<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-22293
IWL COMMUNICATIONS, INCORPORATED
(Exact name of registrant as specified in its charter)
TEXAS 76-0043882
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12000 Aerospace Avenue, Suite 200
Houston, Texas 77034
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 482-0289
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
COMMON STOCK, $0.01 PAR VALUE 3,987,718
(Title of Each Class) (Number of Shares Outstanding at August 7, 1998)
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
<TABLE>
PAGE
NUMBER
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at December 31, 1997
and June 30, 1998 3
Consolidated Statements of Operations for the Six Months and
Three Months Ended June 30, 1997 and 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 15
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, 1997 June 30, 1998
(Unaudited)
----------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 3,345,312 359,212
Accounts receivable . . . . . . . . . . . . . . . .
Trade, less allowance for doubtful accounts
of $140,613 and $171,846, respectively. . . . . . 6,342,127 6,699,844
Affiliate . . . . . . . . . . . . . . . . . . . . 30,344 31,171
Other . . . . . . . . . . . . . . . . . . . . . . 239,298 221,157
Inventory. . . . . . . . . . . . . . . . . . . . . . 1,022,927 1,092,471
Deferred tax asset-current . . . . . . . . . . . . . 107,750 276,117
Prepaid expenses and deposits. . . . . . . . . . . . 447,067 1,059,558
------------ ----------
Total current assets . . . . . . . . . . . . . . . . 11,534,825 9,739,530
Property, plant and equipment. . . . . . . . . . . . 20,387,102 24,546,442
Accumulated depreciation . . . . . . . . . . . . . . (6,039,032) (7,226,157)
------------ ----------
Net property, plant and equipment. . . . . . . . . . 14,348,070 17,320,285
Investment in unconsolidated joint venture . . . . . --- 83,750
Goodwill . . . . . . . . . . . . . . . . . . . . . . --- 1,917,575
Accumulated amortization . . . . . . . . . . . . . . --- (61,866)
------------ ----------
Goodwill net of accumulated amortization . . . . . . --- 1,855,709
Other assets . . . . . . . . . . . . . . . . . . . . 400,681 728,882
------------ ----------
Total assets . . . . . . . . . . . . . . . . . . . . $ 26,283,576 29,728,156
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable-current portion. . . . . . . . . . . . $ 6,035,069 10,130,686
Trade accounts payable and accrued expenses. . . . . 3,626,519 3,152,521
Customer deposits. . . . . . . . . . . . . . . . . . 171,972 23,366
Federal income tax payable . . . . . . . . . . . . . 264,964 183,251
Deferred revenue - current portion . . . . . . . . . 14,667 9,973
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . . . . . . 92,022 304,019
------------ ----------
Total current liabilities. . . . . . . . . . . . . . 10,205,213 13,803,816
Notes payable, noncurrent portion. . . . . . . . . . 3,588,308 1,455,541
Deferred income taxes. . . . . . . . . . . . . . . . 323,913 440,871
------------ ----------
Total long-term liabilities. . . . . . . . . . . . . 3,912,221 1,896,412
------------ ----------
Total liabilities. . . . . . . . . . . . . . . . . . 14,117,434 15,700,228
Stockholders equity:
Common stock, $.01 par value. 100,000,000
authorized, issued and outstanding 3,754,230
and 3,986,710 shares in 1997 and 1998,
respectively. . . . . . . . . . . . . . . . . . . 37,542 39,867
Additional paid-in capital . . . . . . . . . . . . . 7,601,589 9,236,867
Retained earnings. . . . . . . . . . . . . . . . . . 4,527,011 4,744,302
Translation adjustment . . . . . . . . . . . . . . . --- 6,892
------------ ----------
Total stockholders' equity . . . . . . . . . . . . . 12,166,142 14,027,928
------------ ----------
Total liabilities and stockholders' equity . . . . . $ 26,283,576 29,728,156
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
- --------------------------------------------------------------------------------------------------------------
Telecommunication Services . . . . . . . . . . . . $ 3,537,372 7,135,282 1,239,640 4,331,574
- --------------------------------------------------------------------------------------------------------------
Project/Other Revenue. . . . . . . . . . . . . . . 8,214,563 9,510,343 5,053,753 4,259,534
- --------------------------------------------------------------------------------------------------------------
Product resales. . . . . . . . . . . . . . . . . . 2,945,563 --- 439,108 ---
- --------------------------------------------------------------------------------------------------------------
Total revenues . . . . . . . . . . . . . . . 14,697,498 16,645,625 6,732,501 8,591,108
- --------------------------------------------------------------------------------------------------------------
Cost of services (exclusive of items
shown separately below). . . . . . . . . . . . . 7,704,835 10,013,991 3,967,192 5,592,892
- --------------------------------------------------------------------------------------------------------------
Cost of services-product resales . . . . . . . . . 2,347,060 --- 411,075 ---
- --------------------------------------------------------------------------------------------------------------
Gross profit . . . . . . . . . . . . . . . . . . . 4,645,603 6,631,634 2,354,234 2,998,216
- --------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses . . . 3,110,329 4,589,690 1,499,437 2,402,345
- --------------------------------------------------------------------------------------------------------------
Depreciation and amortization. . . . . . . . . . . 767,621 1,369,154 420,436 721,824
- --------------------------------------------------------------------------------------------------------------
Operating income (loss). . . . . . . . . . . . . . 767,653 672,790 434,361 (125,953)
- --------------------------------------------------------------------------------------------------------------
Other income (expense):
- --------------------------------------------------------------------------------------------------------------
Net Interest expense . . . . . . . . . . . . . . . (300,118) (351,499) (175,463) (196,903)
- --------------------------------------------------------------------------------------------------------------
Other income (expense) . . . . . . . . . . . . . . 109,959 104,924 (3,882) 104,376
- --------------------------------------------------------------------------------------------------------------
Total other expense. . . . . . . . . . . . . . . . (190,159) (246,575) (179,345) (92,527)
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes. . . . . . . . . 577,494 426,215 255,016 (218,480)
- --------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) . . . . . . . . . . . 148,852 208,925 54,321 (45,184)
- --------------------------------------------------------------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . $ 428,642 217,290 200,695 (173,296)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
- --------------------------------------------------------------------------------------------------------------
Basic. . . . . . . . . . . . . . . . . . . . . . . .18 .06 .08 (.04)
- --------------------------------------------------------------------------------------------------------------
Diluted. . . . . . . . . . . . . . . . . . . . . . .18 .05 .08 (.04)
- --------------------------------------------------------------------------------------------------------------
Weighted average shares Outstanding
(in thousands):
- --------------------------------------------------------------------------------------------------------------
Basic. . . . . . . . . . . . . . . . . . . . . . . 2,372 3,926 2,515 3,939
- --------------------------------------------------------------------------------------------------------------
Diluted. . . . . . . . . . . . . . . . . . . . . . 2,435 4,225 2,577 3,939
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
SIX MONTHS ENDED JUNE 30,
1997 1998
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 428,642 217,290
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . 767,621 1,369,154
Gain from sale of assets . . . . . . . . . . . . . . . (29,542) (23,990)
Deferred income taxes. . . . . . . . . . . . . . . . . 66,870 (51,409)
Equity in earnings of unconsolidated Joint Venture . . (80,445) (83,750)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . (779,984) (340,403)
Inventory. . . . . . . . . . . . . . . . . . . . . . . 798,239 (69,544)
Costs and estimated earnings in excess of billings . . (159,597) 00
Prepaid expenses and deposits. . . . . . . . . . . . . (23,136) (612,491)
Other assets . . . . . . . . . . . . . . . . . . . . . 60,233 (338,467)
Trade accounts payable and accrued expenses. . . . . . 1,905,935 (473,998)
Customer deposits. . . . . . . . . . . . . . . . . . . (90,734) (148,606)
Deferred revenue . . . . . . . . . . . . . . . . . . . (567,396) (4,694)
Billings in excess of costs and estimated earnings . . (49,948) 211,997
Federal income taxes payable . . . . . . . . . . . . . (35,775) (81,713)
--------------------------
Net cash provided (used) by operating
activities . . . . . . . . . . . . . . . . . . . 2,210,983 (430,624)
--------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment. . . . . . . (4,556,246) (4,176,551)
Proceeds from disposal of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . 90,434 201,365
Purchase of ICEL . . . . . . . . . . . . . . . . . . . 0 (609,822)
--------------------------
Net cash used in investing activities . . . . . . (4,465,812) (4,585,008)
--------------------------
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . . . . . 3,218,235 9,978,143
Debt payments. . . . . . . . . . . . . . . . . . . . . (581,410) (8,015,293)
Proceeds from issuance of common stock . . . . . . . . 6,996,505 59,790
--------------------------
Net cash provided by financing activities . . . . 9,633,330 2,022,640
--------------------------
Effect of exchange rate on cash and equivalents. . . . 0 6,892
Net increase (decrease) in cash for period . . . . . . 7,378,501 (2,986,100)
Cash and cash equivalents at beginning of period . . . 281,482 3,345,312
--------------------------
Cash and cash equivalents at end of period . . . . . . $7,659,983 $359,212
--------------------------
--------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest . . . . . . . $296,324 $394,966
--------------------------
--------------------------
Cash paid during the period for income taxes . . . . . $43,000 $30,000
--------------------------
--------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements, which should be
read in conjunction with the consolidated financial statements and footnotes
included in the Company's Transitional Report on Form 10-K for the period
ended December 31, 1997, are unaudited (the December 31, 1997 consolidated
balance sheet was derived from the Company's audited financial statements),
but have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. Accounting
measurements at interim dates inherently involve greater reliance on
estimates than at year end.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
- -------------------------------------------------------------------
December 31, 1997 June 30, 1998
- -------------------------------------------------------------------
<S> <C> <C>
Material 1,005 884
- -------------------------------------------------------------------
Work In-Process 18 208
- -------------------------------------------------------------------
Total 1,023 1,092
- -------------------------------------------------------------------
</TABLE>
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings Per Share". Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earning per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
<TABLE>
- -------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------
1997 1998 1997 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
- -------------------------------------------------------------------------------
Net income (loss) 429 217 201 (173)
- -------------------------------------------------------------------------------
Denominator:
- -------------------------------------------------------------------------------
Denominator for basic earnings (loss)
per share-weighted-average shares
outstanding 2,372 3,926 2,515 3,939
- -------------------------------------------------------------------------------
Effect of dilutive securities:
- -------------------------------------------------------------------------------
Employee stock options 63 299 62 --
- -------------------------------------------------------------------------------
Denominator for diluted earnings
(loss) per share 2,435 4,225 2,577 3,939
- -------------------------------------------------------------------------------
Basic earnings (loss) per share .18 .06 .08 (.04)
- -------------------------------------------------------------------------------
Diluted earnings (loss) per share .18 .05 .08 (.04)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
4. Acquisitions
In January 1998, the Company completed the acquisition of Integrated
Communications and Engineering, Ltd. (ICEL), a communications systems
integrator and maintenance provider in Aberdeen, Scotland. The Company paid
a total purchase price of approximately $2.7 million comprised of $380,000 in
cash and 207,266 shares of the Company's common stock.
The acquisition was accounted for as a purchase and was effective as of
January 1, 1998; therefore, the statement of operations for the six months
and three months ended June 30, 1998 reflects the operations of ICEL. The
goodwill resulting from the acquisition is being amortized over 7 and 20
years.
5. Notes Payable
The Company was in violation of the financial covenants requiring
maintenance of a current ratio at December 31, 1997 and March 31, 1998 and a
fixed charge ratio at June 30, 1998, and also was in technical default of a
covenant requiring the lender's consent to the Combination (as defined
below). The Company has obtained a waiver of these covenant violations and
has obtained the lender's consent to the Combination. The waiver of the
financial covenant requiring maintenance of a current ratio extends through
August 31, 1998 and, accordingly, the Company was not technically in
violation of such covenant at June 30, 1998. On June 17, 1998, the Company
was extended additional credit under a Short-Term Facility by the lender up
to $4.0 million. The Short-Term Facility, the Term Loan, and all other
amounts due to the lender will mature on August 31, 1998.
6. Business Combination
The Company announced in February 1998 that it had entered into a
definitive agreement to combine through mergers and an interest exchange (the
"Combination") with CapRock Communications Corp. (formerly IWL Holdings
Corp.) ("CapRock"), CapRock Telecommunications Corp. (formerly CapRock
Communications Corp.) ("Telecommunications") and CapRock Fiber Network, Ltd.
(the "Partnership"). The Combination is subject to, among other matters,
approval by the shareholders of the Company and Telecommunications and the
partners of the Partnership.
7. Subsequent Events
In July 1998, CapRock, Telecommunications and the Partnership (with the
Company as guarantor) issued, through a private placement under Rule 144A
under the Securities Act of 1933, as amended, $150 million aggregate
principal amount of their 12% Senior Notes due 2008 (the "Notes"), which
closed on July 16, 1998. Interest on the Notes will be payable semi-annually
in arrears on January 15 and July 15 of each year, commencing on January 15,
1999, at the rate of 12% per annum. The net proceeds from the offering were
initially placed in a segregated escrow account and will be released only in
accordance with the provisions of an escrow agreement. Upon consummation of
the Combination, (i) the proceeds in such escrow account will be released to
CapRock, (ii) Telecommunications and the Partnership will no longer be
co-obligors under the Notes, and (iii) the Company will be released from its
obligations in connection with the special offer to purchase. If the
Combination is not consummated by August 31, 1998, CapRock,
Telecommunications, and the Partnership will be required to offer to purchase
the Notes (the "Special Offer to Purchase") at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of such repurchase. To the extent the amounts held in the escrow
account are insufficient to repurchase all tendered Notes, each of CapRock,
Telecommunications, the Partnership, and the Company (as guarantor) shall be
jointly and severally liable to fund any such deficiency (with an estimated
contingent liability of not more than approximately $7.0 million). There can
be no assurance that CapRock, Telecommunications, the Partnership and IWL
will have sufficient funds available at the time of such offer to purchase to
repay all Notes tendered.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in the
Company's 1997 Transitional Report on Form 10-K for the period from July 1,
1997 to December 31, 1997. The Company believes that all necessary
adjustments (consisting only of normal recurring adjustments) have been
included in the amounts stated below to present fairly the following
<PAGE>
quarterly information. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. Quarterly operating
results have varied significantly in the past and can be expected to vary in
the future. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year.
Forward Looking Information
Certain information contained herein contains forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995)
regarding future events or the future financial performance of the Company,
and are subject to a number of risks and other factors which could cause the
actual results of the Company to differ materially from those contained in
and anticipated by the forward-looking statements. Among such factors are:
completion of the Combination, industry concentration and the Company's
dependence on major customers, competition, risks associated with
international operations and entry into new markets, government regulation,
variability in operating results, general business and economic conditions,
customer acceptance of any demand for the Company's new products, the
Company's overall ability to design, test, and introduce new products on a
timely basis, reliance on third parties and other telecommunication carriers,
the Company's ability to manage change, dependence on key personnel,
dependence on information systems and changes in technology, and possible
service interruptions. The forward-looking statements contained herein are
necessarily dependent upon assumptions, estimates and data that may be
incorrect or imprecise. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized. Forward-looking statements contained herein include,
but are not limited to, forecasts, projections and statements relating to
inflation, future acquisitions and anticipated capital expenditures. All
forecasts and projections in this report are based on management's current
expectations of the Company's near term results, based on current information
available pertaining to the Company, including the aforementioned risk
factors. Actual results could differ materially.
Overview
The Company's total revenues are derived from the provision of a variety
of services, including telecommunications services, project and other
revenue. Telecommunications services include the resale of long distance
telecommunications services, the provision of private leased lines, and lease
or rental of telecommunications systems connected with the provision of
telecommunications services. Project and other services consist of the
performance of telecommunications projects involving the engineering and
integration of telecommunications systems and the sales, service and
maintenance of telecommunications equipment.
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 1997, the Company provided services to Shell Offshore Services
Company, which included the resale of a significant amount of Alcatel
products. For the six months ended June 30, 1997, Shell purchased from the
Company approximately $2.9 million of Alcatel products and other equipment
and hardware, representing approximately 11.1% of total sales during such
periods. Although profitable, the sale of Alcatel products to Shell
significantly reduced the Company's gross margin in this period. The Shell
project was substantially completed in May 1997 and, therefore, is not
expected to contribute in a material manner to the Company's total sales in
future periods.
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 Louisiana.
<PAGE>
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
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.
RESULTS OF OPERATIONS:
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1998
TOTAL REVENUES. Total revenues increased $1.9 million or 28.4% from
$6.7 million for the three months ended June 30, 1997 to $8.6 million for the
three months ended June 30, 1998. This increase was comprised of an increase
of $3.1 million or 249.4% in the Company's telecommunications services, a
decrease of $794,000 or 15.7% in the Company's project and other services
revenue and a decrease of $439,000 or 100% in product resales to a single
customer. The increase in telecommunications services was largely
attributable to the expansion of the Company's ODDS services and increased
network traffic. The decrease in projects and other revenues resulted from
decreased sales of telecommunications equipment and related services and
lower telecommunications project revenues. The product resale to a single
customer were substantially completed in May 1997.
GROSS MARGIN. Gross profit increased $644,000 or 26.8% from $2.4
million for the three months ended June 30, 1997 to $3.0 million for the
three months ended June 30, 1998, representing gross margins of 35.0% and
34.9%, respectively. Excluding product resales, gross profit for the three
months ended June 30, 1997 would have been approximately $2.3 million
representing a gross margin of 37.0%. The decrease in margin percentage
reflects increased cost from the Company's network expansion and changes in
revenue mix for the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $903,000 or 60.2% from $1.5 million for the
three months ended June 30, 1997 to $2.4 million for the three months ended
June 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased from 22.3% for the three months ended June
30, 1997 to 28.0% for the three months ended June 30, 1998. The increase
in selling, general, and administrative expenses as a percentage of sales and
in dollar amount were due in part to the completion of the product resale in
May 1997 and to increased personnel and internal structure to support revenue
growth and an expanded network.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$302,000 or 71.9% from $420,000 for the three months ended June 30, 1997 to
$722,000 for the three months ended June 30, 1998. This increase was
primarily attributable to the acquisition of an additional $10.3 million of
property, plant and equipment, comprised of $9.0 million in satellite,
microwave and other telecommunications equipment, $1.2 million for computers,
furniture and fixtures, service vehicles and test equipment and $100,000 for
building and improvements.
NET INTEREST EXPENSE. Net interest expenses increased $22,000 or 12.6%
from $175,000 for the three months ended June 30, 1997 to $197,000 for the
three months ended June 30, 1998. The Company's borrowings increased from
$8.7 million for the three months ended June 30, 1997 to $11.6 million for
the three months ended June 30, 1998. The increase in borrowings was used to
fund acquisitions of property, plant and equipment.
OTHER INCOME, NET. Other income for the three months ended June 30,
1997 included the Company's 50% ownership interest in the earnings of Kenwood
Systems Group as well as certain other asset dispositions. Other income for
the three months ended June 30, 1998 was comprised of the Company's 50%
ownership interest in the earnings of the Joint Venture as well as certain
other asset dispositions.
INCOME TAX EXPENSE. Provision for income taxes decreased $99,000 or
182.2% from $54,000 for the three months ended June 30, 1997 to ($45,000) for
the three months ended June 30, 1998 which represents an effective tax rate
of 21.3% and 20.7% for each period, respectively.
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1998
TOTAL REVENUES. Total revenues increased $1.9 million or 12.9% from
$14.7 million for the six months ended June 30, 1997 to $16.6 million for the
six months ended June 30, 1998. This increase was comprised of an increase
of $3.6 million or 102.9% in the Company's telecommunications services, an
increase of $1.3 million or 15.9% in the Company's projects and other
revenues and a decrease of $2.9 million or 100% in product resales to a
single customer. The increase in telecommunications services was largely
attributable to the continued expansion of the Company's ODDS services and
increased traffic on the Company's network. The growth in project and other
revenues resulted from increased sales of telecommunications equipment and
related services. The product resales were substantially completed in May
1997.
GROSS MARGIN. Gross profit increased $2.0 million or 39.1% from $4.6
million for the six months ended June 30, 1997 to $6.6 million for the six
months ended June 30, 1998, representing gross margins of 31.6% and 39.8%,
respectively. The increase in margin was due in part to the completion of
the product resale to a single customer in May 1997 and from changes in the
Company's revenues mix to higher margin services. Excluding product resales,
gross profit for the six months ended June 30, 1997 would have been
approximately $4.0 million representing a gross margin of 34.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million or 48.4% from $3.1 million for
the six months ended June 30, 1997 to $4.6 million for the six months ended
June 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased from 21.1% for the six months ended June
30, 1997 to 27.6% for the six months ended June 30, 1997. The increase in
the selling, general and administrative expenses as a percentage of sales and
in dollar amount were due in principal part to the completion of the product
resale in May 1997 and to increased personnel and internal structure to
support revenue growth and an expanded network.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$602,000 or 78.4% from $768,000 for the six months ended June 30, 1997 to
$1.4 million for the six months ended June 30, 1998. This increase was the
result primarily from increases in property, plant and equipment for
infrastructure and network expansion.
NET INTEREST EXPENSE. Net interest expense increased $51,000 or 17.0%
from $300,000 for the six months ended June 30, 1997 to $351,000 for the six
months ended June 30, 1998. The increase resulted from increased borrowings
to fund the Company's infrastructure expansion.
OTHER INCOME, NET. Other income decreased $5,000 or 4.5% from $110,000
for the six months ended June 30, 1997 to $105,000 for the six months ended
June 30, 1998. Other income for the six months ended June 30, 1997 included
the Company's 50% ownership interest in the earnings of Kenwood System Group
as well as certain other asset dispositions. Other income for the six months
ended June 30, 1998 included the Company's 50% ownership interest in the
earnings of the Joint Venture as well as certain other asset dispositions.
INCOME TAX EXPENSE. Provision for income taxes increased $60,000 or
40.3% from $149,000 for the six months ended June 30, 1997 to $209,000 for
the six months ended June 30, 1998 which represents an effective tax rate of
25.8% and 49.0% for each period, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company used $431,000 of
cash in operating activities, borrowed an additional net amount of $2.0
million from credit facilities, and received $60,000 from the sale and
issuance of Common Stock. The Company invested $4.0 million in property and
equipment (net of proceeds of $201,000 from certain dispositions of assets).
The Company also expended $610,000 to acquire Integrated Communications and
Engineering, LTD. in January, 1998. The increase in property, plant and
equipment reflects the Company's work in progress in relation to the
deployment of the Company's ODDS program and the development of its Gulf
Coast network. These activities decreased the Company's cash balance by $3.0
million to a balance of $359,000 at June 30, 1998.
<PAGE>
The Company has four credit facilities with Bank One, Texas, N.A., its
primary lender, to provide working capital and to finance equipment to be
leased by the Company to its customers. The Company has a secured revolving
line of credit (the "Working Capital Loan"), a secured guidance line of
credit (the "Guidance Line"), a term facility (the "Term Loan"), and a
short-term facility issued on June 17, 1998 under the existing revolving
credit agreement ("Short-Term Facility") from Bank One, Texas, N.A. The
maximum amount of the Working Capital Loan is $5.0 million subject to a
borrowing base based on accounts receivables and inventory. The maximum
amount of the Guidance Line is $5.0 million, which is used to finance the
Company's purchase and subsequent lease of telecommunications equipment. The
Term Loan, the Short-Term Facility and the Working Capital Loan are
collateralized by substantially all of the personal property of the Company.
The Guidance Line is reduced by the term loan created as the leased equipment
is deployed. The interest rate on each facility is, at Company's option,
Bank One, Texas, N.A.'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 credit agreement. The Guidance Line
expired on June 30, 1998. Borrowing availability under the Working Capital
Loan is 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
Loan. The Company was in violation of the financial covenants requiring
maintenance of a current ratio at December 31, 1997 and March 31, 1998 and a
fixed charge ratio at June 30, 1998, and also was in technical default of a
covenant requiring the lender's consent to the Combination. The Company has
obtained a waiver of these covenant violations and has obtained the lender's
consent to the Combination. The waiver of the financial covenant requiring
maintenance of a current ratio extends through August 31, 1998 and,
accordingly, the Company was not technically in violation of such covenant at
June 30, 1998. On June 17, 1998, the lender extended the Company additional
credit under the Short-Term Facility of up to $4.0 million. At June 30,
1998, the Company had $4.0 million available under the Short-Term Facility
and was fully advanced under the Working Capital Loan. The Short-Term
Facility, the Term Loan and the Working Capital Loan and all other amounts
due the lender will mature on August 31, 1998. CapRock, which will become
the parent of the combined entities upon consummation of the Combination,
intends to use part of the proceeds from the sale of the Notes to repay
indebtedness owing by the Company to Bank One, Texas, N.A. If the
Combination is not consummated by August 31, 1998 (and as a result, the net
proceeds from the issuance of the Notes are not available to CapRock), the
Company intends to renegotiate the terms of its loans from Bank One, Texas,
N.A. If such negotiations are not successful, the Company will seek
additional sources of financing. No assurance can be given that such
financing will be available or, if available, that the terms will be
satisfactory. See Item 1 - Financial Information - Notes to Consolidated
Financial Statements (Note 6).
The Company anticipates that, based on current plans and assumptions
relating to its operations, 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 hereof. 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.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
requires classification of items of other comprehensive income by nature in a
financial statement and a breakout of the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the equity section of a statement of financial position.
Reporting comprehensive income provides a measure of all changes in equity
that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Adoption of this statement did not have a material effect on the Company's
consolidated financial position or results of operation because there are no
material differences between net income and comprehensive income in the
Company's circumstances.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the manner in which business enterprises are to report
information about operating statements in its annual statements and requires
those enterprises to report selected information regarding operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS 131 is effective for fiscal years beginning
after December 15, 1997. Financial statement disclosures for prior periods
are required to be restated. The Company is in the process of evaluating the
disclosure requirements. The adoption of SFAS 131 will not have an impact on
the Company's results of operation, financial position or cash flows and any
effect will be limited to the presentation of its disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133") which requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS 133 will not have an impact on the
Company's results of operations, financial position or cash flow.
CONTINGENCIES
The Company is not currently a party to any litigation. However, the
Company is from time to time a party to ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on the
results of operation, financial condition or cash flow of the Company.
YEAR 2000
As the year 2000 approaches, the Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 computer software
failures. The Company is addressing this issue to ensure the availability
and integrity of its financial systems and the reliability of its operational
systems. The Company has established processes for evaluating and managing
the risks and costs associated with this problem. The Company has and will
continue to make certain investments in its software systems and applications
to ensure the Company is year 2000 compliant. The financial impact to the
Company has not yet been fully determined, however such impact is not
anticipated to have a material adverse effect on the financial condition,
results of operations or cash flow of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
Item 2. Changes in Securities and Use of Proceeds
On June 12, 1997 (the "Effective Date"), the Company's Registration
Statement on Form S-1 (Registration No. 333-22801) relating to its initial
public offering (the "IPO") was declared effective and the offering of up to
1,667,500 shares of the Company's Common Stock covered by such Registration
Statement commenced. The IPO was managed by Cruttenden Roth Incorporated, as
the representative (the "Representative") of the several underwriters (the
"Underwriters") of the IPO. Of the shares of Common Stock sold by the
Company, 1,450,000 shares were sold in June 1997 and 62,495 shares (which
were subject to an overallotment option granted by the Company to the
Underwriters) were sold in July 1997. From the Effective Date of the IPO
until June 30, 1998, total expenses of approximately $1,775,097 were incurred
for the Company's account in connection with the 1,512,495 shares of Common
Stock sold in the IPO, which expenses consisted of: (i) $635,000 representing
underwriting discounts and commissions paid to the Underwriters; (ii)
$272,000 representing a nonaccountable expense allowance paid to the
Representative; and (iii) other offering expenses, including without
limitation, attorney's fees, accountants' fees, printing costs and filing
fees, of approximately $868,097. None of such expense payments were direct
or indirect payments to directors or officers of the Company or their
associates or to persons owning 10 percent or more of any class of equity
securities of the Company or to affiliates of the Company. The net offering
proceeds of 1,512,495 shares sold by the Company in the IPO, after deducting
such total expenses, was approximately $7.3 million through June 30, 1998.
The Company had expended $6.1 million on infrastructure, property and
equipment, retired debt of $667,000, and used $533,000 for working capital
support.
Information pertaining to working capital restrictions and other
limitations upon the payment of dividends is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 First Amendment to Agreement and Plan of Merger and Plan of
Exchange, dated as of April 30, 1998, by and among the Company,
CapRock, Telecommunications, the Partnership, IWL Acquisition
Corp., and CapRock Acquisition Corp. (collectively, the
"Parties"). (Incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-4, as amended, first filed by
CapRock Communications Corp. with the SEC on June 22, 1998) (SEC
Registration No. 333-57365) (the "Form S-4").
2.2 Second Amendment to Agreement and Plan of Merger and Plan of
Exchange, dated as of June 19, 1998, by and among the Parties
(incorporated by reference to Exhibit 2.3 to the Form S-4).
3.1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 filed March 5, 1997, as
amended, File No. 333-22801).
3.2 Amended and Restated Bylaws of the Company, as amended by the
Amendment to Amended and Restated Bylaws for the Company dated
November 7, 1997 (Incorporated by reference to Exhibit 3.2 to
the Company's Form 10-Q for the period ended December 31, 1997
filed February 17, 1998, File No. 0-22293).
4.1 Specimen certificate for the Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 filed March 5, 1997, as
amended, File No. 333-22801).
<PAGE>
10.1 Modification Agreement dated as of June 17, 1998 by and between
the Company and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.54 to the Form S-4).
10.2 Promissory Note dated June 17, 1998 executed by the Company
payable to the order of Bank One, Texas, N.A. in the principal
amount of $4,000,000.00 (Incorporated by reference to Exhibit
10.55 to the Form S-4).
+11.1 Statement re: computation of per share earnings (loss)
+27.1 Financial Data Schedule.
(b) Reports on Form 8-K
Current report on Form 8-K dated as of May 7, 1998, and filed
May 11, 1998, regarding change in fiscal year.
- -------------
+ Filed herewith.
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IWL COMMUNICATIONS, INCORPORATED
Date: August 12, 1998 By: /s/ Richard H. Roberson
-----------------------------
Richard H. Roberson
Chief Financial Officer and Director (Duly Authorized
Officer and Principal Financial and Accounting
Officer)
<PAGE>
Exhibit 11.1
IWL Communications, Incorporated
Computation of Earnings (Loss) Per Common Share
(In thousands, except per share amounts)
<TABLE>
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
Numerator: 1997 1998 1997 1998
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ 429 217 $ 201 (175)
------ ----- ------ ------
Denominator:
Denominator for basic earnings
(loss) per share - weighted
average shares outstanding 2,372 3,926 2,515 3,939
Effect of dilutive securities:
Employee stock options 63 299 62 0
------ ----- ------ ------
2,435 4,225 2,577 3,939
------ ----- ------ ------
------ ----- ------ ------
Basic earnings (loss) per share .18 .06 .08 (.04)
------ ----- ------ ------
------ ----- ------ ------
Diluted earnings (loss) per share .18 .05 .08 (.04)
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENT FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998
<CASH> 720 359
<SECURITIES> 0 0
<RECEIVABLES> 8,055 6,952
<ALLOWANCES> 157 172
<INVENTORY> 998 1,092
<CURRENT-ASSETS> 10,940 9,740
<PP&E> 23,243 24,546
<DEPRECIATION> 6,573 7,226
<TOTAL-ASSETS> 29,834 29,728
<CURRENT-LIABILITIES> 11,338 13,804
<BONDS> 10,302 11,586
0 0
0 0
<COMMON> 40 40
<OTHER-SE> 14,095 14,028
<TOTAL-LIABILITY-AND-EQUITY> 29,834 29,728
<SALES> 0 0
<TOTAL-REVENUES> 8,055 16,646
<CGS> 4,421 10,014
<TOTAL-COSTS> 7,256 15,973
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 155 351
<INCOME-PRETAX> 645 426
<INCOME-TAX> 254 209
<INCOME-CONTINUING> 391 217
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 391 217
<EPS-PRIMARY> .10 .06
<EPS-DILUTED> .09 .05
</TABLE>
