Stock owned by such individual or group. Except as otherwise noted or
pursuant to community property laws, each person has sole voting and sole
investment power with respect to the shares shown. The address of each person
listed is 12000 Aerospace Avenue, Suite 200, Houston, Texas 77034, except as
otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER THE
NAME OWNED OFFERING OFFERING
- ------------------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
Ignatius W. Leonards.................................................... 2,000,000 89.8% 54.4%
Byron M. Allen.......................................................... 222,200 10.0 6.0
J. Keith Johnson(2)..................................................... 18,231 * *
Richard H. Roberson..................................................... -- -- --
Christopher J. Amenson(3)............................................... -- -- --
c/o SBS Technologies, Inc.
2400 Louisiana Boulevard, NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
Myron J. Goins(3)....................................................... -- -- --
803 Kleberg Court
Southlake, Texas 76092
All executive officers and directors as a group
(seven persons)(4).................................................... 2,270,149 99.9 61.0
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of the class.
(1) Assumes no exercise of the Underwriters' over-allotment options. If the
Underwriters' over-allotment options are exercised in full, the Company will
sell an additional 117,500 shares of Common Stock and Ignatius W. Leonards,
the Company's Chief Executive Officer, Chairman of the Board and a director
(the "Selling Shareholder"), will sell 100,000 shares of Common Stock, and
the Company will have issued and outstanding 3,795,316 shares of Common
Stock. In such event, upon completion of the Offering, Mr. Leonards will
beneficially own 1,900,000 shares, or 50.1%, of the Company's outstanding
Common Stock. In addition, in such event, upon completion of the Offering,
the executive officers and directors of the Company as a group will
beneficially own 2,170,149 shares, or 56.5%, of the Company's outstanding
Common Stock.
(2) Includes 15,423 shares of Common Stock subject to currently exercisable
options. Does not include 20,718 shares subject to options the vesting of
which will become automatically accelerated effective upon completion of the
Offering.
(3) Messrs. Amenson and Goins have agreed to become directors of the Company
upon completion of the Offering.
(4) Includes 45,141 shares of Common Stock subject to currently exercisable
options. Does not include 57,666 shares of Common Stock subject to options
granted to the executive officers of the Company, as a group, the vesting of
which will become automatically accelerated concurrently with the completion
of the Offering.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the Company's authorized capital
stock will consist of 100,000,000 shares of Common Stock, par value $.01 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share.
COMMON STOCK
As of March 31, 1997, there were 2,227,816 shares of Common Stock issued and
outstanding, and held of record by four shareholders. There will be 3,677,816
shares outstanding after giving effect to the sale of shares of Common Stock
offered hereby (3,795,316 if the Underwriters' over-allotment options are
exercised in full). The holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. Cumulative voting
of shares of Common Stock is prohibited, which means that the holders of a
majority of shares voting for the election of directors can elect all members of
the Board of Directors. Except as otherwise required by applicable law, a
majority vote is sufficient for any act of shareholders. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, subject to the payment of any preferential dividends with respect to
any Preferred Stock that from time to time may be outstanding. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of the holders of any
outstanding Preferred Stock. The holders of Common Stock have no preemptive or
conversion rights or other subscription rights, and there are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable, and all of the shares
of Common Stock offered hereby, when issued, will be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock in one or more series and to fix the designations, relative
powers, preferences, rights, qualifications, limitations and restrictions of all
shares of each such series, including, without limitation dividend rates,
preemptive rights, conversion rights, voting rights, redemption and sinking fund
provisions, liquidation preferences and the number of shares constituting each
such series, without any further vote or action by the shareholders. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or adversely affect the
rights and powers, including voting rights, of the holders of Common Stock. The
issuance of Preferred Stock also could have the effect of delaying, deferring or
preventing a change in control of the Company, including transactions in which
the shareholders might otherwise receive a premium for their shares over the
then current market price, and may adversely affect the market price of the
Common Stock. At present, the Company has no plans to issue any shares of
Preferred Stock.
REPRESENTATIVE'S WARRANT
The Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Representative's Warrant to purchase up to 145,000
shares of Common Stock at an exercise price equal to 120% of the initial price
of the Common Stock being offered hereby to the public. The Representative has
certain demand and "piggy-back" registration rights that may require the Company
to register for resale the shares of Common Stock issuable under the
Representative's Warrant. The Representative's Warrant is exercisable for a
period of four years, beginning one year from the date of this Prospectus. See
"Underwriting."
56
<PAGE>
CERTAIN ANTI-TAKEOVER MATTERS
Upon the consummation of the Offering, there will be 96,322,184 authorized
and unissued shares of Common Stock and 10,000,000 authorized and unissued
shares of Preferred Stock. The existence of authorized but unissued Common Stock
and Preferred Stock may enable the Board of Directors to render more difficult
or to discourage an attempt to obtain control of the Company by means of a
merger, tender offer, proxy solicitation or otherwise. For example, if in the
due exercise of its fiduciary obligations, the Board of Directors were to
determine that a takeover proposal is not in the Company's best interest, the
Board of Directors could cause shares of Common Stock or Preferred Stock to be
issued without shareholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquiror or insurgent shareholder or shareholder group or create a substantial
voting block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors. In this regard, the Company's
Restated Articles of Incorporation grant the Board of Directors broad power to
establish the rights, preferences and privileges of authorized and unissued
Preferred Stock without shareholder approval. The issuance of shares of
Preferred Stock pursuant to the Board of Director's authority described above
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of such holders. The issuance of Common Stock or Preferred Stock
could also have the effect of delaying, deferring or preventing a change in
control of the Company, including transactions in which the shareholders might
otherwise receive a premium for their shares over the then current market price,
and may adversely affect the market price of the Common Stock. The Board of
Directors does not currently intend to seek shareholder approval prior to any
issuance of Common Stock or Preferred Stock, unless otherwise required by law.
The Company also is subject to prior regulatory approval by the FCC and
various state regulatory agencies for a transfer of control of the Company or
for the assignment of the Company's intrastate certification authority and its
international authority. The 1934 Communications Act provides that non-U.S.
citizens, foreign governments or their representatives or corporations organized
under the laws of a foreign country may not own in the aggregate more than 20%
of a company that owns common carrier radio licenses such as the Company. In
addition, because the Company holds FCC authority to provide international
service, the FCC will scrutinize an ownership interest in the Company of greater
than 25%, or a controlling interest at any level, by a dominant foreign carrier.
International carriers, such as the Company, must notify the FCC 60 days in
advance of an acquisition of a 10% or greater interest by a foreign carrier in
such carriers. Furthermore, the Company's bank loan agreement provides that an
event of default thereunder will occur if all or a controlling interest in the
Company's capital stock is sold, assigned or otherwise transferred. Any of the
foregoing factors could have the effect of delaying, deferring or preventing a
change of control of the Company. See "--Preferred Stock" and
"Business--Government Regulation."
TRANSFER AGENT AND REPORTS
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust Incorporated.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 3,677,816
shares of Common Stock, assuming no exercise of options or warrants after the
date of this Prospectus. Of these shares, all 1,450,000 shares offered hereby
(1,667,500 shares if the Underwriters' over-allotment options are exercised in
full) will be freely tradeable in the public market without restriction unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. The remaining 2,227,816 shares of Common Stock
outstanding upon completion of the Offering are "restricted securities" as that
term is defined in Rule 144.
The executive officers and directors of the Company, who as of the date of
this Prospectus held an aggregate of 2,225,008 shares of Common Stock and
options to purchase an aggregate of 146,695 shares, all of which will be
currently exercisable upon closing of the Offering, have entered into lock-up
agreements (collectively, the "Lock-Up Agreements") with the Representative
pursuant to which such persons have agreed not to sell any of such shares of
Common Stock owned by such persons pursuant to Rule 144 under the Securities Act
or otherwise, without the prior written consent of the Representative, for a
period of one year from the date of this Prospectus. The Representative has
informed the Company that it does not intend to reduce or eliminate the lock-up
period.
Upon expiration of the one-year lock-up period, approximately 2,225,008
additional shares of Common Stock will be eligible for sale subject to the
timing, volume and manner of sale restrictions of Rule 144. The 2,808 remaining
restricted shares held by an existing shareholder will become eligible for sale
at various times over a period of less than one year. In addition, 13,919 shares
subject to outstanding vested stock options under the Incentive Stock Option
Plan, if exercised, will become eligible for sale 90 days after the
effectiveness of the Offering and, upon expiration of certain Lock-Up
Agreements, an additional 146,695 shares subject to outstanding stock options
under the Incentive Stock Option Plan (including unvested options the vesting of
which will become automatically accelerated upon completion of the Offering),
along with 130,000 shares subject to outstanding stock options under the 1997
Stock Option Plan (which are not subject to Lock-Up Agreements), if exercised
once vested, will be eligible for sale, in each case subject to the restrictions
of Rule 701 unless sold pursuant to an effective registration statement under
the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year, including
persons who may be deemed to be "affiliates" of the Company as that term is
defined under Rule 144, would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock (36,778 shares after the
Offering) or the average weekly trading volume in the Nasdaq National Market
during the four calendar weeks preceding the date on which the notice of the
sale is filed with the SEC. Sales by affiliates and beneficial owners of
restricted securities held for less than two years may not be made under Rule
144 until 90 days after the date of this Prospectus and are subject to the
foregoing volume limitations and to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is not an affiliate of the Company at any time
within 90 days preceding a sale and who has beneficially owned shares for at
least two years would be entitled immediately, upon the date of this Prospectus,
to sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, notice and current public information requirements.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after an issuer
becomes subject to the reporting requirements of the Exchange Act (which will
occur upon completion of the Offering) in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirements,
contained in Rule 144.
The Company, which has granted outstanding options to acquire 160,614 shares
under the Incentive Stock Option Plan, does not intend to grant any additional
options under that plan. There are also
58
<PAGE>
(i) 300,000 shares of Common Stock reserved for issuance under the 1997 Stock
Option Plan, of which options to acquire 130,000 shares of Common Stock were
outstanding as of the date of this Prospectus at an average exercise price per
share equal to the initial price of the Common Stock being offered to the public
hereby, (ii) 100,000 shares of Common Stock reserved for issuance under the 1997
Director Option Plan and (iii) 145,000 shares of Common Stock subject to the
Representative's Warrant. The Company intends to file a registration statement
after the Offering on Form S-8 under the Securities Act to register the 560,614
shares of stock issuable under the Company's stock option plans. See
"Management--Benefit Plans." Shares issued upon exercise of options after the
effective date of such registration statement generally will be eligible for
sale in the open market, subject to expiration of certain Lock-Up Agreements. In
addition, the Representative will receive demand and "piggy-back" registration
rights in connection with the issuance of the Representative's Warrant.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act (except
for shares purchased by affiliates of the Company) immediately upon the
effective date of such registration. If the holder or holders of the
Representative's Warrant exercise a demand registration right, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to include in a Company-initiated registration such shares
pursuant to the exercise of piggy-back registration rights, such sales may have
an adverse effect on the Company's ability to raise additional capital. The
Representative's Warrant may not be exercised until the first anniversary of the
date of this Prospectus. See "Description of Capital Stock--Representative's
Warrant" and "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sales, will have on
the market price of the Common Stock. Sales of a substantial number of shares of
Common Stock in the public market following the Offering, or the perception that
such sales could occur, could adversely affect the market price of the Company's
Common Stock.
59
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated is
acting as the Representative, have agreed severally, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions, and that the Underwriters are committed to purchase all of
such shares (other than those covered by the over-allotment options described
below), if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated..................................................... 750,000
Robert W. Baird & Co. Incorporated............................................... 70,000
Hanifen, Imhoff Inc.............................................................. 70,000
Howe Barnes Investments Inc...................................................... 70,000
John G. Kinnard & Company, Incorporated.......................................... 70,000
Principal Financial Securities, Inc.............................................. 70,000
Sands Brothers & Co., Ltd........................................................ 70,000
Scott & Stringfellow, Inc........................................................ 70,000
Southcoast Capital Corp.......................................................... 70,000
Stephens Inc..................................................................... 70,000
Wheat, First Securities, Inc..................................................... 70,000
----------
Total.......................................................................... 1,450,000
----------
----------
</TABLE>
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price reflected on the cover page of this Prospectus and to selected securities
dealers at such price less a concession not exceeding $0.25 per share. The
Underwriters may allow, and such dealers may reallow, a concession not exceeding
$0.10 per share to other dealers. After the public offering of the shares of
Common Stock, the public offering price and other offering terms may be changed.
No change in such terms shall change the amount of proceeds to be received by
the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an over-allotment option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 117,500 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less the underwriting
discounts and commissions. Ignatius W. Leonards, the Company's Chief Executive
Officer, Chairman of the Board and a director, also has granted the Underwriters
an over-allotment option, exercisable during the 45-day period after the date of
this Prospectus, to purchase up to 100,000 shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus less the
underwriting discounts and commissions. The Underwriters may exercise the
over-allotment options only to cover over-allotments in the sale of the Common
Stock offered hereby. If the Underwriters exercise the over-allotment options,
the Underwriters will purchase additional shares in approximately the same
proportion from the Company and the Selling Shareholder as the shares set forth
in the above table.
In connection with the Offering, the Company has agreed to issue to the
Representative the Representative's Warrant to purchase up to 145,000 shares of
Common Stock. The Representative's Warrant is exercisable for a period of four
years, beginning one year from the date of this Prospectus. The Representative's
Warrant is exercisable at an exercise price equal to 120% of the initial price
of the Common Stock being offered hereby to the public. The Representative's
Warrant is nontransferable, except (i) to officers of the Representative, (ii)
to general partnerships, the general partners of which are the Representative
and one or more persons, each of whom on the date of transfer is an officer of
the
60
<PAGE>
Representative, (iii) a successor to the Representative in any merger or
consolidation, (iv) to a purchaser of all or substantially all of the
Representative's assets or (v) after one year from the effective date of this
Prospectus, to any person receiving the Representative's Warrant from the
persons listed in (i)-(iv). The holders of the Representative's Warrant will
have, in that capacity, no voting, dividend or other shareholder rights. During
the exercise period, the holders of the Representative's Warrant are entitled to
certain demand and "piggy-back" registration rights which will expire five years
after the date of this Prospectus and which may require the Company to register
for public resale the shares of Common Stock issuable under the Representative's
Warrant. The number of shares covered by the Representative's Warrant and the
exercise price thereof are subject to adjustment in certain events to prevent
dilution. Any profit realized by the Representative on the sale of securities
issuable upon exercise of the Representative's Warrant may be deemed to be
additional underwriting compensation.
The Representative also will receive at the closing of the Offering a
nonaccountable expense allowance equal to 3% of the aggregate public offering
price of the shares of Common Stock sold in the Offering including proceeds from
the over-allotment options, if exercised. The Representative's expenses in
excess of the non-accountable expense allowance, including its legal expenses,
will be borne by the Representative. To the extent that the expenses of the
Representative are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representative.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of shares of Common Stock.
Prior to the Offering, there has not been a public market for the Common
Stock. The public offering price of the Common Stock has been determined by
arm's-length negotiation between the Company and the Representative. Among the
factors that were considered by the Company and the Representative in pricing
the Common Stock were prevailing market conditions, the results of operations,
current financial condition and future prospects of the Company, the experience
of management, the amount of ownership to be retained by present shareholders,
the general condition of the economy and the demand for similar securities of
companies considered comparable to the Company.
Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid, or the effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member in connection
with the Offering are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-counter
market, or otherwise. Such stabilizing, if commenced, may be discontinued at any
time.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof. Copies of the Underwriting Agreement are on file
at the offices of the Representative, the Company and the SEC. See "Additional
Information."
61
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Munsch Hardt Kopf Harr & Dinan, P.C., Dallas, Texas. Certain legal
matters in connection with the Common Stock offered hereby will be passed upon
for the Underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.
EXPERTS
The consolidated financial statements of IWL Communications, Incorporated at
June 30, 1995 and 1996 and at March 31, 1997 and for each of the three years
ended June 30, 1996 and the nine months ended March 31, 1997, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. The Company has filed with the SEC a Registration Statement
(which term shall include any amendments thereto) on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the SEC.
For further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to such Registration Statement and exhibits.
Statements contained in this Prospectus as to the contents of any document are
not necessarily complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate document filed with the SEC. The
Registration Statement, including the exhibits thereto, may be examined without
charge at the SEC's public reference facility at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of all or any
part of the Registration Statement, including such exhibits thereto, may be
obtained from the SEC at its principal office in Washington, D.C., upon payment
of the fees prescribed by the SEC.
The Registration Statement and the reports and other information to be filed
by the Company following the Offering in accordance with the Exchange Act can be
inspected and copied at the principal office of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the SEC: 7 World Trade Center, New York, NY 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60601. Copies of such material may be obtained from the Public Reference Section
of the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the SEC. The SEC maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the SEC.
The Company intends to provide its shareholders with annual reports
containing consolidated financial statements audited by independent auditors and
quarterly reports for the first three fiscal quarters of each year containing
unaudited summary consolidated financial information.
62
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at June 30, 1995 and 1996 and March 31, 1997.............. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1994, 1995 and 1996
and for the Nine Months Ended March 31, 1996 (Unaudited) and 1997................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1994,
1995 and 1996 and for the Nine Months Ended March 31, 1997.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and 1996
and for the Nine Months Ended March 31, 1996 (Unaudited) and 1997................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IWL Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of IWL
Communications, Inc. and Subsidiaries (the Company) as of June 30, 1995 and 1996
and March 31, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996 and the nine months ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IWL Communications, Inc. and Subsidiaries as of June 30, 1995 and 1996 and March
31, 1997 and the results of their operations and their cash flows for each of
the years in the three-year period ended June 30, 1996 and the nine months ended
March 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 5, 1997, except as to
Note 15, which is as
of May 27, 1997
F-2
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1995 1996 1997
----------- ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 290,629 $ 360,930 $ 340,134
Accounts receivable:
Trade, less allowance for doubtful accounts of $27,981, $74,513 and $53,125,
respectively............................................................... 2,028,368 5,501,317 4,413,176
Affiliate.................................................................... 22,849 73,234 89,418
Other........................................................................ 22,738 7,172 51,381
Notes receivable--trade, current portion....................................... 329,354 230,429 79,866
Inventory...................................................................... 598,358 851,380 2,084,753
Costs and estimated earnings in excess of billings on uncompleted contracts.... 2,881 135,675 192,740
Deferred tax asset--current.................................................... 27,673 74,659 91,991
Prepaid expenses and deposits.................................................. 132,208 132,266 372,367
----------- ------------ -------------
Total current assets....................................................... 3,455,058 7,367,062 7,715,826
----------- ------------ -------------
Property, plant and equipment.................................................... 7,163,812 8,385,538 12,526,632
Accumulated depreciation....................................................... (3,038,446) (3,894,863) (4,760,230)
----------- ------------ -------------
Net property, plant and equipment.......................................... 4,125,366 4,490,675 7,766,402
----------- ------------ -------------
Investment in unconsolidated subsidiary.......................................... 323,026 297,153 415,247
Notes receivable--trade, noncurrent portion...................................... 277,528 112,118 70,775
Deferred offering costs.......................................................... -- -- 134,825
Other assets..................................................................... 51,366 142,330 215,190
----------- ------------ -------------
Total assets............................................................... $ 8,232,344 $ 12,409,338 $ 16,318,265
----------- ------------ -------------
----------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current portion................................................. $ 2,262,932 $ 997,904 $ 1,110,857
Trade accounts payable and accrued expenses.................................... 1,145,165 3,907,185 4,231,791
Customer deposits.............................................................. 61,301 388,993 102,139
Federal income taxes payable................................................... -- 37,418 17,227
Deferred revenue--current portion.............................................. 250,962 175,977 136,154
Billings in excess of costs and estimated earnings on uncompleted contracts.... -- 48,892 133,659
----------- ------------ -------------
Total current liabilities.................................................. 3,720,360 5,556,369 5,731,827
----------- ------------ -------------
Notes payable, noncurrent portion................................................ 1,328,594 2,943,837 6,150,996
Deferred revenue, noncurrent portion............................................. 122,122 66,748 13,485
Deferred income taxes............................................................ 106,576 144,034 225,255
----------- ------------ -------------
Total liabilities.......................................................... 5,277,652 8,710,988 12,121,563
----------- ------------ -------------
Stockholders' equity:
Common stock, $.01 par value. 100,000,000 authorized; 2,222,200, 2,225,008 and
2,227,816 issued and outstanding at June 30, 1995 and 1996, and March 31,
1997, respectively........................................................... 22,222 22,250 22,278
Additional paid-in capital..................................................... 249,658 259,626 269,595
Retained earnings.............................................................. 2,682,812 3,416,474 3,904,829
----------- ------------ -------------
Total stockholders' equity................................................. 2,954,692 3,698,350 4,196,702
Commitments and contingencies
----------- ------------ -------------
Total liabilities and stockholders' equity................................. $ 8,232,344 $ 12,409,338 $ 16,318,265
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------------------------- -----------------------------
1994 1995 1996 1997
-------------- ------------- -------------- 1996 --------------
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Telecom and carrier...................... $ 13,642,478 $ 14,565,699 $ 15,683,375 $ 11,600,111 $ 14,150,927
Land mobile.............................. 1,217,501 1,228,375 1,558,858 1,297,886 2,256,482
Product resales.......................... -- -- 10,553,846 3,450,181 7,201,680
-------------- ------------- -------------- ------------- --------------
Total sales............................ 14,859,979 15,794,074 27,796,079 16,348,178 23,609,089
Cost of sales (exclusive of items shown
separately below)........................ (10,071,384) (9,639,347) (10,743,266) (7,915,282) (10,742,057)
Cost of sales--product resales............. -- -- (9,672,078) (3,104,169) (6,615,986)
-------------- ------------- -------------- ------------- --------------
Gross profit........................... 4,788,595 6,154,727 7,380,735 5,328,727 6,251,046
Selling expenses........................... 892,452 862,183 842,038 627,626 831,908
General and administrative expenses........ 3,178,101 3,537,004 4,257,067 3,014,831 3,513,910
Depreciation and amortization.............. 570,770 820,957 1,003,296 733,016 982,600
-------------- ------------- -------------- ------------- --------------
Income from operations................. 147,272 934,583 1,278,334 953,254 922,628
-------------- ------------- -------------- ------------- --------------
Other income (expense):
Interest income.......................... 33,604 52,036 46,300 40,773 23,679
Interest expense......................... (248,827) (296,299) (316,412) (247,862) (362,060)
Equity in earnings (loss) of
unconsolidated subsidiary.............. 17,198 105,829 (25,873) (6,810) 68,094
Gain from sale of assets................. 212,457 24,926 67,021 86,616 64,699
Other.................................... 23,424 8,123 -- -- --
-------------- ------------- -------------- ------------- --------------
Total other income (expense)........... 37,856 (105,385) (228,964) (127,283) (205,588)
-------------- ------------- -------------- ------------- --------------
Income before income taxes............. 185,128 829,198 1,049,370 825,971 717,040
Income tax expense......................... 41,304 293,557 315,708 285,264 228,685
-------------- ------------- -------------- ------------- --------------
Net income............................. $ 143,824 $ 535,641 $ 733,662 $ 540,707 $ 488,355
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Net income per share....................... $ 0.07 $ 0.24 $ 0.33 $ 0.24 $ 0.22
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
Weighted average shares outstanding........ 2,011,160 2,232,751 2,232,967 2,232,751 2,233,846
-------------- ------------- -------------- ------------- --------------
-------------- ------------- -------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- --------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993........... 2,000,000 $ 20,000 $ 231,028 $ 2,003,347 $ (296,136) $ 1,958,239
Issuance of stock................... 222,200 2,222 314,766 -- -- 316,988
Retirement of treasury stock........ -- -- (296,136) -- 296,136 --
Net income for the year............. -- -- -- 143,824 -- 143,824
---------- --------- ---------- ------------ ----------- ------------
Balances at June 30, 1994........... 2,222,200 22,222 249,658 2,147,171 -- 2,419,051
Net income for the year............. -- -- -- 535,641 -- 535,641
---------- --------- ---------- ------------ ----------- ------------
Balances at June 30, 1995........... 2,222,200 22,222 249,658 2,682,812 -- 2,954,692
Issuance of stock................... 2,808 28 9,968 -- -- 9,996
Net income for the year............. -- -- -- 733,662 -- 733,662
---------- --------- ---------- ------------ ----------- ------------
Balances at June 30, 1996........... 2,225,008 22,250 259,626 3,416,474 -- 3,698,350
Issuance of stock................... 2,808 28 9,969 -- -- 9,997
Net income for the period........... -- -- -- 488,355 -- 488,355
---------- --------- ---------- ------------ ----------- ------------
Balance at March 31, 1997........... 2,227,816 $ 22,278 $ 269,595 $ 3,904,829 $ -- $ 4,196,702
---------- --------- ---------- ------------ ----------- ------------
---------- --------- ---------- ------------ ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
------------------------------------- ------------------------
1994 1995 1996 1997
----------- ----------- ----------- 1996 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 143,824 $ 535,641 $ 733,662 $ 540,707 $ 488,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 570,770 820,957 1,003,296 733,016 982,600
Gain from sale of assets............................. (212,457) (24,926) (67,021) (86,616) (64,699)
Deferred income taxes................................ (70,007) 78,903 (9,528) (23,671) 57,943
Equity in earnings (loss) of unconsolidated
subsidiary......................................... (17,198) (105,829) 25,873 (6,810) (68,094)
Changes in operating assets and liabilities:
Accounts receivable................................ (1,053,588) (296,166) (3,903,405) (4,195,127) 1,027,748
Inventory.......................................... 450,091 374,297 (253,022) 146,568 (1,233,373)
Costs and estimated earnings in excess of bilings.. -- (2,881) (132,794) 2,881 (57,065)
Prepaid expenses and other current assets.......... 17,412 (43,997) (58) (57,540) (240,101)
Other assets....................................... (85,260) 32,274 (101,611) (86,804) (66,914)
Trade accounts payable and accrued expenses........ 72,128 (640,238) 2,762,020 3,095,294 324,606
Customer deposits.................................. 179,511 (118,485) 327,692 79 (286,854)
Deferred revenues...................................... (486,904) 177,296 (130,359) 1,449,863 (93,086)
Billings in excess of costs and estimated
earnings......................................... -- -- 48,892 -- 84,767
Federal income taxes payable....................... (19,060) (90,559) 37,418 180,278 (20,191)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities........ (510,738) 696,287 341,055 1,692,118 835,642
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment............. (1,439,110) (1,585,103) (1,492,487) (1,039,850) (3,481,281)
Proceeds from disposals of property, plant, and
equipment............................................ 179,290 70,525 201,550 91,355 88,901
Proceeds from notes receivable......................... 476,916 283,755 659,972 535,267 191,906
Investment in unconsolidated subsidiary................ (200,000) -- -- -- (50,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities..................................... (982,904) (1,230,823) (630,965) (413,228) (3,250,474)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from debt..................................... 1,483,624 2,350,729 8,352,398 1,514,030 3,471,080
Debt payments.......................................... (336,904) (1,496,470) (8,002,183) (2,423,417) (952,216)
Proceeds from issuance of common stock................. 316,988 -- 9,996 -- 9,997
Decrease in cash overdraft............................. (41,888) (29,094) -- -- --
Deferred offering costs................................ -- -- -- -- (134,825)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... 1,421,820 825,165 360,211 (909,387) 2,394,036
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash for period............... (71,822) 290,629 70,301 369,503 (20,796)
Cash and cash equivalents at beginning of period......... 71,822 -- 290,629 290,629 360,930
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............... $ -- $ 290,629 $ 360,930 $ 660,132 $ 340,134
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest................................. $ 261,500 $ 317,404 $ 298,546 $ 178,424 $ 332,145
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cash paid for income taxes............................. $ 109,619 $ 367,267 $ 150,866 $ 42,571 $ 91,589
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Conversion of accounts receivable to notes receivable.... $ 558,654 $ 331,983 $ 395,637 -- --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Issuance of debt for property, plant and equipment....... -- -- -- -- $ 801,248
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company provides communications solutions to customers with operations
in remote, difficult-access regions and in areas around the world where
government deregulation has created new market opportunities. The Company
delivers communications services to its customers by utilizing a broad range of
analog and digital technologies, including satellite, microwave radio,
conventional two-way radio and fiber optic cable. The Company has operations in
Friendswood and Houston, Texas, New Orleans and Lafayette, Louisiana and Moscow,
Russia.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of IWL
Communications, Inc. and its wholly-owned subsidiaries, Spacelink Systems, Inc.,
Spacelink Systems FSC, Inc. and IWL Communications Ltd. (Russia). All material
intercompany accounts and transactions have been eliminated. The Company's
investment in and operating results of Kenwood Systems Group, which is a 50%
owned entity, are included in the accompanying financial statements on the basis
of the equity method of accounting.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company performs credit evaluations of its customers, but does not
require collateral.
MAJOR CUSTOMERS AND SUPPLIERS
For the nine months ended March 31, 1997, approximately $9,104,496 (39%) of
the Company's sales were from one customer. At March 31, 1997, accounts
receivable-trade included balances of approximately $1,393,000 and $325,000 from
two of the Company's major customers.
The majority of these sales ($7,201,680) were attributable to a one-time
project, which includes a significant equipment resale component, that the
Company expects will be substantially completed in fiscal 1997 and, therefore,
is not expected to contribute in a material manner to the Company's revenue in
future periods.
The Company purchases substantially all of its telecommunications equipment
for use in the oil and gas industry from one supplier pursuant to an exclusive
distributorship agreement.
INVENTORY
Inventory substantially consists of parts and equipment held for resale.
Inventory that can be specifically identified using a unique identification
number is stated at the lower of specific cost or market. Inventory that cannot
be specifically identified is stated at the lower of cost or market where cost
is determined using the first in-first out method. Market value, in all cases,
represents the lower of replacement cost or net realizable value.
F-7
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT/DEPRECIATION
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as indicated
below:
<TABLE>
<S> <C>
Buildings and improvements...................................... 7-31 years
Vehicles........................................................ 5 years
Furniture and fixtures.......................................... 5-7 years
Leasehold improvements.......................................... Lease term
Equipment for rent/lease........................................ 7-10 years
Computers, office and test equipment............................ 5-7 years
</TABLE>
Significant expenditures that add materially to the utility or useful lives
of property, plant and equipment are capitalized. All other maintenance and
repair costs are charged to current operations. The cost and related accumulated
depreciation of assets replaced, retired or otherwise disposed of are eliminated
from the property accounts and any gain or loss is reflected as other income and
expense.
REVENUE RECOGNITION
The Company provides services such as telecom and carrier services and land
mobile services whose revenue is recognized based on the monthly service
provided. Lease revenues from equipment rentals are recorded over the life of
the lease contract. Communication systems contracts are typically fixed price
and revenue is recognized based on the percentage-of-completion method,
primarily based on contract cost incurred to date compared with total estimated
contract costs. Estimated costs and estimated earnings or losses, if any, are
recognized in excess of amounts billed and are classified as current assets. It
is anticipated that the incurred costs associated with work in progress at the
end of the respective periods will be billed and collected within the next year.
Amounts received from clients in excess of revenues recognized to date are
classified as current liabilities.
The following are components of revenues for the respective periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Service Revenue...................... $ 11,559,422 $ 10,004,504 $ 10,711,342 $ 8,030,811 $ 10,515,917
Rental Revenue....................... 3,300,557 5,789,570 6,530,891 4,867,186 5,891,492
Product Resales Revenue.............. -- -- 10,553,846 3,450,181 7,201,680
------------- ------------- ------------- ------------- -------------
$ 14,859,979 $ 15,794,074 $ 27,796,079 $ 16,348,178 $ 23,609,089
</TABLE>
Both telecom and carrier and landmobile revenues are comprised of service
and rental activities.
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to
F-8
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 commencing in its June 30, 1997 financial statements.
The effect of applying the requirements of SFAS No. 123 is not considered to be
material to the financial statements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rate and laws that will be in
effect when the differences are expected to reverse.
The provision for income taxes includes federal, foreign, state and local
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
FAIR VALUE
The Company believes that the carrying amounts of its current assets and
current liabilities approximate the fair value of such items due to their
short-term nature. The carrying amount of long-term notes payable approximates
its fair value because interest rates approximate market.
ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the nine months ended March 31,
1996 are unaudited. In the opinion of the Company, the unaudited consolidated
financial statements for the nine months ended March 31, 1996, include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods.
NET INCOME PER SHARE
Net income per common share is based on the weighted average number of
common stock outstanding during the respective periods adjusted for common stock
equivalents when dilutive and significant except as described below. Pursuant to
certain Securities and Exchange Commission (SEC) Staff Accounting Bulletins,
common stock issued for consideration below the initial public offering (IPO)
price and stock options and warrants granted with exercise prices below the IPO
price during the 12-month period prior to the date of the initial filing of the
Registration Statement, even when antidulitive, have been included in
F-9
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the calculation of net income per share, using the treasury stock method based
on the IPO price, as if they were outstanding for all periods presented prior to
their issuance or grant.
Fully diluted earnings per share are not presented for 1994, 1995, 1996 and
1997 because they do not materially differ from primary earnings per share.
On November 1, 1995, the Board of Directors declared a two hundred-for-one
common stock split effective November 1, 1995. All share amounts and numbers of
shares have been restated to reflect the stock split.
(2) NOTES RECEIVABLE
Notes receivable due from customers on the sale of communications equipment
at June 30, 1995, June 30, 1996 and March 31, 1997 were as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Note dated May 1, 1996, at 10.5% interest, with the first 12
monthly payments of principal and interest of $18,243, and the
next 24 monthly payments of principal and interest of $5,377.... $ -- $ 297,352 $ 150,641
Note dated November 16, 1994, at 12.5% interest, with 24 fixed
monthly payments of principal and interest of $9,461. Note was
paid in full December 1996...................................... 146,120 45,195 --
Note dated May 1, 1994, at 10.0% interest, with 36 fixed monthly
payments of principal and interest of $18,136. Note was paid in
full December 1995.............................................. 373,273 -- --
Note dated June 30, 1994, at 10.0% interest, with 36 fixed monthly
payments of principal and interest of $1,819. Note was paid in
full December 1995.............................................. 39,408 -- --
Note dated August 31, 1994, at 10.0% interest, with 36 fixed
monthly payments of principal and interest of $2,065. Note was
paid in full December 1995...................................... 48,081 -- --
---------- ---------- -----------
606,882 342,547 150,641
Less current portion.............................................. 329,354 230,429 79,866
---------- ---------- -----------
$ 277,528 $ 112,118 $ 70,775
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-10
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts.............................. $ 163,459 271,100 527,588
Estimated earnings................................................... 48,826 127,332 180,572
---------- --------- ----------
212,285 398,432 708,160
Less: Billings to date............................................... 209,404 311,649 649,079
---------- --------- ----------
$ 2,881 86,783 59,081
---------- --------- ----------
---------- --------- ----------
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ $ 2,881 135,675 192,740
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ 0 (48,892) (133,659)
---------- --------- ----------
$ 2,881 86,783 59,081
---------- --------- ----------
---------- --------- ----------
</TABLE>
(4) INVESTMENT IN KENWOOD SYSTEMS GROUP
The Company owns 50% of the voting common stock of Kenwood Systems Group,
Inc. (KSG), a California corporation. The remaining 50% of the voting common
stock is owned by Kenwood Americas Corporation (KAC). The Company and KAC are
the original owners of KSG which began operations on May 1, 1994. KSG engineers
and fabricates turnkey solutions of 800 and 900 MHz trunk radio systems under
the Kenwood brand name.
The investment is recorded using the equity method in which the original
investment, adjusted for the Company's proportionate share of KSG's income,
losses and dividend distributions, is recorded as a long-term investment. The
Company's original investment in KSG was $200,000. An additional investment of
$50,000 was made during the nine months ended March 31, 1997. The Company's
proportionate share of KSG's (losses)/earnings for the years ended June 30,
1994, 1995 and 1996 were $17,198, $105,829 and ($25,873), respectively. The
Company's proportionate share of KSG's (losses)/earnings for the nine months
ended March 31, 1996 and 1997 were ($6,810) (unaudited) and $68,094,
respectively.
The Company receives a management fee from KSG equal to 2% of gross sales
that is paid quarterly. For the years ended June 30, 1994, 1995 and 1996, the
Company earned a management fee of $15,820, $59,995, and $58,253, respectively.
The Company earned management fees for the nine months ended March 31, 1996 and
1997 of $46,735 and $56,988, respectively. In addition, KSG is covered by
worker's compensation, property, medical, dental and general liability insurance
policies maintained by the Company. KSG also purchases various supplies and
computer equipment from the Company from time to time. Employees of KSG are
eligible to participate in a 401(k) plan maintained by the Company. Billings by
the Company to KSG for the nine months ended March 31, 1997 for insurance,
supplies, equipment and management fees totaled approximately $152,000. At June
30, 1995 and 1996, $22,849 and $73,234 is included on the accompanying balance
sheets as account receivable-affiliate which is due from KSG. At March 31, 1997
$89,418 is included as account receivable-affiliate which is due from KSG.
F-11
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENT IN KENWOOD SYSTEMS GROUP (CONTINUED)
Pertinent financial data (unaudited) of KSG, at or for the years ended June
30, 1995, June 30, 1996 and the nine months ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Total assets........................................ $ 1,095,449 $ 1,248,217 $ 2,089,358
------------ ------------ ------------
------------ ------------ ------------
Stockholders' equity................................ $ 646,053 $ 594,307 $ 846,819
------------ ------------ ------------
------------ ------------ ------------
Revenues............................................ $ 2,999,745 $ 2,912,637 $ 2,888,493
------------ ------------ ------------
------------ ------------ ------------
Net earnings (loss)................................. $ 211,660 $ (51,746) $ 136,189
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(5) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND NET THE
PERIOD EXPENSES OF RECOVERIES END OF PERIOD
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1994................................ $ 110,000 $ -- $ (25,000) $ 85,000
Year ended June 30, 1995................................ 85,000 29,510 (86,529) 27,981
Year ended June 30, 1996................................ 27,981 46,532 -- 74,513
Nine months ended March 31, 1997........................ 74,513 -- (21,388) 53,125
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1995, June 30, 1996 and March 31,
1997 was as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Land................................................................ $ 41,046 $ 41,046 $ 41,046
Equipment for Rent/Lease............................................ 5,932,122 6,355,557 9,816,527
Building and Improvements........................................... 418,473 456,355 740,252
Computer, Office and Test Equipment................................. 371,032 889,326 1,065,853
Vehicles............................................................ 257,506 475,353 570,716
Furniture and Fixtures.............................................. 143,633 167,901 292,238
------------ ------------ -------------
7,163,812 8,385,538 12,526,632
Accumulated depreciation and amortization
Equipment for Rent/Lease............................................ 2,614,179 3,316,813 3,979,624
Building and Improvements........................................... 124,187 144,548 162,306
Computer, Office and Test Equipment................................. 34,686 100,283 216,686
Vehicles............................................................ 187,953 234,601 277,152
Furniture and Fixtures.............................................. 77,441 98,618 124,462
------------ ------------ -------------
3,038,446 3,894,863 4,760,230
------------ ------------ -------------
Net property, plant and equipment..................................... $ 4,125,366 $ 4,490,675 $ 7,766,402
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-12
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: provision of advanced
communication solutions. The Company markets and sells its products and services
in the United States and in foreign countries through its direct sales
organization.
The following table presents information about the Company by geographic
area. Export sales and certain income and expense items are reported in the
geographic area where the transaction originates. Substantially all identifiable
assets of the Company are held in the United States.
All significant transactions and agreements of the Company are conducted in
U.S. dollars; therefore, no foreign currency translation gains or losses are
included in the accompanying financial statements.
<TABLE>
<CAPTION>
NORTH
AMERICA RUSSIA OTHER TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
FOR THE YEAR ENDED JUNE 30,
1994:
Revenues................................................................ $ 12,251 $ 2,194 $ 415 $ 14,860
Operating income (loss)................................................. 132 (92) 107 147
Identifiable assets..................................................... 7,437 -- -- 7,437
1995:
Revenues................................................................ 11,956 3,262 576 15,794
Operating income (loss)................................................. 520 190 225 935
Identifiable assets..................................................... 8,232 -- -- 8,232
1996:
Revenues................................................................ 25,306 2,281 209 27,796
Operating income (loss)................................................. 908 436 (66) 1,278
Identifiable assets..................................................... 12,409 -- -- 12,409
FOR THE NINE MONTHS ENDED MARCH 31, 1997:
Revenues................................................................ 22,057 1,256 296 23,609
Operating income (loss)................................................. 411 375 137 923
Identifiable assets..................................................... 16,318 -- -- 16,318
</TABLE>
(8) NOTES PAYABLE AND FINANCING ARRANGEMENTS
Borrowing under the Company's credit facility and long-term notes payable at
June 30, 1995, June 30, 1996 and March 31, 1997 consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to bank, principal and interest due monthly in
the amount of $22,500, interest at 9.0%, due in November
2001, secured by specific underlying equipment.............. $ -- $ -- $ 1,260,000
Notes payable to finance company, principal and interest due
monthly in the amount of $3,520, interest at 8.5%, due in
September 1999, secured by specific underlying equipment.... -- -- 92,250
</TABLE>
F-13
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Borrowings under a revolving credit facility, bearing interest
at prime plus .75% (9.25% at March 31, 1997), due in
December 1998, secured by specific underlying accounts
receivable, equipment and inventory. Maximum borrowings are
$4,500,000 under the facility. The weighted average interest
rate was 9.1% for the nine months ended March 31, 1997...... -- 1,426,598 2,843,051
Note payable to finance company, principal and interest due
monthly in the amount of $9,200, interest at 6.75%, due in
July 2007, secured by specific underlying equipment......... -- -- 801,248
Note payable to bank, principal due monthly in the amount of
$15,833, plus interest at prime plus .75% (9.25% at March
31, 1997), due in December 1998, secured by specific
underlying equipment........................................ -- 870,835 728,338
Note payable to bank, principal due monthly in the amount of
$24,306, plus interest at prime plus 1% (9.5% at March 31,
1997), due in December 1997, secured by specific underlying
accounts receivable, equipment and inventory................ 731,900 440,233 174,515
Note payable to leasing company, principal and interest due
monthly in the amount of $13,699, interest at 10.7%, due in
February 1998, secured by specific underlying equipment..... 376,913 247,040 139,944
Note payable to mortgage company, varying principal and
interest due monthly ($1,669 at March 31, 1997), principal
and interest adjusted quarterly to prime plus 2.5% (11.0% at
March 31, 1997, due in April 2015, secured by specific
underlying property......................................... 188,149 185,462 182,940
Note payable to bank, principal and interest due monthly in
the amount of $1,220, interest at prime plus .75% (9.25% at
March 31, 1997), due in December 1998, secured by specific
underlying property......................................... -- -- 172,584
Note payable to leasing company, principal and interest due
monthly in the amount of $5,595, interest at 9%, due in
December 1998, secured by specific underlying equipment..... -- 149,963 108,482
Note payable to finance company, principal and interest due
monthly in the amount of $3,180, interest at 10.2%, due in
February 2000, secured by specific underlying equipment..... -- 108,657 87,269
</TABLE>
F-14
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to bank, principal due monthly beginning July 1,
1997 in the amount of 2.1% of the amount outstanding plus
interest at prime plus .75% (9.25% at March 31, 1997), due
in December 1998, secured by specific underlying equipment
and inventory............................................... -- 90,473 500,000
Note payable to bank, principal due monthly in the amount of
$10,556 plus interest at prime plus 1% Note was fully paid
in February 1997............................................ 211,111 84,444 --
Note payable to leasing company, principal and interest due
monthly in the amount of $4,831, interest at 10%, due in
December 1997, secured by specific underlying equipment..... -- 84,210 45,712
Note payable to finance company, principal and interest due
monthly in the amount of $1,916, interest at 8.8%, due in
June 1999, secured by specific underlying equipment......... -- 56,203 42,146
Notes payable to individuals who are employees and relatives
of the principal shareholder, principal and interest due
monthly in the amount of $4,296, interest rates ranging from
9%-12%, due in August 2001, unsecured....................... 165,416 54,818 45,716
Note payable to bank, principal and interest due monthly in
the amount of $8,959, interest at 6.98%, due in December
1996, secured by a certificate of deposit................... 152,700 52,694 --
Note payable to benefit plan, principal and interest due
monthly in the amount of $5,500, interest at 10%, due in
February 1997, unsecured.................................... 101,845 43,399 --
Notes payable to bank, principal and interest due monthly in
the amount of $1,090, interest at 8.5%, due in March 1998,
secured by vehicles......................................... 30,623 19,735 10,942
Note payable to finance company, principal and interest due
monthly in the amount of $499, interest at 12.1%, due in
June 1999, secured by specific underlying equipment......... -- 14,777 11,820
Borrowings under a revolving credit facility, bearing interest
at prime plus 1%, due and paid on September 30, 1995........ 1,233,900 -- --
Note payable to bank, principal due monthly in the amount of
$17,708 plus interest at 7.93%. Note was fully paid in
December 1995............................................... 225,000 -- --
</TABLE>
F-15
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to bank, principal due monthly in the amount of
$3,712, plus interest at prime plus 1%. Note was fully paid
in December 1995............................................ 115,075 -- --
Note payable to finance company, principal and interest due
monthly in the amount of $1,671, interest at 12.5%. Note was
fully paid in December 1995................................. 43,023 -- --
Other......................................................... 15,871 12,200 14,896
------------ ------------ ------------
3,591,526 3,941,741 7,261,853
Less current portion.......................................... 2,262,932 997,904 1,110,857
------------ ------------ ------------
Total notes payable and financing arrangements.............. $ 1,328,594 $ 2,943,837 $ 6,150,996
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The following is a summary of maturities of notes payable and financing
arrangements at March 31, 1997 during the next five years:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1997 $ 286,687
- ----------------------------------------------------------------
<S> <C>
YEAR ENDED JUNE 30,
- ----------------------------------------------------------------
1998............................................................ 1,503,141
1999............................................................ 3,576,526
2000............................................................ 623,197
2001............................................................ 523,672
2002............................................................ 244,809
Thereafter...................................................... 503,821
---------
Total......................................................... $7,261,853
---------
---------
</TABLE>
The Company's revolving credit facility (the Revolver) allows the Company to
borrow the lesser of (i) $4.5 million or (ii) eighty percent of the receivables
borrowing base (as defined) plus the lesser of $500,000 or the amount of the
inventory borrowing base (as defined). Interest rate on the borrowings under the
Revolver is at prime plus .75% (9.25% at March 31, 1997), and a fee of .5% is
charged on any unused portion of the Revolver, which was $1,656,949 at March 31,
1997. The Revolver is secured by specific underlying accounts receivable,
equipment and inventory. The revolver provides for certain reporting and
financial covenants including minimum net worth and maximum debt to net worth
requirements. The Company was in compliance with such covenants at March 31,
1997. The Company violated a financial covenant under the Revolver at March 31,
1997. The bank lender did not declare the Company in default and waived the
violation. In addition, the bank lender has amended the financial covenant at
issue, such that the Company does not expect to be in violation of such covenant
in the future.
Under the terms of the Company's revolving credit facility, the Company may
not pay dividends without prior consent of the lending bank.
The Company capitalized financing costs of $54,764 for the year ended June
30, 1996 and is amortizing such costs over the life of the respective loan.
These financing costs are included in other assets
F-16
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
on the balance sheet. Amortization expense for the nine months ended March 31,
1997 amounted to $13,689.
(9) INCOME TAXES
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH
---------------------------------- 31,
1994 1995 1996 1997
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
United States Federal
Current income tax expense............... $ 30,202 $ 214,654 $ 175,404 $ 63,769
Deferred income tax expense.............. 11,102 78,903 (9,528) 57,943
Foreign income tax expense................. -- -- 149,832 106,973
---------- ---------- ---------- ------------
$ 41,304 $ 293,557 $ 315,708 $ 228,685
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
Foreign income tax expense results from taxes withheld on sales related to
the Russian operations. Operating income (loss) from such operations for the
years ended June 30, 1994, 1995 and 1996 were ($92,000), $190,000 and $436,000,
respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1995 and June 30, 1996 and March 31, 1997 are presented below:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful
accounts........................................... $ 9,514 $ 25,335 $ 23,544
Accrued vacation pay................................. 20,462 30,497 40,532
Deferred revenue..................................... 55,651 41,521 27,915
Alternative minimum tax credit carryforward.......... 75,786 74,918 66,928
Equity in losses of affiliates....................... -- 8,796 --
----------- ----------- -----------
Total deferred tax assets.......................... 161,413 181,067 158,919
Deferred tax liabilities:
Property, plant and equipment........................ (198,609) (250,442) (280,945)
Deferred revenue..................................... (41,707) -- --
Equity in income of affiliates....................... -- -- (11,237)
----------- ----------- -----------
Total deferred tax liabilities..................... (240,316) (250,442) (292,182)
----------- ----------- -----------
Net deferred tax liability......................... $ (78,903) $ (69,375) $ (133,263)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
There was no valuation allowance on deferred tax assets as of June 30, 1995,
June 30, 1996 and March 31, 1997 as management has determined that it is more
likely than not that these tax assets will be utilized.
The Company also has alternative minimum tax credit carryforwards of $66,928
at March 31, 1997 which are available to reduce future federal regular income
taxes, if any, over an indefinite period.
F-17
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The difference between the actual income tax provision and the tax provision
computed by applying the statutory Federal income tax rate to income before
taxes is attributable to the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS
---------------------------------- ENDED MARCH
1994 1995 1996 31, 1997
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Income tax provision at 34%............. $ 62,944 $ 281,927 $ 356,789 $ 243,794
Expenses not deductible for tax
purposes.............................. -- 11,630 11,990 13,205
Change in valuation allowance........... (21,640) -- -- --
Effect of foreign operations, including
foreign tax credits................... -- -- (53,071) (28,314)
---------- ---------- ---------- ------------
Actual income tax provision............. $ 41,304 $ 293,557 $ 315,708 $ 228,685
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Effective tax rate...................... 22.3% 35.4% 30.1% 31.9%
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
(10) EMPLOYEE BENEFITS
The Company has a 401(k) profit sharing plan covering employees with six or
more months of tenure. The plan allows employee contributions of up to 15% of
applicable employee wages. The Company makes matching contributions to the plan
as a percentage of the employee's contribution. The Company's contribution is
subject to the employee meeting certain vesting requirements. The Company's net
contributions to the plan (after forfeitures) for the years ended June 30, 1994,
1995 and 1996 were $24,917, $23,367 and $30,287, respectively. The Company's net
contributions to the plan (after forfeitures) for the nine months ended March
31, 1996 and 1997 were $24,716 (unaudited) and $35,706, respectively.
(11) INCENTIVE STOCK OPTION PLAN
During the year ended June 30, 1996, the Company adopted an Employee
Incentive Stock Option Plan (the Plan). The Plan provides for the granting of a
maximum of 258,600 options to purchase shares of common stock to key employees
of the Company. The option price per share may not be less than the estimated
fair value of a share on the date the option is granted. Options generally vest
at the rate of 20% per year over a five year period, however, the Board at its
discretion may accelerate the vesting schedule. Stock options will expire ten
years from the date of grant.
At March 31, 1997, there were options for 160,614 shares granted under the
Plan with option prices ranging from $3.56 to $4.49. All options granted were
outstanding at March 31, 1997, and there were 62,482 shares under options which
were exercisable at March 31, 1997. On March 31, 1997, there were 97,986
additional shares available for grant.
In addition, effective upon completion of a public offering of common stock,
the vesting of all unvested options granted under the Employee Incentive Stock
Option Plan would be automatically accelerated and such options would become
fully vested and presently exercisable at such time.
The Company adopted a 1997 Stock Option Plan and a 1997 Director Stock
Option Plan in February 1997 (the Plans). Options to be granted under the 1997
Stock Option Plan may be either Incentive Stock Options or non-statutory stock
options under the Code. Incentive Stock Options may be granted under the
F-18
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCENTIVE STOCK OPTION PLAN (CONTINUED)
1997 Stock Option Plan to any person who is an officer or other employee of the
Company or any of its subsidiaries. A total of 300,000 shares of Common Stock
have been reserved for issuance upon the exercise of options which may be
granted under the 1997 Stock Option Plan.
The 1997 Director Stock Option Plan was adopted to encourage ownership of
the Company by eligible non-employee directors. All options granted will be
non-qualified and not eligible for treatment as Incentive Stock Options under
Section 422 of the Code. A total of 100,000 shares of Common Stock have been
reserved for issuance under the 1997 Director Option Plan.
(12) LEASE CONTRACTS
The Company provides telecommunications services to various customers under
operating leases with typical terms of one to five years. The services may
include communications equipment, line/satellite charges and/or maintenance
charges. These leases impose certain obligations on both the lessor and lessee
which must be met during the term of the lease.
A significant portion of these services requires that the Company have
access to international communication satellites. The Company has contracted
with a Russian entity for rights to access its portion of an international
communications satellite. The Company has agreed to pay a recurring monthly fee
to the entity based on the amount of satellite space segment utilized by each
lessee. Additionally, the Company has sold communications equipment to the
entity. The Company utilizes those facilities to provide communication services
to various United States oil and gas companies and other customers doing
business in Russia.
The following is a summary of the expected revenue to be earned during the
next five years by the Company on lease agreements executed on or before March
31, 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1997 $691,728
- -------------------------------------------------------
<S> <C>
FISCAL YEAR ENDED JUNE 30,
- -------------------------------------------------------
1998................................................... 2,155,793
1999................................................... 1,212,133
2000................................................... 683,280
2001................................................... 683,280
2002................................................... 142,350
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Total................................................ $ 5,568,564
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-------------------
</TABLE>
(13) COMMITMENTS
The Company leases office space, equipment and communications services for
its operations under leases expiring through 2002. Rental expense under the
leases for the years ended June 30, 1994, 1995 and 1996 was $409,665, and
$348,184 and $555,033, respectively. Rental expense for the nine months ended
March 31, 1996 and 1997 was $391,682 (unaudited) and $1,689,200, respectively.
F-19
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) COMMITMENTS (CONTINUED)
Future minimum lease payments as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1997 $ 435,225
- -------------------------------------------------------
<S> <C>
FISCAL YEAR ENDED JUNE 30,
- -------------------------------------------------------
1998................................................... 1,572,574
1999................................................... 1,119,770
2000................................................... 218,247
2001................................................... 180,612
2002................................................... 89,671
-------------------
Total................................................ $ 3,616,099
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-------------------
</TABLE>
(14) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock which may be
issued by the Board of Directors in one or more series and the Board is
authorized to fix the designations, relative powers, preferences, rights,
qualifications, limitations and restrictions of all shares of each of such
series, including without limitation dividend rates, preemptive rights,
conversion rights, voting rights, redemption and sinking fund provisions,
liquidation preferences and the number of shares constituting each such series,
without any further vote or action by the shareholders. Upon consummation of a
public offering of common stock, there will be 10,000,000 authorized and
unissued shares of preferred stock. The Company's Articles of Incorporation
grant the Board of Directors power to establish the rights, preferences and
privileges of authorized and unissued preferred stock. The issuance of shares of
preferred stock pursuant to the Board of Director's authority described above
could decrease the amount of earnings and assets available for distribution to
holders of common stock.
(B) COMMON STOCK
The Company amended and restated its Articles of Incorporation to restate
the common stock authorized, issued and outstanding from no par value to a $0.01
par value per common share. All share amounts have been restated to reflect this
amendment.
(C) REPRESENTATIVE'S WARRANT
The Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Representative's Warrant to purchase up to 145,000
shares of Common Stock at an exercise price equal to 120% of the IPO price. The
Representative has certain demand and "piggy-back" registration rights that may
require the Company to register for resale the shares of Common Stock issuable
under the Representative's Warrant. The Representative's Warrant is exercisable
for a period of four years, beginning one year from the date of this Prospectus.
F-20
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUBSEQUENT EVENT
(A) FINANCING ARRANGEMENTS
In May 1997, the Company entered into a commitment to obtain a secured
revolving line of credit ("Working Capital Loan") and a secured guidance line of
credit ("Guidance Line") from Bank One, Texas, N.A. The maximum amount of the
Working Capital Loan will be $5.0 million subject to a borrowing base based on
accounts receivables and inventory. The proceeds of the Working Capital Loan are
to be used for working capital needs and general corporate purposes. Proceeds of
the Working Capital Loan will be used initially to extinguish the Company's
current revolving credit facility with Marine Midland Business Loans, Inc. (Note
8). The maximum amount of the Guidance Loan will be $5.0 million and the
proceeds will be used to finance the Company's purchase and subsequent lease of
communications equipment. The interest rate on both lines will be, at the
Company's option, Bank One's base rate or 30, 60 or 90 day adjusted LIBOR plus
2.40%. The interest rate is subject to adjustment after June 30, 1997 as
specified in the loan agreement. The entire unpaid principal balance and accrued
and unpaid interest for the Working Capital Loan will be due on October 31, 1998
and for the Guidance Loan will be due on May 1, 1998. The definitive credit
agreement that the Company will be required to enter into will prohibit the
payment of dividends without prior approval of the lender and will require the
Company to maintain certain covenants and financial ratios including working
capital and net worth ratios. The definitive credit agreement will also prohibit
certain changes in the Company's basic business or in its Chief Executive
Officer, Chief Financial Officer and President positions, without prior lender
approval.
F-21
<PAGE>
INSIDE BACK COVER
[MAP OF IWL'S GULF COAST REGIONAL NETWORK]
<PAGE>
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE UNDERWRITERS, OR ANY OTHER PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF THE DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
--------------------------
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 17
Dividend Policy................................ 17
Dilution....................................... 18
Capitalization................................. 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 29
Management..................................... 47
Certain Transactions........................... 54
Principal and Selling Shareholders............. 55
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 58
Underwriting................................... 60
Legal Matters.................................. 62
Experts........................................ 62
Additional Information......................... 62
Index to Consolidated Financial Statements..... F-1
</TABLE>
--------------------------
UNTIL JULY 7, 1997 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF THE DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR ALLOTMENTS OR
SUBSCRIPTIONS.
1,450,000 SHARES
[COMPANY LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[LOGO]
JUNE 12, 1997
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