<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1998
REGISTRATION NO. 333-57365
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
CAPROCK COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
TEXAS 1731 75-2765572
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Number) Identification
Incorporation or Organization) Number)
</TABLE>
TWO GALLERIA TOWER, SUITE 1925
13455 NOEL ROAD
DALLAS, TX 75240-6638
(972) 982-9500
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
--------------------------
MR. JERE W. THOMPSON, JR.
CHIEF EXECUTIVE OFFICER
CAPROCK COMMUNICATIONS CORP.
TWO GALLERIA TOWER, SUITE 1925
13455 NOEL ROAD
DALLAS, TX 75240-6638
(972) 982-9500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
A. MICHAEL HAINSFURTHER, ESQ. MR. IGNATIUS W. LEONARDS DUDLEY W.
MARK A. KOPIDLANSKY, ESQ. PRESIDENT MURREY, ESQ.
MUNSCH HARDT KOPF HARR & CAPROCK COMMUNICATIONS CORP. HUGHES & LUCE,
DINAN, P.C. 12000 AEROSPACE AVENUE, L.L.P.
1445 ROSS AVE., SUITE 4000 SUITE 200 1717 MAIN
DALLAS, TX 75202-2790 HOUSTON, TX 77034 STREET, SUITE
(214) 855-7500 (281) 482-0289 2800
DALLAS, TX 75201
(214) 939-5500
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger of one subsidiary of CapRock Communications Corp.
("Holdings") with and into IWL Communications, Incorporated ("IWL"), the
consummation of the exchange of Holdings common stock for all of the partnership
interests of CapRock Fiber Network, Ltd. that are validly tendered to and
accepted by Holdings, and the merger of another subsidiary of Holdings with and
into CapRock Telecommunications Corp., all as described in the Agreement and
Plan of Merger and Plan of Exchange dated as of February 16, 1998, as amended.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
[IWL PRESIDENT'S LETTER]
, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of the shareholders of
IWL Communications, Incorporated ("IWL") on , 1998 (the "IWL Special
Meeting"), at which shareholders of IWL will be asked to approve the combination
of the businesses of IWL, CapRock Telecommunications Corp. (formerly known as
CapRock Communications Corp.) ("Telecommunications") and CapRock Fiber Network,
Ltd. (the "Partnership"). Upon the consummation of this business combination,
IWL and Telecommunications will become wholly owned subsidiaries of a newly
formed holding company, CapRock Communications Corp. (formerly known as IWL
Holdings Corp.) ("Holdings"), and Holdings will become a substitute limited
partner in the Partnership, with Telecommunications becoming a substitute
general partner in the Partnership. In addition, at the IWL Special Meeting, the
shareholders of IWL will be asked to approve the adoption of the CapRock
Communications Corp. 1998 Equity Incentive Plan (the "Equity Incentive Plan")
and the CapRock Communications Corp. 1998 Director Stock Option Plan (the
"Director Stock Option Plan").
Upon the completion of the business combination:
- each outstanding share of IWL common stock will be converted into one
share of Holdings common stock;
- each outstanding share of Telecommunications common stock will be
converted into 1.789030878 shares of Holdings common stock; and
- each one percent (1%) of the general and limited partnership interests in
the Partnership that is validly tendered to and accepted by Holdings will
be exchanged for 63,194.54 shares of Holdings common stock.
Immediately following the business combination, assuming all partnership
interests are validly tendered and accepted, the former holders of IWL common
stock will collectively hold approximately 13.8% of the issued and outstanding
shares of Holdings common stock, the former holders of Telecommunications common
stock will collectively hold approximately 64.4% of the issued and outstanding
shares of Holdings common stock and the former partners of the Partnership will
hold approximately 21.8% of the issued and outstanding shares of Holdings common
stock. On a diluted basis, the former holders of common stock, options, warrants
and partnership interests of IWL, Telecommunications and the Partnership will
own approximately 15%, 63.8% and 21.2% of the equity interests in Holdings,
respectively.
The accompanying Joint Proxy Statement/Prospectus provides you with detailed
information concerning the IWL Special Meeting, the proposed business
combination and the Holdings common stock to be issued in connection with the
transaction, the Equity Incentive Plan, the Director Stock Option Plan and
certain other matters. Please read the accompanying Joint Proxy
Statement/Prospectus carefully and give this information your careful attention.
Your Board of Directors (the "Board") has carefully reviewed and considered
the terms and conditions of the proposed business combination and believes that
the proposed business combination will provide opportunities to achieve
substantial benefits for IWL shareholders and customers through the more
efficient utilization of the combined assets, management and personnel of IWL,
Telecommunications and the Partnership. Your Board further believes that
Holdings will be better able to capitalize on growth opportunities in the
telecommunications industry, both domestically and internationally, and be
better positioned to compete effectively in the rapidly changing
telecommunications industry.
Cruttenden Roth Incorporated, the Board's financial advisor in connection
with this transaction, has delivered a written opinion to the Board, a copy of
which is attached to the accompanying Joint Proxy Statement/Prospectus, to the
effect that, as of the date of such opinion and based on and subject to the
assumptions, limitations and qualifications set forth therein, from a financial
point of view, the relative
<PAGE>
exchange ratio of Holdings common stock to IWL common stock and the
consideration to be received by the shareholders of IWL are fair to the
shareholders of IWL.
Your Board, by unanimous vote, has determined that the terms and provisions
of the proposed business combination are fair to, and in the best interests of,
IWL and the shareholders of IWL, and recommends that you vote FOR the proposal
to approve the business combination.
Your Board also has carefully reviewed and considered the Equity Incentive
Plan and the Director Stock Option Plan and unanimously recommends that you vote
FOR the proposals to approve each of these plans.
Please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to revoke your proxy, including by attending the IWL Special Meeting and
voting in person.
Sincerely yours,
Ignatius W. Leonards
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
12000 Aerospace Avenue
Suite 200
Houston, Texas 77034
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
Houston, Texas
, 1998
Notice is hereby given that a special meeting of the shareholders (the "IWL
Special Meeting") of IWL Communications, Incorporated ("IWL") will be held on
, 1998 at 10:00 a.m. local time, at , for the
following purposes:
1. To consider and vote on a proposal to approve and adopt the
Agreement and Plan of Merger and Plan of Exchange dated as of February 16,
1998, as amended (as so amended, the "Merger Agreement"), among IWL, CapRock
Communications Corp., a Texas corporation formerly known as IWL Holdings
Corp. ("Holdings"), IWL Acquisition Corp., a Texas corporation ("I-Sub"),
CapRock Telecommunications Corp., a Texas corporation formerly known as
CapRock Communications Corp. ("Telecommunications"), CapRock Acquisition
Corp., a Texas corporation ("C-Sub"), and CapRock Fiber Network, Ltd., a
Texas limited partnership (the "Partnership"), pursuant to which (i) I-Sub,
a newly formed subsidiary of Holdings, will be merged with and into IWL,
(ii) the general partnership interest and the limited partnership interests
in the Partnership that are validly tendered to and accepted by Holdings
will be exchanged (the "Interest Exchange") for shares of Holdings common
stock and (iii) C-Sub, a newly formed subsidiary of Holdings, will be merged
with and into Telecommunications (the mergers described in (i) and (iii) are
collectively referred to herein as the "Mergers"). As a result of the
Mergers and the Interest Exchange, and assuming that the general partnership
interest and at least 80% of the limited partnership interests are validly
tendered and accepted, IWL and Telecommunications will become wholly owned
subsidiaries of Holdings, Telecommunications will become a substitute
general partner in the Partnership and Holdings will become a substitute
limited partner in the Partnership. Upon the consummation of the Mergers,
each outstanding share of IWL common stock will be converted into one share
of Holdings common stock and each outstanding share of Telecommunications
common stock will be converted into 1.789030878 shares of Holdings common
stock. Upon consummation of the Interest Exchange, each one percent (1%)
general or limited partnership interest in the Partnership that is validly
tendered to and accepted by Holdings will be exchanged for 63,194.54 shares
of Holdings common stock. Immediately following the Mergers and the Interest
Exchange, assuming all partnership interests are validly tendered and
accepted, the former holders of IWL common stock will collectively hold
approximately 13.8% of the issued and outstanding shares of Holdings common
stock, the former holders of Telecommunications common stock will
collectively hold approximately 64.4% of the issued and outstanding shares
of Holdings common stock and the former partners of the Partnership will
hold approximately 21.8% of the issued and outstanding shares of Holdings
common stock. On a diluted basis, the former holders of common stock,
options, warrants and partnership interests of IWL, Telecommunications and
the Partnership will own approximately 15%, 63.8% and 21.2% of the equity
interests in Holdings, respectively.
2. To consider and vote on a proposal to approve the CapRock
Communications Corp. 1998 Equity Incentive Plan (the "Equity Incentive
Plan").
3. To consider and vote on a proposal to approve the CapRock
Communications Corp. 1998 Director Stock Option Plan (the "Director Stock
Option Plan").
4. To grant authorization to IWL to adjourn the IWL Special Meeting to
solicit additional proxies.
5. To transact such other business as may properly come before the IWL
Special Meeting.
<PAGE>
Shareholders of record at the close of business on , 1998 will be
entitled to receive notice of, and to vote at, the IWL Special Meeting. The
presence, in person or by proxy, of the holders of a majority of the outstanding
shares of IWL common stock entitled to vote at the IWL Special Meeting is
necessary to constitute a quorum at the IWL Special Meeting. Under the Texas
Business Corporation Act and pursuant to IWL's Articles of Incorporation, as
amended, the affirmative vote, in person or by proxy, of the holders of a
majority of the shares of IWL common stock outstanding and entitled to vote
thereon is required to approve and adopt the Merger Agreement. The affirmative
vote of a majority of the votes cast (including express abstentions), in person
or by proxy, by the holders of IWL common stock entitled to vote thereon at the
IWL Special Meeting, assuming a quorum is present, is required to approve all
other action proposed, including the Equity Incentive Plan and the Director
Stock Option Plan, except that the affirmative vote of the holders of a majority
of the IWL common stock represented in person or by proxy at the IWL Special
Meeting and entitled to vote thereon is required to approve the adjournment of
the IWL Special Meeting, if no quorum is present.
Please note that attendance at the IWL Special Meeting will be limited to
shareholders of IWL as of the record date (or their authorized representatives).
If your shares are held by a bank or broker, please bring to the IWL Special
Meeting evidence from your bank or broker of your beneficial ownership of IWL
common stock. A complete list of shareholders entitled to vote at the IWL
Special Meeting will be maintained in IWL's offices at 12000 Aerospace Avenue,
Suite 200, Houston, Texas 77034, for ten (10) days prior to the IWL Special
Meeting and will be open to the examination of any shareholder during ordinary
business hours of IWL.
Please advise IWL's transfer agent, American Securities Transfer & Trust,
Inc., 1825 Lawrence Street, Suite 444, Denver, Colorado 80202, of any changes in
your address.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE IWL SPECIAL MEETING, PLEASE
PROMPTLY MARK, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE
ENCLOSED PREPAID ENVELOPE. SHAREHOLDERS WHO DECIDE TO ATTEND THE IWL SPECIAL
MEETING MAY REVOKE THEIR PROXIES AT OR PRIOR TO THE IWL SPECIAL MEETING AND VOTE
IN PERSON EVEN IF THEY HAVE PREVIOUSLY RETURNED A PROXY.
By Order of the Board of Directors,
Richard H. Roberson
SECRETARY
<PAGE>
[TELECOMMUNICATIONS PRESIDENT'S LETTER]
, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of the shareholders of
CapRock Telecommunications Corp. (formerly known as CapRock Communications
Corp.)("Telecommunications") on , 1998 (the
"Telecommunications Special Meeting"), at which the shareholders of
Telecommunications will be asked to approve the combination of the businesses of
Telecommunications, CapRock Fiber Network, Ltd. (the "Partnership"), and IWL
Communications, Incorporated ("IWL"). Upon the consummation of this business
combination, Telecommunications and IWL will become wholly owned subsidiaries of
a newly formed holding company, CapRock Communications Corp. (formerly known as
IWL Holdings Corp.) ("Holdings"), and Holdings will become a substitute limited
partner in the Partnership, with Telecommunications becoming a substitute
general partner in the Partnership. In addition, at the Telecommunications
Special Meeting, the shareholders of Telecommunications will be asked to approve
the adoption of the CapRock Communications Corp. 1998 Equity Incentive Plan (the
"Equity Incentive Plan") and the CapRock Communications Corp. 1998 Director
Stock Option Plan (the "Director Stock Option Plan").
Upon the completion of the business combination:
- each outstanding share of Telecommunications common stock will be
converted into 1.789030878 shares of Holdings common stock;
- each one percent (1%) of the general and limited partnership interests in
the Partnership that is validly tendered to and accepted by Holdings will
be exchanged for 63,194.54 shares of Holdings common stock; and
- each outstanding share of IWL common stock will be converted into one
share of Holdings common stock.
Immediately following the business combination, assuming all partnership
interests are validly tendered and accepted, the former holders of IWL common
stock will collectively hold approximately 13.8% of the issued and outstanding
shares of Holdings common stock, the former holders of Telecommunications common
stock will collectively hold approximately 64.4% of the issued and outstanding
shares of Holdings common stock and the former partners of the Partnership will
hold approximately 21.8% of the issued and outstanding shares of Holdings common
stock. On a diluted basis, the former holders of common stock, options, warrants
and partnership interests of IWL, Telecommunications and the Partnership will
own approximately 15%, 63.8% and 21.2% of the equity interests in Holdings,
respectively.
The accompanying Joint Proxy Statement/Prospectus provides you with detailed
information concerning the Telecommunications Special Meeting, the proposed
business combination and the Holdings common stock to be issued in connection
with the transaction, the Equity Incentive Plan, the Director Stock Option Plan
and certain other matters. Please read the accompanying Joint Proxy
Statement/Prospectus carefully and give this information your careful attention.
Your Board of Directors (the "Board") has carefully reviewed and considered
the terms and conditions of the proposed business combination and believes that
the proposed business combination will provide opportunities to achieve
substantial benefits for Telecommunications shareholders and customers through
the more efficient utilization of the combined assets, management and personnel
of Telecommunications, the Partnership and IWL. Your Board further believes that
Holdings will be better able to capitalize on growth opportunities in the
telecommunications industry, both domestically and internationally, and be
better positioned to compete effectively in the rapidly changing
telecommunications industry.
Your Board, by unanimous vote, has determined that the terms and provisions
of the proposed business combination are fair to, and in the best interests of,
Telecommunications and the shareholders of Telecommunications and recommends
that you vote FOR the proposal to approve the business combination.
Your Board also has carefully reviewed and considered the Equity Incentive
Plan and the Director Stock Option Plan and unanimously recommends that you vote
FOR the proposals to approve each of these plans.
Please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to revoke your proxy, including by attending the Telecommunications
Special Meeting and voting in person.
Sincerely yours,
Jere W. Thompson, Jr.
PRESIDENT
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
TWO GALLERIA TOWER
13455 NOEL ROAD
SUITE 1925
DALLAS, TEXAS 75240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
Dallas, Texas
, 1998
Notice is hereby given that a special meeting of the shareholders (the
"Telecommunications Special Meeting") of CapRock Telecommunications Corp.
(formerly known as CapRock Communications Corp.) ("Telecommunications") will be
held on , 1998 at 10:00 a.m. local time, at
, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the
Agreement and Plan of Merger and Plan of Exchange dated as of February 16,
1998, as amended (as so amended, the "Merger Agreement"), among
Telecommunications, CapRock Communications Corp., a Texas corporation
formerly known as IWL Holdings Corp. ("Holdings"), IWL Acquisition Corp., a
Texas corporation ("I-Sub"), IWL Communications, Incorporated, a Texas
corporation ("IWL"), CapRock Acquisition Corp., a Texas corporation
("C-Sub"), and CapRock Fiber Network, Ltd., a Texas limited partnership (the
"Partnership"), pursuant to which (i) I-Sub, a newly formed subsidiary of
Holdings, will be merged with and into IWL, (ii) the general partnership
interest and the limited partnership interests in the Partnership that are
validly tendered to and accepted by Holdings will be exchanged (the
"Interest Exchange") for shares of Holdings common stock and (iii) C-Sub, a
newly formed subsidiary of Holdings, will be merged with and into
Telecommunications (the mergers described in (i) and (iii) are collectively
referred to herein as the "Mergers"). As a result of the Mergers and the
Interest Exchange, and assuming that the general partnership interest and at
least 80% of the limited partnership interests are validly tendered and
accepted, Telecommunications and IWL will become wholly owned subsidiaries
of Holdings, Telecommunications will become a substitute general partner in
the Partnership and Holdings will become a substitute limited partner in the
Partnership. Upon the consummation of the Mergers, each outstanding share of
Telecommunications common stock will be converted into 1.789030878 shares of
Holdings common stock and each outstanding share of IWL common stock will be
converted into one share of Holdings common stock. Upon consummation of the
Interest Exchange, each one percent (1%) general or limited partnership
interest in the Partnership that is validly tendered to and accepted by
Holdings will be exchanged for 63,194.54 shares of Holdings common stock.
Immediately following the Mergers and the Interest Exchange, assuming all
partnership interests are validly tendered and accepted, the former holders
of IWL common stock will collectively hold approximately 13.8% of the issued
and outstanding shares of Holdings common stock, the former holders of
Telecommunications common stock will collectively hold approximately 64.4%
of the issued and outstanding shares of Holdings common stock and the former
partners of the Partnership will hold approximately 21.8% of the issued and
outstanding shares of Holdings common stock. On a diluted basis, the former
holders of common stock, options, warrants and partnership interests of IWL,
Telecommunications and the Partnership will own approximately 15%, 63.8% and
21.2% of the equity interests in Holdings, respectively.
2. To consider and vote on a proposal to approve the CapRock
Communications Corp. 1998 Equity Incentive Plan (the "Equity Incentive
Plan").
3. To consider and vote on a proposal to approve the CapRock
Communications Corp. 1998 Director Stock Option Plan (the "Director Stock
Option Plan").
4. To grant authorization to Telecommunications to adjourn the
Telecommunications Special Meeting to solicit additional proxies.
5. To transact such other business as may properly come before the
Telecommunications Special Meeting.
Shareholders of record at the close of business on , 1998
will be entitled to receive notice of, and to vote at, the Telecommunications
Special Meeting. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of Telecommunications common stock entitled
<PAGE>
to vote at the Telecommunications Special Meeting is necessary to constitute a
quorum at the Telecommunications Special Meeting. Under the Texas Business
Corporation Act, the affirmative vote, in person or by proxy, of the holders of
at least two-thirds of the shares of Telecommunications common stock outstanding
and entitled to vote thereon is required to approve and adopt the Merger
Agreement. The affirmative vote of a majority of the votes cast (including
express abstentions), in person or by proxy, by the holders of
Telecommunications common stock entitled to vote thereon at the
Telecommunications Special Meeting, assuming a quorum is present, is required to
approve all other action proposed, including the Equity Incentive Plan and the
Director Stock Option Plan, except that the affirmative vote of the holders of a
majority of the Telecommunications common stock represented in person or by
proxy at the Telecommunications Special Meeting and entitled to vote thereon is
required to approve the adjournment of the Telecommunications Special Meeting,
if no quorum is present.
Please note that attendance at the Telecommunications Special Meeting will
be limited to shareholders of Telecommunications as of the record date (or their
authorized representatives). If your shares are held by a bank or broker, please
bring to the Telecommunications Special Meeting evidence from your bank or
broker of your beneficial ownership of Telecommunications common stock. A
complete list of shareholders entitled to vote at the Telecommunications Special
Meeting will be maintained in Telecommunications' offices at Two Galleria Tower,
13455 Noel Road, Suite 1925, Dallas, Texas 75240, for ten (10) days prior to the
Telecommunications Special Meeting and will be open to the examination of any
shareholder during ordinary business hours of Telecommunications.
Please advise Telecommunications, at its offices at such address to the
attention of its Corporate Secretary, of any changes in your address.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE TELECOMMUNICATIONS SPECIAL
MEETING, PLEASE PROMPTLY MARK, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND
RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. SHAREHOLDERS WHO DECIDE TO ATTEND
THE TELECOMMUNICATIONS SPECIAL MEETING MAY REVOKE THEIR PROXIES AT OR PRIOR TO
THE TELECOMMUNICATIONS SPECIAL MEETING AND VOTE IN PERSON EVEN IF THEY HAVE
PREVIOUSLY RETURNED A PROXY.
By Order of the Board of Directors,
Timothy M. Terrell
SECRETARY
<PAGE>
[GENERAL PARTNER'S PRESIDENT'S LETTER AND NOTICE]
, 1998
Dear Partner:
Notice is hereby given of the proposed combination of the businesses of
CapRock Fiber Network, Ltd. (the "Partnership"), CapRock Telecommunications
Corp. (formerly known as CapRock Communications Corp.)("Telecommunications") and
IWL Communications, Incorporated ("IWL"). Upon the consummation of this business
combination, Telecommunications and IWL will become wholly owned subsidiaries of
a newly formed holding company, CapRock Communications Corp. (formerly known as
IWL Holdings Corp.) ("Holdings"), and Holdings will become a substitute limited
partner in the Partnership, with Telecommunications becoming a substitute
general partner in the Partnership. In addition, in connection with such
transaction, Holdings intends to adopt the CapRock Communications Corp. 1998
Equity Incentive Plan (the "Equity Incentive Plan") and the CapRock
Communications Corp. 1998 Director Stock Option Plan (the "Director Stock Option
Plan").
Upon the completion of the business combination:
- each one percent (1%) of the general and limited partnership interests in
the Partnership that is validly tendered to and accepted by Holdings will
be exchanged for 63,194.54 shares of Holdings common stock;
- each outstanding share of Telecommunications common stock will be
converted into 1.789030878 shares of Holdings common stock; and
- each outstanding share of IWL common stock will be converted into one
share of Holdings common stock.
Immediately following the business combination, assuming all partnership
interests are validly tendered and accepted, the former holders of IWL common
stock will collectively hold approximately 13.8% of the issued and outstanding
shares of Holdings common stock, the former holders of Telecommunications common
stock will collectively hold approximately 64.4% of the issued and outstanding
shares of Holdings common stock and the former partners of the Partnership will
hold approximately 21.8% of the issued and outstanding shares of Holdings common
stock. On a diluted basis, the former holders of common stock, options, warrants
and partnership interests of IWL, Telecommunications and the Partnership will
own approximately 15%, 63.8% and 21.2% of equity interests in Holdings,
respectively.
Each partner of the Partnership is being provided with a contribution
agreement (the "Contribution Agreement") pursuant to which each partner may
elect, among other things, to:
1. Approve and adopt the Agreement and Plan of Merger and Plan of
Exchange dated as of February 16, 1998, as amended (as so amended, the
"Merger Agreement"), among the Partnership, Telecommunications, Holdings,
IWL, IWL Acquisition Corp., a Texas corporation ("I-Sub"), and CapRock
Acquisition Corp., a Texas corporation ("C-Sub"), pursuant to which (i)
C-Sub and I-Sub, two newly formed subsidiaries of Holdings, will be merged
with and into Telecommunications and IWL, respectively (the "Mergers"), and
(ii) immediately after the effective time of the Merger of
I-Sub into IWL and immediately prior to the effective time of the Merger of
C-Sub into Telecommunications, the general partnership interest and the
limited partnership interests in the Partnership that are validly tendered
to and accepted by Holdings will be exchanged (the "Interest Exchange") for
shares of Holdings common stock.
2. Transfer and contribute the partner's entire partnership interest in
the Partnership to Holdings in exchange for shares of Holdings common stock
at the exchange ratio set forth above, and consent to all other transfers of
partnership interests in the Interest Exchange, including the transfer of
the general partnership interest (i) from CapRock Systems, Inc., a Texas
corporation that is the current general partner in the Partnership (the
"General Partner") to Holdings, (ii) from Holdings to C-Sub and (iii) from
C-Sub to Telecommunications.
<PAGE>
3. Consent to the substitution of Holdings as a substitute limited
partner in the Partnership in respect of the limited partnership interests
accepted by it in the Interest Exchange.
4. Consent to the substitution of Telecommunications as a substitute
general partner in the Partnership in respect of the general partnership
interest accepted by Holdings in the Interest Exchange and then transferred
indirectly to Telecommunications.
5. Approve the Equity Incentive Plan.
6. Approve the Director Stock Option Plan.
The accompanying Joint Proxy Statement/Prospectus provides you with detailed
information concerning the Interest Exchange, the special meetings of the
shareholders of IWL and Telecommunications for the Mergers, the proposed
business combination and the Holdings common stock to be issued in connection
with the transaction, the Equity Incentive Plan, the Director Stock Option Plan
and certain other matters. Please read the accompanying Joint Proxy
Statement/Prospectus carefully and give this information your careful attention.
The Board of Directors of the General Partner has carefully reviewed and
considered the terms and conditions of the proposed business combination and
believes that the proposed business combination will provide opportunities to
achieve substantial benefits for the Partnership's partners and customers
through the more efficient utilization of the combined assets, management and
personnel of the Partnership, Telecommunications and IWL. The General Partner's
Board of Directors further believes that Holdings will be better able to
capitalize on growth opportunities in the telecommunications industry, both
domestically and internationally, and be better positioned to compete
effectively in the rapidly changing telecommunications industry.
The Board of Directors of the General Partner, by unanimous vote, has
determined that the terms and provisions of the proposed business combination
are fair to, and in the best interests of the Partnership and the holders of
partnership interests in the Partnership and recommends that you approve the
business combination and the Interest Exchange and, in connection therewith, the
substitution of Holdings and Telecommunications as a substitute limited partner
and general partner, respectively, in the Partnership.
The Board of Directors of the General Partner also has carefully reviewed
and considered the Equity Incentive Plan and the Director Stock Option Plan and
unanimously recommends that you approve each of these plans.
Please complete and sign the enclosed Contribution Agreement and return it
in the enclosed prepaid envelope as soon as possible (please leave the
Contribution Agreement undated; it will be dated as of the effective date of the
IWL Merger).
Sincerely yours,
Jere W. Thompson, Jr.
PRESIDENT, CAPROCK SYSTEMS, INC.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
FOR SPECIAL MEETINGS OF SHAREHOLDERS
OF
IWL COMMUNICATIONS, INCORPORATED
AND
CAPROCK TELECOMMUNICATIONS CORP.
TO BE HELD ON , 1998
------------------------
CAPROCK COMMUNICATIONS CORP.
29,738,607 SHARES OF $.01 PAR VALUE COMMON STOCK
------------------
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, par value $.01 per share ("IWL Common Stock"), of IWL
Communications, Incorporated, a Texas corporation ("IWL"), and holders of common
stock, $.01 par value per share ("Telecommunications Common Stock"), of CapRock
Telecommunications Corp., a Texas corporation formerly known as CapRock
Communications Corp. ("Telecommunications"), in connection with the solicitation
of proxies by the respective Boards of Directors of IWL and Telecommunications
for use at their respective special meetings of shareholders, and at any
adjournment or postponement thereof (the "IWL Special Meeting" and the
"Telecommunications Special Meeting," respectively, and, collectively, the
"Special Meetings"), called to consider and vote upon (i) a proposal to approve
and adopt the Agreement and Plan of Merger and Plan of Exchange, dated as of
February 16, 1998, as amended (as so amended, the "Merger Agreement"), among
IWL, Telecommunications, CapRock Communications Corp., a Texas corporation
formerly known as IWL Holdings Corp. ("Holdings"), IWL Acquisition Corp., a
Texas corporation ("I-Sub"), CapRock Acquisition Corp., a Texas corporation
("C-Sub"), and CapRock Fiber Network, Ltd., a Texas limited partnership (the
"Partnership"), and (ii) proposals (collectively, the "Plan Proposals") to
approve each of the CapRock Communications Corp. 1998 Equity Incentive Plan (the
"Equity Incentive Plan") and the CapRock Communications Corp. 1998 Director
Stock Option Plan (the "Director Stock Option Plan"). This Joint Proxy
Statement/Prospectus is also being furnished in connection with the issuance of
shares of Holdings Common Stock (as defined below) to holders of IWL Common
Stock, holders of Telecommunications Common Stock, and holders of Partnership
Interests (as defined below) upon the consummation of the Mergers and the
Interest Exchange (as defined below). The combination of the businesses of IWL,
Telecommunications and the Partnership contemplated by the Merger Agreement is
referred to herein as the "Transaction." Prior to the mailing of this Joint
Proxy Statement/Prospectus, Holdings, which was incorporated as "IWL Holdings
Corp.," changed its name to "CapRock Communications Corp." and, in connection
therewith, Telecommunications changed its name from "CapRock Communications
Corp." to "CapRock Telecommunications Corp."
The Merger Agreement provides, among other things, for (a) the merger of
I-Sub with and into IWL (the "IWL Merger"), with IWL surviving the IWL Merger as
a wholly owned subsidiary of Holdings, (b) the exchange (the "Interest
Exchange") of the general partnership interest and limited partnership interests
(collectively, the "Partnership Interests") in the Partnership that are validly
tendered to and accepted by Holdings pursuant to the Exchange Offer (as defined
below) for shares of the common stock, par value $.01 per share, of Holdings
(the "Holdings Common Stock") and (c) the merger of C-Sub with and into
Telecommunications (the "Telecommunications Merger" and, together with the IWL
Merger, the "Mergers"), with Telecommunications surviving the Telecommunications
Merger as a wholly owned subsidiary of Holdings. Upon the effectiveness of the
Mergers, the shares of IWL Common Stock and the shares of Telecommunications
Common Stock will be converted into shares of Holdings Common Stock, and the
holders of such shares will become shareholders of Holdings, on the terms
described in the Merger Agreement and this Joint Proxy Statement/Prospectus. The
Mergers are expected to become effective after the receipt of the requisite
regulatory and shareholder approvals (the time at which the IWL Merger becomes
effective being called the "IWL Merger Effective Time," the time at which the
Telecommunications Merger becomes effective being called the "Telecommunications
Merger Effective Time" and each being called an "Effective Time"). As part of
the Interest Exchange, Holdings will contribute to C-Sub the general Partnership
Interest in the Partnership received by Holdings in the Interest Exchange. At
the Effective Time of the Telecommunications Merger, Telecommunications, as
successor by merger to C-Sub, will acquire the general Partnership Interest in
the Partnership and will become a substitute general partner in the Partnership.
In addition, the Interest Exchange will result in Holdings becoming a substitute
limited partner in the Partnership in respect of the limited Partnership
Interests received by it in the Interest Exchange. Holders of Partnership
Interests that are validly tendered in the Exchange Offer to and are accepted by
Holdings will receive shares of Holdings Common Stock in exchange for their
interests in the Partnership and will become shareholders of Holdings on the
terms described in the Merger Agreement and this Joint Proxy
Statement/Prospectus. Holders of Telecommunications Common Stock will be
entitled to appraisal rights but holders of IWL Common Stock and holders of
Partnership Interests will not have such appraisal rights. See "The Transaction"
and "The Merger Agreement."
SEE "RISK FACTORS" BEGINNING ON PAGE 39 OF THIS JOINT PROXY
STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE
CAREFULLY CONSIDERED BY HOLDERS OF IWL COMMON STOCK AND HOLDERS OF
TELECOMMUNICATIONS COMMON STOCK IN DETERMINING HOW TO VOTE WITH RESPECT TO THE
MERGER AGREEMENT AND BY HOLDERS OF PARTNERSHIP INTERESTS IN DETERMINING WHETHER
TO PARTICIPATE IN THE INTEREST EXCHANGE.
<PAGE>
Holdings has filed a registration statement on Form S-4 (together with all
amendments thereto and all schedules and exhibits filed or incorporated by
reference as a part thereof, the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to up to 29,738,607
shares of Holdings Common Stock that are proposed to be issued (i) in connection
with the Mergers to holders of outstanding shares of IWL Common Stock and to
holders of outstanding shares of Telecommunications Common Stock, (ii) in
connection with the Interest Exchange to holders of outstanding Partnership
Interests in the Partnership that are validly tendered and accepted and (iii)
upon the exercise of IWL and Telecommunications stock options and warrants that
are outstanding and unexercised at the Effective Time and that, pursuant to the
Merger Agreement, will be assumed by Holdings and converted into options and
warrants to purchase shares of Holdings Common Stock. This Joint Proxy
Statement/Prospectus also constitutes the Prospectus of Holdings filed as part
of the Registration Statement. Upon completion of the Transaction, the former
holders of IWL Common Stock, stock options and warrants, the former holders of
Telecommunications Common Stock and stock options and the former holders of the
Partnership Interests (assuming all Partnership Interests are validly tendered
to and accepted by Holdings in the Exchange Offer) will hold approximately 15%,
63.8% and 21.2%, respectively, of the issued and outstanding shares of Holdings
Common Stock, on a diluted basis.
Prior to the date on which the Mergers and the Interest Exchange are
consummated (the "Closing Date"), Holdings shall use its best efforts to obtain
the approval for listing on the Nasdaq National Market, subject to official
notice of issuance, of the Holdings Common Stock registered under the
Registration Statement. It is a condition to the closing of the Transaction that
such approval be obtained. See "The Merger Agreement--Consideration to be
Received in the Mergers," "--Treatment of Stock Options" and "--Certain
Conditions."
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to holders of IWL Common Stock, holders of Telecommunications
Common Stock and holders of Partnership Interests on or about July , 1998.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN TIME, ON AUGUST
, 1998, UNLESS EXTENDED. SEE "THE INTEREST EXCHANGE."
------------------------------
THE IWL BOARD HAS DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR
TO, AND IN THE BEST INTERESTS OF, IWL AND THE HOLDERS OF IWL COMMON STOCK AND
RECOMMENDS THAT HOLDERS OF IWL COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT. THE TELECOMMUNICATIONS BOARD HAS DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, TELECOMMUNICATIONS
AND THE HOLDERS OF TELECOMMUNICATIONS COMMON STOCK AND RECOMMENDS THAT THE
HOLDERS OF TELECOMMUNICATIONS COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT.
THE GENERAL PARTNER'S BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF
THE MERGER AGREEMENT AND THE EXCHANGE OFFER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE PARTNERSHIP AND THE HOLDERS OF PARTNERSHIP INTERESTS AND
RECOMMENDS THAT THE HOLDERS OF PARTNERSHIP INTERESTS PARTICIPATE IN THE INTEREST
EXCHANGE AND, IN CONNECTION THEREWITH, EXCHANGE THEIR PARTNERSHIP INTERESTS FOR
SHARES OF HOLDINGS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE
EXCHANGE OFFER.
------------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
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 JOINT PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus does not cover any resales of the
Holdings Common Stock to be received by the holders of IWL Common Stock or the
holders of Telecommunications Common Stock upon the consummation of the Mergers
or to be received by holders of Partnership Interests upon consummation of the
Interest Exchange. No person is authorized to make any use of this Joint Proxy
Statement/Prospectus in connection with any such resale.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JULY , 1998.
2
<PAGE>
AVAILABLE INFORMATION
IWL is subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Upon
consummation of the Transaction, Holdings will be subject to the information
reporting requirements of the Exchange Act and, in accordance therewith, will be
required to file reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, Room 1024, N.W., Washington, D.C. 20549 and at the Regional Offices of
the Commission at Seven World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a Web site on
the Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
including IWL (http: / / www.sec.gov). IWL Common Stock is listed on the Nasdaq
National Market and such information with respect to IWL may also be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. Upon consummation of the Transaction,
Holdings' Common Stock will be listed on the Nasdaq National Market and such
information with respect to Holdings may also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Joint Proxy Statement/Prospectus does not include all of the
information set forth in the Registration Statement filed by Holdings with the
Commission under the Securities Act, as permitted by the rules and regulations
of the Commission. The Registration Statement is available for inspection and
copying as set forth above. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated herein by reference or
included herein concerning the contents of any contract or other document
referred to herein or therein are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, and each statement
shall be deemed qualified in its entirety by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES COVERED BY THIS JOINT PROXY
STATEMENT/ PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR
TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF IWL,
TELECOMMUNICATIONS, THE PARTNERSHIP OR HOLDINGS SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED OR INCORPORATED HEREIN BY REFERENCE IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
Neither Telecommunications nor the Partnership is currently subject to the
reporting requirements of the Exchange Act, and neither has any class of
securities listed on a national securities exchange or quoted on the Nasdaq
National Market.
3
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995),
including, without limitation, the information concerning possible, assumed or
projected future results of operations of IWL set forth under "The Transaction--
Recommendation of IWL Board,"--"Recommendation of Telecommunications Board,"
"--Reasons for the Transaction," "--Fairness Opinion of IWL Financial Advisor,"
"Business of Holdings," "Summary-- Summary Selected Unaudited Pro Forma Combined
Condensed Financial Data," "Unaudited Pro Forma Combined Condensed Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of IWL," statements preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "may," "will," "could," "should," or "continue" or the negative
thereof or other variations thereof and other similar expressions and all other
statements that are not historical facts. All forward-looking statements in this
Joint Proxy Statement/Prospectus are based on management's current expectations
of the near term results of IWL based on certain assumptions and current
information available pertaining to IWL, including the risk factors described
below under the caption "Risk Factors." All forward-looking statements involve
risks and uncertainties and do not purport to be predictions of future events or
circumstances and actual results could differ materially. Readers are cautioned
that the following important factors, in addition to those discussed elsewhere
herein (including, without limitation, the matters discussed under "Risk
Factors"), could affect the future results of IWL and cause those results to
differ materially from those expressed in such forward-looking statements: the
ability to service substantial indebtedness and to comply with the restrictive
covenants associated therewith, IWL's ability to fund its significant capital
requirements, risks associated with the development of provisioning, billing,
customer service and management information systems, competition and
technological advances, dependence on other long distance and local carriers,
dependence on key personnel, risks associated with industry concentration, and
dependence on major customers, risks associated with international customers,
risks of government regulation, risks of possible service interruptions and
natural disasters, risks associated with being an Internet service provider,
risks associated with variability of operating results, risks associated with
the Year 2000 issues and risks associated with general business and economic
conditions.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION................................................................. 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS............................ 4
SUMMARY............................................................................... 11
Risk Factors........................................................................ 11
The Companies....................................................................... 11
The Special Meetings................................................................ 17
The Transaction..................................................................... 20
The Plan Proposals.................................................................. 28
Summary Selected Unaudited Pro Forma
Combined Condensed Financial Data................................................. 29
Summary Selected Consolidated Historical Financial Data of IWL...................... 31
Summary Selected Historical Financial Data of Telecommunications.................... 33
Summary Selected Historical Financial Data of the Partnership....................... 35
Comparative Per Share Information................................................... 37
Comparative Per Share Market Price Information...................................... 38
Listing of Holdings Common Stock.................................................... 38
Dividend Policy..................................................................... 38
RISK FACTORS.......................................................................... 39
Fixed Exchange Ratio................................................................ 39
Sustantial Indebtedness; Restrictive Covenants...................................... 39
Holding Company Structure; Structural Subordination................................. 40
Managing Rapid Change; Integration of Combined Businesses........................... 41
Significant Capital Requirements.................................................... 42
Risks Related to the Fiber Network.................................................. 42
Development of Provisioning, Billing, Customer Service
and Management Information Systems................................................ 43
Competition......................................................................... 43
Dependence on Other Long Distance Carriers.......................................... 46
Dependence on Incumbent Local Exchange Carriers..................................... 46
Dependence on Key Personnel......................................................... 46
Dependence on Major Customers....................................................... 46
Risks Associated with International Customers....................................... 47
Regulation of Long Distance and Local Telephone Services............................ 47
Possible Service Interruptions; Natural Disasters................................... 48
Potential Liability of Internet Service Providers................................... 49
Need to Obtain and Maintain Rights-of-Way........................................... 49
Failure to Consummate Transaction; Proceeds in Escrow Account May Be Insufficient to
Repurchase Proposed Notes......................................................... 49
Variability in Operating Results.................................................... 50
Possible Claims Relating to Ownership of Proprietary Rights......................... 50
Lack of Dividends................................................................... 50
Concentration of Ownership.......................................................... 51
Change of Control of IWL............................................................ 51
Year 2000 Compliance................................................................ 51
Certain Anti-Takeover Matters....................................................... 51
Assumption of General Partner Liabilities........................................... 52
THE TRANSACTION....................................................................... 53
General............................................................................. 53
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Background of the Transaction....................................................... 53
Recommendation of IWL Board......................................................... 60
Recommendation of Telecommunications Board.......................................... 61
Recommendation of General Partner Board............................................. 62
Reasons for the Transaction......................................................... 63
Fairness Opinion of IWL Financial Advisor........................................... 64
Interests of Certain Persons in the Transaction..................................... 69
Accounting Treatment................................................................ 71
Certain United States Federal Income Tax Consequences of the Mergers................ 71
Certain United States Federal Income Tax Consequences of the Interest Exchange...... 73
Regulatory Approvals................................................................ 74
Nasdaq Listing...................................................................... 75
Delisting and Deregistration of IWL Common Stock;
Cessation of Periodic Reporting................................................... 75
Federal Securities Laws Consequences................................................ 75
Appraisal Rights.................................................................... 75
BUSINESS OF HOLDINGS.................................................................. 79
DIRECTORS AND MANAGEMENT OF HOLDINGS.................................................. 81
Directors........................................................................... 81
Committees of Holdings.............................................................. 81
Directors and Officers.............................................................. 82
Executive Compensation.............................................................. 83
OWNERSHIP OF HOLDINGS................................................................. 83
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION........................... 86
SELECTED HISTORICAL FINANCIAL DATA OF TELECOMMUNICATIONS.............................. 87
SELECTED HISTORICAL FINANCIAL DATA OF THE PARTNERSHIP................................. 89
SELECTED HISTORICAL FINANCIAL DATA OF IWL............................................. 91
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS........................... 93
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS............................................. 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TELECOMMUNICATIONS..................................... 100
Overview............................................................................ 100
Results of Operations............................................................... 100
New Accounting Pronouncements....................................................... 102
Liquidity and Capital Resources..................................................... 103
Contingencies....................................................................... 104
Year 2000........................................................................... 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE PARTNERSHIP........................................ 105
Overview............................................................................ 105
Results of Operations............................................................... 105
New Accounting Pronouncements....................................................... 107
Liquidity and Capital Resources..................................................... 108
Contingencies....................................................................... 109
Year 2000........................................................................... 109
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IWL.................................................... 110
Overview............................................................................ 110
Comparison of Three Months Ended March 31, 1998 and 1997............................ 111
Comparison of Six Months Ended December 31, 1997 and 1996........................... 112
Comparison of Fiscal Years Ended June 30, 1997 and 1996............................. 113
Comparison of Fiscal Years Ended June 30, 1996 and 1995............................. 114
New Accounting Pronouncements....................................................... 115
Liquidity and Capital Resources..................................................... 116
Contingencies....................................................................... 117
Year 2000........................................................................... 117
Recent Developments................................................................. 117
OFFERING OF PROPOSED NOTES............................................................ 118
INFORMATION REGARDING TELECOMMUNICATIONS.............................................. 120
Business............................................................................ 120
Products and Services............................................................... 120
Carrier Services.................................................................... 122
Sales and Marketing................................................................. 122
Competition and Government Regulation............................................... 123
Customer Care and Support Systems................................................... 124
Employees........................................................................... 124
Properties.......................................................................... 124
Legal Proceedings................................................................... 124
Directors and Executive Officers.................................................... 125
Executive Compensation.............................................................. 126
Employee Benefit Plans and Arrangements............................................. 126
Related Party Transactions.......................................................... 127
Security Ownership of Certain Beneficial Owners
and Management of Telecommunications.............................................. 128
INFORMATION REGARDING THE PARTNERSHIP................................................. 130
Business............................................................................ 130
Network............................................................................. 130
Service Agreements.................................................................. 131
Competition......................................................................... 131
Employees........................................................................... 131
Properties.......................................................................... 131
Legal Proceedings................................................................... 131
Directors and Executive Officers.................................................... 131
Executive Compensation.............................................................. 131
Related Party Transactions.......................................................... 131
Ownership of Certain Beneficial Owners and Management of the Partnership............ 131
INFORMATION REGARDING IWL............................................................. 134
Business............................................................................ 134
Service Offerings................................................................... 135
Project Management Services......................................................... 135
Offshore Services................................................................... 135
Internet Service Provider........................................................... 135
Wireless Services................................................................... 135
Sales and Marketing................................................................. 135
</TABLE>
7
<PAGE>
<TABLE>
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Customer Service.................................................................... 136
Competition and Government Regulation............................................... 136
Employees........................................................................... 136
Licenses and Certifications......................................................... 136
Properties.......................................................................... 137
Legal Proceedings................................................................... 137
Directors and Executive Officers.................................................... 138
Board Committees.................................................................... 140
Director Compensation............................................................... 140
Compensation Committee Interlocks and Insider Participation......................... 140
Executive Compensation.............................................................. 140
Summary Compensation Table.......................................................... 141
Option Grants in Last Fiscal Year................................................... 142
Fiscal Year-End Option Values Table................................................. 142
Incentive Bonus Program............................................................. 142
Related Party Transactions.......................................................... 142
Security Ownership of Certain Beneficial Owners and Management of IWL............... 143
COMPETITION........................................................................... 145
REGULATION AND LICENSES............................................................... 148
Government Regulation............................................................... 148
Licenses............................................................................ 154
THE SPECIAL MEETINGS.................................................................. 155
General............................................................................. 155
Record Dates........................................................................ 155
Times and Places; Purposes.......................................................... 155
Voting Rights; Votes Required for Approval.......................................... 156
Proxies............................................................................. 157
THE MERGER AGREEMENT.................................................................. 159
General............................................................................. 159
Consideration to be Received in the Mergers......................................... 159
Dissenter's Rights.................................................................. 160
Treatment of Stock Options.......................................................... 160
Holdings Following the Merger....................................................... 161
Certain Conditions.................................................................. 161
Certain Representations and Warranties.............................................. 162
Certain Covenants................................................................... 163
No Solicitation of Transactions..................................................... 164
Control of Other Party's Business................................................... 164
Employment Agreements............................................................... 164
Pooling Accounting.................................................................. 164
Termination......................................................................... 164
Effect of Termination............................................................... 165
Expenses............................................................................ 166
Modification or Amendment........................................................... 167
THE INTEREST EXCHANGE................................................................. 167
Terms of the Exchange; Expiration Date.............................................. 167
Acceptance for Exchange............................................................. 168
Conditions.......................................................................... 169
Procedure for Tendering Partnership Interests....................................... 169
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Withdrawal Rights................................................................... 170
Representations, Appointments, Waivers and Covenants................................ 170
Extension of Tender Period; Termination; Amendment.................................. 171
THE PLAN PROPOSALS.................................................................... 172
The Equity Incentive Plan........................................................... 172
The Director Stock Option Plan...................................................... 175
Certain Federal Income Tax Consequences............................................. 176
COMPARISON OF SHAREHOLDER RIGHTS...................................................... 178
Comparison of Shareholder Rights of IWL and Holdings................................ 179
Comparison of Shareholder Rights of Telecommunications and Holdings................. 179
COMPARISON OF PARTNERSHIP INTERESTS AND HOLDINGS COMMON STOCK......................... 181
Issuer.............................................................................. 182
Taxation............................................................................ 182
Distributions and Dividends......................................................... 182
Management.......................................................................... 183
Voting Rights....................................................................... 183
Special Meetings.................................................................... 184
Conversion Rights................................................................... 184
Liquidation Rights.................................................................. 184
Right to Compel Dissolution......................................................... 184
Limited Liability................................................................... 185
Liquidity and Marketability......................................................... 185
Continuity of Existence............................................................. 185
Financial Reporting................................................................. 185
Certain Legal Rights................................................................ 185
Right to List of Holders; Inspection of Books and Records........................... 186
DESCRIPTION OF HOLDINGS CAPITAL STOCK................................................. 186
Authorized Capital Stock............................................................ 186
Common Stock........................................................................ 186
Preferred Stock..................................................................... 187
Preemptive Rights................................................................... 187
Transfer Agent and Registrar........................................................ 187
Certain Anti-Takeover Effects....................................................... 187
Warrants............................................................................ 188
Registration Rights................................................................. 188
LEGAL MATTERS......................................................................... 188
EXPERTS............................................................................... 188
ACCOUNTANTS........................................................................... 189
FUTURE STOCKHOLDER PROPOSALS.......................................................... 189
CAPROCK TELECOMMUNICATIONS CORP. (FORMERLY CAPROCK COMMUNICATIONS CORP.)
Independent Auditors' Report of KPMG Peat Marwick LLP................................. F-1
Independent Auditors' Report of Burds, Reed and Mercer, P.C........................... F-2
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998.................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998...................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1998...................................... F-5
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998...................................... F-6
Notes to Financial Statements......................................................... F-7
CAPROCK FIBER NETWORK, LTD.
Independent Auditors' Report of KPMG Peat Marwick LLP................................. F-16
Independent Auditors' Report of Burds, Reed and Mercer, P.C........................... F-17
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998.................... F-18
Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998...................................... F-19
Statements of Partners' Deficit for the years ended December 31, 1995, 1996 and 1997
and the three months ended March 31, 1998........................................... F-20
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998...................................... F-21
Notes to Financial Statements......................................................... F-22
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report.......................................................... F-27
Consolidated Balance Sheets as of June 30, 1996 and 1997 and December 31, 1997........ F-28
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and 1997
and for the six months ended December 31, 1996 and 1997............................. F-29
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1995,
1996 and 1997 and for the six months ended December 31, 1997........................ F-30
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997
and for the six months ended December 31, 1996 and 1997............................. F-31
Notes to Consolidated Financial Statements............................................ F-33
Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998................ F-49
Consolidated Statements of Operations for the three months ended March 31, 1997 and
1998................................................................................ F-50
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and
1998................................................................................ F-51
Notes to Consolidated Financial Statements............................................ F-52
CAPROCK COMMUNICATIONS CORP. (FORMERLY IWL HOLDINGS CORP.)
Independent Auditors' Report.......................................................... F-54
Consolidated Balance Sheet as of March 31, 1998....................................... F-55
Notes to Balance Sheet................................................................ F-56
</TABLE>
<TABLE>
<S> <C> <C>
Appendix I - Merger Agreement, as amended
Appendix II - Opinion of Cruttenden Roth Incorporated
Appendix III - Articles of Incorporation of CapRock
Communications Corp.
Appendix IV - Bylaws of CapRock Communications Corp.
Appendix V - Articles 5.11 through 5.13 of the
the Texas Business Corporation Act
Appendix VI - CapRock Communications Corp. 1998
Equity Incentive Plan
Appendix VII - CapRock Communications Corp. 1998
Director Stock Option Plan
</TABLE>
10
<PAGE>
SUMMARY
THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS OTHERWISE REFERRED
TO HEREIN, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO OF
TELECOMMUNICATIONS, THE PARTNERSHIP AND IWL. HOLDERS OF TELECOMMUNICATIONS
COMMON STOCK, HOLDERS OF PARTNERSHIP INTERESTS AND HOLDERS OF IWL COMMON STOCK
SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK
FACTORS" AND ARE URGED TO READ THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS
ENTIRETY. UNLESS THE CONTEXT OTHERWISE INDICATES, ALL REFERENCES TO
TELECOMMUNICATIONS, THE PARTNERSHIP AND IWL HEREIN INCLUDE SUCH COMPANIES AND
THEIR RESPECTIVE SUBSIDIARIES AND PREDECESSORS. UNLESS THE CONTEXT OTHERWISE
REQUIRES OR AS OTHERWISE EXPRESSLY PROVIDED HEREIN, REFERENCES IN THIS JOINT
PROXY STATEMENT/PROSPECTUS TO HOLDINGS REFER TO CAPROCK COMMUNICATIONS CORP. AND
ITS SUBSIDIARIES, COLLECTIVELY, INCLUDING, AFTER CONSUMMATION OF THE MERGERS AND
THE INTEREST EXCHANGE, TELECOMMUNICATIONS, THE PARTNERSHIP AND IWL AND THEIR
RESPECTIVE SUBSIDIARIES. ALL REFERENCES HEREIN TO YEARS ARE REFERENCES TO
CALENDAR YEARS AND NOT FISCAL YEARS UNLESS OTHERWISE STATED. IN CONNECTION WITH
THE TRANSACTION, IN MAY 1998, IWL CHANGED ITS FISCAL YEAR END FROM JUNE 30 TO
DECEMBER 31.
RISK FACTORS
SEE "RISK FACTORS" FOLLOWING THIS SUMMARY FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY THE IWL SHAREHOLDERS AND THE
TELECOMMUNICATIONS SHAREHOLDERS IN EVALUATING WHETHER TO VOTE IN FAVOR OF THE
MERGERS AND BY THE PARTNERS IN THE PARTNERSHIP IN EVALUATING WHETHER TO
PARTICIPATE IN THE INTEREST EXCHANGE.
These risks include, among other factors, the fact that the exchange ratios
are fixed, the ability to service substantial indebtedness and to comply with
the restrictive covenants associated therewith, the risks associated with a
holding company structure, the ability of Holdings to manage rapid change
(particularly as evidenced by IWL's recent reclassification of interim financial
information) and to integrate the business of three companies and achieve the
benefits of the Transaction, Holdings' ability to fund its significant capital
requirements, risks related to building a fiber network, risks associated with
the development of provisioning, billing, customer service and management
information systems, competition and technological advances, dependence on other
long distance and local carriers, dependence on key personnel, risks associated
with industry concentration and dependence on major customers, risks associated
with international customers, risks of government regulation, risks of possible
service interruptions and natural disasters, risks associated with being an
Internet service provider, risks of obtaining and maintaining rights of way for
the fiber network, risks associated with variability of operating results
(particularly as evidenced by IWL's revenues not reaching the business plan
provided to Telecommunications and the Partnership and delays in certain IWL
contracts), risks of claims relating to ownership of proprietary rights, risks
associated with lack of dividends, risks associated with the concentration of
ownership, risks associated with the Year 2000 issues, risks associated with
certain anti-takeover matters and risks associated with the assumption of
General Partner liabilities.
THE COMPANIES
HOLDINGS
Holdings is a Texas corporation that was formed on February 3, 1998 to be a
holding company for IWL, Telecommunications and the Partnership and their
respective subsidiaries following the consummation of the Mergers and the
Interest Exchange. Prior to the consummation of the Transaction, Holdings has
had and will have no operations other than those incident to its formation, its
execution of the Merger Agreement, the preparation of this Joint Proxy
Statement/Prospectus and, possibly, the incurrence of
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indebtedness under the Proposed Notes (as defined below). See "Offering of
Proposed Notes." Holdings currently has no operations and nominal or no assets
and liabilities, and, unless the context otherwise requires, all discussions
herein of the historical and planned business operations and strategy of
Holdings assumes, on a pro forma basis, that the proposed business combination
to be effected by the Mergers and Interest Exchange has been consummated. On
such pro forma basis, Holdings would have had 1997 revenues and net income of
approximately $75.3 million and $2.6 million, respectively. Prior to the mailing
of this Joint Proxy Statement/Prospectus, Holdings, which was incorporated as
"IWL Holdings Corp.," changed its name to "CapRock Communications Corp." and, in
connection therewith, Telecommunications changed its name from "CapRock
Communications Corp." to "CapRock Telecommunications Corp."
Holdings intends to become the leading facilities-based integrated
communications provider ("ICP") in Texas, Louisiana, Oklahoma and Arkansas
("Texas and the Gulf Coast region"). The combined businesses will offer a
complete suite of telecommunications services including local, long distance,
Internet, data and private line services to small and medium-sized businesses.
Holdings will also provide switched and dedicated access, regional and
international long distance, private lines and dark fiber to carrier customers.
Holdings believes the Transaction will enable it to significantly accelerate the
implementation of its business plan and to more rapidly achieve its business
objectives by: (i) enhancing its revenue opportunities by leveraging the
existing and planned fiber and switching network infrastructure of each company
to offer voice, data, and broadband services in markets geographically clustered
along or near Holdings' infrastructure, (ii) creating greater organizational
depth through the combination of the sales, customer service and networking
strengths of Telecommunications with the technological, project management and
last mile distribution expertise of IWL and the fiber network construction and
operational expertise of the Partnership, (iii) providing the opportunity to
cross-sell its products and provide single source onshore and offshore
communications solutions to IWL's existing base of oil and gas customers and to
Telecommunications' existing base of business and carrier customers throughout
Texas and the Gulf Coast region, (iv) capitalizing on international revenue
opportunities through the combination of Telecommunications' customer base, the
Partnership's planned network and IWL's relationships with foreign regulators
and communications providers and (v) reducing the combined capital expenditures
of the three companies through the construction of a single communications
infrastructure.
BUSINESS STRATEGY
Holdings' business objectives are (i) to become the leading ICP in Texas and
the Gulf Coast region, offering local, long distance, data and private line
services to end-user customers, (ii) to establish itself as the premier
carriers' carrier in Texas and the Gulf Coast region, providing voice, data and
broadband services over the most extensive alternative fiber optic network in
Texas and the Gulf Coast region, and (iii) to capitalize on the growing
opportunities to provide international long distance and international project
services. To achieve these objectives, Holdings intends to:
BECOME A SINGLE SOURCE PROVIDER OF COMMUNICATIONS AND NETWORK INTEGRATION
SERVICES. Holdings believes that there is significant demand among small and
medium-sized business customers in its target markets for an integrated package
of communications services and equipment tailored to satisfy the customer's
total communications needs. Holdings intends to offer its customers local,
domestic and international long distance, data (including asynchronous transfer
mode ("ATM"), frame relay, digital subscriber line and Internet) and broadband
(including T-1/E-1, DS-3, OC-N and dark fiber) services. Holdings believes that
its ability to provide an integrated package of communications services, to
provide, install and maintain a broad range of communications equipment and to
invoice these services on a single, convergent bill will enable it to rapidly
penetrate its targeted markets, capture virtually all of its customers'
expenditures for telecommunications services and equipment, increase customer
satisfaction and reduce customer turnover.
STRATEGICALLY BUILD OUT ITS REGIONAL FIBER NETWORK. Holdings intends to
expand the Partnership's fiber optic network to approximately 4,300 route miles
throughout Texas and the Gulf Coast region. Holdings'
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fiber optic backbone will provide it with a platform to offer an integrated
package of voice, data and broadband services, as well as to access primary,
secondary and tertiary cities and the tandems of incumbent local exchange
carriers ("ILECs") throughout Texas and the Gulf Coast region. The Partnership
owns and operates 260 route miles of fiber network in Texas extending from
Houston to Victoria and Corpus Christi, and is currently constructing an
additional 500 route miles in Texas from San Antonio to Laredo, McAllen,
Harlingen, Brownsville and Corpus Christi. The completion of Holdings' network
will allow it to originate and terminate most of its customers' voice and data
traffic within the region on-net, dramatically increase its available broadband
capacity and link together more markets than other competitive providers of
communications services in the region.
OFFER DATA, INTERNET AND ENHANCED SERVICES TO ACCELERATE MARKET PENETRATION
AND MINIMIZE POTENTIAL CHURN. Data services represent one of the fastest
growing product segments in the communications industry. Holdings believes it
can accelerate new account penetration and minimize potential customer turnover
by offering local area network ("LAN") interconnections, frame relay, ATM,
Internet services, Integrated Services Digital Network ("ISDN"), digital
subscriber line ("DSL"), Web page design, Web server hosting, and other enhanced
services not generally available from the ILECs (or available only at prices
higher than those Holdings intends to charge). Holdings intends to leverage its
expertise in providing data services by targeting small and medium-sized
business customers, as well as data-intensive and multi-point customers, such as
banks, financial institutions and health care providers.
BUILD MARKET SHARE THROUGH PERSONALIZED SALES AND CUSTOMER
SERVICE. Holdings believes the most effective method of acquiring and retaining
a high quality customer base is through a consultative, face-to-face sales
process to develop creative solutions and respond rapidly to customers'
communications needs, as well as providing superior and personalized customer
service. Holdings believes that small and medium-sized business customers in its
target markets have been neglected by the ILECs with respect to these
approaches. Holdings intends to significantly increase the size of its direct
and agent sales forces over the next three years.
DEVELOP EFFICIENT AUTOMATED BACK OFFICE SYSTEMS. Holdings will handle its
provisioning, customer care, convergent billing and traffic reporting functions
on a proprietary software platform currently being developed by RiverRock
Systems, Ltd., a Texas limited partnership ("RiverRock") in which
Telecommunications is a limited partner. These operations support systems
("OSS") and other back office systems are required to enter, schedule and track
a customer's order from the point of sale to the installation and testing of
service. These systems also include or interface with trouble management,
inventory, billing, collection and customer service systems. The system is
scalable and flexible to support Holdings' expected future back office
requirements. The system, when fully implemented, will enable Holdings to: (i)
minimize the time to initiate local and long distance services for new customers
internally and through the ILEC (commonly referred to as provisioning), (ii)
provide detailed and customized customer billing information, (iii) respond
quickly to customers' needs and information requests, and (iv) monitor and
analyze traffic, financial and operating trends. Holdings believes that this
system, when fully implemented, will provide a significant competitive advantage
in terms of cost, ability to process large order volumes, and customer service
as compared to ILECs using legacy systems and CLECs that outsource back-office
services or that do not have an advanced OSS platform.
EXPAND INTERNATIONAL SERVICE OFFERINGS. Holdings believes that it can
leverage IWL's existing international commercial relationships, regulatory
expertise and points of presence in Texas, Russia and Scotland with
Telecommunications' extensive relationships with domestic carriers to
significantly increase Holdings' international traffic.
PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. In Holdings' target markets, a
large number of small private companies provide local and long distance
services, data services, Internet services, and telecommunications equipment.
This fragmentation creates numerous opportunities for Holdings to acquire
industry participants that can provide technical support, management talent,
customers and product
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extensions and could enable Holdings to accelerate the implementation of its
business plan. Holdings also intends to pursue strategic relationships with
utilities, state transportation departments and other governmental authorities.
LEVERAGE ITS EXPERIENCED MANAGEMENT TEAM. Holdings' management team will
include individuals with significant experience in the deployment and marketing
of communications services. Jere W. Thompson, Jr., President of
Telecommunications and Chief Executive Officer of Holdings, founded the
Partnership in 1992. Ignatius W. Leonards, Chief Executive Officer of IWL and
President of Holdings, founded IWL in 1981 and has over 23 years of experience
in the telecommunications industry. Timothy W. Rogers, Timothy M. Terrell and
Scott L. Roberts, each Executive Vice Presidents of Telecommunications and
Holdings, founded Telecommunications in 1991 and have a combined 33 years of
telecommunications experience working at Sprint Corporation ("Sprint"), Qwest
Communications International Inc. ("Qwest") and Telecommunications in carrier
and commercial sales. Byron M. Allen, President of IWL and an Executive Vice
President of Holdings, has five years of experience in the domestic and
international telecommunications industry, and Kevin W. McAleer, Holding's Chief
Financial Officer, has over 16 years of experience as the chief financial
officer of publicly-held companies.
The mailing address of Holdings' principal executive offices is Two Galleria
Tower, 13455 Noel Road, Suite 1925, Dallas, Texas 75240 and its telephone number
is (972) 982-9500.
TELECOMMUNICATIONS
Telecommunications commenced operations in Dallas, Texas in 1992. It is a
facilities-based provider of voice, data and broadband communications services
to interexchange carriers and other communications entities and to businesses
and consumers. In 1997, Telecommunications' revenues more than doubled, growing
from $23.2 million in 1996 to $46.7 million, and net income was $1.8 million as
compared to a net loss of $183,000 in 1996. Telecommunications' volume of
monthly long distance minutes of traffic has grown from approximately 2.6
million minutes in April 1994 to approximately 75 million minutes in April 1998.
The number of Telecommunications' full-time employees has increased from
approximately 42 on December 31, 1996 to approximately 81 on April 30, 1998.
Telecommunications' early strategy was to double in size every year, to grow
from internal cash flow, to develop the internal systems and processes to
support its growth, and once cash flow from carrier services generated excess
capital, to build a commercial services division. In mid-1996,
Telecommunications began investing in the infrastructure to support commercial
sales activities. As a result, Telecommunications' commercial sales grew
five-fold in 1997 over 1996 and now represents approximately 30% of sales. At
April 30, 1998, Telecommunications had a direct sales force of 11 carrier and 29
commercial sales people. Telecommunications also has an agent sales force
numbering approximately 100 independent agents throughout Texas.
Telecommunications owns a DSC DEX 600 switch in Dallas, Texas, and a smaller
PC-based switch used to provide calling card services. To extend
Telecommunications' reach across the Southwest and to lower its terminating
costs in the Western United States, Telecommunications has acquired a second DEX
600 switch, which is currently being installed in Phoenix, Arizona.
Telecommunications intends to install an advanced mainframe switch capable of
providing local and long distance services in Houston, Texas in the second half
of 1998.
Telecommunications' provisioning, customer care, convergent billing and
traffic reporting functions are performed on a proprietary software platform
that is currently being developed by RiverRock, a limited partnership in which
Telecommunications is a limited partner. Telecommunications believes that this
platform is scalable, flexible and well suited to support Telecommunications'
strategy to minimize the time to initiate local and long distance services for
new customers, to provide detailed and customized customer billing information,
to respond quickly to customers' needs and information requests, and to provide
convergent billing for local, long distance, data and private line services. See
"Information Regarding Telecommunications--Business--Customer Care and Support
Systems."
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Telecommunications currently has over 30 carrier customers including AT&T
Corporation ("AT&T"), IXC Communications, Inc. ("IXC"), MCI Communications
Corporation ("MCI"), Qwest and Sprint, as well as various regional independent
telephone companies, such as Century Telephone Enterprises, Inc. and Lufkin
Conroe Telephone. Telecommunications offers its commercial customers flat rate
pricing with rates generally lower than those of AT&T, MCI, Sprint and WorldCom,
Inc. ("WorldCom"). Telecommunications has introduced various local exchange
services ("LEC Services") to customers by acquiring such services from various
ILECs on a bundled basis and reselling them. Telecommunications also offers
frame-relay and ATM data products, as well as broadband services that it resells
over the networks of other carriers.
The mailing address of Telecommunications' principal executive offices is
Two Galleria Tower, 13455 Noel Road, Suite 1925, Lock Box 46, Dallas, Texas
75240-6638 and its telephone number is (972) 982-9500.
THE PARTNERSHIP
The Partnership is a facilities-based provider of broadband
telecommunications services ("Telecommunications Services") to interexchange
carriers, other communications entities and businesses. The Partnership had no
revenues in 1996. In 1997 it had revenues and a net loss of $1.9 million and
$104,000, respectively.
The Partnership began operations in 1992 to design, manage the construction
of, operate, maintain and market a 185 route mile fiber optic network in South
Texas. In 1996, the Partnership entered into a ten year contract for the lease
of dark fiber over a 260 route mile fiber network between Houston and Corpus
Christi, Texas. The Partnership completed construction of the network in January
1997. In January 1998, the Partnership entered into a contract for the sale of
dark fiber between San Antonio and Laredo, Texas. The Partnership expects to
complete the construction of approximately 500 additional route miles of fiber
network from San Antonio to Laredo, McAllen, Harlingen, Brownsville and Corpus
Christi, Texas by the end of 1998. The Partnership intends to expand its
regional fiber network to approximately 4,300 route miles throughout Texas and
the Gulf Coast region by the end of 2000. The Partnership's ability to expand
its network and increase its revenues will be dependent upon a number of
factors, including the availability of financing, and, as a result, no assurance
can be given that its expansion plans will be met.
The Partnership provides dedicated line services over the Partnership's
owned fiber network to interexchange carriers and other telecommunications
providers for terms of one year or longer. High volume capacity service
agreements and dedicated line service agreements generally provide for "take or
pay" monthly payments at fixed rates based on the capacity term and length of
circuit used. Customers are typically billed on a monthly basis and also may
incur an installation charge or certain ancillary charges for equipment. After
contract expiration, the contracts may be renewed or the services may be
provided on a month-to-month basis. The Partnership is expanding its network to
increase its revenue stream and reduce per unit costs, targeting capacity sales
on a segment-by-segment basis as the Partnership's network is deployed and
activated, and is increasingly seeking longer-term, high-volume capacity
agreements from major carriers. In addition to traditional telecommunications
carriers, the Partnership is marketing to Internet service providers and other
data service companies.
As of December 31, 1997, substantially all of the Partnership's revenues
were derived from two customers. One of the customers provided for approximately
93% of total revenues and comprised 78% of the trade receivable balance. The
other significant customer provided for approximately 5% of total revenues in
1997 and comprised 22% of the trade receivable balance. The lease terms are
through August 2004 and July 2006, respectively.
The mailing address of the Partnership's principal executive offices is Two
Galleria Tower, 13455 Noel Road, Suite 1925, Lock Box 46, Dallas, Texas
75240-6638 and its telephone number is (972) 982-9500.
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IWL
IWL's revenues are derived from the provision of a variety of services,
including telecommunications services, project and other services and product
resales. IWL had revenues and net income of $30.3 million and $689,000 for its
fiscal year ended June 30, 1997 compared to revenues and net income of $27.8
million and $734,000 for its fiscal year 1996. Telecommunications services
include the resale of long distance telecommunications services, the provision
of private leased lines and the rental of telecommunications equipment and
systems. IWL operates a tandem switch at its facility in Houston, Texas to
provide services as a switch-based long distance carrier and is currently
completing the installation of its Gulf Coast regional network. Project and
other services consist of the installation of telecommunications system projects
and the sale, service and maintenance of communications systems.
In connection with product resales, IWL serves as the exclusive
manufacturer's representative of products of Alcatel Network Systems, Inc.
("Alcatel") to the U.S. oil and gas industry. In fiscal 1996 and 1997, IWL
provided services to a subsidiary of Shell Oil Company ("Shell"), which included
the resale of a significant amount of Alcatel products. For the fiscal years
ended June 30, 1996 and 1997, the Shell subsidiary purchased from IWL
approximately $10.6 million and $7.6 million, respectively, of Alcatel products
and other equipment and hardware, representing approximately 38.0% and 25.2%,
respectively, of total sales during such periods. Although profitable, the sale
of Alcatel products to the Shell subsidiary significantly reduced IWL's gross
margin in these periods. The Shell project was substantially completed in May
1997 and, therefore, is not expected to contribute in a material manner to IWL's
total sales in future periods.
IWL 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, IWL 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 IWL began providing
telecommunications services and network support inside the former Soviet Union
to United States oil and gas customers. As IWL 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. IWL is
continuing to expand its network through its tandem switch and the installation
of fiber optic cable and microwave radios in targeted service areas. In
connection with such expansion, IWL has also received status as a CLEC (as
defined below) in Texas and Louisiana.
While annual growth rates of IWL's total sales since 1992 have ranged from
6.3% to 76.0%, IWL'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 IWL's services and product mix, levels of product resales, adverse weather
conditions in customer locations, the degree to which IWL 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 IWL or its competitors and changes in billing rates by IWL or
its competitors. IWL's ability to grow its revenues will be dependent upon a
number of factors, many of which are not within its control and, as a result, no
assurance can be given that such objectives will be met.
In May 1998, IWL changed its fiscal year to a December 31 year end to
coincide with the fiscal years of Holdings, Telecommunications and the
Partnership and, in connection therewith, filed a December 31, 1997 transition
period Form 10-K for the transition period from June 30, 1997 to December 31,
1997.
The mailing address of IWL's principal executive offices is 12000 Aerospace
Avenue, Suite 200, Houston, Texas 77034 and its telephone number is (281)
482-0289. IWL also has domestic offices in
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Friendswood, Texas, and Lafayette and New Orleans, Louisiana, and international
offices in Moscow, Russia, and Aberdeen, Scotland.
OFFERING OF PROPOSED NOTES
It is expected that prior to the Closing Date, Holdings, Telecommunications
and the Partnership (with IWL as a guarantor of certain obligations with respect
to the Proposed Notes) will offer, through a private placement under Rule 144A
under the Securities Act, senior notes (the "Proposed Notes"), although there is
no assurance that the Proposed Notes will, in fact, be offered or, if offered,
will be sold. The following is a description of the Proposed Notes that Holdings
currently anticipates offering, but there is no assurance that the terms of any
Proposed Notes actually offered and sold, if any, will not vary significantly
from the terms described in this Joint Proxy Statement/Prospectus. Holdings
currently expects that the aggregate principal amount of the Proposed Notes to
be offered will be approximately $150.0 million, but may be more or less. The
maturity date of the Proposed Notes will be ten years after the date of their
issuance, and interest on the Proposed Notes will be payable semi-annually in
cash, commencing approximately six months after the date of issuance. The
Proposed Notes will be senior unsecured obligations of Holdings and, as such,
will rank PARI PASSU in right of payment with all existing and future unsecured
and unsubordinated indebtedness of Holdings. Holdings, Telecommunications and
the Partnership (with IWL as a guarantor) will be required to make an offer to
purchase the Proposed Notes at 101% of their principal amount, plus accrued and
unpaid interest to the date of repayment, in the event that the Transaction is
not consummated and certain other conditions are not satisfied by August 31,
1998, or if it appears, in the sole judgment of Holdings, Telecommunications,
the Partnership and IWL, that the Transaction will not be consummated or such
conditions will not be satisfied by such date. Prior to the earlier of (i) the
date on which the Transaction is consummated and certain other conditions are
satisfied and (ii) the payment date for all Proposed Notes tendered in such
offer to purchase, approximately $145.0 million of the net proceeds from the
offering of the Proposed Notes will be held in an escrow account pursuant to the
terms of an escrow and security agreement (the "Escrow Agreement"). To the
extent amounts held in the escrow account are insufficient to repurchase
Proposed Notes tendered pursuant to such offer to purchase, Holdings,
Telecommunications, the Partnership and IWL (as guarantor) have jointly and
severally agreed to repay such amounts (with an estimated contingent liability
of not more than approximately $7.0 million). There can be no assurance that
Holdings, Telecommunications, the Partnership and IWL will have sufficient funds
available at the time of such offer to purchase to repay all Proposed Notes
tendered. Following payment of all Proposed Notes tendered in such offer to
purchase, if any Proposed Notes remain outstanding, Holdings and IWL will be
released from their obligations under the Proposed Notes and Telecommunications
and the Partnership will be required to effect either a statutory merger or
interest exchange within 60 days after the payment of all Proposed Notes
tendered in such offer to purchase. In the event the Transaction is consummated
by August 31, 1998, Telecommunications and the Partnership will be released from
the Proposed Notes (and IWL will be released from its obligations under such
offer to purchase), and Holdings will be the sole obligor thereunder. See
"Offering of Proposed Notes."
THE SPECIAL MEETINGS
TELECOMMUNICATIONS
The Telecommunications Special Meeting will be held at on
, 1998, starting at a.m., local time. At the Telecommunications
Special Meeting, holders of Telecommunications Common Stock will be asked to (i)
approve and adopt the Merger Agreement, (ii) approve the Plan Proposals, (iii)
grant authorization to Telecommunications to adjourn the Telecommunications
Special Meeting to solicit additional proxies and (iv) approve such other
business as may properly come before the Telecommunications Special Meeting. See
"The Transaction," "The Merger Agreement" and "The Plan Proposals."
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Holders of record of Telecommunications Common Stock at the close of
business on , 1998 (the "Telecommunications Record Date") have the
right to receive notice of, and to vote at, the Telecommunications Special
Meeting. On the Telecommunications Record Date, there were approximately
10,398,954 shares of Telecommunications Common Stock outstanding. Each share of
Telecommunications Common Stock outstanding on the Telecommunications Record
Date is entitled to one vote on each matter that is properly presented to
shareholders for a vote at the Telecommunications Special Meeting. Under the
Texas Business Corporation Act (the "TBCA"), the affirmative vote, in person or
by proxy, of the holders of at least two-thirds of the outstanding shares of
Telecommunications Common Stock entitled to vote thereon is required to approve
and adopt the Merger Agreement. The affirmative vote of a majority of the votes
cast (including express abstentions), in person or by proxy, by the holders of
Telecommunications Common Stock at the Telecommunications Special Meeting,
assuming a quorum is present, is required to approve the Plan Proposals and any
other matter that properly comes before the Telecommunications Special Meeting.
The affirmative vote of the holders of a majority of the Telecommunications
Common Stock represented in person or by proxy at the Telecommunications Special
Meeting at which a quorum is not present is required to approve an adjournment
of the Telecommunications Special Meeting. The Merger Agreement and the Plan
Proposals are also subject to approval by the holders of IWL Common Stock and
the holders of Partnership Interests as described herein. IWL, in its capacity
as the current sole shareholder of Holdings, has adopted and approved the Equity
Incentive Plan and the Director Stock Option Plan. Proxies may be revoked by
notice of revocation or a later signed and dated proxy or by attending the
Telecommunications Special Meeting and voting in person. Attendance at the
Telecommunications Special Meeting will not in itself constitute the revocation
of a proxy. See "The Special Meetings--Voting Rights; Votes Required for
Approval" and "--Proxies."
As of the Telecommunications Record Date, CapRock Investors, a Texas joint
venture ("CapRock Investors"), owned 23.5% by Jere W. Thompson, Jr., the
President and a director of Telecommunications, 42.5% by Mark Langdale, a
director of Telecommunications, and 30.9% by Jere W. Thompson, Sr., a director
of Telecommunications, owned 4,835,514 shares of Telecommunications Common
Stock, which represented approximately 46.5% of the outstanding shares of
Telecommunications Common Stock as of such date. As of the Telecommunications
Record Date, each of Scott L. Roberts, Timothy W. Rogers and Timothy M. Terrell,
each of whom is an Executive Vice President of Telecommunications, owned
1,611,838 shares of Telecommunications Common Stock, which represented in the
aggregate approximately 46.5% of the outstanding shares of Telecommunications
Common Stock as of such date. CapRock Investors and Messrs. Roberts, Rogers and
Terrell entered into the CapRock Owners Agreement (as hereinafter defined) with
IWL pursuant to which they have agreed to vote all of their respective shares of
Telecommunications Common Stock in favor of the approval of the Merger
Agreement, subject to the conditions set forth in the CapRock Owners Agreement.
If the conditions set forth in the CapRock Owners Agreement are satisfied,
approval of the Merger Agreement by the holders of Telecommunications Common
Stock is assured. See "The Transaction--Interests of Certain Persons in the
Transaction--CapRock Owners Agreement."
IWL
The IWL Special Meeting will be held at , on , 1998,
starting at a.m., local time. At the IWL Special Meeting, holders of IWL
Common Stock will be asked to (i) approve and adopt the Merger Agreement, (ii)
approve the Plan Proposals, (iii) grant authorization to IWL to adjourn the IWL
Special Meeting to solicit additional proxies and (iv) approve such other
business as may properly come before the IWL Special Meeting. See "The
Transaction," "The Merger Agreement" and "The Plan Proposals."
Holders of record of IWL Common Stock at the close of business on
, 1998 (the "IWL Record Date") have the right to receive notice of,
and to vote at, the IWL Special Meeting. On the IWL Record Date, there were
approximately shares of IWL Common Stock issued and outstanding and entitled
to vote. Each share of IWL Common Stock outstanding on the IWL Record Date is
entitled to one vote on each matter that is properly presented to shareholders
for a vote at the IWL Special Meeting.
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Under the TBCA and pursuant to the provisions of IWL's Articles of
Incorporation, the affirmative vote, in person or by proxy, of the holders of a
majority of the outstanding shares of IWL Common Stock entitled to vote thereon
is required to approve and adopt the Merger Agreement. The affirmative vote of a
majority of the votes cast (including express abstentions), in person or by
proxy, by the holders of IWL Common Stock at the IWL Special Meeting, assuming a
quorum is present, is required to approve the Plan Proposals and any other
matter that properly comes before the IWL Special Meeting. The affirmative vote
of the holders of a majority of the IWL Common Stock represented in person or
proxy at the IWL Special Meeting at which a quorum is not present is required to
approve an adjournment of the IWL Special Meeting. The Merger Agreement and the
Plan Proposals are also subject to approval by the holders of Telecommunications
Common Stock and the holders of Partnership Interests as described herein. IWL,
in its capacity as the current sole shareholder of Holdings, has adopted and
approved the Equity Incentive Plan and the Director Stock Option Plan. Proxies
may be revoked by notice of revocation or a later signed and dated proxy or by
attending the IWL Special Meeting and voting in person. Attendance at the IWL
Special Meeting will not in itself constitute the revocation of a proxy. See
"The Special Meetings--Voting Rights; Votes Required for Approval" and
"--Proxies."
As of the IWL Record Date, Ignatius W. Leonards, the Chief Executive Officer
and Chairman of the Board of IWL, beneficially owned 1,897,528 shares of IWL,
which represented approximately 47.6% of the outstanding shares of IWL Common
Stock as of such date. As of the IWL Record Date, Byron M. Allen, President and
a director of IWL, beneficially owned 222,200 shares of IWL, which represented
approximately 5.6% of the outstanding shares of IWL Common Stock as of such
date. Messrs. Leonards and Allen entered into the IWL Shareholders Agreement (as
hereunder defined) with Telecommunications and the Partnership pursuant to which
they have agreed to vote all of their respective shares of IWL Common Stock in
favor of the approval of the Merger Agreement, subject to the conditions set
forth in the IWL Shareholders Agreement. If the conditions set forth in the IWL
Shareholders Agreement are satisfied, approval of the Merger Agreement by the
holders of IWL Common Stock is assured. See "The Transaction--Interests of
Certain Persons in the Transaction--IWL Shareholders Agreement."
THE PARTNERSHIP
The consent of the limited partners in the Partnership is not required to
approve the Merger Agreement, the Mergers and the transactions contemplated
thereby. The Interest Exchange is not a statutory interest exchange; as a
result, the partners of the Partnership will not vote on or consent to the
Interest Exchange but will each make his or its own decision whether to accept
the Exchange Offer. However, the consummation of the Transaction, including the
consummation of the Mergers, is conditioned on the receipt by Holdings of a
Contribution Agreement (as defined below) from the General Partner and from
limited partners holding, in the aggregate, at least 80% of the limited
Partnership Interests in the Partnership pursuant to which such partner, among
other things, shall approve and adopt the Merger Agreement, transfer and
contribute the partner's entire Partnership Interest in the Partnership to
Holdings in exchange for shares of Holdings Common Stock at the exchange ratio
set forth in the Merger Agreement, consent to all transfers of Partnership
Interests contemplated by the Interest Exchange, consent to the substitution of
Holdings as a substitute limited partner in the Partnership, consent to the
substitution of Telecommunications as a substitute general partner in the
Partnership, approve the Equity Incentive Plan and approve the Director Stock
Option Plan. See "The Interest Exchange."
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<PAGE>
THE TRANSACTION
CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS IN THE MERGERS
Pursuant to the Merger Agreement, I-Sub will be merged with and into IWL,
with IWL surviving the IWL Merger as a wholly owned subsidiary of Holdings. Upon
consummation of the IWL Merger, (i) each outstanding share of IWL Common Stock
will be converted into one share of Holdings Common Stock (the "IWL Exchange
Ratio") and (ii) any outstanding shares of IWL Common Stock held by IWL in its
treasury will be canceled and will cease to exist. Immediately following the
Transaction, assuming all Partnership Interests are validly tendered and
accepted, the former holders of IWL Common Stock will collectively hold
approximately 13.8% of the issued and outstanding shares of Holdings Common
Stock and, on a diluted basis, the former holders of common stock, options and
warrants of IWL will own approximately 15% of the equity interests in Holdings.
See "--Ownership of Holdings After the Transaction." Fractional shares of
Holdings Common Stock will not be issued in connection with the IWL Merger. See
"The Merger Agreement--Consideration to be Received in the Mergers." For a
description of Holdings Common Stock, see "Description of Holdings Capital
Stock." For a summary of the principal differences between the rights of holders
of IWL Common Stock and holders of Holdings Common Stock, see "Comparison of
Shareholder Rights."
Pursuant to the Merger Agreement, C-Sub will be merged with and into
Telecommunications, with Telecommunications surviving the Telecommunications
Merger as a wholly owned subsidiary of Holdings. Upon consummation of the
Telecommunications Merger, (i) each outstanding share of Telecommunications
Common Stock will be converted into 1.789030878 shares (the "Telecommunications
Exchange Ratio") of Holdings Common Stock (the "Telecommunications Merger
Consideration") and (ii) any outstanding shares of Telecommunications Common
Stock held by Telecommunications in its treasury will be canceled and will cease
to exist. Immediately following the Transaction, assuming all Partnership
Interests are validly tendered and accepted, the former holders of
Telecommunications Common Stock will collectively hold approximately 64.4% of
the issued and outstanding shares of Holdings Common Stock and, on a diluted
basis, the former holders of common stock and options of Telecommunications will
own approximately 63.8% of the equity interests in Holdings. See "--Ownership of
Holdings After the Transaction." Fractional shares of Holdings Common Stock will
not be issued in connection with the Telecommunications Merger. For a discussion
of the treatment of fractional shares that would otherwise be issued, see "The
Merger Agreement--Consideration to be Received in the Mergers." For a
description of Holdings Common Stock, see "Description of Holdings Capital
Stock." For a summary of the principal differences between the rights of holders
of Telecommunications Common Stock and holders of Holdings Common Stock, see
"Comparison of Shareholder Rights."
For a description of the treatment of outstanding options and warrants to
purchase IWL Common Stock and outstanding options to purchase Telecommunications
Common Stock upon the consummation of the Mergers, see "The Merger
Agreement--Treatment of Stock Options."
HOLDERS OF TELECOMMUNICATIONS COMMON STOCK AND HOLDERS OF IWL COMMON STOCK
SHOULD NOT SEND IN THEIR STOCK CERTIFICATES WITH THEIR PROXY CARDS. A LETTER OF
TRANSMITTAL WITH INSTRUCTIONS REGARDING THE EXCHANGE OF SHARES OF HOLDINGS
COMMON STOCK WILL BE SENT TO FORMER HOLDERS OF TELECOMMUNICATIONS COMMON STOCK
AND IWL COMMON STOCK AS SOON AS PRACTICABLE FOLLOWING THE CLOSING DATE.
Each one percent (1%) of the Partnership Interests issued and outstanding
immediately before the Closing Date shall, if validly tendered to and accepted
by Holdings, be exchanged for 63,194.54 shares of Holdings Common Stock.
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<PAGE>
THE INTEREST EXCHANGE
In connection with the Mergers, holders of all Partnership Interests in the
Partnership are being offered the opportunity to tender their Partnership
Interests to Holdings in exchange for Holdings Common Stock (the "Exchange
Offer"). Each one percent (1%) of the Partnership Interests issued and
outstanding immediately before the Effective Time and all rights in respect
thereof at the Effective Time shall, if validly tendered to and accepted by
Holdings, be exchanged for 63,194.54 (the "Partnership Exchange Ratio" and,
collectively with the IWL Exchange Ratio and the Telecommunications Exchange
Ratio, the "Exchange Ratios") shares of Holdings Common Stock (the "Interest
Exchange Consideration"). Immediately following the Transaction, assuming all
Partnership Interests are validly tendered and accepted, the former partners of
the Partnership will hold approximately 21.8% of the issued and outstanding
shares of Holdings Common Stock and, on a diluted basis, the former holders of
Partnership Interests in the Partnership will own approximately 21.2% of the
equity interests in Holdings. See "--Ownership of Holdings After the
Transaction."
The consent of the limited partners in the Partnership is not required to
approve the Merger Agreement, the Mergers and the transactions contemplated
thereby. The Interest Exchange is not a statutory interest exchange; as a
result, the limited partners of the Partnership will not vote on or consent to
the Interest Exchange but will each make his or its own decision whether to
exchange such partner's Partnership Interests for Holdings Common Stock.
However, it is a condition to the consummation of the Transaction, including the
Mergers, that the General Partner and limited partners holding, in the
aggregate, at least 80% of the limited Partnership Interests in the Partnership
shall have executed and delivered to Holdings a Contribution Agreement in
respect of such holder's Partnership Interest, shall have consented to the
transfers of Partnership Interests contemplated by the Interest Exchange, shall
have consented to the substitution of Telecommunications as a substitute general
partner in the Partnership and of Holdings as a substitute limited partner in
the Partnership and shall have approved the Plan Proposals.
For additional information regarding the Interest Exchange and the Exchange
Offer, see "The Interest Exchange" and "The Transaction--Certain United States
Federal Income Tax Consequences of the Interest Exchange."
RELATIVE EXCHANGE RATIOS AND CONSIDERATION
The following table sets forth the market value of the shares of Holdings
Common Stock (assuming an equivalent per share value of Holdings Common Stock
and IWL Common Stock) to be received upon the Mergers and the Interest Exchange
calculated based on (i) the closing price of shares of IWL Common Stock of
$15.00 per share as reported on the Nasdaq National Market on June 19, 1998, the
date prior to the date the original exchange ratios were changed to the modified
Exchange Ratios pursuant to the second amendment to the Merger Agreement, (ii)
the closing price of shares of IWL Common Stock of $8.75 per share as reported
on the Nasdaq National Market on June 22, 1998, the day the change of the
original exchange ratios to the modified Exchange Ratios was announced and (iii)
the closing price of shares of IWL Common Stock of $9.5625 per share as reported
on the Nasdaq National Market on July 7, 1998, the most recent practicable date
prior to the mailing of this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
TOTAL VALUE TO
BE RECEIVED AT TOTAL VALUE TO
$15.00 BE RECEIVED AT
(CLOSING PRICE TOTAL VALUE TO BE $9.5625
ON RECEIVED AT $8.75 (CLOSING PRICE
JUNE 19, (CLOSING PRICE ON ON
1998)(1) JUNE 22, 1998)(2) JULY 7, 1998)(2)
---------------- ----------------- ----------------
<S> <C> <C> <C>
IWL (3).................................................... $ 59,800,770 $ 34,883,783 $ 38,132,553
Telecommunications......................................... 117,448,830 162,785,438 177,901,228
The Partnership............................................ 39,929,700 55,295,223 60,429,779
</TABLE>
(1) Calculated using the original exchange ratios for IWL of 1:1, for
Telecommunications of .75295288:1 and for the Partnership of 26,619.8:1,
which were in effect on June 19, 1998.
(2) Calculated using the modified Exchange Ratios for IWL of 1:1, for
Telecommunications of 1.789030878:1 and for the Partnership of 63,194.54:1,
which were in effect on June 22, 1998 and July 7, 1998.
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<PAGE>
(3) The number of shares of IWL Common Stock that were issued and outstanding on
June 19, 1998 and June 22, 1998 was 3,986,718 and on July 7, 1998 was
3,987,718.
These values are shown for illustrative purposes only. Actual values
received will be dependent upon the market value of Holdings Common Stock. There
can be no assurance that the values reflected in this table will be achieved or
that the value of IWL Common Stock before the Transaction will be indicative of
the value of Holdings Common Stock after the Transaction.
AMENDMENT OF MERGER AGREEMENT
The Merger Agreement has been amended three times and the amendments are
included in the Appendix hereto. The original Merger Agreement (as amended April
30, 1998) provided that each outstanding share of IWL Common Stock would be
converted into one share of Holdings Common Stock, a Telecommunications Exchange
Ratio of .75295288 and a Partnership Exchange Ratio of 26,619.8. On June 20,
1998, the original Merger Agreement was amended for the second time, and on July
8, 1998 for a third time. The first amendment to the Merger Agreement was made
on April 30, 1998 to make minor adjustments to the Telecommunications Exchange
Ratio in order to address calculation errors in the number of options and shares
of Telecommunications Common Stock that were outstanding. Such amendment did not
change any of the other Exchange Ratios or change the total number of shares
that had been approved for issuance by Holdings. The second amendment provided
for a Telecommunications Exchange Ratio of 1.789030878 and a Partnership
Exchange Ratio of 63,194.54. The second amendment is expected to result in an
additional 14,639,148 shares of Holdings Common Stock being issued, for a total
of 29,738,607 (assuming all of the Partnership interests are validly tendered to
and accepted by Holdings in the Exchange Offer). The second amendment and the
revised Exchange Ratios were prompted by assertions by Telecommunications and
the Partnership that the reduction in IWL's revenues from its plan constituted a
Material Adverse Effect (as defined in the Merger Agreement) with respect to IWL
which could reasonably be expected to have a Material Adverse Effect on
Telecommunications and the Partnership. In lieu of terminating the Merger
Agreement or disputing whether such a right to terminate existed, the parties
agreed to modify the Exchange Ratios. In modifying the Exchange Ratios, the
parties considered, among other factors, (i) contract delays causing lower IWL
project revenues and operating income than those set forth in the IWL business
plan furnished to Telecommunications and the Partnership in connection with the
original negotiations of the Merger Agreement, (ii) the continued improvement in
Telecommunications' and the Partnership's operations and (iii) the significant
expansion in Telecommunications' and the Partnership's business plans from the
plans furnished to IWL in connection with the original negotiations of the
Merger Agreement. The second amendment was entered into on June 20, 1998 to
adjust the IWL Exchange Ratio, the Telecommunications Exchange Ratio and the
Partnership Exchange Ratio, to remove various conditions to closing that had
been met or which had been determined to not be material and to allow for the
issuance by Holdings, Telecommunications and the Partnership of the Proposed
Notes and their guarantee by IWL. The third amendment was entered into to
confirm the receipt of all required regulatory approvals and the fairness
opinion from IWL's financial advisor.
OWNERSHIP OF HOLDINGS AFTER THE TRANSACTION
Immediately following the Mergers and the Interest Exchange, assuming all
Partnership Interests are validly tendered and accepted, the former holders of
IWL Common Stock will collectively hold approximately 13.8% of the issued and
outstanding shares of Holdings Common Stock, the former holders of
Telecommunications Common Stock will collectively hold approximately 64.4% of
the issued and outstanding shares of Holdings Common Stock, and the former
partners of the Partnership will hold approximately 21.8% of the issued and
outstanding shares of Holdings Common Stock. On a diluted basis, the former
holders of common stock, options, warrants and partnership interests of IWL,
Telecommunications and the Partnership will own approximately 15%, 63.8% and
21.2% of the equity interests in Holdings, respectively. Consequently, the
former holders of the Telecommunications Common Stock and options and the former
holders of Partnership Interests in the Partnership will hold over 50% of the
shares of Holdings Common Stock to be outstanding immediately after the
consummation of the Transaction.
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<PAGE>
The following two charts show the ownership structure of the various parties
to the Merger Agreement prior to the consummation of the Transaction and
following the consummation of the Transaction.
PRE-TRANSACTION STRUCTURE
[LOGO]
POST-TRANSACTION STRUCTURE
[GRAPH]
23
<PAGE>
RECOMMENDATION OF IWL BOARD OF DIRECTORS
The Board of Directors of IWL (the "IWL Board"), by unanimous vote, has
determined that the terms and provisions of the Merger Agreement are fair to,
and in the best interests of, IWL and the holders of IWL Common Stock and
recommends that holders of IWL Common Stock vote in favor of approval of the
Merger Agreement. The decision of the IWL Board to enter into the Merger
Agreement and to recommend that holders of IWL Common Stock vote in favor of the
approval of the Merger Agreement is based upon its evaluation of a number of
factors, including, among others, the written opinion of Cruttenden Roth
Incorporated ("Cruttenden Roth"), IWL's financial advisor in connection with the
Transaction, dated June 19, 1998 and updated as of the date of this Joint Proxy
Statement/Prospectus, stating that, as of such dates and based on and subject to
the assumptions, limitations and qualifications set forth therein, from a
financial point of view, the relative Exchange Ratios and the consideration to
be received by IWL shareholders in the IWL Merger were fair to the shareholders
of IWL. See "The Transaction--Recommendation of IWL Board" and "--Fairness
Opinion of IWL Financial Advisor."
RECOMMENDATION OF TELECOMMUNICATIONS BOARD OF DIRECTORS
The Board of Directors of Telecommunications (the "Telecommunications
Board"), by unanimous vote, has determined that the Transaction is fair to and
in the best interests of Telecommunications and the holders of
Telecommunications Common Stock and recommends that the holders of
Telecommunications Common Stock vote in favor of approval of the Merger
Agreement. See "The Transaction--Recommendation of Telecommunications Board."
RECOMMENDATION OF BOARD OF DIRECTORS OF GENERAL PARTNER
The Board of Directors of CapRock Systems, Inc. (the "General Partner
Board"), a Texas corporation that is the current general partner of the
Partnership (the "General Partner"), by unanimous vote, has determined that the
Transaction is in the best interests of the Partnership and the holders of
Partnership Interests and recommends that the holders of Partnership Interests
participate in the Interest Exchange by accepting the Exchange Offer and that,
in connection therewith, they deliver to Holdings their Contribution Agreement
with respect to their Partnership Interests. See "The
Transaction--Recommendation of General Partner Board."
REASONS FOR THE TRANSACTION
The combination of IWL, Telecommunications and the Partnership will create
an integrated communications company with extensive assets and customers in
Texas and the Gulf Coast region. The IWL Board, the Telecommunications Board and
the General Partner Board (collectively, the "Boards") believe that the
Transaction will provide opportunities to achieve substantial benefits for the
respective shareholders and partners of the three companies. The Boards further
believe that the combined entities will be better and more quickly able to
capitalize on opportunities in the telecommunications industry, both
domestically and internationally, and be better positioned to compete
effectively in the rapidly changing telecommunications industry than any of the
entities on a stand-alone basis.
The primary strategic advantages of the Transaction that were considered by
the Boards in reaching their determinations to recommend the Transaction were
(i) enhanced revenue opportunities from the integration of the existing fiber
and switching network infrastructure of each company, (ii) greater
organizational depth through the combination of the marketing, customer service
and networking strengths of Telecommunications with the technological, project
management and last mile distribution expertise of IWL, (iii) opportunities to
leverage the Partnership's fiber network by offering voice, data and
24
<PAGE>
broadband services in markets geographically clustered along or near the
existing and planned infrastructure of the three companies and (iv)
opportunities for international revenue growth through the combination of
Telecommunications' customer base, the Partnership's planned network and IWL's
relationships with numerous foreign regulators and communications providers.
In addition to the joint reasons for the Transaction described above, in
reaching its determination to recommend the Transaction, the IWL Board
considered the benefits of obtaining access to the existing Partnership network,
which will enable IWL to avoid the cost, delay and management time commitment
required to build new network infrastructures.
In addition to the joint reasons for the Transaction described above, in
reaching their determination to recommend the Transaction, the
Telecommunications Board and the General Partner Board considered the benefits
of being able to quickly access the public capital markets to help grow their
businesses, including to finance capital expenditures.
For a more complete discussion of IWL's, Telecommunications' and the
Partnership's reasons for the Transaction, see "The Transaction--Reasons for the
Transaction."
OPINION OF FINANCIAL ADVISOR TO IWL
On June 19, 1998, Cruttenden Roth delivered its written opinion to the IWL
Board to the effect that, as of such date and based on and subject to the
assumptions, limitations and qualifications set forth therein, from a financial
point of view, the relative Exchange Ratios and the consideration to be received
by the IWL shareholders in the IWL Merger were fair to the shareholders of IWL.
Cruttenden Roth subsequently updated such opinion by delivery of its written
opinion dated as of the date of this Joint Proxy Statement/Prospectus. A copy of
the Cruttenden Roth opinion, dated as of the date of this Joint Proxy
Statement/Prospectus, which sets forth the assumptions made and matters
considered by Cruttenden Roth in rendering its opinion, is attached as Appendix
II to this Joint Proxy Statement/Prospectus. Holders of IWL Common Stock are
urged to read such opinion in its entirety. See "The Transaction--Fairness
Opinion of IWL Financial Advisor."
BOARD OF DIRECTORS AND MANAGEMENT OF HOLDINGS, IWL AND TELECOMMUNICATIONS
It is expected that, following the consummation of the Transaction, the
Board of Directors of Holdings (the "Holdings Board") will consist of Ignatius
W. Leonards, Chairman of the IWL Board and a director of IWL, Byron M. Allen,
President and a director of IWL, Jere W. Thompson, Jr., President and a director
of Telecommunications, Mark Langdale, a director of Telecommunications, Timothy
W. Rogers, Executive Vice President and a director of Telecommunications, one
outside director designated by IWL (who will initially be Christopher J.
Amenson, a director of IWL) and one outside director designated by
Telecommunications (who will initially be John R. Harris).
Following the consummation of the Transaction, Mr. Thompson will be Chief
Executive Officer and Chairman of the Board of Holdings, Mr. Leonards will be
President and Vice Chairman of the Board of Holdings, Kevin W. McAleer will be
Senior Vice President and Chief Financial Officer of Holdings (and is currently
serving in that position in anticipation of the Transaction), Byron M. Allen,
Scott L. Roberts, Timothy W. Rogers and Timothy M. Terrell each will be an
Executive Vice President of Holdings, and Richard H. Roberson will be
Controller, Treasurer and Secretary of Holdings. Messrs. Roberts, Rogers and
Terrell are currently Executive Vice Presidents and directors of
Telecommunications. Mr. Roberson is currently the Chief Financial Officer,
Secretary and a director of IWL.
Holdings has entered into new employment agreements with, among other
persons, each of Jere W. Thompson, Jr., Ignatius W. Leonards, Kevin W. McAleer,
Byron M. Allen, Scott L. Roberts, Timothy W. Rogers, Timothy M. Terrell and
Richard H. Roberson. See "The Transaction--Interests of Certain Persons in the
Transaction--Employment Agreements."
25
<PAGE>
ACCOUNTING TREATMENT
IWL, Telecommunications and the Partnership expect that the Mergers and the
Interest Exchange will be accounted for using the pooling of interests method of
accounting. The pooling of interests method of accounting assumes that the
combining companies were merged from inception and the historical financial
statements for the periods prior to consummation of the Mergers and the Interest
Exchange are restated as though the companies had been combined from inception.
It is a condition to closing that IWL, Telecommunications and the Partnership
shall each have received from KPMG Peat Marwick LLP, their independent auditors,
letters, dated the date of or shortly prior to the Closing Date, stating its
opinion that the Mergers and the Interest Exchange qualify for
pooling-of-interests accounting treatment. See "The Transaction--Accounting
Treatment."
The unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the pooling of interests accounting
method to account for the Mergers and the Interest Exchange. See "Unaudited Pro
Forma Combined Condensed Financial Statements."
CONDITIONS TO THE MERGERS
The respective obligations of IWL, Telecommunications and the Partnership to
consummate the Mergers and the Interest Exchange are subject to the satisfaction
of certain conditions, including, among others, (a) receipt of material
regulatory approvals from the FCC and various state regulatory agencies in the
states of Texas, Louisiana, Arkansas and Oklahoma, (b) receipt of updated tax
opinions as of the Closing Date which will update the tax opinions filed as
exhibits to the Registration Statement by each of Telecommunications, the
Partnership and IWL from their respective special tax counsel, (c) receipt by
IWL of a regulatory opinion from Telecommunications' and the Partnership's
regulatory counsel and by Telecommunications and the Partnership of a regulatory
opinion from IWL's regulatory counsel, (d) receipt of letters by IWL,
Telecommunications and the Partnership from KPMG Peat Marwick LLP, their
independent auditors, letters, dated the date of or shortly prior to the
Effective Time, stating its opinion that the Mergers and the Interest Exchange
qualify for pooling-of-interests accounting treatment and (e) the absence of any
event that has had or could reasonably be expected to have a Material Adverse
Effect (as defined in the Merger Agreement) on the other or on Holdings. The
Transaction requires the consent of the existing lenders to IWL, the Partnership
and Telecommunications, which consents have been obtained. Receipt of tax
opinions and the receipt of the accountants' letters as described in (b) and (d)
above are waivable conditions of the Merger Agreement although such waivers are
not anticipated to be granted and are likely to not be allowed under the
Indenture for the Proposed Notes without the consent of the holders of a
majority of the Proposed Notes. If such conditions are waived, the parties would
amend the Registration Statement and resolicit votes for the Transaction. See
"The Merger Agreement--Certain Conditions."
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE
The Merger Agreement may be terminated prior to the Closing Date under
certain circumstances by IWL, Telecommunications or the Partnership if, among
other events, (a) the Mergers and the Interest Exchange are not consummated on
or before December 31, 1998 (the "Termination Date"), unless such failure to
consummate is caused solely by reason of the failure to obtain certain
regulatory approvals, in which case the Termination Date shall be extended to
February 16, 1999, (b) a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action, in each case permanently
restraining, enjoining or otherwise prohibiting either of the Mergers or the
Interest Exchange, (c) another party shall have breached, or failed to comply
with, in any material respect, any of its obligations under the Merger Agreement
or any of its representations or warranties shall have been incorrect in any
material respect when made or shall have since ceased to be true and correct and
such breach, failure or incorrect representation or warranty shall have resulted
or be reasonably expected to result in a Material Adverse Effect on the
terminating party,
26
<PAGE>
(d) a Material Adverse Effect or an event which could reasonably be expected to
result in a Material Adverse Effect on another party or on Holdings occurs, (e)
the Board of Directors of another party (or of the General Partner, as the case
may be), or any committee thereof, withdraws or modifies in any adverse manner
its approval or recommendation of the Merger Agreement, the Mergers or the
Interest Exchange, (f) any of the required approvals of the shareholders or
partners, as the case may be, of another party shall fail to be obtained, or (g)
under certain situations and subject to certain conditions, prior to the
approval of the Merger Agreement by the holders of common stock (or Partnership
Interests, if applicable) of another party, the Board of Directors of such other
party (or of the General Partner, as the case may be) determines in good faith
that its fiduciary obligations under applicable law require such action. See
"The Merger Agreement--Effect of Termination."
Under certain circumstances, the Merger Agreement obligates IWL to pay to
Telecommunications and the Partnership a fee of $2.5 million in the aggregate if
the Merger Agreement is terminated (of which $1,875,000 is to be paid to
Telecommunications and $625,000 is to be paid to the Partnership) and under
certain circumstances obligates Telecommunications and the Partnership to pay to
IWL a fee of $2.5 million in the aggregate if the Merger Agreement is terminated
(of which $1,875,000 is to be paid by Telecommunications and $625,000 is to be
paid by the Partnership). See "The Merger Agreement--No Solicitation of
Transactions" and "The Merger Agreement--Effect of Termination."
REGULATORY APPROVALS
The Transaction is subject to review by the applicable state regulatory
authorities governing telecommunications services in each of the states in which
IWL, Telecommunications or the Partnership provides telephone service and to
receipt of the approval of the FCC. See "The Transaction--Regulatory Approvals."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The Transaction has been structured to qualify as a nontaxable transaction
under the Internal Revenue Code of 1986, as amended (the "Code"). In connection
with the preparation of this Joint Proxy Statement/Prospectus, IWL has received
an opinion (the "Munsch Hardt Tax Opinion") from Munsch Hardt Kopf Harr & Dinan,
P.C., counsel to IWL ("Munsch Hardt"), to the effect that no gain or loss will
be recognized by IWL or the holders of IWL Common Stock in connection with the
Mergers. In connection with the preparation of this Joint Proxy
Statement/Prospectus, Telecommunications and the Partnership have received an
opinion (the "Hughes & Luce Tax Opinion") from Hughes & Luce, L.L.P., counsel to
Telecommunications and the Partnership ("Hughes & Luce"), to the effect that no
gain or loss will be recognized by Telecommunications or the Partnership or
their respective holders of common stock or Partnership Interests in connection
with the Mergers and the Interest Exchange. Copies of these opinions are filed
as exhibits to the Registration Statement. See "The Transaction--Certain United
States Federal Income Tax Consequences of the Mergers" and "--Certain United
States Federal Income Tax Consequences of the Interest Exchange."
APPRAISAL RIGHTS
The TBCA provides for certain appraisal rights for shareholders who do not
desire to participate in a merger of their corporation. Under the TBCA and Texas
partnership laws these appraisal rights are available for the shareholders of
Telecommunications, but not for the shareholders of IWL or the holders of
Partnership Interests. See "The Transaction--Appraisal Rights."
27
<PAGE>
THE PLAN PROPOSALS
THE EQUITY INCENTIVE PLAN
The Equity Incentive Plan is intended to provide a means by which selected
employees of and consultants to Holdings may be given an opportunity to acquire
an equity interest in Holdings. Awards granted under the Equity Incentive Plan
("Awards") may consist of stock options, stock appreciation rights, restricted
stock, deferred stock, stock reload options and/or other stock-based awards.
Options granted under the Equity Incentive Plan may be either options that
qualify for treatment as "incentive stock options" under Section 422 of the Code
("Incentive Stock Options") or options that do not so qualify ("Nonqualified
Stock Options"). Stock options may be granted under the Equity Incentive Plan to
any person who is an officer or other employee (including, subject to certain
conditions, officers and employees who are also directors) of Holdings or any of
its subsidiaries. The exercise price of Incentive Stock Options must be at least
the fair market value of a share of Holdings 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 Holdings Common
Stock). The exercise price of Nonqualified Stock Options may be less than 100%
of the fair market value of a share of Holdings Common Stock on the date of
grant. A total of 5,000,000 shares of Holdings Common Stock have been reserved
for issuance in satisfaction of Awards granted under the Equity Incentive Plan
and the maximum number of shares which may be issued to any participant pursuant
to Awards granted under the Equity Incentive Plan is 2,500,000. For a more
detailed description of the Equity Incentive Plan, see "The Plan Proposals."
THE DIRECTOR STOCK OPTION PLAN
The Director Stock Option Plan is intended to encourage ownership of
Holdings by eligible non-employee directors of Holdings whose continued services
are considered essential to Holdings' future progress and to provide them with a
further incentive to remain as directors of Holdings. All options to be granted
under the Director Stock Option Plan will be Nonqualified Stock Options that
will not be eligible for treatment as Incentive Stock Options. The exercise
price per share of each option granted under the Director Stock Option Plan may
be less than 100% of the fair market value of Holdings Common Stock on the date
of grant. A total of 400,000 shares of Holdings Common Stock have been reserved
for issuance upon the exercise of options to be granted under the Director Stock
Option Plan. For a more detailed description of the Director Stock Option Plan,
see "The Plan Proposals."
The adoption of each of the Equity Incentive Plan and the Director Stock
Option Plan has been unanimously approved by each of the IWL Board, the
Telecommunications Board, the General Partner Board and the Holdings Board, in
each case subject to the approval of the holders of IWL Common Stock,
Telecommunications Common Stock and the Partnership Interests. IWL, in its
capacity as the current sole shareholder of Holdings, has adopted and approved
the Equity Incentive Plan and the Director Stock Option Plan. The IWL Board
recommends that holders of IWL Common Stock vote FOR the approval of the Plan
Proposals, the Telecommunications Board recommends that holders of
Telecommunications Common Stock vote FOR the approval of the Plan Proposals and
the General Partner Board recommends that holders of Partnership Interests
execute and deliver their Contribution Agreements, in which they will, among
other things, consent to the adoption by Holdings of the Plan Proposals. See
"The Plan Proposals."
28
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma balance sheet and statement of operations
data of Holdings illustrates the effect of the Transaction as if the Transaction
had occurred on March 31, 1998 for the pro forma balance sheet data and as of
the beginning of the period for the pro forma statement of operations data. In
May 1998, IWL changed its fiscal year end to coincide with the fiscal years of
Holdings, Telecommunications and the Partnership. Accordingly, the pro forma
statement of operations data for 1997 is presented for the 12 months ended
December 31, 1997 on a combined basis for all three entities. The unaudited
combined condensed statement of operations data for the three-month period ended
March 31, 1998 and 1997 combine the financial statements of IWL with those of
Telecommunications and the Partnership. The unaudited pro forma combined
condensed statements of operations for the years ended December 31, 1996 and
1995 combine IWL's consolidated statements of operations data for the years
ended June 30, 1996 and 1995 with the Telecommunications and Partnership
statements of operations data for the years ended December 31, 1996 and 1995.
The revenue and net income of IWL for the six month period ended December 31,
1996 was excluded from the pro forma combined condensed statement of operations
in the amounts of $15.6 million and $260,000, respectively. The pro forma data
is not necessarily indicative of the results of operations or the financial
condition that would have been reported by Holdings had the Transaction been in
effect during those periods, or as of those dates, or that may be reported in
the future. Pro forma combined per share data of IWL, Telecommunications and the
Partnership give effect to the exchange of each share of IWL Common Stock for
one share of Holdings Common Stock, each share of Telecommunications Common
Stock for 1.789030878 shares of Holdings Common Stock, and each 1% of the
Partnership Interests for 63,194.54 shares of Holdings Common Stock.
This information should be read in conjunction with, and is qualified in its
entirety by, the consolidated financial statements of IWL, and the financial
statements of Telecommunications and the Partnership and the related notes
thereto included elsewhere herein and the Unaudited Pro Forma Combined Condensed
Financial Statements and the related notes thereto included elsewhere herein.
See "Unaudited Pro Forma Combined Condensed Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues:
Telecommunications services.......................... $ 18,194 $ 29,705 $ 57,892 $ 11,355 $ 19,162
Projects and other................................... 11,213 10,711 14,512 3,161 5,251
Product resales(1)................................... -- 10,554 2,946 2,506 --
--------- --------- --------- --------- ---------
Total revenues..................................... 29,407 50,970 75,350 17,022 24,413
Operating costs and expenses........................... 29,696 49,876 69,892 16,651 21,729
--------- --------- --------- --------- ---------
Operating income (loss)................................ (289) 1,094 5,458 371 2,684
Other income (expense)................................. 150 41 220 114 (17)
Interest expense, net.................................. (484) (585) (1,603) (368) (433)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item................................................. (623) 550 4,075 117 2,234
Income taxes........................................... 37 143 1,475 2 874
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item................ (660) 407 2,600 115 1,360
Extraordinary item..................................... 645 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)...................................... $ (15) $ 407 $ 2,600 $ 115 $ 1,360
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share(2):
Basic................................................ $ -- $ 0.01 $ 0.09 $ -- $ 0.05
Diluted.............................................. $ -- $ 0.01 $ 0.09 $ -- $ 0.05
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31,
1998
-------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,378
Working capital (deficit)......................... (4,751)
Property and equipment, net....................... 30,000
Total assets...................................... 54,335
Long-term debt and capital lease obligations,
including current portion....................... 13,044
Stockholders' equity.............................. 14,045
</TABLE>
- ------------------------
(1) Includes the resale of Alcatel products and other equipment and hardware to
a subsidiary of Shell Oil Company ("Shell"). For the 12 months ended June
30, 1996 and December 31, 1997, the Shell subsidiary purchased from Holdings
approximately $10.6 million and $2.9 million of Alcatel products and other
equipment and hardware. The Shell project was substantially completed in May
1997 and, therefore, is not expected to contribute in a material manner to
total sales in future periods.
(2) Net income (loss) per share amounts have been calculated in accordance with
SFAS No. 128, "Earnings Per Share," for all periods presented.
30
<PAGE>
SUMMARY SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF IWL
The following selected consolidated historical financial data for each of
the four fiscal years ended June 30, 1997 and for the six months ended December
31, 1997, are derived from IWL's consolidated financial statements, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose report with respect to the three-year period ended June 30, 1997 appears
elsewhere herein. The following selected consolidated historical financial data
for the fiscal year ended June 30, 1993 are derived from IWL's unaudited
consolidated financial statements. The following selected consolidated
historical financial data for the six months ended December 31, 1996 and 1997
and for the three months ended March 31, 1997 and 1998 are derived from
unaudited consolidated financial statements of IWL which, in the opinion of
IWL's management, contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation thereof. The results of
operations for an interim period are not necessarily indicative of the results
of operations to be expected for a full year. The data set forth below in this
table are qualified in their entirety by, and should be read in conjunction
with, the financial statements of IWL and the related notes thereto included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of IWL."
<TABLE>
<CAPTION>
THREE
SIX MONTHS ENDED MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------- ---------
1993 1994 1995 1996 1997 1996 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications services..... $ 2,238 $ 3,301 $ 5,790 $ 6,531 $ 7,993 $ 3,646 $ 4,856 $ 2,298
Project and other............... 10,722 11,559 10,004 10,711 14,708 7,303 7,107 3,161
Product resales(1).............. -- -- -- 10,554 7,641 4,695 -- 2,506
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues................ 12,960 14,860 15,794 27,796 30,342 15,644 11,963 7,965
Cost of revenues.................. 8,641 10,071 9,639 20,416 21,737 11,684 6,557 5,674
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit...................... 4,319 4,789 6,155 7,380 8,605 3,960 5,406 2,291
Operating expenses:
Selling, general and
administrative................ 3,132 4,070 4,399 5,099 5,845 2,736 3,631 1,611
Depreciation and amortization... 359 571 821 1,003 1,403 635 982 347
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses...... 3,491 4,641 5,220 6,102 7,248 3,371 4,613 1,958
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income.................. 828 148 935 1,278 1,357 589 793 333
Interest expense, net............. (10) (215) (244) (270) (514) (214) (218) (125)
Other income (expense)............ (86) 252 139 42 129 19 110 114
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes........ 732 185 830 1,050 972 394 685 322
Income taxes...................... 249 41 294 316 283 134 264 95
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................ $ 483 $ 144 $ 536 $ 734 $ 689 $ 260 $ 421 $ 227
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share amounts(2):
Basic........................... $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.12 $ 0.11 $ 0.10
Diluted......................... $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.11 $ 0.11 $ 0.10
Weighted average shares
outstanding:
Basic........................... 2,000 2,001 2,222 2,222 2,298 2,226 3,737 2,234
Diluted......................... 2,011 2,011 2,233 2,233 2,323 2,261 3,908 2,298
<CAPTION>
1998
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications services..... $ 2,804
Project and other............... 5,251
Product resales(1).............. --
---------
Total revenues................ 8,055
Cost of revenues.................. 4,421
---------
Gross profit...................... 3,634
Operating expenses:
Selling, general and
administrative................ 2,188
Depreciation and amortization... 647
---------
Total operating expenses...... 2,835
---------
Operating income.................. 799
Interest expense, net............. (155)
Other income (expense)............ 1
---------
Income before income taxes........ 645
Income taxes...................... 254
---------
Net income........................ $ 391
---------
---------
Earnings per share amounts(2):
Basic........................... $ 0.10
Diluted......................... $ 0.09
Weighted average shares
outstanding:
Basic........................... 3,912
Diluted......................... 4,199
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 72 $ -- $ 291 $ 361 $ 7,660 $ 3,345 $ 720
Working capital (deficit)...................... 709 (367) (265) 1,811 9,721 1,330 (398)
Total assets................................... 5,748 7,437 8,232 12,409 26,062 26,284 29,834
Long-term debt and capital lease obligations,
net of current portion....................... 533 1,108 1,329 2,944 7,692 3,588 3,948
Stockholders' equity........................... 1,511 2,419 2,955 3,698 11,394 12,166 14,135
</TABLE>
- ------------------------
(1) Comprised of the resale of Alcatel products and other equipment and hardware
to a subsidiary of Shell.
(2) Earnings per share amounts have been calculated in accordance with SFAS No.
128, "Earnings Per Share," in 1997 and 1998. Prior year amounts have been
restated on a comparable basis.
32
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF TELECOMMUNICATIONS
The following selected historical financial data for Telecommunications for
the years ended and as of December 31, 1993 and 1994 have been derived from the
unaudited financial statements of Telecommunications. The financial data for the
years ended and as of December 31, 1995 and 1996 have been derived from
Telecommunications' financial statements and related notes which have been
audited by Burds, Reed & Mercer, P.C., independent certified public accountants.
The financial data for the year ended and as of December 31, 1997 have been
derived from Telecommunications' financial statements and related notes which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial data for the three months ended March 31, 1997 and
1998 are derived from unaudited financial statements of Telecommunications,
which in the opinion of Telecommunication's management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation thereof. The results of operations for an interim period are not
necessarily indicative of the results of operations to be expected for a full
year. The data set forth below in this table are qualified in their entirety by,
and should be read in conjunction with, the financial statements of
Telecommunications and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
Telecommunications."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues......................... $ 526 $ 5,965 $ 13,440 $ 23,174 $ 46,745 $ 8,697 $ 15,770
Cost of revenues....................... 39 4,780 11,043 18,941 35,776 7,118 11,802
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................... 487 1,185 2,397 4,233 10,969 1,579 3,968
Operating expenses:
Selling, general and
administrative..................... 426 1,038 2,601 3,711 7,049 1,487 2,176
Depreciation and amortization........ 4 10 333 478 694 142 231
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses............. 430 1,048 2,934 4,189 7,743 1,629 2,407
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................ 57 137 (537) 44 3,226 (50) 1,561
Interest expense....................... -- (9) (240) (315) (311) (78) (86)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes...... 57 128 (777) (271) 2,915 (128) 1,475
Income taxes (benefit)................. 3 36 (245) (88) 1,100 (65) 578
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)...................... $ 54 $ 92 $ (532) $ (183) $ 1,815 $ (63) $ 897
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per common share(1):
Basic................................ $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ (0.01) $ 0.09
Diluted.............................. $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ (0.01) $ 0.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $ 37 $ 104 $ (533) $ (1,348) $ (576) $ (38)
Property and equipment, net......................... 34 118 2,214 2,858 3,693 4,162
Total assets........................................ 111 1,716 4,953 7,356 13,327 14,552
Long-term debt and capital lease obligations, net of
current portion................................... 3 113 1,114 720 453 431
Stockholders' equity (deficit)...................... (3) 375 593 411 2,247 3,165
</TABLE>
33
<PAGE>
- ------------------------
(1) Earnings (loss) per share amounts have been calculated in accordance with
SFAS No. 128, "Earnings Per Share," in 1997 and 1998. Prior year amounts
have been restated on a comparable basis.
34
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF THE PARTNERSHIP
The following selected historical financial data for the Partnership for the
years ended and as of December 31, 1993, 1994, 1995 and 1996 have been derived
from the Partnership's financial statements and related notes which have been
audited by Burds, Reed & Mercer, P.C., independent certified public accountants.
The financial data for the year ended and as of December 31, 1997 have been
derived from the Partnership's financial statements and related notes which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The financial data for the three months ended March 31, 1997 and 1998 are
derived from unaudited financial statements of the Partnership, which in the
opinion of the Partnership's management, contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation thereof.
The results of operations for an interim period are not necessarily indicative
of the results of operations to be expected for a full year. The data set forth
below in this table are qualified in their entirety by, and should be read in
conjunction with, the financial statements of the Partnership and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications services....................... $ -- $ -- $ -- $ -- $ 1,945 $ 360 $ 588
Projects and other................................ 240 334 173 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................................. 240 334 173 -- 1,945 360 588
Operating costs and expenses:
Network access expenses........................... -- 444 503 -- 86 41 12
Selling, general and administrative............... 245 457 326 174 286 65 67
Depreciation and amortization..................... 18 50 31 54 902 166 185
--------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses.............. 263 951 860 228 1,274 272 264
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................. (23) (617) (687) (228) 671 88 324
Interest expense.................................... -- -- -- -- (774) (165) (210)
Other income (expense).............................. 15 4 12 -- (1) -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item.............................................. (8) (613) (675) (228) (104) (77) 114
Income taxes(1)..................................... -- -- -- -- -- -- (42)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item............. (8) (613) (675) (228) (104) (77) 72
Extraordinary item (2).............................. -- -- 645 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ (8) $ (613) $ (30) $ (228) $ (104) $ (77) $ 72
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- ----- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................ $ 497 $ (178) $ 1 $ (2,616) $ (1,059) $ (1,314)
Property and equipment, net.............................. 239 206 -- 8,552 9,300 9,168
Total assets............................................. 788 443 13 8,757 9,779 9,949
Long-term debt and capital lease obligations, net of
current portion........................................ -- -- -- 6,336 8,665 8,184
Partners' capital (deficit).............................. 742 34 4 (223) (327) (255)
</TABLE>
35
<PAGE>
- ------------------------
(1) Effective January 1, 1998, the Partnership elected to be taxed as a
corporation and as such has recorded income taxes of $42,000 relating to the
three months ended March 31, 1998. Prior to January 1, 1998, the Partnership
allocated net income and net losses to its Partnership Interests and
therefore no income taxes were recorded for periods ended prior to January
1, 1998.
(2) Extraordinary gain of approximately $645,000 relates to extinguishment of
certain lease obligations in 1995.
36
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth, for the periods indicated, selected pro
forma per share amounts for Holdings Common Stock, pro forma per share
equivalent amounts for Telecommunications Common Stock, pro forma per one
percent equivalent amounts for Partnership Interests, giving effect to the
Transaction, and the corresponding historical per share data for IWL Common
Stock and Telecommunications Common Stock and the historical data for each one
percent Partnership Interest in the Partnership. Net income per share data is
computed using diluted share information. The information presented is based
upon, and is qualified in its entirety by, the Consolidated Financial Statements
and the related notes thereto of IWL and the Financial Statements and related
notes thereto of Telecommunications and the Partnership included elsewhere
herein. These data are not necessarily indicative of the results of the future
operations of Holdings or the actual results that would have occurred if the
Transaction had been consummated prior to the periods indicated. See "Unaudited
Pro Forma Combined Condensed Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER ENDED MARCH
31, 31,
------------------------------------- ------------
1995 1996 1997 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED(1)
Net income (loss) per share--diluted........................ $ -- $ 0.01 $ 0.09 $ 0.05
Book value per share........................................ $ 0.49
TELECOMMUNICATIONS PER SHARE EQUIVALENTS(2)
Net income (loss) per share--diluted........................ $ -- $ 0.03 $ 0.16 $ 0.08
Book value per share........................................ $ 0.87
PARTNERSHIP ONE PERCENT EQUIVALENTS(3)
Net income (loss) per one percent interest.................. $ (36.55) $ 947.09 $ 5,785.62 $ 2,951.19
Book value per one percent interest......................... $ 30,720.18
IWL HISTORICAL(4)
Net income per share--diluted............................... $ 0.24 $ 0.33 $ 0.30 $ 0.08
Book value per share........................................ $ 3.56
TELECOMMUNICATIONS HISTORICAL
Net income (loss) per share................................. $ (0.05) $ (0.02) $ 0.17 $ 0.09
Book value per share........................................ $ 0.30
PARTNERSHIP HISTORICAL
Net loss per one percent interest........................... $ (301.61) $ (2,274.03) $ (1,037.98) $ 716.40
Book deficit per one percent interest....................... $ (2,552.98)
</TABLE>
- ------------------------
(1) The pro forma IWL per share equivalents are equal to the Unaudited Pro Forma
Combined per share amounts as the Exchange Ratio of IWL Common Stock to
Holdings Common Stock is 1 to 1.
(2) The Telecommunications Per Share Equivalents were calculated by multiplying
the Unaudited Pro Forma Combined per share amounts by the Telecommunications
Exchange Ratio to reflect the exchange of 1.789030878 shares of Holdings
Common Stock for each share of Telecommunications Common Stock pursuant to
the Merger Agreement.
(3) The Partnership One Percent Equivalents were calculated by multiplying the
Unaudited Pro Forma Combined per share amounts by the Partnership Exchange
Ratio to reflect the exchange of 63,194.54 shares of Holdings Common Stock
for each one percent (1%) of the Partnership Interests pursuant to the
Merger Agreement.
37
<PAGE>
(4) The IWL historical net income per share amounts are presented for the years
ended June 30, 1995 and 1996 and for the twelve months ended December 31,
1997 to correspond with the periods used to prepare the unaudited pro forma
combined condensed financial statements.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
IWL Common Stock is listed on the Nasdaq National Market under the trading
symbol "IWLC." On February 12, 1998, the last full trading day prior to the
public announcement of the proposed Mergers, the closing price of IWL Common
Stock on the Nasdaq National Market was $9.875 per share. On July 7, 1998, the
most recent practicable date prior to the mailing of this Joint Proxy
Statement/Prospectus, the closing price of IWL Common Stock on the Nasdaq
National Market was $9.5625 per share. Holders of IWL Common Stock are urged to
obtain current market quotations of the IWL Common Stock prior to making any
decision with respect to the Mergers. There has previously been no public market
for the shares of Holdings Common Stock or Telecommunications Common Stock or
the Partnership Interests. See "Comparative Per Share Market Price and Dividend
Information."
LISTING OF HOLDINGS COMMON STOCK
Holdings intends to apply for listing of the Holdings Common Stock on the
Nasdaq National Market and anticipates that its shares will trade on the Nasdaq
National Market, upon official notice of issuance, under the symbol "CPRK."
There has previously been no public market for the shares of Holdings Common
Stock. See "The Transaction--Nasdaq Listing."
DIVIDEND POLICY
Holdings currently intends to retain all future earnings for use in the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment in the future
of any cash dividends will be at the discretion of the Holdings Board and will
depend upon, among other factors, the earnings, capital requirements and
financial position of Holdings, existing and/or future covenants contained in
Holdings' bank credit agreements or other financing documents and general
economic conditions. IWL has not paid any dividends to date. Telecommunications
has not paid any dividends to date. The Partnership made a one time,
extraordinary distribution in April 1994 to its partners, but otherwise has not
paid any distributions to date.
38
<PAGE>
RISK FACTORS
THIS SECTION DESCRIBES CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY THE
IWL SHAREHOLDERS AND TELECOMMUNICATIONS SHAREHOLDERS IN EVALUATING WHETHER TO
VOTE IN FAVOR OF THE MERGERS AND BY THE PARTNERS IN THE PARTNERSHIP IN
EVALUATING WHETHER TO PARTICIPATE IN THE INTEREST EXCHANGE, AND INCLUDES RISK
FACTORS FOR THE COMBINED BUSINESSES OF IWL, TELECOMMUNICATIONS AND THE
PARTNERSHIP AS WELL AS RISK FACTORS THAT RELATE ONLY TO ONE OF SUCH COMPANIES.
FIXED EXCHANGE RATIO
The IWL Exchange Ratio, Telecommunications Exchange Ratio and Partnership
Exchange Ratio are expressed as fixed ratios in the Merger Agreement. The Merger
Agreement does not contain any provisions for adjustment of the IWL Exchange
Ratio, the Telecommunications Exchange Ratio or the Partnership Exchange Ratio
based upon fluctuations in the market price of IWL Common Stock. Accordingly,
the value of the stock consideration to be received by holders of IWL Common
Stock, Telecommunications Common Stock and Partnership Interests upon the
consummation of the Mergers and the Interest Exchange, as determined by
reference to the market price of the IWL Common Stock on the Nasdaq National
Market, is not presently ascertainable and will depend upon the market price of
Holdings Common Stock on the Closing Date, which in turn will be affected by,
among other factors, the market price of IWL Common Stock immediately prior to
the Closing Date and the value of the business of Telecommunications and the
Partnership on the Closing Date. The exchange ratios were initially determined
on February 16, 1998, which is also the date prior to the date the Transaction
was announced. On February 12, 1998, the most recent day in which trading
occurred in IWL Common Stock prior to such date, the closing price of IWL Common
Stock on the Nasdaq National Market was $9.875 per share. The Exchange Ratios
were recalculated on June 20, 1998. From February 17, 1998 until June 19, 1998,
the date prior to the date the Exchange Ratios were recalculated, the highest
and lowest closing prices of IWL Common Stock were $22.375 per share and $11.75
per share, respectively. On June 19, 1998, the closing price was $15.00 per
share. From June 20, 1998, through July 7, 1998, the highest and lowest closing
prices of IWL Common Stock on the Nasdaq National Market were $9.5625 per share
and $8.125 per share, respectively, and the closing price on July 7, 1998, the
most recent practicable date prior to the mailing of this Joint Proxy
Statement/Prospectus, was $9.5625 per share. These variations may result from
changes in the business, amendments to the Merger Agreement, operations or
prospects of IWL, Telecommunications or the Partnership, market assessment of
the Transaction, general economic conditions or other factors. The IWL Common
Stock is the only publicly traded security of the parties to the Transaction and
it has a one for one exchange ratio for the Holdings Common Stock. As the market
value of the shares of IWL Common Stock increases or decreases, the market value
(and not the number of such shares of stock) to be received by the shareholders
or partners of IWL, Telecommunications or the Partnership, as applicable, will
also increase or decrease (assuming an equivalent per share value of Holdings
Common Stock and IWL Common Stock). Holders of IWL Common Stock,
Telecommunications Common Stock and Partnership Interests are urged to obtain
current market quotations prior to making any decision with respect to the
Mergers and the Interest Exchange. There has previously been no public market
for the shares of Holdings Common Stock, Telecommunications Common Stock or the
Partnership Interests. The Merger Agreement provides that fluctuations in the
price of IWL Common Stock shall be deemed to be an event that does not have a
Material Adverse Effect (as defined in the Merger Agreement) on any other party
or on Holdings that would give rise to the right to terminate the Merger
Agreement.
SUBSTANTIAL INDEBTEDNESS; RESTRICTIVE COVENANTS
It is expected that prior to the Closing Date, Holdings, Telecommunications
and the Partnership (with IWL as a guarantor of certain obligations with respect
to the Proposed Notes) will offer, through a private placement under Rule 144A
under the Securities Act, the Proposed Notes, although there is no assurance
that the Proposed Notes will, in fact, be offered or, if offered, will be sold.
Holdings currently expects that
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the aggregate principal amount of the Proposed Notes to be offered will be
approximately $150,000,000, but may be more or less. As a result of the issuance
of the Proposed Notes, Holdings will be highly leveraged. At March 31, 1998, on
a pro forma basis after giving effect to the consummation of the Transaction and
the offering of the Proposed Notes and the application of the net proceeds
therefrom, Holdings would have had total consolidated indebtedness of $150
million before the costs of the Transaction and the offering of the Proposed
Notes (or approximately 92% of the total capitalization of Holdings) and the
total liabilities of Holdings (including trade accounts payable and accrued
liabilities) would have been approximately $168.6 million. The degree to which
Holdings is leveraged may adversely affect Holdings' ability to finance its
future operations, to compete effectively against better capitalized companies,
to be flexible in planning for, or reacting to, changes in its business, to
withstand downturns in its business or the economy generally, and to pursue
business opportunities that may be in the best interests of Holdings.
The successful implementation of Holdings' strategy, including expanding its
network, increasing its sales force and obtaining and retaining a significant
number of customers in order to generate significant and sustained growth in
Holdings' cash flow, will be necessary for Holdings to be able to meet its debt
service requirements, including its obligations under the Proposed Notes (if
they are sold). There can be no assurance that Holdings will successfully
implement its strategy or that Holdings will be able to generate sufficient cash
flow from operating activities to meet its debt service obligations and working
capital requirements. In the event the implementation of Holdings' strategy is
delayed or is unsuccessful or Holdings does not generate sufficient cash flow to
meet its debt service and working capital requirements, Holdings may need to
seek additional financing. There can be no assurance that any such financing
could be obtained on terms that are acceptable to Holdings, or at all. In the
absence of such financing, Holdings could be forced to dispose of assets in
order to make up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. As a result, there can be no assurance that Holdings' assets could
be sold quickly enough or for sufficient amounts to enable Holdings to meet its
obligations, including its obligations with respect to the Proposed Notes (if
they are sold).
Holdings is currently negotiating with a lender to obtain a senior credit
facility (the "Credit Facility") which the Company expects will become available
upon consummation of the Transaction. The Credit Facility and the Indenture (as
defined below) will impose operating and financial restrictions on Holdings and
its subsidiaries. These restrictions will affect, and in certain cases
significantly limit or prohibit, among other things, the ability of Holdings and
its subsidiaries to incur additional indebtedness, create liens upon assets,
apply the proceeds from the disposal of assets, make investments, make dividend
payments and other distributions on capital stock (other than to Holdings) and
redeem capital stock. In addition, the Credit Facility is expected to require
Holdings to maintain certain financial ratios and meet certain financial
covenants relating to Holdings. There can be no assurance that Holdings will be
able to maintain such ratios or that such covenants will not adversely affect
Holdings' ability to finance its future operations or capital needs or to engage
in other business activities that may be in the best interest of Holdings.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
Upon completion of the Transaction, Holdings will be a holding company with
no direct operations and no significant assets other than its direct and
indirect ownership interests in its subsidiaries. Upon completion of the
Transaction, the Proposed Notes (if they are sold) will be general unsecured
obligations of Holdings and will rank pari passu in right of payment with all
future senior indebtedness of Holdings, if any, and senior in right of payment
to all future subordinated indebtedness of Holdings, if any. Holdings does not
currently have any other existing debt other than debt of its subsidiaries. Each
of Holdings' subsidiaries is a separate legal entity that upon completion of the
Transaction has no obligation to pay any amounts that may be due pursuant to the
Proposed Notes (if the sale thereof is completed) or to make any funds available
therefor, whether by dividends, loans or other payments. Because upon completion
of the
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Transaction (as currently contemplated) the Proposed Notes will not be
guaranteed by the subsidiaries, all indebtedness of the subsidiaries, including
the subsidiaries' borrowings under the Credit Facility, any vendor financings
and trade payables, will be structurally senior to the Proposed Notes. In
addition, Holdings may be required to pledge the stock of Telecommunications and
IWL, which will become Holdings' direct wholly owned subsidiaries upon
completion of the Transaction, to secure the borrowings under the Credit
Facility and other vendor financings and Holdings subsidiaries may be required
to grant liens on substantially all of their assets as security for the
obligations under the Credit Facility. In the event of any dissolution,
bankruptcy or liquidation or reorganization of Holdings' subsidiaries, the right
of Holdings to receive assets of the subsidiaries upon such liquidation or
reorganization (and the consequent right of holders of the Proposed Notes to
participate in the distribution or realize proceeds from those assets) will be
effectively subordinated to the claims of the subsidiaries' creditors (including
trade creditors and holders of other indebtedness of such subsidiaries) except
if and to the extent Holdings is itself a creditor of such subsidiary, in which
case the claims of Holdings would still be effectively subordinated to any
security interest in the assets of such subsidiary held by other creditors. As
of March 31, 1998, after giving effect to the Transaction and the offering of
the Proposed Notes (and the application of the net proceeds therefrom) Holdings
and its subsidiaries, on a consolidated basis, would have had approximately
$18.6 million of total outstanding liabilities (excluding intercompany payables
and the Proposed Notes), all of which would have been liabilities of Holdings'
subsidiaries and all of which would have been structurally senior to the
Proposed Notes. See "Unaudited Pro Forma Combined Condensed Financial
Statements." Holdings will be dependent on the cash flow of its subsidiaries to
meet its obligations, including the payment of interest and principal
obligations on the Proposed Notes (if they are sold) when due. Accordingly,
Holdings' ability to make principal, interest and other payments to holders of
the Proposed Notes when due will be dependent on the receipt of sufficient funds
from its subsidiaries. Receipt of such funds will be restricted by the terms of
existing and future indebtedness of the subsidiaries, including the Credit
Facility.
MANAGING RAPID CHANGE; INTEGRATION OF COMBINED BUSINESSES
IWL, Telecommunications and the Partnership each have experienced a recent
period of significant growth and expansion that has placed, and if sustained
would continue to place, a significant strain on their respective
administrative, operational and financial resources, as evidenced by IWL's
recent misclassification of revenue. This growth has resulted in an increase in
the level of responsibility for management personnel. The Transaction is
intended in part to help fuel additional growth and expansion, which could add
additional strain on Holdings' resources and increase demands on its systems and
controls. Holdings' ability to continue to manage its growth successfully will
require Holdings to enhance its operational, management, financial and
information systems and controls and to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. There can be no
assurance that Holdings will be able to do so.
The Transaction involves the integration of three companies, which will
impose many risks on Holdings, including risks associated with assimilating the
operations, services, products and personnel of the three companies. No
assurance can be given that Holdings will not encounter significant difficulties
in integrating the respective operations of IWL, Telecommunications and the
Partnership or that the benefits and revenue growth expected from such
integration will be realized. The achievement of the benefits and revenue growth
expected from such integration will require Holdings to, among other things,
access significant amounts of growth capital, to complete successfully the
approximately 4,300 route mile fiber network planned by the Partnership, to
provide cost-effective services in many new markets, to expand rapidly its sales
force and customer service department, to introduce new data products as they
become available and, in regards to the Transaction, to incur significant costs
in connection with the integration of IWL's, Telecommunications' and the
Partnership's operations, financial reporting and accounting systems, and
networks, as well as other costs relating to transitional planning and
implementation. The incurrence
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of any such costs, as well as any unexpected costs or delays in connection with
such integration, could have a material adverse effect on Holdings' financial
condition, results of operations and cash flow.
SIGNIFICANT CAPITAL REQUIREMENTS
Following the Transaction, the expansion of Holdings' fiber network, the
installation of additional switches, the opening of new sales offices, the
recruiting and training of new personnel, additional and increased marketing
expenses and other expenses related to Holdings' growth will require substantial
capital and operating funds. Holdings currently estimates that its aggregate
capital expenditure requirements will total approximately $50 million during the
second half of 1998 and $140 million for 1999. Holdings anticipates making
substantial capital expenditures thereafter. Capital expenditures and working
capital will be required to (i) fund the construction and operation of the fiber
optic network, (ii) fund the installation of voice and data switches and (iii)
open sales offices and add sales support and customer service personnel in
markets throughout Texas and the Gulf Coast region. Holdings believes that the
estimated net proceeds from the offering of the Proposed Notes, together with
cash flow from operations, borrowings under the Credit Facility which Holdings
is currently negotiating with a bank lender, vendor financings, sales of dark
fiber or otherwise, will provide sufficient funds to enable Holdings to fund its
capital expenditures and working capital requirements for the next 18 months.
There can be no assurance, however, that the offering of the Proposed Notes will
be successful, or if successful, as to the terms and conditions of the Proposed
Notes as issued or as to when and if Holdings will enter into the Credit
Facility or any other substitute senior credit facility or as to the amount or
terms of the Credit Facility or any other substitute credit facility. Additional
capital will be required after such time to finance additional expansion of
Holdings network.
The actual amount and timing of Holdings' future capital requirements may
differ materially from Holdings' estimates, depending on the demand for
Holdings' services and as a result of regulatory, technological and competitive
developments, including new market developments and new opportunities, in
Holdings' industry. Holdings may also require additional capital in the future,
or sooner than currently anticipated, for new business activities related to its
current and planned businesses or in the event it decides to make additional
acquisitions or enter into joint ventures and strategic alliances. Sources of
additional capital may include cash flow from operations and public and private
equity and debt financings. There can be no assurance, however, that Holdings
will be successful in producing sufficient cash flow or raising sufficient debt
or capital to meet its strategic objectives or that such funds, if available,
will be available on a timely basis on terms that are acceptable to Holdings and
within the limitations contained in Holdings' financing arrangements. See
"--Substantial Indebtedness; Restrictive Covenants." Failure to generate or
raise sufficient funds, whether in the Proposed Offering, the Credit Facility,
through vendor financings, sales of dark fiber or otherwise, may require
Holdings to delay or abandon some or all of its future expansion plans or
expenditures, which could have a material adverse effect on Holdings' financial
condition, results of operations and cash flow. Such failure could also limit
the ability of Holdings to make principal and interest payments on its
indebtedness, including the Proposed Notes.
RISKS RELATED TO THE FIBER NETWORK
Holdings' ability to achieve its strategic objectives will depend in large
part upon the successful, timely and cost-effective completion of its planned
4,300 route mile fiber network. Additionally, Holdings must achieve substantial
traffic volume over the expanded network in order to fully realize the expected
cash flows, operating efficiencies and cost benefits. The construction of
Holdings' fiber network may be affected by a variety of factors, uncertainties
and contingencies, many of which are beyond Holdings' control, including but not
limited to, Holdings' access to sufficient capital, access to rights-of-way, the
timely granting of franchise agreements, availability of construction
contractors, timing conflicts with other fiber projects which could increase
contractor costs, the pricing and availability of advanced fiber optic cable,
construction delays and cost overruns. Although Holdings believes that its cost
estimates and build-out
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schedule are reasonable, there can be no assurance that the actual construction
costs or time required to complete the construction of Holdings' fiber network
will not exceed current estimates. Holdings believes that it is likely that
broadband prices for carriers' carrier services and end-user services will
continue to decline over the next several years due primarily to (i) the
construction of additional fiber networks that will supply substantially more
transmission capacity than historically has been demanded, (ii) technological
advances that permit substantial increases in the transmission capacity of fiber
at costs lower than building new fiber networks and (iii) strategic alliances,
such as long distance capacity purchasing alliances among certain Regional Bell
Operating Companies, ("RBOCs"), that increase customer purchasing power. There
can be no assurance that Holdings will be able to achieve increased capacity and
traffic volumes at prices necessary to support the expanded network. A
significant delay, or the inability to complete Holdings' fiber network or to
successfully market the capacity of the network, could have a material adverse
effect on Holdings' financial condition, results of operations and cash flow.
DEVELOPMENT OF PROVISIONING, BILLING, CUSTOMER SERVICE AND MANAGEMENT
INFORMATION SYSTEMS
Sophisticated OSS systems are vital to Holdings' ability to add new
customers and new products, manage network capacity, monitor costs, render
monthly invoices for services, process customer orders, provide customer service
and achieve operating efficiencies. Holdings intends to develop internally or
acquire the information and support systems necessary to manage its growth and
provide its services efficiently. However, there can be no assurance that
Holdings will be able to timely and successfully develop, acquire or operate
such systems. As Holdings begins to provide local switched services, the need
for sophisticated billing and information systems will also increase
significantly, and Holdings will have significant additional requirements for
electronic data interfaces with ILECs and other CLECs. Additionally, any
acquisitions would place additional burdens on Holdings' accounting, information
and other systems. Unanticipated problems in any of the above areas, or
Holdings' inability to implement solutions in a timely manner or to establish or
upgrade systems as necessary, could have a material adverse impact on the
ability of Holdings to reach its objectives and on its financial condition,
results of operations and cash flow.
COMPETITION
OVERVIEW. The communications services industry is highly competitive,
rapidly evolving and subject to constant technological change. In particular,
there are numerous companies offering long distance and local services, and
Holdings expects competition to increase in the future. Holdings believes that
existing competitors are likely to continue to expand their service offerings to
appeal to existing or potential customers of Holdings. Many of Holdings's
existing competitors have financial, personnel and other resources, including
brand name recognition, substantially greater than those of Holdings. Moreover,
Holdings expects that new competitors are likely to enter the communications
market, and some of these new competitors may market communications services
similar to Holdings' services. In addition, some of these new competitors may
have financial, personnel and other resources, including brand name recognition,
substantially greater than those of Holdings.
In addition, the regulatory environment in which Holdings operates is
undergoing significant change. As this regulatory environment evolves, changes
may occur which could create greater or unique competitive advantages for all or
some of Holdings' current or potential competitors, or could make it easier for
additional parties to provide services. Other providers currently offer one or
more of each of the services offered by Holdings, and many communications
companies operate generally in the same long distance and local service
submarkets as Holdings. As a service provider in the long distance
communications industry, Holdings competes with several well established
providers, as well as many other long distance providers with less significant
market shares.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. Holdings provides long distance
services using its own facilities and by reselling the facilities of other
carriers in the United States and between the United States
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and other countries. The long distance communications industry is intensely
competitive and significantly influenced by the marketing and pricing decisions
of the larger industry participants such as AT&T, MCI, Sprint and WorldCom.
Moreover, the industry is undergoing significant consolidation that has created
and will continue to create numerous other entities with substantial resources
to compete for long distance business, such as Excel Communications, Inc.,
Frontier Communications Service, Inc. and Qwest. In addition, as a result of the
Telecommunications Act of 1996 (the "1996 Telecommunications Act"), RBOCs and
GTE Operating Companies ("GTOCs") are able or will be able in the future to
enter the long distance market. These larger competitors have significantly
greater name recognition, financial, technical, network and marketing resources.
They may also offer a broader portfolio of services and have long standing
relationships with customers targeted by Holdings. Moreover, there can be no
assurances that certain of Holdings' competitors will not be better situated to
negotiate contracts with suppliers of telecommunications services which are more
favorable than contracts negotiated by Holdings. Many of Holdings' competitors
enjoy economies of scale that can result in a lower cost structure for
transmission and related terminating costs, which could cause significant
pricing pressures on Holdings.
Holdings competes in the long distance market primarily on the basis of
price, customer service and the ability to provide a variety of communications
products and services. Customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. Prices for domestic and international long distance calls have
declined in recent years and are likely to continue to decrease. Competition in
all of the relevant markets is expected to increase which could adversely affect
net revenue per minute and gross margins as a percentage of net revenue. There
can be no assurance that Holdings will be able to compete effectively in the
domestic or international long distance markets.
LOCAL EXCHANGE SERVICE. Holdings seeks to expand significantly its
operations to provide services typically provided by ILECs. The local service
market has only recently been opened broadly to new service providers following
enactment of the 1996 Telecommunications Act. The services intended to be
offered by Holdings will compete with those offered by ILECs, such as BellSouth,
Southwestern Bell and the GTOCs, as well as very large interexchange carriers
("IXCs"), such as AT&T, MCI, Sprint and WorldCom. The ILECs currently dominate
the provision of local services in their respective markets and the ILECs and
the IXCs have greater name recognition, financial, technical, network, marketing
and personnel resources than the new entrants, as well as longer standing
relationships with regulatory authorities at the federal and state levels.
Moreover, there can be no assurance that certain of Holdings' competitors will
not be better situated to negotiate contracts with suppliers of
telecommunications services which are more favorable than contracts negotiated
by Holdings. Holdings also may face competition from other current and potential
market entrants, including other CLECs, cable companies, electric utilities,
local exchange carriers ("LECs") operating outside their current local service
areas, other long distance carriers, wireless telephone system owners, microwave
owners, satellite carriers, private networks built by large companies, and
start-up telecommunications ventures. There can be no assurance that Holdings
will be able to compete effectively in the local service markets.
FIBER NETWORKS. Holdings intends to expand its fiber optic network to
approximately 4,300 route miles throughout Texas and the Gulf Coast region.
Holdings will compete with numerous established and start-up national and
regional fiber optic networks owned by IXCs, ILECs and CLECs throughout Texas
and the Gulf Coast region. These competitors include very large companies such
as AT&T, MCI, WorldCom, Sprint, IXC and Qwest, each of whom has greater name
recognition, financial, personnel, technical and marketing resources than
Holdings. Holdings is aware that other facilities-based providers of local and
long distance telecommunications services are planning and constructing fiber
networks and/or purchasing or leasing dark fiber in order to build additional
networks that, if and when completed, could compete with Holdings' network. In
addition to IXCs and LECs, entities potentially capable of offering broadband
services in competition with Holdings' existing and planned network include
other facilities-based communications service providers, cable television
companies, electric utilities, microwave carriers,
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satellite carriers, wireless telephone system operators and large companies who
build private networks. Such competing networks may also have advanced fiber and
operating capabilities similar to those of Holdings' existing and planned
network and may be positioned geographically to compete directly with Holdings'
existing and planned network for many of the same customers along a significant
portion of the same routes.
INTERNET TELEPHONY. Internet services are currently deemed enhanced
services by the FCC and therefore are not subject to federal and state common
carrier regulations, including long distance interstate and intra-state access
fees. Certain Internet service providers ("ISPs") have recently announced plans
to use Internet protocol technologies ("IP Telephony") to introduce domestic and
international long distance services at rates 30% to 50% below standard long
distance rates. Although the FCC intends to review this issue, IP Telephony
could increase pressure on IXCs and other communications companies to reduce
prices and margins from domestic and international long distance services. There
can be no assurance that Holdings or the carrier customers of Holdings will not
experience substantial decreases in call volume, pricing and/or margins due to
IP Telephony. There can also be no assurance that Holdings will be able to offer
its telecommunications services to end users at a price which is competitive
with the IP Telephony services offered by these new companies. IWL also is an
ISP. There can be no assurance that Internet services will not be subject to
additional regulation in the future, although Holdings seeks to compete by
introducing IP Telephony in late 1998. The Internet services market is highly
competitive although there are no substantial barriers to entry, and Holdings
expects that competition will continue to intensify. Holdings' competitors in
this market include ISPs, other telecommunications companies, online services
providers and Internet software providers. Many of these competitors have
greater financial, technical and marketing resources than those available to
Holdings.
TECHNOLOGICAL ADVANCES. In the future, Holdings may be subject to intense
competition due to the development of new technologies resulting in an increased
supply of domestic and international transmission capacity. The
telecommunications industry is experiencing a period of rapid and significant
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar to
those to be provided by Holdings. For instance, recent advances in wave division
multiplexing technology permit substantial increases in transmission capacity of
both new and older fiber. The introduction of new products or emergence of new
technologies may cause capacity to greatly exceed the demand, reducing the
pricing of certain services to be provided by Holdings. There can be no
assurance that Holdings' services will satisfy future customer needs, that
Holdings' technologies will not become obsolete in light of future technological
developments, or that Holdings will
not have to make significant additional capital investments to upgrade or
replace its system and equipment. The effect on Holdings' operations of
technological changes cannot be predicted, and if Holdings is unable to keep
pace with advances, it could have a material adverse effect on the financial
condition, results of operations and cash flow of Holdings.
OFFSHORE AND REMOTE TELECOMMUNICATIONS SERVICES. Currently, Holdings
provides telecommunications services to oil and gas customers in the Gulf of
Mexico, the North Sea and other oil and gas producing regions around the world.
In the Gulf of Mexico, Holdings competes directly with Autocomm Communications
Engineering Corp., Sola Communications, Inc., Datacom and Shell, as well as
cellular carriers such as Petrocom and Coastel, and with Data Marine Systems and
EAE Ltd. in the North Sea. Shell currently provides competing services through
its microwave network in the Gulf of Mexico and has announced plans to become a
full service telecommunications provider to the oil and gas industry in the
region. Holdings provides private-line telecommunications services in Russia. In
Russia, the major competitors for networks are SOVAMTEL and AMRUSCOM. Although
Holdings believes that it competes successfully in each of its markets today,
there can be no assurance that Holdings will be able to continue to compete
successfully in the future. Holdings believes that most of its larger
competitors have generally not made it a priority to provide remote,
difficult-access telecommunications services. Should one or more of the
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competitors decide to focus on such services, it could have a material adverse
effect on the financial condition, results of operations and cash flow of
Holdings.
DEPENDENCE ON OTHER LONG DISTANCE CARRIERS
Holdings has agreements with many carriers to terminate domestic and
international long distance traffic. Certain of these agreements allow for the
termination of domestic traffic, particularly intrastate traffic, at rates
significantly lower than those which Holdings could obtain by terminating
directly with the ILEC at tariffed rates. A termination of service by these
carriers, a reduction in their quality of service or a change in the rates these
carriers charge for their services could have a material adverse effect on
Holdings' financial condition, results of operations and cash flow.
More than half of Holdings' international traffic is to Mexico. In January
and February 1998, many carriers, including one used by Holdings, were
temporarily unable to terminate traffic into Mexico. Most of these carriers have
since regained their ability to terminate traffic, and they, along with many
other new carriers, continue to offer terminating rates significantly below
international settlement rates. If competing carriers can provide Holdings'
customers with quality and rates Holdings is unable to match, Holdings could
lose a significant portion of its traffic into Mexico or any other foreign
country, which could have a material adverse effect on Holdings' financial
condition, results of operations and cash flow.
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
In addition to reselling local service from ILECs, Holdings intends to
significantly expand its existing efforts to utilize unbundled network elements
that are the components of those services. Such resale will play an important
part in Holdings' local exchange service business strategy. Although the 1996
Telecommunications Act requires the ILECs to allow such resale, there can be no
assurance (i) that the implementation of the 1996 Telecommunications Act, which
has been challenged in federal court by the ILECs, will be concluded on a timely
basis and on terms favorable to Holdings or (ii) that Holdings will be
successful in negotiating with ILECs the necessary co-location, interconnection
and resale agreements, particularly the unbundled network elements that Holdings
intends to resell, on terms that will be favorable to Holdings. Any substantial
limitation on Holdings' ability to secure reasonable and timely access to ILEC
services and unbundled network elements could have a material adverse effect on
Holdings' financial condition, results of operations and cash flow.
DEPENDENCE ON KEY PERSONNEL
The success of Holdings' business will depend, in part, on the continued
services of certain members of the management of Holdings, IWL,
Telecommunications and the Partnership. In particular, the loss of the services
of one or more of Jere W. Thompson, Jr., Chief Executive Officer and Chairman of
the Board of Holdings, President of Telecommunications and President of the
General Partner, Ignatius W. Leonards, President and Vice Chairman of the Board
of Holdings and Chief Executive Officer and Chairman of the Board of IWL, Byron
M. Allen, Executive Vice President of Holdings and President of IWL and Scott L.
Roberts, Timothy W. Rogers or Timothy M. Terrell, each Executive Vice Presidents
of Holdings and each Executive Vice Presidents of Telecommunications, could have
a material adverse effect on the business, results of operations and financial
condition of Holdings. The competition for qualified managers and employees in
the telecommunications industry is intense. Accordingly, there can be no
assurance that Holdings and its operating subsidiaries will be able to retain
their key employees or that they will be able to attract or retain skilled
personnel in the future.
DEPENDENCE ON MAJOR CUSTOMERS
Holdings' carrier customers generally use more than one service provider for
switched access services and can quickly reduce their use of Holdings' services
and move to other providers without incurring
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significant expense. Holdings' private line agreements with its customers
generally provide that the customer may terminate service without penalty in the
event of certain prolonged outages in service and for certain other defined
causes. As a result of these and other factors, there can be no assurance that
Holdings will be able to retain its carrier customers. For the year ended
December 31, 1997, revenues from services provided to MCI accounted for more
than 10% of Holdings' combined pro forma revenues. The loss of or a significant
decrease of business from any of Holdings' largest customers would have a
material adverse effect on Holdings' financial condition, results of operations
and cash flow.
Customers in the oil and gas industry accounted for substantially all of
Holdings' offshore and project related sales in the fiscal year ended December
31, 1997. Price decreases in oil and gas and other market forces negatively
affecting the oil and gas industry as a whole could affect funding for drilling
activities in the Gulf of Mexico, the North Sea and elsewhere, which could have
a material adverse effect on Holdings' financial condition, results of
operations and cash flow.
RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS
A portion of IWL's project-related sales to date have been made to customers
located outside of the United States, including customers located in Moscow,
Russia and Quito, Ecuador. Risks inherent in Holdings' international business
activities include changes in regulatory requirements, costs and risks of
localizing systems in foreign countries, customs matters, longer payment cycles,
higher tax rates or additional withholding requirements, difficulty in enforcing
agreements, military, political and transportation obstacles, political and
economic instability, expropriation, nationalization, insurrection, war,
difficulties in staffing and managing foreign operations, fluctuations in
currency exchange rates, regulations which restrict or prohibit repatriation of
funds, technology export and import restrictions or prohibitions, the burden of
complying with a wide variety of complex foreign laws and treaties, changes in
local laws and difficulty in accounts receivable collections. There can be no
assurance that any of these factors will not have a material adverse effect on
Holdings' financial condition, results of operations and cash flow.
REGULATION OF LONG DISTANCE AND LOCAL TELEPHONE SERVICES
Telecommunications services are subject to significant regulation at the
federal, state, local and international levels, affecting Holdings and its
existing and potential competitors. Delays in receiving required regulatory
approvals or the enactment of new and adverse legislation, regulations or
regulatory requirements may have a material adverse effect on Holdings'
financial condition, results of operations and cash flow. In addition, future
legislative, judicial and regulatory agency actions could alter competitive
conditions in the markets in which Holdings intends to operate, in ways not
necessarily to Holdings' advantage.
Holdings is currently subject to federal and state government regulation of
its long distance and local telephone services. Holdings is regulated at the
federal level by the FCC and is required to maintain both domestic and
international tariffs for interstate services containing the currently effective
rates, terms and conditions of service. The FCC has proposed, however, to
eliminate the tariffing requirement for domestic interstate non-dominant
carriers, although such detariffing is being reviewed by a federal court and
carriers must continue to file such tariffs during the pendency of the
litigation. In addition, Holdings is required to obtain and maintain a
certificate, issued by the FCC, in connection with its international services.
Holdings holds global authority from the FCC to provide resale of switched
services, and holds global authority from the FCC to provide private line (where
permitted by the FCC) and facilities-based services. Holdings also maintains
numerous licenses in the satellite earth station, microwave and business radio
services which are subject to detailed licensing, operations and technical
requirements established by the FCC. The FCC generally retains the right to
sanction a carrier or revoke its authorization if a carrier violates applicable
laws of regulations. Intrastate long distance telecommunications operations are
also subject to various state laws and regulations, including prior
certifications, notification, or registration
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requirements. Holdings generally must obtain and maintain certificates of public
convenience and necessity from regulatory authorities in most states in which it
offers intrastate long distance service. In most of these jurisdictions,
Holdings must file and obtain prior regulatory approval of tariffs for
intrastate services. In addition, Holdings must update or amend the tariffs and,
in some cases, the certificates of public convenience and necessity when rates
are adjusted or new products are added to the long distance services. The FCC
and numerous state agencies also impose prior approval requirements on transfers
of control, including pro forma transfers of control and corporate
reorganizations, and assignments of regulatory authorizations. As a result,
Telecommunications, IWL and Holdings filed notices and/or applications for
approval of the Transaction, and the receipt of certain of such approvals is a
condition to the consummation of the Transaction. While Holdings expects to
receive all such approvals that have been requested, there can be no assurance
that such approvals will be granted in a timely fashion.
Holdings' CLEC operations are subject to specific state certification and
compliance requirements. Most states require a certification or other
authorization to offer local exchange services. These certifications generally
require a showing that the carrier has adequate financial, managerial and
technical resources to offer the proposed services in a manner consistent with
the public interest. States generally retain the right to sanction a carrier or
to revoke certifications if a carrier violates applicable laws and/or
regulations.
Holdings' cost of providing long distance service, and its revenues from
providing local services, will both be affected by changes in "access charges"
and universal services. In 1997, the FCC released an order establishing a
significantly expanded federal universal service subsidy regime to be funded by
interstate carriers and certain other entities. The FCC established new
universal service funds to support telecommunications and information services
provided to qualifying schools, libraries and rural health care providers, and
expanded the federal subsidies for local telephone services provided to
low-income consumers. If the federal and state regulations requiring the LECs to
provide equal access for the origination and termination of calls by long
distance subscribers change or if the regulations governing access charge rates
or universal service contribution change, such changes could have a material
adverse effect on Holdings' financial condition, results of operations and cash
flow. On July 18, 1997, the United States Court of Appeals for the Eighth
Circuit overturned many of the rules the FCC had established pursuant to the
1996 Telecommunications Act. The Eighth Circuit decision substantially limits
the FCC's jurisdiction and expands state regulators' jurisdiction to set and
enforce rules governing the development of local competition. As a result, it is
more likely that the rules governing local competition will vary substantially
from state to state. If a patchwork of state regulations were to develop, it
could increase Holdings' cost of regulatory compliance and could make entry into
and conducting business in some markets more expensive than in others. The U.S.
Supreme Court has decided to review the Eighth Circuit's decision. There can be
no assurance as to how or when the U.S. Supreme Court will act on the appeal or
that the outcome of the appeal will not have a material adverse effect on
Holdings' financial condition, results of operations and cash flow. See
"Competition" and "Regulation and Licenses--Government Regulation."
POSSIBLE SERVICE INTERRUPTIONS; NATURAL DISASTERS
Holdings' operations are dependent on its ability, and the ability of third
parties from whom it obtains services, to protect its network and equipment
against damage that may be caused by fire, equipment failures, weather, power
loss, failures, fiber cuts, failure or loss of satellites, human error,
unauthorized intrusion, natural disasters or occurrences, acts of sabotage and
other similar events. Almost all of Telecommunications' voice traffic currently
passes through its single Dallas switch. A second switch is not planned to be
operational until the third quarter of 1998, and no assurance can be given that
such additional switch will be installed on a timely basis or at all. IWL's
operations in remote and underdeveloped areas of the world make IWL's
operations, equipment and employees susceptible to extreme environmental
conditions and political instability. A significant portion of the satellite
communications equipment and foreign circuits used by IWL to provide services is
housed in a single location in IWL's
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network operations center without a back-up center and a second center is not
planned to be operational until the fourth quarter of 1998, and no assurance can
be given that such additional center will be operational on a timely basis or at
all. In addition, IWL owns or leases equipment located in the Gulf of Mexico
that is susceptible to hurricanes. There can be no assurance that fire,
equipment failure or other events would not disable Telecommunications', the
Partnership's or IWL's equipment, which could have a material adverse effect on
Holdings' 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 or regulatory
issues from time to time. It is therefore possible that the networks and
facilities utilized by IWL, Telecommunications and the Partnership may from time
to time experience service interruptions or equipment failures that would have a
material adverse effect on Holdings' financial condition, results of operations
and cash flow.
POTENTIAL LIABILITY OF INTERNET SERVICE PROVIDERS
IWL is an ISP. The law governing the liability of on-line services providers
and Internet access providers for participating in the hosting or transmission
of objectionable materials or information currently is unsettled. Under the
terms of the 1996 Telecommunications Act, both civil and criminal penalties can
be imposed for the use of interactive computer services for the transmission of
certain indecent or obscene communications. However, this provision as it
relates to indecent, but not obscene, communications was recently found to be
unconstitutional by the United States Supreme Court in JANET RENO V. AMERICAN
CIVIL LIBERTIES UNION. Nonetheless, many states have adopted or are considering
adopting similar requirements, and the constitutionality of such state
requirements remains unsettled at this time. In addition, several private
lawsuits have been filed seeking to hold Internet access providers accountable
for information which they transmit, such as libelous material and copyrighted
material. While the outcome of these activities is uncertain, the ultimate
imposition of potential liability on Internet access providers for information
which they host, distribute or transport could materially change the way they
must conduct business and could impact the determination by Holdings to expand
or continue this business and could subject IWL, Telecommunications or the
Partnership to litigation which could have a material adverse effect on
Holdings' financial condition, results of operations and cash flow.
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY
The Partnership must obtain rights-of-way and other permits to install
underground conduits from railroads, utilities, state highway authorities, local
governments and transit authorities. There can be no assurance that the
Partnership will be able to obtain and maintain the additional rights and
permits needed to implement its business plan on acceptable terms. Loss of
substantial rights and permits or the failure to enter into and maintain
required arrangements for the fiber network could have a material adverse effect
on Holdings' financial condition, results of operations and cash flow.
FAILURE TO CONSUMMATE TRANSACTION; PROCEEDS IN ESCROW ACCOUNT MAY BE
INSUFFICIENT TO REPURCHASE PROPOSED NOTES
Consummation of the Transaction is subject to certain closing conditions,
including, among other conditions, approval of the respective Mergers by the
shareholders of IWL and Telecommunications, the agreement of the General Partner
and Limited Partners holding at least 80% of the limited Partnership Interests
in the Partnership to contribute their Partnership Interests to Holdings in
exchange for shares of Holdings Common Stock and receipt of material regulatory
approvals from the FCC and various state regulatory agencies in states in which
IWL, Telecommunications or the Partnership provide communications services. The
failure to satisfy such conditions would permit Holdings or the other parties
thereto to refuse to consummate the Transaction. Accordingly, there can be no
assurance that the Transaction will be
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consummated. The Merger Agreement provides for the Transaction to be consummated
no later than December 31, 1998, although such date may be modified by the
parties to the Merger Agreement.
Approximately $145.0 million of the net proceeds from the offering of the
Proposed Notes, if completed, will be deposited into the Escrow Account and
invested in temporary cash investments. If the offering of the Proposed Notes is
completed, and if the Transaction is not consummated by August 31, 1998,
Holdings, Telecommunications and the Partnership will be required to make an
offer to purchase the Proposed Notes at 101% of their original principal amount,
plus accrued and unpaid interest to the date of purchase. See "Offering of
Proposed Notes." The amounts held in the Escrow Account may be insufficient to
repurchase all tendered Proposed Notes, and will be insufficient by
approximately $7.0 million if all or substantially all of the Proposed Notes are
tendered. Although each of Holdings, Telecommunications and the Partnership have
jointly and severally agreed to fund any such deficiency (and IWL has guaranteed
such obligation), they do not currently have the financial ability to fund any
such deficiency. In addition, the ability of Holdings, Telecommunications, the
Partnership and IWL to repurchase the Proposed Notes in the event of such offer
to purchase may be limited by the terms of their respective then existing
contractual obligations.
In the event such offer to purchase is required to be made and is
consummated and any Proposed Notes remain outstanding thereafter, Holdings and
IWL shall be released from their respective obligations under the Proposed
Notes, and Telecommunications and the Partnership will be required to engage in
either a statutory merger or interest exchange. No assurance can be given
however, that the Partnership and Telecommunications will consummate such merger
or interest exchange.
VARIABILITY IN OPERATING RESULTS
The timing of IWL's project-related sales have varied significantly in the
past and are expected to vary significantly in the future, particularly as
evidenced by the recent variations in IWL's revenues, which did not reach the
levels contemplated by the business plan provided to Telecommunications and the
Partnership. This could cause Holdings 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of IWL."
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
Notwithstanding that Holdings has registered the use of the mark CAPROCK
COMMUNICATIONS in the United States, numerous other companies in many different
industries, particularly in West Texas, have preexisting rights to the name
"Caprock" within defined territories, including one company that may have the
right to use the name for long distance services within an established area, and
these companies could seek to require Holdings to obtain a license from them for
the use of the name "CapRock" within those defined territories or require
Holdings to change its name, either of which could require Holdings to incur
additional expenses. Additionally, if Holdings were required to change its name,
it could lose the goodwill, if any, associated with the CapRock name.
LACK OF DIVIDENDS
Neither IWL nor Telecommunications has ever paid dividends on its common
stock, and the Partnership has never made a distribution to its partners (other
than an one-time, extraordinary distribution in 1994) and Holdings does not
anticipate paying any cash dividends on the Holdings Common Stock in the
foreseeable future and, in certain circumstances, will be prohibited from doing
so under the terms of the Proposed Notes (if they are sold), the Credit Facility
(if it is entered into) and any other credit documents to which Holdings is a
party of from time to time. See "Management's Discussion and Analysis
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of Financial Condition and Results of Operations of IWL" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Telecommunications."
CONCENTRATION OF OWNERSHIP
Following the consummation of the Transaction (and assuming all Partnership
Interests are validly tendered pursuant to the Exchange Offer and accepted), the
current officers and directors of IWL, Telecommunications and the General
Partner will beneficially own, in the aggregate, approximately 90.0% of the
outstanding shares of Holdings Common Stock (on a non-dilutive basis).
Accordingly, the current officers and directors of IWL, Telecommunications and
the General Partner, acting as a group, will have the ability to elect all of
the directors of Holdings and to control Holdings' management, operations and
affairs. In addition, following the consummation of the Transaction (and
assuming all of the Partnership Interests are validly tendered pursuant to the
Exchange Offer and accepted), the current officers and directors of
Telecommunications and the General Partner will beneficially own, in the
aggregate, approximately 82.7% of the outstanding shares of Holdings Common
Stock (on a non-dilutive basis).
CHANGE OF CONTROL OF IWL
After the Transaction is consummated, and assuming all of the Partnership
Interests are validly tendered pursuant to the Exchange Offer and accepted, the
former shareholders and optionholders of Telecommunications and the former
partners in the Partnership will own, in the aggregate, approximately 85% of the
Holdings Common Stock and the former shareholders, optionholders and
warrantholders of IWL will own approximately 15% of the Holdings Common Stock on
a diluted basis. This will effectively constitute substantial dilution of the
voting interest of IWL shareholders in IWL and an effective change of control of
IWL.
YEAR 2000 COMPLIANCE
IWL, Telecommunications and the Partnership each utilizes a significant
number of computer software programs and operating systems in its operations,
including applications used in product development, financial business systems,
and various administrative functions. To the extent that their software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such applications will be necessary. IWL, Telecommunications and
the Partnership are each currently in the process of completing its
identification of applications that are not "Year 2000" compliant. Given
information known at this time about their systems having such issues, coupled
with their on-going, normal course-of-business efforts to upgrade or replace
business critical systems, as necessary, it is currently not anticipated that
these "Year 2000" costs will have any material adverse impact on Holdings'
financial condition or its results of operations or cash flow. To the extent
that either Holdings' systems or the systems of the entities with which Holdings
contracts are not fully Year 2000 compliant, potential systems interruptions or
the cost necessary to update software by IWL, Telecommunications and the
Partnership or one of their major vendors or customers could have a material
adverse effect on Holdings' financial condition, results of operations and cash
flow.
CERTAIN ANTI-TAKEOVER MATTERS
Upon the consummation of the Transaction, based on the number of shares of
IWL Common Stock and Telecommunications Common Stock outstanding as of May 31,
1998 and assuming all of the Partnership Interests are validly tendered pursuant
to the Exchange Offer and accepted by Holdings, there will be 171,089,778
authorized and unissued shares of Common Stock and 20,000,000 authorized and
unissued shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock") of Holdings. 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 Holdings by means of a
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merger, tender offer, proxy solicitation or otherwise. Holdings is also subject
to prior regulatory approval by the FCC and various state regulatory agencies
for a transfer of control of Holdings or for the assignment of Holdings' (or its
subsidiaries') intrastate certification authority, its international authority
and other FCC licenses and authorizations. The Communications Act of 1934, as
amended (the "1934 Communications Act"), generally limits direct foreign
ownership of wireless licenses to 20%, but provides for indirect foreign
ownership holdings above 25% upon FCC approval. In addition, because Holdings
(or its subsidiaries) holds FCC authority to provide international service, the
FCC will scrutinize an ownership interest in Holdings of greater than 25%, or a
controlling interest at any level, by a dominant foreign carrier. International
carriers, such as Holdings, must notify the FCC 60 days in advance of an
acquisition by a foreign carrier or by an entity that controls a foreign carrier
of a 25% or greater or a controlling interest in such carriers. However, new
rules allow for up to 100% indirect ownership of most wireless licenses upon FCC
review and approval by foreign interests from countries that have participated
in the 1997 World Trade Organization ("WTO") Agreement on Basic
Telecommunications Services, in which the United States and 68 other countries
committed to open their telecommunications markets to competition starting in
1998. Furthermore, it is currently expected that the Indenture will provide for
a mandatory purchase of the Proposed Notes upon a change of control and that the
Credit Facility will provide that an event of default or redemption event
thereunder will occur if all or a controlling interest in Holdings' 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 Holdings. The Articles of Incorporation of Holdings provide that Article
13.03 of the Texas Business Corporation Act, which includes statutory anti-
takeover measures, will not apply to Holdings. See "Regulation and
Licenses--Government Regulation" and "Description of Holdings Capital
Stock--Preferred Stock" and "--Certain Anti-Takeover Effects."
ASSUMPTION OF GENERAL PARTNER LIABILITIES
After giving effect to the Interest Exchange, and assuming all Partnership
Interests are validly tendered pursuant to the Exchange Offer and accepted,
Telecommunications will become a substitute general partner in the Partnership.
As a general partner, Telecommunications will become generally liable for the
debts and obligations of the Partnership, including debts and obligations that
may be contingent or unknown at the time of the acquisition. The liabilities of
the Partnership outstanding at March 31, 1998 consisted of trade accounts
payable and accrued expenses of $1.1 million and a term construction loan of
$9.1 million, due December 31, 2001. The Partnership was in violation of certain
debt covenants as of December 31, 1996 and 1997 and March 31, 1998. The
Partnership has obtained a waiver for its covenant violations. The Partnership's
lender has consented to consummation of the Transaction. There can be no
assurance that these obligations will not have a material adverse effect on
Holdings' financial condition, results of operations and cash flow.
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THE TRANSACTION
GENERAL
The Merger Agreement provides for a business combination among IWL,
Telecommunications and the Partnership. Pursuant to the Merger Agreement and
subject to the satisfaction of the conditions set forth therein, I-Sub will be
merged with and into IWL and C-Sub will be merged with and into
Telecommunications, with IWL and Telecommunications each continuing as the
surviving corporations of the Mergers. Pursuant to the Interest Exchange,
immediately after the IWL Merger Effective Time and immediately prior to the
Telecommunications Merger Effective Time, all of the Partnership Interests that
are validly tendered to and accepted by Holdings pursuant to the Exchange Offer
will be exchanged for shares of Holdings Common Stock. Upon the IWL Merger
Effective Time and the Telecommunications Merger Effective Time, respectively,
the holders of IWL Common Stock and the holders of Telecommunications Common
Stock will become shareholders of Holdings, with each outstanding share of IWL
Common Stock being converted into one share of Holdings Common Stock and each
outstanding share of Telecommunications Common Stock being converted into
1.789030878 shares of Holdings Common Stock. After the Interest Exchange and
prior to the Telecommunications Merger Effective Time, Holdings will contribute
to C-Sub the general Partnership Interest received by Holdings in the Interest
Exchange. As a result, upon consummation of the Telecommunications Merger,
Telecommunications (which will acquire the general Partnership Interest from
C-Sub in the Telecommunications Merger) will become a substitute general partner
in the Partnership in respect of the general Partnership Interest transferred to
it, Holdings will become a substitute limited partner in the Partnership in
respect of the limited Partnership Interests transferred to it and the holders
of the Partnership Interests will become shareholders of Holdings, with each one
percent (1%) of the Partnership Interests being exchanged for 63,194.54 shares
of Holdings Common Stock. As a result of the Mergers and the Interest Exchange,
assuming all Partnership Interests are validly tendered pursuant to the Exchange
Offer and accepted, the former holders of IWL Common Stock and stock options and
warrants to acquire IWL Common Stock collectively will hold approximately 15% of
the equity interests in Holdings, and the former holders of Telecommunications
Common Stock and stock options to acquire Telecommunications Common Stock and
the former holders of the Partnership Interests collectively will hold
approximately 85% of the equity interests in Holdings.
BACKGROUND OF THE TRANSACTION
Prior to entering into negotiations relating to the Transaction, IWL had in
September 1997 entered into a commercial relationship with Telecommunications
and the Partnership to lease fiber from the Partnership. See "--Interests of
Certain Persons in the Transaction."
IWL, Telecommunications and the Partnership each regularly evaluated
strategic opportunities, including possible alliances, joint ventures,
acquisitions and other business combinations with various industry participants.
Under appropriate circumstances, representatives of IWL, Telecommunications or
the Partnership established direct or indirect contact with potential
candidates. Set forth below is a summary of the background of the negotiations
that led to the Transaction.
On Friday, October 10, 1997, Norman Bagwell of Bank One, Texas, N.A.
suggested to Jere W. Thompson, Jr., President of Telecommunications and of the
General Partner, that he meet with representatives of IWL to discuss each
company's strategy for growing their respective businesses.
On Friday, October 17, 1997, Richard H. Roberson, the Chief Financial
Officer of IWL, and Byron M. Allen, the President of IWL, were introduced to
Mark Langdale, a director and principal shareholder of Telecommunications and
Secretary and a director of the General Partner, and Mr. Thompson by Mark Wade
and Norman Bagwell of Bank One, Texas, N.A. A meeting was held in Dallas, Texas.
During the meeting, the discussions were limited to general conversation
regarding each company's business and the similarities between the companies and
their respective strategies for growth. An invitation was extended to Messrs.
Thompson and Langdale to visit the IWL facilities in Houston.
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On Friday, October 31, 1997, Messrs. Roberson, Allen and Ignatius W.
Leonards, the Chief Executive Officer of IWL, met with Messrs. Thompson and
Langdale in Houston, Texas, where the discussion included the possible benefits
of a merger of the two companies and the Partnership. Between October 31, 1997
and November 20, 1997, Mr. Thompson and Mr. Allen had several telephone
conversations to discuss the possible organizational structure of the combined
companies.
On Thursday, November 20, 1997, Mr. Thompson met with Messrs. Allen and
Leonards and a representative of Cruttenden Roth to discuss a potential
transaction by IWL with Telecommunications and the Partnership.
On Friday, November 21, 1997, Messrs. Leonards, Allen and Roberson met with
Mr. Thompson and Timothy W. Rogers, Timothy M. Terrell and Scott L. Roberts,
each an Executive Vice President of Telecommunications, to discuss and describe
to each other the respective business of their companies.
On Monday, December 1, 1997, Messrs. Leonards and Thompson had a conference
call from their respective offices to discuss the benefits of a possible
combination of their companies.
On Tuesday, December 2, 1997, IWL and Telecommunications executed a
Confidentiality Agreement and Messrs. Leonards and Thompson met in Houston,
Texas, to discuss the benefits of a merger. Mr. Allen joined the meeting to
discuss transactions being considered by IWL.
On Friday, December 5, 1997, the Board of Directors of IWL held a scheduled
board meeting telephonically. During the meeting, Mr. Leonards briefed the IWL
Board regarding the discussions with Telecommunications and the Partnership. A
representative of Munsch Hardt explained the fiduciary duties of the IWL Board
in such a transaction.
On Monday, December 15, 1997, Mr. Allen and Myron Goins, an outside director
of IWL, together with a representative of Cruttenden Roth, met with Messrs.
Rogers, Thompson and Langdale. Extensive discussions and negotiations were held
regarding various operational strengths of each organization and, among other
things, the terms and structure of a possible merger, pooling versus purchase
accounting, board representation of the combined company, executive officers of
the combined company, termination fees, proposed exchange ratios, valuation of
each organization and other legal, tax and financial considerations relating to
a possible transaction.
On Tuesday and Wednesday, December 16 and 17, 1997, Messrs. Thompson,
Leonards and Allen had various telephone conversations regarding the proposed
business combination and the business synergies which would make the combined
companies more successful.
On Thursday, December 18, 1997, representatives of IWL, Telecommunications
and the Partnership met at the offices of IWL's counsel, Munsch Hardt, in
Dallas, Texas. Those present included Messrs. Thompson and Langdale of
Telecommunications and Mr. Allen of IWL. A representative of Cruttenden Roth was
present, as well as representatives of Munsch Hardt and representatives of
Hughes & Luce, counsel to Telecommunications and the Partnership. At this
meeting the parties discussed the need for maintenance of confidentiality of the
discussions and, among other things, the structure of the merger, pooling
issues, exchange ratios, caps and collars, timing for preparation and execution
of a definitive agreement, the selection of an auditor and the need for audited
financial statements, the potential need to raise additional capital, due
diligence issues, existing options, break up fees, and members of the Board of
Directors of the new public entity.
On Thursday, December 18, 1997, Telecommunications retained Hoak, Breedlove
& Wesneski, Inc. ("Hoak Breedlove") as its financial advisor pursuant to an
agreement dated as of December 18, 1997. No report, opinion or appraisal was
provided by Hoak Breedlove.
From Friday, December 26, 1997, through the execution of the Merger
Agreement, management of IWL, Telecommunications and the Partnership had
numerous telephone conferences and held numerous
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due diligence meetings and numerous other meetings to consider organizational
and operational issues of the combined businesses and the terms of the proposed
business combination.
On Friday, January 2, 1998, Messrs. Thompson, Leonards and Allen met in
Houston where they discussed management structure and international
opportunities for the combined companies.
On Tuesday, January 6, 1998, IWL retained Cruttenden Roth pursuant to a
letter dated January 6, 1998, to assist IWL as a financial advisor with respect
to a potential transaction with Telecommunications and the Partnership.
On Friday, January 9, 1998, Messrs. Thompson, Terrell and Rogers of
Telecommunications met in Houston with Mr. Allen and other members of IWL
management to discuss their respective companies and the proposed business
combination.
On Thursday, January 15, 1998, a special meeting of the IWL Board was held
telephonically to discuss and approve the acquisition by IWL of the shares of
stock of ICEL. Also present at the meeting was a representative from Munsch
Hardt. During that meeting Mr. Leonards provided an update to the IWL Board on
the status of the discussions with Telecommunications and the Partnership and
responded, along with Messrs. Allen and Roberson, to various questions by the
directors about the Transaction and about Telecommunications and the
Partnership.
On Monday, January 19, 1998, a special meeting of the IWL Board was held
telephonically, although Messrs. Leonards and Allen were in the offices of
Telecommunications after having meetings with Mr. Thompson to discuss the
proposed business combination. Also present via teleconference were
representatives of Munsch Hardt and a representative of Cruttenden Roth. At this
meeting the representative of Cruttenden Roth reviewed in detail among other
things (i) the operations of Telecommunications and the Partnership, (ii) sales
and marketing department of Telecommunications, (iii) customer mix, (iv) the
opportunities for growth both domestically and internationally, (v) potential
synergies of the combined businesses, (vi) the basis for the valuations being
considered, (vii) the value of the IWL shares, (viii) pooling issues, (ix)
expectations for revenue growth but little, if any, expectations for cost
savings from the termination of redundant operations, although cost savings may
result from avoidance of redundancy in the future, (x) the need for future
capital for the combined business and (xi) the network capacity of the combined
businesses.
On Friday, January 23, 1998, Messrs. Allen and Leonards met with Mr.
Thompson to continue the negotiation of the relative values of both businesses
and the respective exchange ratios and issues regarding termination of traffic
in Mexico and Texas.
On Thursday, January 29, 1998, Messrs. Thompson and Langdale and a
representative of Hoak Breedlove, on the one hand, and Messrs. Leonards, Allen
and a representative of Cruttenden Roth, on the other hand, had numerous
telephone conversations regarding the proposed exchange ratios for the proposed
business combination. These discussions continued through the next day and were
culminated when Messrs. Thompson and Leonards agreed upon the exchange ratios
for the Transaction, subject to the other terms and provisions of the Merger
Agreement being finalized.
On Tuesday, February 3, 1998, the IWL Board held a special meeting at the
offices of Telecommunications in Dallas which enabled outside directors of IWL
to tour the facilities of Telecommunications and the Partnership and to have
personal meetings with the members of the executive team of Telecommunications
and the Partnership. Also present at the meeting were representatives of Munsch
Hardt and a representative of Cruttenden Roth. At this meeting a representative
of Munsch Hardt reviewed the material terms of the agreements for the
Transaction. Mr. Allen explained to the IWL Board that, since the ICEL
transaction had just occurred, both the value of ICEL and the shares of stock of
IWL issued to acquire ICEL were excluded from the calculation of values and
ratios which the IWL Board considered and ultimately approved when it approved
the Transaction. The representative from Cruttenden Roth then presented its
valuation materials to the IWL Board and made his presentation to the IWL Board,
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discussing among other things: (i) the analysis prepared by Cruttenden Roth of
each entity, (ii) the relationship between EBITDA and gross revenues in the
various analyses and (iii) the likely impact on the business of
Telecommunications and the Partnership and the proposed combined business if the
rates to be charged to Telecommunications for terminating traffic in Mexico and
in certain areas of Texas were increased. The IWL Board requested that
Cruttenden Roth prepare revised materials showing an increase in the rates
charged to Telecommunications for business in Mexico and certain areas of Texas
and lower margins for such business. Mr. Allen reviewed with the IWL Board the
perceived competitive advantages of each company, including for
Telecommunications and the Partnership (i) strong sales growth, (ii) fiber and
switch infrastructure, (iii) strong management team and (iv) carrier billing
system. Mr. Allen explained how these strengths complemented IWL's (i) deployed
fiber, microwave and switches, (ii) oil company customers and international
traffic, (iii) technical and service personnel and (iv) status as a CLEC in
Texas and Louisiana.
Mr. Allen then explained to the IWL Board the strategy for the combined
business of building an infrastructure in Texas, Louisiana and Oklahoma
utilizing the Partnership's existing network and fiber and IWL's existing
network to grow the business. The representative of Cruttenden Roth then
summarized the results of its analysis and delivered its oral opinion to the IWL
Board that, as of such date and subject to certain assumptions, limitations and
qualifications from a financial point of view, the relative exchange ratios and
the consideration to be received by the shareholders of IWL in the Transaction
were fair to the shareholders of IWL.
Mr. Thompson joined the meeting to discuss with the IWL Board the strategy
of Telecommunications and the Partnership, his vision and implementation plans
for the Transaction and the combined business.
On Thursday, February 5, 1998, the Telecommunications Board met to discuss
the Transaction and its terms. At that time, it determined that the provisions
and terms of the Merger Agreement were fair to and in the best interest of
Telecommunications and its shareholders and authorized the officers of
Telecommunications to execute the Merger Agreement and the related agreements on
behalf of Telecommunications.
On Thursday, February 5, 1998, the General Partner Board determined that the
provisions and terms of the Merger Agreement were fair to and in the best
interest of the Partnership and the partners and authorized the officers of the
General Partner to execute the Merger Agreement and the related agreements on
behalf of the Partnership.
On Saturday, February 7, 1998, Mr. Thompson called Mr. Leonards to inform
him that one of Telecommunications' underlying long distance carriers into
Mexico could no longer complete Telecommunications' traffic to Mexico.
On Sunday, February 8, 1998, Mr. Thompson met with Messrs. Allen and
Leonards in Houston to discuss the Transaction and the impact, if any, on
Telecommunications and the proposed business combination of the loss of one of
Telecommunications' underlying long distance carriers into Mexico.
On Tuesday, February 10, 1998, the IWL Board held a special telephonic board
meeting to discuss the proposed business combination. Each director had received
a revised analysis from Cruttenden Roth that had been revised to address changes
in the pricing and the potential decline in revenues for Telecommunications'
traffic into Mexico and certain areas of Texas. The representative from
Cruttenden Roth made a presentation summarizing the Transaction and the history
of the negotiations and discussions including (i) caps and collars, (ii) pooling
of interests, (iii) the accretive nature of the transaction, (iv) strategic
implications for the combined companies, (v) the financial markets viewpoint of
telecommunications companies, (vi) enhanced speed to market for IWL because of
the existing network of the Partnership, (vii) the synergy of IWL's technical
expertise with the marketing expertise of Telecommunications, (viii) the
additional minutes which would be provided for use on the Partnership's network
from IWL customers, (ix) growth areas in the international markets and (x) the
enhanced ability for the combined business to
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provide more traditional telecommunications services and products including long
distance and LEC Services to customers.
Mr. Allen then gave a report on the status of Telecommunications' traffic
into Mexico. IWL's staff had been working with another carrier in Mexico to
enter into an agreement for the termination of calls into Mexico, and Mr. Allen
believed that such an agreement was imminent. The analysis prepared by
Cruttenden Roth contemplated such a potential service interruption occurrence in
Mexico. The analysis reflected that Telecommunications, like many other long
distance carriers, has agreements with many carriers to terminate domestic and
international long distance traffic, and the termination of certain of these
contracts or a change in the rates these carriers charge for their services
would impact Telecommunications. Mr. Allen and the representative of Cruttenden
Roth pointed out to the IWL Board that the exchange ratios had been previously
adjusted due to the potential risk of lost traffic into Mexico and Texas.
The IWL Board decided to defer any decision on the Transaction until it had
received a report from Telecommunications' management regarding the impact of
traffic into Mexico.
On Thursday, February 12, 1998, the IWL Board held a special telephonic
board meeting to discuss the proposed business combination. Also participating
in the meeting by invitation of the IWL Board were representatives of Cruttenden
Roth and representatives of Munsch Hardt. Each director confirmed that they had
received reports from Cruttenden Roth reflecting changes in the assumptions for
the discounted cash flow analysis of IWL, Telecommunications and the
Partnership. The assumptions of Telecommunications and the Partnership were
adjusted to reflect possible changes in tariffs and rates both in Mexico and
other areas for Telecommunications and the Partnership. Mr. Allen advised the
IWL Board that Telecommunications had retained a significant portion of its
traffic into Mexico and that an agreement between IWL and a long distance
carrier based in Mexico to terminate traffic into Mexico had been negotiated.
Mr. Allen also provided support for the reasonableness of the assumptions used
by Cruttenden Roth. A representative from Cruttenden Roth confirmed that its
analysis showed that the Transaction would be accretive on a going forward basis
in 1998. A representative of Cruttenden Roth then reconfirmed that its opinion
regarding the Transaction remained unchanged after review of the various matters
that had transpired since the February 3, 1998, IWL Board meeting, and that
based upon its analysis of the Transaction it was its opinion that as of that
date, subject to the certain assumptions, limitations, and qualifications, from
a financial point of view, the exchange ratios and the consideration to be
received by the IWL shareholders in the Transaction were fair to the IWL
shareholders. After deliberations with respect thereto, the IWL Board
unanimously determined that the provisions and terms of the Merger Agreement
were fair to and in the best interest of IWL and the IWL shareholders,
recommended that the holders of IWL Common Stock vote for the approval of the
Merger Agreement and authorized the officers of IWL to execute the Merger
Agreement and the related agreements on behalf of IWL.
Following the IWL Board meeting on Thursday, February 12, 1998, Messrs.
Leonards, Allen, Roberson, Thompson and Langdale, as well as representatives of
Munsch Hardt and of Hughes & Luce, met at the offices of Telecommunications in
Dallas to finalize the terms of the Merger Agreement, which contained exchange
ratios that would have resulted in holders of IWL Common Stock and options and
warrants owning 29% and holders of Telecommunications Common Stock and options
and of Partnership Interests (assuming they were all tendered to and accepted by
Holdings in the Exchange Offer) owning 71% of the Holdings Common Stock, on a
diluted basis, upon consummation of the Transaction.
On Monday, February 16, 1998, IWL, Telecommunications and the Partnership
executed the Merger Agreement, certain owners of Telecommunications and the
Partnership and IWL executed the CapRock Owners Agreement and certain IWL
shareholders and Telecommunications and the Partnership executed the IWL
Shareholders Agreement. February 16, 1998 was a holiday. The closing price of
shares of IWL Common Stock on the Nasdaq National Market on Friday, February 12,
1998, the last business day prior to February 16, 1998 on which IWL Common Stock
was traded, was $9.875 per share, which, under the original exchange ratios (as
amended in April 1998), which were in effect on that date (and assuming an
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equivalent per share value of Holdings Common Stock and IWL Common Stock), would
have resulted in the shareholders of IWL receiving Holdings Common Stock with a
market value of $37,073,021, the shareholders of Telecommunications receiving
Holdings Common Stock with a market value of $77,320,495 and the holders of the
Partnership Interests receiving Holdings Common Stock with a market value of
$26,287,053 if the Transaction was effected that day and all of the Partnership
Interests were validly tendered to and accepted by Holdings in the Exchange
Offer.
On Tuesday, February 17, 1998, prior to the opening of trading on the Nasdaq
National Market, IWL issued a press release announcing the Transaction.
On April 30, 1998, the IWL Board, the General Partner Board, the
Telecommunications Board, the Holdings Board and the boards of each merger
subsidiary approved, and the appropriate officers executed, the First Amendment
to the Merger Agreement to make minor adjustments to the Telecommunications
Exchange Ratio to address calculation errors in the number of shares of
Telecommunications Common Stock and of Telecommunications options that were
outstanding. Such amendment did not change any of the other exchange ratios or
change the total number of shares that had been approved for issuance by
Holdings.
On Thursday, June 11, 1998, the Board of Directors of Holdings and the IWL
Board each held meetings to authorize the issuance and guarantee of the Proposed
Notes and the amendment of the Merger Agreement in order to update or correct
certain schedules and to specify the states in which the receipt of regulatory
approvals was a condition to closing. The Boards of Directors of
Telecommunications and of the General Partner approved the issuance of the
Proposed Notes on Thursday June 18, 1998.
On Saturday, June 13, 1998, Mr. Thompson called Mr. Leonards to assert that,
in Mr. Thompson's opinion, the decline in IWL revenues from those set forth in
the IWL business plan furnished to Telecommunications and the Partnership in
connection with the original negotiations of the Merger Agreement constituted a
Material Adverse Effect (as defined in the Merger Agreement) with respect to IWL
which could reasonably be expected to have a Material Adverse Effect on
Telecommunications and the Partnership. As a result of such asserted Material
Adverse Effect, Mr. Thompson asserted that Telecommunications and the
Partnership believed that they had the right to terminate the Merger Agreement,
but that in lieu of exercising such right of termination, they would be willing
to complete the Transaction with modified exchange ratios.
On Saturday, June 13, 1998, following the conversation between Messrs.
Leonards and Thompson, the IWL Board held a special meeting. Also participating
in this meeting by invitation of the IWL Board was a representative of
Cruttenden Roth and a representative of Munsch Hardt. At this meeting, Mr.
Leonards provided a summary to the IWL Board of his conversations with Mr.
Thompson. Mr. Roberson then provided an update to the IWL Board of the decline
of IWL's revenues as compared with those in its business plan which had been
provided to Telecommunications and the Partnership prior to execution of the
Merger Agreement. The decline in revenues from the business plan was
attributable primarily to delays in contracts and, to a much lesser extent, to
delays in developing revenues in the IWL's long distance and dedicated access
services. Mr. Thompson had been advised of the contract delays during the
preceding week. A representative of Munsch Hardt then provided a summary of the
terms of the Merger Agreement and the legal alternatives available. After
significant discussion of potential benefits as well as the potential risks of
disputing the assertions, terminating the Merger Agreement, or amending the
exchange ratios, the IWL Board determined that the alternative that was in the
best interest of IWL and the shareholders of IWL was to pursue the Transaction
with modified exchange ratios. A representative of Cruttenden Roth was requested
to provide an updated opinion to the IWL Board regarding the modified exchange
ratios once they were tentatively determined. Mr. Leonards was authorized to
approach Mr. Thompson to discuss alternative exchange ratios.
Between June 13, 1998, and June 18, 1998, Messrs. Leonards and Thompson had
numerous telephone conversations regarding the proposed Transaction and the
existing exchange ratios, as well as proposed
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modifications thereto. As a result of these discussions, it was proposed that
the exchange ratios be changed so that the holders of IWL Common Stock and
options and warrants would own 15% of Holdings Common Stock, holders of
Telecommunications Common Stock and options would own 63.8% of Holdings Common
Stock and the holders of Partnership Interests (assuming they were all validly
tendered to and accepted by Holdings in the Exchange Offer) would own 21.2% of
Holdings Common Stock, on a diluted basis, upon consummation of the Transaction.
On Thursday, June 18, 1998, the IWL Board held a special meeting. Also
participating in this meeting by invitation of the IWL Board was a
representative of Cruttenden Roth and a representative of Munsch Hardt. Mr.
Leonards provided a summary of his conversations with Mr. Thompson which
included the modifications to the exchange ratios as requested by Mr. Thompson.
A representative of Munsch Hardt discussed the terms of the proposed amendment
to the Merger Agreement, which in addition to modifying the exchange ratios
removed many of the conditions to the Transaction, including the receipt of
lock-up agreements, officers' certificates, acceptance of the form of documents
by counsel and accountants, the receipt of affiliate agreements, the receipt of
employment agreements, the execution of a shareholders' and owners' agreement,
the release of guaranties and the receipt of certain consents. Each director
confirmed that he had received revised reports from Cruttenden Roth. The report
showed the disparities between IWL's actual operations and those of the
forecasts used internally by IWL and provided to Telecommunications and the
Partnership in connection with negotiation of the Merger Agreement. The report
also reflected changes in the assumptions in the discounted cash flow analysis
of Telecommunications and the Partnership. The assumptions for IWL were adjusted
to reflect its performance to date for the year and management's expectations
for the remainder of the year. The assumptions for Telecommunications and the
Partnership were adjusted to reflect the respective entities' revised combined
projections, which included the build out of a 4,300 route mile fiber network. A
representative of Cruttenden Roth then provided its oral opinion that, based
upon its analysis of the Transaction and the proposed modified exchange ratios,
it was its opinion that, as of that date, subject to certain assumptions,
limitations and qualifications, from a financial point of view, the modified
exchange ratios and the consideration to be received by the IWL shareholders in
the Transaction were fair to the IWL shareholders. After deliberations with
respect thereto, the IWL Board determined that the amendment to the Merger
Agreement containing the modified exchange ratios and the consideration to be
received by the IWL shareholders in the Transaction were fair to and in the best
interest of IWL and the IWL shareholders, recommended that the holders of IWL
Common Stock vote for the approval of the Merger Agreement with the modified
exchange ratios and authorized the officers of IWL to execute an amendment to
the Merger Agreement to reflect such modified exchange ratios. The closing price
of shares of IWL Common Stock on the Nasdaq National Market on Thursday, June
18, 1998 was $16.00 per share, which under the original exchange ratios, which
were in effect on that day (and assuming an equivalent per share value of
Holdings Common Stock and IWL Common Stock), would have resulted in the
shareholders of IWL receiving shares of Holdings Common Stock with a market
value of $63,787,488, the shareholders of Telecommunications receiving shares of
Holdings Common Stock with a market value of $125,278,752 and the holders of the
Partnership Interests receiving shares of Holdings Common Stock with a market
value of $42,591,680 if the Transaction was effected that day and assuming that
all of the Partnership Interests were validly tendered to and accepted by
Holdings.
On Thursday, June 18, 1998, the Telecommunications Board determined that the
amendment to the Merger Agreement containing the modified exchange ratios was
fair to and in the best interest of Telecommunications and its shareholders and
authorized the officers of Telecommunications to execute an amendment to the
Merger Agreement to reflect the modified exchange ratios.
On Thursday, June 18, 1998, the General Partner Board determined that the
amendment to the Merger Agreement containing the modified exchange ratios were
fair to and in the best interest of the partners and the Partnership and
authorized the officers of the General Partner to execute an amendment to the
Merger Agreement to reflect the modified exchange ratios.
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On Thursday, June 18, 1998, following the meetings of the boards of IWL,
Telecommunications and the General Partner, Mr. Thompson learned of and then
called Mr. Leonards to advise him of uncertainties regarding the size and timing
of the offering of the Proposed Notes. Mr. Leonards then called a meeting of the
IWL Board to be held on Saturday, June 20, 1998, in order to consider the new
information prior to his execution of the amendment to the Merger Agreement.
On Saturday, June 20, the IWL Board met again and, following review of the
information regarding the uncertainties of the size and timing of the offering
of the Proposed Notes, confirmed their decisions made on Thursday, June 18,
1998, and reauthorized the officers to execute an amendment to the Merger
Agreement to reflect, among other things, the modified exchange ratios. The
amendment to the Merger Agreement was executed on June 20, 1998.
On Monday, June 22, 1998, IWL issued a press release announcing the
amendment to the Merger Agreement and the change in the exchange ratios (the
press release was issued prior to the commencement of trading in IWL Common
Stock on that date). The closing price of shares of IWL Common Stock on the
Nasdaq National Market on Friday, June 19, 1998, the last trading day prior to
such press release, was $15.00 per share, which under the original exchange
ratios, which were in effect on that day (and assuming an equivalent per share
value of Holdings Common Stock and IWL Common Stock), would have resulted in the
shareholders of IWL receiving shares of Holdings Common Stock with a market
value of $59,800,770, the shareholders of Telecommunications receiving shares of
Holdings Common Stock with a market value of $117,448,830 and the holders of the
Partnership Interests receiving shares of Holdings Common Stock with a market
value of $39,929,700 if the Transaction was effected that day and assuming that
all of the Partnership Interests were validly tendered to and accepted by
Holdings. The closing price of shares of IWL Common Stock on the Nasdaq National
Market on Monday, June 22, 1998, the date such press release was issued, was
$8.75 per share (a decrease of $6.25 per share from the closing price on June
19, 1998), which under the modified Exchange Ratios, which were in effect on
that day (and assuming an equivalent per share value of Holdings Common Stock
and IWL Common Stock), would have resulted in the shareholders of IWL receiving
shares of Holdings Common Stock with a market value of $34,883,783, the
shareholders of Telecommunications receiving shares of Holdings Common Stock
with a market value of $162,785,438 and the holders of the Partnership Interests
receiving shares of Holdings Common Stock with a market value of $55,295,223 if
the Transaction was effected that day and assuming that all of the Partnership
Interests were validly tendered to and accepted by Holdings.
On July 8, 1998, the IWL Board, the General Partner Board, the
Telecommunications Board, the Holdings Board and the boards of each merger
subsidiary approved, and the appropriate officers executed, the Third Amendment
to the Merger Agreement to confirm the receipt of all required regulatory
approvals and the receipt of the fairness opinion from IWL's financial advisor.
RECOMMENDATION OF IWL BOARD
THE IWL BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF THE HOLDERS OF IWL
COMMON STOCK AND RECOMMENDS THAT HOLDERS OF IWL COMMON STOCK VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the IWL Board consulted with IWL management
and financial and legal advisors and considered the proposed terms of the Merger
Agreement and the related agreements. In reaching its conclusions, the IWL Board
also considered the strategic advantages of the Transaction described below
under "--Reasons for the Transaction," as well as, among other things the
following: (i) information concerning the financial performance and condition,
business operations, capital levels, asset quality and prospects of
Telecommunications and the Partnership and the projected future financial
performance of IWL as a separate entity and of IWL, Telecommunications and the
Partnership on a combined basis including the customer mix of
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each of the companies, the enhanced speed to gain access to the market for IWL
through the existing network of the Partnership, the synergy of IWL's technical
expertise with the marketing expertise of Telecommunications, the additional
minutes which would be provided for use on the Partnership's network from IWL's
customers, growth opportunities domestically in the Texas Gulf Coast region and
internationally, particularly Mexico, and the enhanced ability for the combined
business to provide more traditional telecommunications services and products
including long distance and LEC services to customers; (ii) current industry,
economic and market conditions and trends, including the likelihood of
continuing consolidation and increasing competition in the telecommunications
industry; (iii) the opinion of Cruttenden Roth described below as to the
fairness, from a financial point of view, to the shareholders of IWL of the
relative exchange ratios (which were determined through arm's-length
negotiations among IWL, Telecommunications and the Partnership) and the
consideration to be received by the IWL shareholders in the Transaction; (iv)
the likelihood of obtaining required regulatory approvals and the possibility
that regulatory authorities may impose burdensome conditions to the grant of
such approvals; (v) presentations by IWL management and its financial and legal
advisors regarding Telecommunications and the Partnership; (vi) that the board
representation initially provided in the Merger Agreement reflecting the
minority shareholder position of the IWL shareholders in Holdings would not be
guaranteed after the Transaction; (vii) the risks and benefits of completing the
Transaction with the Exchange Ratios (as modified in June 1998) as compared with
disputing the existence of a Material Adverse Effect or terminating the Merger
Agreement; (viii) the existing cash position of IWL, the recognition of the need
for capital for IWL and the ability to accelerate the business plan of IWL if
the Proposed Notes were issued, as weighed against the risk of such offering not
being completed and the ability of IWL to raise capital on its own without the
Transaction; (ix) expectations for revenue growth of the combined businesses but
little, if any, expectations for cost savings from termination of redundant
operations, although cost savings were determined to be potentially available
from the avoidance of redundancy in the future; (x) the network capacity of the
combined business; (xi) the strong sales growth of Telecommunications and the
Partnership; (xii) the synergies among the combined and complementary management
teams; and (xiii) the risks associated with the Transaction which, among other
things, included the ability of all three businesses to manage change and to
maintain operations during the merger process, the ability to integrate the
business, the impact upon employees and customers, the need for capital to
achieve the business plan of the combined organizations and competition.
RECOMMENDATION OF TELECOMMUNICATIONS BOARD
THE TELECOMMUNICATIONS BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE
TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF,
TELECOMMUNICATIONS AND THE HOLDERS OF TELECOMMUNICATIONS COMMON STOCK AND
RECOMMENDS THAT THE HOLDERS OF TELECOMMUNICATIONS COMMON STOCK VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the Telecommunications Board consulted with
Telecommunications management and financial and legal advisors and considered
the proposed Merger Agreement and the related agreements although no financial
report, opinion or appraisal was provided. In reaching its conclusions, the
Telecommunications Board also considered the strategic advantages of the
Transaction described below under "--Reasons for the Transaction," as well as,
among other things, the following: (i) the terms of the Merger Agreement and the
ability of the holders of Telecommunications Common Stock to receive Holdings
Common Stock, which upon consummation of the Transaction will, subject to
applicable securities laws, be publicly traded, in exchange for their
Telecommunications Common Stock; (ii) its knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Telecommunications, the Partnership and IWL, including the synergies between the
technical expertise of IWL and the marketing expertise of Telecommunications,
the benefits to be obtained from the existing CLEC status of IWL in Texas and
Louisiana and the access to the customer base and international traffic of IWL;
(iii) current industry,
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economic and market conditions; (iv) presentations by Telecommunications
management and its financial and legal advisors regarding IWL and the
Partnership; (v) the compatibility of the respective business philosophies of
Telecommunications, the Partnership and IWL; (vi) the opportunity for the
holders of Telecommunications Common Stock to participate in a larger, stronger
and more competitive telecommunications company; (vii) the benefits of being
able to access the public capital markets to help grow its business and finance
its operations; (viii) continuing the existing business plan of
Telecommunications as an independent organization; (ix) the potential benefit of
completing the Transaction with the exchange ratios (as modified in June 1998)
versus the risks associated with the variable revenue stream and net income of
IWL as caused by contract delays or otherwise and the risks associated with
potential delays in implementing its business plan and the potential costs and
risks associated with terminating the Merger Agreement; and (x) the risks
associated with the Transaction which, among other things, included the ability
of all three businesses to manage change and to maintain operations during the
merger process, the ability to integrate the business, the impact upon
customers, the need for capital to achieve the business plan of the combined
organizations, and competition.
RECOMMENDATION OF GENERAL PARTNER BOARD
THE GENERAL PARTNER BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE TERMS
OF THE MERGER AGREEMENT AND THE EXCHANGE OFFER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE PARTNERSHIP AND THE HOLDERS OF PARTNERSHIP INTERESTS AND
RECOMMENDS THAT THE HOLDERS OF PARTNERSHIP INTERESTS PARTICIPATE IN THE INTEREST
EXCHANGE AND, IN CONNECTION THEREWITH, EXCHANGE THEIR PARTNERSHIP INTERESTS FOR
SHARES OF HOLDINGS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE
EXCHANGE OFFER.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the General Partner Board consulted with
Partnership management and financial and legal advisors and considered the
proposed Merger Agreement and the related agreements although no financial
report, opinion or appraisal was provided. In reaching its conclusions, the
General Partner Board also considered the strategic advantages of the
Transaction described below under "--Reasons for the Transaction," as well as,
among other things, the following: (i) the terms of the Merger Agreement, and
the ability of the holders of Partnership Interests to receive Holdings Common
Stock, which, upon consummation of the Interest Exchange, will, subject to
applicable securities laws, be publicly traded, in exchange for their
Partnership Interests; (ii) its knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Telecommunications, the Partnership and IWL, including the complementary
locations of IWL's existing microwave locations and switches with the deployed
fiber and switches of the Partnership; (iii) current industry, economic and
market conditions; (iv) presentations by Partnership management and its
financial and legal advisors regarding IWL and Telecommunications; (v) the
compatibility of the respective business philosophies of Telecommunications, the
Partnership and IWL; (vi) the opportunity for the holders of Partnership
Interests to participate in a larger, stronger and more competitive
telecommunications company; (vii) the benefits of being able to access the
public capital markets to help finance the expansion and construction of its
fiber network; (viii) continuing the existing business plan of the Partnership
as an independent entity; (ix) the potential benefit of completing the
Transaction with the Exchange Ratios (as modified in June 1998) versus the risks
associated with the variable revenue stream and net income of IWL as caused by
contract delays or otherwise and the risks associated with potential delays in
implementing its business plan and the potential costs and risks associated with
terminating the Merger Agreement; and (x) the risks associated with the
Transaction which, among other things, included the ability of all three
businesses to manage change and the ability to maintain operations during the
merger process, the ability to integrate the business, the impact upon employees
and customers, the need for capital to achieve the business plan of the combined
organizations, and competition.
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REASONS FOR THE TRANSACTION
The IWL Board, the Telecommunications Board and the General Partner Board
believe that the combination of businesses of IWL, Telecommunications and the
Partnership will create the platform for Holdings to become a leading
facilities-based provider of integrated communications services in Texas and the
Gulf Coast region. The IWL Board, the Telecommunications Board and the General
Partner Board believe that the Transaction will provide opportunities to achieve
substantial benefits for the respective shareholders and partners of each
company by combining their respective assets, management, personnel and
customers. The Boards further believe that the combined entities will be better
and more quickly able to capitalize on opportunities in the rapidly changing
communications industry, both domestically and internationally, than any of the
entities on a stand-alone basis.
The Boards believe that the Transaction enables Holdings to offer a complete
suite of communications services, including local and long distance, data and
dedicated long distance capacity. The primary strategic advantages of the
Transaction that were considered by the Boards in reaching their determinations
to recommend the Transaction were (i) enhanced revenue opportunities from the
integration of the existing fiber and switching network infrastructure of each
company, (ii) greater organizational depth through the combination of the
marketing, customer service and networking strengths of Telecommunications with
the technological, project management and last mile distribution expertise of
IWL, (iii) opportunities to leverage the Partnership's fiber network by offering
voice, data and broadband services in markets geographically clustered near or
along the existing and planned infrastructure of the three companies; and (iv)
opportunities for international revenue growth through the combination of
Telecommunications' customer base, the Partnership's planned network and IWL's
relationships with numerous foreign regulators and communications providers.
In addition to the joint reasons for the Transaction described above, in
reaching its determination to recommend the Transaction the IWL Board considered
the benefits of obtaining access to an existing network, which will enable IWL
to avoid the cost, delay and management time commitment required to build a new
network infrastructure.
In addition to the joint reasons for the Transaction described above, in
reaching their determination to recommend the Transaction, the
Telecommunications Board and the General Partner Board considered the benefits
of being able to access the public capital markets to help grow their
businesses, including to finance capital expenditures.
The following are the primary strategic advantages of the Transaction that
were considered by the Boards in reaching their determinations to recommend the
Transaction:
COMBINED NETWORK INFRASTRUCTURE. The IWL Board, the Telecommunications
Board and the General Partner Board believe that the Transaction will create
revenue opportunities from the combination of existing switching fiber and
microwave network infrastructure of the three companies in Texas and the Gulf
Coast region. The Partnership's existing fiber network extends from Houston to
Corpus Christi, Texas. Telecommunications owns a DSC DEX 600 switch and a
smaller PC based switch installed in Dallas, Texas with an extensive originating
and terminating network throughout Texas and Oklahoma. IWL owns multiple earth
stations and leases access to satellites having footprints covering parts of the
U.S. and Europe. IWL also owns a digital microwave network in and along the
Texas Gulf Coast connecting drilling rigs, and 15 towns and cities to the
Partnership's existing fiber network.
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BRINGING THE IWL CUSTOMER BASE TO THE PARTNERSHIP'S NETWORK. The Boards
believe that the margins for the combined business will be enhanced by utilizing
the Partnership's network for IWL's existing traffic and that additional
services will be available for sale to such customers as a result.
ENHANCED MANAGEMENT CAPABILITIES. The Boards believe that the marketing,
customer service and networking strengths of Telecommunications will be able to
expand the business of the customers and contacts of IWL and that the technology
and project expertise of IWL will help the expansion of the business of
Telecommunications and the Partnership.
REVENUE GROWTH INTERNATIONALLY. The Boards have seen the combined
management teams of IWL, and Telecommunications and the Partnership work
together to address the delivery of long distance service into Mexico and
believe that this will be an opportunity for additional growth. The Boards also
believe that the contacts, customers, expertise and presence of IWL in various
other international markets will, when combined with the marketing talents of
Telecommunications, provide additional opportunities for growth.
CLEC. IWL is licensed to provide LEC Services in Louisiana and Texas, and
IWL has negotiated agreements with Southwestern Bell and Bell South that permit
IWL to purchase unbundled network elements. Telecommunications has a Service
Provider Certificates of Authority ("SPCOA") in Texas and similar authority in
Oklahoma, Kansas and Arkansas to sell LEC Services, and has negotiated
agreements with Southwestern Bell and Bell South that permit Telecommunications
to resell their local and enhanced services. The Boards believe these agreements
(together with the completed fiber network of the Partnership) will create
opportunities for revenue growth.
In addition to the joint reasons for the Transaction described above, in
reaching its determination to recommend the Transaction the IWL Board
considered:
ACCELERATION OF FIBER NETWORK BUILD OUT. One of IWL's business strategies
has been to develop company-owned fiber infrastructure. The Transaction will
accelerate the achievement of this strategy by providing IWL with access to the
Partnership's existing fiber network, expansion plans and management, thereby
enabling IWL to avoid the cost, delay and management time commitment required to
build its own fiber network infrastructure.
In addition to the joint reasons for the Transaction described above in
reaching its determination to recommend the Transaction, the Telecommunications
Board and the General Partner Board considered:
ACCESS TO PUBLIC CAPITAL MARKETS. The Telecommunications Board and the
General Partner Board believe the combination with IWL will give
Telecommunications and the Partnership, respectively, enhanced and quicker
access to the public capital markets, making it easier to finance the capital
expenditures and the growth of the businesses of Telecommunications and the
Partnership. Additionally, the Transaction will provide liquidity to the holders
of Telecommunications Common Stock and the Partnership Interests who, upon
consummation of the Transaction, will receive Holdings Common Stock which will
be publicly traded, subject to applicable securities laws.
There can be no assurance that any of the potential advantages, efficiencies
or opportunities described herein will be achieved through the consummation of
the Transaction. See "Cautionary Statement Concerning Forward-Looking
Statements" and "Risk Factors."
The foregoing discussion of the information and factors considered by the
Boards is not intended to be exhaustive, but is intended to include the material
factors considered by each Board. In view of the wide variety of factors
considered by each of the Boards, the directors of each Board did not find it
practical to, and did not, quantify or otherwise assign relative weight to the
specific factors considered and individual directors may have ascribed different
weights to different factors.
FAIRNESS OPINION OF IWL FINANCIAL ADVISOR
Cruttenden Roth acted as financial advisor to IWL in connection with the
Transaction and delivered a written opinion to the IWL Board dated June 19, 1998
(such written opinion, the "Cruttenden Roth
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Opinion"), stating that as of the date of the Cruttenden Roth Opinion, and based
on and subject to the assumptions, limitations and qualifications set forth
therein, from a financial point of view, the consideration to be paid by
Holdings and the relative exchange ratios are fair to the shareholders of IWL.
THE FULL TEXT OF CRUTTENDEN ROTH'S WRITTEN OPINION IS ATTACHED AS ANNEX II
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. IWL SHAREHOLDERS SHOULD READ THE CRUTTENDEN ROTH OPINION IN ITS
ENTIRETY FOR ASSUPTIONS MADE, PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED.
Cruttenden Roth's analysis in its determination of the fairness of the
exchange ratios to the shareholders of IWL and the consideration to be paid by
Holdings in the Transaction included discounted cash flow analysis of
Telecommunication's and the Partnership's projections, which assumed the
buildout of a 4,300 route mile fiber network as compared to earlier projections
that assumed a 1,100 route mile fiber network, the ability of Telecommunications
and the Partnership to finance a 4,300 route mile fiber network and
Telecommunications' and the Partnership's achievement of their respective
business plans to date. Additionally, Cruttenden Roth analyzed actual and
anticipated operating results for IWL as compared to IWL management's earlier
business plan.
No limitations were imposed by IWL on the scope of Cruttenden Roth's
investigation or the procedures to be followed by Cruttenden Roth in rendering
its opinion. Cruttenden Roth was not requested to and did not make any
recommendation to the IWL Board as to the form or amount of the consideration to
be paid by IWL, which was determined through arm's-length negotiations among the
parties. In arriving at its opinion, Cruttenden Roth did not ascribe a specific
range of values to Telecommunications, the Partnership or IWL, but rather made
its determination as to the fairness, from a financial point of view, to the
shareholders of IWL, of the relative exchange ratios and the consideration to be
paid by Holdings in the Transaction on the basis of the financial and
comparative analyses described below. Cruttenden Roth's opinion is for the use
and benefit of the IWL Board and was rendered to the IWL Board in connection
with its consideration of the Transaction. Cruttenden Roth's opinion is not
intended to be and does not constitute a recommendation to any shareholder of
IWL as to how such shareholder should vote with respect to the Transaction.
Cruttenden Roth was not requested to opine as to, and its opinion does not
address, IWL's underlying business decision to proceed with or effect the
Transaction.
In arriving at its opinion, Cruttenden Roth reviewed and analyzed: (1) the
Merger Agreement, as amended, and the specific terms of the Transaction, (2)
such publicly available information relating to IWL, Telecommunications and the
Partnership which it believed to be relevant to Cruttenden Roth's analysis, (3)
historical and projected financial and operating information with respect to the
business, operations and prospects of IWL furnished to Cruttenden Roth by IWL,
(4) historical and projected financial and operating information with respect to
the business, operations and prospects of Telecommunications and the Partnership
furnished to Cruttenden Roth by Telecommunications, the Partnership and IWL, (5)
the trading history of IWL Common Stock from its initial public offering date to
the date of the Cruttenden Roth Opinion and a comparison of that trading history
with those of other companies that it deemed relevant, (6) a comparison of the
historical financial results and present financial condition of IWL with those
of other companies that Cruttenden Roth deemed relevant, (7) a comparison of the
historical financial results and the financial condition of Telecommunications
and the Partnership as of the date of Cruttenden Roth Opinion with those of
other companies that Cruttenden Roth deemed relevant, (8) a comparison of the
quarterly and annual earnings estimates of Cruttenden Roth's research analyst
for IWL with IWL's actual and projected results, (9) the potential pro forma
financial effects of the proposed Transaction, (10) a comparison of the
financial terms of the proposed Transaction with the financial terms of certain
other transactions that Cruttenden Roth deemed relevant and (11) the projections
of IWL, Telecommunications and the Partnership on a combined basis and the
relative contribution of the business of IWL to the projected combined operating
results in relation to the relative exchange ratios. In addition, Cruttenden
Roth had discussions with the managements of IWL, Telecommunications and the
Partnership
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concerning their respective businesses, operations, assets, financial conditions
and prospects and the potential strategic benefits of the proposed Transaction
and has undertaken such other studies, analyses and investigations as Cruttenden
Roth deemed appropriate.
In arriving at its opinion, Cruttenden Roth assumed and relied upon the
accuracy and completeness of the financial and other information used by
Cruttenden Roth without assuming any responsibility for independent verification
of such information and further relied upon the assurances of management of IWL,
Telecommunications and the Partnership that they are not aware of any facts that
would make such information inaccurate or misleading. With respect to the
financial projections of IWL, Telecommunications and the Partnership, upon
advice of IWL, Cruttenden Roth assumed that such projections were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of IWL, Telecommunications, and the Partnership as
to the future financial performance of IWL, Telecommunications, the Partnership
and the combined company (not including the cost savings and operating
synergies, if any, which may result from a combination of IWL,
Telecommunications and the Partnership.) In arriving at its opinion, Cruttenden
Roth did not make or obtain any evaluations or appraisals of the assets or
liabilities of IWL, Telecommunications and the Partnership. Upon advice of IWL
and its legal and accounting advisors, Cruttenden Roth assumed that the
Transaction will qualify as a tax-free transaction to the shareholders of IWL
and Telecommunications and the partners in the Partnership. Cruttenden Roth's
opinion necessarily is based upon market, economic and other conditions as they
existed on, and could be evaluated as of, the date of its opinion.
In connection with the delivery of its opinion, Cruttenden Roth performed a
variety of financial and comparative analyses, the principal elements of which
are described below. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances, and, therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Cruttenden Roth
did not attribute any particular weight to any analysis or factor considered by
it but, rather, made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, Cruttenden Roth believes that its
analyses must be considered as a whole and that considering any portion of such
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the process underlying its opinion. In its
analyses, Cruttenden Roth made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of IWL, Telecommunications and the Partnership. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
COMPARABLE COMPANY ANALYSIS. Using publicly available information,
Cruttenden Roth compared the financial performance of Telecommunications and the
Partnership with the following companies which were selected based on general
business, operating and financial characteristics representative of local, long
distance and fiber communications based communications companies: Winstar
Communications Inc., ICG Communications Inc., Qwest Communications International
Inc., Intermedia Communications Inc., McLeodUSA Inc., Nextlink Communications
Inc., E Spire Communications Inc. (formerly American Communications Services
Inc, ITC Deltacom Inc., Startec Global Communications Inc., Trescom
International Inc., US Wats Inc., IXC Communications Inc., Star
Telecommunications Inc., and Pacific Gateway Exchange Inc. (the "Comparable
Public Companies"). Cruttenden Roth calculated the median multiples for the
Comparable Public Companies for the equity market value plus net indebtedness,
preferred stock and minority interests ("Firm Value") to latest twelve months
revenue and to estimated fiscal 1998 and 1999 revenues. The median multiples
were 7.9x, 4.9, and 3.4x, respectively. The range of multiples was from 0.7x to
24.5x, 0.4x to 21.9x and 0.3x to 6.0x, respectively. These compared to multiples
of 4.8x, 3.4x and 2.1x for Telecommunications and the Partnership, collectively.
Cruttenden Roth calculated the median multiples for the Firm Value of the
Comparable Public Companies to latest twelve months earnings before
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interest, taxes, depreciation and amortization ("EBITDA") and to estimated 1998
and 1999 EBITDA. The median multiples were -13.6x, 12.3x, and 12.0x,
respectively. The range of multiples was from -109.6x to 531.3x, -348.3x to
141.8x and -40.9x to 55.4x, respectively. These compared to multiples of 36.0x,
28.3x and 16.6x for Telecommunications and the Partnership, collectively. The
ratios for Telecommunications and the Partnership are based on financial
statements for the last twelve months and period ending March 31, 1998 and the
ratios for the Comparable Public Companies are based on the most recently
reported public financial statements for the last twelve months of operations
and closing stock market prices on June 18, 1998 and the most recent Cruttenden
Roth and third party equity research reports available to Cruttenden Roth as of
June 18, 1998 that contained revenue and EBITDA projections.
Cruttenden Roth noted that the foregoing multiples for Telecommunications
and the Partnership were within the range of multiples for the Comparable Public
Companies. However, because of the inherent differences between the businesses,
operations and prospects of Telecommunications and the Partnership and the
businesses, operations and prospects of the Comparable Public Companies,
Cruttenden Roth believed that it was inappropriate to, and therefore did not,
rely solely on the quantitative result of the analysis, and accordingly also
made qualitative judgments concerning differences between the characteristics of
Telecommunications and the Partnership and the Comparable Public Companies that
would affect the public trading values of Telecommunications and the Partnership
and the Comparable Public Companies.
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information,
Cruttenden Roth reviewed certain terms and financial characteristics of 12
telecommunications company merger or acquisition transactions which Cruttenden
Roth deemed to be comparable to the Transaction. The transactions considered by
Cruttenden Roth in its analysis consisted of (identified by acquirer/acquiree):
Excel Communications Inc./Telco Communications Inc., LCI International Inc./USLD
Communications Corp., WorldCom Inc./MCI Communications Corp., Teleport
Communications Group/ACC Corp., AT&T Corp./ Teleport Communications Group, AvTel
Communications Inc./Matrix Telecom Inc., IXC Communications Inc./Network Long
Distance Inc., World Access Inc./NACT Telecommunications, Primus
Telecommunications/TresCom International Inc., Qwest Communications Corp./LCI
International Inc., ALLTEL Corp./360 Communications Co., and SBC Communications
Inc./Ameritech Corp. (the "Cruttenden Roth Comparable Transactions"). The median
Firm Value (using the transaction price for equity market value) to latest
twelve months revenue and EBITDA multiple for the Cruttenden Roth Comparable
Transactions was 2.9x, and 24.1x, respectively. The range of multiples was from
0.9x to 7.7x and 19.1x to 280.6x, respectively. This compared to a transaction
multiple of 4.8x and 46.7x, respectively, for the Transaction based on the
consideration described in the Merger Agreement.
Cruttenden Roth noted that for each of the foregoing multiples, the
transaction multiples for the Transaction were within the range of multiples for
the Cruttenden Roth Comparable Transactions. However, because the reasons for
and the circumstances surrounding each of the Cruttenden Roth Comparable
Transactions analyzed were specific to each transaction and because of the
inherent differences in the businesses, operations and prospects of IWL,
Telecommunications and the Partnership and the businesses, operations and
prospects of the acquired companies included in the Cruttenden Roth Comparable
Transactions, Cruttenden Roth believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis, and
accordingly also made qualitative judgments concerning differences between the
characteristics of these transactions and the Transaction that would affect the
acquisition values of Telecommunications and the Partnership and such acquired
companies.
DISCOUNTED CASH FLOW ANALYSIS OF TELECOMMUNICATIONS AND THE
PARTNERSHIP. Cruttenden Roth calculated the present value of the streams of
after-tax cash flows that Telecommunications and the Partnership could be
expected to produce over a five and ten year period. The analysis utilized
financial and operating information relating to the business, operations and
prospects of Telecommunications and the Partnership provided by management of
Telecommunications and the Partnership and relied on certain assumptions with
respect to future business and operations. After-tax cash flows for the five and
ten year period beginning on January 1, 1998 and ending on December 31, 2002 and
2007, respectively, were calculated as
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unlevered after-tax earnings plus amortization and depreciation less net changes
in non-cash, non-debt working capital and capital expenditures. Cruttenden Roth
calculated terminal values for Telecommunications and the Partnership in 2002
and 2007 by applying to projected EBITDA a range of multiples of 7x to 10x.
Cruttenden Roth's determination of the appropriate range of multiples was based
on an assessment of forward EBITDA trading multiples in the current market of
the Comparable Public Companies and on Cruttenden Roth's general experience in
valuations of companies. The cash flow streams and terminal values were then
discounted to present values using a range of discount rates of 16% to 25%,
which were chosen based on several assumptions regarding factors such as the
inflation rate, interest rates, the inherent business risk in Telecommunications
and the Partnership's business, and the cost of capital of Telecommunications
and the Partnership.
The management of Telecommunications and the Partnership provided Cruttenden
Roth with a set of projections reflecting current expectations for
Telecommunications and the Partnership results of operations (the
"Telecommunications Case Projections"). Cruttenden Roth performed discounted
cash flow analyses and generated per share equity value ranges based on these
projections. The Telecommunications Case Projections generated a five-year per
share value range of $13.71 to $33.02. The Telecommunications Case Projections
generated a ten-year per share value range of $12.32 to $37.27.
PRO FORMA MERGER ANALYSIS. Using IWL management's financial projections for
1998 with respect to IWL and the Telecommunications Case Projections for 1998
with respect to Telecommunications and the Partnership, and making such other
assumptions it deemed necessary, Cruttenden Roth performed discounted cash flow
analysis on the pro forma forecasted results of operations and compared IWL's
estimated earnings per share ("EPS") for calendar year 1998 both on a
stand-alone basis and assuming consummation of the Transaction. These estimates
assume that each share of Telecommunications Common Stock and the Partnership
Interests will be exchanged for consideration as described in the Merger
Agreement. Based upon the assumptions and estimates relied upon and including
financings and other costs associated with the build out of the combined company
fiber network, Cruttenden Roth noted that the Transaction would not result in
EPS accretion in the near term for current holders of IWL Common Stock and that
the Transaction would most likely have a dilutive effect on earnings per share.
RELATIVE PERFORMANCE ANALYSIS. Using IWL management's financial projections
for 1998 with respect to IWL and the Telecommunications Case Projections for
1998 with respect to Telecommunications and the Partnership, and making such
other assumptions it deemed necessary, Cruttenden Roth compared the actual
results operations for the period ended March 31, 1998 for IWL,
Telecommunications and the Partnership to those results internally forecasted
prior to the announcement date of the proposed Transaction. Cruttenden Roth
considered revised growth rates and revenue and EBITDA variances between the
forecasted and actual results of operations in arriving at its opinion.
Cruttenden Roth is a nationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The IWL Board selected Cruttenden
Roth because of its expertise, reputation and familiarity with IWL in particular
and the telecommunications industry in general and because its investment
banking professionals have substantial experience in transactions similar to the
Transaction.
As compensation for its services in connection with the Transaction, IWL has
agreed to pay Cruttenden Roth a fee for acting as financial advisor in
connection with the Transaction, including rendering its opinion. This fee,
which was determined by IWL and Cruttenden Roth, includes (i) a $25,000 retainer
which was payable upon signing of the engagement letter between IWL and
Cruttenden Roth, dated January 6, 1998, and which is to be credited against the
remainder of the fee to be paid as set forth in (ii) and (iii) below, (ii)
$125,000 payable upon the signing of the Merger Agreement and (iii) $225,000
payable upon the closing the Transaction. In addition, IWL has agreed to
indemnify Cruttenden Roth and
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certain related persons for certain liabilities that may arise out of its
engagement by IWL and the rendering of its services.
In the ordinary course of its business, Cruttenden Roth may actively trade
in IWL Common Stock and Holdings Common Stock for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Cruttenden Roth underwrote the initial public
offering of IWL Common Stock which occurred on June 12, 1997 and as a result was
paid commissions of approximately $635,000 and received a non-accountable
expense allowance of approximately $272,000 and received warrants to purchase
145,000 shares of IWL Common Stock at an exercise price per share of $7.20,
subject to adjustment pursuant to the terms of the Warrant Purchase Agreement.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the respective recommendations of the IWL Board, the
Telecommunications Board and the General Partner Board with respect to the
Transaction, the holders of IWL Common Stock, the holders of Telecommunications
Common Stock and the holders of the Partnership Interests should be aware that
certain members of the management of IWL, Telecommunications and the Partnership
have interests in the Transaction that are different from, or in addition to,
the interests of the holders of IWL Common Stock, the holders of
Telecommunications Common Stock and the holders of Partnership Interests
generally.
IWL has entered into agreements with the Partnership to use the
Partnership's network for DS-3s services for five years in three segments in
Texas. The agreement regarding the first segment was entered into in September
1997 and became operative in March 1998, the agreement regarding the second
segment was entered into in September 1997 and became operative in April 1998,
and the agreement regarding the third segment was entered into in October 1997
and became operative in April 1998. The three leases each has a term of not to
exceed 60 months, with monthly payments of approximately $3,000 each, once the
service is initiated. In addition, once the service is initiated, a
telecommunications agreement is entered into for traffic, with charges based
upon the time and location of the traffic.
EMPLOYMENT AGREEMENTS
Pursuant to the terms of the Merger Agreement, upon execution thereof,
Holdings entered into an employment agreement with, among other persons, each of
Jere W. Thompson, Jr., Ignatius W. Leonards, Byron M. Allen, Richard H.
Roberson, Scott L. Roberts, Timothy W. Rogers, and Timothy M. Terrell. In
addition, on May 11, 1998, Holdings entered into an employment agreement with
Kevin W. McAleer (collectively, the "Employment Agreements"). The following is a
summary of the principal terms of the Employment Agreements.
Each of the Employment Agreements will be for an initial term of three
years, subject to the right of either party to terminate such agreement upon 30
days' advance written notice at any time.
Pursuant to their Employment Agreements, Messrs. Thompson and Leonards have
agreed to serve as Chief Executive Officer and President of Holdings,
respectively. Each of Messrs. Thompson and Leonards will receive an annual base
salary of $180,000 and $168,000, respectively, subject to increase upon review
annually by the Board of Directors of Holdings.
Pursuant to their Employment Agreements, Mr. McAleer has agreed to serve as
Senior Vice President and Chief Financial Officer of Holdings, Messrs. Allen,
Roberts, Rogers and Terrell have each agreed to serve as an Executive Vice
President of Holdings and Mr. Roberson has agreed to serve as Controller,
Treasurer and Secretary of Holdings. Messrs. McAleer, Allen, Roberts, Rogers,
Terrell and Roberson will receive annual salaries of $200,000, $125,000,
$133,333, $133,333, $133,333 and $92,000, respectively, in each case subject to
increase upon review annually by the Board of Directors of Holdings.
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Each of the Employment Agreements provides that, at the discretion of the
Holdings Board, each employee may be paid bonus compensation and/or may be
allowed to participate in a management incentive bonus plan should one be
adopted by Holdings. Each of the Employment Agreements also provides for certain
insurance benefits and provides that the employee is eligible to participate in
all retirement and other benefit plans generally available to employees of
Holdings and any equity or other employee benefit plan of Holdings that is
generally available to senior executive officers of such company. In addition,
each of the Employment Agreements provides for certain payments and benefits in
the event the employee is terminated without cause or due to death or permanent
disability.
Each Employment Agreement generally provides that the employee will keep
confidential certain non-public information regarding Holdings and further
provides that, during the period specified therein (generally during the term of
employment and for two years thereafter), the employee will not, subject to
certain exceptions, own, manage, control, or participate in the ownership,
management or control of, or be employed by or otherwise associated with, or
receive compensation from or otherwise engage in, any business in which Holdings
is engaged during such restricted period, including the provision of local and
long distance telecommunications services. The restricted territory under each
Employment Agreement is generally the entire United States but in certain cases
is limited to certain southern states. Each employee further agrees that during
the restricted period he will not (i) solicit or engage the business of any
clients of Holdings or its affiliates or (ii) solicit any employee of Holdings
or its affiliates to terminate any relationship that person may have with
Holdings or its affiliates or engage, employ or compensate any employee of
Holdings or its affiliates.
CAPROCK OWNERS AGREEMENT
Pursuant to the CapRock Owners Agreement dated as of February 16, 1998 (the
"CapRock Owners Agreement"), among IWL, the General Partner, certain of the
shareholders of Telecommunications and each of the partners in the Partnership,
including the General Partner (such shareholders and partners each being called
an "Owner" and collectively called the "Owners"), each Owner agreed, among other
things, to vote (or cause to be voted) the shares in Telecommunications and/or
the Partnership Interests beneficially owned by such Owner, whether theretofore
owned or thereafter acquired (and, if applicable, agreed to grant any required
consents under the limited partnership agreement of the Partnership), (i) in
favor of approval of the Merger Agreement, the Telecommunications Merger and the
Interest Exchange, in each case on the terms and subject to the conditions set
forth in the Merger Agreement, and any actions required in furtherance thereof,
including the issuance of shares of Holding Common Stock in connection with the
Transaction; (ii) against any action or agreement that would result in a breach
in any respect of any covenant, representation or warranty or any other
obligation or agreement of Telecommunications or the Partnership under the
Merger Agreement (after giving effect to any materiality or similar
qualifications contained therein); and (iii) except to the extent the action is
not prohibited to be taken by Telecommunications or the Partnership under the
Merger Agreement or is otherwise agreed to in writing in advance by IWL, against
any action which is intended, or could reasonably be expected, to impede,
interfere with, materially delay or postpone, or materially adversely affect the
Telecommunications Merger, the Interest Exchange or the transactions
contemplated by the CapRock Owners Agreement and the Merger Agreement. The
foregoing agreements contained in the CapRock Owners Agreement are subject to
the condition that such agreements will terminate upon the earlier of the
Closing Date and the termination of the Merger Agreement. As a result of these
provisions of the CapRock Owners Agreement (but subject to the condition
described above), the requisite approval of the Merger Agreement by the holders
of Telecommunications Common Stock and the holders of the Partnership Interests
is assured.
Each Owner has further agreed that, during the period commencing thirty days
prior to the Closing Date and continuing until the first to occur of the Closing
Date and the termination of the Merger Agreement in accordance with its terms,
such Owner shall not, directly or indirectly, except as contemplated by the
Merger Agreement, offer for sale, sell, transfer, tender, pledge, encumber,
assign or
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otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of, any or all of
such Owner's shares in Telecommunications and/or interests in the Partnership
or, in either case, any interest therein.
IWL SHAREHOLDERS AGREEMENT
Pursuant to the IWL Shareholders Agreement, dated as of February 16, 1998
(the "IWL Shareholders Agreement"), among Messrs. Leonards and Allen and their
spouses (collectively, the "IWL Shareholders"), Telecommunications, and the
Partnership, each of the IWL Shareholders has agreed, among other things, to
vote (or cause to be voted) the shares of IWL Common Stock held or beneficially
owned by such IWL Shareholder (i) in favor of approval of the Merger Agreement
and any actions required in furtherance thereof, including the issuance of
shares of Holdings Common Stock in connection with the Transaction; (ii) against
any action that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of IWL under the
Merger Agreement (after giving effect to any materiality or similar
qualifications contained therein); and (iii) except to the extent any action is
not prohibited to be taken by IWL under the Merger Agreement or is otherwise
agreed to in writing in advance by Telecommunications or the Partnership,
against any action which is intended, or could reasonably be expected, to
impede, interfere with, materially delay or postpone, or materially adversely
affect the IWL Merger or the transactions contemplated by the IWL Shareholders
Agreement and the Merger Agreement. The foregoing agreement is subject to the
condition that such agreement will terminate upon the earlier of the Closing
Date and the termination of the Merger Agreement. As a result of these
provisions of the IWL Shareholders Agreement (but subject to the condition
described above), the requisite approval of the Merger Agreement by the holders
of IWL Common Stock is assured.
Each of the IWL Shareholders has further agreed that, until the earlier of
the termination of the Merger Agreement and the Closing Date, such IWL
Shareholder will not, directly or indirectly, sell or otherwise transfer any of
its shares of IWL Common Stock.
ACCOUNTING TREATMENT
IWL, Telecommunications and the Partnership expect that the Mergers and the
Interest Exchange will be accounted for using the pooling of interests method of
accounting. The pooling of interests method of accounting assumes that the
combining companies were merged from inception and the historical financial
statements for the periods prior to consummation of the Mergers and the Interest
Exchange are restated as though the companies had been combined from inception
subject to certain adjustments. It is a condition to closing that IWL,
Telecommunications and the Partnership shall each have received from KPMG Peat
Marwick LLP, their independent auditors, letters, dated the date of or shortly
prior to the Closing Date, stating its opinion that the Mergers and the Interest
Exchange all qualify for pooling of interests accounting treatment. See "The
Transaction--Accounting Treatment."
The unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the pooling of interests accounting
method to account for the Mergers and the Interest Exchange. See "Unaudited Pro
Forma Combined Condensed Financial Statements."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
In connection with the preparation of this Joint Proxy Statement/Prospectus,
Munsch Hardt has delivered to IWL an opinion and Hughes & Luce has delivered to
Telecommunications an opinion, regarding the material federal income tax
consequences of the Transaction. Copies of these opinions are filed as exhibits
to the Registration Statement. The following discussion, together with the
discussion at "--Certain United States Federal Income Tax Consequences of the
Interest Exchange" below, is intended only as a description of the material
United States federal income tax consequences of the Transaction and
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does not purport to be a complete analysis or description of all potential tax
effects of the Transaction. The following discussion is based on the Code, the
final, proposed and temporary Treasury regulations promulgated thereunder,
administrative rulings and interpretations, and judicial decisions, in each case
as in effect as of the date hereof. All of the foregoing are subject to change
at any time, possibly with retroactive effect. The discussion set forth below
does not address all aspects of federal income taxation that may be relevant to
a shareholder in light of such shareholder's particular circumstances or to
shareholders subject to special rules under the federal income tax laws, such as
non-United States persons, financial institutions, tax-exempt organizations,
insurance companies, dealers in securities or shareholders who acquired their
IWL or Telecommunications shares pursuant to the exercise of employee stock
options
or otherwise as compensation, nor any consequences arising under the laws of any
state, locality or foreign jurisdiction. This discussion assumes that holders of
IWL Common Stock and holders of Telecommunications Common Stock hold their
respective shares of stock as capital assets within the meaning of Section 1221
of the Code.
None of IWL, Telecommunications, the Partnership or Holdings intends to
secure a ruling from the Internal Revenue Service with respect to the tax
consequences of the Transaction. It is a condition to the obligation of IWL to
consummate the Transaction that IWL shall have received an updated opinion from
Munsch Hardt as of the Closing Date to the effect that no gain or loss will be
recognized by Holdings, IWL or I-Sub as a result of the Merger of I-Sub with and
into IWL in the IWL Merger and that no gain or loss will be recognized by
holders of IWL Common Stock as a result of the IWL Merger. It is a condition to
the obligation of Telecommunications and the Partnership to consummate the
Transaction that Telecommunications shall have received an updated opinion from
Hughes & Luce as of the Closing Date to the effect that no gain or loss will be
recognized by Holdings, Telecommunications or C-Sub as a result of the Merger of
C-Sub with and into Telecommunications in the Telecommunications Merger, no gain
or loss will be recognized by holders of Telecommunications Common Stock as a
result of the Telecommunications Merger and no gain or loss will be recognized
by the Partners as a result of the Interest Exchange. The updated tax opinions
from Munsch Hardt and Hughes & Luce as of the Closing Date will update the tax
opinions filed with the Registration Statement. Receipt of such updated tax
opinions are waivable conditions of the Merger Agreement although such waivers
are not anticipated to be granted and are likely to not be allowed under the
Indenture for the Proposed Notes without the consent of the holders of a
majority of the Proposed Notes. If such conditions are waived, the parties would
amend the Registration Statement and resolicit votes for the Transaction. The
opinions of Munsch Hardt and Hughes & Luce referred to in this section will be
based on facts existing at the date hereof and at the Closing Date. In rendering
the opinions of counsel referred to in this section, Munsch Hardt and Hughes &
Luce assume the absence of changes in existing facts and will rely on
representations and covenants made by Holdings, IWL, Telecommunications and the
Partnership and others.
TAX IMPLICATIONS TO IWL SHAREHOLDERS, HOLDINGS, IWL AND I-SUB. The opinion
of Munsch Hardt states that the material federal income tax consequences of the
Transaction to holders of IWL Common Stock, Holdings, IWL, and I-Sub are as
follows: (i) no gain or loss will be recognized for federal income tax purposes
by holders of IWL Common Stock who exchange their IWL Common Stock for Holdings
Common Stock pursuant to the IWL Merger, (ii) the aggregate tax basis of
Holdings Common Stock received as a result of the IWL Merger will be the same as
the shareholder's aggregate tax basis in the IWL Common Stock surrendered in the
exchange, (iii) the holding period of the Holdings Common Stock held by former
holders of IWL Common Stock as a result of the exchange will include the period
during which such shareholders held the IWL Common Stock exchanged, and (iv) no
gain or loss will be recognized for federal income tax purposes by Holdings, IWL
or I-Sub as a result of the formation of Holdings or I-Sub or as a result of the
IWL Merger.
TAX IMPLICATIONS TO TELECOMMUNICATIONS SHAREHOLDERS, HOLDINGS,
TELECOMMUNICATIONS AND C-SUB. The opinion of Hughes & Luce states that the
material federal income tax consequences of the Transaction to holders of
Telecommunications Common Stock, Holdings, Telecommunications, and C-Sub are as
follows:
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(i) no gain or loss will be recognized for federal income tax purposes by
holders of Telecommunications Common Stock as a result of the Telecommunications
Merger, (ii) the aggregate tax basis of Holdings Common Stock received as a
result of the Telecommunications Merger will be the same as the shareholder's
aggregate tax basis in the Telecommunications Common Stock surrendered in the
exchange, (iii) the holding period of the Holdings Common Stock held by former
holders of Telecommunications Common Stock as a result of the exchange will
include the period during which such shareholder held the Telecommunications
Common Stock exchanged, and (iv) no gain or loss will be recognized for federal
income tax purposes by Holdings, Telecommunications or C-Sub as a result of the
formation of Holdings, C-Sub and the Telecommunications Merger. Under current
law, the holding period required for taxation of long-term capital gains at a
maximum rate of twenty-percent (20%) is more than eighteen (18) months. However,
the House of Representatives and the Senate recently passed legislation (the
"Proposed Tax Legislation") which, if signed by the President, would reduce the
holding period required for application of the 20% rate to more than one year
from more than 18 months for all investments sold on or after January 1, 1998.
There can be no assurance that the Proposed Tax Legislation will in fact be
enacted into law.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE TRANSACTION, INCLUDING THE APPLICABILITY AND EFFECT
OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND THE EFFECT OF ANY PROPOSED
CHANGES IN THE TAX LAWS.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE INTEREST EXCHANGE
In connection with the preparation of this Joint Proxy Statement/Prospectus,
Hughes & Luce has delivered to the Partnership an opinion regarding the material
federal income tax consequences of the Interest Exchange. A copy of this opinion
is filed as an exhibit to the Registration Statement. The following discussion,
together with the discussion at "--Certain United States Federal Income Tax
Consequences of the Mergers" above, is intended only as a description of the
material United States federal income tax consequences of the Transaction and
does not purport to be a complete analysis or description of all potential tax
effects of the Transaction. The following discussion is based on the provisions
of the Code, the final, proposed and temporary Treasury regulations promulgated
thereunder, administrative rulings and interpretations, and judicial decisions,
in each case as in effect as of the date hereof. All of the foregoing are
subject to change at any time, possibly with retroactive effect. The discussion
set forth below does not address all aspects of federal income taxation that may
be relevant to a holder of a Partnership Interest (a "Partner") in light of such
Partner's particular circumstances or to Partners subject to special rules under
the federal income tax laws, such as non-United States persons, financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or Partners who acquired their Partnership Interest pursuant to the
exercise of employee equity options or otherwise as compensation, nor any
consequences arising under the laws of any state, locality or foreign
jurisdiction. This discussion assumes that Partners hold their Partnership
Interest as a capital asset within the meaning of Section 1221 of the Code.
None of the Partnership, the General Partner or Holdings intends to secure a
ruling from the Internal Revenue Service with respect to the tax consequences of
the Interest Exchange. It is a condition to the obligation of the Partnership to
consummate the Interest Exchange that the Partnership shall have received an
updated opinion from Hughes & Luce as of the Closing Date to the effect that no
gain or loss will be recognized for federal income tax purposes by the Partners
upon their exchange of Partnership Interests for shares of Holdings Common Stock
pursuant to the Interest Exchange. The updated tax opinions from Hughes & Luce
as of the Closing Date will update the tax opinions filed with the Registration
Statement. Receipt of such updated tax opinions are waivable conditions of the
Merger Agreement although such waivers are not anticipated to be granted and are
likely to not be allowed under the Indenture for the Proposed Notes without the
consent of the holders of a majority of the Proposed Notes. If such conditions
are waived, the parties would amend the Registration Statement and resolicit
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votes for the Transaction. The opinions of Hughes & Luce referred to in this
section will be based on facts existing at the date hereof and at the Closing
Date. In rendering the opinion of counsel referred to in this section, Hughes &
Luce will assume the absence of changes in existing facts and will rely on
representations and covenants made by Holdings, IWL, Telecommunications and the
Partnership and others. Among other representations and assumptions, the opinion
of Hughes & Luce as of the date hereof relies, and the opinion of Hughes & Luce
on the Closing Date will rely, on (i) representations from IWL,
Telecommunications and the Partnership that they have no knowledge of contracts
entered into by the holders of IWL Common Stock, the holders of
Telecommunications Common Stock, or the Partners to sell Holdings Common Stock
that would cause them as a group not to have control of Holdings (as defined in
Section 368(c) of the Code) immediately after the Closing Date and (ii) the
assumption that any such contracts are not of an aggregate magnitude that would
cause the holders of IWL Common Stock, the holders of Telecommunications Common
Stock, or the Partners as a group not to have control of Holdings (as defined in
Section 368(c) of the Code) immediately after the Closing Date.
PRE-INTEREST EXCHANGE OPERATIONS OF THE PARTNERSHIP. The Partnership has
elected for federal income tax purposes to be taxed as a corporation as of
January 1, 1998. Although this election does not change the Partnership's
characterization as a partnership for state law purposes, the Partnership will
be regarded as a corporation for all federal income tax purposes as of such
time. Consequently, as of January 1, 1998, the Partnership itself will be
subject to the federal corporate income tax, and the Partnership's income and
deductions will no longer be allocated among and reported by the Partners.
TAX IMPLICATIONS TO PARTNERS. The opinion of Hughes & Luce states that the
material federal income tax consequences of the Transaction to a Partner who
receives shares of Holdings Common Stock as a result of the Interest Exchange
are as follows: (i) no gain or loss will be recognized for federal income tax
purposes by the Partners who exchange their Partnership Interests for Holdings
Common Stock, (ii) a Partner's aggregate tax basis in all shares of Holdings
Common Stock received in the Interest Exchange will equal the Partner's
aggregate tax basis in the Partner's Partnership Interest, and (iii) a Partner's
holding period for the Holdings Common Stock received in the Interest Exchange
will include the holding period of the Partnership Interest surrendered in
exchange therefor. Under current law, the holding period required for taxation
of long-term capital gains at a maximum rate of twenty-percent (20%) is more
than eighteen (18) months. However, the House of Representatives and the Senate
recently passed the Proposed Tax Legislation (as defined above) which, if signed
by the President, would reduce the holding period required for application of
the 20% rate to more than one year from more than 18 months for all investments
sold on or after January 1, 1998. There can be no assurance that the Proposed
Tax Legislation will in fact be enacted into law.
PARTNERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE INTEREST EXCHANGE, INCLUDING THE APPLICABILITY AND
EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
REGULATORY APPROVALS
STATE AND FEDERAL REGULATORY APPROVALS. The Transaction is also subject to
certain other state and federal regulatory approvals. It is expected that the
Transaction will require prior approval by the appropriate telecommunications
agencies, commonly known as public service commissions or public utility
commissions, governing telecommunications services (the "State Commissions") in
approximately four states. All such approvals have been obtained. Although the
Transaction does not require approval of the State Commissions in the other
states, notice of the Transaction has been filed with certain of those State
Commissions. The governing legal standard varies from state to state, but
approval of the Transaction generally requires a showing that it is consistent
with the public interest.
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IWL and Telecommunications each hold global authority from the FCC to
provide resale of switched services, and IWL holds global authority from the FCC
to provide private line and facilities-based services. IWL and
Telecommunications each maintain an international tariff on file with the FCC.
As a result, the Transaction will require the prior approval of the FCC, which
has been obtained.
NASDAQ LISTING
Holdings has applied for the listing of Holdings Common Stock on the Nasdaq
National Market and anticipates that its shares will trade on the Nasdaq
National Market, upon official notice of issuance, under the symbol "CPRK." It
is a condition to the Mergers and the Interest Exchange that the shares of
Holdings Common Stock issuable in the Mergers and the Interest Exchange be
approved for listing on the Nasdaq National Market.
DELISTING AND DEREGISTRATION OF IWL COMMON STOCK; CESSATION OF PERIODIC
REPORTING
If the Transaction is consummated, IWL Common Stock will cease to be listed
on the Nasdaq National Market. In such event, IWL intends to apply to the
Commission for the deregistration of such securities.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Holdings Common Stock received by holders of IWL Common Stock,
holders of Telecommunications Common Stock and holders of Partnership Interests
in the Mergers and the Interest Exchange will be freely transferable, except
that shares of Holdings Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of IWL,
Telecommunications or the Partnership prior to the Transaction may be resold by
them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who become affiliates of Holdings) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of IWL,
Telecommunications, the Partnership or Holdings generally include individuals or
entities that control, are controlled by, or are under common control with, such
party and may include certain officers and directors of such party as well as
principal shareholders of such party. Each affiliate of IWL, Telecommunications
and the Partnership has agreed that such person will not offer or sell or
otherwise dispose of any of the shares of Holdings Common Stock issued to such
person in the Transaction in violation of the Securities Act or the rules and
regulations promulgated thereunder.
APPRAISAL RIGHTS
Article 5.11 of the TBCA provides for appraisal rights in the case of a plan
of merger or exchange or a sale of all or substantially all of the corporation's
assets where shareholder approval is required. No appraisal rights are available
for a plan of merger or plan of exchange if (i) the shares of the corporation
held by the shareholder are listed on a national securities exchange or on the
Nasdaq Stock Market or are held of record by not less than 2,000 holders and
(ii) the shareholder is not required to accept any consideration that is
different than the consideration (other than cash in lieu of fractional shares)
to be provided to any other holder of shares of the same class of shares held by
the shareholder, (iii) the shareholder is not required to accept any
consideration other than (a) shares of a corporation that will be listed or
authorized for listing upon official notice of issuance on a national securities
exchange or approved for quotation as a national market security by the NASD or
will be held of record by not less than 2,000 holders and (b) cash in lieu of
fractional shares. Accordingly, holders of Telecommunications Common Stock will
be entitled to appraisal rights in the Telecommunications Merger, but holders of
IWL Common Stock will not be entitled to appraisal rights in the Merger.
Set forth below is a summary of the procedures relating to the exercise of
the right to dissent as provided in the TBCA. The summary does not purport to be
complete and is qualified in its entirety by
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reference to Articles 5.11, 5.12 and 5.13 of the TBCA, copies of which are
attached hereto as Appendix V. FAILURE TO COMPLY WITH ANY OF THE REQUIRED STEPS
MAY RESULT IN TERMINATION OF A SHAREHOLDER'S RIGHT TO DISSENT.
Each Telecommunications shareholder has a right to dissent which can be
exercised only by complying with the following procedures: (i) with respect to
the proposal to approve the Merger Agreement that is being submitted to a vote
of the Telecommunications shareholders at the Telecommunications Special
Meeting, the shareholder must file with Telecommunications, prior to the
Telecommunications Special Meeting, a written objection to the Merger Agreement,
setting out that the shareholder's right to dissent will be exercised if the
Telecommunications Merger is effected and giving the shareholder's address to
which notice thereof shall be delivered or mailed in the event that the
Telecommunications Merger is effected; and (ii) if the Telecommunications Merger
is effected and the shareholder shall not have voted in favor of the Merger
Agreement, Holdings shall, within ten days after the Telecommunications Merger
is effective, deliver or mail to the shareholder written notice that the
Telecommunications Merger has been effected, and the shareholder may, within ten
days from the delivery or mailing of the notice, make written demand on Holdings
for payment of the fair value of the shareholder's shares of Telecommunications
Common Stock.
A shareholder who votes in favor of the Merger Agreement will be deemed to
have waived the right to dissent. However, as described above, a vote against
the Merger Agreement alone will not satisfy the requirements of the TBCA
relative to the right to dissent.
The fair value of the Telecommunications Common Stock shall be the value
thereof as of the day immediately preceding the Telecommunications Special
Meeting, excluding any appreciation or depreciation in anticipation of the
Telecommunications Merger. The demand shall state the number of shares of
Telecommunications Common Stock owned by the shareholder and the fair value of
such shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten-day period shall be bound by the Merger Agreement and the
Telecommunications Merger. Within twenty days after demanding payment for his
shares, each holder of certificates formerly representing shares of
Telecommunications Common Stock so demanding payment shall submit such
certificates to Telecommunications for notation thereon that such demand has
been made. The failure of a holder of such certificates to do so shall, at the
option of Telecommunications, terminate such shareholder's rights to dissent,
unless a court of competent jurisdiction for good and sufficient cause shown
shall otherwise direct.
Any shareholder who has demanded payment for shares in accordance with the
TBCA shall not thereafter be entitled to vote or exercise any other rights of a
shareholder except the right to receive payment for such holder's shares of
Telecommunications Common Stock in accordance with the TBCA and the right to
maintain an appropriate action to obtain relief on the ground that the
Telecommunications Merger would be or was fraudulent. The respective shares of
Telecommunications Common Stock for which payment has been properly demanded
shall not thereafter be considered outstanding for the purposes of any
subsequent vote of Telecommunications shareholders.
Within 20 days after receipt by Holdings of a demand for payment made by a
dissenting shareholder, Holdings shall deliver or mail to the dissenting
shareholder a written notice that shall either: (i) state that Holdings accepts
the amount claimed in the demand and agrees to pay that amount within 90 days
after the date on which the Telecommunications Merger was effected, upon the
surrender of the share certificates duly endorsed, or (ii) contain an estimate
by Holdings of the fair value of the shares of Telecommunications Common Stock,
together with an offer to pay the amount of that estimate within 90 days after
the date on which the Telecommunications Merger was effected, upon receipt of
notice within 60 days after that date from the shareholder that the shareholder
agrees to accept that amount, upon the surrender of the certificates duly
endorsed.
If, within 60 days after the date on which the Telecommunications Merger was
effected, the value of the shares of Telecommunications Common Stock is agreed
upon between the shareholder and Holdings,
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payment for the shares shall be made within 90 days after the date on which the
Telecommunications Merger was effected and, in the case of shares represented by
certificates, upon surrender of the share certificates duly endorsed.
If, within the period of 60 days after the date on which the
Telecommunications Merger was effected, the dissenting shareholder and Holdings
do not so agree, then the shareholder or Holdings may, within 60 days after the
expiration of such 60 day period, file a petition in any court of competent
jurisdiction in Dallas County, Texas asking for a finding and determination of
the fair value of the shareholder's shares of Telecommunications Common Stock.
The clerk of the court shall give notice of the time and place fixed for the
hearing of the petition by registered mail to Holdings and to the shareholders
who have demanded payment for their shares and with whom agreements as to the
value of their shares have not been reached by Telecommunications. Holdings and
all Telecommunications shareholders so notified shall be bound by the final
judgment of such court.
After the hearing on the petition, the court shall determine the
shareholders who have complied with the provisions of Article 5.12 of the TBCA
and have become entitled to the valuation of and payment for their shares and
shall appoint one or more qualified appraisers to determine that value. In
addition to having the power to examine the books and records of
Telecommunications, the appraisers shall afford a reasonable opportunity to the
interested parties to submit to the appraisers pertinent evidence as to the
value of the shares of Telecommunications Common Stock.
The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the court clerk.
Notice of the filing of the report shall be given by the clerk to the parties in
interest. The report shall be subject to exceptions to be heard before the court
both upon the law and the facts. The court shall by its judgment determine the
fair value of the shares of the shareholders entitled to payment for their
shares and shall direct the payment of that value by Holdings together with
interest thereon, beginning 91 days after the date on which the
Telecommunications Merger was effected to the date of such judgment, to the
shareholders entitled to payment. The judgment shall be payable to the holders
of shares represented by certificates only upon, and simultaneously with, the
surrender to Holdings of duly endorsed certificates for those shares. Upon
payment of the judgment, the dissenting shareholders shall cease to have any
interest in those shares or in Telecommunications. The court shall allow the
appraisers a reasonable fee as court costs, and all costs shall be allocated
between the parties in the manner that the court determines to be fair and
equitable.
Pursuant to the Merger Agreement, Telecommunications shareholders exercising
their right to dissent under the TBCA will be entitled to payment solely out of
the historic assets of Telecommunications.
Any Telecommunications Common Stock held by a Telecommunications shareholder
who ultimately receives payment for such Telecommunications Common Stock
pursuant to Article 5.11 through 5.13 of the TBCA will not be converted into
Holdings Common Stock pursuant to the Merger Agreement, and the holder thereof
will only be entitled to such rights as are granted by the TBCA.
Any shareholder who has demanded payment for shares of Telecommunications
Common Stock in accordance with the TBCA may withdraw such demand at any time
before payment for such holder's shares or before any petition has been filed
pursuant to the TBCA asking for a finding and determination of the fair value of
such shares, but no such demand may be withdrawn after such payment has been
made or, unless Holdings shall consent thereto, after any such petition has been
filed. However, if: (i) such demand shall be withdrawn as described above, (ii)
pursuant to the TBCA, Telecommunications shall terminate the shareholder's
rights to dissent under the TBCA, (iii) no petition asking for a finding and
determination of fair value of such shares of Telecommunications Common Stock by
a court shall have been filed within the time provided in the TBCA or (iv) after
the hearing of a petition filed pursuant to the TBCA, the court shall determine
that a shareholder is not entitled to the relief provided by the TBCA, then, in
any such case, such shareholder and all persons claiming under such shareholder
shall be
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conclusively presumed to have approved and ratified the Telecommunications
Merger and shall be bound thereby, the right of such shareholder to be paid the
fair value of such holder's shares shall cease.
If after the Telecommunications Merger Effective Time a dissenter loses the
right to receive payment pursuant to Articles 5.11 through 5.13 of the TBCA,
then upon the occurrence of such event, such holder's shares will automatically
be converted into Holdings Common Stock effective as of the Telecommunications
Merger Effective Time, without prejudice to any corporate proceedings which may
have been taken during the interim period between the Telecommunications Merger
Effective Time and the occurrence of such event, and such shareholder will be
entitled to receive any dividends or other distributions made to Holdings
shareholders during such interim period.
Exercise of the right to dissent under the TBCA, if such right is available,
may result in a judicial determination that the "fair value" of a dissenting
shareholder's shares of Telecommunications Common Stock is higher or lower than
the value of the consideration to be received pursuant to the Merger Agreement.
In general, a dissenting shareholder receiving cash for Telecommunications
shares pursuant to the exercise of appraisal rights will recognize gain or loss
for federal income tax purposes upon receipt of the payment of the cash. See
"--Certain United States Federal Income Tax Consequences of the Mergers."
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BUSINESS OF HOLDINGS
Holdings is a Texas corporation that was formed on February 3, 1998 to be a
holding company for IWL, Telecommunications and the Partnership and their
respective subsidiaries following the consummation of the Mergers and the
Interest Exchange. Prior to the consummation of the Transaction, Holdings has
had and will have no operations other than those incident to its formation, its
execution of the Merger Agreement, the preparation of this Joint Proxy
Statement/Prospectus and, possibly, the incurrence of indebtedness under the
Proposed Notes. See "Offering of Proposed Notes." Holdings currently has no
operations and nominal or no assets and liabilities, and, unless the context
otherwise requires, all discussions herein of the historical and planned
business operations and strategy of Holdings assumes, on a pro forma basis, that
the proposed business combination to be effected by the Mergers and Interest
Exchange has been consummated. On such pro forma basis, Holdings would have had
1997 revenues and net income of approximately $75.3 million and $2.6 million,
respectively. Prior to the mailing of this Joint Proxy Statement/Prospectus,
Holdings, which was incorporated as "IWL Holdings Corp.," changed its name to
"CapRock Communications Corp." and, in connection therewith, Telecommunications
changed its name from "CapRock Communications Corp." to "CapRock
Telecommunications Corp."
Holdings intends to become the leading facilities-based ICP in Texas and the
Gulf Coast region. The combined businesses will offer a complete suite of
telecommunications services including local, long distance, Internet, data and
private line services to small and medium-sized businesses. Holdings will also
provide switched and dedicated access, regional and international long distance,
private lines and dark fiber to carrier customers. Holdings believes the
Transaction will enable it to significantly accelerate the implementation of its
business plan and to more rapidly achieve its business objectives by: (i)
enhancing its revenue opportunities by leveraging the existing and planned fiber
and switching network infrastructure of each company to offer voice, data, and
broadband services in markets geographically clustered along or near the
Company's infrastructure, (ii) creating greater organizational depth through the
combination of the sales, customer service and networking strengths of
Telecommunications with the technological, project management and last mile
distribution expertise of IWL and the fiber network construction and operational
expertise of the Partnership, (iii) providing the opportunity to cross-sell its
products and provide single source onshore and offshore communications solutions
to IWL's existing base of oil and gas customers and to Telecommunications'
existing base of business and carrier customers throughout Texas and the Gulf
Coast region, (iv) capitalizing on international revenue opportunities through
the combination of Telecommunications' customer base, the Partnership's planned
network and IWL's relationships with foreign regulators and communications
providers and (v) reducing the combined capital expenditures of the three
companies through the construction of a single communications infrastructure.
BUSINESS STRATEGY
Holdings' business objectives are (i) to become the leading ICP in Texas and
the Gulf Coast region, offering local, long distance, data and private line
services to end-user customers, (ii) to establish itself as the premier
carriers' carrier in Texas and the Gulf Coast region, providing voice, data and
broadband services over the most extensive alternative fiber optic network in
Texas and the Gulf Coast region, and (iii) to capitalize on the growing
opportunities to provide international long distance and international project
services. To achieve these objectives, Holdings intends to:
BECOME A SINGLE SOURCE PROVIDER OF COMMUNICATIONS AND NETWORK INTEGRATION
SERVICES. Holdings believes that there is significant demand among small and
medium-sized business customers in its target markets for an integrated package
of communications services and equipment tailored to satisfy the customer's
total communications needs. Holdings intends to offer its customers local,
domestic and international long distance, data (including ATM, frame relay,
digital subscriber line and Internet) and broadband (including T-1/E-1, DS-3,
OC-N and dark fiber) services. Holdings believes that its ability to provide an
integrated package of communications services, to provide, install and maintain
a broad range of communications equipment and to invoice these services on a
single, convergent bill will enable it to
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rapidly penetrate its targeted markets, capture virtually all of its customers'
expenditures for telecommunications services and equipment, increase customer
satisfaction and reduce customer turnover.
STRATEGICALLY BUILD OUT ITS REGIONAL FIBER NETWORK. Holdings intends to
expand the Partnership's fiber optic network to approximately 4,300 route miles
throughout Texas and the Gulf Coast region. Holdings' fiber optic backbone will
provide it with a platform to offer an integrated package of voice, data and
broadband services, as well as to access primary, secondary and tertiary cities
and the tandems of ILECs throughout Texas and the Gulf Coast region. The
Partnership owns and operates 260 route miles of fiber network in Texas
extending from Houston to Victoria and Corpus Christi, and is currently
constructing an additional 500 route miles in Texas from San Antonio to Laredo,
McAllen, Harlingen, Brownsville and Corpus Christi. The completion of Holdings'
network will allow it to originate and terminate most of its customers voice and
data traffic within the region on-net, dramatically increase its available
broadband capacity and link together more markets than other competitive
providers of communications services in the region.
OFFER DATA, INTERNET AND ENHANCED SERVICES TO ACCELERATE MARKET PENETRATION
AND MINIMIZE POTENTIAL CHURN. Data services represent one of the fastest
growing product segments in the communications industry. Holdings believes it
can accelerate new account penetration and minimize potential customer turnover
by offering LAN interconnections, frame relay, ATM, Internet services, ISDN,
DSL, Web page design, Web server hosting, and other enhanced services not
generally available or from the ILECs (or available only at prices higher than
those Holdings intends to charge). Holdings intends to leverage its expertise in
providing data services by targeting small and medium-sized business customers,
as well as data-intensive and multi-point customers, such as banks, financial
institutions and health care providers.
BUILD MARKET SHARE THROUGH PERSONALIZED SALES AND CUSTOMER
SERVICE. Holdings believes the most effective method of acquiring and retaining
a high quality customer base is through a consultative, face-to-face sales
process to develop creative solutions and respond rapidly to customers'
communications needs, as well as providing superior and personalized customer
service. Holdings believes that small and medium-sized business customers in its
target markets have been neglected by the ILECs with respect to these
approaches. Holdings intends to significantly increase the size of its direct
and agent sales forces over the next three years.
DEVELOP EFFICIENT AUTOMATED BACK OFFICE SYSTEMS. Holdings will handle its
provisioning, customer care, convergent billing and traffic reporting functions
on a proprietary software platform currently being developed by RiverRock, a
limited partnership in which Telecommunications is a limited partner. These OSS
and other back office systems are required to enter, schedule and track a
customer's order from the point of sale to the installation and testing of
service. These systems also include or interface with trouble management,
inventory, billing, collection and customer service systems. The system is
scalable and flexible to support Holdings' expected future back office
requirements. The system, when fully implemented, will enable Holdings to: (i)
minimize the time to initiate local and long distance services for new customers
internally and through the ILEC (commonly referred to as provisioning), (ii)
provide detailed and customized customer billing information, (iii) respond
quickly to customers' needs and information requests, and (iv) monitor and
analyze traffic, financial and operating trends. Holdings believes that this
system, when fully implemented, will provide a significant competitive advantage
in terms of cost, ability to process large order volumes, and customer service
as compared to ILECs using legacy systems and CLECs that outsource back-office
services or that do not have an advanced OSS platform.
EXPAND INTERNATIONAL SERVICE OFFERINGS. Holdings believes that it can
leverage IWL's existing international commercial relationships, regulatory
expertise and points of presence in Texas, Russia and Scotland with
Telecommunications' extensive relationships with domestic carriers to
significantly increase Holdings' international traffic.
80
<PAGE>
PURSUE ACQUISITIONS AND STRATEGIC ALLIANCES. In Holdings' target markets, a
large number of small private companies provide local and long distance
services, data services, Internet services, and telecommunications equipment.
This fragmentation creates numerous opportunities for Holdings to acquire
industry participants that can provide technical support, management talent,
customers and product extensions and could enable Holdings to accelerate the
implementation of its business plan. Holdings also intends to pursue strategic
relationships with utilities, state transportation departments and other
governmental authorities.
LEVERAGE ITS EXPERIENCED MANAGEMENT TEAM. Holdings' management team will
include individuals with significant experience in the deployment and marketing
of communications services. Jere W. Thompson, Jr., President of
Telecommunications and Chief Executive Officer of Holdings, founded the
Partnership in 1992. Ignatius W. Leonards, Chief Executive Officer of IWL and
President of Holdings, founded IWL in 1981 and has over 23 years of experience
in the telecommunications industry. Timothy W. Rogers, Timothy M. Terrell and
Scott L. Roberts, each Executive Vice Presidents of Telecommunications and
Holdings founded Telecommunications in 1991 and have a combined 33 years of
telecommunications experience working at Sprint, Qwest and Telecommunications in
carrier and commercial sales. Byron M. Allen, President of IWL and an Executive
Vice President of Holdings, has five years of experience in the domestic and
international telecommunications industry, and Kevin W. McAleer, Holding's Chief
Financial Officer, has over 16 years of experience as the chief financial
officer of publicly-held companies.
DIRECTORS AND MANAGEMENT OF HOLDINGS
DIRECTORS
BOARD. It is expected that, following the consummation of the Transaction,
the Board of Directors of Holdings will consist of Jere W. Thompson, Jr.,
Ignatius W. Leonards, Byron M. Allen, Mark Langdale, Timothy W. Rogers, one
outside director designated by IWL (who will initially be Christopher J.
Amenson) and one outside director designated by Telecommunications (who will
initially be John R. Harris), provided that IWL and Telecommunications each has
the right to veto the other's designee. The Merger Agreement provides that
Holdings will use commercially reasonable efforts to cause its board of
directors to consist of Ignatius W. Leonards, Byron M. Allen, Jere W. Thompson,
Jr., Mark Langdale, Tim Rogers and one outside director designated by IWL and
one by Telecommunications.
COMMITTEES OF HOLDINGS
The Holdings Board has established a Compensation Committee ("Holdings
Compensation Committee") consisting of Christopher J. Amenson and, effective
upon consummation of the Transaction, John R. Harris. All members of the
Holdings Compensation Committee will be "Non-Employee Directors" within the
meaning of Rule 16b-3 of the Exchange Act and "outside directors" within the
meaning of Section 162(m) of the Code. The Holdings Compensation Committee will
be responsible for establishing salaries, bonuses, and other compensation for
Holdings' executive officers and for administering the Equity Incentive Plan
(including granting options and other awards and setting the terms thereof
pursuant to such plan) and Holdings' other executive compensation plans and
programs. In the event that at any time any member of the Holdings Compensation
Committee fails to qualify as a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Exchange Act, the entire Holdings Board will also approve
stock option grants and other awards.
The Holdings Board has established an audit committee consisting of
Christopher J. Amenson and, effective upon consummation of the Transaction, John
R. Harris. The audit committee will be responsible for reviewing Holdings'
annual audit and meeting with Holdings' independent accountants to review
Holdings' internal controls and financial management practices.
81
<PAGE>
DIRECTORS AND OFFICERS
Directors who are employees of Holdings or its subsidiaries will not receive
any compensation for service on the Holdings Board, but will be reimbursed by
Holdings for expenses incurred in attending meetings of the Holdings Board or
any committees thereof. In order to more closely align the interests of
directors and shareholders, non-employee directors of Holdings will be eligible
to participate in the Director Stock Option Plan, pursuant to which each will be
eligible to receive Nonqualified Options. See "The Plan Proposals--The Director
Stock Option Plan."
The directors and the senior management team of Holdings is expected to be
comprised of the following individuals, upon consummation of the Transaction,
many of whom are currently officers and/or directors of IWL or
Telecommunications:
<TABLE>
<CAPTION>
<S> <C>
Jere W. Thompson, Jr.................................... Chairman of the Board, Chief Executive Officer and
Director
Ignatius W. Leonards.................................... Vice Chairman of the Board, President and Director
Kevin W. McAleer........................................ Senior Vice President and Chief Financial Officer
Byron M. Allen.......................................... Executive Vice President and Director
Timothy M. Terrell...................................... Executive Vice President
Timothy W. Rogers....................................... Executive Vice President and Director
Scott L. Roberts........................................ Executive Vice President
Richard H. Roberson..................................... Controller, Treasurer and Secretary
Mark Langdale........................................... Director
Christopher J. Amenson.................................. Director
John R. Harris.......................................... Director Nominee*
</TABLE>
- ------------------------
*Mr. Harris has consented to becoming a director upon consummation of the
Transaction.
The following provides certain information regarding Messrs. McAleer and
Harris as of June 1, 1998:
Mr. Kevin W. McAleer, age 47, has served as Senior Vice President and Chief
Financial Officer of the Company since April 1998. From 1996 to 1998, Mr.
McAleer served as Chief Financial Officer, Secretary and as a member of the
Executive Management Committee of American Pad and Paper Co., one of the largest
manufacturers and marketers of paper-based office products in North America.
From 1990 to 1996, Mr. McAleer served as Executive Vice President, Chief
Financial Officer and as a member of the Executive Management Committee of
Rexene Corporation, which manufactures plastic film and plastic resins. From
1985 to 1990, Mr. McAleer served as Senior Vice President--Administration, Chief
Financial Officer, Secretary and Treasurer, and as a member of the Executive
Management Committee and the Board of Directors of Varo, Inc., which
manufactures electronics supplied primarily to U.S. military agencies, such as
proprietary night vision systems, high-reliability power systems and airborne
missile launchers. From 1981 to 1985, Mr. McAleer served as Vice President
Finance, Chief Financial Officer, Secretary and Treasurer, and as a member of
the Executive Management Committee of Tocom, Inc., which designs and
manufactures high-technology communications products and services for the cable
industry. Mr. McAleer is a certified public accountant and is a member of the
American Institute of Certified Public Accountants and the Texas Society of
Certified Public Accountants. Mr. McAleer has a B.S. in Accounting/ Economics
from LaSalle University in Philadelphia, Pennsylvania.
Mr. John R. Harris, age 49, has been a Corporate Vice President at
Electronic Data Systems Corporation, an information and technology outsourcing
and data processing company ("EDS"), since 1997 where he is responsible for
marketing and corporate strategy. From 1989 to 1997, he served as a Vice
President of the Communications Industry Group at EDS where he was responsible
for four business units directed toward wirelines, wireless, media and
interactive services. Mr. Harris is on the Board of Directors
82
<PAGE>
of Applied Graphics Technologies, Inc., an independent provider of digital
prepress services. Mr. Harris received his undergraduate and graduate degrees in
business administration from West Georgia University.
For biographical and other information regarding Messrs. Thompson, Terrell,
Rogers, Roberts and Langdale, see "Information Regarding
Telecommunications--Directors and Executive Officers." For biographical and
other information regarding Messrs. Leonards, Allen, Roberson and Amenson, see
"Information Regarding IWL--Directors and Executive Officers."
EXECUTIVE COMPENSATION
For information regarding compensation paid to executive officers of
Telecommunications, the General Partner and IWL in 1997, including the
individuals named above, see "Information Regarding
Telecommunications--Executive Compensation," "Information Regarding the
Partnership--Executive Compensation," and "Information Regarding IWL--Executive
Compensation," respectively. The Holdings Board will rely on the Holdings
Compensation Committee, which will be composed of Non-Employee Directors, to
recommend the form and amount of compensation to be paid to executive officers
of Holdings who do not have an employment agreement with Holdings. For
information regarding employment agreements with certain of the above
individuals, see "The Transaction--Interests of Certain Persons in the
Transaction--Employment Agreements."
OWNERSHIP OF HOLDINGS
There are currently 1,000 shares of Holdings Common Stock outstanding, all
of which are owned by IWL and will be canceled in the IWL Merger. It is
anticipated that, after giving effect to the Transaction, approximately
28,910,222 shares of Holdings Common Stock will be issued and outstanding,
approximately 828,385 additional shares will be reserved for issuance upon the
exercise of options and warrants to acquire IWL Common Stock and
Telecommunications Common Stock assumed by Holdings and approximately 5,400,000
additional shares will be available for issuance in connection with grants made
after the Closing Date under the Equity Incentive Plan and the Director Stock
Option Plan.
The following table sets forth information as of May 31, 1998, concerning
the beneficial ownership of Holdings Common Stock as of May 31, 1998 after
giving effect to the Mergers and the Interest Exchange and assuming all
Partnership Interests are validly tendered and accepted pursuant to the Exchange
Offer, by (i) each person or group of persons known to IWL, Telecommunications
or the Partnership expected to beneficially own more than five percent (5%) of
the outstanding shares of Holdings Common Stock, (ii) each person who is (or,
upon consummation of the Mergers and the Interest Exchange, will be) an
executive officer, director or director nominee of Holdings and (iii) all such
executive officers and directors of Holdings 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, which
means generally any person who, directly or indirectly, has or shares voting
power or investment power with respect to a security. Shares of Holdings Common
Stock not outstanding but deemed beneficially owned by virtue of the right of an
individual or group to acquire such shares within 60 days after May 31, 1998 are
treated as outstanding only when determining the amount and percentage of
Holdings Common Stock owned by such individual or group. All information with
respect to the beneficial ownership of any principal shareholder was furnished
by such principal shareholder and Holdings believes that, except as otherwise
noted or pursuant to community property laws, each shareholder has sole voting
and investment power with respect to shares shown. The address for Messrs.
Leonards, Allen and Roberson is 12000 Aerospace Ave., Suite 200, Houston, Texas
77034. The address for Messrs. Thompson, Rogers, Roberts, Terrell, McAleer,
83
<PAGE>
CapRock Investors and Greenway Holdings, L.P. is Two Galleria Tower, 13455 Noel
Road, Suite 1925, Dallas, Texas 75240.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------
NUMBER PERCENTAGE
NAME OF SHARES OWNERSHIP
- ---------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Jere W. Thompson, Jr.(2)................................................................ 10,773,897 37.3%
Ignatius W. Leonards(3)................................................................. 1,897,528 6.6%
Byron M. Allen(4)....................................................................... 222,200 *
Timothy W. Rogers....................................................................... 2,883,628 10.0%
Scott L. Roberts........................................................................ 2,883,628 10.0%
Timothy M. Terrell...................................................................... 2,883,628 10.0%
Kevin W. McAleer........................................................................ -- --
Richard H. Roberson(5).................................................................. 3,400 *
Mark Langdale(6)........................................................................ 11,224,352 38.8%
5950 Berkshire, Suite 990
Dallas, TX 75225
Christopher J. Amenson.................................................................. 2,000 *
c/o SBS Technologies, Inc.
2400 Louisiana Blvd., N.E.
AFC Building 5, Suite 600
Albuquerque, NM 87110
Jere W. Thompson, Sr.(7)................................................................ 10,657,169 36.9%
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite 1850
Dallas, TX 75219
Greenway Holdings, L.P.(2).............................................................. 2,014,081 7.0%
CapRock Investors(2).................................................................... 8,650,884 29.9%
All executive officers and directors as a group (ten persons)(8)........................ 24,014,445 83.1%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of the class.
(1) Based upon 28,910,222 shares of Holdings Common Stock issued and
outstanding.
(2) Represents 8,650,884 shares held of record by CapRock Investors, 108,932
shares held of record of by CapRock Systems, Inc. and 2,014,081 shares held
of record by Greenway Holdings, L.P. CapRock Investors is a Texas joint
venture, of which Jere W. Thompson, Jr. is the managing venturer and in
which he owns a controlling interest. The Joint Venture Agreement of CapRock
Investors grants to Mr. Thompson, Jr. certain authority, including the
authority to decide and cast all votes on behalf of CapRock Investors as a
shareholder of Telecommunications. As a consequence, both CapRock Investors
and Mr. Thompson, Jr. may each be deemed to be the beneficial owner of all
of the shares. CapRock Systems, Inc. is a Texas corporation of which Mr.
Thompson, Jr. owns 50% of the outstanding common stock and is an officer and
a director; as a result he has shared voting, investment, and dispositive
power with respect to the 108,932 shares held by CapRock Systems, Inc.
Greenway Holdings, L.P. is a Texas limited partnership of which Mr.
Thompson, Jr. is the general partner and has sole voting, investment and
dispositive power; as a result, he may be deemed to be the beneficial owner
of all of the shares held of record by Greenway Holdings, L.P.
(3) Includes 6,666 shares held by Ignatius W. Leonards as custodian for minor
children.
84
<PAGE>
(4) Includes 7,300 shares held by Byron M. Allen as custodian for minor children
and 7,300 shares held by Mr. Allen's daughters, the voting, investment and
dispositive power of which are shared by Mr. Allen with his daughters.
(5) Includes 100 shares held by the spouse of Richard H. Roberson and 200 shares
held by Richard H. Roberson as custodian for minor children, the voting,
investment and dispositive power of which are shared by Mr. Roberson with
his spouse. Includes 3,000 shares subject to options exercisable within 60
days of May 31, 1998. Does not include 27,000 shares subject to options not
yet vested.
(6) Includes 8,650,884 shares held of record by CapRock Investors and 108,932
shares held of record of CapRock Systems, Inc. Under the Joint Venture
Agreement of CapRock Investors, the approval of a majority-in-interest of
the venturers is required to approve the disposition of the shares. Because
of the ownership interest of Jere W. Thompson, Jr., Mark Langdale, and Jere
W. Thompson, Sr. (23.5%, 42.5% and 30.9%, respectively), two of the three
acting together can authorize or prevent a disposition of the shares. As a
result, each may be deemed to be the beneficial owner of all of the shares.
CapRock Systems, Inc. is a Texas corporation of which Mr. Langdale owns 50%
of the outstanding common stock and is an officer and a director; as a
result he has shared voting, investment and dispositive power with respect
to the 108,932 shares held by CapRock Systems, Inc.
(7) Includes 1,302,282 shares held of record by The Williamsburg Corporation,
8,650,884 shares held of record by CapRock Investors and 289,677 shares held
of record by Jere W. Thompson, Jr.'s spouse. Under the Joint Venture
Agreement of CapRock Investors, the approval of a majority-in-interest of
the venturers is required to approve the disposition of the shares. Because
of the ownership interest of Jere W. Thompson, Jr., Mark Langdale, and Jere
W. Thompson, Sr., two of the three acting together can authorize or prevent
a disposition of the shares. As a result, each may be deemed to be the
beneficial owner of all of the shares. The Williamsburg Corporation is a
Texas corporation, of which Mr. Thompson, Sr. is the president and a
director; as a result he has shared voting, investment, and dispositive
power with respect to the 1,302,282 shares held by The Williamsburg
Corporation.
(8) Includes 3,000 shares subject to options exercisable within 60 days of May
31, 1998 granted to the executive officers of Holdings as a group.
85
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
IWL consummated the initial public offering of its common stock in June
1997, and the IWL Common Stock has been listed on the Nasdaq National Market
since June 1997 under the symbol "IWLC." There is currently no public market for
the Holdings Common Stock, the Telecommunications Common Stock or the
Partnership Interests.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of IWL Common Stock as reported on the Nasdaq
National Market based on published financial sources.
<TABLE>
<CAPTION>
IWL COMMON STOCK MARKET
PRICE
------------------------
HIGH LOW
------------ ----------
<S> <C> <C>
1997
Second Quarter beginning on June 12, 1997................................... $ 6 $ 51/4
Third Quarter............................................................... $ 81/2 $ 5
Fourth Quarter.............................................................. $ 13 $ 81/4
1998
First Quarter............................................................... $ 263/8 $ 81/4
Second Quarter.............................................................. $ 22 $ 75/8
Third Quarter (through July 7, 1998)........................................ $ 913/16 $ 83/4
</TABLE>
During the calendar quarters indicated above, no dividends or distributions
were declared or made by IWL, Telecommunications, the Partnership or Holdings.
On February 12, 1998, the last full trading day prior to the public
announcement of the proposed Transaction, the closing price of IWL Common Stock
on the Nasdaq National Market was $9.875 per share. On June 19, 1998, the date
on which the exchange ratios were changed pursuant to the second amendment to
the Merger Agreement, the closing price of IWL Common Stock was $15.00 per
share, and on June 22, 1998, the date such changed exchange ratios were publicly
announced, the closing price was $8.75 per share (a decrease of $6.25 per share
from the closing price on June 19, 1998). On July 7, 1998, the most recent
practicable date prior to the mailing of this Joint Proxy Statement/Prospectus,
the closing price of IWL Common Stock on the Nasdaq National Market was $9.5625
per share. Holders of IWL Common Stock, Telecommunications Common Stock or
Partnership Interests are urged to obtain current market quotations prior to
making any decision with respect to the Mergers and the Interest Exchange. See
"Summary--Comparative Per Share Information."
86
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF TELECOMMUNICATIONS
The following selected historical financial data for Telecommunications for
the years ended and as of December 31, 1993 and 1994 have been derived from the
unaudited financial statements of Telecommunications. The financial data for the
years ended and as of December 31, 1995 and 1996 have been derived from
Telecommunications' financial statements and related notes which have been
audited by Burds, Reed & Mercer, P.C., independent certified public accountants.
The financial data for the year ended and as of December 31, 1997 have been
derived from Telecommunications' financial statements and related notes which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial data for the three months ended March 31, 1997 and
1998 are derived from unaudited financial statements of Telecommunications,
which in the opinion of Telecommunication's management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation thereof. The results of operations for an interim period are not
necessarily indicative of the results of operations to be expected for the full
year. The data set forth below in this table are qualified in their entirety by,
and should be read in conjunction with, the financial statements of
Telecommunications and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
Telecommunications."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues............................. $ 526 $ 5,965 $ 13,440 $ 23,174 $ 46,745 $ 8,697 $ 15,770
Cost of revenues........................... 39 4,780 11,043 18,941 35,776 7,118 11,802
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................... 487 1,185 2,397 4,233 10,969 1,579 3,968
Operating expenses:
Selling, general and administrative...... 426 1,038 2,601 3,711 7,049 1,487 2,176
Depreciation and amortization............ 4 10 333 478 694 142 231
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................. 430 1,048 2,934 4,189 7,743 1,629 2,407
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................... 57 137 (537) 44 3,226 (50) 1,561
Interest expense........................... -- (9) (240) (315) (311) (78) (86)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.......... 57 128 (777) (271) 2,915 (128) 1,475
Income taxes (benefit)..................... 3 36 (245) (88) 1,100 (65) 578
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ 54 92 $ (532) $ (183) $ 1,815 $ (63) $ 897
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE(1):
Basic...................................... $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ (0.01) $ 0.09
Diluted.................................... $ 0.01 $ 0.01 $ (0.05) $ (0.02) $ 0.17 $ (0.01) $ 0.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 37 $ 104 $ (533) $ (1,348) $ (576) $ (38)
Property and equipment, net.......................... 34 118 2,214 2,858 3,693 4,162
Total assets......................................... 111 1,716 4,953 7,356 13,327 14,552
Long-term debt and capital lease obligations......... 3 113 1,114 720 453 431
Stockholders' equity (deficit)....................... (3) 375 593 411 2,247 3,165
</TABLE>
87
<PAGE>
- ------------------------
(1) Earnings (loss) per share amounts have been calculated in accordance with
SFAS No. 128, "Earnings Per Share," in 1997 and 1998. Prior year amounts
have been restated on a comparable basis.
88
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF THE PARTNERSHIP
The following selected historical financial data for the Partnership for the
years ended and as of December 31, 1993, 1994, 1995 and 1996 have been derived
from the Partnership's financial statements and related notes which have been
audited by Burds, Reed & Mercer, P.C., independent certified public accountants.
The financial data for the year ended and as of December 31, 1997 have been
derived from the Partnership's financial statements and related notes which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The financial data for the three months ended March 31, 1997 and 1998 are
derived from unaudited financial statements of the Partnership, which in the
opinion of the Partnership's management, contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation thereof.
The results of operations for an interim period are not necessarily indicative
of the results of operations to be expected for the full year. The data set
forth below in this table are qualified in their entirety by, and should be read
in conjunction with, the financial statements of the Partnership and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Telecommunications services....................... $ -- $ -- $ -- $ -- $ 1,945 $ 360 $ 588
Projects and other................................ 240 334 173 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................................. 240 334 173 -- 1,945 360 588
OPERATING EXPENSES:
Network access expenses........................... -- 444 503 -- 86 41 12
Selling, general and administrative............... 245 457 326 174 286 65 67
Depreciation and amortization..................... 18 50 31 54 902 166 185
--------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses.............. 263 951 860 228 1,274 272 264
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................. (23) (617) (687) (228) 671 88 324
Interest expense.................................... -- -- -- -- (774) (165) (210)
Other income (expense).............................. 15 4 12 -- (1) -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item.............................................. (8) (613) (675) (228) (104) (77) 114
Income taxes(1)..................................... -- -- -- -- -- -- (42)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item............. (8) (613) (675) (228) (104) (77) 72
Extraordinary item(2)............................... -- -- 645 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ (8) $ (613) $ (30) $ (228) $ (104) $ (77) $ 72
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- ----- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................ $ 497 $ (178) $ 1 $ (2,616) $ (1,059) $ (1,314)
Property and equipment, net.............................. 239 206 -- 8,552 9,300 9,168
Total assets............................................. 788 443 13 8,757 9,779 9,949
Long-term debt and capital lease obligations, net of
current portion........................................ -- -- -- 6,336 8,665 8,184
Partners' capital (deficit).............................. 742 34 4 (223) (327) (255)
</TABLE>
89
<PAGE>
- ------------------------
(1) Effective January 1, 1998, the Partnership elected to be taxed as a
corporation and as such has recorded income taxes of $42,000 relating to the
three months ended March 31, 1998. Prior to January 1, 1998, the Partnership
allocated net income and net losses to its Partnership Interests and
therefore no income taxes were recorded for periods ended prior to January
1, 1998.
(2) Extraordinary gain of approximately $645,000 relates to extinguishment of
certain lease obligations in 1995.
90
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF IWL
The following selected consolidated historical financial data for each of
the four fiscal years ended June 30, 1997 and for the six months ended December
31, 1997, are derived from IWL's consolidated financial statements, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose report with respect to the three-year period ended June 30, 1997 appears
elsewhere herein. The following selected consolidated historical financial data
for the fiscal year ended June 30, 1993 are derived from IWL's unaudited
consolidated financial statements. The following selected consolidated
historical financial data for the six months ended December 31, 1996 and for the
three months ended March 31, 1997 and 1998 are derived from unaudited
consolidated financial statements of IWL which, in the opinion of IWL's
management, contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation thereof. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results of operations to be expected for the full year. The
data set forth below in this table are qualified in their entirety by, and
should be read in conjunction with, the financial statements of IWL and the
related notes thereto included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of IWL."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunication services................. $ 2,238 $ 3,301 $ 5,790 $ 6,531 $ 7,993 $ 3,646 $ 4,856
Project and other.......................... 10,722 11,559 10,004 10,711 14,708 7,303 7,107
Product resales(1)......................... -- -- -- 10,554 7,641 4,695 --
--------- --------- --------- --------- --------- --------- ---------
Total revenues........................... 12,960 14,860 15,794 27,796 30,342 15,644 11,963
Cost of revenues............................. 8,641 10,071 9,639 20,416 21,737 11,684 6,557
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................. 4,319 4,789 6,155 7,380 8,605 3,960 5,406
Operating expenses:
Selling, general and administrative........ 3,132 4,070 4,399 5,099 5,845 2,736 3,631
Depreciation and amortization.............. 359 571 821 1,003 1,403 635 982
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................. 3,491 4,641 5,220 6,102 7,248 3,371 4,613
--------- --------- --------- --------- --------- --------- ---------
Operating income............................. 828 148 935 1,278 1,357 589 793
Interest expense, net........................ (10) (215) (244) (270) (514) (214) (218)
Other income (expense)....................... (86) 252 139 42 129 19 110
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes................... 732 185 830 1,050 972 394 685
Income taxes................................. 249 41 294 316 283 134 264
--------- --------- --------- --------- --------- --------- ---------
Net income................................... $ 483 $ 144 $ 536 $ 734 $ 689 $ 260 $ 421
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share amounts(2):
Basic...................................... $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.12 $ 0.11
Diluted.................................... $ 0.24 $ 0.07 $ 0.24 $ 0.33 $ 0.30 $ 0.11 $ 0.11
Weighted average shares outstanding:
Basic...................................... 2,000 2,001 2,222 2,222 2,298 2,226 3,737
Diluted.................................... 2,011 2,011 2,233 2,233 2,323 2,261 3,908
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunication services................. $ 2,298 $ 2,804
Project and other.......................... 3,161 5,251
Product resales(1)......................... 2,506 --
--------- ---------
Total revenues........................... 7,965 8,055
Cost of revenues............................. 5,674 4,421
--------- ---------
Gross profit................................. 2,291 3,634
Operating expenses:
Selling, general and administrative........ 1,611 2,188
Depreciation and amortization.............. 347 647
--------- ---------
Total operating expenses................. 1,958 2,835
--------- ---------
Operating income............................. 333 799
Interest expense, net........................ (125) (155)
Other income (expense)....................... 114 1
--------- ---------
Income before income taxes................... 322 645
Income taxes................................. 95 254
--------- ---------
Net income................................... $ 227 $ 391
--------- ---------
--------- ---------
Earnings per share amounts(2):
Basic...................................... $ 0.10 $ 0.10
Diluted.................................... $ 0.10 $ 0.09
Weighted average shares outstanding:
Basic...................................... 2,234 3,912
Diluted.................................... 2,298 4,199
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 72 $ -- $ 291 $ 361 $ 7,660 $ 3,345
Working capital (deficit)........................... 709 (367) (265) 1,811 9,721 1,330
Total assets........................................ 5,748 7,437 8,232 12,409 26,062 26,284
Long-term debt and capital lease obligations, net of
current portion................................... 533 1,108 1,329 2,944 7,692 3,588
Stockholders' equity................................ 1,511 2,419 2,955 3,698 11,394 12,166
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 720
Working capital (deficit)........................... (398)
Total assets........................................ 29,834
Long-term debt and capital lease obligations, net of
current portion................................... 3,948
Stockholders' equity................................ 14,135
</TABLE>
- ------------------------------
(1) Comprised of the resale of Alcatel products and other equipment and hardware
to a Shell subsidiary.
(2) Earnings per share amounts have been calculated in accordance with SFAS No.
128, "Earnings Per Share," in 1997 and 1998. Prior year amounts have been
restated on a comparable basis.
92
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the Transaction under the pooling of interests method of
accounting. The unaudited pro forma combined condensed financial statements are
based upon the respective historical financial statements of IWL,
Telecommunications, and the Partnership and should be read in conjunction with
such historical financial statements and the notes thereto, which are included
elsewhere in this Joint Proxy Statement/Prospectus. In May 1998, IWL changed its
fiscal year end to coincide with the fiscal years of Holdings,
Telecommunications and the Partnership. Accordingly, the pro forma statement of
operations for 1997 is presented for the 12 months ended December 31, 1997 on a
combined basis for all three entities. The unaudited combined condensed
statement of operations for the three months ended March 31, 1998 combine the
financial statements of IWL with those of Telecommunications and the
Partnership. The unaudited pro forma combined condensed statements of operations
for the years ended December 31, 1995 and 1996 combine IWL's consolidated
statements of operations for the years ended June 30, 1995 and 1996 with the
Telecommunications and Partnership statements of operations for the years ended
December 31, 1995 and 1996. The revenues and net income of IWL for the six month
period ended December 31, 1996 were excluded from the pro forma combined
condensed statement of operations for the year ended December 31, 1996 in the
amount of $15.6 million and $260,000, respectively.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Transaction had been consummated as presented in the
accompanying unaudited pro forma combined financial information, nor is it
necessarily indicative of future operating results or financial position.
93
<PAGE>
CAPROCK COMMUNICATIONS CORP.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------------- ------------------------
IWL TELECOMMUNICATIONS PARTNERSHIP ADJUSTMENTS COMBINED
--------- ------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications services.............. $ 2,804 $ 15,770 $ 588 $ -- $ 19,162
Projects and other....................... 5,251 -- -- -- 5,251
--------- ------- ----- ----------- -----------
Total revenues......................... 8,055 15,770 588 -- 24,413
Cost of services........................... 4,421 11,802 12 -- 16,235
--------- ------- ----- ----------- -----------
Gross profit............................... 3,634 3,968 576 -- 8,178
Operating expenses
Selling, general and administrative...... 2,188 2,176 67 -- 4,431
Depreciation and amortization............ 647 231 185 -- 1,063
--------- ------- ----- ----------- -----------
Total operating costs and expenses....... 2,835 2,407 252 -- 5,494
--------- ------- ----- ----------- -----------
Operating income........................... 799 1,561 324 -- 2,684
Interest expense, net...................... (155) (68) (210) -- (433)
Other income (expense)..................... 1 (18) -- -- (17)
--------- ------- ----- ----------- -----------
Income before income taxes................. 645 1,475 114 -- 2,234
Income taxes............................... 254 578 42 -- 874
--------- ------- ----- ----------- -----------
Net income................................. $ 391 $ 897 $ 72 $ -- $ 1,360
--------- ------- ----- ----------- -----------
--------- ------- ----- ----------- -----------
Earnings per common share:
Basic.................................... $ 0.10 $ 0.09 $ -- $ -- $ 0.05
Diluted.................................. $ 0.09 $ 0.08 $ -- $ -- $ 0.05
Weighted average shares outstanding:
Basic.................................... 3,912 10,399 -- 14,525(a) 28,836
Diluted.................................. 4,199 10,581 -- 14,342(a) 29,122
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
94
<PAGE>
CAPROCK COMMUNICATIONS CORP.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------ ------------------------
IWL TELECOMMUNICATIONS PARTNERSHIP ADJUSTMENTS COMBINED
--------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services.............. $ 9,202 $ 46,745 $ 1,945 $ -- $ 57,892
Projects and other...................... 14,512 -- -- 14,512
Product resales......................... 2,946 -- -- -- 2,946
--------- ------- ----------- ----------- -----------
Total revenues........................ 26,660 46,745 1,945 -- 75,350
Cost of services.......................... 14,261 35,776 86 -- 50,123
Cost of product resales................... 2,347 -- -- -- 2,347
--------- ------- ----------- ----------- -----------
Gross profit.............................. 10,052 10,969 1,859 -- 22,880
Operating expenses:
Selling, general, and
administrative........................ 6,742 7,049 286 -- 14,077
Depreciation and amortization........... 1,749 694 902 -- 3,345
--------- ------- ----------- ----------- -----------
Total operating cost and expenses..... 8,491 7,743 1,188 -- 17,422
--------- ------- ----------- ----------- -----------
Operating income.......................... 1,561 3,226 671 -- 5,458
Interest income (expense), net............ (518) (311) (774) -- (1,603)
Other income (expense).................... 221 -- (1) -- 220
--------- ------- ----------- ----------- -----------
Income before income taxes................ 1,264 2,915 (104) -- 4,075
Income taxes (benefit).................... 413 1,100 -- (38)(b) 1,475
--------- ------- ----------- ----------- -----------
Net income (loss)......................... $ 851 $ 1,815 $ (104) $ 38 $ 2,600
--------- ------- ----------- ----------- -----------
--------- ------- ----------- ----------- -----------
Earnings per common share:
Basic................................... $ 0.28 $ 0.17 $ -- $ -- $ 0.09
Diluted................................. $ 0.26 $ 0.17 $ -- $ -- $ 0.09
Weighted average shares outstanding:
Basic................................... 3,060 10,399 -- 14,525(a) 27,984
Diluted................................. 3,231 10,581 -- 14,527(a) 28,339
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
95
<PAGE>
CAPROCK COMMUNICATIONS CORP.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------
FOR THE YEAR ENDED
--------------------------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 PRO FORMA
--------- ------------------ ------------- ------------------------
IWL TELECOMMUNICATIONS PARTNERSHIP ADJUSTMENTS COMBINED
--------- ------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services............. $ 6,531 $ 23,174 $ -- $ -- $ 29,705
Project and other...................... 10,711 -- -- 10,711
Product resales........................ 10,554 -- -- -- 10,554
--------- ------- ----- ----------- -----------
Total revenues....................... 27,796 23,174 -- -- 50,970
Cost of services....................... 10,744 18,941 -- -- 29,685
Cost of product resales................ 9,672 -- -- -- 9,672
--------- ------- ----- ----------- -----------
Gross profit........................... 7,380 4,233 -- -- 11,613
Operating costs and expenses:
Selling, general, and administrative... 5,099 3,711 174 -- 8,984
Depreciation and amortization.......... 1,003 478 54 -- 1,535
--------- ------- ----- ----------- -----------
Total operating expenses............. 6,102 4,189 228 -- 10,519
--------- ------- ----- ----------- -----------
Operating income......................... 1,278 44 (228) -- 1,094
Interest expense, net.................... (270) (315) -- -- (585)
Other income............................. 41 -- -- -- 41
--------- ------- ----- ----------- -----------
Income before income taxes............... 1,049 (271) (228) -- 550
Income taxes (benefit)................... 315 (88) -- (84)(b) 143
--------- ------- ----- ----------- -----------
Net income (loss)........................ $ 734 $ (183) $ (228) $ 84 $ 407
--------- ------- ----- ----------- -----------
--------- ------- ----- ----------- -----------
Earnings (loss) per common share:
Basic.................................. $ 0.33 $ (0.02) $ -- $ -- $ 0.01
Diluted................................ $ 0.33 $ (0.02) $ -- $ -- $ 0.01
Weighted average shares outstanding:
Basic.................................. 2,222 10,399 -- 14,525(a) 27,146
Diluted................................ 2,233 10,399 -- 14,525(a) 27,157
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
96
<PAGE>
CAPROCK COMMUNICATIONS CORP.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------
FOR THE YEAR ENDED
--------------------------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1995 1995 PRO FORMA
--------- ------------------ ------------- ------------------------
IWL TELECOMMUNICATIONS PARTNERSHIP ADJUSTMENTS COMBINED
--------- ------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services............. $ 5,790 $ 12,231 $ -- $ -- $ 18,021
Projects and other..................... 10,004 1,209 173 -- 11,386
--------- ------- ----- ----------- -----------
Total revenues....................... 15,794 13,440 173 -- 29,407
Cost of services....................... 9,639 11,043 503 -- 21,185
--------- ------- ----- ----------- -----------
Gross profit........................... 6,155 2,397 (330) -- 8,222
Operating expenses:
Selling, general, and administrative... 4,399 2,601 326 -- 7,326
Depreciation and amortization.......... 821 333 31 -- 1,185
--------- ------- ----- ----------- -----------
Total operating expenses............... 5,220 2,934 357 -- 8,511
--------- ------- ----- ----------- -----------
Operating income......................... 935 (537) (687) -- (289)
Interest expense, net.................... (244) (240) -- -- (484)
Other.................................... 138 -- 12 -- 150
--------- ------- ----- ----------- -----------
Income (loss) before income taxes and
extraordinary item..................... 829 (777) (675) -- (623)
Income taxes (benefit)................... 293 (245) -- (11)(b) 37
--------- ------- ----- ----------- -----------
Income (loss) before extraordinary item 536 (532) (675) 11 (660)
Extraordinary item -- -- 645 -- 645
--------- ------- ----- ----------- -----------
Net income (loss)........................ $ 536 $ (532) $ (30) $ 11 $ (15)
--------- ------- ----- ----------- -----------
--------- ------- ----- ----------- -----------
Earnings (loss) per common share:
Basic.................................. $ 0.24 $ (0.05) $ -- $ -- $ --
Diluted................................ $ 0.24 $ (0.05) $ -- $ -- $ --
Weighted average shares outstanding:
Basic.................................. 2,222 9,717 -- 13,987(a) 25,926
Diluted................................ 2,233 9,717 -- 13,987(a) 25,937
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
97
<PAGE>
CAPROCK COMMUNICATIONS CORP.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------ ------------------------
IWL TELECOMMUNICATIONS PARTNERSHIP ADJUSTMENTS COMBINED
--------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 720 $ -- $ 658 $ -- $ 1,378
Accounts receivable, net................ 8,056 9,319 44 -- 17,419
Inventories............................. 998 -- -- -- 998
Prepaid expenses and other.............. 924 447 4 -- 1,375
Deferred income taxes................... 242 624 -- -- 866
--------- ------- ----------- ----------- -----------
Total current assets.................. 10,940 10,390 706 -- 22,036
Property, plant and equipment, net........ 16,670 4,162 9,168 -- 30,000
Other assets.............................. 2,224 -- 75 -- 2,299
--------- ------- ----------- ----------- -----------
Total assets.......................... $ 29,834 $ 14,552 $ 9,949 $ -- $ 54,335
--------- ------- ----------- ----------- -----------
--------- ------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....... $ 6,354 $ 1,642 $ 891 $ -- $ 8,887
Accounts payable and accrued expenses... 3,975 7,710 388 3,000(c) 15,073
Accrued commitment and guarantor fees... -- -- 418 -- 418
Customer deposits....................... 360 35 -- -- 395
Current installments under capital
lease................................. -- 247 -- -- 247
Income taxes payable.................... 490 642 -- -- 1,132
Unearned revenue........................ 159 153 323 -- 635
--------- ------- ----------- ----------- -----------
Total current liabilities............. 11,338 10,429 2,020 3,000 26,787
Long-term debt............................ 3,948 128 8,184 -- 12,260
Deferred income taxes..................... 413 527 -- -- 940
Obligations under capital lease........... -- 303 -- -- 303
--------- ------- ----------- ----------- -----------
Total liabilities..................... 15,699 11,387 10,204 3,000 40,290
Stockholders' equity
Common Stock............................ 40 1,458 -- (1,353)(a) 145
Additional paid-in capital.............. 9,173 -- (255) 1,353(a) 10,271
Retained earnings....................... 4,922 2,082 -- (3,000)(c) 4,004
Unearned compensation................... -- (375) -- -- (375)
--------- ------- ----------- ----------- -----------
Total stockholders' equity............ 14,135 3,165 (255) (3,000) 14,045
--------- ------- ----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $ 29,834 $ 14,552 $ 9,949 $ -- $ 54,335
--------- ------- ----------- ----------- -----------
--------- ------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
98
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(a) The Merger Agreement, as amended, was entered into on February 16, 1998 by
IWL, Telecommunications, the Partnership and Holdings and other subsidiaries
created to facilitate the Transaction. Under terms of the Merger Agreement,
each share of IWL Common Stock will be exchanged for one share of Holdings
Common Stock, each share of Telecommunications Common Stock will be
exchanged for 1.789030878 shares of Holdings Common Stock and each one
percent (1%) of the general and limited Partnership Interests in the
Partnership that are validly tendered to and accepted by Holdings will be
exchanged for 63,194.54 shares of Holdings Common Stock. The following table
details the pro forma issuances in connection with the Transaction as if the
Transaction had occurred on March 31, 1998:
<TABLE>
<CAPTION>
COMMON
SHARES NUMBER OF
OUTSTANDING EXCHANGE RATIO HOLDINGS SHARES
------------ -------------- ---------------
<S> <C> <C> <C>
Holdings Common Shares to be issued to the
shareholders of Telecommunications........... 10,398,954 1.789030878 18,604,050
Holdings Common Shares to be issued to the
partners of the Partnership.................. 6,319,454
Holdings Common Shares to be issued to the
shareholders of IWL.......................... 3,968,607 1.0 3,968,607
---------------
Total Holdings Common Shares outstanding after
completion of the Transaction................ 28,892,111
---------------
---------------
</TABLE>
The actual number of shares of Holdings Common Stock to be issued will be
determined at the effective time of the Transaction based on the number of
shares of IWL and Telecommunications Common Stock outstanding and the number
of Partnership Interests that are validly tendered to and accepted by
Holdings. The adjustments to the balance sheet as of March 31, 1998 result
in the recapitalization of Holdings.
(b) The net adjustments to tax expense for the Partnership for the years ended
December 31, 1995, 1996 and 1997 included in the pro forma adjustments were
estimated at 37%. These adjustments were made to reflect the tax expense and
the deferred tax assets and liabilities that would have been recorded if the
Partnership had been taxed as a C Corporation in those years.
(c) Since the Transaction has not been completed, costs of the Transaction can
only be estimated at this time. IWL, Telecommunications and the Partnership
estimate they will incur certain direct transaction costs of approximately
$3.0 million associated with the Transaction consisting of transaction fees
for investment bankers, attorneys, accountants, financial printing and other
related charges. The pro forma combined condensed balance sheet as of March
31, 1998 includes the effect of these costs as if the Transaction occurred
on March 31, 1998 and the pro forma combined condensed statement of
operations for all prior periods presented exclude the effects of these
costs. Such costs will be expenses in the period in which the Transaction is
consummated.
99
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TELECOMMUNICATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED HISTORICAL FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES THERETO AND
THE OTHER HISTORICAL FINANCIAL INFORMATION OF TELECOMMUNICATIONS CONTAINED
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
OVERVIEW
Telecommunications is a facilities-based provider of voice, data and
broadband communications services to interexchange carriers, to other
communications entities and to businesses and consumers ("Telecommunications
Services"). Revenue from Telecommunications Services is recognized primarily on
a minutes-of-use basis. Telecommunications experiences slight seasonal
reductions of revenues around the Thanksgiving and Christmas holidays.
TELECOMMUNICATIONS SERVICES. Telecommunications Services includes switched
services over owned and leased network facilities to interexchange carriers and
other telecommunications providers, as well as voice and data services to
businesses and consumers. Telecommunications plans to expand its presence in the
market by developing its brand identity and aggressively marketing its existing
and planned voice, data and other products and services. Telecommunications also
plans to further build direct, end-user relationships by significantly
increasing the size of its direct and agent sales forces, providing competitive
pricing and superior network quality and offering enhanced, market-driven
services to businesses and consumers. Telecommunications' ability to grow its
revenues will be dependent upon a number of factors, many of which are not
within its control and as a result no assurance can be given that such
objectives will be met. For the year ended December 31, 1997,
Telecommunications' five largest carrier customers accounted for approximately
41% of Telecommunications revenues, and MCI accounted for more than 10% of
Telecommunications' revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
REVENUE. Total revenue was $15.8 million for the three months ended March
31, 1998, as compared to $8.7 million for the same period in 1997. The 82%
increase was due to increases in both domestic and international switched
services and to growth in switched services provided to small and medium-sized
businesses as a result of continued expansion of Telecommunications' direct and
agent sales channels. For the three months ended March 31, 1998, revenues from
international operations was $5.6 million, or 36% of total revenues, as compared
to $2.1 million for the three months ended March 31, 1997, or 24% of total
revenues.
OPERATING COSTS AND EXPENSES. Telecommunications' principal operating costs
and expenses consist of cost of revenues, SG&A, and depreciation.
Total operating costs and expenses increased to approximately $14.2 million
as compared to $8.7 million for the same period in 1997. Cost of revenues
increased to $11.8 million for the three months ended March 31, 1998, as
compared to $7.1 million for the same period in 1997. The growth in cost of
revenues was primarily attributable to the continued growth in switched services
and network operations. The increase in gross margin from 18% to 25% resulted
from, among other things, favorable pricing attributable to the higher traffic
and new vendors, as well as a more favorable mix of international and domestic
traffic. Gross margins may vary in the future periods as a result of these
factors.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased to $2.2
million for the three months ended March 31, 1998 as compared to $1.5 million
for the same period in 1997. The increase resulted from the expanded
administrative and information activities needed to support Telecommunications'
growth,
100
<PAGE>
recruitment of additional personnel and additional sales commission payments.
SG&A expenses, in terms of absolute costs, will increase in subsequent periods
as Telecommunications continues to expand its telecommunications services,
expand its agent and direct sales operations, open additional commercial sales
offices in selected Texas markets, and recruit experienced telecommunications
industry personnel to implement Telecommunications' strategy.
Telecommunications' depreciation and amortization expense increased to
$231,000 for the three months ended March 31, 1998 as compared to $142,000 for
the same period in 1997. The increase resulted primarily from purchases of
additional equipment and other fixed assets to accommodate Telecommunications'
growth. Telecommunications expects that depreciation and amortization expense
will continue to increase in subsequent periods as Telecommunications continues
to expand its facilities.
INTEREST EXPENSE. For the three months ended March 31, 1998,
Telecommunications' interest expense increased to $86,000 as compared to $78,000
for the same period in 1997.
INCOME TAXES. Telecommunications' income tax expense was $578,000 for the
three months ended March 31, 1998, as compared to an income tax benefit of
$65,000 for the same period in 1997.
NET INCOME (LOSS). Telecommunications reported net income of $897,000 for
the three months ended March 31, 1998, compared to a net loss of $63,000 for the
three months ended March 31, 1997 as a result of the factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Total revenues increased to approximately $46.7 million during the
year ended December 31, 1997, as compared to approximately $23.2 million in
1996. The 101% increase was due to increases in revenues from both domestic and
international switched services and to growth in switched services provided to
small and medium-sized businesses and to consumers as a result of continued
expansion of Telecommunications' direct and agent sales channels. In 1997,
revenues from international operations were $14.0 million, or 30% of total
revenues, as compared to $4.2 million in 1996, or 18% of total revenues.
OPERATING COSTS AND EXPENSES. Telecommunications' principal operating costs
and expenses consist of cost of revenues, SG&A, and depreciation.
Total operating costs and expenses increased to approximately $43.5 million
during the year ended December 31, 1997 as compared to approximately $23.1
million during the corresponding period in 1996. Cost of revenues increased to
approximately $35.8 million for the year ended December 31, 1997, as compared to
approximately $18.9 million for 1996. The growth in cost of revenues was
primarily attributable to the continued growth in switched services and network
operations. The increase in gross margin from 18% to 23% resulted from, among
other things, favorable pricing attributable to the higher traffic and the
efficient utilization of Telecommunications' switching network.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased to $7.0
million for the year ended December 31, 1997, as compared to approximately $3.7
million in 1996. The increase resulted from the expanded administrative and
information activities needed to support Telecommunications' growth, recruitment
of additional personnel and additional sales commission payments.
Telecommunications' depreciation and amortization expense increased to
approximately $694,000 during the year ended December 31, 1997 as compared to
approximately $478,000 in 1996. This increase resulted primarily from purchases
of additional equipment and other fixed assets to accommodate
Telecommunications' growth. Telecommunications expects that depreciation and
amortization expense will continue to increase in subsequent periods as
Telecommunications continues to expand its facilities.
101
<PAGE>
INTEREST EXPENSE. During 1997, Telecommunications' interest expense
decreased slightly to approximately $311,000 as compared to approximately
$315,000 in 1996.
INCOME TAXES. Telecommunications' income tax expense was approximately $1.1
million during the year ended December 31, 1997 as compared to an income tax
benefit of approximately $88,000 in 1996. This increase was attributable to the
improved profitability of Telecommunications in 1997.
NET INCOME (LOSS). Telecommunications realized net income of approximately
$1.8 million in the year ended December 31, 1997, as compared to a net loss of
approximately $183,000 in the corresponding period of 1996 as a result of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenues increased to approximately $23.2 million during the
year ended December 31, 1996 from approximately $13.4 million in 1995 due to
significantly higher revenues from Telecommunications Services. This 73%
increase was largely attributable to growth in domestic switched services
provided to carriers.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased
to approximately $23.1 million in 1996 from approximately $14.0 million in 1995,
due primarily to increases in cost of revenues and SG&A. Expenses for cost of
revenues increased to approximately $18.9 million for the year ended December
31, 1996 as compared to approximately $11.0 million for 1995. The growth in cost
of revenues was primarily attributable to the continued growth in switched
services and network operations.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased to $3.7
million for the year ended December 31, 1996 as compared to $2.6 million in
1995. The increase resulted from the expanded administrative and information
activities needed to support Telecommunications' growth, recruitment of
additional personnel and additional sales commission payments.
Telecommunications' depreciation and amortization expense increased to
approximately $478,000 in 1996 from approximately $333,000 in 1995. This
increase was primarily due to Telecommunications' purchases of additional
equipment and other fixed assets to accommodate Telecommunications' growth.
INTEREST EXPENSE. During 1996, Telecommunications' net interest expense
increased to approximately $315,000 from approximately $240,000 in 1995. This
increase is primarily attributable to increases in revolving line borrowings to
support Telecommunications' working capital requirements.
INCOME TAXES. Telecommunications' income tax benefit was approximately
$88,000 during the year ended December 31, 1996 as compared to a benefit of
approximately $245,000 in 1995.
NET LOSS. Telecommunications experienced a net loss of approximately
$183,000 in 1996 compared to a net loss of approximately $532,000 in 1995 as a
result of the factors discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS 128") effective for financial
statements issued for periods ending after December 15, 1997. SFAS 128
establishes standards for computing and presenting earnings per share and
supersedes APB No. 15, "Earnings Per Share." Telecommunications adopted SFAS 128
and all prior periods have been restated to conform with the requirements of
this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components. The required disclosures for SFAS 130
will be adopted in 1998. The adoption of SFAS 130 will have no impact
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on Telecommunications' results of operations, financial position or cash flows
and any effect will be limited to the presentation of its disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
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 segments 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
statements disclosures for prior periods are required to be restated.
Telecommunications is in the process of evaluating the disclosure requirements.
The adoption of SFAS 131 will not have an impact on Telecommunications' results
of operations, financial position or cash flows and any effect will be limited
to the presentation of its disclosures.
LIQUIDITY AND CAPITAL RESOURCES
From January 1, 1995 through December 31, 1997, Telecommunications funded
capital expenditures, debt service and cash used in operations through a
combination of stockholder loans, the sale of common stock, a revolving credit
facility with a bank and a note payable to a bank guaranteed by certain
shareholders of Telecommunications. Total cash expended during the three years
ended December 31, 1997 to fund capital expenditures and repayments of long-term
debt to third parties, was $3.3 million and $1.1 million, respectively. Total
cash generated from operations was $2.9 million during the same period. Total
cash provided during this same period from revolving loans was $1.2 million. As
of December 31, 1997, Telecommunications had a working capital deficit of
$576,000. At December 31, 1996, Telecommunications had a working capital deficit
of approximately $1.3 million. As of March 31, 1998, Telecommunications had a
working capital deficit of $38,000. Telecommunications has a $2.5 million
secured revolving line of credit with Bank One, Texas, N.A. The amount available
to be drawn thereunder has certain borrowing base limitations, primarily
relating to the accounts receivable balance. Interest is at prime plus 2%. The
loan agreement contains affirmative and negative prohibitions on the payment of
dividends. Telecommunications has previously been in technical default of a
covenant requiring lender consent to the Transaction and certain actions to be
taken by Telecommunications in connection therewith. The bank has waived such
defaults, consented to the Transaction and such actions by Telecommunications
and has renewed the line of credit through August 31, 1998, The balance
outstanding at December 31, 1997 was approximately $1.2 million. Throughout
1997, Telecommunications also had a $1.5 million secured line of credit. In June
1998, Telecommunications increased its bank line of credit to $7 million,
subject to a borrowing base based on accounts receivable and property, plant and
equipment. Telecommunications can advance a maximum of $2.5 million to the
Partnership. The line of credit will mature on August 31, 1998. If the offering
of the Proposed Notes is successful, Holdings intends to use part of the
proceeds to repay indebtedness owing by Telecommunications to Bank One, Texas,
N.A. If the offering of the Proposed Notes is not successful, Telecommunications
intends to renegotiate the terms of its loans from Bank One, Texas, N.A. If such
negotiations are not successful, Telecommunications 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.
Telecommunications anticipates that, based on current plans and assumptions
relating to its operations, its financial resources and equipment financing
arrangements will be sufficient to fund Telecommunications' growth and
operations for approximately 12 months from the date of this Joint Proxy
Statement/ Prospectus. Telecommunications believes that its capital needs at the
end of such period will continue to be significant and, therefore,
Telecommunications may continue to seek additional sources of capital. Further,
in the event Telecommunications' plans or assumptions change or prove to be
inaccurate, or if Telecommunications consummates any unplanned acquisitions of
businesses or assets, Telecommunications may be required to seek additional
sources of capital sooner than currently anticipated. Sources of additional
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capital may include public and private equity and debt financings, sales of
non-strategic assets and other financing arrangements. See "Offering of Proposed
Notes."
CONTINGENCIES
Telecommunications is party to ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on the
results of operations, financial condition or cash flow of Telecommunications.
YEAR 2000
As the year 2000 approaches, Telecommunications recognizes the need to
ensure its operations will not be adversely impacted by Year 2000 computer
software failures. Telecommunications is addressing this issue to ensure the
availability and integrity of its financial systems and the reliability of its
operational systems. Telecommunications has established processes for evaluating
and managing the risks and costs associated with this problem.
Telecommunications has and will continue to make certain investments in its
software systems and applications to ensure Telecommunications is Year 2000
compliant. The financial impact to Telecommunications 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
Telecommunications.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE PARTNERSHIP
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED HISTORICAL FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES THERETO AND
THE OTHER HISTORICAL FINANCIAL INFORMATION OF THE PARTNERSHIP CONTAINED
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
OVERVIEW
The Partnership is a facilities-based provider of broadband
Telecommunications Services to interexchange carriers, other communications
entities and businesses. The Partnership had no revenues in 1996. In 1997 it had
revenues and a net loss of $1.9 million and $104,000, respectively.
The Partnership began operations in 1992 to design, manage the construction
of, operate, maintain and market a 185 route mile fiber optic network in South
Texas. In 1996, the Partnership entered into a ten year contract for the lease
of dark fiber over a 260 route mile fiber network between Houston and Corpus
Christi, Texas. The Partnership completed construction of the network in January
1997. In January 1998, the Partnership entered into a contract for the sale of
dark fiber between San Antonio and Laredo, Texas. The Partnership expects to
complete the construction of approximately 500 additional route miles of fiber
network from San Antonio to Laredo, McAllen, Harlingen, Brownsville and Corpus
Christi, Texas by the end of 1998. The Partnership intends to expand its
regional fiber network to approximately 4,300 route miles throughout Texas and
the Gulf Coast region by the end of 2000. The Partnership's ability to expand
its network and increase its revenues will be dependent upon a number of
factors, including the availability of financing, and as a result no assurance
can be given that its expansion plans will be met.
The Partnership provides dedicated line services over the Partnership's
owned fiber network to interexchange carriers and other telecommunications
providers for terms of one year or longer. High volume capacity service
agreements and dedicated line service agreements generally provide for "take or
pay" monthly payments at fixed rates based on the capacity term and length of
circuit used. Customers are typically billed on a monthly basis and also may
incur an installation charge or certain ancillary charges for equipment. After
contract expiration, the contracts may be renewed or the services may be
provided on a month-to-month basis. The Partnership is expanding its network to
increase its revenue stream and reduce per unit costs, targeting capacity sales
on a segment-by-segment basis as the Partnership's network is deployed and
activated, and is increasingly seeking longer-term, high-volume capacity
agreements from major carriers. In addition to traditional telecommunications
carriers, the Partnership is marketing to ISPs and other data service companies.
As of December 31, 1997, substantially all of the Partnership's revenues
were derived from two customers. One of the customers provided for approximately
93% of total revenues in 1997 and comprised 78% of the trade receivable balance.
The other significant customer provided for approximately 5% of total revenues
in 1997 and comprised 22% of the trade receivable balance. The lease terms are
through August 2004 and July 2006, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
REVENUE. Total revenues were $588,000 for the three months ended March 31,
1998, as compared to $360,000 for the same period in 1997. Telecommunications
Services revenues represented 100% of the revenue for these periods. This
reflected the completion of the Partnership's fiber optic network between
Houston and Corpus Christi, Texas in January 1997.
OPERATING EXPENSES. The Partnership's principal operating expenses consist
of expenses for SG&A, and depreciation and amortization. Total operating
expenses remained comparable with $264,000 for the three months ended March 31,
1998 and $272,000 for the same period in 1997.
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SG&A includes cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A remained
comparable with $67,000 for the three months ended March 31, 1998 and $65,000
for the same period in 1997. SG&A expenses will increase as the Partnership
continues to expand its Telecommunications Services, initiate its direct sales
operations and recruit experienced telecommunications industry personnel to
implement the Partnership's network expansion strategy.
The Partnership's depreciation and amortization expense increased to
$185,000 for the three months ended March 31, 1998 as compared to $166,000 for
the same period in 1997. This increase resulted primarily from activating the
initial segment of the Partnership's fiber network during 1997, purchases of
additional equipment used in constructing the Partnership's fiber network and
purchases of other fixed assets to accommodate the Partnership's growth. The
Partnership expects that depreciation and amortization expense will continue to
increase in subsequent periods as the Partnership continues to activate
additional segments of the Partnership's planned fiber network.
INTEREST EXPENSE. For the three months ended March 31, 1998, the
Partnership's interest expense increased to $210,000 as compared to $165,000 for
the same period in 1997. The increase resulted from an increase in long-term
indebtedness.
INCOME TAXES. Effective January 1, 1998, the Partnership elected to be
taxed as a corporation and as such has recorded income taxes of $42,000 relating
to the three months ended March 31, 1998. Prior to January 1, 1998, the
Partnership allocated net income and net losses to its Partnership Interests and
therefore no income taxes were recorded for periods ended prior to January 1,
1998.
NET INCOME (LOSS). The Partnership reported net income of $72,000 for the
three months ended March 31, 1998, compared to a net loss of $77,000 for the
three months ended March 31, 1997 as a result of the factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Total revenues were approximately $1.9 million, during the year
ended December 31, 1997, as compared to $0 in 1996. Telecommunications Services
revenue represented 100% of 1997 revenues which reflected the completion of the
Partnership's fiber optic network between Houston and Corpus Christi, Texas in
January 1997.
OPERATING EXPENSES. The Partnership's principal operating expenses consist
of expenses for network access expenses, SG&A, and depreciation and
amortization. Total operating expenses increased to approximately $1.3 million
during the year ended December 31, 1997 as compared to approximately $228,000 in
the corresponding period in 1996. Network access expenses were $86,000 in 1997,
as compared to $0 in 1996, as the fiber network was placed in service in January
1997.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased to
approximately $286,000 in the year ended December 31, 1997, as compared to
approximately $174,000 in 1996. The increase was due primarily to increases in
expenses related to the Partnership's first full year of operating the initial
segment of its fiber network.
The Partnership's depreciation and amortization expense increased to
approximately $902,000 during the year ended December 31, 1997 as compared to
approximately $54,000 in 1996. This increase resulted primarily from activating
the initial segment of the Partnership's fiber network during 1997, purchases of
additional equipment used in constructing the Partnership's fiber network and
purchases of other fixed assets to accommodate the Partnership's growth.
INTEREST EXPENSE. During 1997, the Partnership's net interest expense
increased to approximately $774,000 as compared to $0 in 1996. The increase
resulted from an increase in interest on long-term
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indebtedness, and expensing interest as opposed to capitalizing interest during
the construction phase in 1996. In 1996, the Partnership capitalized
approximately $143,000 of interest. None was capitalized in 1997.
INCOME TAXES. The Partnership allocated net income and net losses to its
Partnership Interests. Therefore, no income taxes were recorded for 1997 or
1996.
NET LOSS. The Partnership realized a net loss of approximately $104,000 in
the year ended December 31, 1997, as compared to a net loss of approximately
$228,000 in the corresponding period of 1996 as a result of the factors
discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue decreased to $0 during the year ended December 31,
1996 from approximately $173,000 in 1995, due to the termination of both a lease
agreement and a maintenance and operating agreement between the Partnership and
the owner of the 185 route mile fiber network between Corpus Christi and
McAllen, Texas, which the Partnership designed, managed the construction of,
maintained, operated and marketed. The parties agreed to terminate the
agreements in the third quarter of 1995 due to a disagreement on the strategy of
extending the fiber network to Houston. The Partnership's sole activity in 1996
was the construction of the 260 route mile fiber network between Houston and
Corpus Christi, Texas.
OPERATING EXPENSES. Total operating expenses decreased to approximately
$228,000 from approximately $860,000 during 1995 and network access expenses
were $0 in 1996 and $503,000 in 1995 due to the discontinuation of operating and
maintenance activities in late 1995 related to the fiber network line between
Corpus Christi and McAllen, Texas.
SG&A expenses decreased from approximately $326,000 in 1995 to approximately
$174,000 in 1996. The Partnership incurred lower SG&A expenses due to the
discontinuation of operating and maintenance activities in late 1995 related to
the fiber network line between Corpus Christi and McAllen, Texas.
The Partnership's depreciation and amortization expense increased from
approximately $31,000 in 1995 to approximately $54,000 in 1996. This increase
was primarily due to the Partnership's investment in the initial segment of its
fiber network between Houston and Corpus Christi, Texas.
EXTRAORDINARY ITEM. The Partnership recorded a gain on extinguishment of
debt of approximately $645,000 in 1995 which related to forgiveness of lease
amounts due in exchange for property and equipment provided to the owner of the
Corpus Christi to McAllen fiber network line, and the forgiveness by such owner
of current and future lease payments due from the Partnership.
INCOME TAXES. The Partnership allocated net income and net losses to its
Partnership Interests. Therefore, no income taxes were recorded for 1996 or
1995.
NET LOSS. The Partnership had a net loss of approximately $228,000 in 1996
compared to a net loss of approximately $30,000 in 1995 as a result of the
factors discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components. The required disclosures for SFAS 130
will be adopted in 1998. The adoption of SFAS 130 will have no impact on the
Partnership's results of operations, financial position or cash flows and any
effect will be limited to the presentation of its disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
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 segments in its
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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
statements disclosures for prior periods are required to be restated. The
Partnership is in the process of evaluating the disclosure requirements. The
adoption of SFAS 131 will not have an impact on the Partnership's results of
operations, financial position or cash flows and any effect will be limited to
the presentation of its disclosures.
LIQUIDITY AND CAPITAL RESOURCES
From January 1, 1995 through December 31, 1995, the Partnership funded
capital expenditures and cash used in operations with operating cash flow and
partners' capital contributions. From January 1, 1996 through December 31, 1997,
the Partnership funded capital expenditures and cash used in operations with the
proceeds from a $10.0 million long term bank loan. The Partnership intends to
finance its operations in the future through internally and externally generated
funds without relying on contributions or guarantees from its general and
limited partners. Total cash expended during the three years ended December 31,
1997 to fund capital expenditures and loan fees on long-term debt was $9.5
million. Total cash used in operations was approximately $431,362 during the
same period. Total cash provided during this same period from proceeds under the
long-term note agreement was $9.9 million. As of December 31, 1997, the
Partnership had a working capital deficit of approximately $1.1 million. As of
March 31, 1998, the Partnership had a working capital deficit of $1.3 million.
As of January 1998, the Partnership had obtained approximately $5.0 million of
contracts for sales of dark fiber, which amounts will be paid as the Partnership
completes certain milestones under the contracts (which is expected to occur in
the fourth quarter of 1998). In addition, the Partnership obtained a loan
agreement with a bank to borrow up to $10 million for the construction, start-up
and related expenses of the Houston to Corpus Christi fiber optic network.
Approximately $9.1 million was outstanding thereunder at March 31, 1998. Accrued
interest is payable monthly. Principal payments began on March 31, 1997.
Principal payment amounts escalate from 0.5% to 3.5% of the outstanding
principal balance existing at March 31, 1997. Additional principal payments
began on June 30, 1997 based upon excess cash flow, as defined in the loan
agreement. All unpaid principal and accrued interest is due in full by December
31, 2001, subject to acceleration on August 31, 1998. If the offering of the
Proposed Notes is successful, Holdings intends to use part of the proceeds to
repay indebtedness owing by the Partnership to Bank One, Texas, N.A. If the
offering of the Proposed Notes is not successful, the Partnership intends to
renegotiate the terms of its loans from Bank One, Texas, N.A. If such
negotiations are not successful, the Partnership 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. Interest is charged at the
bank's prime rate (8.25%, 8.5% and 8.5% at December 31, 1996 and 1997, and March
31, 1998, respectively). The current portion outstanding under this loan
agreement at December 31, 1996 and 1997 and March 31, 1998 was $506,981 and
$886,304 and $891,000, respectively. The Partnership was in violation of certain
covenants requiring maintenance of debt as a percentage of adjusted net income
as of December 31, 1996 and 1997 and April 30, 1998, and also was in technical
default of a covenant requiring the lender's consent to the Transaction. The
Partnership has obtained a waiver of these covenant violations and has obtained
the lender's consent to the Transaction and has executed an amendment revising
these covenants. The Partnership anticipates that the amended covenant
requirements will be met through December 31, 1998.
The Partnership 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 Partnership's growth and operations
for approximately 12 months from the date of this Joint Proxy Statement/
Prospectus only if the Partnership limits its current construction efforts and
plans. The Partnership plans to seek sources of additional capital which may
include public and private equity and debt financings and other financing
arrangements. There can be no assurance that Holdings will be successful in
raising the
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funds. If unsuccessful, the scope and plans for expansion of Telecommunications'
business and the Partnership's fiber network will be significantly curtailed.
See "Offering of Proposed Notes."
CONTINGENCIES
The Partnership has never been a party to any litigation.
YEAR 2000
As the year 2000 approaches, the Partnership recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 computer software
failures. The Partnership is addressing this issue to ensure the availability
and integrity of its financial systems and the reliability of its operational
systems. The Partnership has established processes for evaluating and managing
the risks and costs associated with this problem. The Partnership has and will
continue to make certain investments in its software systems and applications to
ensure the Partnership is Year 2000 compliant. The financial impact to the
Partnership 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 Partnership.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IWL
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA, CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO AND THE OTHER HISTORICAL FINANCIAL INFORMATION OF
IWL CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
OVERVIEW
IWL's revenues are derived from the provision of a variety of services,
including telecommunications services, project and other services and product
resales. Telecommunications services include the resale of long distance
telecommunications services, the provision of private leased lines and the
rental of telecommunications equipment and systems. IWL operates a tandem switch
at its facility in Houston, Texas to provide services as a switch-based long
distance carrier and is currently completing the installation of its Gulf Coast
regional network. Project and other services consist of the installation of
telecommunications system projects and the sale, service and maintenance of
communications systems.
In connection with product resales, IWL serves as the exclusive
manufacturer's representative of Alcatel products to the U.S. oil and gas
industry. In fiscal 1996 and 1997, IWL provided services to a subsidiary of
Shell, which included the resale of a significant amount of Alcatel products.
For the fiscal years ended June 30, 1996 and 1997, the Shell subsidiary
purchased from IWL approximately $10.6 million and $7.6 million, respectively,
of Alcatel products and other equipment and hardware, representing approximately
38.0% and 25.2%, respectively, of total sales during such periods. Although
profitable, the sale of Alcatel products to the Shell subsidiary significantly
reduced IWL's gross margin in these periods. The Shell project was substantially
completed in May 1997 and, therefore, is not expected to contribute in a
material manner to IWL's total sales in future periods.
IWL 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, IWL 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 IWL began providing
telecommunications services and network support inside the former Soviet Union
to United States oil and gas customers. As IWL 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. IWL is
continuing to expand its network through its tandem switch and the installation
of fiber optic cable and microwave radios in targeted service areas. In
connection with such expansion, IWL has also received CLEC status in Texas and
Louisiana.
While annual growth rates of IWL's total sales since 1992 have ranged from
6.3% to 76.0%, IWL'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 IWL's services and product mix, levels of product resales, adverse weather
conditions in customer locations, the degree to which IWL 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 IWL or its competitors and changes in billing rates by IWL or
its competitors. IWL's ability to grow its revenues will be dependent upon a
number of factors, many of which are not within its control and as a result no
assurance can be given that such objectives will be met.
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In May 1998, IWL changed its fiscal year to a December 31 year end to
coincide with the fiscal years of CapRock, Telecommunications and the
Partnership and, in connection therewith, filed a December 31, 1997 transition
period Form 10-K for the transition period from June 30, 1997 to December 31,
1997.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
TOTAL REVENUES. Total revenues increased approximately $90,000 or
approximately 1.1% to approximately $8.1 million for the three months ended
March 31, 1998 from approximately $8.0 million for the three months ended March
31, 1997. This increase was comprised of an increase of approximately $506,000
or approximately 22.0% in the IWL's telecommunications services revenues, an
increase of approximately $2.1 million or approximately 65.6% in IWL's project
and other services revenues and a decrease of approximately $2.5 million or 100%
in product resales to a single customer. The increase in telecommunications
services revenues was largely attributable to increased traffic on IWL's telecom
network in the Gulf of Mexico from the continued expansion of IWL's ODDS
services. The increase in projects and other revenue resulted from increased
sales of telecommunications equipment and related services. The product resales
to a single customer were substantially completed in May 1997.
GROSS PROFIT. Gross profit increased approximately $1.3 million or
approximately 56.5% to approximately $3.6 million for the three months ended
March 31, 1998 from approximately $2.3 million for the three months ended March
31, 1997, representing gross profit of approximately 45.1% and approximately
28.8%, respectively. The increase in gross profit was due in principal part to
the completion of the product resales to a single customer in May 1997 and from
increased demand for higher margin services. Excluding product resales, gross
profit for the three months ended March 31, 1997 would have been approximately
$1.7 million representing a gross profit of approximately 31.5%.
SELLING EXPENSES. Selling expenses increased approximately $109,000 or
approximately 32.3% to approximately $446,000 for the three months ended March
31, 1998 from approximately $337,000 for the three months ended March 31, 1997.
Selling expenses as a percentage of total revenues increased to approximately
5.5% from approximately 4.2% 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 approximately $467,000 or approximately 35.9% to approximately $1.7
million for the three months ended March 31, 1998 from approximately $1.3
million for the three months ended March 31, 1997. As a percentage of total
revenues, general and administrative expenses increased to approximately 21.6%
for the three months ended March 31, 1998 from approximately 16.0% for the three
months ended March 31, 1997. The increases in general and administrative
expenses as a percentage of sales was primarily due to the decline in product
resales overall. 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, provision for bad debts, rent
expense and legal expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately $300,000 or approximately 86.5% to approximately
$647,000 for the three months ended March 31, 1998 from approximately $347,000
for the three months ended March 31, 1997. This increase was primarily
attributable to the acquisition of an additional $10.7 million of property,
plant and equipment, comprised of approximately $9.5 million in satellite,
microwave and other telecommunications equipment, approximately $1.1 million for
computers, furniture and fixtures, service vehicles and test equipment and
approximately $127,000 for building and improvements.
NET INTEREST EXPENSE. Net interest expense increased approximately $30,000
or approximately 24.0% to approximately $155,000 for the three months ended
March 31, 1998 from approximately $125,000 for the three months ended March 31,
1997. IWL's borrowings increased to approximately $10.3 million for the three
months ended March 31, 1998 from approximately $7.3 million for the three months
ended
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March 31, 1997. The increase in borrowings was used to fund acquisitions of
property, plant and equipment.
OTHER INCOME NET. Other income for the three months ended March 31, 1997
included IWL's 50% ownership interest in the earnings of Kenwood Systems Group
("Kenwood") as well as certain other asset dispositions.
INCOME TAX EXPENSE. Provision for income taxes increased approximately
$160,000 or approximately 168.4% to approximately $254,000 for the three months
ended March 31, 1998 from approximately $95,000 for the three months ended March
31, 1997 which represents an effective tax rate of approximately 39.4% and
approximately 29.3% for each period, respectively.
NET INCOME. IWL reported net income of $390,586 for the three months ended
March 31, 1998, compared to $227,847 for the three months ended March 31, 1997
as a result of the factors discussed above.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
TOTAL REVENUES. Total revenues decreased approximately $3.7 million or
approximately 23.5% to approximately $12.0 million for the six months ended
December 31, 1997 from approximately $15.6 million for the six months ended
December 31, 1996. This decrease was comprised of an increase of approximately
$1.2 million or approximately 33.2% in IWL's telecommunications services, a
decrease of approximately $196,000 or approximately 2.7% in IWL's project and
other services and a decrease of approximately $4.7 million or 100% in product
resales to a single customer. The increase in telecommunications services was
largely attributable to increased traffic on IWL's telecom network in the Gulf
of Mexico and the continued expansion of IWL's ODDS services in the Gulf of
Mexico. The decrease in project and other services resulted from a decrease in
product and project sales. The product resales were substantially completed in
May 1997.
GROSS PROFIT. Gross profit increased approximately $1.4 million or
approximately 36.5% to approximately $5.4 million for the six months ended
December 31, 1997 from $4.0 million for the six months ended December 31, 1996,
representing gross profit of approximately 45.2% and approximately 25.3%,
respectively. The increase in gross profit was due in principal part to the
completion of the product resales to a single customer in May 1997, which had
lower margins, and from changes in IWL's sales mix to higher margin services.
Excluding product resales, gross profit for the six months ended December 31,
1996 would have been approximately $3.9 million representing a gross profit of
approximately 36.0%.
SELLING EXPENSES. Selling expenses increased approximately $298,000 or
approximately 60.2% to approximately $793,000 for the six months ended December
31, 1997 from approximately $495,000 for the six months ended December 31, 1996.
The increase in selling expenses resulted from increased salary expenses related
to the addition of sales personnel and from increases in travel and advertising
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $598,000 or approximately 26.7% to approximately $2.8
million for the six months ended December 31, 1997 from approximately $2.2
million for the six months ended December 31, 1996. The increase in the dollar
amount of general and administrative expenses over these periods were due in
principal part to increases in salaries and personnel cost and increases in
telephone, insurance, rent, and legal expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately $347,000 or approximately 54.5% to approximately
$982,000 for the six months ended December 31, 1997 from approximately $635,000
in the six months ended December 31, 1996. This increase was primarily due to
infrastructure and network expansion.
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NET INTEREST EXPENSE. Net interest expense increased approximately $4,000
or approximately 1.9% to approximately $218,000 for the six months ended
December 31, 1997 from approximately $214,000 for the six months ended December
31, 1996. The increase was comprised of an increase in interest expense of
approximately $116,000 to approximately $348,000 from approximately $232,000 for
the comparable six month period in 1996. This increase was offset by an increase
in interest income of approximately $112,000 to approximately $130,000 from
approximately $18,000 for the same six month period in 1996.
OTHER INCOME, NET. Other income for the six months ended December 31, 1997
included the gain of approximately $66,000 resulting primarily from the
disposition of IWL's 50% ownership in Kenwood, as well as certain other asset
dispositions, and from IWL's 50% ownership interest in the earnings of Kenwood
through the date of sale. Other income for the six months ended December 31,
1996 included IWL's 50% ownership interest in the earnings of Kenwood, as well
as certain other asset dispositions.
INCOME TAX EXPENSE. Provision for income taxes increased approximately
$130,000 or approximately 97.0% to approximately $265,000 for the six months
ended December 31, 1997 from approximately $134,000 for the six months ended
December 31, 1996 which represents an effective tax rate of 38.6% and 34% for
each period, respectively.
NET INCOME. IWL reported net income of $421,487 for the six months ended
December 31, 1997, compared to $260,408 for the six months ended December 31,
1996 as a result of the factors discussed above.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
TOTAL REVENUES. Total revenues increased approximately $2.5 million or
approximately 9.0% to approximately $30.3 million for fiscal 1997 from
approximately $27.8 million for fiscal 1996. This increase was comprised of an
increase of approximately $1.5 million or approximately 23.1% in IWL's
telecommunications services, an increase of approximately $4.0 million or
approximately 37.4% in IWL's project and other services and a decrease of
approximately $2.9 million or approximately 27.6% in product resales to a single
customer. The increase in telecommunications services was largely attributable
to increased traffic on IWL's telecom network in the Gulf of Mexico, an increase
in the number of ODDS units in the Gulf of Mexico, and expansion of IWL's
business outside the Gulf of Mexico. The increase in project and other services
was largely due to increases in the winning of larger projects and the
associated support revenues. The product resales were substantially completed in
May 1997 and, therefore, are not expected to contribute in a material manner to
IWL's total sales in future periods.
GROSS PROFIT. Gross profit increased approximately $1.2 million or
approximately 16.6% to approximately $8.6 million for fiscal 1997 from
approximately $7.4 million for fiscal 1996, representing gross profit of
approximately 28.4% and 26.6%, respectively. The increase in gross profit was
due in principal part to the completion of the product resales to a single
customer in May 1997. Excluding product resales, gross profit for fiscal 1997
and fiscal 1996 would have been approximately $8.0 million and $6.5 million,
respectively, representing a gross profit of approximately 35.2% and 37.7%,
respectively. The decrease in gross profit was attributable to the increase of
land mobile services (which yield lower margins) in IWL's overall service mix.
SELLING EXPENSES. Selling expenses increased approximately $299,000 or
approximately 35.5% to approximately $1.1 million for fiscal 1997 from
approximately $842,000 for fiscal 1996. Selling expenses as a percentage of
total sales increased to approximately 3.8% from 3.0% 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 approximately $447,000 or approximately 10.5% to approximately $4.7
million for fiscal 1997 from approximately
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$4.3 million for fiscal 1996. As a percentage of total sales, general and
administrative expenses increased to approximately 15.5% for fiscal 1997 from
approximately 15.3% for fiscal 1996. The increase in general and administrative
expenses as a percentage of sales was primarily due to the decline in product
resales overall. The increase in the dollar amount of general and administrative
expenses over these periods were due in principal part to increased telephone
expenses, insurance expenses, rent expenses and legal expenses relating to
facilities and personnel additions in Houston, Texas and Lafayette, Louisiana.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately $400,000 or approximately 39.9% to approximately $1.4
million for fiscal 1997 from approximately $1.0 million in fiscal 1996. This
increase was primarily attributable to the acquisition of an additional
approximately $5.9 million of property, plant and equipment, comprised of
approximately $4.7 million in equipment for satellite, microwave and other
equipment, approximately $936,000 for computers, furniture and fixtures, service
vehicles and test equipment and approximately $285,000 for buildings and
improvements.
NET INTEREST EXPENSE. Net interest expense increased approximately $244,000
or approximately 90.4% to approximately $514,000 for fiscal 1997 from
approximately $270,000 for fiscal 1996. IWL's borrowings increased to
approximately $8.7 million for fiscal 1997 from approximately $3.9 million for
fiscal 1996. Borrowings were reduced in fiscal 1996 due to the receipt of
approximately $2.0 million from a subsidiary of 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 fiscal 1997 and 1996 resulted from
IWL's 50% ownership interest in Kenwood, as well as certain asset dispositions
affected in such periods. Such items were not material to IWL's operating
results for fiscal 1997 and 1996.
INCOME TAX EXPENSE. Provision for income taxes decreased approximately
$33,000 or approximately 10.4% to approximately $283,000 for fiscal 1997 from
approximately $316,000 for fiscal 1996 which represents an effective tax rate of
29.0% and 30.1% for each period, respectively.
NET INCOME. IWL reported net income of $689,050 for the year ended June 30,
1997, compared to $733,662 for the year ended June 30, 1996 as a result of the
factors above.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
TOTAL REVENUES. Total revenues increased by approximately $12.0 million or
approximately 75.9% to approximately $27.8 million for fiscal 1996 from
approximately $15.8 million for fiscal 1995. Of this increase, approximately
$741,000 or approximately 12.8% resulted from increases in IWL's
telecommunications services, project and other services accounted for
approximately $707,000 or approximately 7.1% of such increase, and approximately
$10.6 million, or approximately 88% of such increase, resulted in part from
product resales to a single customer. While revenues related to project and
other services were relatively constant, the increase in sales of
telecommunications services reflected continued growth of IWL's offshore
network. Excluding product resales, total sales for fiscal 1996 would have been
approximately $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 IWL's total sales in future periods after fiscal 1997.
GROSS PROFIT. Gross profit increased approximately $1.2 million or
approximately 19.7% to approximately $7.34 million in fiscal 1996 from
approximately $6.2 million in fiscal 1995, representing gross profit of
approximately 26.5% and 39.0%, respectively. The decrease in gross profit
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 profit of approximately 37.7%.
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SELLING EXPENSES. Selling expenses decreased approximately $20,000 or
approximately 2.4% to approximately $842,000, or approximately 3.0% of total
sales, in fiscal 1996 from approximately $862,000, or approximately 5.5% of
total sales, in fiscal 1995. Advertising and promotion expenditures increased
approximately $81,000, travel expenses increased approximately $21,000 and
salaries and employee benefits decreased approximately $110,000, which reflected
the reassignment of certain employees to other departments.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $720,000 or approximately 20.4% to approximately $4.2
million in fiscal 1996 from approximately $3.5 million in fiscal 1995. As a
percentage of total sales, general and administrative expenses decreased to
approximately 15.3% for fiscal 1996 from approximately 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 IWL'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 IWL'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 IWL's international operations and
costs associated with opening offices in Lafayette and New Orleans, Louisiana.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately $182,000 or approximately 22.3% to approximately $1.0
million in fiscal 1996 from approximately $820,000 in fiscal 1995. This increase
was principally attributable to an additional $1.2 million of property, plant
and equipment, comprised of approximately $621,000 for satellite, microwave and
other telecommunications equipment, and approximately $579,000 for computers,
furniture and fixtures, service vehicles and test equipment.
NET INTEREST EXPENSE. Net interest expense increased approximately $26,000
or approximately 10.6% to approximately $270,000 in fiscal 1996 from
approximately $244,000 in fiscal 1995. The increase in interest expense was due
to an increase of approximately $350,000 in borrowings under IWL'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 IWL's 50% ownership interest in Kenwood, as well as certain asset
dispositions affected in such periods. Such items were not material to IWL's
operating results in fiscal 1996 or fiscal 1995.
INCOME TAX EXPENSE. Provision for income taxes increased approximately
$23,000 or approximately 7.8% to approximately $316,000 in fiscal 1996,
representing an effective income tax rate of 30.0%, from approximately $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.
NET INCOME. IWL reported net income of $733,662 for the year ended June 30,
1996, compared to $535,641 for the year ended June 30, 1995 as a result of the
factors discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS 128 effective for financial
statements issued for periods ending after December 15, 1997. SFAS 128
establishes standards for computing and presenting earnings per share and
supersedes APB No. 15, "Earnings Per Share." IWL adopted SFAS 128 and all prior
periods have been restated to conform with the requirements of this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components. The
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required disclosures for SFAS 130 will be included in the quarterly reports on
Form 10-Q in 1998. The adoption of SFAS 130 will have no impact on IWL's results
of operations, financial position or cash flows and any effect will be limited
to the presentation of its disclosures.
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 segments 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 statements disclosures for prior periods are required to be restated.
IWL is in the process of evaluating the disclosure requirements. The adoption of
SFAS 131 will not have an impact on IWL's results of operations, financial
position or cash flows and any effect will be limited to the presentation of its
disclosures.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1998, IWL borrowed an additional net
amount of approximately $679,000 from credit facilities, and received
approximately $25,000 from the sale and issuance of IWL's common stock. IWL
invested approximately $2.8 million in property and equipment (net of proceeds
of approximately $73,000 from certain dispositions of assets) and also expended
approximately $610,000 to acquire Integrated Communications and Engineering,
LTD. in January, 1998. IWL's cash balance decreased by approximately $2.6
million to a balance of approximately $720,000 at March 31, 1998. IWL had a
working capital deficit of approximately $400,000 at March 31, 1998. The
reduction in IWL's working capital at March 31, 1998 was the result of, among
other factors, the reclassification of IWL's Working Capital Loan (as defined
below) to current liabilities from long-term debt. During the twelve months
ended December 31, 1997, IWL generated approximately $2.2 million of cash in
operating activities, borrowed an additional net amount of approximately $3.6
million from credit facilities, and received approximately $7.3 million from the
sale and issuance of IWL common stock. IWL invested approximately $10.6 million
in property and equipment (net of proceeds of approximately $115,000 from
certain dispositions of assets) and realized proceeds of approximately $529,000
from the disposition of its investment in an unconsolidated subsidiary. These
activities increased IWL's cash balance by approximately $3.0 million to a
balance of approximately $3.3 million at December 31, 1997. IWL had working
capital of approximately $1.3 million at December 31, 1997.
IWL 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 IWL
to its customers. IWL 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
IWL'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 IWL. IWL had approximately $1.2
million available under the Working Capital Loan at March 31, 1998 and $500,000
available under the Guidance Line. The Guidance Line is reduced by the term loan
created as the leased equipment is deployed. The interest rate on each facility
is, at IWL'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. IWL was in violation of the financial covenant requiring maintenance of a
current ratio as of
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December 31, 1997 and March 31, 1998 and was in technical default of a covenant
requiring the lender's consent to the Transaction. IWL has obtained a waiver of
these covenant violations and has obtained the lender's consent to the
Transaction. On June 17, 1998, the lender extended IWL additional credit under
the Short-Term Facility of up to $4.0 million. 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. If the offering of the Proposed Notes is successful,
Holdings intends to use part of the proceeds to repay indebtedness owing by IWL
to Bank One, Texas, N.A. If the offering of the Proposed Notes is not
successful, IWL intends to renegotiate the terms of its loans from Bank One,
Texas, N.A. If such negotiations are not successful, IWL 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.
IWL anticipates that, based on current plans and assumptions relating to its
operations, its financial resources and equipment financing arrangements will be
sufficient to fund IWL's growth and operations for approximately 12 months from
the date of this Joint Proxy Statement/Prospectus. IWL believes that its capital
needs at the end of such period will continue to be significant and, therefore,
IWL will continue to seek additional sources of capital. Further, in the event
IWL's plans or assumptions change or prove to be inaccurate, or if IWL
consummates any unplanned acquisitions of businesses or assets, IWL 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 "Offering of Proposed Notes."
CONTINGENCIES
IWL is not currently a party to any litigation. However, IWL 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 operations,
financial condition or cash flow of IWL.
YEAR 2000
As the year 2000 approaches, IWL recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 computer software
failures. IWL is addressing this issue to ensure the availability and integrity
of its financial systems and the reliability of its operational systems. IWL has
established processes for evaluating and managing the risks and costs associated
with this problem. IWL has and will continue to make certain investments in its
software systems and applications to ensure IWL is Year 2000 compliant. The
financial impact to IWL 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 IWL.
RECENT DEVELOPMENTS
Based upon preliminary results for the quarter ended June 30, 1998, IWL's
revenues for such quarter are expected to be between $8.2 million and $8.4
million and its net income for such quarter is expected to be between $1,000 and
$100,000. For the quarter ended June 30, 1997, IWL had revenues of $6.8 million
and net income of approximately $200,000.
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OFFERING OF PROPOSED NOTES
It is expected that prior to the Closing Date, Holdings, Telecommunications
and the Partnership (with IWL as a guarantor of certain obligations with respect
to the Proposed Notes) will offer, through a private placement under Rule 144A
under the Securities Act, the Proposed Notes, although there is no assurance
that the Proposed Notes will, in fact, be offered or, if offered, will be sold.
The following is a description of the Proposed Notes that Holdings currently
anticipates offering, but there is no assurance that the terms of any Proposed
Notes actually offered and sold, if any, will not vary significantly from the
terms described in this Joint Proxy Statement/Prospectus. Holdings currently
expects that the aggregate principal amount of the Proposed Notes to be offered
will be approximately $150.0 million, but may be more or less. The maturity date
of the Proposed Notes will be ten years after the date of their issuance, and
interest on the Proposed Notes will be payable semi-annually in cash, commencing
approximately six months after the date of issuance. The Proposed Notes will be
senior unsecured obligations of Holdings and, as such, will rank PARI PASSU in
right of payment with all existing and future unsecured and unsubordinated
indebtedness of Holdings. Holdings, Telecommunications and the Partnership (with
IWL as a guarantor) will be required to make an offer to purchase the Proposed
Notes at 101% of their principal amount, plus accrued and unpaid interest to the
date of repayment, in the event that the Transaction is not consummated and
certain other conditions are not satisfied by August 31, 1998, or if it appears,
in the sole judgment of Holdings, Telecommunications, the Partnership and IWL,
that the Transaction will not be consummated or such conditions will not be
satisfied by such date. Prior to the earlier of (i) the date on which the
Transaction is consummated and certain other conditions are satisfied and (ii)
the payment date for all Proposed Notes tendered in such offer to purchase,
approximately $145.0 million of the net proceeds from the offering of the
Proposed Notes will be held in an escrow account pursuant to the terms of the
Escrow Agreement. To the extent amounts held in the escrow account are
insufficient to repurchase Proposed Notes tendered pursuant to such offer to
purchase, Holdings, Telecommunications, the Partnership and IWL (as guarantor)
have jointly and severally agreed to repay such amounts (with an estimated
contingent liability of not more than approximately $7.0 million). There can be
no assurance that Holdings, Telecommunications, the Partnership and IWL will
have sufficient funds available at the time of such offer to purchase to repay
all Proposed Notes tendered. Following payment of all Proposed Notes tendered in
such offer to purchase, if any Proposed Notes remain outstanding, Holdings and
IWL will be released from their obligations under the Proposed Notes and
Telecommunications and the Partnership will be required to effect either a
statutory merger or interest exchange within 60 days after the payment of all
Proposed Notes tendered in such offer to purchase. In the event the Transaction
is consummated by August 31, 1998, Telecommunications and the Partnership will
be released from the Proposed Notes (and IWL will be released from its
obligations under such offer to purchase), and Holdings will be the sole obligor
thereunder.
Assuming the Transaction is consummated prior to August 31, 1998, Holdings
intends to use the net proceeds from the offering of the Proposed Notes, which
are expected to be approximately $144.4 million after deduction of discounts and
estimated expenses payable by Holdings (i) to fund additional capital
expenditures for the construction and operation of its fiber optic network, (ii)
fund the installation of voice and data switches, (iii) open sales offices and
add sales support and customer service personnel, in markets throughout Texas
and the Gulf Coast region, (iv) to repay approximately $21.7 million of
outstanding indebtedness, and (v) for potential acquisitions and additional
working capital and other general corporate purposes.
The indenture (the "Indenture") that will govern the Proposed Notes is
expected to contain certain covenants including, among other things, covenants
with respect to the following matters: (i) limitation on additional
indebtedness, (ii) limitation on certain restricted payments, (iii) limitation
on dividends and other payment restrictions affecting certain restricted
subsidiaries, (iv) limitation on issuances and sales of capital stock of certain
restricted subsidiaries, (v) limitation on issuances of guarantees by certain
restricted subsidiaries, (vi) limitation on transactions with stockholders and
affiliates, (vii) limitation on liens,
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(viii) limitation on any sale lease-back transactions, (ix) limitation on
certain asset sales, and (x) reports. All of the covenants are expected to be
subject to a number of important qualifications and exceptions. The Proposed
Notes will not initially be registered under the Securities Act, provided that
Holdings will, pursuant to a registration rights agreement to be entered into
concurrently with the offering of the Proposed Notes, agree to file a
registration statement with respect to an offer to exchange the Proposed Notes
for senior debt securities of Holdings with terms identical to the Proposed
Notes (except that such exchange notes will not contain terms with respect to
transfer restrictions).
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INFORMATION REGARDING TELECOMMUNICATIONS
BUSINESS
Telecommunications commenced operations in Dallas, Texas in 1992. It is a
facilities-based provider of voice, data and broadband communications services
to interexchange carriers and other communications entities and to businesses
and consumers. Telecommunications was a switchless, non-facilities based
reseller of long distance services prior to the investment by CapRock Investors
in April 1994. The decision to become facilities based was made in October 1994.
Thereafter, the manner in which Telecommunications delivered products changed,
but the products remained essentially the same. In 1997, Telecommunications'
revenues more than doubled, growing from $23.2 million in 1996 to $46.7 million,
and a $183,000 loss in 1996 improved to $1.8 million of net income in 1997.
Telecommunications' volume of monthly long distance minutes of traffic has grown
from approximately 2.6 million minutes in April 1994 to approximately 75 million
minutes in April 1998. The number of Telecommunications' full-time employees has
increased from approximately 42 on December 31, 1996 to approximately 81 on
April 30, 1998.
Telecommunications' early strategy was to double in size every year, to grow
from internal cash flow, to develop the internal systems and processes to
support its growth, and once cash flow from carrier services generated excess
capital, to build a commercial services division. In mid-1996,
Telecommunications began investing in the infrastructure to support commercial
sales activities. As a result, Telecommunications' commercial sales grew
five-fold in 1997 over 1996 and now represents approximately 30% of sales. At
April 30, 1998, Telecommunications had a direct sales force of 11 carrier and 29
commercial sales people. Telecommunications also has an agent sales force
numbering approximately 100 independent agents throughout Texas.
Telecommunications owns a DSC DEX 600 switch in Dallas, Texas, and a smaller
PC-based switch used to provide calling card services. To extend
Telecommunications' reach across the Southwest and to lower its terminating
costs in the Western United States, Telecommunications has acquired a second DEX
600 switch, which is currently being installed in Phoenix, Arizona.
Telecommunications intends to install an advanced mainframe switch capable of
providing local and long distance services in Houston, Texas in the second half
of 1998.
Telecommunications' provisioning, customer care, convergent billing and
network traffic reporting functions are performed on a proprietary software
platform, which is being developed by RiverRock, a limited partnership in which
Telecommunications is a limited partner. Telecommunications believes that this
platform is scalable, flexible and well suited to support Telecommunications'
strategy to minimize the timing to initiate local and long distance services for
new customers, to provide detailed and customized customer billing information,
to respond quickly to customers' needs and information requests, and to provide
convergent billing for local, long distance, data and private line services. See
"Information Regarding Telecommunications--Business--Customer Care and Support
Systems."
Telecommunications currently has over 30 carrier customers including AT&T,
IXC, MCI, Qwest and Sprint, as well as various regional independent telephone
companies, such as Century Telephone Enterprises, Inc. and Lufkin Conroe
Telephone. Telecommunications offers its commercial customers flat rate pricing
with rates generally lower than those of AT&T, MCI, Sprint and WorldCom.
Telecommunications has introduced various LEC Services to customers by acquiring
such services from various ILECs on a bundled basis and reselling them.
Telecommunications also offers frame-relay and ATM data products, as well as
broadband services that it resells over the networks of other carriers.
PRODUCTS AND SERVICES
INTEGRATED COMMUNICATIONS SERVICES
Telecommunications currently offers, on a non-integrated basis, local,
domestic and international long distance, data (including ATM, frame relay, and
Internet) and broadband (including T-1, DS-3 and dark
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fiber) services. By the end of 1998, Telecommunications intends to offer these
services to customers as an integrated suite of products that will be invoiced
on a single, convergent bill. Telecommunications believes that its ability to
provide an integrated package of communications services, to provide, install
and maintain a broad range of communications equipment and to invoice these
services on a single, convergent bill will enable it to (i) rapidly penetrate
its targeted markets, (ii) capture virtually all of its existing and newly
acquired customers' expenditures for telecommunications services and equipment,
(iii) increase customer satisfaction, and (iv) reduce customer turnover.
Telecommunications offers (or, where indicated, intends to offer) the
following products:
ONE PLUS LONG DISTANCE. This service offers customers the ability to make
outbound switched long distance calls by simply dialing a 1, plus the area code
and phone number. Customers select Telecommunications as their primary long
distance provider by placing an order with it. This service may be used for both
domestic and international calling.
LONG DISTANCE DEDICATED SERVICE. This service is designed for larger users
with sufficient long distance traffic volume to warrant the use of dedicated
lines directly to the customer to originate calls. Instead of long distance
calls switched through the ILEC, this service uses a dedicated line that
directly connects the end user and Telecommunications' switch. This eliminates
ILEC originating access fees and reduces per minute rates to the user.
LOCAL EXCHANGE SERVICES. These services offer customers local switched and
enhanced services. Telecommunications intends to continue to obtain local
telephone services from ILECs on a wholesale basis and resell such services to
end-users. As the demand for LEC services in an area economically justifies the
introduction of a local switch, Telecommunications intends to purchase unbundled
network elements from ILECs and to begin utilizing its own value-added switching
facilities. Telecommunications believes this approach will significantly boost
its margins and return on invested capital, and will reduce the time required to
enter new markets.
INTERNET. Telecommunications currently provides Internet services to
approximately 1,000 customers. The services include a mail server, news server,
and hosting of customer web pages.
INTERNET TELEPHONY. Telecommunications plans to introduce IP Telephony
services based on voice over IP protocols in major Texas markets. Service will
be expanded to other Texas markets in conjunction with the planned fiber network
build out. Telecommunications plans to offer its Internet customers long
distance services at significant discounts to basic rates offered by most IXCs.
DATA. Telecommunications' fiber network has been designed with SONET
technology and broadband capabilities to provide a platform to support high
capacity, bandwidth intensive products such as frame relay, ATM, multi-media,
and Internet-related applications. Telecommunications currently resells data
products and intends to migrate those services onto its own network as that
network is built out.
CUSTOMER PREMISE EQUIPMENT. Telecommunications currently sells and installs
telephone and switchboard equipment to its offshore customers.
Telecommunications intends to add office switchboard and private branch exchange
equipment for its small and medium-sized business customers. Telecommunications
already has and intends to build its relationships with local customer premise
equipment installation companies in all of its markets for the purpose of
selling and installing customer premise equipment not otherwise provided by
Telecommunications.
TOLL FREE 800/888. This inbound service, where the receiving party pays for
the call, is accessed by dialing an 800/888 area code. This is used in a wide
variety of applications, many of which generate revenue for the user (such as
reservation centers or customer service centers).
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CALLING CARD. These traditional, basic telephone calling cards allow the
user to place calls from anywhere in the United States or Canada.
Telecommunications offers additional features such as conference calling,
international origination and speed dialing.
PREPAID CARD. Prepaid cards allow a customer to purchase and pay in advance
for a card with a fixed amount of calling time. The card is then used as a
standard calling card from which time is deducted when used. Prepaid cards may
be purchased with enhanced features similar to those of calling cards and also
may be renewed by purchasing additional time.
CARRIER SERVICES
Telecommunications' business objective is to establish itself as the premier
carriers' carrier within Texas and the Gulf Coast region, providing voice, data
and bandwidth services over the approximately 4,300 route mile advanced fiber
network that the Partnership intends to build throughout the region.
Telecommunications carrier services consist of three principal products: the
transmission of long distance traffic processed through Telecommunications'
switches ("long distance switched services"), the sale and leasing of dark fiber
over Telecommunications' facilities ("dark fiber"), and the transmission of
voice and data over dedicated circuits ("private lines"). Telecommunications'
carrier customer base includes more than 30 national carriers, including AT&T,
WorldCom, MCI, Sprint, IXC, Qwest, as well as regional independents such as
Century Telephone, Lufkin Conroe Telephone and Pioneer Telephone Company.
LONG DISTANCE SWITCHED SERVICES. The domestic and international long
distance switched services provided by Telecommunications are processed through
Telecommunications' digital switches and carried over long distance circuits and
other transmission facilities owned or leased by Telecommunications.
Telecommunications sells these services on a per-call basis, charging by minutes
of use ("MOU"), with payment due monthly after services are rendered.
Telecommunications' volume of monthly long distance minutes of traffic has grown
from approximately 2.6 million minutes in April 1994 to approximately 75 million
minutes in April 1998, which included approximately 4.5 million minutes of
traffic terminated in Mexico.
PRIVATE LINE SERVICES. Telecommunications' private line customers include
non-facilities based carriers requiring dedicated long distance transmission
capacity to carry their customers' long distance traffic and facilities-based
carriers that require long distance transmission capacity where they have
geographic gaps in their facilities, and additional capacity or require
geographically diverse routing. Services are provided through private line
contracts, requiring fixed monthly payments, generally in advance, some of which
contain "take or pay" commitments.
SALES AND MARKETING
INTEGRATED COMMUNICATIONS SERVICES. Telecommunications focuses its retail
sales efforts on small to medium-sized businesses in Texas and the Gulf Coast
region. Telecommunications markets its integrated telecommunications services
primarily through two channels: Telecommunications' direct sales force and its
network of independent sales agents.
Telecommunications' direct sales force consisted of 11 account executives in
Dallas, Texas as of April 30, 1998. Telecommunications also has 100 independent
sales agents located throughout Texas. Telecommunications intends to recruit,
train and deploy an additional 75 account executives by the end of 1998 and an
additional 100 account executives by the end of 1999. Telecommunications' sales
personnel call on prospective and existing business customers, conduct analyses
of business customers' telecommunications usage histories and service needs, and
demonstrate how Telecommunications' various service packages will improve a
customer's communications capabilities in a cost-effective manner. Sales
personnel identify potential business customers by several methods, including
customer referral, marketing research, telemarketing and other networking
alliances such as endorsement agreements with trade
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associations and local chambers of commerce. Telecommunications' sales personnel
work closely with Telecommunications' engineers and field support specialists to
address customers' network and service delivery needs and to design new service
products and applications for customers.
Telecommunications' agent program, established in 1996, is a network of
independent telephone equipment vendors and other agents authorized by
Telecommunications to market its products and services. As of May 31, 1998,
approximately 100 agents were participating in the agent program. Authorized
agents receive recurring commissions based on products and services sold, volume
of usage and retention of the customer. Telecommunications has four agent
managers who actively recruit new agents. Telecommunications intends to add an
additional 25 agents by the end of 1998 and an additional 50 agents by the end
of 1999.
Telecommunications' direct sales force and its authorized agents are trained
to emphasize Telecommunications' customer focused sales and customer service
approach. Telecommunications reinforces this approach by tying a portion of each
account executive's and agent's compensation directly to the longevity of their
customer accounts. Telecommunications' marketing strategy is built upon the
belief that customers prefer to have one company serve all of their
telecommunications needs. As part of this strategy, Telecommunications generally
assigns to each customer its own dedicated field support specialist, thereby
providing the customer with a single point of contact to address its
telecommunications needs with a combination of products and services designed to
meet the customer's needs. Telecommunications believes that this personalized
attention to a business needs, coupled with Telecommunications' ability to
provide one fully integrated billing statement for all of the services that it
offers, is appealing to both existing and prospective customers.
Telecommunications intends to rapidly build its direct sales force
throughout Texas, Louisiana and Oklahoma over the next two years.
Telecommunications intends to recruit new account executives by emphasizing the
Company's extensive and advanced fiber communications network, attractive
compensation and commission plans, stock option programs, and marketing support
plans. Additionally, Telecommunications believes it will be able to attract and
retain highly qualified sales and support personnel by offering them the
opportunity to: (i) work with an experienced and success proven management team
in building a developing, entrepreneurial company; (ii) market an integrated
package of communications products and services; and (iii) participate in the
potential economic returns made available through a results oriented
compensation package emphasizing sales commissions and equity incentives.
CARRIER SERVICES. Telecommunications established a carrier services sales
force in 1992. This group markets carrier services to telecommunications
carriers and other large end-user customers. Telecommunications believes it can
compete effectively in this market based on a combination of price, reliability,
advanced technology, route diversity, ease of ordering and customer service.
Telecommunications markets its carrier services primarily through five direct
sales personnel and four support specialists located in Telecommunications'
headquarters in Dallas. In general, these sales professionals locate potential
customers for Telecommunications' carrier services through customer referrals,
trade shows and industry alliances. When calling on a potential customer,
Telecommunications' sales professionals work with network engineers to gain a
better understanding of the customer's operations and bulk telecommunications
transmission needs to develop innovative application-specific solutions for each
customer's requirements. Telecommunications also markets its carrier services
through trade forums and generally attends industry trade shows.
COMPETITION AND GOVERNMENT REGULATION
The telecommunications industry and Telecommunications' provision of
communications services is subject to intense competition and extensive federal
and state regulation. See "Competition" and "Regulation and Licenses."
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CUSTOMER CARE AND SUPPORT SYSTEMS
Telecommunications strives to provide superior customer care and support for
its customers and believes that personal contact with its customers through
customer service representatives is a significant factor in customer acquisition
and retention. Telecommunications intends for the number of customer service
agents to grow rapidly through 1999 as the number of direct and agent sales
representatives grows.
Telecommunications operates a call center in Dallas, Texas staffed by
Telecommunications' customer service employees, who have completed a
certification and training program provided by Telecommunications. To enhance
the effectiveness of the customer service representatives, Telecommunications,
in addition to the initial training program, provides ongoing training to all
customer service representatives. Telecommunications' customer service
department uses on-line, real-time automated systems that provide notes from all
prior contacts with the customer, and provide a complete account and payment
history for customers directly billed by Telecommunications. Through this
proprietary contact management software, Telecommunications is able to provide a
high level of customer care. As Telecommunications' sales force and operations
expand, Telecommunications intends to recruit and train additional sales
personnel to support its operations.
Telecommunications handles its provisioning, customer care, convergent
billing and traffic reporting functions on a proprietary software platform ("OSS
System") currently being developed by RiverRock, a limited partnership in which
Telecommunications is a limited partner. The OSS System has been in use since
January 1997 and continues to be enhanced. The OSS System is required to enter,
schedule and track a customer's order from the point of sale to the installation
and testing of service and also include or interface with trouble management,
inventory, billing, collection and customer service systems. The OSS System is
scalable and flexible to support Telecommunications' expected future back office
requirements. The OSS System, when fully implemented, will enable
Telecommunications to: (i) minimize the time to initiate local and long distance
services for new customers through the ILEC (commonly referred to as
provisioning), (ii) provide detailed and customized customer billing
information, (iii) respond quickly to customer's needs and information requests,
and (iv) monitor and analyze traffic, financial and operating trends.
Telecommunications believes that the OSS System, when fully implemented, will
provide a significant competitive advantage in terms of cost, ability to process
large order volumes and customer service as compared to ILECs using legacy
systems and CLECs that outsource back-office services or that do not have an
advanced OSS platform. See "--Related Party Transactions."
EMPLOYEES
As of April 30, 1998, Telecommunications employed 81 employees of which
approximately 12 perform corporate and administrative services, approximately 9
provide Network Construction Services, approximately 29 provide Commercial
Services, approximately 11 provide Carrier Services, and approximately 20
perform network operations and related functions.
PROPERTIES
Telecommunications operates out of three separate locations in Dallas, Texas
consisting of approximately 19,200 square feet of general and administrative
office space under leases that expire at various times in the future. As of
April 30, 1998, Telecommunications was negotiating leases for switch sites in
both Phoenix, Arizona and Houston, Texas. Telecommunications believes that
suitable additional space will be available, as needed, to accommodate further
physical expansion of corporate operations.
LEGAL PROCEEDINGS
Telecommunications is party to ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on the
results of operations, financial condition or cash flow of Telecommunications.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding the directors and
executive officers of Telecommunications as of June 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Jere W. Thompson, Sr............ 66 Chairman of the Board and Director
Jere W. Thompson, Jr............ 41 President and Director
Timothy M. Terrell.............. 35 Executive Vice President and Director
Timothy W. Rogers............... 35 Executive Vice President and Director
Scott L. Roberts................ 36 Executive Vice President and Director
Mark Langdale................... 44 Director
</TABLE>
Jere W. Thompson, Sr. has served as Chairman and a Director of
Telecommunications since April 1994. Mr. Thompson joined The Southland
Corporation in 1956 and served in various capacities, including President from
1973 and President and Chief Executive Officer from May 1986 to March 1991, and
as a director from 1962 through 1996. Mr. Thompson is president of The
Williamsburg Corporation, an investment company which owns shares of
Telecommunications Common Stock, and has served in such capacity since its
inception in 1958. Mr. Thompson currently serves as Chairman of the National
Center of Policy Analysis and on the boards of directors of The Communities
Foundation of Texas, The Brady Center, The University of Texas Chancellor's
Council, The University of Texas Development Board, the Longhorn Foundation, The
St. Paul Medical Center Foundation and The Catholic Charities Foundation. Mr.
Thompson has a B.A. in Business from The University of Texas and is the father
of Jere W. Thompson, Jr.
Jere W. Thompson, Jr. has served as President of Telecommunications since
April 1994. In July 1992, Mr. Thompson founded the Partnership and is President
of its General Partner. From 1978 to 1980, Mr. Thompson worked at Goldman, Sachs
& Co. as an analyst in its Investment Banking Division. From 1980 through 1982,
Mr. Thompson attended graduate school at The University of Texas Graduate School
of Business. From 1982 to 1986, Mr. Thompson worked in commercial real estate as
a broker and then with Trammell Crow Community Development Company. In 1987, he
joined The Thompson Company where he became a Vice President and assisted in the
acquisition and management of several of The Thompson Company portfolio
companies. Since 1989 Mr. Thompson has been a member of the board of directors
and since 1995 he has served as Chairman of the North Texas Tollway Authority
and its predecessor, the Texas Turnpike Authority. Mr. Thompson is also a board
member of The Cistercian Preparatory School. Mr. Thompson has a B.A. in
Economics from Stanford University and an M.B.A. from the University of Texas
Graduate School of Business.
Timothy M. Terrell has served as Executive Vice President and a Director of
Telecommunications since April 1994. In 1992, Mr. Terrell co-founded Synergy
Telecommunications, Inc. ("Synergy"), a telecommunications company responsible
for marketing a fiber optic network in West Texas, Oklahoma, Colorado and New
Mexico and from February 1993 to April 1994 served as one of its three executive
officers. In April 1994, CapRock Investors purchased half of Synergy and
subsequently Synergy changed its name to Telecommunications. From November 1986
to June 1988, Mr. Terrell was a major account representative with Sprint. From
July 1988 to January 1989, Mr. Terrell held the same position at Metromedia Long
Distance. From February 1989 to January 1993, Mr. Terrell was Director of Sales
of Qwest and acted as Vice President of Sales during a transition period
following Qwest's buyout by MCI. Mr. Terrell has a B.B.A. in Marketing from
Southwest Texas State University.
Timothy W. Rogers has served as Executive Vice President and a Director of
Telecommunications since April 1994. In 1992, Mr. Rogers was a co-founder of
Synergy and from February 1992 to April 1994 served as one of its three
executive officers. From August 1989 to December 1991, Mr. Rogers was a sales
manager of Qwest. From July 1988 to August 1989, Mr. Rogers was a Senior Account
Executive for
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Southwest Network Services. From April 1987 to June 1988, Mr. Rogers was an
account executive with Sprint. Mr. Rogers has a B.B.A. in Marketing from
Southwest Texas State University.
Scott L. Roberts has served as Executive Vice President and a Director of
Telecommunications since April 1994. In 1992, Mr. Roberts co-founded Synergy and
served as one of its three executive officers from February 1992 to April 1994.
From September 1989 to February 1992, Mr. Roberts was a carrier sales manager of
Qwest. From April 1987 to September 1989, Mr. Roberts was a major account
representative with Sprint. Mr. Roberts has a B.S. in Business Administration
from the University of Nebraska.
Mark Langdale has served as a Director of Telecommunications since April
1994 and Secretary of the General Partner since 1992. Mr. Langdale is President
of Posadas USA, Inc., a subsidiary of Grupo Posadas S.A. De C.V., a hotel
management company domiciled in Mexico, a position he has held since 1989. From
1987 to 1989, he served as Vice President for Thompson Realty Company, a real
estate investment company. Mr. Langdale currently serves as a member of the
Board of Directors of Grupo Posadas S.A. De C.V., a director of the Texas
Department of Commerce Policy Board and as Chairman of the Texas Department of
Economic Development.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table set forth certain
compensation awarded or paid by Telecommunications to its President and the
other executive officers of Telecommunications whose total annual salary and
bonus for services to Telecommunications exceeded $100,000 in the fiscal year
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (SHARES) COMPENSATION
- -------------------------------------------------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr.................................... $ 122,283 $ 100,000(1) -- --
President
Timothy M. Terrell...................................... $ 125,781 $ 125,000(1) -- --
Executive Vice President
Timothy W. Rogers....................................... $ 126,814 $ 125,000(1) -- --
Executive Vice President
Scott L. Roberts........................................ $ 124,521 $ 125,000(1) -- $ 4,937(2)
Executive Vice President
</TABLE>
- ------------------------
(1) Represents bonus amount earned in fiscal year 1997 and paid in fiscal year
1998.
(2) Represents payment of club dues for Mr. Roberts.
EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS
Telecommunications entered into employment agreements with Vice Presidents
Timothy W. Rogers, Timothy M. Terrell and Scott L. Roberts in April 1994. The
agreements had contract terms from April 1994 to April 2000, with base
compensation as provided for in the agreements. The agreements included an
annual bonus of $25,000 per individual to be paid April 15th (or accrued if not
paid), through April 2000. The agreements were terminated in connection with new
agreements entered into with Holdings in connection with the Transaction.
Telecommunications established a nonqualified stock option plan in September
1997. Options granted under this plan vest 20% per year and have a term of ten
years. Vesting accelerates in the event of an initial
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public offering or a change of control; however, the Transaction does not cause
such acceleration of vesting to occur. In September 1997, Telecommunications
granted approximately 208,550 options under such plan to employees. These
options will be assumed by Holdings in connection with the Transaction.
Telecommunications established a 401(k) Savings Plan as of July 1, 1996.
Contributions to the plan include employer discretionary contributions and
discretionary matching contributions. Employees vest in employer match and are
fully vested after six years of service. A favorable determination letter was
received by the IRS on November 17, 1997.
RELATED PARTY TRANSACTIONS
Telecommunications' OSS System is being developed by RiverRock, a limited
partnership in which Telecommunications owns a 49% limited partnership interest
and David E. Thompson owns a 50% limited partnership interest and of which
Thompson Technology, Inc., a Texas corporation ("TTI") (which is owned by David
E. Thompson, a brother of Jere W. Thompson, Jr.) is the general partner and owns
a 1% general partnership interest. Although it is the intention of RiverRock to
market and sell licenses for the OSS System to third parties, to date no
marketing or sales to third parties have been made. RiverRock was formed when
Telecommunications and TTI transferred all rights to the OSS System developed by
Telecommunications and TTI into RiverRock. Telecommunications has been granted a
royalty-free, perpetual and non-exclusive license for the use of the OSS System.
Telecommunications also receives upgrades, maintenance and other support from
RiverRock for three years, without the payment of any fees or royalties.
Thereafter, Telecommunications will be required to pay the same fees and
royalties for OSS System upgrades, maintenance and support as other licensees of
RiverRock. Telecommunications is currently contributing approximately $25,000 to
$30,000 a month to RiverRock for the development of the OSS System and has
committed to fund up to a total of $700,000 as capital contributions to
RiverRock, which will be used for the continued development of the OSS System.
See "--Customer Care and Support Systems."
The Williamsburg Corporation, a Texas corporation of which Jere W. Thompson,
Sr., Chairman of the Board and a director of Telecommunications, is the
president, lent Telecommunications $1,170,000 in 1995 at the rate of 13% per
annum and payable on demand or the due date of March 31, 1998. During the fiscal
year ended December 31, 1996, The Williamsburg Corporation converted $750,000 of
the outstanding principal amount of such note into 727,925 shares of
Telecommunications common stock. The remaining principal balance of the note,
together with interest thereon, was repaid by Telecommunications during the
fiscal year ended December 31, 1997. Jere W. Thompson, Sr. is the father of Jere
W. Thompson, Jr.
The Partnership has an administrative services agreement with
Telecommunications pursuant to which Telecommunications and its employees
provide administrative and management services for the Partnership. The
Partnership reimburses Telecommunications for the direct costs of the network,
plus 5%. The total general and administrative expenses reimbursed were $0,
$77,000 and $150,948 for the years ended December 31, 1995, 1996 and 1997,
respectively. In addition, as payment for marketing services, the Partnership
will pay 7% of any additional lease payments generated as a result of
Telecommunications efforts. There were no payments made in 1995, 1996 and 1997.
Holdings intends to terminate the administrative services agreement upon
completion of the Transaction.
Telecommunications currently leases private line services from TISP, Inc.
("TISP"), which is owned by Patrick J. Thompson, a brother of Jere W. Thompson,
Jr. Total payments to TISP in 1997 were $764,742. Pricing of private line
services is a function of the capacity, term and distance of the circuit
involved. Circuits are usually available from multiple vendors, and vendors are
selected on the basis of price, speed of provisioning and circuit diversity.
Rates are fixed and payable monthly, generally in advance. The actual rates paid
to TISP are determined in the same manner as rates for unrelated parties.
In 1994, Telecommunications executed three promissory notes, one payable to
the order of each of Scott L. Roberts, Timothy M. Terrell and Timothy W. Rogers,
each Executive Vice Presidents of Holdings
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and of Telecommunications, relating to 334 shares of Telecommunications Common
Stock repurchased from each of them with such shares of stock pledged by
Telecommunications to repay the notes. The aggregate purchase price for the 334
shares from each individual was $50,000. Each of the original notes are in the
amount of $50,000 with no stated interest rate. The notes have been discounted
using an interest rate of 5.8% and are payable in three annual installments
beginning April 1998. The aggregate amount outstanding relating to these notes,
net of unamortized discount, was $112,827 and $128,166 as of December 31, 1996
and 1997, respectively. The unamortized discount was $37,173 and $21,834 as of
December 31, 1996 and 1997, respectively. Upon completion of the Transaction,
Holdings intends to repay the notes.
Telecommunications has a revolving credit facility with Bank One, Texas N.A.
in the amount of $2,500,000, which is guaranteed by Jere W. Thompson, Jr. The
release of this guaranty is a condition to the closing of the Transaction. See
"Information Regarding the Partnership--Related Party Transactions."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF TELECOMMUNICATIONS
The following table sets forth certain information regarding the beneficial
ownership of Telecommunications Common Stock as of May 31, 1998 (and prior to
giving effect to the Mergers and the Interest Exchange) by (i) each person who
is known by Telecommunications to own beneficially more than five percent (5%)
of Telecommunications Common Stock, (ii) each of Telecommunications' executive
officers, directors and director nominees, and (iii) all of the current
executive officers and directors of Telecommunications 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
which means generally any person who, directly or indirectly, has or shares
voting power or investment power with respect to a security. Shares of
Telecommunications 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 May 31, 1998 are treated as outstanding only when determining the amount
and percentage of Telecommunications Common Stock owned by such individual or
group. All information with respect to the beneficial ownership of any principal
shareholder was furnished by such principal shareholder and Holdings believes
that except as otherwise noted or pursuant to community property laws, each
shareholder has sole voting and sole investment power with respect to the shares
shown. The address of each person listed is Two Galleria Tower, 13455 Noel Road,
Suite 1925, Dallas, Texas 75240, except as otherwise indicated.
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SHARES OF TELECOMMUNICATIONS
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY
OWNED
---------------------------
NUMBER OF PERCENTAGE
NAME SHARES OWNERSHIP(1)
- ----------------------------------------------------------------- ------------ -------------
<S> <C> <C>
CapRock Investors(2)............................................. 4,835,514 46.5%
Jere W. Thompson, Jr.(2)......................................... 4,835,514 46.5%
Mark Langdale(3)
5950 Berkshire, Suite 990
Dallas, TX 75225............................................... 4,835,514 46.5%
Scott L. Roberts................................................. 1,611,838 15.5%
Timothy M. Terrell............................................... 1,611,838 15.5%
Timothy W. Rogers................................................ 1,611,838 15.5%
The Williamsburg Corporation(4)
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite 1850
Dallas, TX 75219............................................... 727,926 7.0%
Jere W. Thompson, Sr.(5)
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite 1850
Dallas, TX 75219............................................... 5,563,440 53.5%
All executive officers and directors as a group (six persons).... 10,398,954 100.0%
</TABLE>
- ------------------------
(1) Based upon 10,398,954 shares of Telecommunications Common Stock issued and
outstanding.
(2) Represents 4,835,514 shares held of record by CapRock Investors. CapRock
Investors is a Texas joint venture, of which Jere W. Thompson, Jr. is the
managing venturer and in which he owns a controlling interest. The Joint
Venture Agreement of CapRock Investors grants to Mr. Thompson, Jr. certain
authority, including the authority to decide and cast all votes on behalf of
CapRock Investors as a shareholder of Telecommunications. As a consequence,
both CapRock Investors and Mr. Thompson may each be deemed to be the
beneficial owner of all of the shares.
(3) Represents 4,835,514 shares held of record by CapRock Investors. Under the
Joint Venture Agreement of CapRock Investors, the approval of a
majority-in-interest of the venturers is required to approve the disposition
of the shares. Because of the ownership interest of Jere W. Thompson, Jr.,
Mark Langdale, and Jere W. Thompson, Sr. (23.5%, 42.5% and 30.9%,
respectively), two of the three acting together can authorize or prevent a
disposition of shares. As a result, each may be deemed to be the beneficial
owner of all of the shares.
(4) The Williamsburg Corporation, which is the record owner of 727,926 shares of
Telecommunications Common Stock, is a Texas corporation, of which Mr. Jere
W. Thompson, Sr. is the Chairman of the Board and a Director; as a result
each of them has shared voting, investment and dispositive power with
respect to the 727,926 shares held by The Williamsburg Corporation.
(5) Represents 727,926 shares held of record by The Williamsburg Corporation and
4,835,514 shares held of record by CapRock Investors. Under the Joint
Venture Agreement of CapRock Investors, the approval of a
majority-in-interest of the venturers is required to approve the disposition
of the shares. Because of the ownership interest of Jere W. Thompson, Jr.,
Mark Langdale, and Jere W. Thompson, Sr., two of the three acting together
can authorize or prevent a disposition of shares. As a result, each may be
deemed to be the beneficial owner of all of the shares.
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INFORMATION REGARDING THE PARTNERSHIP
BUSINESS
The Partnership is a facilities-based provider of broadband
Telecommunications Services to interexchange carriers, other communications
entities and businesses. The Partnership had no revenues in 1996. In 1997 it had
revenues and a net loss of $1.9 million and $104,000, respectively.
The Partnership began operations in 1992 to design, manage the construction
of, operate, maintain and market a 185 route mile fiber optic network in South
Texas. In 1996, the Partnership entered into a ten year contract for the lease
of dark fiber over a 260 route mile fiber network between Houston and Corpus
Christi, Texas. The Partnership completed construction of the network in January
1997. In January 1998, the Partnership entered into a contract for the sale of
dark fiber between San Antonio and Laredo, Texas. The Partnership expects to
complete the construction of approximately 500 additional route miles of fiber
network from San Antonio to Laredo, McAllen, Harlingen, Brownsville and Corpus
Christi, Texas by the end of 1998. The Partnership intends to expand its
regional fiber network to approximately 4,300 route miles throughout Texas and
the Gulf Coast region by the end of 2000. The Partnership's ability to expand
its network and increase its revenues will be dependent upon a number of
factors, including the availability of financing, and as a result no assurance
can be given that its expansion plans will be met.
The Partnership provides dedicated line services over the Partnership's
owned fiber network to interexchange carriers and other telecommunications
providers for terms of one year or longer. High volume capacity service
agreements and dedicated line service agreements generally provide for "take or
pay" monthly payments at fixed rates based on the capacity term and length of
circuit used. Customers are typically billed on a monthly basis and also may
incur an installation charge or certain ancillary charges for equipment. After
contract expiration, the contracts may be renewed or the services may be
provided on a month-to-month basis. The Partnership is expanding its network to
increase its revenue stream and reduce per unit costs, targeting capacity sales
on a segment-by-segment basis as the Partnership's network is deployed and
activated, and is increasingly seeking longer-term, high-volume capacity
agreements from major carriers. In addition to traditional telecommunications
carriers, the Partnership is marketing to ISPs and other data service companies.
As of December 31, 1997, substantially all of the Partnership's revenues
were derived from two customers. One of the customers provided for approximately
93% of total revenues in 1997 and comprised 78% of the trade receivable balance.
The other significant customer provided for approximately 5% of total revenues
in 1997 and comprised 22% of the trade receivable balance. The lease terms are
through August 2004 and July 2006, respectively.
NETWORK
The Partnership completed construction of the first 260 route miles of its
fiber network in January 1997. The Partnership intends to expand its network to
approximately 800 route miles by the end of 1998, linking San Antonio, Laredo,
McAllen, Harlingen, Brownsville and Corpus Christi, Texas. The Partnership
intends to expand its network to approximately 3,000 route miles by the end of
1999 and approximately 4,300 route miles by the end of 2000. The Partnership
believes that its network, once completed, will be the most extensive
alternative fiber network in Texas and the Gulf Coast region and will enable the
Partnership to serve nearly every primary, secondary and tertiary city in the
region. The Partnership's network is designed to be scalable and will have
significant flexibility to meet future demand. The Partnership network will
include advanced fiber capable of supporting dense wave division multiplexing
with an OC-48 backbone scalable to OC-192. The Partnership will install 96
fibers and two spare ducts throughout most of its network and will retain on
average 48 fiber strands. The routes of the network expansion are planned to be
generally geographically diverse from the existing fiber networks of AT&T, IXC,
MCI, Qwest, Sprint, and WorldCom. The fiber network will also interconnect with
the fiber networks of selected Mexican carriers at multiple border crossings.
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The Partnership 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 Partnership's growth (including the
buildout of its fiber network) for approximately 12 months from the date of this
Joint Proxy Statement/Prospectus only if the Partnership limits its current
construction efforts and plans. The Partnership plans to seek sources of
additional capital which may include public and private equity and debt
financings and other financing arrangements. There can be no assurance that the
Partnership will be successful in raising the funds. If unsuccessful, the scope
and plans for expansion of the Partnership's fiber network will be significantly
curtailed. See "Offering of Proposed Notes."
SERVICE AGREEMENTS
The Partnership provides high volume transmission capacity services through
service agreements for terms of one year or longer. Dedicated line services are
generally offered under service agreements for an initial term of one year. High
volume capacity service agreements and dedicated line service agreements
generally provide for "take or pay" monthly payments at fixed rates based on the
capacity term and length of circuit used. Customers are typically billed on a
monthly basis and also may incur an installation charge of certain ancillary
charges for equipment. After contract expiration, the contracts may be renewed
or the services may be provided on a month-to-month basis.
COMPETITION
The telecommunications industry and the Partnership's provision of
communications services is subject to intense competition and extensive federal
and state regulation. See "Competition" and "Regulation and Licenses."
EMPLOYEES
As of April 30, 1998, the Partnership leased the services of two fiber
technicians and five network construction personnel from Telecommunications. The
Partnership uses the services of independent contractors for installation and
maintenance of portions of its network.
PROPERTIES
The Partnership's network, including the completed portions and the portions
currently being constructed, and its component assets are the principal
properties owned by the Partnership. The Partnership owns substantially all of
the telecommunications equipment required for its business and owns or leases
various sites for transmission facilities. The Partnership installed fiber optic
cable is laid under various public and private rights-of-ways. Other fixed
assets are located at various locations in geographic areas served by the
Partnership.
LEGAL PROCEEDINGS
The Partnership is not currently a party to any litigation.
DIRECTORS AND EXECUTIVE OFFICERS
Jere W. Thompson, Jr. is the President and a director of the General
Partner. Mark Langdale is the Secretary and a director of the General Partner.
Mr Thompson received compensation from the Partnership totaling $24,628 in 1997.
Additionally, Mr. Thompson received $205,908 from the General Partner in 1997,
which was based upon the total construction services revenue earned by the
General Partner, which has a construction management agreement with the
Partnership. Mr. Langdale earned loan commitment fees, loan guaranty fees and a
subsequent guarantee fee in return for guaranteeing the entire amount of the
construction loan. As of March 31, 1998, guaranty and commitment fees together
with accrued interest due to Mark Langdale amounted to approximately $157,000.
Additionally the General Partner, CapRock
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Systems, Inc., agreed to pay Mr. Langdale a $20,000 guaranty fee, which was paid
in May 1998. See "--Related Party Transactions" and "Information Regarding
Telecommunications--Directors and Executive Officers."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
General Partner or the Partnership to the President of the General Partner.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- AWARDS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEARS SALARY BONUS (SHARES) COMPENSATION
- -------------------------------------------------------- --------- --------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Jere W. Thompson, Jr.................................... 1997 $ 24,628 -- -- $ 205,908(1)
President of the General Partner
</TABLE>
- ------------------------
(1) Such amounts represent the fees paid by the General Partner and were based
upon the total construction services revenues earned by the General Partner
in 1996 and 1997.
RELATED PARTY TRANSACTIONS
Mark Langdale, Joe C. Thompson, Jr., The Florida Company (which is owned by
Joe C. Thompson, an uncle of Jere W. Thompson, Jr.), The Hayden Company (which
is owned by John P. Thompson, an uncle of Jere W. Thompson, Jr.) and Jere W.
Thompson, Sr., who are partners of the Partnership, guaranteed portions of the
$10,000,000 loan from Bank One, Texas, N.A. to the Partnership in 1996 and each
received in exchange for each $1 million of indebtedness guaranteed (i) a 2.67%
limited partnership interest in the Partnership, (ii) a commitment fee equal to
1% of the amount guaranteed, which accrued interest at the rate of 12% per annum
commencing July 1, 1997 and increases 2% on each July 1 thereafter that the
commitment fee remains unpaid and (iii) an annual loan guaranty fee equal to 7%
of the amount of each partner's guarantee multiplied by a fraction, the
numerator being the lesser of $8 million or the average outstanding daily
principal of the loan guaranteed and the denominator being $8 million. The
guarantees (other than the joint and several guarantees of Mark Langdale and
Jere W. Thompson, Jr.) were released in April 1997 and, therefore, no guaranty
fees have been accrued subsequent to April 1, 1997 other than the accrued
interest. The total commitment fees and loan guarantee fees accrued as of
December 31, 1996 and 1997 were approximately $208,000 and $406,000,
respectively. Additionally, in exchange for Mark Langdale remaining on his joint
and several guaranty, the General Partner agreed to pay him $20,000, which was
paid in 1998.
The Partnership retained Telecommunications to manage and administer the
operations of the network. In consideration for these services, the Partnership
will reimburse direct costs of the network plus 5%, payable monthly. The total
general and administrative expenses paid to the General Partner were $0, $77,000
and $150,948, respectively for the years ended December 31, 1995, 1996 and 1997.
In addition, as payment for marketing services, the Partnership will pay 7% of
any additional lease payments generated as a result of Telecommunications'
efforts. There were no payments made in 1995, 1996 and 1997 under this
agreement. See "Information Regarding Telecommunications--Related Party
Transactions."
The Partnership entered into an agreement with the General Partner to manage
the construction of the Houston to Corpus Christi fiber optic network. Under
this agreement, the Partnership paid approximately 4% of the costs of
constructing the network to the General Partner. The Partnership paid management
fees of $285,964 in 1997 and a total of $450,964 under the contract.
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OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE PARTNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Partnership Interests as of May 31, 1998 (and prior to giving
effect to the Mergers and the Interest Exchange) for the executive officers,
directors and five percent (5%) shareholders of Telecommunications who also hold
Partnership Interests in the Partnership. The address of each person listed
below is Two Galleria Tower, 13455 Noel Road, Suite 1925, Dallas, Texas 75240,
except as otherwise indicated.
<TABLE>
<CAPTION>
INTERESTS
BENEFICIALLY OWNED
---------------------
INTERESTS TYPE OF
NAME OWNED INTEREST
- ------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
CapRock Systems, Inc.(1)........................................... 1.72375% General
Mark Langdale(2)................................................... 38.99919% Limited
5950 Berkshire, Suite 990
Dallas, TX 75225
Jere W. Thompson, Sr.(3)........................................... 11.14024% Limited
Two Turtle Creek Village
3838 Oak Lawn Avenue, Suite 1850
Dallas, TX 75219
Jere W. Thompson, Jr.(4)........................................... 31.87113% Limited
Greenway Holdings, L.P.(4)......................................... 31.87113% Limited
</TABLE>
- ------------------------
(1) CapRock Systems, Inc. is a Texas corporation of which Mr. Thompson, Jr. and
Mr. Langdale each own 50% of the outstanding common stock and of which each
is an officer and director.
(2) Does not include the 1.72375% general partnership interest held by CapRock
Systems, Inc. See footnote (1).
(3) Represents a 6.55635% interest held by Mr. Thompson, Sr. and a 4.58389%
interest held by his spouse.
(4) Represents a 31.87113% interest held of record by Greenway Holdings, L.P., a
Texas limited partnership of which Mr. Thompson, Jr. is the general partner.
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INFORMATION REGARDING IWL
BUSINESS
IWL's revenues are derived from the provision of a variety of services,
including telecommunications services, project and other services and product
resales. Telecommunications services include the resale of long distance
telecommunications services, the provision of private leased lines, and the
rental of telecommunications equipment and systems. IWL operates a tandem switch
at its facility in Houston, Texas to provide services as a switch-based long
distance carrier and is currently completing the installation of its Gulf Coast
regional network. Project and other services consist of the installation of
telecommunications system projects and the sale, service and maintenance of
communications systems.
In connection with product resales, IWL serves as the exclusive
manufacturer's representative of Alcatel products to the U.S. oil and gas
industry. In fiscal 1996 and 1997, IWL provided services to a subsidiary of
Shell, which included the resale of a significant amount of Alcatel products.
For the fiscal years ended June 30, 1996 and 1997, the Shell subsidiary
purchased from IWL approximately $10.6 million and $7.6 million, respectively,
of Alcatel products and other equipment and hardware, representing approximately
38.0% and 25.2%, respectively, of total sales during such periods. Although
profitable, the sale of Alcatel products to the Shell subsidiary significantly
reduced IWL's gross margin in these periods. The Shell project was substantially
completed in fiscal 1997 and, therefore, is not expected to contribute in a
material manner to IWL's total sales in future periods.
IWL 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, IWL 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 IWL began providing
telecommunications services and network support inside the former Soviet Union
to United States oil and gas customers. On January 22, 1998 to expand its
presence in the North Sea, IWL purchased all of the issued share capital of
Integrated Communications and Engineering Limited, a limited company
incorporated in Scotland ("ICEL") from its three foreign shareholders, and paid
the sum of L230,540.06 or U.S.$377,854 and issued to such shareholders 207,266
shares of IWL Common Stock. As IWL 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. IWL is continuing to expand its
network through its tandem switch and the installation of fiber optic cable and
microwave radios in targeted service areas. In connection with such expansion,
IWL has also received CLEC status in Texas and Louisiana.
While annual growth rates of IWL's total sales since 1992 have ranged from
6.3% to 76.0%, IWL'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 IWL's services and product mix, levels of product resales, adverse weather
conditions in customer locations, the degree to which IWL 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 IWL or its competitors and changes in billing rates by IWL or
its competitors. IWL's ability to grow its revenues will be dependent upon a
number of factors, many of which are not within its control and as a result no
assurance can be given that such objectives will be met.
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<PAGE>
In May 1998, IWL changed its fiscal year to a December 31 year end to
coincide with the fiscal years of CapRock, Telecommunications and the
Partnership and, in connection therewith, filed a December 31, 1997 transition
period Form 10-K for the transition period from June 30, 1997 to December 31,
1997.
SERVICE OFFERINGS
IWL's service offerings include project management services, offshore
services, Internet services and wireless services.
PROJECT MANAGEMENT SERVICES
To provide its customers with total, integrated communications services, IWL
performs many functions, including system specification, project engineering,
integration, equipment procurement, test, installation and maintenance and
network management. IWL's expertise in planning, designing and implementing
communications solutions for customers with operations in remote regions or
underdeveloped areas allows IWL, from time to time, to provide communications
services for special projects with critical-timing requirements or other extreme
and unusual challenges. IWL utilizes satellite, microwave and fiber solutions
for voice and data applications to meet its customers' specifications.
OFFSHORE SERVICES
IWL provides offshore voice and data services to the oil and gas industry in
the Gulf of Mexico and the North Sea. Satellite and microwave transmission media
are used depending on the type and location of the drilling rig involved. IWL's
communications systems are flexible and can be quickly readjusted as rigs move
to new locations. IWL's telecommunications services also provide the connection
between other carriers' networks and a customer's location. Although this
connection can span large distances, it is commonly referred to as last-mile
connectivity. IWL's Offshore Dedicated Digital Services program ("ODDS"), which
delivers connectivity to offshore locations, exemplifies IWL'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.
INTERNET SERVICE PROVIDER
IWL provides Internet access to retail, commercial and other ISPs in the
Houston area and in Moscow. The services include a mail server, news server, and
hosting of customer web pages. IWL is linked to the Internet backbone via a
direct connection with a global service provider in Houston on dedicated lines.
WIRELESS SERVICES
IWL 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 wireless division. IWL resells a broad line
of two-way and trunking radios, paging products and wireless systems for both
voice and data applications. IWL also engineers and designs new systems and
modifies existing systems to meet its customers' specifications. In addition,
IWL 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.
SALES AND MARKETING
IWL targets domestic and international customers that require turnkey system
solutions and other telecommunications services. IWL's sales force sells
frequency bandwidth and call completion and system solutions, which allows IWL
to further develop its own telecommunications infrastructure. Current and
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<PAGE>
prospective customers are assigned to account managers, who are principally
responsible for providing high levels of contact and customer service. In
addition, IWL 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. IWL currently has a sales force of
approximately 23 sales representatives, with sales personnel located in Houston,
Texas, New Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland. IWL's
direct sales approach enables it to provide a high level of customer service. To
complement IWL's direct sales efforts, IWL often participates in various
domestic and international industry trade shows and conducts advertising
campaigns in trade publications.
CUSTOMER SERVICE
IWL also provides customer support for its project management and offshore
products and services through its full-service support teams in Friendswood,
Texas, Lafayette and New Orleans, Louisiana, Moscow, Russia and Aberdeen,
Scotland. 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 in
Friendswood, Texas where IWL's 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 wireless
division, (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 IWL's engineers can custom design or modify hardware to improve its
performance within a particular system.
COMPETITION AND GOVERNMENT REGULATION
The telecommunications industry and IWL's provision of communications
services is subject to intense competition and extensive federal and state
regulation. See "Competition" and "Regulation and Licenses."
EMPLOYEES
As of March 31, 1998, IWL employed approximately 166 people, including
approximately 23 in sales and marketing, approximately 100 in engineering and
technical services and approximately 43 in management, administration and
finance. None of IWL's employees is represented by a labor union or is subject
to a collective bargaining agreement. IWL believes that its relations with its
employees are good.
LICENSES AND CERTIFICATIONS
IWL 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 IWL allow it to provide land mobile, microwave and
satellite communications services. IWL currently holds approximately 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 1998 and March 2002. As licenses come due for renewal, IWL
evaluates the need for such license and elects to either renew the license or
let it expire. For example, the license that will expire in July 1998 is for a
location in Arkansas that is no longer used by IWL and which is not anticipated
to be used in the future. As a result, IWL does not intend to renew it. These
licenses allow IWL 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. IWL 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. IWL holds and operates seven Ku band and two C band fixed earth
stations and holds FCC licenses that allow IWL to locate earth stations in Texas
and other U.S. locations.
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<PAGE>
IWL operates as a FCC licensed 214 carrier to provide resold switched
telecommunications services. IWL has also obtained broader common carrier
authority from the FCC to provide global resale of switched and private line
services as well as global facilities-based service. IWL currently provides
international facilities-based private line service on a private carrier basis
into Bolivia, Bosnia, Croatia, Ecuador, Hungary and Russia. In 1997, IWL
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 IWL's plans to increase its service offerings,
IWL has obtained authority to provide dedicated services in Louisiana and CLEC
and long distance services in Texas and Louisiana. In addition, IWL 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 IWL
to attach its own fiber optic cable to such parties' respective utility poles.
PROPERTIES
IWL occupies buildings that contain approximately 70,000 square feet of
floor space. IWL owns an office building in Friendswood, Texas and Lafayette,
Louisiana and leases additional space in Friendswood and Houston, Texas, New
Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland under agreements that
expire at various dates through 2004. The principal facilities are located as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET DESCRIPTION
- ------------------------------------- ------------- ------------------------------------------------------------
<S> <C> <C>
Houston, Texas (Aerospace)........... 18,940 Corporate headquarters for administration, finance and sales
functions, and IWL Connect
Friendswood, Texas................... 12,500 Engineering, Research and Development, Network Operations
Center, Production, and Warehouse
Lafayette, Louisiana................. 8,450 Administration, Sales, Production, Shipping/Receiving, and
Warehouse
Friendswood, Texas................... 7,000 Administration, Sales, Production and Warehouse
New Orleans, Louisiana............... 6,470 Administration, Sales, Production, Shipping/Receiving, and
Warehouse
Friendswood, Texas................... 5,000 Procurement, Inventory, Shipping/Receiving and Warehouse
Aberdeen, Scotland................... 4,200 Administrative, Sales, Shipping/Receiving and Warehouse
Moscow, Russia....................... 1,800 Administrative and Engineering
</TABLE>
IWL 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.
LEGAL PROCEEDINGS
IWL is not currently a party to any litigation. However, IWL 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 operations,
financial condition or cash flow of IWL.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding the directors and
executive officers of IWL as of June 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Ignatius W. Leonards.............................. 44 Chairman, Chief Executive Officer and Director
Byron M. Allen.................................... 50 President and Director
Richard H. Roberson............................... 39 Chief Financial Officer, Secretary and Director
James T. Gordon................................... 59 Vice President-Telecom Operations
J. Keith Johnson.................................. 36 Vice President-Marketing
Bryan L. Olivier.................................. 36 Vice President-IWL Connect Division
Errol J. Olivier.................................. 35 Vice President-Telecom Sales
Christopher J. Amenson............................ 48 Director
Myron J. Goins.................................... 37 Director
</TABLE>
- ------------------------
There is no family relationship between any executive officers or directors of
IWL.
Mr. Ignatius W. Leonards has served as Chairman of the Board, Chief
Executive Officer and a director of IWL since founding IWL 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 IWL since
February 1997 and served as a Vice President of IWL 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 IWL since
joining IWL in October 1996 and has served as a director of IWL 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 is a certified public accountant and is a member of
the American Institute of Certified Public Accountants and the Texas Society of
Certified Public Accountants. Mr. Roberson has a B.B.A. in Accounting from the
University of Texas at Austin.
Mr. James T. Gordon has served as Vice President-Telecom Operations of IWL
since October 1996. Prior to joining IWL, 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., a telecommunications company, 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 B.B.A. in Production Management from the University of
North Texas.
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<PAGE>
Mr. J. Keith Johnson has served as Vice President of Marketing since
December 1992 and was Director of Sales and Marketing of IWL 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 IWL's IWL Connect-TM-
division since January 1996. Prior thereto, he served as Director of Engineering
for Spacelink Systems, Inc., a subsidiary of IWL, 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 IWL's
Lafayette and New Orleans offices. Mr. Olivier joined IWL in March 1990 and
served as an Account Manager from March 1990 until January 1992 and as the
Regional Manager of IWL'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 served as a director of IWL since June 1997.
Mr. Amenson has served as President and Chief Operating Officer of SBS
Technologies, Inc., a manufacturer of computer components, 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 served as a director of IWL since June 1997. 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, a long distance company, 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 B.B.A. degree from the University of Memphis
and his M.B.A. 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 IWL Board is currently composed
of five directors. Officers serve at the discretion of the IWL Board. There are
no family relationships among any of the directors or IWL Named Executive
Officers (as defined below).
Pursuant to IWL's By-Laws, the next annual meeting of shareholders of IWL
will be held in 1998.
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<PAGE>
BOARD COMMITTEES
Effective upon the consummation of IWL's initial public offering in June
1997, the IWL Board established two standing committees: the Audit Committee and
the Compensation Committee. The functions of the Audit Committee, of which Mr.
Amenson and Mr. Goins are the current members, are to make recommendations
regarding the engagement of IWL's independent auditors and to review with
management and the independent auditors IWL'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 are the current members, are to review and recommend to
the IWL Board the compensation of executive officers of IWL and to administer
and make awards and take all other action as prescribed under the employee
benefit plans of IWL (other than IWL's 1997 Director Option Plan, which is
administered by the entire IWL Board). All members of the Compensation Committee
are and will continue to be "Non-Employee Directors" within the meaning of Rule
16b-3(b) promulgated under the Exchange Act and "outside directors" as
contemplated by Section 162(m)(4)(C)(i) of the Code.
DIRECTOR COMPENSATION
Non-Employee Directors of the IWL Board are paid $1,000 per meeting for
attending or participating in meetings of the IWL Board or any committee thereof
and receive reimbursement for out-of-pocket expenses incurred for attendance at
meetings. Non-Employee Directors will also receive from time to time
non-statutory stock options under IWL's 1997 Director Option Plan. IWL granted
options to acquire 10,000 shares of IWL Common Stock at a per share exercise
price of $6.00 under the 1997 Director Option Plan to each of Messrs. Amenson
and Goins effective upon their commencing to serve as directors of IWL in June
1997. IWL's policy is not to pay any additional compensation to employees of IWL
for their services as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Amenson and Goins were the sole members of the Compensation
Committee during the fiscal year ended June 30, 1997 and for the transition
period from July 1, 1997 until December 31, 1997 (the "1997 Transition Period").
The IWL Board established the Compensation Committee effective upon consummation
of IWL's initial public offering in June 1997. Prior thereto, IWL had no
Compensation Committee or other committee of the IWL Board performing similar
functions, and accordingly, the IWL Board determined the compensation for the
executive officers and related matters.
During the last fiscal year and during the 1997 Transition Period, no
executive officer of IWL 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 IWL Board or IWL's Compensation Committee.
Caroline Fontenot, the sister of Mr. Leonards, IWL's Chairman of the Board
and Chief Executive Officer, lent IWL $75,000 on June 1, 1992, of which a
balance of $39,460, bearing interest at the rate of 12% per annum, remained
outstanding as of December 31, 1997 and a balance of $43,693 remained
outstanding as of June 30, 1997.
IWL paid to Mr. Leonards during fiscal year 1996 and fiscal year 1997,
$18,000 and $10,500, respectively, in management fees ($1,500 a month) for
management rights granted by Mr. Leonards to IWL with respect to a condominium
owned by Mr. Leonards and used by IWL.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
compensation awarded or paid by IWL to its Chairman of the Board and Chief
Executive Officer and the other executive officers of IWL whose total annual
salary and bonus for services to IWL exceeded $100,000 in the fiscal year ended
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June 30, 1997 (the "IWL Named Executive Officers"). Information is also provided
for such persons for the 1997 Transition Period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ---------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEARS SALARY BONUS OPTIONS (SHARES) COMPENSATION
- ---------------------------------------------- ------------ ---------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Ignatius W. Leonards ......................... 1997(1) $ 84,390 $ -- -- $ $4,260(2)
Chairman of the Board and Chief Executive 1997 157,427 -- -- 29,254(3)
Officer 1996 150,000 -- -- 36,522(4)
1997(1) $ 60,000 -- -- $ 806(5)
J. Keith Johnson ............................. 1997 115,485 -- 5,000(6) 1,801(5)
Vice President--Marketing 1996 100,604 $ 12,250 36,141(7) 1,655(5)
</TABLE>
- ------------------------
(1) IWL changed its year end from June 30 to December 31, therefore the
information presented in this line item represents the 1997 Transition
Period, which is from July 1, 1997 to December 31, 1997.
(2) Represents (i) $606 of matching payments made by IWL to Mr. Leonards'
account under IWL's Retirement and Savings Plan (the "401(k) Plan"); and
(ii) $3,654 for the company car provided to Mr. Leonards by IWL
(3) Represents (i) $8,998 earned by Mr. Leonards pursuant to an agreement (the
"Kenwood Agreement") between IWL and Kenwood Americas Corporation ("KAC")
whereby Mr. Leonards is paid 10% of the net profits of Kenwood Systems
Group, Inc. (IWL owns 50% of the outstanding capital stock of Kenwood
Systems Group, Inc., with the other 50% owned by KAC); (ii) $2,448 of
matching payments made by IWL to Mr. Leonards' account under IWL's 401(k)
Plan; (iii) $10,500 in management fees ($1,500 a month) paid to Mr. Leonards
by IWL for management rights granted by Mr. Leonards to IWL with respect to
a condominium owned by Mr. Leonards and used by IWL; and (iv) $7,308 for the
company car provided to Mr. Leonards by IWL.
(4) Represents (i) $9,000 earned by Mr. Leonards pursuant to the Kenwood
Agreement; (ii) $2,214 of matching payments made by IWL to Mr. Leonards'
account under IWL's 401(k) Plan; (iii) $18,000 in management fees ($1,500 a
month) paid to Mr. Leonards by IWL for management rights granted by Mr.
Leonards to IWL with respect to a condominium owned by Mr. Leonards and used
by IWL; and (iv) $7,308 for the company car provided to Mr. Leonards by IWL.
(5) Represents matching payments made by IWL to Mr. Johnson's account under
IWL's 401(k) Plan.
(6) Represents stock options granted pursuant to IWL's 1997 Stock Option Plan,
which have an exercise price of $6.00 per share and are subject to vesting
requirements.
(7) Represents stock options granted pursuant to IWL's Employee Incentive Stock
Option Plan, which have an exercise price of $3.56 per share. The vesting of
all such options was accelerated upon consummation of IWL's initial public
offering in June 1997.
OPTION GRANTS TABLE. There were no option grants during the 1997 Transition
Period to the IWL Named Executive Officers. The following table provides
information on grants of stock options pursuant to the Employee Incentive Stock
Option Plan during the fiscal year ended June 30, 1997 to the IWL Named
Executive Officers:
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED TO EXERCISE OR OPTION TERM (1)
UNDERLYING EMPLOYEES IN FISCAL BASE PRICE EXPIRATION --------------------
NAME OPTIONS GRANTED YEAR (PER SHARE) DATE 5% 10%
- -------------------------------- ----------------- ------------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Keith Johnson................ 5,000(2) 3.6% $ 6.00(3) 5/8/07 $ 18,867 $ 77,813
</TABLE>
- ------------------------
(1) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Commission and do not represent IWL's estimate
or projection of future IWL Common Stock prices. The actual value realized
may be greater or less than the potential realizable value set forth in the
table.
(2) These options were granted to Mr. Johnson in May 1997 pursuant to IWL's 1997
Stock Option Plan and vest in five installments of 20% each and become fully
vested five years after due date of grant.
(3) These options were granted at a price per share of $6.00, which was equal to
the initial public offering price of IWL's Common Stock in its initial
public offering and, accordingly, was at least equal to the fair market
value of the IWL Common Stock on the date of grant, as determined by the IWL
Board.
FISCAL YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Keith Johnson.......................................... 36,141(2) 5,000 $ 341,171 $ 35,000
</TABLE>
- ------------------------
(1) Based on the fair market value of the IWL Common Stock of $13.00 per share
as reported on the Nasdaq National Market on December 31, 1997.
(2) The IWL Board accelerated the vesting of all outstanding options granted
under the Employee Incentive Stock Option Plan effective upon completion of
IWL's initial public offering in June 1997.
INCENTIVE BONUS PROGRAM
The bonuses available to the executive officers are based upon the
subjective evaluation of the performance of each individual and are not
contingent on the achievement of any specific performance targets. Such bonuses
are designed to maximize the shareholder value.
RELATED PARTY TRANSACTIONS
Since the beginning of IWL's 1994 fiscal year, IWL has entered into the
various transaction with officers, directors and affiliates of IWL described
below.
Byron M. Allen, IWL's President and a director, loaned IWL $150,000 in
September 1994, which loan is 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 loaned IWL an additional $100,000 evidenced by
another 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 such notes, together with interest thereon,
was repaid by IWL in December 1995.
Caroline Fontenot, the sister of Mr. Leonards, IWL's Chairman of the Board
and Chief Executive Officer, loaned IWL $75,000 on June 1, 1992, of which a
balance of $39,460, bearing interest at the rate of
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<PAGE>
12% per annum, remained outstanding as of December 31, 1997 and a balance of
$43,693 remained outstanding as of June 30, 1997.
IWL paid to Mr. Leonards during fiscal year 1996 and fiscal year 1997,
$18,000 and $10,500, respectively, in management fees ($1,500 a month) for
management rights granted by Mr. Leonards to IWL with respect to a condominium
owned by Mr. Leonards and used by IWL. Such fees were equal to $1,500 a month
and terminated in January 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF IWL
The following table sets forth certain information regarding the beneficial
ownership of IWL Common Stock as of May 31, 1998 by (i) each person who is known
by IWL to own beneficially more than five percent (5%) of IWL Common Stock, (ii)
each of IWL's Named Executive Officers, directors and director nominees, and
(iii) all of the current executive officers and directors of IWL 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
which means generally any person who, directly or indirectly, has or shares
voting power or investment power with respect to a security. Shares of IWL
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 May 31,
1998 are treated as outstanding only when determining the amount and percentage
of IWL Common Stock owned by such individual or group. All information with
respect to the beneficial ownership of any principal shareholder was supplied in
a Schedule 13D or 13G filed with the Commission by or on behalf of such
principal shareholder under the Exchange Act and/or was furnished by such
principal shareholder and Holdings believes that, except as otherwise noted or
pursuant to community property laws, each shareholder 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>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
-------------------------
NUMBER OF PERCENTAGE
NAME SHARES OWNERSHIP
- ----------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Ignatius W. Leonards(2).................................................................. 1,897,528 47.6%
Byron M. Allen(3)........................................................................ 222,200 5.6%
J. Keith Johnson(4)...................................................................... 37,949 *
Richard H. Roberson(5)................................................................... 3,400 *
Christopher J. Amenson................................................................... 2,000 *
c/o SBS Technologies, Inc.
2400 Louisiana Boulevard, NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
Myron J. Goins........................................................................... -- --
200 North Main Street, Suite 301
Greenville, South Carolina 29601
Wellington Management Company, LLP(6).................................................... 360,000 9.0%
75 State Street
Boston, MA 02109
All executive officers and directors as a group (nine persons)(7)........................ 2,250,203 54.8%
---------- ---
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of the class.
(1) Based upon 3,986,718 shares of IWL Common Stock issued and outstanding.
(2) Includes 6,666 shares held by Ignatius W. Leonards as custodian for minor
children.
(3) Includes 7,300 shares held by Byron M. Allen as custodian for minor children
and 7,300 shares held by Mr. Allen's daughters, the voting, investment and
dispositive power of which are shared by Mr. Allen with his daughters.
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<PAGE>
(4) Includes 36,141 shares of IWL Common Stock subject to currently exercisable
options and 1,000 shares of IWL Common Stock subject to options exercisable
within 60 days of May 31, 1998. Does not include 4,000 shares of IWL Common
Stock subject to options not yet vested.
(5) Includes 100 shares of IWL Common Stock held by spouse of Richard H.
Roberson and 200 shares of IWL Common Stock held by Richard H. Roberson as
custodian for minor children, the voting, investment and dispositive power
of which are shared by Mr. Roberson with his spouse. Includes 3,000 shares
of IWL Common Stock subject to options exercisable within 60 days of May 31,
1998. Does not include 27,000 shares of IWL Common Stock subject to options
not yet vested.
(6) Address and current ownership information obtained from review of Commission
Form 13G filed by Wellington Management Company, LLP on February 9, 1998.
(7) Includes 102,807 shares of IWL Common Stock subject to currently exercisable
options, and 20,200 shares of IWL Common Stock subject to options
exercisable within 60 days of May 31, 1998, granted to the executive
officers of IWL, as a group.
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<PAGE>
COMPETITION
OVERVIEW. The communications services industry is highly competitive,
rapidly evolving and subject to constant technological change. In particular,
there are numerous companies offering long distance and local services, and
Holdings expects competition to increase in the future. Holdings believes that
existing competitors are likely to continue to expand their service offerings to
appeal to existing or potential customers of Holdings. Many of Holdings'
existing customers have financial, personnel and other resources, including
brand name recognition, substantially greater than that of Holdings. Moreover,
Holdings expects that new competitors are likely to enter the communications
market, and some of these new competitors may market communications services
similar to Holdings' services. In addition, some of these new competitors may
have financial, personnel and other resources, including brand name recognition,
substantially greater than those of Holdings.
In addition, the regulatory environment in which Holdings operates is
undergoing significant change. As this regulatory environment evolves, changes
may occur which could create greater or unique competitive advantages for all or
some of Holdings' current or potential competitors, or could make it easier for
additional parties to provide services. Other providers currently offer one or
more of each of the services offered by Holdings, and many communications
companies operate generally in the same long distance and local services
submarkets as Holdings. As a service provider in the long distance
communications industry, Holdings competes with several well established
providers, as well as many other long distance providers with less significant
market shares.
DOMESTIC AND INTERNATIONAL LONG DISTANCE. Holdings provides long distance
services using its own facilities and by reselling the facilities of other
carriers in the United States and between the United States and other countries.
The long distance communications industry is intensely competitive and
significantly influenced by the marketing and pricing decisions of the larger
industry participants such as AT&T, MCI, Sprint and WorldCom. Moreover, the
industry is undergoing significant consolidation that has created and will
continue to create numerous other entities with substantial resources to compete
for long distance business, such as Excel Communications, Inc., Frontier
Communications Service, Inc. and Qwest. In addition, as a result of the 1996
Telecommunications Act, RBOCs and GTOCs are able or will be able in the future
to enter the long distance market. These larger competitors have significantly
greater name recognition, financial, technical, network and marketing resources.
They may also offer a broader portfolio of services and have longer standing
relationships with customers targeted by Holdings. Moreover, there can be no
assurance that certain of Holdings's competitors will not be better situated to
negotiate contracts with suppliers of telecommunications services which are more
favorable than contracts negotiated by Holdings. Many of Holdings' competitors
enjoy economies of scale that can result in a lower cost structure for
transmission and related terminating costs, which could cause significant
pricing pressures on Holdings.
Holdings competes in the long distance market primarily on the basis of
price, customer service and the ability to provide a variety of communications
products and services. Customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. Prices for domestic and international long distance calls have
declined in recent years and are likely to continue to decrease. Competition in
all of the relevant markets is expected to increase which could adversely affect
net revenue per minute and gross margins as a percentage of net revenue. There
can be no assurance that Holdings will be able to compete effectively in the
domestic or international long distance markets.
LOCAL EXCHANGE SERVICE. Holdings seeks to expand significantly its
operations to provide LEC services typically provided by ILECs. The local
service market has only recently been opened broadly to new service providers
following enactment of the 1996 Telecommunications Act. The services intended to
be offered by Holdings will compete with those offered by ILECs, such as
BellSouth, Southwestern Bell and the GTOCs, as well as very large IXCs, such as
AT&T, MCI, Sprint and WorldCom. The ILECs currently dominate the provision of
local services in their respective markets, and the ILECs and IXCs
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<PAGE>
have greater name recognition, financial, technical, network, marketing and
personnel resources, as well as longer standing relationships with regulatory
authorities at the federal and state levels than the new entrants. Moreover,
there can be no assurance that certain of Holdings' competitors will not be
better situated to negotiate contracts with suppliers of telecommunications
services which are more favorable than contracts negotiated by Holdings.
Holdings also may face competition from other current and potential market
entrants, including other CLECs, cable companies, electric utilities, LECs
operating outside their current local service areas, other long distance
carriers, wireless telephone system owners, microwave owners, satellite
carriers, private networks built by large companies, and start-up
telecommunications ventures. There can be no assurance that Holdings will be
able to compete effectively in the local service markets.
FIBER NETWORKS
Holdings intends to expand the fiber optic network to approximately 4,300
route miles throughout Texas and the Gulf Coast region. Holdings will compete
with numerous established and start-up national and regional fiber optic
networks owned by IXCs, ILECs and CLECs throughout Texas and the Gulf Coast
region. These competitors include very large companies such as AT&T, MCI,
WorldCom, Sprint, IXC and Qwest, each of whom has greater name recognition,
financial, personnel, technical and marketing resources than Holdings. Holdings
is aware that other facilities-based providers of local and long distance
telecommunications services are planning and constructing fiber networks and/or
purchasing or leasing dark fiber in order to build additional networks that, if
and when completed, could compete with Holdings' network. In addition to IXCs
and LECs, entities potentially capable of offering broadband services in
competition with Holdings' existing and planned network include other
facilities-based communications service providers, cable television companies,
electric utilities, microwave carriers, satellite carriers, wireless telephone
system operators and large companies who build private networks. Such competing
networks may also have advanced fiber and operating capabilities similar to
those of Holdings' existing and planned network and may be positioned
geographically to compete directly with Holdings' existing and planned network
for many of the same customers along a significant portion of the same routes.
INTERNET SERVICE PROVIDER AND INTERNET TELEPHONY
IWL is an ISP and Holdings plans to introduce IP Telephony in late 1998.
Internet services are currently deemed enhanced services by the FCC and
therefore are not subject to federal and state common carrier regulations,
including long distance interstate and intra-state access fees. Certain ISPs
have recently announced plans to use IP Telephony to introduce domestic and
international long distance services at rates 30% to 50% below standard long
distance rates. Although the FCC intends to review this issue, IP Telephony
could increase pressure on IXCs and other communications companies to reduce
prices and margins from domestic and international long distance services. There
can be no assurance that Holdings or the carrier customers of Holdings will not
experience substantial decreases in call volume, pricing and/or margins due to
IP Telephony. There can also be no assurance that Holdings will be able to offer
its telecommunications services to end users at a price which is competitive
with the IP Telephony services offered by these new companies, or that Internet
services will not be subject to additional regulation in the future, although
Holdings seeks to compete by introducing IP Telephony in late 1998. The Internet
services market is highly competitive, although there are no substantial
barriers to entry, and Holdings expects that competition will continue to
intensify. Holdings's competitors in this market include ISPs, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to Holdings.
TECHNOLOGICAL ADVANCES
In the future, Holdings may be subject to intense competition due to the
development of new technologies resulting in an increased supply of domestic and
international transmission capacity. The
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<PAGE>
telecommunications industry is experiencing a period of rapid and significant
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar to
those to be provided by Holdings. For instance, recent advances in wave division
multiplexing technology permit substantial increases in transmission capacity of
both new and older fiber. The introduction of new products or emergence of new
technologies may cause capacity to greatly exceed the demand, reducing the
pricing of certain services to be provided by Holdings. There can be no
assurance that Holdings' services will satisfy future customer needs, that
Holdings' technologies will not become obsolete in light of future technological
developments, or that Holdings will not have to make significant additional
capital investments to upgrade or replace its system and equipment. The effect
on Holdings's operations of technological changes cannot be predicted and if
Holdings is unable to keep pace with advances, it could have a material adverse
effect on the financial condition, results of operations and cash flow of
Holdings.
OFFSHORE AND REMOTE AND TELECOMMUNICATIONS SERVICES
Currently, Holdings provides telecommunications services to oil and gas
customers in the Gulf of Mexico, the North Sea and other oil and gas producing
regions around the world. In the Gulf of Mexico, Holdings competes directly with
Autocomm Communications Engineering Corp., Sola Communications, Inc., Datacom
and Shell, as well as cellular carriers such as Petrocom and Coastel, and with
Data Marine Systems and EAE Ltd. in the North Sea. Shell currently provides
competing services through its microwave network in the Gulf of Mexico and has
announced plans to become a full service telecommunications provider to the oil
and gas industry in the region. Holdings provides private-line
telecommunications services in Russia. In Russia, the major competitors for
networks are SOVAMTEL and AMRUSCOM. Although Holdings believes that it competes
successfully in each of its markets today, there can be no assurance that
Holdings will be able to continue to compete successfully in the future.
Holdings believes that most of its larger competitors have generally not made it
a priority to provide remote, difficult-access telecommunications services.
Should one or more of the competitors decide to focus on such services, it could
have a material adverse effect on the financial condition, results of operations
and cash flow of Holdings.
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REGULATION AND LICENSES
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED FEDERAL, STATE AND LOCAL
REGULATIONS AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS INDUSTRY. OTHER
EXISTING FEDERAL, STATE AND LOCAL LEGISLATION AND REGULATIONS ARE CURRENTLY THE
SUBJECT OF JUDICIAL PROCEEDINGS, LEGISLATIVE HEARINGS, AND ADMINISTRATIVE
PROPOSALS WHICH COULD CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THIS
INDUSTRY OPERATES. NEITHER THE OUTCOME OF THESE PROCEEDINGS, NOR THEIR IMPACT
UPON THE TELECOMMUNICATIONS INDUSTRY OR HOLDINGS, CAN BE PREDICTED AT THIS TIME.
THIS SECTION ALSO SETS FORTH A BRIEF DESCRIPTION OF REGULATORY AND TARIFF ISSUES
PERTAINING TO THE OPERATION OF HOLDINGS.
Holdings provides domestic and international services that are subject to
varying degrees of U.S. federal, state and local regulation. In the United
States, the provision of telecommunications services is subject to the 1934
Communications Act, as amended, including as amended by the 1996
Telecommunications Act and the regulations thereunder promulgated by the FCC, as
well as the applicable laws and regulations of the various states and state
regulatory commissions. The FCC exercises jurisdiction under Title II of the
1934 Communications Act over all facilities of, and services offered by,
telecommunications common carriers to the extent such services involve
jurisdictionally interstate communications, including international
communications, while state regulatory authorities retain jurisdiction over
jurisdictionally intrastate communications. Under Title III of the 1934
Communications Act, the FCC is also charged with regulating the licensing and
use of the radio frequency spectrum. Local governments sometimes impose
franchise or licensing requirements on local service competitors and/or
facilities companies. Services provided in other countries are subject to the
telecommunications laws and regulations of those countries.
Holdings is subject to the authority of the FCC and the state regulatory
agencies to enforce applicable regulatory requirements. The FCC and the state
regulatory agencies may address regulatory non-compliance with a variety of
enforcement mechanisms, including monetary forfeitures, refund orders,
injunctive relief, license conditions, and/or license revocation.
The regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to carriers. There can be
no assurance that future regulatory, judicial or legislative activities will not
have a material adverse effect on the financial condition, results of operations
or cash flow of Holdings or that domestic or international regulators or third
parties will not raise material issues with regard to compliance or
non-compliance with applicable regulations.
U.S. FEDERAL REGULATION
LOCAL SERVICE REGULATION UNDER THE 1996 TELECOMMUNICATIONS ACT. The 1934
Communications Act was substantially amended by the 1996 Telecommunications Act,
which provides for comprehensive reform of the United States' telecommunications
laws. The 1996 Telecommunications Act may have potentially significant effects
on the financial condition, results of operations or cash flow of Holdings. The
1996 Telecommunications Act is designed to enhance competition in, among other
markets, the local telecommunications marketplace by, among other things: (i)
removing state and local entry barriers, (ii) requiring ILECs to provide
interconnection to their facilities, (iii) facilitating the end users' choice to
switch service providers from ILECs to CLECs, and (iv) requiring access to
rights-of-way. The legislation also is designed to increase local competition by
newer competitors such as long distance carriers, cable companies and public
utility companies. Under the 1996 Telecommunications Act, RBOCs have the
opportunity to provide out of region long distance services immediately and in
region long distance services if certain conditions are met and are no longer
prohibited (in most instances) from providing certain cable TV services. Entry
of such companies into the domestic and international long distance business and
the
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emergence of other new local competitors could result in substantial competition
to CapRock and may have a material adverse effect on the financial condition,
results of operations or cash flow of CapRock.
The 1996 Telecommunications Act specifically requires all LECs (including
ILECs and CLECs): (i) not to prohibit or unduly restrict resale of their
services; (ii) to provide dialing parity, number portability and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications. ILECs are
specifically required to provide interconnection on certain terms and
conditions, as well as unbundled network elements, resold local services at
wholesale rates, reasonable public notice of any changes in the information
needed for transmission and routing services over their communications
facilities and physical collocation of equipment necessary for interconnection
and access to unbundled network elements at the LECs' premises. An RBOC can
enter the market for in-region long distance services within the area where it
provides local exchange service upon FCC approval based on a showing that
facilities-based competition is present and that interconnection agreements
meeting a 14-point checklist are in place in the states to be entered. RBOCs are
permitted to enter the out of region long distance market immediately upon
enactment. The provision of inter-LATA services by RBOCs is expected to reduce
the market share of major IXCs, and consequently, may have an adverse effect on
the ability of CLECs to generate access revenues from the IXCs.
On August 8, 1996, the FCC released the Interconnection Decision, which
established a framework of minimum, national rules enabling state commissions
and the FCC to begin implementing many of the local competition provisions of
the 1996 Telecommunications Act. Among other things, the Interconnection
Decision prescribed certain minimum points of interconnection, adopted a minimum
list of unbundled network elements that ILECs must make available to
competitors, and adopted a methodology for states to use when setting wholesale
prices for retail services. The U.S. Court of Appeals for the Eighth Circuit
issued a decision vacating certain portions of the Interconnection Decision and
the United States Supreme Court has agreed to consider the challenges to the
Eighth Circuit Court's decision filed by the FCC and interested carriers.
Whether the Eighth Circuit decisions will stand, or what further actions the FCC
may or may not take in response to these appellate decisions cannot be
predicted.
In a separate case, on December 31, 1997, the U.S. District Court for the
Northern District of Texas ruled that Sections 271 to 275 of the 1996
Telecommunications Act, which establish the conditions the RBOCs must satisfy
before they may provide in-region long distance telecommunications services, are
unconstitutional (the "SBC Decision"). The SBC Decision has been stayed and is
being reviewed by higher courts, and could ultimately be reviewed by the Supreme
Court. The outcome of that review cannot be predicted. If, however, the SBC
Decision were upheld on appeal it would likely have an unfavorable effect on the
ability of new entrants to compete because the SBC Decision removes the
incentive for RBOCs to open their local markets to competition.
DOMESTIC INTERSTATE SERVICES. Domestic interstate common carriers without
market power, such as Holdings, are deemed nondominant and are subject to
minimal FCC regulation. Interstate carriers offering services to the public must
comply with the federal statutory and regulatory requirements of common carriage
under the 1934 Communications Act. Among other things, interstate common
carriers must offer service on a non-discriminatory basis at just and reasonable
rates. Nondominant carriers are exempt from the requirement to obtain specific
prior FCC approval to initiate or expand domestic interstate services, although
they are required to file a tariff at the FCC and remain subject to the FCC's
complaint jurisdiction. The FCC has issued an order eliminating the requirement
that nondominant carriers maintain tariffs for their domestic interstate
services on file at the FCC. The FCC order has been appealed to the U.S. Court
of Appeals for the District of Columbia and stayed pending resolution of the
appeal. If the FCC order becomes effective, nondominant interexchange carriers
will need to find new means of providing notice to customers of prices, terms
and conditions on which they offer their interstate services. Elimination of
tariffs will require that Holdings secure with each of its customers contractual
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agreements containing the terms of the services offered. To the extent that
disputes arise over such contacts, carriers such as Holdings may no longer
resort to the legal doctrine that the terms of a filed tariff supersede
individual contract language.
INTERNATIONAL SERVICE REGULATION. Holdings is a nondominant international
carrier and must comply with the federal statutory and regulatory requirements
of common carriage under the 1934 Communications Act. International common
carriers are required to obtain authority under Section 214 of the 1934
Communications Act and to file a tariff containing the rates, terms, and
conditions applicable to their services prior to initiating their international
telecommunications services. Holdings holds global authority from the FCC to
provide resale of switched services and to provide private line (where permitted
by the FCC) and facilities-based services. Holdings maintains an international
tariff on file with the FCC. International telecommunications service providers
are also required to file copies of their contracts with other carriers,
including foreign carrier agreements, and a variety of reports regarding their
international revenue, traffic flows and use of international facilities.
Carriers holding Section 214 authority are also subject to FCC rules requiring,
among other things, prior approval for transfers of control and assignments.
Authorized international carriers are subject to the FCC's international
service regulations, including the International Settlements Policy ("ISPY")
that governs the payment settlements between U.S. common carriers and their
foreign correspondents for terminating traffic over each other's networks, the
accounting rates for such settlement and permissible deviations from these
policies. The FCC recently enacted certain changes in its rules designed to
permit alternative arrangements outside of its ISPY as a means of encouraging
competition and lower, cost-based accounting rates. As a part of implementing
the ISPY, the FCC maintains a private line resale policy that prohibits carriers
from reselling international private leased circuits to provide switched
services to or from a country unless the FCC has found that the country affords
U.S. carriers equivalent resale opportunities to engage in similar activities in
that country. The FCC recently revised this and other policies to accommodate
the 1997 WTO Agreement on basic services, a compact that addresses market
access, foreign investment, and procompetitive regulatory principles in areas
currently generating a vast majority of the world's telecommunications revenue.
Currently, the FCC's rules permit U.S. carriers to provide switched service over
international leased lines or facilities-based private lines between the U.S.
and WTO countries where the local telecommunications provider generally charges
U.S. carriers at or below an FCC-determined rate for terminating the U.S.
carriers' traffic or equivalent resale opportunities are available.
The FCC has adopted measures intended to overhaul the system of
international settlements by, among other things, establishing lower ceilings
("Benchmarks") for the rates that U.S. carriers will pay foreign carriers for
the termination of international services. Several parties have sought
reconsideration and/or filed appeals of the FCC's benchmark decision. While
these rule changes may provide carriers with more flexibility to respond more
rapidly to changes in the global telecommunications market, they will also
likely increase the level of competition in the international telecommunications
marketplace.
WIRELESS SERVICES. Holdings owns and maintains a variety of
telecommunications infrastructures and holds various FCC and international
licenses to transmit voice and data. Holdings currently holds numerous FCC
licenses to provide land mobile, microwave and satellite communications
services. Holdings holds approximately 35 FCC licenses, with approximately 300
frequency pairs for business radio service. These licenses allow Holdings 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. Holdings holds approximately 20 microwave
licenses providing voice and data services along the Texas and Louisiana Gulf
Coast region and offshore to drilling, production and related companies. IWL
holds and operates a network of fixed earth stations and Very Small Aperture
Terminal ("VSAT") networks, which include seven KU band and two C band fixed
earth station authorizations.
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Facilities licensed by the FCC to provide microwave, satellite earth station
and land mobile service are subject, under Title III of the 1934 Communications
Act, 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, to implement certain provisions
of the 1996 Telecommunications Act, and to eliminate confusing, outdated,
redundant or otherwise burdensome regulation. Opportunities to obtain new common
carrier wireless licenses are often limited by the FCC's auction process under
which wireless licenses are assigned to the highest bidder.
The 1934 Communications Act generally limits direct foreign ownership of
wireless licenses to 20%, but provides for indirect foreign ownership holdings
above 25% upon FCC approval. In its order implementing the U.S. commitment under
the WTO Agreement, the FCC established new rules that effectively relax the
foreign ownership limits for common carrier wireless licenses. Specifically, the
new rules allow for up to 100% indirect ownership of wireless licenses by
foreign interests from countries that have participated in the WTO Agreement
upon FCC review and approval.
ACCESS CHARGES. The cost of providing long distance and local exchange
services will be affected by changes in the "access charge" rates imposed by
ILECs on long-distance carriers for origination and termination of calls over
local facilities. On May 8, 1997, the FCC released an order intended to reform
its system of interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act.
Access service is the use of local exchange facilities for the origination and
termination of interexchange communications. The FCC's recent access reform
order adopts various changes to its policies governing interstate access service
pricing designed to move access charges, over time, to more economically
efficient levels and rate structures. Among other things, the FCC modified rate
structures for certain non-traffic sensitive access rate elements, moving some
costs from a per-minute-of-use basis to flat-rate recovery, including one new
flat rate element; changed its structure for interstate transport services; and
affirmed that ISPs may not be assessed interstate access charges. In response to
claims that existing access charge levels are excessive, the FCC stated that it
would rely on market forces first to drive prices for interstate access to
levels that would be achieved through competition but that a "prescriptive"
approach, specifying the nature and timing of changes to existing access rate
levels, might be adopted in the absence of competition. The FCC has indicated
that it will promulgate additional rules sometime in 1998 that may grant
increased pricing flexibility to price cap LECs (i.e., the RBOCs, GTE and
certain independents that are permitted flexibility to establish rates at or
below a designated price ceiling and are no longer regulated based on cost of
service) upon demonstrations of increased competition (or potential competition)
in relevant markets.
UNIVERSAL SERVICE CHARGES. In 1997, the FCC released an order establishing
a significantly expanded federal universal service subsidy regime to be funded
by interstate carriers and certain other entities. The FCC established new
universal service funds to support telecommunications and information services
provided to qualifying schools, libraries and rural health care providers, and
expanded the federal subsidies for local telephone services provided to
low-income consumers. In accordance with the 1996 Telecommunications Act, the
FCC adopted plans to implement the recommendations of a Federal-State Joint
Board to preserve universal service, including a definition of services to be
supported, and defining carriers eligible for contributing to and receiving from
universal service subsidies. The FCC plans to revise its rules for subsidizing
service provided to consumers in high cost areas, which may result in further
substantial increases in the overall cost of the subsidy program. The FCC issued
a public notice in April 1998 seeking comment on proposals to revise the
methodology for determining universal service support. In a recent report to
Congress, the FCC clarified that transmission services supplied to ISPs are
revenue subject to the contribution. The FCC plans to address in the future the
contribution obligations, if any, of ISPs using their own facilities and ISPs
providing phone-to-phone IP telephony. The outcome of these proceedings or
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their effect on the companies, cannot be predicted. Several parties have
appealed the FCC's order and those appeals are pending before the Fifth Circuit
Court of Appeals. The outcome of the further FCC proceedings or of the pending
judicial appeals or petitions for FCC reconsideration on its operations cannot
be predicted.
INTERNET SERVICES. Federal and state regulations generally treat ISPs as
"enhanced service providers" and exempt from federal and state common carrier
regulations. Accordingly, Internet access services are exempt from tariffing,
certification and rate regulation. In December 1996, the FCC initiated a Notice
of Inquiry regarding whether to impose regulations or surcharges upon providers
of Internet access and Information Services (the "Internet NOI"). The Internet
NOI sought public comment upon whether to impose or continue to forebear from
regulation of Internet and other packet-switched network service providers and
specifically identifies Internet telephony as a subject for FCC consideration.
Additionally, regulations governing disclosure of confidential communications,
copyright, excise tax, and other requirements may apply to the provision of
Internet access services. The extent to which federal and state regulatory
authorities will impose additional regulation on Internet service providers
cannot be predicted.
The Eighth Circuit is currently considering the issue of whether the FCC has
a reasonable basis for not requiring Internet service providers to pay access
charges. The FCC is expected to address this issue in future rule making
proceedings. In June 1997, every RBOC advised CLECs that they did not consider
calls in the same local calling area from their customers to CLEC customers, who
are ISPs, to be local calls under the interconnection agreements between the
RBOCs and the CLECs. The RBOCs claimed, however, that the FCC exempted these
calls from access charges so that no compensation is owed to the CLECs for
transporting and terminating such calls. As a result, the RBOCs threatened to
withhold, and in many cases did withhold, reciprocal compensation for the
transport and termination of such calls. To date, numerous state commissions
have ruled on this issue in the context of state commission arbitration
proceedings or enforcement proceedings. In every state, to date, the state
commission has determined that reciprocal compensation is owed for such calls
although in at least one state, such a decision has been stayed. Several of
these cases are presently on appeal. The outcome of these appeals, or of
additional pending cases, cannot be predicted.
STATE REGULATION
Most states require a certification or other authorization to offer local
exchange and long distance intrastate services. These certifications generally
require a showing that the carrier has adequate financial, managerial and
technical resources to offer the proposed services in a manner consistent with
the public interest. In addition to tariff requirements, most states require
that common carriers charge just and reasonable rates and not discriminate among
similarly situated customers. Some states also require the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. States also often require
prior approvals or notifications for certain transfers of assets, customers, or
ownership. States generally retain the right to sanction a carrier or to revoke
certifications if a carrier violates relevant laws and/or regulations. If any
state regulatory agency were to conclude that Holdings is or was providing
intrastate service without the appropriate authority, the agency could initiate
enforcement actions, which could include the imposition of fines, the disgorging
of revenues, or the refusal to grant the regulatory authority necessary for the
future provision of intrastate telecommunications services. Holdings holds
authority to provide interexchange and competitive local exchange services in
certain service areas in Arkansas, Kansas, Louisiana, Oklahoma and Texas, and
has had its application for interexchange authority granted or is permitted to
offer interexchange service on a deregulated basis in at least 35 states.
In addition, carriers are subject to the outcome of proceedings held by
state utility commissions to determine state regulatory policies with respect to
ILEC and CLEC competition, geographic build-out, mandatory de-tariffing and
other matters. Certain states have adopted specific universal service funding
obligations. Proceedings to adopt state universal service funding obligations
rules are also pending or
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contemplated in numerous other states. State commissions generally have
authority to impose sanctions on carriers ranging from fines to license
revocation to address non-compliance with the states' particular regulatory
policies and requirements.
State regulatory agencies also regulate access charges and other pricing for
telecommunications services within each state. The RBOCs and other LECs have
been seeking reduction of state regulatory requirements, including greater
pricing flexibility. If regulations are changed to allow variable pricing of
access charges based on volume Holdings could be placed at a competitive
disadvantage over larger long distance carriers. Holdings also could face
increased price competition from the RBOCs and other LECs for local and long
distance services, which competition may be increased by the removal of former
restrictions on long distance service offerings by the RBOCs as a result of the
1996 Telecommunications Act. The impact of such rule changes on Holdings cannot
be predicted.
LOCAL GOVERNMENT AUTHORIZATIONS
Holdings may own telecommunications facilities that may be subject to
certain local government requirements. In particular, facilities companies must
obtain street use and construction permits and licenses and/or franchises to
install and expand fiber optic networks using municipal rights of way.
Termination of the existing franchise or license agreements prior to their
expiration dates or failure to renew such agreements and any resulting
requirement to remove facilities could have a material adverse effect on
Holdings' financial condition, results of operations and cash flow. In some
municipalities carriers must pay license or franchise fees based on a percentage
of gross revenues or on a per linear foot basis, as well as post performance
bonds or letters of credit. There can be no assurance that following expiration
of existing franchises, fees will remain at their current levels.
Telecommunications is generally required by its Texas Public Service
Commission authority to provide 911 service along with its CLEC offerings in
Texas. As a condition to providing 911 service in the City of Dallas, the City
of Dallas requires that service providers obtain a municipal franchise, which,
among other things, requires the franchise holder to pay a 4% gross revenue fee
based on operations in the City of Dallas, permits use of certain conduit by the
City of Dallas without charge, and provides a single fiber pair in the
franchisee's system for the City of Dallas' exclusive use. To date,
Telecommunications has not obtained a franchise and on May 26, 1998,
Telecommunications, along with two other entities authorized to provide CLEC
service in Texas, Golden Harbor of Texas, Inc., and Westel, Inc., filed suit in
the U.S. District Court for the Northern District of Texas against the City of
Dallas alleging that the franchise requirements imposed by the City of Dallas
violate the 1996 Telecommunications Act. This action has been consolidated with
a similar action brought by AT&T Communications of the Southwest, Inc.
("AT&TSW"). Although AT&TSW has obtained a preliminary injunction against the
City of Dallas' imposition of certain conditions on its franchise, there can be
no assurance that Telecommunications will prevail in its pending lawsuit against
the City of Dallas.
FOREIGN REGULATION
International telecommunications providers are subject to varying degrees of
regulation in each of the jurisdictions in which they provide services. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly from country to country. To the extent that Holdings
provides, now or in the future, services in non-U.S. countries, it will be
subject to the laws and regulations of foreign countries. The nature and extent
of telecommunications regulation varies significantly from country to country
and may include requirements that reflect closed or limited market access and/or
requirements Holdings may also face to obtain initial licensing, operational and
rate requirements in the relevant countries.
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LICENSES
Holdings has had its application for state certification granted or is
authorized, by virtue of state certification, tariff, registration, or on a
deregulated basis, to provide resold long distance services in at least 35
states. In order to provide its wireless mobile services, Holdings owns various
radio systems that provide two-way voice communications and has obtained
approximately 35 FCC licenses with approximately 300 frequency pairs. These
licenses have varying terms which expire and will require renewal between July
1998 and August 2002. As each license comes due for renewal, Holdings will
evaluate the need for such license and elect to either renew the license or let
it expire. For example, the license that will expire in July 1998 is for a
location in Arkansas that is no longer used by Holdings and which is not
anticipated to be used in the future. As a result, Holdings does not intend to
renew it. These licenses allow Holdings 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. Holdings holds approximately 20 microwave FCC licenses providing
voice and data services along the Texas and Louisiana Gulf Coast region and
offshore to drilling, production and related companies. Holdings holds and
operates seven Ku band and two C band fixed earth stations and holds FCC
licenses that allow Holdings to locate VSAT earth stations in Texas and other
U.S. locations.
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Holdings operates as a FCC certificated section 214 carrier to provide
resold switched telecommunications services. Holdings has also obtained broader
common carrier authority from the FCC to provide global resale of switched and
private line services as well as global facilities-based service. Holdings
currently provides international facilities-based private line service on a
private carrier basis into Bolivia, Bosnia, Croatia, Ecuador, Hungary and
Russia. As part of Holdings' plans to increase its service offerings, Holdings
has obtained authority to provide dedicated services in Louisiana and CLEC and
long distance services in Arkansas, Kansas, Louisiana, Oklahoma and Texas. In
addition, Holdings 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 Holdings to attach its own fiber optic cable to such
parties' respective utility poles. In addition, Holdings' installed fiber optic
cable is laid under various public and private rights-of-ways.
THE SPECIAL MEETINGS
GENERAL
IWL. This Joint Proxy Statement/Prospectus is being furnished to holders of
IWL Common Stock in connection with the solicitation of proxies by the IWL Board
for use at the IWL Special Meeting to consider and vote upon the approval and
adoption of the Merger Agreement and the approval of the Plan Proposals, to
grant authorization to IWL to adjourn the IWL Special Meeting to solicit
additional proxies and to transact such other business as may properly come
before the IWL Special Meeting.
THE IWL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RATIFIED THE
PLAN PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF IWL COMMON STOCK
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR THE APPROVAL
OF THE PLAN PROPOSALS.
TELECOMMUNICATIONS. This Joint Proxy Statement/Prospectus is being
furnished to holders of Telecommunications Common Stock in connection with the
solicitation of proxies by the Telecommunications Board for use at the
Telecommunications Special Meeting to consider and vote upon the approval and
adoption of the Merger Agreement and the approval of the Plan Proposals, to
grant authorization to Telecommunications to adjourn the Telecommunications
Special Meeting to solicit additional proxies and to transact such other
business as may properly come before the Telecommunications Special Meeting.
THE TELECOMMUNICATIONS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RATIFIED THE PLAN PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
TELECOMMUNICATIONS COMMON STOCK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND FOR APPROVAL OF THE PLAN PROPOSALS.
RECORD DATES
IWL. The IWL Board has fixed the close of business on , 1998 as
the IWL Record Date for the determination of the holders of IWL Common Stock
entitled to receive notice of, and to vote at, the IWL Special Meeting.
TELECOMMUNICATIONS. The Telecommunications Board has fixed the close of
business on , 1998 as the Telecommunications Record Date for the
determination of the holders of Telecommunications Common Stock entitled to
receive notice of, and to vote at, the Telecommunications Special Meeting.
TIMES AND PLACES; PURPOSES
IWL. The IWL Special Meeting will be held at on ,
1998, starting at a.m. local time. At the IWL Special Meeting, the holders
of IWL Common Stock will be asked to
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consider and vote upon (i) the Merger Agreement, (ii) the Plan Proposals and
(iii) such other matters as may properly come before the IWL Special Meeting,
including adjournment of the IWL Special Meeting to solicit additional proxies.
TELECOMMUNICATIONS. The Telecommunications Special Meeting will be held at
on , 1998, starting at a.m. local time. At the
Telecommunications Special Meeting, the holders of Telecommunications Common
Stock will be asked to consider and vote upon (i) the Merger Agreement, (ii) the
Plan Proposals and (iii) such other matters as may properly come before the
Telecommunications Special Meeting, including adjournment of the
Telecommunications Special Meeting to solicit additional proxies.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
IWL. Only holders of record of shares of IWL Common Stock on the IWL Record
Date are entitled to notice of, and to vote at, the IWL Special Meeting. On the
IWL Record Date, there were approximately shares of IWL Common Stock
outstanding and entitled to vote at the IWL Special Meeting held by
approximately shareholders of record.
Each holder of record of IWL Common Stock, as of the IWL Record Date, is
entitled to cast one vote per share. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of IWL Common Stock entitled to
vote is necessary to constitute a quorum at the IWL Special Meeting. Under the
TCBA and pursuant to IWL's Articles of Incorporation, the affirmative vote, in
person or by proxy, of the holders of a majority of the outstanding shares of
IWL Common Stock entitled to vote thereon is required to approve and adopt the
Merger Agreement. The affirmative vote of a majority of the votes cast
(including express abstentions), in person or by proxy, by the holders of IWL
Common Stock at the IWL Special Meeting, assuming a quorum is present, is
required to approve the Plan Proposals and any other matter that properly comes
before the IWL Special Meeting. The affirmative vote of the holders of a
majority of the IWL Common Stock represented in person or proxy at the IWL
Special Meeting, at which a quorum is not present, is required to approve an
adjournment of the IWL Special Meeting. The Merger Agreement and the Plan
Proposals are also subject to approval by the holders of Telecommunications
Common Stock and the holders of Partnership Interests as described herein. IWL,
in its capacity as the current sole shareholder of Holdings, has adopted and
approved the Equity Incentive Plan and the Director Stock Option Plan. Proxies
may be revoked by notice of revocation or a later signed and dated proxy or by
attending the IWL Special Meeting and voting in person. Attendance at the IWL
Special Meeting will not in itself constitute the revocation of a proxy.
As of the IWL Record Date, Ignatius W. Leonards, the Chief Executive Officer
and Chairman of the Board of IWL, beneficially owned 1,897,528 shares of IWL
Common Stock, which represented approximately 47.6% of the outstanding shares of
IWL Common Stock as of such date. As of the IWL Record Date, Byron M. Allen,
President and a director of IWL, beneficially owned 222,200 shares of IWL Common
Stock, which represented approximately 5.6% of the outstanding shares of IWL
Common Stock as of such date. Messrs. Leonards and Allen entered into the IWL
Shareholders Agreement with Telecommunications and the Partnership pursuant to
which they have agreed to vote all of their respective shares of IWL Common
Stock in favor of the approval of the Merger Agreement, subject to the
conditions set forth in the IWL Shareholders Agreement. If the conditions set
forth in the IWL Shareholders Agreement are satisfied, approval of the Merger
Agreement by the holders of IWL Common Stock is assured. See "The
Transaction--Interests of Certain Persons in the Transaction--IWL Shareholders
Agreement."
TELECOMMUNICATIONS. Only holders of record of shares of Telecommunications
Common Stock on the Telecommunications Record Date are entitled to notice of and
to vote at the Telecommunications Special Meeting. On the Telecommunications
Record Date, there were approximately 10,398,954 shares of
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Telecommunications Common Stock outstanding and entitled to vote at the
Telecommunications Special Meeting held by five shareholders of record.
Each holder of record of Telecommunications Common Stock, as of the
Telecommunications Record Date, is entitled to cast one vote per share. The
presence, in person or by proxy, of the holders of a majority of the outstanding
shares of Telecommunications Common Stock entitled to vote is necessary to
constitute a quorum at the Telecommunications Special Meeting. Under the TBCA,
the affirmative vote, in person or by proxy, of the holders of at least
two-thirds of the outstanding shares of Telecommunications Common Stock entitled
to vote thereon is required to approve and adopt the Merger Agreement. The
affirmative vote of a majority of the votes cast (including express
abstentions), in person or by proxy, by the holders of Telecommunications Common
Stock at the Telecommunications Special Meeting, assuming a quorum is present,
is required to approve the Plan Proposals and any other matter that properly
comes before the Telecommunications Special Meeting. The affirmative vote of the
holders of a majority of the Telecommunications Common Stock represented in
person or by proxy at the Telecommunications Special Meeting, at which a quorum
is not present, is required to approve an adjournment of the Special Meeting.
The Merger Agreement and the Plan Proposals are also subject to approval by the
holders of IWL Common Stock and holders of Partnership Interests as described
herein. IWL, in its capacity as the current sole shareholder of Holdings, has
adopted and approved the Equity Incentive Plan and the Director Stock Option
Plan. Proxies may be revoked by notice of revocation or a later signed and dated
proxy or by attending the Telecommunications Special Meeting and voting in
person. Attendance at the Telecommunications Special Meeting will not in itself
constitute the revocation of a proxy.
As of the Telecommunications Record Date, CapRock Investors, a Texas joint
venture owned 23.5% by Jere W. Thompson, Jr., the President and a director of
Telecommunications, 42.5% by Mark Langdale, a director of Telecommunications,
and 30.9% by Jere W. Thompson, Sr., a director of Telecommunications, owned
4,835,514 shares of Telecommunications Common Stock, which represent 46.5% of
the outstanding shares of Telecommunications Common Stock as of such date. As of
the Telecommunications Record Date, each of Scott L. Roberts, Timothy W. Rogers
and Timothy M. Terrell, each of whom is an Executive Vice President of
Telecommunications, owned 1,611,838 shares of Telecommunications Common Stock,
which represented in the aggregate 46.5% of the outstanding shares of
Telecommunications Common Stock as of such date. CapRock Investors and Messrs.
Roberts, Rogers and Terrell entered into the CapRock Owners Agreement with IWL
pursuant to which they have agreed to vote all of their respective shares of
Telecommunications Common Stock in favor of the approval of the Merger
Agreement, subject to the conditions set forth in the CapRock Owners Agreement.
If the conditions set forth in the CapRock Owners Agreement are satisfied,
approval of the Merger Agreement by the holders of Telecommunications Common
Stock is assured. See "The Transaction--Interests of Certain Persons in the
Transaction-- CapRock Owners Agreement."
PROXIES
All shares of IWL Common Stock and Telecommunications Common Stock
represented by properly executed proxies received prior to or at the IWL Special
Meeting or Telecommunications Special Meeting, respectively, and not
subsequently revoked will be voted in accordance with the instructions indicated
on such proxies. If no instructions are indicated on a properly executed and
returned proxy, such proxy will be voted FOR the approval of the Merger
Agreement and FOR the approval of the Plan Proposals. A properly executed proxy
marked "ABSTAIN," although counted for purposes of determining whether there is
a quorum and for purposes of determining the aggregate voting power and number
of shares represented and entitled to vote at the applicable Special Meeting,
will not be voted. Accordingly, as the affirmative vote of a majority (in the
case of IWL) or two-thirds (in the case of Telecommunications) of the
outstanding shares is required for the approval of the Merger Agreement, a proxy
marked "ABSTAIN" will have the effect of a vote against the proposal.
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A broker non-vote occurs when an agent holding shares for a beneficial owner
does not vote on a particular proposal because the agent does not have
discretionary voting power with respect to that proposal and has not received
instructions with respect to how to vote on such matter from the beneficial
owner. In accordance with Nasdaq National Market rules, brokers and nominees are
precluded from exercising their voting discretion with respect to the approval
and adoption of the Merger Agreement and approval of the Plan Proposals and,
therefore, absent specific instructions from the beneficial owner of such
shares, are not empowered to vote such shares with respect to such proposals.
Shares represented by broker non-votes will be counted for purposes of
determining whether there is a quorum at the applicable Special Meeting but will
not be counted for purposes of determining the number of shares present entitled
to vote with respect to a particular proposal for which authorization to vote
was withheld. With respect to the Merger Agreement, however, since the
affirmative vote of a majority or two-thirds, as the case may be, of the
outstanding shares is required for approval of the Merger Agreement, a broker
non-vote with respect to such proposal will have the effect of a vote against
such proposal. For other matters to come before a meeting, broker non-votes have
the practical effect of reducing the number of affirmative votes required to
achieve the requisite vote for such proposal by reducing the total number of
shares of common stock from which the requisite vote is calculated. Accordingly,
broker non-votes with respect to a proposal will not be considered shares
entitled to vote and, therefore, will not be counted as votes for or against
such proposal in determining whether such proposal is approved.
The IWL Board and the Telecommunications Board are not currently aware of
any business to be acted upon at their respective Special Meetings other than as
described herein. If, however, other matters are properly brought before either
Special Meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment. Such adjournment may be for the purpose of soliciting
additional proxies. Shares represented by proxies voting against the approval
and adoption of the Merger Agreement or against the approval of the Plan
Proposals will be voted against a proposal to adjourn the respective Special
Meeting for the purpose of soliciting additional proxies with respect to such
matter.
Holders of IWL Common Stock and holders of Telecommunications Common Stock
will not be entitled to present any matter for consideration at either of the
Special Meetings.
A holder of IWL Common Stock or a holder of Telecommunications Common Stock
may revoke his or her proxy at any time prior to the voting of the proxy by
delivering to the Secretary of IWL or Telecommunications, as the case may be, a
signed notice of revocation or a later dated signed proxy or by attending the
applicable Special Meeting and voting in person. Attendance at the IWL Special
Meeting or the Telecommunications Special Meeting will not itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by IWL for IWL proxies and
by Telecommunications for Telecommunications proxies. In addition to
solicitation by mail, arrangements may be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxy material to beneficial
owners, and IWL or Telecommunications, as the case may be, will, upon request,
reimburse them for their reasonable expenses in so doing.
HOLDERS OF IWL COMMON STOCK AND HOLDERS OF TELECOMMUNICATIONS COMMON STOCK
SHOULD NOT SEND IN ANY STOCK OR SHARE CERTIFICATES WITH THEIR PROXY CARDS. A
TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES FOR IWL
COMMON STOCK AND TELECOMMUNICATIONS COMMON STOCK WILL BE MAILED BY IWL AND
TELECOMMUNICATIONS TO THEIR RESPECTIVE HOLDERS OF COMMON STOCK AS SOON AS
PRACTICABLE AFTER THE CONSUMMATION OF THE TRANSACTION. SEE "THE
TRANSACTION--APPRAISAL RIGHTS."
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THE MERGER AGREEMENT
GENERAL
The Merger Agreement contemplates the mergers of I-Sub and C-Sub, two wholly
owned subsidiaries of Holdings, with and into IWL and Telecommunications,
respectively, with IWL and Telecommunications surviving the Mergers as wholly
owned subsidiaries of Holdings, and upon the consummation of the IWL Merger, but
before the consummation of the Telecommunications Merger, the Interest Exchange
of the Partnership Interests for shares of Holdings Common Stock, resulting in
the Partnership becoming an indirect subsidiary of Holdings (with
Telecommunications becoming a substitute general partner of the Partnership in
respect of the general Partnership Interest, which will be transferred to
Holdings, contributed to C-Sub and then transferred to Telecommunications by
virtue of the Telecommunications Merger, and Holdings becoming a substitute
limited partner of the Partnership in respect of the limited Partnership
Interests transferred to it). The Mergers will become effective by filing
Articles of Merger with the Secretary of State of the State of Texas. It is
anticipated that such filings will be made immediately on the closing under the
Merger Agreement. The Merger Agreement obligates Holdings to use its best
efforts to obtain the listing of the Holdings Common Stock on the Nasdaq
National Market upon official notice of issuance and obtaining such listing
approval is a condition to the consummation of the Transaction. The following
description of the Merger Agreement is qualified by reference to the complete
text of the Merger Agreement, which is incorporated by reference herein and
attached hereto as Appendix I. Capitalized terms used in the following
description of the Merger Agreement that are defined in the Merger Agreement and
not otherwise defined are used herein as defined in the Merger Agreement.
CONSIDERATION TO BE RECEIVED IN THE MERGERS
IWL MERGER. At the IWL Merger Effective Time, (a) each outstanding share of
IWL Common Stock (excluding those held in the treasury of IWL) and all rights in
respect thereof will be converted into one share of Holdings Common Stock and
(b) each outstanding share of IWL Common Stock held in the treasury of IWL will
be canceled and cease to exist.
TELECOMMUNICATIONS MERGER. At the Telecommunications Merger Effective Time,
(a) each outstanding share of Telecommunications Common Stock (excluding those
held in the treasury of Telecommunications and any Dissenter's Shares) and all
rights in respect thereof will be converted into 1.789030878 shares of Holdings
Common Stock and (b) each outstanding share of Telecommunications Common Stock
held in the treasury of Telecommunications will be canceled and cease to exist.
INTEREST EXCHANGE. Prior to the Closing Date, the holders of each issued
and outstanding one percent (1%) Partnership Interest and all rights in respect
thereof will be offered the opportunity to participate in the Exchange Offer and
tender such Partnership Interests to Holdings in exchange for 63,194.54 shares
of Holdings Common Stock.
EXCHANGE OF SHARES. Subject to the terms and conditions of the Merger
Agreement, at or prior to the Closing Date, Holdings will appoint an exchange
agent (the "Exchange Agent") to effect the exchange of IWL Common Stock,
Telecommunications Common Stock and Partnership Interests for Holdings Common
Stock. Holdings will upon the Closing Date deposit certificates representing
shares of Holdings Common Stock with the Exchange Agent for conversion of IWL
Common Stock and Telecommunications Common Stock and exchange of Partnership
Interests. Commencing immediately after the relevant Effective Time, holders of
IWL Common Stock or Telecommunications Common Stock may surrender their
certificates to the Exchange Agent (or, if at the time of such surrender there
is no Exchange Agent, to Holdings directly). In exchange for such share
certificates, holders will receive Holdings Common Stock certificates
representing such number of shares as described under "--Consideration to be
Received in the Transaction." Holders of unexchanged certificates that, prior to
the relevant Effective Time, represented shares of IWL Common Stock or
Telecommunications Common Stock will not be entitled to receive any
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dividends or other distributions payable by Holdings until their certificates
are surrendered. Upon surrender, however, subject to applicable laws, such
holders will receive accumulated dividends and distributions, without interest.
In order to validly tender Partnership Interests pursuant to the Exchange
Offer, each tendering holder of Partnership Interests will need to execute and
deliver to Holdings a Contribution Agreement in respect of such holder's
Partnership Interest. By executing and delivering a Contribution Agreement, the
holder of a Partnership Interest, among other things, will (a) tender the
Partnership Interest in the Exchange Offer; (b) consent to and approve the
Merger Agreement; (c) approve the Plan Proposals; (d) consent to all of the
transfers of Partnership Interests in the Interest Exchange, including the
transfer of the general Partnership Interest first to Holdings, then to C-Sub
and finally to Telecommunications; (e) consent to the substitution of Holdings
as a substitute limited partner in the Partnership in respect of the transferred
limited Partnership Interests and the substitution of Telecommunications as a
substitute general partner in respect of the transferred general Partnership
Interest; (f) waive any right to purchase any of the Partnership Interests
transferred to Holdings in the Interest Exchange or to C-Sub and/or
Telecommunications following the Interest Exchange; and (g) consent to the
continuation of the business of the Partnership to the extent any of the actions
described above would dissolve the Partnership. See "Interest
Exchange--Representations, Approvals, Appointments, Waivers and Covenants."
No fractional shares of Holdings Common Stock will be issued. Each holder of
shares of Telecommunications Common Stock and each holder of Partnership
Interests who would otherwise be entitled to a fraction of a share of Holdings
Common Stock (after aggregating all fractional shares of Holdings Common Stock
to be received by such holder) shall be entitled to receive a whole share of
Holdings Common Stock.
DISSENTER'S RIGHTS
Holders of shares of Telecommunications Common Stock have dissenters' rights
under Articles 5.11 through 5.13 of the TBCA. Any shares of capital stock of
Telecommunications with respect to which the holder thereof ("Dissenter")
ultimately receives payment pursuant to Articles 5.11 through 5.13 of the TBCA
will not be converted into Holdings Common Stock pursuant to the Agreement, but
the holder thereof will only be entitled to such rights as are granted by the
TBCA. Pursuant to Article 5.11.B of the TBCA, holders of IWL Common Stock will
not have dissenters' rights. See "The Transaction--Appraisal Rights."
If, after the Closing Date, a Dissenter loses the right to receive payment
pursuant to Articles 5.11 through 5.13 of the TBCA, then such holder's shares
will automatically be converted into and represent only the Holdings Common
Stock into which such shares would have been converted under the Merger
Agreement if there had been no dissent, effective as of the relevant Effective
Time. Upon surrender of the certificate representing such shares, without
prejudice to any corporate proceedings which may have been taken during the
interim period between the relevant Effective Time and the occurrence of such
event, such shareholder will be entitled to receive any dividends or other
distributions made to shareholders during such interim period. See "The
Transaction--Appraisal Rights."
TREATMENT OF STOCK OPTIONS
At the relevant Effective Time, (a) each outstanding and unexercised option
to purchase shares of IWL Common Stock or Telecommunications Common Stock (an
"Option") will be assumed by Holdings and converted into an option ("Holdings
Option") to purchase shares of Holdings Common Stock. The number of shares of
Holdings Common Stock to be subject to the Holdings Option into which an Option
is converted (a "Converted Option") shall be equal to the product of (x) the
number of shares of IWL Common Stock or Telecommunications Common Stock subject
to the Option that is converted immediately prior to the relevant Effective Time
and (y) the IWL Exchange Ratio or the Telecommunications
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Exchange Ratio, as applicable, each rounded down to the nearest whole share. The
exercise price per share of Holdings Common Stock for each particular Holdings
Option shall be equal to (x) if such Holdings Option resulted from a Converted
Option to acquire IWL Common Stock, the exercise price per share under the
Converted Option, or (y) if such Holdings Option resulted from a Converted
Option to acquire Telecommunications Common Stock, (1) the exercise price per
share under the Converted Option divided by (2) the Telecommunications Exchange
Ratio, each of which shall be rounded up to the nearest whole cent.
For a further discussion of the treatment of IWL and Telecommunications
stock options and other employee benefit plans for each of IWL,
Telecommunications and the Partnership under the Merger Agreement, see "The
Transaction--Interests of Certain Persons in the Transaction." For a description
of Holdings Common Stock, see "Description of Holdings Capital Stock--Common
Stock."
HOLDINGS FOLLOWING THE MERGER
BOARD. The Merger Agreement provides that following the consummation of the
Mergers, Holdings shall use commercially reasonable efforts to cause the Board
of Directors of Holdings to consist of Ignatius W. Leonards, Byron M. Allen,
Jere W. Thompson, Jr., Mark Langdale, Timothy W. Rogers, one outside director
designated by IWL (who will initially be Christopher J. Amenson) and one outside
director designated by the Telecommunications (who will initially be John R.
Harris) (provided that IWL and the Telecommunications shall each have the right
to veto the other's designee). See "Directors and Management of
Holdings--Directors."
CERTAIN CONDITIONS
CONDITIONS OF EACH PARTY'S OBLIGATION TO EFFECT THE MERGERS. In addition to
approval by shareholders of IWL and Telecommunications and the partners in the
Partnership, the obligation of each party to the Merger Agreement to consummate
the Mergers and the Interest Exchange is subject to the following conditions:
(a) no federal, state or foreign statute, rule, regulation, executive order,
decree or injunction shall have been enacted, entered, promulgated or enforced
by any court or governmental authority which makes the Mergers or the Interest
Exchange illegal or otherwise prohibits their consummation, (b) all material
authorizations, consents, orders and approvals of, or declarations and filings
with, and all expirations of waiting periods imposed by the Federal
Communications Commission ("FCC"), (and, as the date hereof, the parties have
agreed that all such necessary approvals have been obtained), and the state
public utility commissions or other similar authority which governs the
provision of telecommunications services in the states of Texas, Louisiana,
Arkansas and Oklahoma shall have been obtained (and, as the date hereof, the
parties have agreed that all such necessary approvals have been obtained), (c)
the Registration Statement, of which this Joint Proxy Statement/Prospectus forms
a part, shall have become effective prior to mailing by IWL, Telecommunications
and the Partnership of this Joint Proxy Statement/ Prospectus to their
respective shareholders and Partners and no stop order suspending the
effectiveness of the Registration Statement, of which this Joint Proxy
Statement/Prospectus forms a part, shall be then threatened, initiated or in
effect, (d) all required state securities and blue sky permits or approvals
shall have been received and (e) the Holdings Common Stock shall have been duly
approved for listing on the Nasdaq National Market.
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF IWL AND THE MERGER
SUBSIDIARIES. The obligations of IWL, I-Sub and C-Sub (I-Sub and C-Sub being
referred to collectively as the "Merger Subsidiaries") to effect the
transactions contemplated by the Merger Agreement are further subject to all of
the following conditions, among others: (a) the representations and warranties
of Telecommunications and the Partnership contained in the Merger Agreement
shall be true and correct as of the Closing Date with the same effect as though
made on and as of such time (except to the extent such representations and
warranties speak as of an earlier date); (b) Telecommunications and the
Partnership shall have performed or complied in all material respects with all
covenants, obligations and conditions required to be performed and complied
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with as of the Closing Date; (c) Telecommunications and the Partnership shall
have obtained certain required third-party consents with respect to the
transactions; (d) IWL and the Merger Subsidiaries and Telecommunications and the
Partnership shall have received certain legal opinions with respect to
corporate, regulatory and tax matters; (e) there shall not have occurred any
event, fact or condition which has had or reasonably would be expected to have a
Material Adverse Effect on Holdings, Telecommunications, the Partnership or the
surviving corporations since the date of the Merger Agreement; (f) the General
Partner and the holders of at least 80% of the limited Partnership Interests in
the Partnership shall have executed and delivered to Holdings and not withdrawn
a Contribution Agreement in respect of such partner's Partnership Interests; and
(g) IWL shall have received a letter from KPMG Peat Marwick, LLP to the effect
that the Mergers and the Interest Exchange qualify for "pooling of interests"
accounting treatment under Accounting Principles Board Opinion No. 16 if
consummated in accordance with the Merger Agreement. -
ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF TELECOMMUNICATIONS AND THE
PARTNERSHIP. The obligations of Telecommunications and the Partnership to
effect the transactions contemplated by the Merger Agreement are further subject
to all of the following conditions, among others: (a) the representations and
warranties of IWL and the Merger Subsidiaries contained in the Merger Agreement
shall be true and correct as of the Closing Date with the same effect as though
made as of such time (except to the extent such representations and warranties
speak as of an earlier date); (b) IWL and the Merger Subsidiaries shall have
performed or compiled in all material respects with all covenants, obligations
and conditions required to be performed and complied with as of the Closing
Date; (c) Telecommunications and the Partnership and IWL and the Merger
Subsidiaries shall have received certain legal opinions with respect to
corporate, regulatory and tax matters; (d) there shall not have occurred any
event that has had or could reasonably be expected to have a Material Adverse
Effect on IWL; (e) each of Telecommunications and the Partnership shall have
received a letter from KPMG Peat Marwick, LLP to the effect that the Mergers and
the Interest Exchange qualify for "pooling of interests" accounting treatment
under Accounting Principles Board Opinion No. 16 if consummated in accordance
with the Merger Agreement.
"Material Adverse Effect," as defined in the Merger Agreement, means any
change in or effect on the business of the referenced entity or any of its
subsidiaries that is or will be materially adverse to the business, operations
(including the income statement), properties (including intangible properties),
condition (financial or otherwise), assets, liabilities or regulatory status of
such referenced entity and its subsidiaries, taken as a whole, but shall not
include the effects of changes that are generally applicable in (A) the United
States economy or (B) the United States securities markets if, in either of (A)
or (B), the effect on IWL, Telecommunications or the Partnership (as the case
may be) and its respective subsidiaries, taken as a whole, is not
disproportionate relative to the effect on the other parties and its
subsidiaries, taken as a whole. The parties to the Merger Agreement have agreed
that the increase or decrease in the price of the shares of IWL Common Stock as
reported on the Nasdaq National Market shall be deemed to not have a Material
Adverse Effect on any of the parties to the Merger Agreement. The parties have
further agreed that the modification made to the IWL Exchange Ratio, the
Telecommunications Exchange Ratio and the Partnership Exchange Ratio in the
second amendment to the Merger Agreement addresses and takes into account all
changes of which they are aware to the business of IWL since the execution of
the Merger Agreement through the date of the second amendment to the Merger
Agreement, including, but not limited to, IWL's failure to meet earnings, income
projections or models.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties of IWL,
Telecommunications and the Partnership as to, among other things, due
organization and good standing, authorized capital stock, authorized Partnership
Interests, ownership of subsidiaries, corporate or partnership authority to
enter into the contemplated transactions, recent filings with the Commission (if
applicable), financial statements, ownership of and title to assets and
properties, material contracts, tax matters, regulatory
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matters, information supplied for use in this Registration Statement and Joint
Proxy Statement/Prospectus, the absence of certain undisclosed liabilities, the
absence of material changes or events, compliance with laws, agreements,
contracts or commitments with third parties, ownership of personal property,
litigation, employee benefit plans, intellectual property, labor matters and
environmental matters.
CERTAIN COVENANTS
The Merger Agreement provides that from the date thereof to the Closing
Date, except as otherwise permitted by the Merger Agreement, Telecommunications
and the Partnership will each conduct its business in the ordinary course
consistent with past practices. By way of illustration and without limiting the
foregoing, the Merger Agreement places restrictions on the ability of
Telecommunications and the Partnership to, among other things, (a) enter into
any commitment or transaction involving more than $500,000 of products and
services of Telecommunications and the Partnership; (b) grant any severance or
termination pay in excess of $10,000; (c) transfer intellectual property rights,
subject to certain exceptions; (d) enter into, amend or terminate or assign any
agreements pursuant to which any other party is granted exclusive marketing or
other rights with respect to any products of Telecommunications or the
Partnership; (e) violate or amend any contracts or agreements required to be set
forth in the disclosure schedule to the Merger Agreement; (f) subject to certain
exceptions, commence any litigation except for normal collection actions; (g)
declare or pay dividends, make distributions with respect to Telecommunications
stock, or split, combine or reclassify Telecommunications' stock or issue
securities; (h) issue or sell shares, unless pursuant to an employee stock
option granted prior to the execution of the Merger Agreement; (i) amend
Telecommunications' Articles of Incorporation or Bylaws or the Partnership's
Agreement of Limited Partnership except as provided in the Articles of Merger;
(j) acquire assets of any entity or dispose of any assets which are material to
the business of the Telecommunications or the Partnership; (k) incur
indebtedness; (l) adopt or amend employee compensation and severance benefits;
(m) revalue any of its assets, other than in the ordinary course of business;
(n) pay more than $25,000 in any one case (or $100,000 in the aggregate) of any
obligation except in the ordinary course of business or liabilities reflected or
reserved against in certain of Telecommunications' or the Partnership's
financial statements; (o) change any material election or any accounting method
in respect of taxes; or (p) take any action which would jeopardize the ability
of the business combination to be effected by the Mergers and the Interest
Exchange from being accounted for as a pooling of interests.
The Merger Agreement also requires IWL, except as otherwise permitted by the
Merger Agreement, to conduct its business in the ordinary course consistent with
past practices and places restrictions on the ability of IWL to (a) enter into
any commitment or transaction involving more than $500,000 of products and
services of IWL; (b) grant any severance or termination pay in excess of
$10,000; (c) transfer intellectual property rights, subject to certain
exceptions; (d) enter into, amend or terminate or assign any agreements pursuant
to which any other party is granted exclusive marketing or other rights with
respect to any products of IWL; (e) violate or amend any contracts or agreements
required to be set forth in the disclosure schedule to the Merger Agreement; (f)
subject to certain exceptions, commence any litigation except for normal
collection actions; (g) declare or pay dividends, make distributions with
respect to IWL stock, or split, combine or reclassify IWL's stock or issue
securities; (h) issue or sell shares, unless pursuant to an employee stock
option granted prior to the execution of the Merger Agreement; (i) amend IWL's
Articles of Incorporation or Bylaws except as provided in the Articles of
Merger; (j) acquire assets of any entity or dispose of any assets which are
material to the business of IWL; (k) incur indebtedness; (l) adopt or amend
employee compensation and severance benefits; (m) revalue any of its assets,
other than in the ordinary course of business; (n) pay more than $25,000 in any
one case (or $100,000 in the aggregate) of any obligation except in the ordinary
course of business or liabilities reflected or reserved against in certain of
IWL's financial statements; (o) change any material election or any accounting
method in respect of taxes; or (p) take any action which would jeopardize the
ability of the business combination to be effected by the Mergers and the
Interest Exchange from being accounted for as a pooling of interests.
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NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that Telecommunications and the Partnership
will not, and will not allow any of its officers, directors, or shareholders
affiliated with any officer, director, or Telecommunications' agents to,
directly or indirectly, solicit, initiate, encourage or participate in any
discussions or negotiations relating to an Acquisition Proposal (as defined
below) or cooperate with any Acquisition Proposal. Except for disclosures made
in the ordinary course of business, Telecommunications and the Partnership will
not disclose information concerning its business and properties.
As defined in the Merger Agreement, "Acquisition Proposal" means a proposal
or offer for a tender or exchange offer, merger, consolidation or other business
combination involving Telecommunications or the Partnership or any proposal to
acquire in any manner a substantial equity interest in, or all or substantially
all the assets of, Telecommunications or the Partnership.
CONTROL OF OTHER PARTY'S BUSINESS
Nothing in the Merger Agreement grants (i) IWL the right to control or
direct Telecommunications or the Partnership's operations prior to the Closing
Date, or (ii) Telecommunications or the Partnership the right to control or
direct IWL's operations prior to the Closing Date.
EMPLOYMENT AGREEMENTS
Pursuant to the Merger Agreement, each of Ignatius W. Leonards, Byron M.
Allen, Errol J. Olivier, Richard H. Roberson and Bryan L. Olivier, who are
currently IWL employees, and each of Jere W. Thompson, Jr., Scott L. Roberts,
Timothy W. Rogers and Timothy M. Terrell, who are currently Telecommunications'
employees, entered into an Employment Agreement (which includes a covenant not
to compete) with Holdings. Under the terms of the Merger Agreement, prior to the
Closing Date, Telecommunications is responsible for the performance of all of
Holdings' obligations under the Employment Agreements of the Telecommunications
employees and IWL is responsible for the performance of all of Holdings'
obligations under the Employment Agreements with the IWL employees, in each case
including obligations to pay base compensation and bonus (if any), tax
withholding and payment obligations (including with respect to FICA, Medicare
and all other similar taxes) and employee expense reimbursement obligations.
POOLING ACCOUNTING
IWL, the Partnership and Telecommunications are each required under the
Merger Agreement to use commercially reasonable efforts to cause the business
combination to be effected by the Mergers and the Interest Exchange to be
accounted for as a pooling of interests. Each of IWL, the Partnership and
Telecommunications is also required under the Merger Agreement to use
commercially reasonable efforts to cause their respective "affiliates" (within
the meaning of Rule 145 promulgated under the Securities Act) not to take any
action that would adversely affect the ability of the parties to account for the
business combination to be effected by the Mergers and the Interest Exchange as
a pooling of interests.
TERMINATION
At any time prior to the Closing Date, the Merger Agreement may be
terminated as authorized by the respective Boards of Directors of IWL, on the
one hand, or of Telecommunications or the General Partner, on the other hand, as
follows: (a) by mutual written consent of IWL, Telecommunications and the
General Partner; (b) by either IWL, on the one hand (referred to as "party" to
the Transaction), or Telecommunications and the Partnership, on the other hand
(also collectively referred to as a "party" to the Transaction), if the Mergers
and the Interest Exchange shall not have been consummated on or before December
31, 1998 (unless such failure to consummate is caused solely by reason of the
failure to obtain certain regulatory approvals, in which case the Termination
Date shall be extended to February 16, 1999) unless
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the terminating party caused the failure to consummate; (c) by either party if
the other party shall have made a misrepresentation or breached an obligation
under the Merger Agreement, and such breach or misrepresentation is not cured
within 30 days after notice thereof and such breach or misrepresentation results
or would reasonably be expected to result in a Material Adverse Effect on the
terminating party; (d) by either party upon the occurrence of a Material Adverse
Effect on the other party or an event which could reasonably be expected to
result in a Material Adverse Effect on the other party; (e) by either party (the
"terminating party") (i) if the other party's Board of Directors or any
committee of the Board of Directors or the General Partner, as applicable, shall
withdraw or modify in any adverse manner its approval or recommendation of the
Merger Agreement or the Mergers or the Interest Exchange or (ii) if the
terminating party's own Board of Directors or any committee of the Board of
Directors or General Partner, as applicable, shall withdraw or modify in any
adverse manner its approval or recommendation of the Merger Agreement or the
Mergers or the Interest Exchange; (f) by either party if any of the required
approvals of the shareholders or partners, as the case may be, shall fail to
have been obtained; (g) by either party prior to the approval of the Merger
Agreement by the shareholders or the partners of such party, as applicable, upon
two business days' prior notice to the other party, if, as a result of an
Acquisition Proposal received from a person other than a party to the
Transaction or any of its affiliates, the Board of Directors or the General
Partner, as applicable, of such party determines in good faith, on the basis of
oral or written advice of outside counsel, that their fiduciary obligations
under applicable law require that such Acquisition Proposal be accepted;
provided, however, that (i) the Board of Directors or the General Partner of
such party shall have concluded in good faith, after considering applicable
provisions of law, on the basis of oral or written advice of outside counsel,
that such action is necessary for the Board of Directors or the General Partner
of such party to act in a manner consistent with its fiduciary duties under
applicable law and (ii) prior to any such termination, the terminating party
shall, and shall cause its respective financial and legal advisors to, negotiate
with the non-terminating party to adjust the terms and conditions of the Merger
Agreement to provide the opportunity for the terminating party to proceed with
the transactions contemplated thereby; or (h) by IWL, Telecommunications or the
Partnership if there exists a final, nonappealable order or a ruling by a court
of competent jurisdiction or governmental, regulatory or administrative agency
or commission permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement. See "--Certain Covenants."
EFFECT OF TERMINATION
The Merger Agreement obligates IWL to pay to Telecommunications and the
Partnership, or Telecommunications and the Partnership to pay to IWL, in certain
circumstances set forth in the Merger Agreement, a termination fee of $2.5
million in cash in the aggregate (the "Termination Fee") on the date the Merger
Agreement is terminated. The Merger Agreement obligates Telecommunications and
the Partnership to pay to IWL the Termination Fee if (i) IWL (or, in certain
cases, Telecommunications and the Partnership) terminates the Merger Agreement
because the Board of Directors or any committee thereof of Telecommunications or
the General Partner withdraws or modifies in any adverse manner its approval or
recommendation of the Merger Agreement, the Mergers or the Interest Exchange,
(ii) IWL or Telecommunications or the Partnership terminate the Merger Agreement
due to the failure to obtain the required approval from the Telecommunications
shareholders or the Partnership's partners, (iii) Telecommunications and the
Partnership terminate the Merger Agreement prior to the approval of the Merger
Agreement by the Telecommunications shareholders or the partners in the
Partnership, upon Telecommunications or the Partnership having received an
Acquisition Proposal and the Telecommunications Board or the General Partner
Board having concluded that its fiduciary obligations under applicable law
require that such Acquisition Proposal be accepted, or (iv) IWL terminates the
Merger Agreement as a result of the failure of Telecommunications or the
Partnership to take all action necessary to obtain approval of the Transaction
from their respective shareholders and partners. In such event, $1,875,000 of
the Termination Fee will be paid by Telecommunications and $625,000 will be paid
by the Partnership.
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In addition, the Merger Agreement obligates IWL to pay to Telecommunications
and the Partnership the Termination Fee if (i) Telecommunications and the
Partnership (or, in certain cases, IWL) terminate the Merger Agreement because
the IWL Board or any committee thereof withdraws or modifies in any adverse
manner its approval or recommendation of the Merger Agreement, the Mergers or
the Interest Exchange; (ii) IWL or Telecommunications or the Partnership
terminate the Merger Agreement due to the failure to obtain the required
approval from the IWL shareholders, (iii) IWL terminates the Merger Agreement
prior to the approval of the Merger Agreement by the IWL shareholders upon IWL
having received an Acquisition Proposal and the IWL Board having concluded that
its fiduciary obligations under applicable law require that such Acquisition
Proposal be accepted, or (iv) Telecommunications or the Partnership terminates
the Merger Agreement as a result of IWL's failure to take all action necessary
to obtain approval of the Transaction from IWL's shareholders. In such event,
IWL will pay $1,875,000 of the Termination Fee to Telecommunications and will
pay $625,000 of the Termination Fee to the Partnership.
EXPENSES
Each of the parties to the Merger Agreement will bear its own costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby, except that the expenses incurred in connection with the
printing of this Joint Proxy Statement/Prospectus and the Registration Statement
will be shared equally by Telecommunications and IWL.
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MODIFICATION OR AMENDMENT
The Merger Agreement may be amended by action taken in writing by all of the
parties at any time before the Effective Time, but after approval of the Mergers
and the Interest Exchange by the shareholders of IWL or Telecommunications or
the partners of the Partnership (whichever shall occur first), no amendment may
be made that would (a) alter or change the amounts or kinds of consideration to
be received by the holders of IWL Common Stock or Telecommunications Common
Stock or holders of Partnership Interests upon consummation of the Mergers and
the Interest Exchange, (b) alter or change any term of the Articles of
Incorporation of either of the Surviving Corporations or (c) alter or change any
of the terms and conditions of the Merger Agreement if such alteration or change
would adversely affect the holders of any class or series of securities of
Holdings, IWL, Telecommunications or the Partnership. The Merger Agreement has
been amended three times and the amendments are included in the Appendix hereto.
The original Merger Agreement (as amended April 30, 1998) provided that each
outstanding share of IWL Common Stock would be converted into one share of
Holdings Common Stock, a Telecommunications Ratio of .75295288 and a Partnership
Exchange Ratio of 26,619.8. On June 20, 1998, the original Merger Agreement was
amended for the second time and on July 8, 1998 for a third time. The first
amendment to the Merger Agreement was made on April 30, 1998 to make minor
adjustments to the Telecommunications Exchange Ratio in order to address
calculation errors in the number of options and shares of Telecommunications
Common Stock that were outstanding. Such amendment did not change any of the
other Exchange Ratios or change the total number of shares that had been
approved for issuance by Holdings. The second amendment provided for a
Telecommunications Exchange Ratio of 1.789030878 and a Partnership Exchange
Ratio of 63,194.54. The second amendment is expected to result in an additional
14,639,148 shares of Holdings Common Stock being issued, for a total of
29,738,607 (assuming all of the Partnership interests are validly tendered to
and accepted by Holdings in the Exchange Offer). The second amendment and the
revised Exchange Ratios were prompted by assertions by Telecommunications and
the Partnership that the reduction in IWL's revenues from its plan and the
delays in contracts, among other factors, constituted a Material Adverse Effect
(as defined in the Merger Agreement) with respect to IWL which could reasonably
be expected to have a Material Adverse Effect on Telecommunications and the
Partnership. In lieu of terminating the Merger Agreement or disputing whether
such a right to terminate existed, the parties agreed to modify the Exchange
Ratios. In modifying the Exchange Ratios, the parties considered, among other
factors, (i) contract delays causing lower IWL project revenues and operating
income than those set forth in the IWL business plan furnished to
Telecommunications and the Partnership in connection with the original
negotiations of the Merger Agreement, (ii) the continued improvement in
Telecommunications' and the Partership's operations and (iii) the significant
expansion in Telecommunications' and the Partnership's business plans from the
plans furnished to IWL in connection with the original negotiations of the
Merger Agreement. The second amendment was entered into on June 20, 1998 to
adjust the IWL Exchange Ratio, the Telecommunications Exchange Ratio and the
Partnership Exchange Ratio, to remove various conditions to closing that had
been met or which had been determined to not be material and to allow for the
issuance by Holdings, Telecommunications and the Partnership of the Proposed
Notes and their guarantee by IWL. The third amendment was entered into to
confirm the receipt of all required regulatory approvals and the receipt of the
fairness opinion from IWL's financial advisor.
INTEREST EXCHANGE
TERMS OF THE EXCHANGE OFFER; EXPIRATION DATE
Partners in the Partnership are being offered the opportunity to tender
their Partnership Interests in exchange for Holdings Common Stock (the "Exchange
Offer"). Each one percent (1%) of the Partnership Interests issued and
outstanding immediately before the Closing Date and all rights in respect
thereof at the Closing Date shall, upon the execution and delivery by the holder
thereof of a Contribution Agreement with respect to such Partnership Interests
and the acceptance thereof by Holdings, be exchanged for
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63,194.54 shares of Holdings Common Stock. Upon the terms and subject to the
conditions of the Exchange Offer, as stated herein, Holdings will accept for
exchange all Partnership Interests validly tendered on or prior to the
Expiration Date and not withdrawn in accordance with the procedures set forth in
this section. For purposes of the Exchange Offer, the term "Expiration Date"
shall mean 12:00 midnight, Eastern Time, on July , 1998, unless
Holdings, in its sole discretion, shall have extended the period of time for
which the Exchange Offer is open, in which event the term "Expiration Date"
shall mean the latest time and date on which the Exchange Offer, as extended by
Holdings, shall expire. See "--Extension of Tender Period" for a description of
Holdings' right to extend the period of time during which the Exchange Offer is
open and to amend or terminate the Exchange Offer.
If, prior to the Expiration Date, Holdings increases the consideration
offered for Partnership Interests pursuant to the Exchange Offer, the increased
consideration will be delivered for all Partnership Interests accepted for
exchange pursuant to the Exchange Offer, regardless of whether the Partnership
Interests were tendered prior to the increase in the consideration offered.
The Exchange Offer is conditioned upon satisfaction of certain conditions.
See "--Conditions," which describes the conditions of the Exchange Offer.
Holdings reserves the right (but in no event shall be obligated), in its sole
discretion, to waive any or all of those conditions. If, on or prior to the
Expiration Date, any or all of the Exchange Offer Conditions (as described
below) have not been satisfied or waived, Holdings reserves the right to (i)
decline to exchange any of the Partnership Interests tendered and terminate the
Exchange Offer, (ii) waive all of the unsatisfied Exchange Offer Conditions and,
subject to complying with applicable rules and regulations of the Commission,
exchange all Partnership Interests validly tendered, (iii) extend the period of
time during which the Exchange Offer is open and, subject to the right of the
holders of Partnership Interests to withdraw such Partnership Interests until
the Expiration Date, retain the Partnership Interests that are tendered prior to
the Expiration Date and/or (iv) amend the Exchange Offer. See "Merger
Agreement--Certain Conditions."
By executing and delivering a Contribution Agreement, a partner will not
only tender its Parnership Interest but will, among other things, also make
certain representations, waive certain rights, agree to certain actions and
appoint certain proxies and attorneys-in-fact, all as described under
"--Representations, Approvals, Appointments, Waivers and Covenants." The
partners in the Partnership do not have rights equivalent to a corporate
shareholder's appraisal rights. Any partner not executing a Contribution
Agreement will remain a partner in the Partnership.
For a discussion of federal tax consequences applicable to the proposed
Interest Exchange, see "The Transaction--Certain United States Federal Income
Tax Consequences of the Interest Exchange."
This Joint Proxy Statement/Prospectus and the accompanying Contribution
Agreement are being mailed by Holdings to the persons shown by the Partnership's
records to have been holding Partnership Interests as of , 1998.
ACCEPTANCE FOR EXCHANGE
Upon the terms of the Exchange Offer and subject to the satisfaction of the
Exchange Offer Conditions (as described below), Holdings will accept for
exchange all Partnership Interests validly tendered and not withdrawn in
accordance with the procedures specified in this section as promptly as
practicable following the Expiration Date. In all cases, exchanges of
Partnership Interests made pursuant to the Exchange Offer will be made only
after timely receipt by Holdings of a properly completed and duly executed
Contribution Agreement. If any tendered Partnership Interests are not exchanged
for shares of Holdings Common Stock for any reason, the Contribution Agreement
with respect to such Partnership Interests will be destroyed by Holdings and the
holders shall retain such Partnership Interests with all current rights,
obligations and liabilities, as the same may be amended by actions effected
pursuant to the Contribution Agreements that are delivered.
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CONDITIONS
Satisfaction of the following conditions (the "Exchange Offer Conditions")
prior to the Expiration Date is a condition of the Interest Exchange:
MINIMUM ACCEPTANCE. The General Partner and partners holding, in the
aggregate, at least 80% of the limited Partnership Interests in the Partnership
shall have executed and delivered to Holdings a Contribution Agreement in
respect of such partner's Partnership Interest.
MERGERS. If the Mergers are not approved by the requisite vote of all
shareholders eligible to vote for the Mergers or not consummated for some other
reason, no tenders will be accepted by Holdings and the Interest Exchange will
not be consummated.
OTHER CONDITIONS. The Interest Exchange is also subject to satisfaction of
those conditions described under "The Merger Agreement--Certain Conditions" as
well as qualifications under the applicable securities laws of the states in
which the partners and Holdings reside. Any determination by Holdings concerning
the events set forth above will be final and binding on all parties. The
foregoing conditions are for the sole benefit of Holdings and may be waived by
it in its sole discretion, in whole or in part.
PROCEDURE FOR TENDERING PARTNERSHIP INTERESTS
VALID TENDER. In order for a tendering general or limited partner in the
Partnership to participate in the Interest Exchange, such partner's Partnership
Interests must be validly tendered and not withdrawn on or prior to the
Expiration Date. To validly tender Partnership Interests, a properly completed
and duly executed Contribution Agreement, together with any requisite
assignments, releases or other documents indicated in the Contribution
Agreement, must be received by Holdings on or prior to the Expiration Date.
DELIVERY OF CONTRIBUTION AGREEMENT. The method of delivery of the
Contribution Agreement is at the option and risk of the tendering partner, and
delivery will be deemed made only when actually received by Holdings. In all
cases, sufficient time should be allowed to assure timely delivery.
DETERMINATION OF VALIDITY; REJECTION OF INTERESTS'; WAIVER OF DEFECTS; NO
OBLIGATION TO GIVE NOTICE OF DEFECTS. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for exchange of any
tender (or subsequent withdrawal) of Partnership Interests pursuant to the
Exchange Offer will be determined by Holdings, in its sole discretion, which
determination shall be final and binding. Holdings reserves the absolute right
to reject any or all tenders or withdrawals of any particular Partnership
Interests determined by it not to be in proper form or if the acceptance of or
exchange for those Partnership Interests may, in the opinion of Holdings's
counsel, be unlawful. Holdings also reserves the absolute right to waive or
amend any of the conditions of the Exchange Offer that it is legally permitted
to waive as to the tender of any particular Partnership Interests and to waive
any defect or irregularity in any tender or withdrawal with respect to any
particular Partnership Interests of any particular partner. Holdings'
interpretation of the terms and conditions of the Exchange Offer (including the
Contribution Agreement) will be final and binding. No tender or withdrawal of
Partnership Interests will be deemed to have been validly made until all defects
and irregularities have been cured or waived. Neither Holdings nor any other
person will be under any duty to give notification of any defects or
irregularities in the tender or subsequent withdrawal of any Partnership
Interests or will incur any liability for failure to give any such notification.
SPECIAL REQUIREMENTS OF CERTAIN PARTNERS. Some of the partners in the
Partnership are entities. With respect to Partnership Interests tendered by any
such entities, Holdings will require that each Contribution Agreement be
accompanied by evidence acceptable to Holdings that such entity has met all
requirements of its governing instruments, such as its applicable articles of
incorporation or bylaws, and is authorized to tender such Partnership Interests
under the laws of the jurisdiction in which such entity was organized. There may
also be required an opinion of counsel for each such partners in the
Partnership, in a
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form acceptable to Holdings, to the effect that the tender of Partnership
Interests by such entity has been duly authorized and does not violate its
governing instruments and is legal, valid, and binding on such entity.
Holders of Partnership Interests who are individuals living in community
property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, and Washington) may be required to present evidence acceptable to
Holdings that the transfer of Partnership Interests to Holdings is not done in
violation of the applicable community property laws.
BINDING OBLIGATION. A tender of Partnership Interests pursuant to and in
accordance with the procedures described in this section and the acceptance of
shares of Holdings Common Stock by a partner in exchange for such Partnership
Interests will constitute a binding agreement between the tendering partner and
Holdings on the terms set forth in this Joint Proxy Statement/Prospectus and in
the Contribution Agreement.
WITHDRAWAL RIGHTS
Tenders of Partnership Interests made pursuant to the Exchange Offer are
irrevocable, except that Partnership Interests tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date and, unless
already accepted for exchange as provided in this Exchange Offer, may also be
withdrawn at any time after August 31, 1998. For withdrawal to be effective, a
written notice of withdrawal must be timely received by Holdings. Any such
notice of withdrawal must specify the name of the partner who tendered the
Partnership Interests to be withdrawn and must be signed by the person(s) who
signed the Contribution Agreement in the same manner as the Contribution
Agreement was signed. Partnership Interests properly withdrawn will be deemed to
not be validly tendered for purposes of the Exchange Offer. Withdrawn
Partnership Interests may be re-tendered, however, by following the procedures
described in this section at any time prior to the Expiration Date.
REPRESENTATIONS, APPROVALS, APPOINTMENTS, WAIVERS AND COVENANTS
REPRESENTATIONS. By executing and delivering a Contribution Agreement, each
tendering partner will represent in the Contribution Agreement that, among other
things, (i) such partner has the right and authority to transfer the tendered
Partnership Interest, (ii) such Partnership Interest is free and clear of all
liens, encumbrances, and adverse claims other than those liens securing
indebtedness of the Partnership or which were otherwise taken into account in
the calculation of the exchange value of such Partnership Interest, (iii) the
partner has not made any binding commitment requiring such partner to dispose of
the shares of Holdings Common Stock to be received by such partner in the
Interest Exchange and (iv) such partner has no plan or intention of making such
a disposition.
APPROVALS. By executing and delivering a Contribution Agreement, each
tendering partner will approve and consent to a number of items, including the
following: (i) the Merger Agreement, (ii) the Plan Proposals, (iii) the
transfers of the Partnership Interests to Holdings in the Exchange Offer and the
subsequent transfer of the Partnership Interest of the General Partner to C-Sub,
which, as a result of the Telecommunications Merger, will be transferred to
Telecommunications, (iv) the substitution of Telecommunications as a general
partner of the Partnership in respect of the Partnership Interests transferred
to it, without the necessity of signing the Shareholders Agreement as otherwise
required by the Partnership Agreement, and the substitution of Holdings as a
limited partner in respect of the Partnership Interests transferred to it, (v)
the continuation of the business of the Partnership to the extent any of the
actions effected pursuant to the Transaction would cause a dissolution of the
Partnership and (vi) any amendment to the Partnership Agreement necessary to
permit any of the actions effected pursuant to the foregoing or the Transaction.
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WAIVERS. By executing and delivering a Contribution Agreement, a partner
will waive (i) any rights it may have to purchase Partnership Interests that are
transferred in the Interest Exchange or subsequently transferred by Holdings to
C-Sub or in the Telecommunications Merger, including those rights of first
refusal granted in the Partnership Agreement and (ii) any default that exists
under the Partnership Agreement as a result of the Interest Exchange or any of
the other matters consented to by the partner in the Contribution Agreement.
COVENANTS. Each partner who executes and delivers a Contribution Agreement
will agree to take such further action and execute such further documents as
Holdings may request in order to effect or confirm the Interest Exchange and the
other matters addressed by the Contribution Agreement.
APPOINTMENT OF PROXY AND ATTORNEY-IN-FACT. By executing and delivering a
Contribution Agreement, a tendering partner will irrevocably appoint Holdings
and its executive officers and designees as the partner's proxies, in the manner
set forth in the Contribution Agreement, each with full power of substitution,
to the full extent of the partner's rights with respect to the Partnership
Interests tendered by the partner and accepted for exchange by Holdings. Each
such proxy shall be considered coupled with an interest in the tendered
Partnership Interests. Such appointment will be effective when, and only to the
extent that, Holdings accepts the tendered Partnership Interests for exchange.
Upon such acceptance for exchange, all prior proxies given by the partner with
respect to the Partnership Interests will, without further action, be revoked,
and no subsequent proxies may be given (and if given will not be effective).
Holdings and its executive officers and designees will, as to those Partnership
Interests, be empowered to exercise all voting and other rights of the partner
as they in their sole discretion may deem proper at any meeting of partners, by
written consent or otherwise. Holdings reserves the right to require that, in
order for Partnership Interests to be deemed validly tendered, immediately upon
Holding's acceptance for exchange of the Partnership Interests, Holdings must be
able to exercise full voting rights with respect to the Partnership Interests,
including voting at any meeting of partners then scheduled or acting by written
consent without a meeting.
By executing and delivering a Contribution Agreement, a tendering partner
will also irrevocably constitute and appoint Holdings and its executive officers
and designees as the partner's attorneys-in-fact, each with full power of
substitution, to the full extent of the partner's rights with respect to the
Partnership Interests tendered by the partner and accepted for exchange by
Holdings. Such appointment will be effective when, and only to the extent that,
Holdings accepts the tendered Partnership Interests for exchange. The tendering
partner agrees not to exercise any rights pertaining to the tendered Partnership
Interests without the prior consent of Holdings. Upon such acceptance for
exchange, all prior powers of attorney granted by the partner with respect to
such Partnership Interests will, without further action, be revoked, and no
subsequent powers of attorney may be granted (and if granted will not be
effective). Pursuant to such appointment as attorneys-in-fact, Holdings and its
executive officers and designees each will have the power, among other things to
transfer ownership of such Partnership Interests on the Partnership books (and
execute and deliver any accompanying evidences of transfer and authenticity any
of them may deem necessary or appropriate in connection therewith).
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
Holdings expressly reserves the right, in its sole discretion, at any time
and from time to time, (i) to extend the period of time during which the
Exchange Offer is open and thereby delay acceptance for exchange of validly
tendered Partnership Interests, (ii) to terminate the Exchange Offer and not
accept for exchange any Partnership Interests not already accepted for exchange,
or (iii) to amend the Exchange Offer in any respect. In the case of an extension
of the Exchange Offer, the extension will be followed by a press release or
public announcement that will be issued no later than 9:00 a.m., Eastern Time,
on the next business day after the then scheduled Expiration Date, in accordance
with Rule 14e-1(d) under the Exchange Act.
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If Holdings makes a material change in the terms of the Exchange Offer or
the information concerning the Exchange Offer or waives an Exchange Offer
Condition, Holdings will extend the Exchange Offer and disseminate additional
tender offer materials to the extent required by Rules 14d-4(c) and 14d-6(d)
under the Exchange Act. The minimum period during which an offer must remain
open following a material change in the terms of the offer or information
concerning the Exchange Offer will depend upon the facts and circumstances,
including the relative materiality of the change in the terms or information. In
the Commission's view, an offer should remain open for a minimum of five
business days from the date the material change is first published, sent or
given to security holders, and if material changes are made with respect to
information that approaches the significance of price or the percentage of
securities sought, a minimum of ten business days may be required to allow for
adequate dissemination to security holders and investor response. As used in
this section, "business day" means any day other than a Saturday, Sunday or a
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, Eastern Time.
THE PLAN PROPOSALS
Terms not otherwise defined in this discussion of the Plan Proposals shall
have the meanings ascribed to them in the Equity Incentive Plan, a copy of which
is attached as Appendix VI.
THE EQUITY INCENTIVE PLAN
IN GENERAL. The Equity Incentive Plan was adopted and approved prior to the
date hereof by the Holdings Board and was approved by the IWL Board and the
Telecommunications Board, in each case subject to the approval of the holders of
the common stock of their respective companies. The Equity Incentive Plan is
intended to provide a means by which selected employees of and consultants to
Holdings and its subsidiaries may be given an opportunity to acquire an equity
interest in Holdings. Holdings, by means of the Equity Incentive Plan, will seek
to retain the services of persons who are or become employees of or consultants
to Holdings and its subsidiaries and to provide incentives for such persons to
exert maximum efforts for the success of Holdings and its subsidiaries.
ADMINISTRATION. The Equity Incentive Plan will be administered by a
Compensation Committee ("Committee") appointed by the Holdings Board, whose
members will serve at the pleasure of the Holdings Board. The Committee will
have two or more members, each of whom will be an "outside director" within the
meaning of Treasury Regulation Section 1.162-27(e)(3). In addition, such
committee members will also be Non-Employee Directors within the meaning of Rule
16b-3 promulgated under the Exchange Act. If no Committee is so designated, then
the Equity Incentive Plan will be administered by the entire Holdings Board. The
Committee will have full authority, subject to the provisions of the Equity
Incentive Plan, to award (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, (iv) Deferred Stock, (v) Stock Reload Options and/or
(vi) Other Stock-Based Awards (collectively, "Awards").
Subject to the provisions of the Equity Incentive Plan, the Committee will
determine, among other things, the persons to whom from time to time Awards may
be granted ("Participants"), the specific type of Awards to be granted (e.g.,
Stock Options, Restricted Stock, etc.), the number of shares subject to each
Award, share prices, any restrictions or limitations on such Awards and any
vesting, exchange, deferral, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions related to such Awards. The interpretation and
construction by the Committee of any provisions of, and the determination of any
questions arising under the Equity Incentive Plan or any rule or regulation
established by the Committee pursuant to the Equity Incentive Plan will be
final, conclusive and binding on all persons interested in the Equity Incentive
Plan.
SHARES SUBJECT TO THE PLAN, GENERAL TERMS. The Equity Incentive Plan
authorizes the granting of Awards which would allow up to an aggregate of
5,000,000 shares of Holdings Common Stock to be
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acquired by the Holders and provides that a maximum of 2,500,000 shares of
Holdings Common Stock may be issued to any one Holder. In order to prevent the
dilution or enlargement of the rights of Participants under the Equity Incentive
Plan, the number of shares of Holdings Common Stock authorized by the Equity
Incentive Plan is subject to adjustment by the Holdings Board in the event of
any increase or decrease in the number of shares of outstanding Holdings Common
Stock resulting from a stock dividend, stock split, reverse stock split, merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Holdings Common Stock. If any shares granted under the
Equity Incentive Plan are forfeited or terminated, such shares will again be
available for distribution in connection with Awards subsequently granted under
the Equity Incentive Plan.
ELIGIBILITY. Subject to the provisions of the Equity Incentive Plan, Awards
may be granted to key employees, officers, directors, and other persons who are
deemed to have rendered or to be able to render significant services to Holdings
or its subsidiaries and are deemed to have contributed or to have the potential
to contribute to the success of Holdings. Incentive Stock Options may be awarded
only to persons who, at the time of such awards, are employees of Holdings or
its subsidiaries.
STOCK OPTIONS. Options granted under the Equity Incentive Plan may be
either options that are intended to qualify for treatment as "incentive stock
options" under Section 422 of the Code or options that do not so qualify.
Options may be granted under the Equity Incentive Plan to any person who is an
officer or other employee (including an officer or other employee who is also a
director) or consultants of Holdings or any of its subsidiaries. The exercise
price of Incentive Stock Options must be at least the fair market value of a
share of Holdings 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 Holdings Common Stock). The exercise price of
Non-qualified Stock Options may be less than 100% of the fair market value of a
share of Holdings Common Stock on the date of grant. The term of an option may
not exceed 10 years (five years in the case of an Incentive Stock Option granted
to an optionee owning 10% or more of Holdings Common Stock).
STOCK APPRECIATION RIGHTS. The Committee may grant Stock Appreciation
Rights ("SARs" or singularly "SAR") in conjunction with all or part of any
Option granted under the Equity Incentive Plan or may grant SARs on a
freestanding basis. In conjunction with Non-qualified Stock Options, SARs may be
granted either at or after the time of the grant of such Non-qualified Stock
Options. In conjunction with Incentive Options, SARs may be granted only at the
time of the grant of such Incentive Stock Options. An SAR entitles the Holder
thereof to receive an amount (payable in cash and/or shares of Holdings Common
Stock, as determined by the Committee) equal to the excess fair market value of
one share of Holdings Common Stock over the SAR price or the exercise price of
the related Option, multiplied by the number of shares subject to the SAR.
RESTRICTED STOCK AWARDS. The Committee may award shares of restricted stock
("Restricted Stock") either alone or in addition to other Awards granted under
the Equity Incentive Plan. The Committee shall determine the restricted period
during which the shares of stock may be forfeited if, for example, the Holder's
employment is terminated. In order to enforce the forfeiture provisions, the
Equity Incentive Plan requires that all shares of Restricted Stock awarded to
the Holder remain in the physical custody of Holdings until the restrictions on
such shares have terminated.
DEFERRED STOCK. The Committee may award shares of deferred stock ("Deferred
Stock") either alone or in addition to other Awards granted under the Equity
Incentive Plan. The Committee shall determine the deferral period during which
time the receipt of the stock is deferred. The Award may specify, for example,
that the Holder must remain employed by Holdings during the entire deferral
period in order to be issued the stock.
STOCK RELOAD OPTIONS. The Committee may grant Stock Reload Options in
conjunction with any Option granted under the Equity Incentive Plan. In
conjunction with Incentive Options, Stock Reload
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Options may be granted only at the time of the grant of such Incentive Option.
In conjunction with Non-qualified Options, Stock Reload Options may be granted
either at or after the time of the grant of such Non-qualified Options. A Stock
Reload Option permits a Holder who exercises an Option by delivering already
owned stock (i.e., the stock-for-stock method) to receive back from Holdings a
new Option (at the current market price) for the same number of shares delivered
to exercise the Option, which new Option may not be exercised until one year
after it was granted and expires on the date the original option would have
expired (had it not been previously exercised).
OTHER STOCK-BASED AWARDS. The Committee may grant performance shares and
shares of stock valued with reference to the performance of Holdings, either
alone or in addition to or in tandem with Stock Options, Restricted Stock or
Deferred Stock. Subject to the terms of the Equity Incentive Plan, the Committee
has complete discretion to determine the terms and conditions applicable to any
such stock-based awards. Such terms and conditions may require, among other
things, continued employment and/or the attainment of specified performance
objectives.
CHANGE IN CONTROL
Awards may be granted under the Equity Incentive Plan that at any time after
the Effective Time of the Mergers, in the event of (i) any person or group of
persons becoming for the first time the beneficial owner, directly or
indirectly, of more than 50% of the total voting stock of Holdings, other than
as a result of a transfer or series of related transfers of voting stock from a
person or group of persons who immediately prior to such transfer or transfers
was the beneficial owner, and who after giving effect to such transfer or
transfers continues to be the beneficial owner, of more than 50% of the voting
stock of Holdings; (ii) a merger (other than the Mergers) or consolidation of
Holdings as a result of which the holders of all of the voting stock of Holdings
prior to such event do not continue to hold either directly or indirectly at
least a majority of Holdings voting stock after such event, (iii) a sale of all
or substantially all of the assets of Holdings or (iv) certain changes in the
majority of the Holdings Board during any 12 consecutive month period any
portion of which is after the Effective Time of the Mergers, the Awards may be
exercised in whole or in part without regard to any provisions thereof. The
accelerated vesting of outstanding Awards upon the occurrence of such a "change
in control" transaction could have the effect of delaying, deferring, or
preventing a change in control of Holdings.
TERMS AND TERMINATION OF THE EQUITY INCENTIVE PLAN. The Equity Incentive
Plan will be effective upon shareholder approval of the Equity Incentive Plan
("Effective Date"). Any Awards granted under the Equity Incentive Plan prior to
such approval shall be effective when made (unless otherwise specified by the
Committee at the time of grant), but shall be conditioned upon, and subject to,
the approval of the Equity Incentive Plan by Holdings' stockholders. If the
Equity Incentive Plan is not so approved, all Awards granted thereunder shall be
of no effect and any Holdings Common Stock received by a Participant shall be
deemed forfeited and returned to Holdings by the Holder. Unless terminated by
the Board, the Equity Incentive Plan shall continue to remain effective until
such time as no further Awards may be granted and all Awards granted under the
Equity Incentive Plan are no longer outstanding. Notwithstanding the foregoing,
grants of Incentive Stock Options may only be made during the ten-year period
following the Effective Date.
AMENDMENTS TO THE PLAN. The Equity Incentive Plan provides that the
Holdings Board may amend or terminate the Equity Incentive Plan in any respect
whatsoever, provided that any such amendment or termination will not affect
Awards previously granted. If required by Rule 16b-3 under the Exchange Act, or
any Code or NASD requirements, the Holdings Board will not amend or terminate
the Equity Incentive Plan without shareholder approval.
REGISTRATION OF SHARES. Holdings will file with the Commission a
Registration Statement on Form S-8, which will become effective upon filing,
covering the issuance of shares of Holdings Common Stock pursuant to an Award
granted under the Equity Incentive Plan.
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SHAREHOLDER APPROVAL. The affirmative vote of a majority of the outstanding
shares of IWL Common Stock and Telecommunications Common Stock represented at
the IWL Special Meeting and the Telecommunications Special Meeting,
respectively, and entitled to vote is required for approval of the Equity
Incentive Plan.
EACH OF THE IWL BOARD AND THE TELECOMMUNICATIONS BOARD RECOMMENDS A VOTE FOR
THE APPROVAL OF THE EQUITY INCENTIVE PLAN. UNLESS INDICATED OTHERWISE BY YOUR
PROXY VOTE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED FOR THE APPROVAL
OF THE EQUITY INCENTIVE PLAN.
THE DIRECTOR STOCK OPTION PLAN
The Director Stock Option Plan was approved prior to the date hereof by each
of the IWL Board, the Telecommunications Board and the Holdings Board, in each
case subject to the approval of the holders of the common stock of their
respective companies. The purpose of the Director Stock Option Plan is to
encourage ownership of Holdings Common Stock by eligible non-employee directors
of Holdings whose continued services are considered essential to Holdings'
future progress and to provide them with a further incentive to remain as
directors of Holdings. All options to be granted under the Director Stock Option
Plan will be Non-qualified Stock Options. A total of 400,000 shares of Holdings
Common Stock have been reserved for issuance under the Director Stock Option
Plan.
The Director Stock Option Plan will be administered by the Holdings Board.
The Holdings Board will have full and final authority in their discretion,
subject to the provisions of the Director Stock Option Plan, to (i) determine
the individuals to whom, and the time or times at which, options will be granted
and the number of shares of Common Stock covered by each Option and (ii)
construe and interpret the terms of the Director Stock Option Plan and the
options granted thereunder. Holdings expects that each new non-employee director
of Holdings, upon becoming a director, will receive option grants under the
Director Stock Option Plan. The Holdings Board will also have the authority to
make additional option grants to existing non-employee directors.
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 expire three months after the date of termination (but in no event
later than the expiration of the ten-year term). Options are not assignable and
may not be transferred other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order. Upon a
dissolution or liquidation of Holdings, each outstanding option will terminate
unless otherwise provided by the Holdings Board. In the event of a proposed sale
of all or substantially all of the assets of Holdings or upon certain mergers in
which the shareholders of Holdings receive cash or securities of another issuer,
the options will be assumed by the successor entity or substituted with an
equivalent option.
The Director Stock Option Plan provides that the Holdings Board may amend or
terminate the Director Stock Option Plan in any respect whatsoever, provided
that any such amendment or termination will not affect options previously
granted. If required by Rule 16b-3 under the Exchange Act or any Code or NASD
requirements, the Holdings Board will not amend or terminate the Director Stock
Option Plan without shareholder approval.
Holdings will file with the Commission a Registration Statement on Form S-8,
which will become effective upon filing, covering the issuance of shares of
Holdings Common Stock upon exercise of options to be granted under the Director
Stock Option Plan.
The affirmative vote of a majority of the outstanding shares of IWL Common
Stock and Telecommunications Common Stock represented at the IWL Special Meeting
and the Telecommunications Special Meeting, respectively, and entitled to vote
is required for approval of the Director Stock Option Plan.
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EACH OF THE IWL BOARD AND THE TELECOMMUNICATIONS BOARD RECOMMENDS A VOTE FOR
THE APPROVAL OF THE DIRECTOR STOCK OPTION PLAN. UNLESS INDICATED OTHERWISE BY
YOUR PROXY VOTE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED FOR THE
APPROVAL OF THE DIRECTOR STOCK OPTION PLAN.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax consequences of
participation in the Equity Incentive Plan and the Director Stock Option Plan is
based on statutory authority, as well as judicial and administrative
interpretations as of the date of this Joint Proxy Statement/Prospectus, all of
which are subject to change at any time (possibly with retroactive effect). As
the law is technical and complex, the discussion below necessarily represents
only a general summary.
INCENTIVE STOCK OPTIONS. Incentive Stock Options granted under the Equity
Incentive Plan are intended to meet the definitional requirements of Section
422(b) of the Code for "incentive stock options."
An employee who receives an Incentive Stock Option does not recognize any
taxable income upon the grant of such Incentive Stock Option. Similarly, the
exercise of an Incentive Stock Option generally does not give rise to federal
income tax to the employee, PROVIDED THAT (i) the federal "alternative minimum
tax," which depends on the employee's particular tax situation, does not apply
and (ii) the employee is employed by Holdings from the date of grant of the
option until 3 months prior to the exercise thereof, except where such
employment terminates by reason of disability (where the 3 month period is
extended to 1 year) or death (where this requirement does not apply). If an
employee exercises an Incentive Stock Option after these requisite periods, the
Incentive Stock Option will be treated as a Non-qualified Stock Option and will
be subject to the rules set forth below under the caption "Non-qualified
Options."
Further, if after exercising an Incentive Stock Option, an employee disposes
of the shares so acquired more than two years from the date of grant and more
than one year from the date of receipt of the shares upon exercise of such
Incentive Stock Option (the "applicable holding period"), the employee will
normally recognize a capital gain or loss equal to the difference, if any,
between the amount received for the shares and the employee's tax basis in such
shares.
If, however, an employee does not hold the shares so acquired for the
applicable holding period, thereby making a "disqualifying disposition," the
employee would realize ordinary income on the excess of the fair market value of
the shares at the time the Incentive Stock Option was exercised over the
exercise price and the balance, if any, would be short-term, mid-term or
long-term capital gain depending on the length of the employee's holding period
and provided that the employee held such shares as a capital asset at such time.
If the sales price of the stock sold in a disqualifying disposition is less than
its fair market value on the exercise date, the ordinary income is limited to
the amount of the gain (if any) realized on the sale. If the sales price of the
stock sold in a disqualifying disposition is less than the exercise price, the
employee will recognize a capital loss.
An employee who exercises an Incentive Stock Option by delivering shares
previously acquired pursuant to the exercise of an Incentive Stock Option is
treated as making a "disqualifying disposition" of his or her shares if the
employee delivers them before the expiration of their applicable holding period.
Upon the exercise of an Incentive Stock Option with previously-acquired shares
as to which no disqualifying disposition occurs, despite some uncertainty, it
appears that the employee would not recognize gain or loss with respect to such
previously-acquired shares.
Holdings will not be allowed a federal income tax deduction upon the grant
or exercise of an Incentive Stock Option or the disposition, after the
applicable holding period, of the shares acquired upon exercise of an Incentive
Stock Option. In the event of a disqualifying disposition, Holdings generally
will be entitled to a deduction equal to the ordinary income recognized by the
employee, provided that such amount
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constitutes an ordinary and necessary business expense to Holdings and is
reasonable and the limitations of Sections 280G and 162(m) of the Code do not
apply.
NON-QUALIFIED OPTIONS. Non-qualified Stock Options granted under the Equity
Incentive Plan or the Director Stock Option Plan are options that do not qualify
as Incentive Stock Options. An individual who receives a Non-qualified Stock
Option generally will not recognize any taxable income upon the grant of such
Non-qualified Stock Option. However, the individual generally will recognize
ordinary income upon exercise of a Non-qualified Stock Option in an amount equal
to the excess of (i) the fair market value of the shares at the time of exercise
over (ii) the exercise price.
The ordinary income recognized with respect to the receipt of shares upon
exercise of a Non-qualified Stock Option will be subject to both wage
withholding and employment taxes.
As a result of Section 16(b) of the Exchange Act, any individual who is an
officer or director of Holdings or a beneficial owner of more than ten percent
(10%) of any class of equity securities of Holdings should consult with his or
her tax advisor as to whether the timing of income recognition is deferred for
any period following the exercise of a Non-qualified Stock Option (i.e., the
"Deferral Period"). Absent an election pursuant to Section 83(b) of the Code
filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the option (the "Section 83(b) election"),
recognition of income by such an individual will be deferred until the
expiration of the Deferral Period, if any.
An individual's tax basis in the shares received on exercise of a
Non-qualified Stock Option will be equal to the amount of any cash paid on
exercise, plus the amount of ordinary income recognized by such individual as a
result of the receipt of such shares. The holding period for such shares would
begin just after the transfer of the shares or, in the case of an officer,
director or beneficial owner of more than 10% of any class of equity securities
of Holdings who does not make a Section 83(b) election, just after the
expiration of the Deferral Period, if any. A federal income tax deduction
generally will be allowed to Holdings in an amount equal to the ordinary income
included by the individual with respect to his or her Non-qualified Stock
Option, provided that such amount constitutes an ordinary and necessary business
expense to Holdings and is reasonable and the limitations of Sections 280G and
162(m) of the Code do not apply.
If an individual exercises a Non-qualified Stock Option by delivering shares
to Holdings, other than shares previously acquired pursuant to the exercise of
an Incentive Stock Option which is treated as a "disqualifying disposition" as
described above, the individual will not recognize gain or loss with respect to
the exchange of such shares, even if their then fair market value is different
from the individual's tax basis. The individual, however, will be taxed as
described above with respect to the exercise of the Non-qualified Stock Option
as if he or she had paid the exercise price in cash, and Holdings likewise
generally will be entitled to an equivalent tax deduction. So long as the
individual receives a separate identifiable stock certificate therefor, the tax
basis and the holding period for that number of shares received on such exercise
that is equal to the number of shares surrendered on such exercise will be equal
to the tax basis and include the holding period of those shares surrendered. The
individual's tax basis and holding period for the additional shares received on
exercise of a Non-qualified Stock Option paid for, in whole or in part, with
shares will be the same as if the individual had exercised the Non-qualified
Stock Option solely for cash.
As described above, upon a Change of Control of Holdings, some or all of the
then-outstanding stock options and other Awards may immediately become
exercisable. In general, if the total amount of payments to an individual that
are contingent upon a "change of control" of Holdings (as defined in Section
280G of the Code), including payments under the Equity Incentive Plan that vest
upon a Change of Control, equals or exceeds three times the individual's "base
amount" (generally, such individual's average annual compensation for the five
complete years preceding the "change of control"), then, subject to certain
exceptions, the payments may be treated as "parachute payments" under the Code,
in which case
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a portion of such payments would be non-deductible to Holdings and the
individual would be subject to a 20% excise tax.
STOCK APPRECIATION RIGHTS. Recipients of SARs do not recognize income upon
the grant of such rights. When a participant elects to receive payment of an
SAR, the participant recognizes ordinary income in an amount equal to the cash
and fair market value of Holdings Common Shares received, and the employer of
such participant is entitled to a deduction equal to such amount.
RESTRICTED STOCK AWARDS. In the absence of a Section 83(b) election,
grantees of Restricted Stock do not recognize income at the time of the grant of
such stock. When shares of Restricted Stock are no longer subject to a
substantial risk of forfeiture, grantees recognize ordinary income in an amount
equal to the fair market value of the stock less the amount paid, if any, for
the stock. Alternatively, the recipient may elect under Section 83(b) to report
the fair market value of the Restricted Stock as income on the date the stock is
transferred to the recipient, and the employer will be entitled to a
compensation deduction for the same amount.
DEFERRED STOCK. A recipient of an award of Deferred Stock under the Equity
Incentive Plan will be taxed at ordinary income rates on the fair market value
of the award at the later of the time when the Deferred Stock is transferred to
the recipient or when the recipient's rights in such Deferred Stock become
vested. At that time the employer will be entitled to a deduction equal to the
amount which is includible in the recipient's income.
STOCK RELOAD OPTIONS. A recipient who receives Stock Reload Options under
the Equity Incentive Plan will be taxed on such Options in the manner described
above under the heading "Incentive Stock Options" or "Nonqualified Options," as
appropriate, and the consequences to the employer will follow that discussion as
well. The recipient will not be taxed on the grant of the Stock Reload Options,
but will be taxed upon their exercise or on a later sale of the underlying
Stock, depending on the nature of the Options.
OTHER STOCK-BASED AWARDS. The tax consequences arising from the issuance of
Other Stock-Based Awards will depend on the specific terms of the Award, but in
most cases the recipient will be taxed at ordinary income rates on the fair
market value of the Award at the later of the time when cash or Stock is
transferred to the recipient pursuant to the Award or when the recipient's
rights in the subject of the Award become vested.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION. With
certain exceptions, Section 162(m) of the Code denies a deduction to
publicly-held corporations for compensation paid to certain executive officers
in excess of $1 million per executive per taxable year (including any deduction
with respect to the exercise of a Non-qualified Stock Option or the
disqualifying disposition of stock purchased pursuant to an Incentive Stock
Option). One such exception applies to certain performance-based compensation
that has been approved by shareholders in a separate vote where certain other
requirements are met. Holdings presently intends that any new Stock Options
granted under the Equity Incentive Plan with an exercise price of not less than
fair market value at the date of grant will qualify for the performance-based
compensation exception to Section 162(m).
COMPARISON OF SHAREHOLDER RIGHTS
If the Mergers are consummated, IWL's and Telecommunications' shareholders
will receive shares of Holdings Common Stock, and the rights of such
shareholders will be governed by Texas state law, the Articles of Incorporation
of Holdings and the Bylaws of Holdings. The following is a summary of the
material differences between (i) the rights of holders of IWL Common Stock and
the rights of holders of Holdings Common Stock and (ii) the rights of holders of
Telecommunications Common Stock and the rights of holders of Holdings Common
Stock. As each of IWL, Telecommunications and Holdings are
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companies incorporated under the laws of the State of Texas, these differences
arise primarily from various provisions of the articles of incorporation and
bylaws of the companies. This summary does not purport to be a complete
statement of the rights of holders of IWL Common Stock, Telecommunications
Common Stock and Holdings Common Stock, and is qualified in its entirety by
reference to, the Texas Business Corporation Act ("TBCA") and the respective
articles of incorporation and bylaws of IWL, Telecommunications and Holdings.
COMPARISON OF SHAREHOLDER RIGHTS OF IWL AND HOLDINGS
Since the Articles of Incorporation and Bylaws of Holdings and IWL are
substantially identical, and both companies are incorporated in Texas, the
rights of holders of IWL Common Stock and Holdings Common Stock are
substantially identical and have no material differences.
COMPARISON OF SHAREHOLDER RIGHTS OF TELECOMMUNICATIONS AND HOLDINGS
AUTHORIZED CAPITAL
TELECOMMUNICATIONS. The authorized capital stock of Telecommunications is
one hundred thousand (100,000) shares of common stock, par value $.01 per share.
HOLDINGS. The authorized capital stock of Holdings is two hundred and
twenty million (220,000,000) shares of stock in the aggregate, including two
hundred million (200,000,000) shares of common stock and twenty million
(20,000,000) shares of preferred stock, each having a par value of $.01 per
share.
PREFERRED SHARES
TELECOMMUNICATIONS. The Articles of Incorporation of Telecommunications do
not authorize the issuance of preferred stock.
HOLDINGS. The Articles of Incorporation of Holdings authorize the Board of
Directors to issue preferred stock in one or more series and to fix or determine
from time to time the designations, preferences, limitations and relative rights
including voting rights of the shares of any series to the same extent that such
designations, preferences, limitations, and relative rights could be stated if
fully set forth in the Articles of Incorporation. Such authority includes,
without limitation, the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption, redemption price or prices, and
the liquidation preferences of any wholly unissued series of preferred stock.
The holders of common stock may receive distributions and have liquidation
rights subject to the prior rights and preferences of the preferred stock.
PREEMPTIVE RIGHTS
TELECOMMUNICATIONS. The Telecommunications shareholders have the preemptive
right to acquire additional, unissued, or treasury shares of Telecommunications,
or securities of Telecommunications convertible into or carrying a right to
subscribe to or to acquire shares except to the extent limited by Article 2.22
of the TBCA.
HOLDINGS. The Holdings shareholders are denied the right of any preemptive,
preferential or presumptive right to receive, purchase or subscribe to and
treasury shares, evidences of indebtedness or other securities of Holdings,
subscriptions, warrants or options, but the Telecommunications Board may by
contract grant preemptive rights from time to time.
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MEETINGS OF SHAREHOLDERS
TELECOMMUNICATIONS. Meetings of shareholders of Telecommunications may be
held within or without the State of Texas, provided that no meeting of
shareholders be held at any place outside of Dallas County, Texas unless all
shareholders agree to the place and time in writing before the meeting is held.
HOLDINGS. Meetings of shareholders of Holdings may be held inside or
outside the State of Texas, without the consent of the shareholders as to
location.
SPECIAL MEETINGS
TELECOMMUNICATIONS. Special meetings of shareholders of Telecommunications
may be called for any purpose or purposes by the President, the
Telecommunications Board, or the holders of not less than 50% of all shares
entitled to vote at the meeting.
HOLDINGS. Special meetings of shareholders of Holdings may be called for
any purpose or purposes by the Chief Executive Officer, the President, the
Telecommunications Board, or the holders of not less than 10% of all shares
entitled to vote at the meeting.
NOTICE
TELECOMMUNICATIONS. Written notice of a meeting or special meeting must be
delivered not less than 10 nor more than 50 days before the date of the meeting
to each shareholder of record of Telecommunications entitled to vote at the
meeting.
HOLDINGS. Written notice of a meeting or special meeting must be delivered
not less than 10 nor more than 60 days before the date of the meeting to each
shareholder of record of Holdings entitled to vote at the meeting; provided,
however in the event of a merger or consolidation, such notice shall be
delivered not less than 20 days before the meeting.
VOTING
TELECOMMUNICATIONS. The vote of the holders of a majority of the shares
having voting power present in person or represented by proxy at a meeting at
which a quorum is present shall decide any question (including election of
directors) brought before a meeting, unless the question is one which under a
statute, the Articles of Incorporation of Telecommunications or the Bylaws of
Telecommunications, a different vote is required. The TBCA requires the
affirmative vote of at least two-thirds of the outstanding shares entitles to
vote in a merger, exchange, acquisition and a sale, lease or disposition of
substantially all assets (if not in the ordinary course of business).
HOLDINGS. With respect to any matter other than election of a director, the
affirmative vote of the holders of a majority of the shares entitled to vote on
that matter and represented in person or by proxy at a meeting of shareholders
at which a quorum is present shall decide any question brought before a meeting,
unless otherwise provided by statute, the Articles of Incorporation of Holdings
or the Bylaws of Holdings, a different vote is required. The TBCA requires the
affirmative vote of at least a majority of the outstanding shares entitled to
vote in a merger, exchange, acquisition and a sale, lease or disposition of
substantially all assets (if not in the ordinary course of business). With
respect to election of directors, a plurality of the votes cast by the holders
of shares entitled to vote at a meeting at which a quorum is present will
determine the directors.
DIRECTORS
TELECOMMUNICATIONS. The Telecommunications Board consists of three
directors. If any vacancies occur in the Telecommunications Board by reason
other than increase in the number of directors, a
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successor may be elected by either a majority of the remaining directors, though
less than a quorum, or by the shareholders at a special meeting called for that
purpose.
HOLDINGS. The Holdings Board shall consist of not less than one director.
Directors shall be elected by a plurality of votes cast by holders of shares
entitled to vote in the election of directors at each annual meeting and, if a
vacancy occurs in the Holdings Board by reason of increase in the number of
directors, at a special meeting of shareholders called for that purpose. If any
vacancies occur in the Holdings Board by reason other than increase in the
number of directors, a successor may be elected by a majority of the remaining
directors, though less than a quorum.
FIXING RECORD DATE
TELECOMMUNICATIONS. The Telecommunications Board may fix in advance a
record date for the purpose of determining shareholders entitled to receive
payment of any dividend, such record date not to be more than 50 days prior to
the payment date (and under the TBCA, not less than 10 days prior to the payment
date), or the Telecommunications Board may close the stock transfer books for
such purpose for a period of not more than 50 days prior to the payment date of
such dividend.
HOLDINGS. The Holdings Board may fix in advance a record date for the
purpose of determining shareholders entitled to receive payment of any dividend,
such record date not to be more than 60 days prior to the payment date and not
less than 10 days prior to the payment date, or the Holdings Board may close the
stock transfer books for such purpose for a period of not more than 60 days
prior to the payment date of such dividend.
ANTI-TAKEOVER PROVISION
TBCA Part Thirteen prevents an "affiliated shareholder" (defined generally
as a shareholder owning 20% or more of a corporation's outstanding voting
shares) from engaging in a "business combination" (as defined in the TBCA) with
a Texas corporation for three years following the date such person became an
affiliated shareholder, subject to certain exceptions such as transactions done
with the approval of the board of directors and of the holders of at least
two-thirds of the outstanding voting shares not owned by the interested
shareholder ("Business Combination Laws"). The existence of this provision
generally is expected to have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium over the market
price for the shares of Holdings Common Stock.
TELECOMMUNICATIONS. Telecommunications has not elected to opt out of the
Business Combinations Laws of the TBCA. The Business Combinations Law has not
applied to Telecommunications as of the date of the Merger Agreement because
Telecommunications is not an "issuing public corporation" as defined in Part
Thirteen of the TBCA.
HOLDINGS. Holdings has expressly elected not to be governed by Part
Thirteen of the TBCA. Therefore, if Holdings qualifies as "an issuing public
corporation" under Part Thirteen of the TBCA and a shareholder of Holdings who
owns 20% or more of Holdings enters into certain mergers, sales of assets,
reclassifications and other transactions with Holdings, the approval of
two-thirds of the nonaffiliated shareholders will not need to be obtained.
COMPARISON OF PARTNERSHIP INTERESTS AND HOLDINGS COMMON STOCK
If the Interest Exchange is consummated, tendering holders of Partnership
Interests whose valid tenders are accepted will receive shares of Holdings
Common Stock, and the right of such shareholders will be governed by Texas state
law, the Articles of Incorporation of Holdings and the Bylaws of Holdings. The
following summary discusses the material differences between ownership of
Partnership Interests and ownership of Holdings Common Stock and the effects
relating thereto.
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ISSUER
PARTNERSHIP INTERESTS
The Partnership, a Texas limited partnership, is the issuer.
HOLDINGS COMMON STOCK
Holdings, a Texas corporation, is the issuer.
TAXATION
PARTNERSHIP INTERESTS
As a result of the Partnership's election to be taxed as a corporation for
federal income tax purposes as of January 1, 1998, the Partnership is a taxable
entity with respect to its income after allowable deductions and credits.
Partners will have taxable income from the Partnership's operations only to the
extent that taxable dividends and other distributions are declared and paid by
the Partnership. See "The Transaction--Certain United States Federal Income Tax
Consequences of the Interest Exchange."
HOLDINGS COMMON STOCK
Holdings is a taxable entity with respect to its income after allowable
deductions and credits. Shareholders will have taxable income from Holding's
operations only to the extent that taxable dividends and other distributions are
declared and paid on Holdings Common Stock. See "The Transaction--Certain United
States Federal Income Tax Consequences of the Mergers."
No portion of the earnings of, or any dividends received from, Holdings will
constitute unrelated business taxable income to tax-exempt shareholders, except
to the extent their investment in stock of Holdings is considered debt-financed.
See "The Transaction--Certain United States Federal Income Tax Consequences of
the Mergers."
DISTRIBUTIONS AND DIVIDENDS
PARTNERSHIP INTERESTS
The Partnership is required under the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement") to distribute Cash Flow (as
defined below) from activities arising in the ordinary course of business or
from a major capital event arising other than in the ordinary course of
business. Under the Partnership Agreement, Cash Flow is distributed as follows:
(i) first to guarantors under the Partnership Agreement, (ii) next, to the
partners pro rata in accordance with their respective Partnership Interests
until the guarantors (other than Mark Langdale) have been released, and (iii)
thereafter, 1% to the General Partner, 19.5% to Jere W. Thompson, Jr., 4.5% to
Mark Langdale and the remainder among the partners (including Messrs. Thompson
and Langdale) pro rata in accordance with their respective Partnership
Interests. Under the Partnership Agreement, "Cash Flow" means the amount by
which the aggregate cash receipts of the Partnership from any source exceed the
sum of the cash expenditures of the Partnership plus a cash reserve in the
amount determined by the General Partner to be sufficient to meet the working
capital requirements of the Partnership.
HOLDINGS COMMON STOCK
The Board of Directors of Holdings has the discretion to determine whether
or not and when to declare and pay dividends and the amount of any dividend.
Holders of Holdings Common Stock will have no contractual right to receive
dividends.
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MANAGEMENT
PARTNERSHIP INTERESTS
The business and affairs of the Partnership are managed by the General
Partner. The Partnership Agreement does not expressly specify any actions that
may be taken by the General Partner only with the consent of the Limited
Partners.
HOLDINGS COMMON STOCK
The business and affairs of Holdings will be managed by or under the
direction of the Holdings Board. The holders of Holdings Common Stock will have
the ability to elect members of the Holdings Board with a plurality of the votes
cast for such election and to remove the Holdings Board with a majority vote of
the Common Stock outstanding and entitled to vote.
VOTING RIGHTS
PARTNERSHIP INTERESTS
Under the Partnership Agreement, Limited Partners have voting rights with
respect to amendments to the Partnership Agreement. The General Partner and
partners owning more than 50% of the Partnership Interests must approve the
amendment.
HOLDINGS COMMON STOCK
Holders of Holdings Common Stock will have the right to vote on all matters
on which shareholders must be permitted to vote under Texas law and which affect
the structure of Holdings, including election of directors, mergers,
acquisitions, share exchanges, conversions, dissolution, sale of all or
substantially all of the assets of Holdings not in the ordinary course of
business, and amendments to the articles of incorporation or bylaws.
Each share of Holdings Common Stock entitles its holder to cast one vote on
each matter presented to shareholders.
Except for election of directors and voting on matters, if any, under which
Texas law requires the affirmative vote of two-thirds of the shareholders
entitled to vote, approval of any matter submitted to shareholders generally
requires the affirmative vote of the holders of a majority of the Common Stock
outstanding and entitled to vote.
Amendment of the articles of incorporation requires the adoption of a
resolution of the Holdings Board and the affirmative vote of the holders of a
majority of the Common Stock outstanding and entitled to vote. Amendments to the
bylaws require either a resolution of the Holdings Board or the affirmative vote
of the majority of the shareholders entitled to vote thereon. If shareholders
adopt a bylaw with the stipulation that only the shareholders may amend such
bylaw, the Holdings Board does not have the authority to amend such bylaw.
A merger, share exchange, acquisition, conversion and sale of substantially
all assets not in the ordinary course of business requires the adoption of a
resolution by the Holdings Board and the affirmative vote of the holders of a
majority of the Common Stock outstanding and entitled to vote, or the written
consent of all shareholders.
The dissolution of Holdings requires either the adoption of a resolution by
the Holdings Board with the approval of the holders of a majority of the Common
Stock outstanding and entitled to vote.
Shareholders may act by written consent in lieu of a meeting with a number
of votes sufficient for such action.
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SPECIAL MEETINGS
PARTNERSHIP INTERESTS
The Partnership Agreement does not address the issue of special meetings.
The General Partner, as part of its management duties, may call a special
meeting. Texas law does not prohibit a limited partner or limited partners from
calling meetings. Under Texas law, a limited partner will not be considered as
participating in the management of the Partnership by virtue of having called a
meeting or meetings of partners.
HOLDINGS COMMON STOCK
Shareholders are permitted to call a special meeting of shareholders or
require that the board of directors call a special meeting of shareholders if
such meeting is called or requested by holders of at least 10% of outstanding
Holdings Common Stock.
CONVERSION RIGHTS
PARTNERSHIP INTERESTS
The Partnership Interests are not convertible into any other securities.
HOLDINGS COMMON STOCK
Shares of Holdings Common Stock are not convertible into any other
securities.
LIQUIDATION RIGHTS
PARTNERSHIP INTERESTS
In the event of the liquidation of the Partnership, the assets of the
Partnership remaining shall be applied in the following order of priority: (i)
to satisfy all debts and liabilities of the Partnership; (ii) to set up a
reserve account which the General Partner deems reasonably necessary for
contingent or unforseen liabilities or obligations of the Partnership; and (iii)
to the partners in accordance with each partner's interest in the Partnership.
HOLDINGS COMMON STOCK
In the event of a liquidation of Holdings, the holders of Holdings Common
Stock would be entitled to share ratably in any assets remaining after
satisfaction of obligations to creditors and any liquidation preferences on any
series of preferred stock of Holdings that may then be outstanding.
RIGHT TO COMPEL DISSOLUTION
PARTNERSHIP INTERESTS
Under the Partnership Agreement, the General Partner may compel dissolution
of the Partnership. Under Texas law, all partners may compel dissolution by
unanimous written consent. The Limited Partners acting alone are not expressly
granted the authority under the Partnership Agreement to compel dissolution.
HOLDINGS COMMON STOCK
Under Texas law, holders of Holdings Common Stock may compel dissolution of
Holdings, absent prior action by the board of directors, only if all holders
consent in writing. A plan of dissolution adopted by the board of directors must
be approved by the holders of a majority of the Holdings Common Stock
outstanding and entitled to vote.
184
<PAGE>
LIMITED LIABILITY
PARTNERSHIP INTERESTS
In general, holders of Partnership Interests are limited partners in a Texas
limited partnership, and do not have personal liability for obligations of the
Partnership.
HOLDINGS COMMON STOCK
Shares of Holdings Common Stock will be fully paid and nonassessable.
Shareholders generally will not have personal liability for obligations of
Holdings.
LIQUIDITY AND MARKETABILITY
PARTNERSHIP INTERESTS
The Partnership Interests are not freely transferable, except for a transfer
to another partner, unless the (i) written consent of the General Partner is
obtained and (ii) the Partnership Interests are first offered to the other
partners pursuant to the right of first refusal contained in the Partnership
Agreement.
HOLDINGS COMMON STOCK
The Holdings Common Stock will be freely transferable and application has
been made for listing the Holdings Common Stock on the Nasdaq National Market
and subject to satisfaction of applicable securities laws.
CONTINUITY OF EXISTENCE
PARTNERSHIP INTERESTS
The Partnership Agreement provides for the Partnership to continue in
existence until December 31, 2025, unless earlier terminated in accordance with
the Partnership Agreement.
HOLDINGS COMMON STOCK
Holdings' Articles of Incorporation provides for perpetual existence,
subject to Texas law.
FINANCIAL REPORTING
PARTNERSHIP INTERESTS
The Partnership provides annual reports to its Limited Partners at the end
of each fiscal year and notifies limited partners of any significant development
materially adversely affecting the Partnership.
HOLDINGS COMMON STOCK
Holdings will be subject to the reporting requirements of the Exchange Act
and will file annual and quarterly reports thereunder. Holdings also will
provide annual and quarterly reports to its shareholders.
CERTAIN LEGAL RIGHTS
PARTNERSHIP INTERESTS
Texas law allows a limited partner to institute legal action in a court of
competent jurisdiction on behalf of the Partnership (a partnership derivative
action) to recover a judgment in the Partnership's favor where the General
Partner has failed to institute the action.
185
<PAGE>
HOLDINGS COMMON STOCK
Texas law affords shareholders of Holdings rights to bring shareholder
derivative actions when, after the shareholder has made proper demand to the
Holdings Board, the Holdings Board has failed to institute an action against
third parties or directors of Holdings.
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOKS AND RECORDS
PARTNERSHIP INTERESTS
Upon reasonable demand, at the Limited Partner's own expense and for a
purpose reasonably related to his interest in the Partnership, a Limited Partner
may have access, at reasonable times, to certain information regarding the
status of the business and financial condition of the Partnership, tax returns,
governing instruments of the Partnership and a current list of the partners of
the Partnership.
HOLDINGS COMMON STOCK
Under Texas law, any person who shall have been a shareholder for at least
six (6) months immediately preceding the demand or shall be the holder of at
least five percent (5%) of the outstanding shares of the corporation, upon
written request, at reasonable times and for a proper purpose reasonably related
to a shareholder's interest as a shareholder, shall have the right to examine
and copy the corporation's books and records of account, minutes, and share
transfer records.
DESCRIPTION OF HOLDINGS CAPITAL STOCK
The summary of the terms of the capital stock of Holdings set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Holdings Articles of Incorporation and the Holdings Bylaws.
Copies of the Holdings Articles of Incorporation, in substantially the form to
be adopted prior to the Effective Time, and the Holdings Bylaws are attached to
this Joint Proxy Statement/Prospectus as Appendix III and Appendix IV,
respectively.
AUTHORIZED CAPITAL STOCK
Under the Holdings Articles of Incorporation, the total number of shares of
all classes of stock that Holdings will have authority to issue is 220,000,000
shares, each having a par value of $.01 per share, of which 200,000,000 are
shares of Holdings Common Stock and 20,000,000 are shares of Holdings Preferred
Stock. One Thousand shares of Holdings Common Stock are issued and outstanding,
which are held by IWL, and no shares of Holdings Preferred Stock are issued or
outstanding.
COMMON STOCK
Each share of Holdings Common Stock has identical rights and privileges in
every respect. The holders of Holdings Common Stock are entitled to vote upon
all matters submitted to a vote of the stockholders of Holdings and are entitled
to one vote for each share of Holdings Common Stock held.
Subject to the prior rights and preferences, if any, applicable to shares of
Holdings Preferred Stock or any series thereof, the holders of Holdings Common
Stock are entitled to receive such dividends (payable in cash, stock or
otherwise) as may be declared thereon by the Holdings Board at any time and from
time to time out of any funds of Holdings legally available therefor.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of Holdings, after distribution in full of the preferential amounts,
if any, to be distributed to the holders of Holdings Preferred Stock or any
series thereof, the holders of Holdings Common Stock will be entitled to receive
all of the remaining assets of Holdings available for distribution to its
stockholders, ratably in proportion to the number of shares of Holdings Common
Stock held by them.
186
<PAGE>
The shares of Holdings Common Stock, when issued to holders of outstanding
shares of IWL Common Stock or Telecommunications Common Stock in connection with
the Mergers, will be validly issued, fully paid and non-assessable.
Holders of Holdings Common Stock will have no preferences or any preemptive,
conversion or exchange rights.
PREFERRED STOCK
The Holdings Board is authorized at any time and from time to time to
provide for the issuance of shares of Holdings Preferred Stock in one or more
series, and to fix for each such series such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as are set forth in a resolution providing
for the issuance of such series adopted by the Holdings Board. The Holdings
Board could authorize the issuance of shares of Holdings Preferred Stock with
terms and conditions which could discourage a takeover or other transaction that
holders of some or a majority of shares of Holdings Common Stock might believe
to be in their best interests or in which such holders might receive a premium
for their shares of stock over the then market price of such shares. As of the
date hereof, no shares of Holdings Preferred Stock are outstanding and the
Holdings Board has no present intention to issue any shares of Holdings
Preferred Stock after the Effective Time.
PREEMPTIVE RIGHTS
No holder of any shares of any class of stock of Holdings will have any
preemptive or preferential right to acquire or subscribe for any unissued shares
of any class of stock or any authorized securities convertible into or carrying
any right, option or warrant to subscribe for or acquire shares of any class of
stock.
TRANSFER AGENT AND REGISTRAR
The principal transfer agent and registrar for Holdings Common Stock will be
designated by IWL prior to the consummation of the Mergers.
CERTAIN ANTI-TAKEOVER EFFECTS
Upon consummation of the Transaction, based on the number of shares of IWL
Common Stock and Telecommunications Common Stock issued and outstanding as of
May 31, 1998 and assuming all of the Partnership Interests are validly tendered
pursuant to the Exchange Offer and accepted by Holdings, there will be
171,089,778 authorized and unissued shares of Common Stock and 20,000,000
authorized and unissued shares of Preferred Stock of Holdings. 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 Holdings by means of a merger, tender offer, proxy solicitation or otherwise.
Holdings is also subject to prior regulatory approval by the FCC and various
state regulatory agencies for a transfer of control of Holdings or for the
assignment of Holdings's (or its subsidiaries') intrastate certification
authority, its international authority and other FCC licenses and
authorizations. The 1934 Communications Act generally limits direct foreign
ownership of wireless licenses to 20%, but provides for indirect foreign
ownership holdings above 25% upon FCC approval. In addition, because Holdings
(or its subsidiaries) holds FCC authority to provide international service, the
FCC will scrutinize an ownership interest in Holdings of greater than 25%, or a
controlling interest at any level, by a dominant foreign carrier. International
carriers, such as Holdings, must notify the FCC 60 days in advance of an
acquisition by a foreign carrier or by an entity that controls a foreign carrier
of a 25% or greater or a controlling interest in such carriers. However, new
rules allow for up to 100% indirect ownership of wireless licenses by foreign
interests from countries that have participated in the 1997 WTO Agreement on
Basic Telecommunications Services, in which the United States and 68 other
countries committed to open their
187
<PAGE>
telecommunications markets to competition starting in 1998. Furthermore, it is
currently expected that the Indenture will provide for a mandatory purchase of
the Proposed Notes upon a change of control and that the Credit Facility will
provide that an event of default or redemption event thereunder will occur if
all or a controlling interest in Holdings' capital stock is sold, assigned or
otherwise transferred. Furthermore, the Credit Facility is expected to provide
that an event of default thereunder will occur if all or a controlling interest
in Holdings'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 Holdings. The Articles provide that Article 13.03 of the
Texas Business Corporation Act, which includes statutory anti-takeover measures,
will not apply to Holdings. See "Risk Factors - Certain Anti-Takeover Matters."
WARRANTS
In connection with its initial public offering, IWL issued to Cruttenden
Roth or its designees for nominal consideration, warrants to purchase up to
145,000 shares of IWL Common Stock at an exercise price of $7.20 per share
("Representative Warrants"). Following the Transaction, the Representative
Warrants will be exercisable until July 16, 2002 for such shares of Holdings
Common Stock as would have been received had such warrants been exercised
immediately prior to the Transaction.
REGISTRATION RIGHTS
Cruttenden Roth has certain demand and piggyback registration rights
associated with the common stock to be issued upon the exercise of the
Representative Warrants.
In connection with the acquisition of ICEL for cash and shares of IWL Common
Stock the shareholders of ICEL were granted demand and piggyback registration
rights that will expire upon completion of the Transaction.
In connection with the issuance of the Proposed Notes, registration rights
will be granted to the holders of the Proposed Notes requiring Holdings to file
a registration statement with respect to an offer to exchange the Proposed Notes
for senior debt securities of Holdings with terms identical to the Proposed
Notes (except that such exchange notes will not contain terms with respect to
transfer restrictions).
LEGAL MATTERS
The validity of the Holdings Common Stock to be issued in connection with
the Transaction will be passed upon by Munsch Hardt Kopf Harr & Dinan, P.C.,
Dallas, Texas. Matters entered under the heading "The Transaction--Certain
United States Federal Income Tax Consequences of the Mergers" have been passed
upon by Munsch Hardt and Hughes & Luce and are included herein in reliance upon
the authority of such firm as experts. Matters entered under the heading "The
Transaction--Certain United States Federal Income Tax Consequences of the
Interest Exchange" have been passed upon by Hughes & Luce and are included
herein in reliance upon the authority of such firm as experts.
EXPERTS
The consolidated financial statements of IWL at December 31, 1997 and June
30, 1997 and 1996 and for the six months ended December 31, 1997 and for each of
the three years in the period ended June 30, 1997 included herein and made a
part of the Registration Statement of which this Joint Proxy Statement/
Prospectus is a part, have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as set forth in their report thereon included
elsewhere herein. Such consolidated financial statements of IWL and the
consolidated balance sheet of Holdings are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The balance sheet of Holdings as December 31, 1997, and the financial
statements of Telecommunications and the Partnership at December 31, 1996 and
for the years ended December 31, 1995 and 1996,
188
<PAGE>
included herein and made part of the Registration Statement of which this Joint
Proxy Statement/ Prospectus is a part, have been audited by Burds, Reed &
Mercer, P.C., independent certified public accountants, as set forth in their
reports therein included elsewhere herein. Such financial statements of
Telecommunications and the Partnership are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Telecommunications and the Partnership at
December 31, 1997 and for the year ended December 31, 1997, included herein and
made part of the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part, have been audited by KPMG Peat Marwick, LLP,
independent certified public accountants, as set forth in their reports thereon
included elsewhere herein. The consolidated balance sheet of Holdings as of
March 31, 1998 has also been audited by KPMG Peat Marwick LLP, as set forth in
their report therein also included elsewhere herein. Such financial statements
of Holdings, Telecommunications, and the Partnership are included herein in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
It is expected that representatives of KPMG Peat Marwick LLP will be present
at the Special Meetings to respond to appropriate questions of shareholders and
to make a statement if they desire.
ACCOUNTANTS
On January 20, 1998, Burds, Reed & Mercer, P.C. resigned as the independent
certified public accountants of Telecommunications and the Partnership. On the
same day, the Board of Directors of Telecommunications and the Board of
Directors of the general partner of the Partnership approved the appointment of
KPMG Peat Marwick LLP to replace Burds, Reed & Mercer, P.C. as independent
certified public accountants. As a result, Burds, Reed & Mercer, P.C. did not
perform the audit of the financial statements of Telecommunications or the
Partnership for the fiscal year ended December 31, 1997. The accountant's report
on the financial statements for the fiscal year ended December 31, 1996 did not
contain any adverse opinion or disclaimer of opinion or qualification or
modification as to uncertainty, audit scope, or accounting principles. During
Telecommunications' and the Partnership's fiscal years ended December 31, 1995
and 1996, and through the date of their replacement, there have been no
disagreements between Telecommunications or the Partnership and Burds, Reed &
Mercer, P.C. on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures and there were no
"reportable events," as that term is defined in item 304(a)(1)(v) of Regulation
S-K under the Securities Act.
FUTURE STOCKHOLDER PROPOSALS
The timing of the first annual meeting of the public stockholders of
Holdings will depend upon when the Mergers are consummated.
If the Mergers are not completed by the third quarter of 1998, IWL expects
to hold its annual meeting of stockholders in the fourth quarter of 1998.
Commission rules set forth standards as to what stockholder proposals are
required to be included in a proxy statement. Any IWL shareholder who intends to
submit a proposal for inclusion in the proxy materials for the 1998 annual
meeting of IWL must submit such proposal to the Secretary of IWL by .
189
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapRock Telecommunications Corp.
(formerly CapRock Communications Corp.)
We have audited the accompanying balance sheet of CapRock Telecommunications
Corp. (formerly CapRock Communications Corp.) as of December 31, 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapRock Telecommunications
Corp. (formerly CapRock Communications Corp.) as of December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 11, 1998, except as to note 13,
which is as of February 16, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapRock Telecommunications Corp.:
(formerly CapRock Communications Corp.)
We have audited the accompanying balance sheet of CapRock Telecommunications
Corp. (formerly CapRock Communications Corp.), as of December 31, 1996, and the
related statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapRock Telecommunications
Corp. (formerly CapRock Communications Corp.) as of December 31, 1996, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996 in conformity with generally accepted accounting principles.
Burds, Reed and Mercer, P.C.
Dallas, Texas
May 28, 1997
F-2
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------- MARCH 31,
-------------
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ -- $ 2,162 $ --
Accounts receivable and unbilled services, less allowance for
doubtful accounts of $324,703, $1,640,722 and $675,408 at
December 31, 1996 and 1997, and March 31, 1998, respectively..... 3,514,390 8,325,352 9,318,928
Prepaid expenses and other......................................... 225,996 571,650 447,117
Deferred income taxes (note 8)..................................... 735,430 624,095 624,095
------------ ------------- -------------
Total current assets............................................. 4,475,816 9,523,259 10,390,140
Property and equipment, net (note 2)................................. 2,857,622 3,692,670 4,162,199
Other assets......................................................... 22,125 110,741 --
------------ ------------- -------------
Total assets..................................................... $ 7,355,563 $ 13,326,670 $ 14,552,339
------------ ------------- -------------
------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 3,786,838 $ 7,320,590 $ 7,242,599
Bank line of credit (note 4)....................................... 814,422 1,152,329 1,642,290
Accrued liabilities (note 6)....................................... 376,350 534,323 501,503
Current installments of obligations under capital lease (note 3)... 212,695 239,672 246,934
Note payable (note 4).............................................. 521,835 -- --
Income taxes payable (note 8)...................................... -- 324,550 642,198
Unearned revenue................................................... 111,352 527,774 153,089
------------ ------------- -------------
Total current liabilities........................................ 5,823,492 10,099,238 10,428,613
Deferred income taxes (note 8)....................................... 401,270 527,394 527,394
Obligations under capital leases and other long-term debt (notes 3
and 4)............................................................. 719,993 452,938 431,135
------------ ------------- -------------
Total liabilities................................................ 6,944,755 11,079,570 11,387,142
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized,
10,398,954 shares issued and outstanding; 9,680 shares held in
treasury......................................................... 1,041,173 1,458,273 1,458,273
Unearned compensation (note 7)..................................... -- (396,244) (375,388)
Retained earnings (accumulated deficit)............................ (630,365) 1,185,071 2,082,312
------------ ------------- -------------
410,808 2,247,100 3,165,197
Commitments (notes 3 and 9)
------------ ------------- -------------
Total liabilities and stockholder's equity....................... $ 7,355,563 $ 13,326,670 $ 14,552,339
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Telecommunication services............ $ 13,439,658 $ 23,173,904 $ 46,744,549 $ 8,696,632 $ 15,770,312
Cost of revenues...................... 11,042,775 18,941,122 35,776,468 7,117,540 11,802,008
------------- ------------- ------------- ------------ -------------
Gross profit...................... 2,396,883 4,232,782 10,968,081 1,579,092 3,968,304
Operating expenses:
Selling, general and administrative
expenses.......................... 2,600,682 3,710,671 7,047,418 1,487,354 2,175,885
Depreciation and amortization....... 333,282 478,506 694,475 142,123 231,420
------------- ------------- ------------- ------------ -------------
Income (loss) from operations..... (537,081) 43,605 3,226,188 (50,385) 1,560,999
Interest expense...................... (240,370) (314,833) (310,543) (77,283) (86,110)
------------- ------------- ------------- ------------ -------------
Income (loss) before income
taxes........................... (777,451) (271,228) 2,915,645 (127,668) 1,474,889
Income tax expense (benefit) (note
8).................................. (245,600) (88,560) 1,100,209 (65,014) 577,648
------------- ------------- ------------- ------------ -------------
Net income (loss)................. $ (531,851) $ (182,668) $ 1,815,436 $ (62,654) $ 897,241
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Net income (loss) per share:
Basic............................... $ (.05) $ (.02) $ 0.17 $ (.01) $ .09
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Diluted............................. $ (.05) $ (.02) $ 0.17 $ (.01) $ .08
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Weighted average shares outstanding:
Basic............................... 9,717,030 10,398,954 10,398,954 10,398,954 10,398,954
Diluted............................. 9,717,030 10,398,954 10,581,435 10,398,954 10,581,435
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS TOTAL
SHARES COMMON UNEARNED (ACCUMULATED STOCKHOLDERS'
ISSUED STOCK COMPENSATION DEFICIT) EQUITY
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994................... 9,671,198 $ 291,173 $ -- $ 84,154 $ 375,327
Issuance of common stock upon conversion of
note payable (note 4)........................ 727,756 750,000 -- -- 750,000
Net loss....................................... -- -- -- (531,851) (531,851)
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1995................... 10,398,954 1,041,173 -- (447,697) 593,476
Net loss....................................... -- -- -- (182,668) (182,668)
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1996................... 10,398,954 1,041,173 -- (630,365) 410,808
Deferred compensation from compensatory stock
option grants................................ -- 417,100 (417,100) -- --
Amortization of deferred compensation.......... -- -- 20,856 -- 20,856
Net income..................................... -- -- -- 1,815,436 1,815,436
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1997................... 10,398,954 1,458,273 (396,244) 1,185,071 2,247,100
Amortization of deferred compensation.......... -- -- 20,856 -- 20,856
Net income (unaudited)......................... -- -- -- 897,241 897,241
------------ ------------ ------------- ------------ ------------
Balance at March 31, 1998 (unaudited).......... 10,398,954 $ 1,458,273 $ (375,388) $2,082,312 $3,165,197
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ (531,851) $ (182,668) $ 1,815,436 $ (62,654) $ 897,241
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 333,282 478,506 694,475 142,123 142,123
Amortization of discount on notes payable... 6,930 7,338 7,338 -- --
Compensation expense related to stock option
grants.................................... -- -- 20,856 -- 20,856
Deferred income taxes....................... (245,600) (88,560) 237,459 (65,013) --
Allowance for doubtful accounts............. 67,698 356,223 1,316,019 237,831 164,940
Changes in operating assets and liabilities:
Accounts receivable....................... (1,493,899) (1,481,237) (6,126,981) (2,099,443) (1,158,516)
Prepaid expenses and other................ 205,499 (172,231) (463,585) 171,011 235,274
Accounts payable and accrued
liabilities............................. 1,937,495 1,528,907 3,849,004 1,217,977 (68,089)
Income taxes payable...................... -- -- 324,550 -- 317,648
Unearned revenue.......................... 16,097 66,375 416,422 385,337 (374,685)
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities............................ 295,651 512,653 2,090,993 (72,831) 176,792
---------- ----------- ----------- ---------- -----------
Cash flows from investing activities--purchases
of property and equipment..................... (696,407) (1,118,357) (1,500,208) (147,796) (611,652)
---------- ----------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt...... 196,045 200,000 -- -- --
Principal payments on notes payable........... (118,526) (305,602) (713,835) (200,000) --
Proceeds from line of credit.................. -- 18,564,432 40,742,755 7,591,860 14,946,744
Principal payments on line of credit.......... -- (17,750,010) (40,404,848) (7,120,416) (14,456,693)
Principal payments under capital lease
obligations................................. -- (128,324) (212,695) (50,817) (57,353)
---------- ----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities............................ 77,519 580,496 (588,623) 220,627 432,698
---------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash................. (323,237) (25,208) 2,162 -- (2,162)
Cash at beginning of period..................... 348,445 25,208 -- -- 2,162
---------- ----------- ----------- ---------- -----------
Cash at end of period........................... $ 25,208 $ -- $ 2,162 $ -- $ --
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Supplemental disclosure of cash flow
information:
Cash paid for interest........................ $ 138,535 $ 251,786 $ 338,151 $ 93,677 $ 67,610
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Cash paid for income taxes.................... $ -- $ -- $ 538,200 $ -- $ 260,000
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Noncash financing activities:
Network equipment acquired under capital
lease....................................... $1,732,000 $ -- $ -- $ -- $ --
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL INFORMATION
CapRock Telecommunications Corp. (formerly CapRock Communications Corp.)
("the Company") is a Texas corporation formed in 1991. The Company is a
facilities-based provider of voice, data and broadband services to interexchange
carriers and businesses and consumers. The Company's revenues are derived from
the sale of telecommunication services to interexchange and other
telecommunications providers and from the sale of voice and data services to
businesses and consumers. The Company extends credit to customers on an
unsecured basis with the risk of loss limited to outstanding amounts. The
Company markets its services through its internal sales representatives and a
network of independent agents.
The Company declared a 2,420 to 1 stock split effective October 31, 1997.
The financial statements, including all references to the number of shares of
common stock and all per share information, have been adjusted to reflect the
stock dividend on a retroactive basis.
(B) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over
estimated lives ranging from three to fifteen years using the straight-line
method. Property and equipment held under capital leases and leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the related asset.
(C) REVENUES, COST OF REVENUES AND COMMISSIONS EXPENSE
Revenues from telecommunication services are recognized when customer calls
are completed. Cost of revenues is based primarily on the direct costs
associated with owned and leased transmission capacity and the cost of
transmitting and terminating traffic on other carriers' facilities. Commissions
paid to acquire customer call traffic are expensed in the period when associated
call revenues are recognized.
(D) BUSINESS AND CREDIT CONCENTRATION
Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, DISCLOSURE OF
INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, consist primarily of
accounts receivable from carrier and commercial customers.
(E) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-7
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB No. 25). As such,
compensation expense is recorded on the date of grant to the extent the current
market price of the underlying stock exceeds the exercise price. The Company has
provided pro forma disclosures as if the fair value-based method of accounting
for these plans, as prescribed by Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), had been
applied.
(G) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of accounts receivable, accounts payable and lease
obligations are estimated to approximate carrying value due to the short-term
maturities of these financial instruments. The carrying value of the Company's
line of credit approximates fair value as the interest rate is indexed to
changes in the bank's prime lending rate.
(I) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
(J) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128").
SFAS No. 128 revised the previous calculation methods and presentations of
earnings per share under APB 15 and requires that all prior-period earnings
(loss) per share data be restated. The Company adopted SFAS No. 128 in 1997 as
required by this Statement. In accordance with SFAS No. 128, the Company has
presented basic earnings (loss) per share, computed on the basis of the weighted
average number of common shares outstanding during the year, and diluted loss
per share, computed on the basis of the weighted average number of common shares
and all dilutive potential common shares outstanding during the year. All prior
period loss per share amounts have been restated in accordance with this
Statement.
Basic earnings per share has been computed by dividing income available to
common shareholders by the weighted-average number of shares of common stock
outstanding for the year.
Diluted earnings per share reflects the dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common
F-8
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
stock that then shared in the earnings of the entity. Diluted earnings per share
has been computed by dividing the income available to common shareholders by the
weighted average number of shares outstanding for the year plus the weighted
average number of shares that would be issued upon exercise of dilutive options
assuming proceeds were used to repurchase shares pursuant to the treasury stock
method.
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE
--------------------------------------
DECEMBER 31, MARCH 31,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Weighted average number
of common shares...... 9,717,030 10,398,954 10,398,954 10,398,954 10,398,954
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DILUTED EARNINGS PER SHARE
--------------------------------------
DECEMBER 31, MARCH 31,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Weighted average number
of common shares...... 9,717,030 10,398,954 10,398,954 10,398,954 10,398,954
Dilutive stock options
computed using
treasury stock
method................ -- -- 182,481 -- 182,481
---------- ------------ ------------ ------------ ------------
9,717,030 10,398,954 10,581,435 10,398,954 10,581,435
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
(K) UNAUDITED INTERIM FINANCIAL INFORMATION
Interim information for the three months ended March 31, 1997 and 1998,
including such information in the notes to the financial statements, is
unaudited. This information has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, reflects
all adjustments, consisting of normal recurring adjustments considered necessary
for a fair presentation of the results of such period. Financial results for the
interim period are not necessarily indicative of the results for a full year.
F-9
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(2) PROPERTY AND EQUIPMENT
Property and equipment, including assets acquired under capital leases of
$1,732,000 as of December 31, 1996 and 1997 and March 31, 1998, is comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL --------------------------
LIVES 1996 1997
----------- ------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Leasehold improvements..................... 15 $ 134,164 $ 222,903 $ 736,407
Furniture, fixtures and office equipment... 5-7 114,613 194,967 336,209
Computer equipment and purchased
software................................. 5 522,383 896,654 933,183
Network equipment.......................... 5 2,912,529 3,869,376 3,908,364
------------ ------------ ------------
Total property and equipment........... 3,683,689 5,183,900 5,914,163
Less accumulated deprecation, including
amounts applicable to assets acquired
under capital leases of $474,238 and
$721,667 and $783,524 as of December 31,
1996 and 1997, and March 31, 1998,
respectively............................. 826,067 1,491,230 1,751,964
------------ ------------ ------------
Net property and equipment............. $ 2,857,622 $ 3,692,670 $ 4,162,199
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(3) LEASES
The Company leases certain network equipment under capital leases and leases
office space under operating leases. Future minimum lease payments under these
lease agreements for each of the next five years are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ------------
<S> <C> <C>
Year ending December 31,:
1998............................................................. $ 299,632 $ 403,387
1999............................................................. 299,632 315,105
2000............................................................. 99,877 218,462
2001............................................................. -- 147,813
2002............................................................. -- 141,247
Thereafter....................................................... -- 261,106
----------- ------------
Total minimum lease payments................................... 699,141 $ 1,487,120
------------
------------
Less amount representing interest based upon 12% interest rate... (91,976)
-----------
Present value of future minimum lease payments................... 607,165
Less current installments........................................ (239,672)
-----------
Obligations under capital leases, excluding current
installments................................................... $ 367,493
-----------
-----------
</TABLE>
F-10
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(3) LEASES (CONTINUED)
As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $197,345, $210,596
and $259,699 for each of the years ended December 31, 1995, 1996 and 1997,
respectively.
(4) DEBT
In March 1996, the Company entered into a revolving credit facility with a
bank for borrowings up to $1,500,000. In December 1997, the Company entered into
an amended agreement that provides for borrowings up to $2,500,000. Borrowings
under the amended line of credit agreement are due in December, 1998 and bear
interest at the prime rate plus 2% (10.5% at December 31, 1997.) The line of
credit is subject to certain borrowing base limitations, primarily relating to
the accounts receivable balance. The line of credit is secured by accounts
receivable and certain shareholder guarantees. The balance outstanding as of
December 31, 1996 and 1997 under the line of credit was $814,422 and $1,152,329,
respectively; and the amount of unused line of credit was $1,347,671 as of
December 31, 1997.
The Company was in violation of a debt covenant as of December 31, 1997. The
Company has obtained a waiver for this covenant violation. The Company
anticipates that the debt covenant requirements will be met through December 31,
1998.
At December 31, 1995, the Company had outstanding a note payable to a
related party totaling $1,170,000. The payment terms were upon demand or the due
date of March 31, 1998, bearing an interest rate of 13%. In 1995, the related
party converted $750,000 relating to the note payable and accrued interest into
approximately 7% of the outstanding stock of the Company, at that time. The
principal balance outstanding as of December 31, 1996 was $521,835 and was paid
in full in 1997.
In 1994, the Company entered into note payable agreements with three
officers of the Company relating to stock repurchased by the Company. Each of
the original note agreements are in the amount of $50,000 with no stated
interest rate. The notes have been discounted using an interest rate of 5.8% and
are payable in three annual installments beginning April 1998. The aggregate
amount outstanding relating to these notes, net of unamortized discount was
$112,827 and $128,166 as of December 31, 1996 and 1997, respectively. The
unamortized discount was $37,173 and $21,834 as of December 31, 1996 and 1997,
respectively.
At December 31, 1996, the Company had outstanding a note payable to a bank
for $200,000. The note was paid in full in 1997.
The aggregate maturities of long-term debt, exclusive of the unamortized
discount of $15,339, for each of the years subsequent to December 31, 1997 are
as follows: 1998--$50,000; 1999--$50,000 and 2000-- $50,000.
(5) RELATED PARTIES
During 1997, the Company provided general and administrative services for an
affiliate. The Company was reimbursed for the general and administrative
expenses plus a mark-up of 5%. The total general and administrative expenses
reimbursed was $-0-, $77,000 and $150,948 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-11
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(6) ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Compensation-related.................................................. $ 10,728 $ 443,575
Current portion of long-term debt (note 4)............................ 200,000 42,722
Other................................................................. 165,622 48,026
---------- ----------
$ 376,350 $ 534,323
---------- ----------
---------- ----------
</TABLE>
(7) STOCKHOLDERS' EQUITY
STOCK OPTION PLAN
In September 1997, the Company adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant nonqualified
options to employees. The Plan authorizes grants of option to purchase up to 10%
of the common shares outstanding. All stock options have a ten-year term and
cannot be exercised prior to September 1, 1998. The options are exercisable in
20% increments over a five-year vesting period. All options expire August 31,
2007.
In 1997, the Company granted 213,177 nonqualified stock options with an
exercise price of $1.00 per share. The Company recorded deferred compensation of
$417,100 related to these stock option grants which will be recognized in the
income statement over the vesting period. As of December 31, 1997, 4,627 of the
options previously granted were cancelled and no options were exercised.
The Company applied the intrinsic value method prescribed by APB Opinion No.
25 in accounting for its Plan. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income and basic earnings per share would have been:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AS REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net income........................................................ $ 1,815,436 $ 1,779,177
------------ ------------
------------ ------------
Basic earnings per share.......................................... $ 0.17 $ 0.17
------------ ------------
------------ ------------
</TABLE>
Diluted earnings per share yields substantially similar results. The Company
estimated the fair value of stock options granted using the minimum value method
as defined in SFAS No. 123. The minimum value method is applicable for privately
held companies and does not consider the expected volatility of the underlying
stock. Input variables used in the minimum value computation included a risk
free rate of interest of 5.7%, no expected dividend yield, and an estimated
option life of 2.5 years. The pro forma impact on income assumes no options will
be forfeited.
F-12
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(8) INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 1,229,208
State................................................ -- -- 108,459
----------- ---------- ------------
Total current...................................... -- -- 1,337,667
Deferred:
Federal.............................................. (221,810) (78,209) (218,205)
State................................................ (23,790) (10,351) (19,253)
----------- ---------- ------------
Total deferred..................................... (245,600) (88,560) (237,458)
----------- ---------- ------------
Income tax expense (benefit)....................... $ (245,600) $ (88,560) $ 1,100,209
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
Income tax expense (benefit) differs from the amount computed by applying
the federal income tax rate of 34% to earnings before taxes, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ------------
<S> <C> <C> <C>
Expected federal income tax expense (benefit).......... $ (264,333) $ (92,217) $ 991,319
State income tax expense (benefit), net of federal
effect............................................... (23,790) (10,351) 89,206
Other.................................................. 42,523 14,008 19,684
----------- ---------- ------------
$ (245,600) $ (88,560) $ 1,100,209
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
The tax effect of significant temporary differences giving rise to deferred
income tax assets and liabilities are shown below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Deferred income tax liabilities--property and equipment, principally
depreciation adjustments............................................ $ 401,270 $ 527,394
Deferred income tax assets:
Net operating loss carryover........................................ 587,459 --
Allowance for doubtful accounts..................................... 124,199 607,067
Unearned compensation............................................... -- 7,717
Other............................................................... 23,772 9,311
---------- ----------
Total gross deferred tax assets................................... 735,430 624,095
---------- ----------
Net deferred tax asset............................................ $ 334,160 $ 96,701
---------- ----------
---------- ----------
</TABLE>
The net operating loss carryover was fully utilized in 1997. No valuation
allowance for deferred taxes at December 31, 1996 and 1997 was considered
necessary. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
F-13
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(8) INCOME TAXES (CONTINUED)
differences become deductible. The Company considered the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
(9) COMMITMENTS
The Company has an agreement with various vendors which require minimum
usage. In the event such monthly commitments are not met, the Company is
required to remit to the vendor the difference between the commitments and the
actual usage. Such amount, if necessary, would be recorded as cost of revenue in
the period incurred.
(10) RETIREMENT PLAN
Effective July 1, 1996, the Company adopted a 401(k) Retirement Savings Plan
(the "Plan"). The Plan is a defined contribution plan covering all employees of
the Company who have one year of service and have attained the age of 21.
Participants may contribute up to 15% of their base pay in pretax dollars. The
Company will match employee contributions on a discretionary basis. Vesting in
Company contributions is 100% after five years in the Plan. The Company made no
contributions to the Plan in 1996 or 1997.
(11) BUSINESS SEGMENT
The Company operates in a single industry segment. The geographic
termination of revenue is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
United States................................... $ 13,439,658 $ 18,979,427 $ 32,760,482
International................................... -- 2,433,261 7,488,849
Mexico.......................................... -- 1,761,216 6,495,218
------------- ------------- -------------
$ 13,439,658 $ 23,173,904 $ 46,744,549
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(12) CONCENTRATION OF CUSTOMERS AND SUPPLIERS
All revenue was derived from unaffiliated customers. For the year ended
December 31, 1995, three customers provided 19%, 14% and 10% of the Company's
revenue. For the year ended December 31, 1996, three customers provided 15%, 14%
and 10% of the Company's revenue. For the year ended December 31, 1997,
approximately 20% of the Company's total revenues were derived from a single
customer.
Two suppliers accounted for 78% of the purchases in 1995 and three suppliers
accounted for 50% of the purchases in 1996. For the year ended December 31,
1997, approximately 40% of the Company's total cost of sales were attributable
to three suppliers.
(13) SUBSEQUENT EVENTS
On February 16, 1998, the Company entered into a definitive agreement to
merge with IWL Communications, Inc., a public company listed on NASDAQ and
CapRock Fiber Network, Ltd. The merger is subject, among other matters, to
approval by the shareholders of IWL Communications, Inc., the Company and the
Partnership.
F-14
<PAGE>
CAPROCK TELECOMMUNICATIONS CORP.
(FORMERLY CAPROCK COMMUNICATIONS CORP.)
NOTES TO FINANCIAL STATEMENTS
(13) SUBSEQUENT EVENTS (CONTINUED)
In June 1998, the Company increased its bank line of credit discussed in
Note 4 to $7 million. The Company can advance a maximum of $2.5 million to
CapRock Fiber Network, Ltd. The line of credit will mature on August 31, 1998.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of
CapRock Fiber Network, Ltd.:
We have audited the accompanying balance sheet of CapRock Fiber Network,
Ltd., as of December 31, 1997, and the related statements of operations,
partners' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapRock Fiber Network, Ltd.,
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 11, 1998, except as to note 8,
which is as of February 16, 1998
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of
CapRock Fiber Network, Ltd.:
We have audited the accompanying balance sheet of CapRock Fiber Network,
Ltd., as of December 31, 1996, and the related statements of operations,
partners' capital, and cash flows for the years ended December 31, 1995 and
1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapRock Fiber Network, Ltd.,
as of December 31, 1996, and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1996 in conformity with generally
accepted accounting principles.
Burds, Reed and Mercer, P.C.
Dallas, Texas
March 19, 1997
F-17
<PAGE>
CAPROCK FIBER NETWORK, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................................. $ -- $ 172,543 $ 657,599
Restricted cash (note 1(b))........................................... 25,415 -- --
Trade receivables..................................................... -- 206,404 44,373
Prepaid expenses...................................................... 2,733 3,602 3,602
------------ ------------ ------------
Total current assets................................................ 28,148 382,549 705,574
Property, plant and equipment, net (note 2)............................. 8,552,360 9,299,859 9,167,778
Other assets, net....................................................... 176,804 96,797 75,227
------------ ------------ ------------
Total assets........................................................ $ 8,757,312 $ 9,779,205 $ 9,948,579
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Bank overdraft........................................................ $ 957,497 $ -- $ --
Accounts payable...................................................... 894,977 81,904 279,236
Accrued commitment and guarantor fees
(note 6)............................................................ 208,020 406,010 418,312
Accrued liabilities................................................... 77,131 67,337 107,871
Current portion of long-term debt (note 3)............................ 506,981 886,304 410,470
Unearned revenue...................................................... -- -- 323,400
------------ ------------ ------------
Total current liabilities........................................... 2,644,606 1,441,555 1,539,289
Long-term debt, excluding current portion
(note 3).............................................................. 6,335,846 8,664,588 8,664,588
Partners' deficit:
General partner....................................................... (2,231) (3,273) (2,553)
Limited partners...................................................... (220,909) (323,665) (252,745)
------------ ------------ ------------
(223,140) (326,938) (255,298)
Commitments (note 4)
------------ ------------ ------------
Total liabilities and partners' deficit............................. $ 8,757,312 $ 9,779,205 $ 9,948,579
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Telecommunication services and other revenues........ $ 173,227 $ -- $ 1,944,778 $ 359,913 $ 587,533
Operating expenses:
Network access expenses............................ 502,881 -- 86,410 40,981 12,261
Selling, general and administrative (note 6)....... 325,956 173,618 285,219 65,392 67,028
Depreciation and amortization...................... 31,481 54,078 901,990 165,566 184,926
----------- ----------- ------------ ----------- -----------
Total operating expenses......................... 860,318 227,696 1,273,619 271,939 264,215
----------- ----------- ------------ ----------- -----------
Income (loss) from operations.................... (687,091) (227,696) 671,159 87,974 323,318
Other income (expense):
Interest expense (note 3).......................... -- (422) (775,327) (165,648) (209,944)
Interest income.................................... -- 715 1,286 309 340
Other.............................................. 12,278 -- (916) -- --
----------- ----------- ------------ ----------- -----------
Income (loss) before income taxes and
extraordinary item ............................ (674,813) (227,403) (103,798) (77,365) 113,714
Income taxes..................................... -- -- -- -- 42,074
----------- ----------- ------------ ----------- -----------
Income (loss) before extraordinary item.......... (674,813) (227,403) (103,798) (77,365) 71,640
Extraordinary item--extinguishment of debt (note
1(a))............................................ 644,652 -- -- -- --
----------- ----------- ------------ ----------- -----------
Net income (loss)................................ $ (30,161) $ (227,403) $ (103,798) $ (77,365) $ 71,640
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994................................................. $ 343 $ 34,081 $ 34,424
Net loss..................................................................... (300) (29,861) (30,161)
--------- ----------- -----------
Balance at December 31, 1995................................................. 43 4,220 4,263
Net loss..................................................................... (2,274) (225,129) (227,403)
--------- ----------- -----------
Balance at December 31, 1996................................................. (2,231) (220,909) (223,140)
Net loss..................................................................... (1,042) (102,756) (103,798)
--------- ----------- -----------
Balance at December 31, 1997................................................. (3,273) (323,665) (326,938)
Net income (unaudited)....................................................... 1,137 112,577 71,640
--------- ----------- -----------
Balance at March 31, 1998 (unaudited)........................................ $ (2,136) $ (211,088) $ (255,298)
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
CAPROCK FIBER NETWORK, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (30,161) $ (227,403) $ (103,798) $ (77,365) $ 71,640
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt...... (644,652) -- -- -- --
Depreciation and amortization..................... 31,481 54,078 901,990 165,566 184,926
Allowance for doubtful accounts................... 49,183 -- -- -- --
Changes in operating assets and liabilities:
Restricted cash................................... -- (25,415) 25,415 -- --
Trade receivable.................................. 4,453 -- (206,404) -- 162,031
Prepaid expenses.................................. 5,310 (2,087) (869) -- --
Other assets...................................... 4,937 -- (185,131) (190,305) --
Accounts payable and accrued liabilities.......... 414,568 128,020 (624,877) 99,192 250,168
Unearned revenue.................................. -- -- -- -- 323,400
--------- ---------- ---------- ---------- ---------
Net cash used in operating activities........... (164,881) (72,807) (193,674) (2,912) 992,165
--------- ---------- ---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures................................ -- (7,601,034) (1,384,351) (1,194,784) (31,275)
Proceeds from sale of equipment..................... 7,852 -- -- -- --
--------- ---------- ---------- ---------- ---------
Net cash provided by (used in) investing
opportunities................................. 7,852 (7,601,034) (1,384,351) (1,194,784) (31,275)
--------- ---------- ---------- ---------- ---------
Cash flows from financing activities:
Proceeds under long-term note agreement............. -- 6,842,827 3,055,000 3,004,999 --
Principal payments under long-term note agreement... -- -- -- -- (475,834)
Loan fees paid under long-term note agreement....... -- (135,749) (346,935) -- --
Net change in bank overdraft........................ -- 957,497 (957,497) (957,497) --
--------- ---------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities.................................... -- 7,664,575 1,750,568 2,047,502 (475,834)
--------- ---------- ---------- ---------- ---------
Net increase (decrease) in cash....................... (157,029) (9,266) 172,543 849,806 485,056
Cash at beginning of year............................. 166,295 9,266 -- -- 172,543
--------- ---------- ---------- ---------- ---------
Cash at end of year................................... $ 9,266 $ -- $ 172,543 $ 849,806 $ 657,599
--------- ---------- ---------- ---------- ---------
--------- ---------- ---------- ---------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............. $ -- $ -- $ 785,121 $ 165,648 $ 209,944
--------- ---------- ---------- ---------- ---------
--------- ---------- ---------- ---------- ---------
Noncash investing and financing activities (note
7)................................................
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL DESCRIPTION
CapRock Fiber Network, Ltd. ("CapRock Fiber" or "the Partnership"), is a
facilities-based provider of dark fiber bandwidth services to interexchange
carriers and other communications entities as well as to businesses and
consumers. The Partnership operates a digital fiber optic network between
Houston, Victoria and to Corpus Christi, Texas. CapRock Fiber is a Texas limited
partnership formed in December 1992. The general partner is responsible for,
among other things, the management of the affairs of the Partnership and has
unlimited liability for the debts, liabilities and obligations of the
Partnership to third parties. No limited partner shall be personally responsible
for any debts of the Partnership nor any of the losses thereof beyond the amount
of the capital contributions of each to the Partnership, except as to any debt
guarantees provided by two of the limited partners. The fiber network became
operational in January 1997. Prior to 1997, CapRock Fiber was a development
stage enterprise.
In 1995, the Partnership terminated a fiber lease agreement entered into in
June 1994 with a vendor to lease fiber capacity. The Partnership entered into
various agreements to maintain the fiber network and sublease the fiber
capacity. CapRock recorded maintenance revenues in the amount of $173,227 for
the year ended December 31, 1995. CapRock provided property and equipment to the
vendor in exchange for the forgiveness of amounts then due under the lease
agreements and the remaining future obligation. CapRock recorded an
extraordinary gain of approximately $644,000 in 1995 as a result of the
transaction.
(B) RESTRICTED CASH
Restricted cash represents cash which is restricted as security for a surety
bond. The surety bond expired on May 17, 1997, and as such there was no
restricted cash balance at December 31, 1997. The restricted cash balance was
$25,415 at December 31, 1996.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include certain costs
which were capitalized during the installation and expansion of
telecommunications networks including interest costs related to construction of
approximately $143,255, which was incurred in 1996. No interest was capitalized
in 1997, as the fiber network was placed in service in January 1997.
Depreciation is computed using the straight-line method over the estimated usefu
lives of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining terms of the leases. The estimated useful lives of owned
assets are as follows:
<TABLE>
<S> <C>
Land.............................................................. --
Buildings......................................................... 20 years
Leasehold improvements............................................ 20 years
Telecommunication network......................................... 20 years
Equipment......................................................... 5 years
</TABLE>
(D) PARTNERS' CAPITAL
The partners' capital balances are determined in accordance with the
partnership agreement which requires a tax basis computation. The financial
statements have been prepared in accordance with
F-22
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
generally accepted accounting principles (GAAP), therefore differences exist
between the capital accounts maintained on a GAAP basis and tax basis. Net
income or loss is allocated amongst the partners based upon the provisions of
the partnership agreement.
(E) REVENUE RECOGNITION
Telecommunication service revenues are recognized when the services are
provided. The revenue from long-term leases of fiber optic cable is recognized
monthly over the terms of the related leases. Amounts paid in advance are
recorded as unearned revenue.
(F) TRADE RECEIVABLES
As of December 31, 1997 the trade receivables balance consisted of unsecured
amounts due from customers obligated under operating lease agreements. No
allowance for doubtful accounts was recorded as of December 31, 1997. There were
no trade receivables as of December 31, 1996.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Effective January 1, 1996, the Partnership has adopted the provisions of
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, receivables, and accounts payable are estimated to
approximate carrying value due to the short-term maturities of these financial
instruments. The carrying value of the Partnership's long-term debt approximates
fair value as the interest rate is indexed to changes in the bank's prime
lending rate.
(I) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
(J) INCOME TAXES
The Partnership is not subject to federal income tax and, accordingly, no
provision for federal income taxes is required. Net income or loss of the
Partnership is taxed in the income tax returns of the Partners.
Effective January 1, 1998, the Partnership elected to be taxed as a C
Corporation. Consequently, the Partnership will be subject to federal income
taxes effective January 1, 1998. The unaudited pro forma effect on income taxes
as if the Partnership had been taxed as a C Corporation for all periods
presented would have been to provide an income tax benefit of approximately
$11,000, $84,000 and $38,000 for the
F-23
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended December 31, 1995, 1996 and 1997, respectively, and $42,000 for the
three months ended March 31, 1998. The pro forma effect on the balance sheet
would provide for the establishment of deferred income tax assets of
approximately $0, $82,000 and $82,000 as of December 31, 1996 and 1997 and March
31, 1998, respectively, which is primarily attributed to depreciation and
amortization.
(K) UNAUDITED INTERIM FINANCIAL INFORMATION
Interim information for the three months ended March 31, 1997 and 1998,
including such information in the notes to the financial statements, is
unaudited. This information has been prepared on the same basis as the annual
financial statements, and, in the opinion of the Partnership's management,
reflects all adjustments, consisting of normal recurring adjustments considered
necessary for a fair presentation of the results of such period. Financial
results for the interim period are not necessarily indicative of the results for
a full year.
(2) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 10,243 $ 10,243 $ 10,243
Buildings........................................... -- 186,286 186,286
Leasehold improvements.............................. 103,002 107,565 107,565
Telecommunications network.......................... 8,201,258 8,505,917 8,505,917
Equipment........................................... 237,857 1,126,700 1,157,975
------------ ------------ ------------
8,552,360 9,936,711 9,967,986
Accumulated depreciation............................ -- (636,852) (805,054)
------------ ------------ ------------
$ 8,552,360 $ 9,299,859 $ 9,162,932
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Partnership has also leased dark fiber included in the
telecommunications network to unrelated long-distance carriers (see note 5).
(3) LONG-TERM DEBT
The Partnership has a loan agreement with a bank whereby it borrowed $10
million used for the construction, start-up and related expenses of the fiber
optic network. The loan was initially secured by the network, investment
securities of a limited partner, accounts receivable and guarantees of both the
general partner and certain limited partners, and currently is guaranteed by two
of the limited partners (see note 6). The Partnership is required to maintain
certain financial covenants as a condition of this loan. Accrued interest is
payable monthly. Quarterly principal payments began on March 31, 1997. Principal
payment amounts gradually increase from .5% to 3.5% of the outstanding principal
balance existing at March 31, 1997. Additional principal payments began on June
30, 1997 based upon excess cash flow, as defined in the agreement. All unpaid
principal and accrued interest is due in full December 31, 2001. Interest is
charged at either the bank's prime rate (8.25% and 8.5% at December 31, 1996 and
1997, respectively), or a spread over LIBOR. Under the loan agreement, the
Partnership has the ability to secure a fixed rate of interest on certain
portions of the outstanding balance, subject to certain restrictions. The
F-24
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(3) LONG-TERM DEBT (CONTINUED)
balance outstanding under this loan agreement at December 31, 1996 and 1997 was
$6,842,827 and $9,550,892, respectively. The current portion outstanding under
this loan agreement at December 31, 1996 and 1997 was $506,981 and $886,304,
respectively. Principal maturities are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 886,304
1999............................................................ 1,034,022
2000............................................................ 1,230,978
2001............................................................ 6,399,588
---------
$9,550,892
---------
---------
</TABLE>
The Partnership was in violation of certain debt covenants as of December
31, 1996 and 1997. The Partnership has obtained a waiver for these covenant
violations. The Partnership anticipates that debt covenant requirements will be
met through December 31, 1998.
(4) COMMITMENTS
The Partnership leases office space and land used for transmission sites.
These lease terms are for initial terms of five and twenty years, respectively.
Rent expense for the years ended December 31, 1995, 1996 and 1997 was $7,625,
$2,473 and $12,439, respectively. Future minimum lease commitments under these
agreement are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 22,303
1999.............................................................. 22,303
2000.............................................................. 22,303
2001.............................................................. 21,727
2002.............................................................. 21,000
2003 and thereafter............................................... 320,500
---------
$ 430,136
---------
---------
</TABLE>
The Partnership also is obligated to pay a telecommunications franchise fee
to a municipality. These payments are due quarterly, and amount to the greater
of $3,000 or 5% of gross income generated within the municipality.
(5) FIBER OPTIC LINE RENTAL
As of December 31, 1997, multiple lease agreements had been signed with
customers to lease capacity over the fiber optic line. Substantially all of the
Partnership's revenues in 1997 have been derived from two customers. One of the
customers provided for approximately 93% of total revenues in 1997 and comprised
78% of the trade receivable balance. The other significant customer provided for
approximately 5% of total revenues in 1997 and comprised 22% of the trade
receivable balance. The lease terms are through August 2004 and July 2006. These
lease agreements include various renewal options.
F-25
<PAGE>
CAPROCK FIBER NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS
(6) RELATED PARTY TRANSACTIONS
LOAN FEES:
Certain partners have guaranteed the bank loan. In consideration, the
Partnership has agreed to pay a one-time commitment fee equal to 1% of each
partner's guarantee. No commitment fees were accrued in 1997. These loan
commitment fees in 1996 were $80,000, and these fees began accruing interest at
12% on July 1, 1997. This rate increases 2% each July 1 thereafter. The
guarantors were also paid a loan guaranty fee by the Partnership equal to 7% of
the amount of the lesser of $8,000,000 or the average outstanding daily
principal of the loan. The bank released the guaranty requirement in April 1997
for certain limited partners. No guaranty fees will be paid prospectively to the
remaining guarantors and therefore, no guaranty fees have been accrued
subsequent to April 1997, other than accrued interest. The total accrued
commitment fees and loan guarantor fees as of December 31, 1996 and 1997 was
approximately $208,000 and $406,000, respectively. The Partnership has not paid
any amounts related to these agreements as of December 31, 1997.
GENERAL AND ADMINISTRATION SERVICES
The Partnership retained a related party to manage and administer the
operations of the network. In consideration for these services, the Partnership
will reimburse direct costs of the network plus 5%, payable monthly. The total
general and administrative expenses paid to the affiliate was $-0-, $77,000 and
$150,948, respectively for the years ended December 31, 1995, 1996 and 1997. In
addition, as payment for marketing services, the Partnership will pay 7% of any
additional lease payments generated as a result of the related party's efforts.
There were no payments made in 1995, 1996 and 1997 under this agreement.
The Partnership has entered into an agreement with a related party to manage
the construction of the fiber optic network. Under this agreement, the
Partnership paid 4% of the costs of constructing the network, payable monthly at
a minimum of $15,000 per month. The Partnership paid management fees of $296,576
in 1997 and $461,576, cumulative under the arrangement since construction
commenced.
(7) NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996, the Partnership capitalized
property and equipment of $1,171,818 and loan costs of $80,000 through an
increase in accounts payable and accrued liabilities.
(8) SUBSEQUENT EVENTS
MERGER
On February 16, 1998, the Partnership entered into a definitive agreement to
merge with CapRock Communications Corp. and IWL Communications, Inc., a public
company listed on NASDAQ. The merger is subject to approval by the shareholders
of IWL Communications, Inc. and CapRock Communications Corp.
INDEFEASIBLE RIGHT TO USE
The Partnership is constructing a fiber optic network between San Antonio
and Laredo, and Corpus Christi, McAllen, Harlingen, and Brownsville, Texas. On
February 6, 1998, the Partnership entered into an indefeasible right to use
contract for dark fiber. The customer will lease twelve optical fibers with an
option to lease additional fibers. The Partnership is not currently committed to
any vendors for the capital expenditures to build the fiber network.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
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, 1996 and
1997, and as of December 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, 1997 and for the six months ended December 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, 1996 and 1997 and
December 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, 1997 and for the six
months ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
April 3, 1998,
except as to the
second paragraph of
Note 1 which is as of May 7, 1998
F-27
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 360,930 $ 7,659,983 $ 3,345,312
Accounts receivable:
Trade, less allowance for doubtful accounts of $74,513, $100,936
and $140,613, respectively...................................... 5,501,317 5,710,344 6,342,127
Affiliate......................................................... 73,234 67,074 30,344
Other............................................................. 7,172 116,020 239,298
Notes receivable-trade, current portion............................. 230,429 -- --
Inventory........................................................... 851,380 1,856,617 1,022,927
Costs and estimated earnings in excess of billings on uncompleted
contracts......................................................... 135,675 242,862 --
Deferred tax asset-current.......................................... 74,659 242,317 107,750
Prepaid expenses and deposits....................................... 132,266 388,272 447,067
------------ ------------ ------------
Total current assets............................................ 7,367,062 16,283,489 11,534,825
------------ ------------ ------------
Property, plant and equipment......................................... 8,385,538 14,281,182 20,387,102
Accumulated depreciation............................................ (3,894,863) (5,164,829) (6,039,032)
------------ ------------ ------------
Net property, plant and equipment............................... 4,490,675 9,116,353 14,348,070
------------ ------------ ------------
Investment in unconsolidated subsidiary............................... 297,153 428,374 --
Other assets.......................................................... 254,448 233,527 400,681
------------ ------------ ------------
Total assets.................................................... $ 12,409,338 $ 26,061,743 $ 26,283,576
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable-current portion....................................... $ 997,904 $ 963,595 $ 6,035,069
Trade accounts payable and accrued expenses......................... 3,907,185 5,436,445 3,626,519
Customer deposits................................................... 388,993 23,365 171,972
Federal income taxes payable........................................ 37,418 -- 264,964
Deferred revenue-current portion.................................... 175,977 53,480 14,667
Billings in excess of costs and estimated earnings on uncompleted
contracts......................................................... 48,892 85,553 92,022
------------ ------------ ------------
Total current liabilities....................................... 5,556,369 6,562,438 10,205,213
------------ ------------ ------------
Notes payable, noncurrent portion..................................... 2,943,837 7,692,332 3,588,308
Deferred revenue, noncurrent portion.................................. 66,748 -- --
Deferred income taxes................................................. 144,034 413,071 323,913
------------ ------------ ------------
Total liabilities............................................... 8,710,988 14,667,841 14,117,434
------------ ------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 authorized, issued and
outstanding 2,225,008, 3,677,816 and 3,754,230 shares,
respectively...................................................... 22,250 36,778 37,542
Additional paid-in capital.......................................... 259,626 7,251,600 7,601,589
Retained earnings................................................... 3,416,474 4,105,524 4,527,011
------------ ------------ ------------
Total stockholders' equity...................................... 3,698,350 11,393,902 12,166,142
------------ ------------ ------------
Commitment and contingencies
Total liabilities and stockholders' equity...................... $ 12,409,338 $ 26,061,743 $ 26,283,576
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED
------------------------------------------------- DECEMBER 31,
1995 1996 1997 1997
------------ ------------------- -------------- SIX MONTHS ------------
ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Telecommunication services............ $ 5,789,570 $ 6,530,887 $ 7,993,104 $ 3,645,771 $ 4,855,428
Project/other revenue................. 10,004,504 10,711,346 14,707,698 7,303,096 7,107,213
Product resales....................... -- 10,553,846 7,640,788 4,695,225 --
------------ ------------------- -------------- ------------ ------------
Total sales......................... 15,794,074 27,796,079 30,341,590 15,644,092 11,962,641
Cost of sales (exclusive of items shown
separately below)..................... (9,639,347) (10,743,266) (14,709,249) (7,004,414) (6,556,544)
Cost of sales-product resales........... -- (9,672,078) (7,027,061) (4,680,001) --
------------ ------------------- -------------- ------------ ------------
Gross profit............................ 6,154,727 7,380,735 8,605,280 3,959,677 5,406,097
Selling expenses........................ 862,183 842,038 1,140,953 494,702 792,667
General and administrative expenses..... 3,537,004 4,257,067 4,704,302 2,240,224 2,838,058
Depreciation and amortization........... 820,957 1,003,296 1,403,036 635,415 981,733
------------ ------------------- -------------- ------------ ------------
Income from operations.................. 934,583 1,278,334 1,356,989 589,336 793,639
------------ ------------------- -------------- ------------ ------------
Other income and (expense):
Interest income....................... 52,036 46,300 20,374 17,764 130,024
Interest expense...................... (296,299) (316,412) (534,218) (231,490) (347,844)
Gain from sale of investment in
unconsolidated subsidiary........... -- -- -- -- 66,266
Equity in earnings (loss) of
unconsolidated subsidiary........... 105,829 (25,873) 81,221 776 34,662
Gain from sale of assets.............. 24,926 67,021 47,690 18,148 9,240
Other................................. 8,123 -- -- 28 --
------------ ------------------- -------------- ------------ ------------
Total other income (expense)............ (105,385) (228,964) (384,933) (194,774) (107,652)
------------ ------------------- -------------- ------------ ------------
Income before income taxes.............. 829,198 1,049,370 972,056 394,562 685,987
Income tax expense...................... 293,557 315,708 283,006 134,154 264,500
------------ ------------------- -------------- ------------ ------------
Net income.............................. $ 535,641 $ 733,662 $ 689,050 $ 260,408 $ 421,487
------------ ------------------- -------------- ------------ ------------
------------ ------------------- -------------- ------------ ------------
Net income per share:
Basic................................. $ 0.24 $ 0.33 $ 0.30 $ 0.12 $ 0.11
------------ ------------------- -------------- ------------ ------------
------------ ------------------- -------------- ------------ ------------
Diluted............................... $ 0.24 $ 0.33 $ 0.30 $ 0.11 $ 0.11
------------ ------------------- -------------- ------------ ------------
------------ ------------------- -------------- ------------ ------------
Weighted average shares outstanding:
Basic................................. 2,222,200 2,222,416 2,298,377 2,225,939 3,736,967
Diluted............................... 2,232,751 2,232,967 2,323,330 2,261,149 3,907,877
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994..................... 2,222,200 $ 22,222 $ 249,658 $ 2,147,171 $ 2,419,051
Net income.................................... -- -- -- 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.................................... -- -- -- 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
Proceeds from initial public common stock
offering, net of expenses................... 1,450,000 14,500 6,982,005 -- 6,996,505
Net income.................................... -- -- -- 689,050 689,050
---------- --------- ------------ ------------ -------------
Balances at June 30, 1997..................... 3,677,816 36,778 7,251,600 4,105,524 11,393,902
Issuance of stock............................. 76,414 764 386,260 -- 387,024
Additional expenses from initial public
offering.................................... -- -- (36,271) -- (36,271)
Net income.................................... -- -- -- 421,487 421,487
---------- --------- ------------ ------------ -------------
Balance at December 31, 1997.................. 3,754,230 $ 37,542 $ 7,601,589 $ 4,527,011 $ 12,166,142
---------- --------- ------------ ------------ -------------
---------- --------- ------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996, AND 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS
SIX MONTHS ENDED
YEARS ENDED JUNE 30, ENDED DECEMBER 31,
1995 1996 1997 DECEMBER 31, 1997
-------------- -------------- -------------- 1996 --------------
--------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 535,641 $ 733,662 $ 689,050 $ 260,408 $ 421,487
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities: Depreciation and
amortization........................... 820,957 1,003,296 1,403,036 635,415 981,733
Gain from sale of KSG.................... -- -- -- -- (66,266)
Gain from sale of assets................. (24,926) (67,021) (47,690) (18,148) (9,240)
Deferred income taxes.................... 78,903 (9,528) 101,379 34,509 45,409
Equity in (earnings) loss of
unconsolidated subsidiary.............. (105,829) 25,873 (81,221) (776) (34,662)
Changes in operating assets and
liabilities:
Accounts receivable...................... (296,166) (3,903,405) (311,715) 468,269 (718,331)
Inventory................................ 374,297 (253,022) (70,003) (868,242) 833,690
Costs and estimated earnings in excess of
billings............................... (2,881) (132,794) (107,187) 52,410 242,862
Prepaid expenses and deposits............ (43,997) (58) (256,006) (232,870) (58,795)
Other assets............................. 32,274 (101,611) (91,197) (151,430) (205,805)
Trade accounts payable and accrued
expenses............................... (640,238) 2,762,020 1,871,807 (34,128) (1,809,926)
Customer deposits........................ (118,485) 327,692 (365,628) (274,894) 148,607
Deferred revenue......................... 177,296 (130,359) (189,245) 378,151 (38,813)
Billings in excess of costs and estimated
earnings............................... -- 48,892 36,661 86,609 6,469
Federal income taxes payable............. (90,559) 37,418 (37,418) (1,643) 264,964
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in) operating
activities............................. 696,287 341,055 2,544,623 333,640 3,383
-------------- -------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant, and
equipment.............................. (1,585,103) (1,492,487) (6,987,778) (2,431,532) (6,189,659)
Proceeds from disposal of property,
plant, and equipment................... 70,525 201,550 119,210 28,776 24,140
Proceeds from notes receivable........... 283,755 659,972 -- -- --
Proceeds from sale of KSG................ -- -- -- -- 529,262
Investment in unconsolidated
subsidiary............................. -- -- (50,000) (50,000) --
-------------- -------------- -------------- -------------- --------------
Net cash used in investing activities.... $ (1,230,823) $ (630,965) $ (6,918,568) $ (2,452,756) $ (5,636,257)
-------------- -------------- -------------- -------------- --------------
</TABLE>
F-31
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996, AND 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS
SIX MONTHS ENDED
YEARS ENDED JUNE 30, ENDED DECEMBER 31,
1995 1996 1997 DECEMBER 31, 1997
-------------- -------------- -------------- 1996 --------------
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from debt........................ $ 2,350,729 $ 8,352,398 $ 5,902,612 $ 2,684,377 $ 14,280,634
Debt payments............................. (1,496,470) (8,002,183) (1,236,116) (654,706) (13,313,184)
Proceeds from issuance of common stock.... -- 9,996 7,006,502 9,997 350,753
Decrease in cash overdraft................ (29,094) -- -- --
-------------- -------------- -------------- ------------ --------------
Net cash provided by financing
activities.............................. 825,165 360,211 11,672,998 2,039,668 1,318,203
-------------- -------------- -------------- ------------ --------------
Net increase (decrease) in cash for
period.................................. 290,629 70,301 7,299,053 (79,448) (4,314,671)
Cash and cash equivalents at beginning of
period.................................. -- 290,629 360,930 360,930 7,659,983
-------------- -------------- -------------- ------------ --------------
Cash and cash equivalents at end of
period.................................. $ 290,629 $ 360,930 $ 7,659,983 $ 281,482 $ 3,345,312
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for
interest................................ $ 317,404 $ 298,546 $ 509,931 $ 220,185 $ 347,759
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
Cash paid during the year for income
taxes................................... $ 367,267 $ 150,866 $ 320,424 $ 57,500 $ --
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
Supplemental schedule of noncash investing
activities:
Conversion of accounts receivable to notes
receivable.............................. $ 331,983 $ 395,637 $ -- $ -- $ --
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
Offset of notes receivable in lieu of
accounts payable to vendor.............. $ -- $ -- $ 342,547 $ -- $ --
-------------- -------------- -------------- ------------ --------------
-------------- -------------- -------------- ------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND
1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(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.
CHANGE IN FISCAL YEAR-END
The Company changed its fiscal year end from June 30 to December 31 on May
7, 1998. These audited consolidated financial statements reflect the results of
operations and statement of cash flows for the transition six-month period ended
December 31, 1997. The results of operations and statement of cash flows for the
comparable six-month period ended December 31, 1996 are derived from unaudited
consolidated financial statements of IWL which in the opinion of IWL's
management, contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation thereof.
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 was a 50%
owned entity for the years ended June 30, 1995, 1996 and 1997 and for the six
months ended December 31, 1997 until the date of sale 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 years ended June 30, 1996 and 1997, approximately $11,688,251 (42%)
and $9,818,000 (32%), respectively of the Company's sales were from one
customer. None of the Company's sales to customers accounted for more than 10%
of sales for the year ended June 30, 1995 or the six months ended December 31,
1997. At June 30, 1997, accounts receivable-trade included balances of
approximately $880,100 and $594,200 from two of the Company's major customers.
At December 31, 1997, no customer balances accounted for more than 10% of
accounts receivable-trade.
F-33
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND
1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of the sales to the major customer for the year ended June 30,
1996 and 1997 ($10,553,846 and $7,640,800, respectively) were attributable to a
one-time project, which included a significant equipment resale component, that
the Company substantially completed in 1997, and, therefore, is not expected to
contribute in a material manner to the Company's revenue in future periods.
Customers in the oil and gas industry account for substantially all of the
Company's offshore and project related sales. Price decreases in oil and gas and
other market forces which negatively affect the oil and gas industry as a whole,
could affect funding for drilling activities in the Gulf of Mexico, North Sea
and elsewhere, and could impact the Company's financial condition, results of
operations and cash flows.
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.
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 telecommunication 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.
Costs and estimated earnings or losses, if any, recognized in
F-34
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND
1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
excess of amounts billed 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.
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provision 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 recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 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.
INCOME TAXES
The Company uses the 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 financial instruments
included in 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 their 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 this balance sheet in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
F-35
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND
1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 establishes new
standards for computing and presenting earnings per share ("EPS") amounts for
companies with publicly held common stock. The new standards require the
presentation of both basic and diluted EPS amounts for companies with complex
capital structures. Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period, and excludes the effect of potentially dilutive securities (such as
options, warrants and convertible securities) which are converted into common
stock. Dilutive EPS reflects the potential dilution related to the incremental
shares from such convertible securities. Incremental shares resulting from
dilutive employee stock options of 10,551, 10,551, and 24,953 for the years
ended June 30, 1995, 1996, and 1997, respectively were used in the calculation
of diluted EPS. Incremental shares of 35,210 and 170,910 for the six-month
periods ended December 31, 1996 and 1997, respectively, were used in the
calculation of diluted EPS.
Effective October 1, 1997, the Company adopted the requirements of SFAS 128
and has presented basic and diluted EPS for all periods presented.
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) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1997
---------- ------------- ------------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts................................. $ 271,100 $ 958,295 $ 381,074
Estimated earnings...................................................... 127,332 315,106 281,869
---------- ------------- ------------
398,432 1,273,401 662,943
Less billings to date................................................... 311,649 1,116,092 754,965
---------- ------------- ------------
$ 86,783 $ 157,309 $ (92,022)
---------- ------------- ------------
---------- ------------- ------------
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts............................................................... $ 135,675 $ 242,862 $ --
Billings in excess of costs and estimated earnings on uncompleted
contracts............................................................... (48,892) (85,553) (92,022)
---------- ----------- ------------
$ 86,783 $ 157,309 $ (92,022)
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
F-36
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(3) INVESTMENT IN KENWOOD SYSTEMS GROUP
In September 1997, the Company sold its ownership in Kenwood Systems Group,
Inc. (KSG), a California corporation. Prior to the date of sale, the Company
owned 50% of the voting common stock, with the remaining 50% of the voting
common stock owned by Kenwood Americas Corporation (KAC). The results of
operations from July 1, 1997 through the date of sale (September 30, 1997) of
KSG have been reflected in the Company's operating results. The Company and KAC
were the original owners of KSG, which began operations on May 1, 1994. The
Company recorded a gain on the sale of KSG of $66,226.
The investment was 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, was 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 year ended June 30, 1997. The Company's
proportionate share of KSG's (losses)/earnings for the years ended June 30,
1995, 1996 and 1997 and for the six months ended December 31, 1997 were
$105,829, $(25,873), $81,221 and $34,662, respectively.
The Company received a management fee from KSG equal to 2% of gross sales
that was paid quarterly. For the years ended June 30, 1995, 1996 and 1997 and
the six months ended December 31, 1997, the Company earned a management fee of
$59,995, $58,253, $82,476 and $25,406, respectively. In addition, KSG was
covered by worker's compensation, property, medical, dental and general
liability insurance policies maintained by the Company. KSG also purchased
various supplies and computer equipment from the Company from time to time.
Employees of KSG were eligible to participate in a 401(k) plan maintained by the
Company. Billings by the Company to KSG for the years ended June 30, 1996 and
1997 and the six months ended December 31, 1997 for insurance, supplies,
equipment and management fees totaled approximately $128,178, $199,000 and
$75,000, respectively. At June 30, 1995, 1996 and 1997, $22,849, $73,234 and
$67,074, respectively, is included on the accompanying balance sheet as account
receivable-affiliate which is due from KSG.
Pertinent financial data (unaudited) of KSG, for the years ended June 30,
1995, 1996 and 1997 and the six months ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS
---------------------------------------- ENDED
1995 1996 1997 DECEMBER 31, 1997
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Total assets at period end................ $ 1,095,449 $ 1,248,217 $ 1,812,491 $ --
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
Stockholders' equity at period end........ $ 646,053 $ 594,307 $ 869,745 $ --
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
Revenues.................................. $ 2,999,745 $ 2,912,637 $ 4,121,335 $ 1,206,966
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
Net earnings (loss)....................... $ 211,660 $ (51,746) $ 159,115 $ 69,324
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
</TABLE>
F-37
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(4) 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 OF THE END OF
PERIOD EXPENSES RECOVERIES PERIOD
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1995............................. $ 85,000 $ 29,510 $ (86,529) $ 27,981
Year ended June 30, 1996............................. 27,981 46,532 -- 74,513
Year ended June 30, 1997............................. 74,513 26,423 -- 100,936
Six months ended December 31, 1997................... 100,936 39,677 -- 140,613
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1996 and 1997 and December 31,
1997 was as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1997
------------ ------------- -------------
<S> <C> <C> <C>
Assets:
Land..................................................... $ 41,046 $ 41,046 $ 41,046
Equipment for rent/lease................................. 6,355,557 9,743,043 12,003,374
Building and improvements................................ 456,355 767,327 796,198
Computer, office and test equipment...................... 889,326 1,919,700 2,321,238
Vehicles................................................. 475,353 570,716 516,693
Furniture and fixtures................................... 167,901 304,116 335,054
Construction in process.................................. -- 935,234 4,373,499
------------ ------------- -------------
8,385,538 14,281,182 20,387,102
Accumulated depreciation and amortization:
Equipment for rent/lease................................. 3,316,813 4,285,492 4,989,079
Building and improvements................................ 144,548 170,631 187,598
Computer, office and test equipment...................... 100,283 268,159 396,380
Vehicles................................................. 234,601 306,219 310,635
Furniture and fixtures................................... 98,618 134,328 155,340
------------ ------------- -------------
3,894,863 5,164,829 6,039,032
------------ ------------- -------------
Net property, plant and equipment.......................... $ 4,490,675 $ 9,116,353 $ 14,348,070
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
(6) 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.
F-38
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(6) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
For the year ended June 30,
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
1997:
Revenues............................................................ 27,457 2,323 562 30,342
Operating income (loss)............................................. 578 555 224 1,357
Identifiable assets................................................. 26,062 -- -- 26,062
For the six months ended December 31, 1997:
Revenues.............................................................. 9,701 780 1,482 11,963
Operating income (loss)............................................... 397 123 274 794
Identifiable Assets................................................... 26,284 -- -- 26,284
</TABLE>
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS
Borrowing under the Company's credit facility and long-term notes payable
consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Borrowing under a revolving credit facility, bearing interest at LIBOR
plus 2.4% (8.12% at December 31, 1997), due in October 1998, secured
by specific underlying accounts receivable, equipment and inventory.
Maximum borrowings are $5,000,000 under the facility. The weighted
average interest rate was 8.12% for the six months ended December 31,
1997................................................................. $ -- $ -- $4,123,279
Borrowings under a revolving credit facility, bearing interest at prime
plus .75%. Facility was fully paid and closed in August 1997......... 1,426,598 4,521,024 --
Note payable to bank, principal and interest due monthly in the amount
of $25,707, interest at 30-day LIBOR plus 2.4% (8.12% at December 31,
1997), due in December 1999, secured by underlying lease equipment... -- -- 539,589
</TABLE>
F-39
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to bank, principal and interest due monthly in the amount
of $36,053, interest at 30-day LIBOR plus 2.4% (8.12% at December 31,
1997), due in May 2000, secured by underlying lease equipment........ -- -- 745,939
Note payable to bank, principal and interest due in the amount of
$46,939, interest at 8.5%, due in June 2000, secured by underlying
lease equipment...................................................... -- -- 987,000
Note payable to bank, varying principal and interest due monthly
($29,567 at December 31, 1997), interest at 30-day LIBOR plus 2.4%
(8.12% at December 31, 1997), due in September 2001, secured by
underlying lease equipment........................................... -- -- 989,062
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........................................ -- 1,192,500 979,561
Note payable to financing company, principal and interest due monthly
in the amount of $9,200, interest at 6.75%, due in June 2007, secured
by specific underlying equipment..................................... -- 801,248 772,690
Note payable to bank, principal due monthly in the amount of $15,833,
plus interest at prime plus .75%. Note was fully paid in August
1997................................................................. 870,835 680,839 --
Note payable to bank, principal due monthly in the amount of $24,306,
plus interest at prime plus 1%. Note was fully paid in December
1997................................................................. 440,233 101,598 --
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............................. 247,040 102,428 24,260
Note payable to mortgage company, varying principal and interest due
monthly ($1,955 at December 31, 1997), principal and interest
adjusted quarterly to prime plus 2.5% (11.0% at December 31, 1997),
due in April 2015, secured by specific underlying property........... 185,462 182,702 180,328
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 94,069 64,214
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 81,655 64,482
Note payable to bank, principal due monthly in the amount of 2.1% of
the amount outstanding plus interest at prime plus .75%. Note was
fully paid in August 1997............................................ 90,473 500,000 --
</TABLE>
F-40
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
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................................................................. 84,444 -- --
Note payable to leasing company, principal and interest due monthly in
the amount of $4,831, interest at 10%. Note was fully paid in
December 1997........................................................ 84,210 32,272 --
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 37,258 27,168
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...................................................... 54,818 43,693 39,460
Note payable to bank, principal and interest due monthly in the amount
of $8,959, interest at 6.98%. Note was fully paid in December 1996... 52,694 -- --
Note payable to benefit plan, principal and interest due monthly in the
amount of $5,500, interest at 10%. Note was fully paid in February
1997................................................................. 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............................................................. 19,735 7,885 2,113
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 10,652 8,213
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............................. -- 83,589 65,706
Note payable to bank, principal and interest due monthly in the amount
of $1,220, interest at prime plus .75%. Note was fully paid in August
1997................................................................. -- 168,198 --
Other.................................................................. 12,200 14,317 10,313
------------ ------------ ------------
3,941,741 8,655,927 9,623,377
Less current portion................................................... 997,904 963,595 6,035,069
------------ ------------ ------------
Total long-term debt................................................. $ 2,943,837 $ 7,692,332 $3,588,308
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-41
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
The following is a summary of maturities of notes payable and financing
arrangements at December 31, 1997 during the next five years:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------------------------------------------------------------------------------------
<S> <C>
1998...................................................................................... $ 6,035,069
1999...................................................................................... 1,766,429
2000...................................................................................... 722,406
2001...................................................................................... 431,754
2002...................................................................................... 84,610
Thereafter................................................................................ 583,109
------------
Total................................................................................... $ 9,623,377
------------
------------
</TABLE>
The Company's secured revolving line of credit allows the Company to borrow
up to a maximum of $5.0 million subject to a borrowing base based on accounts
receivable and inventory. The Company also has a secured guidance line of credit
that allows the Company to borrow up to $5.0 million to finance the Company's
purchase and subsequent lease of communication equipment. The interest rate on
both lines is at the Company's option, the lending bank's base rate or 30, 60 or
90 day adjusted LIBOR plus 2.4% (8.12% at December 31, 1997). The lines of
credit are secured by specific underlying accounts receivable, equipment and
inventory. The lines of credit provide for certain reporting and financial
covenants including minimum net worth and maximum debt to net worth
requirements. The Company was in violation of the financial covenant requiring
maintenance of a current ratio at December 31, 1997. The Company has obtained a
waiver of this covenant violation. The guidance line of credit is due on May 1,
1998. The Company had $5.0 million available under the guidance line of credit
at December 31, 1997.
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 $79,981 for the six months ended
December 31, 1997 and is amortizing such costs over the life of the respective
loan. These financing costs are included in other assets on the balance sheet.
Amortization expense for the six months ended December 31, 1997 amounted to
$38,651.
(8) INCOME TAXES
Income tax expense attributable to income consists of:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
---------------------------------- DECEMBER 31,
1995 1996 1997 1997
---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
United States Federal
Current income tax expense.................... $ 214,654 $ 175,404 $ 59,989 $ 115,080
Deferred income tax expense................... 78,903 (9,528) 81,607 65,181
Foreign--current income tax expense............. -- 149,832 141,410 84,239
---------- ---------- ---------- --------
$ 293,557 $ 315,708 $ 283,006 $ 264,500
---------- ---------- ---------- --------
---------- ---------- ---------- --------
</TABLE>
F-42
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(8) INCOME TAXES (CONTINUED)
Foreign income tax expense results from taxes withheld on sales related to
the Russian operations. Operating income from such operations for the years
ended June 30, 1995, 1996 and 1997 and the six months ended December 31, 1997
were $190,000, $436,000, $555,000 and $123,000, 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,
1996 and 1997 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
JUNE 30
------------------------ DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts............ $ 25,335 $ 34,317 $ 47,808
Accrued vacation pay................................................... 30,497 27,200 27,200
Deferred revenue....................................................... 41,521 12,467 7,142
Alternative minimum tax credit carryforward............................ 74,918 105,267 116,958
Foreign tax credit..................................................... -- 63,066 25,600
Equity in losses of affiliates......................................... 8,796 -- --
----------- ----------- ------------
Total deferred tax assets............................................ 181,067 242,317 224,708
Deferred tax liabilities:
Property, plant and equipment.......................................... (250,442) (381,170) (440,871)
Equity in income of affiliates......................................... -- (12,130) --
----------- ----------- ------------
Total deferred tax liabilities....................................... (250,442) (393,300) (440,871)
----------- ----------- ------------
Net deferred tax liability........................................... $ (69,375) $ (150,983) $ (216,163)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
There was no valuation allowance on deferred tax assets as of June 30, 1996
and 1997 and December 31, 1997, as management has determined that it is more
likely than not that these tax assets will be realized.
The Company also has alternative minimum tax credit carryforwards of
$116,958 at December 31, 1997 which are available to reduce future federal
regular income taxes, if any, over an indefinite period.
F-43
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(8) 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>
SIX MONTHS
YEAR ENDED JUNE 30 ENDED
---------------------------------- DECEMBER 31,
1995 1996 1997 1997
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Income tax provision at 34%.................................... $ 281,927 $ 356,789 $ 330,499 $ 235,582
Expenses not deductible for tax purposes....................... 11,630 11,990 6,463 16,547
Effect of foreign operations, including foreign tax credits.... -- (53,071) (53,956) (19,451)
Sale of KSG.................................................... -- -- -- 31,822
---------- ---------- ---------- ------------
Actual income tax provision.................................... $ 293,557 $ 315,708 $ 283,006 $ 264,500
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Effective tax rate............................................. 35.4% 30.1% 29.1% 38.6%
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
(9) 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 zero 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, 1995,
1996, and 1997 the six months ended December 31, 1997 were $23,367, $30,287,
$15,035 and $31,035, respectively.
(10) INCENTIVE STOCK OPTION PLANS
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 fair market
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. All options under the Plan
granted on or prior to the IPO date, June 12, 1997, vested in full on the
offering date. Stock options will expire ten years from the date of grant.
As of December 31, 1997, there were options for 146,695 shares granted under
the Plan with option prices ranging from $3.56 to $4.49. All options granted
were outstanding and exercisable at December 31, 1997. On December 31, 1997,
there were 111,905 additional shares available for grant under the plan.
The Company adopted a 1997 Stock Option Plan and a 1997 Director Stock
Option Plan in February 1997 (the Plans). Options 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 of the Company or
any of its subsidiaries. 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 300,000 and
100,000 shares
F-44
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(10) INCENTIVE STOCK OPTION PLANS (CONTINUED)
of Common Stock have been reserved for issuance upon the exercise of options
which may be granted under the 1997 Stock Option Plan and the 1997 Director
Stock Opiton Plan, respectively.
As of December 31, 1997, there were options for 197,350 shares granted under
the 1997 Stock Option and 1997 Director Stock Option Plans with option prices
ranging from $6.00 to $9.50. All options granted were outstanding and none were
exercisable at December 31, 1997. On December 31, 1997, there were 202,650
additional shares available for grant under the Plans.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1997 JUNE 30, 1996 1997
---------------------------- ---------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year............ -- $ -- 152,836 $ 3.59 310,514 $ 4.77
Options granted................ 152,836 3.59 157,678 5.91 47,750 6.16
Options exercised.............. -- -- -- -- (13,919) 3.56
Options forfeited.............. -- -- -- -- (300) 6.00
----------- ----- ----------- ----- ----------- -----
Options outstanding at end of
year......................... 152,836 $ 3.59 310,514 $ 4.77 344,045 $ 5.01
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
Options exercisable at end of
year......................... -- $ -- 160,614 $ 3.62 146,695 $ 3.63
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
A summary of options outstanding as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
- ----------- ----------- ------------------------- -----------
<S> <C> <C> <C>
$3.56 136,140 8.0 136,140
4.49 10,555 8.4 10,555
6.00 186,600 9.5 --
6.25 5,000 9.7 --
6.75 5,000 9.8 --
9.50 750 9.8 --
--
----------- -----------
344,045 8.9 146,695
--
--
----------- -----------
----------- -----------
</TABLE>
The per share weighted-average value of stock options granted during the
years ended June 30, 1996 and 1997 and the six months ended December 31, 1996
(unaudited) and 1997 were $.24, $.35, $.79 and $2.61, respectively, on the date
of grant, using the Black Scholes model with the following assumptions:
risk-free interest rate of 5.77% for the 1996 options and 5.89% for the 1997
options, expected life of 2 to 3 years, expected volatility of 55%, and no
expected dividend yield.
F-45
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(10) INCENTIVE STOCK OPTION PLANS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JUNE 30 DECEMBER 31,
---------------------- ----------------------------
1996 1997 1997
--------- ----- 1996 -----
---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income
As reported......................................... $ 734 689 260 421
Pro Forma........................................... $ 729 592 247 364
Earnings per share (diluted)
As reported......................................... $ .33 .30 .12 .11
Pro Forma........................................... $ .33 .25 .11 .09
</TABLE>
(11) 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 communication equipment to the
entity. The Company utilizes those facilities to provide communication services
to various United States energy 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
December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 3,821,383
1999............................................................................ 2,420,810
2000............................................................................ 2,033,177
2001............................................................................ 908,116
2002............................................................................ 247,552
Thereafter...................................................................... --
------------
Total......................................................................... $ 9,431,038
------------
------------
</TABLE>
F-46
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(12) COMMITMENTS
The Company leases office space, equipment and communication services for
its operations under leases expiring through 2005. Rental expense under the
leases for the years ended June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1997 was $348,184, $555,033, $896,354 and $699,497, respectively.
Future minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 2,669,054
1999............................................................................ 1,772,903
2000............................................................................ 1,304,659
2001............................................................................ 1,116,553
2002............................................................................ 665,595
Thereafter...................................................................... 568,250
------------
Total......................................................................... $ 8,097,014
------------
------------
</TABLE>
(13) 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. 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 in March,
1997 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.
The Company completed an initial public offering (IPO) of common stock on
June 12, 1997, issuing 1,450,000 shares at $6.00 per share. The proceeds, net of
commissions and expenses, from this IPO totaled $6,996,505. In July 1997 the
Underwriters exercised an overallotment option and purchased an additional
62,496 shares resulting in net proceeds of $337,473.
F-47
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
(13) STOCKHOLDERS' EQUITY (CONTINUED)
(c) Representative's Warrant
The Company 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 June 12, 1998.
(14) SUBSEQUENT EVENTS
The Company acquired Integrated Communications and Engineering Ltd. ("ICEL")
on January 29, 1998 in a business combination accounted for under the purchase
method of accounting. The acquisition was for $2.7 million which consisted of
IWL common stock and cash.
The Company announced in February 1998 that it had entered into a definitive
agreement to merge with CapRock Communications Corp. and CapRock Fiber Network,
Ltd.
F-48
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................................... $3,345,312 $ 719,906
Accounts receivable:
Trade, less allowance for doubtful accounts of $140,613 and $157,293,
respectively..................................................................... 6,342,127 7,590,388
Affiliate......................................................................... 30,344 68,816
Other............................................................................. 239,298 395,996
Inventory........................................................................... 1,022,927 998,036
Deferred tax asset-current.......................................................... 107,750 242,317
Prepaid expenses and deposits....................................................... 447,067 924,068
------------ -----------
Total current assets............................................................ 11,534,825 10,939,527
------------ -----------
Property, plant and equipment......................................................... 20,387,102 23,243,370
Accumulated depreciation............................................................ (6,039,032) (6,573,100)
------------ -----------
Net property, plant and equipment............................................... 14,348,070 16,670,270
------------ -----------
Other assets.......................................................................... 400,681 2,223,752
------------ -----------
Total assets.................................................................... $26,283,576 $29,833,549
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable-current portion....................................................... $6,035,069 $ 6,354,081
Trade accounts payable and accrued expenses......................................... 3,626,519 3,974,432
Customer deposits................................................................... 171,972 360,347
Federal income taxes payable........................................................ 264,964 489,814
Deferred revenue-current portion.................................................... 14,667 15,549
Billings in excess of costs and estimated earnings on uncompleted contracts......... 92,022 143,592
------------ -----------
Total current liabilities....................................................... 10,205,213 11,337,815
------------ -----------
Notes payable, noncurrent portion..................................................... 3,588,308 3,947,862
Deferred revenue, noncurrent portion.................................................. -- --
Deferred income taxes................................................................. 323,913 413,071
------------ -----------
Total liabilities............................................................... 14,117,434 15,698,748
------------ -----------
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 authorized, issued and outstanding
3,754,230 and 3,968,607 shares, respectively...................................... 37,542 39,686
Additional paid-in capital.......................................................... 7,601,589 9,172,572
Retained earnings................................................................... 4,527,011 4,917,597
Translation adjustment.............................................................. -- 4,946
------------ -----------
Total stockholders' equity...................................................... 12,166,142 14,134,801
------------ -----------
Commitment and contingencies
Total liabilities and stockholders' equity...................................... $26,283,576 $29,833,549
------------ -----------
------------ -----------
</TABLE>
See condensed notes to consolidated financial statements.
F-49
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1998
------------- ------------
<S> <C> <C>
Sales:
Telecommunication services......................................................... $ 2,297,732 $ 2,803,708
Project/other revenue.............................................................. 3,160,810 5,250,809
Product resales.................................................................... 2,506,455 --
------------- ------------
Total sales...................................................................... 7,964,997 8,054,517
Cost of sales (exclusive of items shown separately below)............................ 3,737,643 4,421,099
Cost of sales--product resales....................................................... 1,935,985 --
------------- ------------
Gross profit..................................................................... 2,291,369 3,633,418
Selling expenses..................................................................... 337,306 446,294
General and administrative expenses.................................................. 1,273,686 1,741,051
Depreciation and amortization........................................................ 347,185 647,330
------------- ------------
Income from operations............................................................... 333,192 798,743
------------- ------------
Other income and (expense):
Interest expense, net.............................................................. (124,655) (154,596)
Other, net......................................................................... 113,841 548
------------- ------------
Total other income (expense)......................................................... (10,814) (154,048)
------------- ------------
Income before income taxes........................................................... 322,378 644,695
Income tax expense................................................................... 94,531 254,109
------------- ------------
Net income........................................................................... $ 227,847 $ 390,586
------------- ------------
------------- ------------
Net income per share:
Basic.............................................................................. $ 0.10 $ 0.10
------------- ------------
------------- ------------
Diluted............................................................................ $ 0.10 $ 0.09
------------- ------------
------------- ------------
Weighted average shares outstanding:
Basic.............................................................................. 2,233,846 3,912,490
Diluted............................................................................ 2,297,526 4,198,922
</TABLE>
See condensed notes to consolidated financial statements.
F-50
<PAGE>
IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 227,947 $ 390,586
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 347,185 647,330
Gain from sale of assets............................................................ (46,551) (548)
Deferred income taxes............................................................... 23,434 (45,409)
Equity in (earnings) loss of unconsolidated subsidiary.............................. (67,318) --
Changes in operating assets and liabilities:
Accounts receivable................................................................. 559,479 (1,443,430)
Inventory........................................................................... (365,131) 24,891
Costs and estimated earnings in excess of billings.................................. (109,475) --
Prepaid expenses and deposits....................................................... (7,231) (477,001)
Other assets........................................................................ 84,516 128,695
Trade accounts payable and accrued expenses......................................... 358,734 347,912
Customer deposits................................................................... (11,960) 188,375
Deferred revenue.................................................................... (471,237) 882
Billings in excess of costs and estimated earnings.................................. (1,842) 51,570
Federal income taxes payable........................................................ (18,548) 224,850
------------- -------------
Net cash provided by operating activities........................................... 502,002 38,703
------------- -------------
Cash flows from investing activities:
Purchase of property, plant, and equipment.......................................... (1,049,749) (2,836,414)
Proceeds from disposal of property, plant, and equipment............................ 60,125 73,300
Purchase of ICEL.................................................................... -- (609,822)
Proceeds from sale of KSG........................................................... 191,906 --
------------- -------------
Net cash used in investing activities............................................... (797,718) (3,372,936)
------------- -------------
Cash flows from financing activities:
Proceeds from debt.................................................................. 786,703 4,277,227
Debt payments....................................................................... (297,510) (3,598,661)
Proceeds from issuance of common stock.............................................. -- 25,315
Deferred offering costs............................................................. (134,825) --
------------- -------------
Net cash provided by financing activities........................................... 354,368 703,881
------------- -------------
Effect of foreign exchange rate on cash............................................. -- 4,946
Net increase (decrease) in cash for period.......................................... 58,652 (2,625,406)
Cash and cash equivalents at beginning of period.................................... 281,482 3,345,312
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 340,134 $ 719,906
------------- -------------
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............................................. $ 130,323 $ 178,361
------------- -------------
------------- -------------
Cash paid during the year for income taxes.......................................... $ -- $ 30,000
------------- -------------
------------- -------------
</TABLE>
See condensed notes to consolidated financial statements.
F-51
<PAGE>
IWL COMMUNICATIONS INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements, and related notes thereto, of IWL
Communications Inc., included elsewhere herein. All references to the "Company"
include IWL Communications Inc. and its subsidiary companies unless otherwise
indicated or the context indicates otherwise.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at March 31, 1998 and
the consolidated results of operations and consolidated cash flows for the three
months ended March 31, 1997 and 1998. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("FAS 128"), "Earnings Per Share". FAS 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>
<CAPTION>
THREE MONTHS ENDED MARCH
31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Numerator:
Net income (loss)..................................................................... 227,847 390,586
------------ ------------
------------ ------------
Denominator:
Denominator for basic earnings per share--weighted-average shares outstanding......... 2,233,846 3,912,490
Effect of dilutive securities:
Employee stock options................................................................ 63,680 286,432
------------ ------------
Denominator for diluted earnings per share............................................ 2,297,526 4,198,922
------------ ------------
------------ ------------
Basic earnings per share.............................................................. .10 .10
Diluted earnings per share............................................................ .10 .09
</TABLE>
3. ACQUISITIONS
In January, the Company completed the acquisition of Integrated
Communications and Engineering, Ltd. ("ICEL"), a communications systems
integrator and maintenance provider in Aberdeen, Scotland.
F-52
<PAGE>
The Company paid a total purchase price of approximately $2.7 million comprised
of approximately $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 three months
ended March 31, 1998 reflects the operations of ICEL. The goodwill and other
intangibles resulting from the acquisition is being amortized over 7 and 20
years.
4. COMPREHENSIVE INCOME
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.
5. NOTES PAYABLE
The Company was in violation of the financial covenant requiring maintenance
of a specified current ratio as of March 31, 1998 and December 31, 1997 and was
in technical default of a covenant requiring the lender's consent to the
Transaction and certain actions to be taken by the Company in connection
therewith. The Company has obtained a waiver for these covenant violations and
has obtained the lender's consent to the Transaction and the taking of such
actions by Telecommunications. On June 17, 1998, the Company was extended
additional credit under a short-term facility by the lender of 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.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
CapRock Communications Corp.
(formerly IWL Holdings Corporation)
We have audited the accompanying balance sheet of CapRock Communications
Corp. (formerly IWL Holdings Corporation) (a Texas corporation) as of March 31,
1998. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit 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 of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the CapRock Communications Corp.
(formerly IWL Holdings Corporation) as of March 31, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
June 18, 1998
F-54
<PAGE>
CAPROCK COMMUNICATIONS CORP.
(FORMERLY IWL HOLDINGS CORPORATION)
BALANCE SHEET
MARCH 31, 1998
ASSETS
<TABLE>
<S> <C>
Due from IWL Communications, Inc.................................................... $ 2,000
---------
---------
SHAREHOLDER'S EQUITY
Preferred stock--$.01 par value; 20,000,000 shares authorized, none issued.......... $ --
Common stock--$.01 par value; 200,000,000 shares authorized, 1,000 shares issued and
outstanding....................................................................... 10
Additional paid-in capital.......................................................... 1,990
---------
Total shareholder's equity........................................................ $ 2,000
---------
---------
</TABLE>
See accompanying notes to balance sheet.
F-55
<PAGE>
CAPROCK COMMUNICATIONS CORP.
(FORMERLY IWL HOLDINGS CORPORATION)
NOTES TO BALANCE SHEET
MARCH 31, 1998
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
CapRock Communications Corp. (formerly IWL Holdings Corporation) (the
"Company") was incorporated as a Texas corporation on February 3, 1998, to serve
as a holding company for the operations of CapRock Telecommunications Corp.
(formerly CapRock Communications Corp.), CapRock Fiber Network, Ltd. and IWL
Communications, Inc. after completion of their merger in conformance with the
provisions of their Agreement and Plan of Merger dated February 16, 1998.
Effective February 3, 1998, IWL Communications, Inc. purchased 2,000 shares
of the common stock of the Company for an aggregate purchase price of $2,000,
for the purpose of completing the organization of the Company. On June 2, 1998,
the Company committed to purchase (i) from IWL Acquisition Corp., a Texas
corporation, 1,000 shares of the common stock, par value $.01 per share of IWL
Acquisition Corp. for an aggregate purchase price of $1,000 and (ii) from
CapRock Acquisition Corp., a Delaware corporation, 1,000 shares of the common
stock, par value $.01 per share of CapRock Acquisition Corp., Inc., for an
aggregate purchase price of $1,000.
The Company's original stock issuance consisted of 1,000 shares of $.01 par
value common stock. The amount of shares authorized were 100,000,000. On June
18, 1998, the Company amended the Articles of Incorporation to adjust the number
of authorized shares from 100,000,000 shares to 200,000,000 shares. On June 3,
1998, IWL Communications, Inc. funded the initial capital contribution of
$2,000.
The accompanying balance sheet presents the financial position of the
Company as of March 31, 1998. The Company has not commenced operations and does
not have any contingent liabilities or commitments, other than its commitments
to enter into the transactions related to the mergers described above.
F-56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX I
AGREEMENT AND PLAN OF MERGER
AND PLAN OF EXCHANGE
AMONG
IWL HOLDINGS CORP.,
IWL COMMUNICATIONS, INCORPORATED,
IWL ACQUISITION CORP.,
CAPROCK COMMUNICATIONS CORP.,
CAPROCK ACQUISITION CORP.
AND
CAPROCK FIBER NETWORK, LTD.
FEBRUARY 16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I--THE MERGERS AND THE INTEREST EXCHANGE......................................................... 2
1.1 The Mergers and the Interest Exchange........................................................ 2
1.2 Effective Time............................................................................... 2
1.3 Effect of the Mergers and the Interest Exchange.............................................. 3
1.4 Articles of Incorporation: Bylaws............................................................ 3
1.5 Directors and Officers....................................................................... 3
1.6 Shares to Be Issued in the Mergers and the Interest Exchange; Effect on Capital Stock........ 3
1.7 Dissenters' Shares........................................................................... 7
1.8 No Further Ownership Rights in IWL Common Stock, Company Common Stock and Partnership
Interests.................................................................................... 7
1.9 Tax Consequences and Accounting Treatment.................................................... 7
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................ 8
2.1 Organization and Qualification, Subsidiaries................................................. 8
2.2 Articles of Incorporation and Bylaws......................................................... 8
2.3 Capitalization............................................................................... 8
2.4 Authority.................................................................................... 9
2.5 Company Financial Statements................................................................. 10
2.6 No Undisclosed Liabilities................................................................... 10
2.7 No Changes................................................................................... 10
2.8 Tax and Other Returns and Reports............................................................ 11
2.9 Restrictions on Business Activities.......................................................... 12
2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment............... 12
2.11 Intellectual Property........................................................................ 13
2.12 Agreements, Contracts and Commitments........................................................ 14
2.13 Interested Party Transactions................................................................ 16
2.14 Governmental Authorizations.................................................................. 16
2.15 Litigation................................................................................... 16
2.16 Accounts Receivable.......................................................................... 16
2.17 Minute Books and Stock Records............................................................... 16
2.18 Environmental and OSHA....................................................................... 17
2.19 Brokers' and Finders' Fees................................................................... 17
2.20 Labor Matters................................................................................ 18
2.21 Insurance.................................................................................... 18
2.22 Inventory.................................................................................... 18
2.23 Compliance with Laws......................................................................... 18
2.24 Registration Statement; Joint Proxy Statement................................................ 19
2.25 Accounting Matters........................................................................... 19
2.26 FIRPTA....................................................................................... 19
2.27 Employee Benefit Plans....................................................................... 19
2.28 Ownership of Securities...................................................................... 21
2.29 Certain Regulatory Matters................................................................... 21
2.30 Representations Complete..................................................................... 22
ARTICLE IIA--REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP........................................... 22
2A.1 Organization and Qualification, Subsidiaries................................................. 22
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
2A.2 Agreement of Limited Partnership............................................................. 22
2A.3 Partnership Interests........................................................................ 22
2A.4 Authority.................................................................................... 23
2A.5 Partnership Financial Statements............................................................. 23
2A.6 No Undisclosed Liabilities................................................................... 23
2A.7 No Changes................................................................................... 23
2A.8 Tax and Other Partnership Returns and Reports................................................ 24
2A.9 Restrictions on Business Activities.......................................................... 25
2A.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment............... 25
2A.11 Intellectual Property........................................................................ 26
2A.12 Agreements, Contracts and Commitments........................................................ 27
2A.13 Interested Party Transactions................................................................ 28
2A.14 Governmental Authorizations.................................................................. 29
2A.15 Litigation................................................................................... 29
2A.16 Accounts Receivable.......................................................................... 29
2A.17 Environmental and OSHA....................................................................... 29
2A.18 Brokers' and Finders' Fees................................................................... 30
2A.19 Labor Matters................................................................................ 30
2A.20 Insurance.................................................................................... 30
2A.21 Inventory.................................................................................... 31
2A.22 Compliance with Laws......................................................................... 31
2A.23 Registration Statement; Joint Proxy Statement................................................ 31
2A.24 Accounting Matters........................................................................... 32
2A.25 FIRPTA....................................................................................... 32
2A.26 Employee Benefit Plans....................................................................... 32
2A.27 Ownership of Securities...................................................................... 33
2A.28 Certain Regulatory Matters................................................................... 33
2A.29 Representations Complete..................................................................... 34
ARTICLE III-- REPRESENTATIONS AND WARRANTIES OF IWL AND THE MERGER SUBSIDIARIES..........................
34
3.1 Organization, Standing and Power............................................................. 34
3.2 Capital Structure............................................................................ 34
3.3 Authority.................................................................................... 36
3.4 SEC Documents; IWL Financial Statements...................................................... 36
3.5 Brokers and Finders' Fees.................................................................... 37
3.6 Registration Statement; Joint Proxy Statement................................................ 37
3.7 Opinion of Financial Advisor................................................................. 37
3.8 Ownership of Securities...................................................................... 37
3.9 Litigation................................................................................... 37
3.10 No Undisclosed Liabilities................................................................... 37
3.11 No Changes................................................................................... 37
3.12 Tax and Other Returns and Reports............................................................ 38
3.13 Restrictions on Business Activities.......................................................... 39
3.14 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment............... 39
3.15 Intellectual Property........................................................................ 40
3.16 Agreements, Contracts and Commitments........................................................ 41
3.17 Governmental Authorizations.................................................................. 42
3.18 Accounts Receivable.......................................................................... 42
3.19 Minute Books and Stock Records............................................................... 43
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
3.20 Labor Matters................................................................................ 43
3.21 Insurance.................................................................................... 43
3.22 Inventory.................................................................................... 43
3.23 Compliance with Laws......................................................................... 43
3.24 FIRPTA....................................................................................... 44
3.25 Employee Benefit Plans....................................................................... 44
3.26 Certain Regulatory Matters................................................................... 45
3.27 Accounting Matters........................................................................... 46
3.28 Interested Party Transactions................................................................ 46
3.29 Environmental and OSHA....................................................................... 46
3.30 Representations Complete..................................................................... 47
3.31 Representations and Warranties with Respect to ICEL.......................................... 47
ARTICLE IV--CONDUCT PRIOR TO THE EFFECTIVE TIME.......................................................... 47
4.1 Conduct of Business of the Company and the Partnership....................................... 47
4.2 No Solicitation.............................................................................. 49
4.3 Conduct of Business of IWL................................................................... 49
4.4 Control of Other Party's Business; Transition Planning....................................... 51
ARTICLE V--ADDITIONAL AGREEMENTS......................................................................... 51
5.1 Joint Proxy Statement and the Registration Statement......................................... 51
5.2 IWL and Company Shareholders' Meetings, Partners' Meeting, and Consummation of the Mergers
and the Interest Exchange.................................................................... 52
5.3 Access to Information........................................................................ 53
5.4 Confidentiality.............................................................................. 53
5.5 Expenses..................................................................................... 53
5.6 Public Disclosure............................................................................ 53
5.7 Filings; Other Action........................................................................ 54
5.8 Affiliate Agreement.......................................................................... 54
5.9 Compliance................................................................................... 54
5.10 Blue Sky Laws................................................................................ 54
5.11 Best Efforts, Additional Documents and Further Assurances.................................... 54
5.12 Employment Agreements........................................................................ 55
5.13 Pooling Accounting........................................................................... 55
5.14 Nasdaq Listing............................................................................... 55
5.15 Post-Merger Board of Directors and Officers of Holdings...................................... 55
5.16 No Registration Rights....................................................................... 55
5.17 Notification of Certain Matters.............................................................. 55
ARTICLE VI--CONDITIONS TO THE MERGERS AND THE INTEREST EXCHANGE.......................................... 56
6.1 Conditions to Obligations of Each Party to Effect the Mergers and the Interest Exchange...... 56
6.2 Additional Conditions to Obligations of the Company and the Partnership...................... 57
6.3 Additional Conditions to the Obligations of IWL and the Merger Subsidiaries.................. 58
ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER........................................................... 60
7.1 Termination.................................................................................. 60
7.2 Effect of Termination........................................................................ 62
7.3 Amendment.................................................................................... 62
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
7.4 Waiver....................................................................................... 62
ARTICLE VIII--GENERAL PROVISIONS......................................................................... 63
8.1 Survival of Representations and Warranties................................................... 63
8.2 Notices...................................................................................... 63
8.3 Interpretation............................................................................... 64
8.4 Counterparts................................................................................. 64
8.5 Miscellaneous................................................................................ 64
8.6 Governing Law................................................................................ 64
8.7 Attorneys' Fees.............................................................................. 64
8.8 Arbitration.................................................................................. 64
8.9 Rules of Construction........................................................................ 64
8.10 Severability................................................................................. 64
8.11 Definitions.................................................................................. 65
</TABLE>
iv
<PAGE>
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit
1.6(a) Company Merger Consideration and Interest Exchange Consideration
Exhibit 5.12 Form of Employment Agreement
</TABLE>
LIST OF SCHEDULES
Company Disclosure Schedule
Partnership Disclosure Schedule
IWL Disclosure Schedule
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND PLAN OF EXCHANGE
This AGREEMENT AND PLAN OF MERGER AND PLAN OF EXCHANGE (this "Agreement") is
made and entered into as of February 16, 1998, among IWL Communications,
Incorporated, a Texas corporation ("IWL"), IWL Holdings Corp., a Texas
corporation ("Holdings"), IWL Acquisition Corp., a Texas corporation ("I-Sub")
and a wholly owned subsidiary of Holdings, CapRock Communications Corp., a Texas
corporation (the "Company"), CapRock Acquisition Corp., a Texas corporation
("C-Sub") and a wholly owned subsidiary of Holdings, and CapRock Fiber Network,
Ltd., a Texas limited partnership (the "Partnership").
RECITALS
A. The Boards of Directors of each of Holdings, the Company, IWL, I-Sub,
C-Sub and CapRock Systems, Inc., the general partner of the Partnership (the
"General Partner"), believe it is in the best interests of each company, the
Partnership and their respective shareholders and partners, as the case may be,
that (a) IWL and I-Sub combine into a single company through the statutory
merger of I-Sub with and into IWL (the "IWL Merger"), (b) that the Company and
C-Sub combine into a single company through the statutory merger of C-Sub with
and into the Company (the "Company Merger" and, together with the IWL Merger,
the "Mergers"), and (c) upon consummation of the Mergers, all of the general and
limited partnership interests (collectively, the "Partnership Interests") in the
Partnership be exchanged (the "Interest Exchange") for shares of the common
stock, par value $.01 per share, of Holdings (the "Holdings Common Stock") in
the manner and order as hereinafter set forth, and, in furtherance thereof, have
approved and adopted the Mergers, the Interest Exchange and this Agreement.
B. Pursuant to the Mergers and the Interest Exchange, among other things,
the outstanding shares of IWL Common Stock (as hereinafter defined) and Company
Common Stock (as hereinafter defined) shall be converted into shares of Holdings
Common Stock and the outstanding Partnership Interests shall be exchanged for
shares of Holdings Common Stock, all at the rates determined herein.
C. Holdings, IWL, the Company, the Partnership, I-Sub and C-Sub desire to
make certain representations and warranties and other agreements in connection
with the Mergers and the Interest Exchange.
D. IWL is unwilling to enter into this Agreement (and effect the
transactions contemplated hereby) unless, contemporaneously with the execution
and delivery hereof, (a) certain record and beneficial holders of shares of
Company Common Stock and the Partners (as hereinafter defined) enter into an
agreement (the "Owners Agreement") providing for certain matters with respect to
their shares of Company Common Stock or their Partnership Interests, as the case
may be (including, without limitation, subject to the express provisions and
conditions of that agreement, to vote such shares or Partnership Interests, as
the case may be, in favor of the Company Merger and the Interest Exchange) and
(b) certain members of the Company's management enter into employment agreements
as provided in Section 5.12 hereof.
E. The Company and the Partnership are unwilling to enter into this
Agreement (and effect the transactions contemplated hereby) unless,
contemporaneously with the execution and delivery hereof, (a) certain record and
beneficial holders of shares of IWL Common Stock enter into an agreement (the
"IWL Shareholders Agreement") providing for certain matters with respect to
their shares of IWL Common Stock (including, without limitation, subject to the
express provisions and conditions of that agreement, to vote such shares in
favor of the IWL Merger) and (b) certain members of IWL's management enter into
employment agreements as provided in Section 5.12 hereof.
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
G. The parties intend that the Mergers and the Interest Exchange be treated
as a pooling of interests for accounting purposes.
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGERS AND THE INTEREST EXCHANGE
1.1 THE MERGERS AND THE INTEREST EXCHANGE. At the Effective Time (as
defined in Section 1.2) and subject to and upon the terms and conditions of this
Agreement and the applicable laws of Texas,
(a) C-Sub shall be merged with and into the Company in the Company Merger, the
separate corporate existence of C-Sub shall cease, and the Company shall
continue as the surviving corporation in the Company Merger, (b) I-Sub shall be
merged with and into IWL in the IWL Merger, the separate corporate existence of
I-Sub shall cease, and IWL shall continue as the surviving corporation in the
IWL Merger, and (c) all of the outstanding Partnership Interests of the
Partnership shall be contributed to Holdings pursuant to, and in the order
contemplated by, the Interest Exchange. The Company and IWL as the surviving
corporations after the Mergers are hereinafter sometimes collectively referred
to as the "Surviving Corporations" and individually as a "Surviving
Corporation."
1.2 EFFECTIVE TIME.
(a) As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VI and the consummation of the Closing referred
to in this Section 1.2, the parties hereto shall cause the Company Merger and
the IWL Merger to be consummated by filing Articles of Merger ("Articles of
Merger") with the Secretary of State of Texas in such form as required by, and
executed in accordance with the relevant provisions of, the laws of the State of
Texas (the time of such filings in Texas and the issuance of a certificate of
merger with respect to each of the Company Merger and the IWL Merger by the
Secretary of State of Texas being the "Effective Time").
(b) At the Effective Time, the General Partner shall execute and deliver to
Holdings a contribution agreement substantially in the form agreed upon by the
parties hereto (a "Contribution Agreement") pursuant to which the General
Partner shall contribute its general Partnership Interest in the Partnership to
Holdings. Immediately thereafter, Holdings shall contribute the general
Partnership Interest in the Partnership to the Company. Immediately following
the consummation of the contribution of the general Partnership Interest to the
Company and at the Effective Date, each of the limited partners in the
Partnership (the "Limited Partners" and, collectively with the General Partner,
the "Partners") shall execute and deliver to Holdings a Contribution Agreement
pursuant to which the Limited Partners shall contribute their respective limited
Partnership Interests in the Partnership to Holdings. The Partnership shall file
a certificate of amendment to its certificate of limited partnership to reflect
that the Company has become the new general partner of the Partnership and that
the General Partner is the withdrawing general partner. The Partnership and the
General Partner hereby consent to (and each Contribution Agreement delivered
hereunder by a Limited Partner shall include such Limited Partner's consent to)
the transfers of the Partnership Interests contemplated by this Agreement and
hereby agree (and each Contribution Agreement delivered hereunder by a Limited
Partner shall include such Limited Partner's agreement) that, effective at the
Effective Time and subject to the consummation of the transactions contemplated
hereby, Holdings shall become a substituted limited partner in the Partnership
and the Company shall become a substituted general partner in the Partnership
and the status of the Partners as partners in the Partnership shall cease. The
Company hereby elects, effective as of the Effective Time and subject to the
consummation of the transactions contemplated hereby, to reconstitute the
Partnership, to continue as the general partner of the Partnership and to
continue the Partnership and its business.
(c) The closing of the transactions contemplated hereby (the "Closing")
shall take place at the offices of Munsch Hardt Kopf Harr & Dinan, P.C., 4000
Fountain Place, 1445 Ross Avenue, Dallas, Texas 75202 at 10:00 a.m., local time,
on the date of the Effective Time (the "Closing Date").
2
<PAGE>
1.3 EFFECT OF THE MERGERS AND THE INTEREST EXCHANGE.
(a) At the Effective Time, the effect of the Mergers shall be as provided
in the applicable provisions of the laws of the State of Texas. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time (a)
all the estate, assets, property, rights, privileges, powers and franchises of
the Company and C-Sub shall vest in the Company as the Surviving Corporation,
and all debts, liabilities and obligations of the Company and C-Sub shall become
the debts, liabilities and obligations of the Company as the Surviving
Corporation and (b) all of the estate, assets, property, rights, privileges,
powers and franchises of IWL and I-Sub shall vest in IWL as the Surviving
Corporation, and all debts, liabilities and obligations of IWL and I-Sub shall
become the debts, liabilities and obligations of IWL as the Surviving
Corporation. After the consummation of the Mergers, each of the Surviving
Corporations shall be a direct, wholly owned subsidiary of Holdings.
(b) At the Effective Time, the Company shall become the sole successor
general partner of the Partnership and Holdings shall become the sole successor
limited partner of the Partnership.
1.4 ARTICLES OF INCORPORATION: BYLAWS.
(a) The Articles of Merger as to both of the Company Merger and the IWL
Merger shall be in substantially the form agreed upon by the parties hereto, and
shall provide that at the Effective Time as to the Company Merger and the IWL
Merger, as the case may be, the Articles of Incorporation of the Surviving
Corporation shall be amended as therein provided, and may thereafter be amended
as provided by law and such Articles of Incorporation.
(b) The Bylaws of the Company and IWL as in effect immediately prior to the
Effective Time as to the Company Merger and the IWL Merger, respectively, shall
be the Bylaws of the Company and IWL, respectively, each as a Surviving
Corporation, until thereafter amended.
1.5 DIRECTORS AND OFFICERS. The directors of each Surviving Corporation
shall be Ignatius W. Leonards, Jere W. Thompson, Jr. and Tim Rogers, each to
hold such position in accordance with the Articles of Incorporation and Bylaws
of such Surviving Corporation, and the officers of each Surviving Corporation
shall be Jere W. Thompson, Jr., who shall hold the office of Chief Executive
Officer, Ignatius W. Leonards, who shall hold the office of President, and Tim
Rogers, who shall hold the offices of Vice President, Treasurer and Secretary,
in each case until their respective successors are duly elected or appointed and
qualified.
1.6 SHARES TO BE ISSUED IN THE MERGERS AND THE INTEREST EXCHANGE; EFFECT ON
CAPITAL STOCK. The manner and basis of converting the shares of common stock of
Holdings, the Surviving Corporations and I-Sub and C-Sub (collectively, the
"Merged Corporations" and individually a "Merged Corporation"), and of
exchanging the Partnership Interests, at the Effective Time by virtue of the
Mergers and the Interest Exchange and without any action on the part of any of
the parties hereto or the holder of any of such securities, shall be as
hereinafter set forth in this Section 1.6.
(a) CONVERSION OF SHARES AND EXCHANGE OF PARTNERSHIP INTERESTS.
(i) Each share of the common stock, par value $.01 per share (the "IWL
Common Stock"), of IWL issued and outstanding immediately before the
Effective Time (other than those held in the treasury of IWL) and all rights
in respect thereof shall at the Effective Time, without any action on the
part of any holder thereof, forthwith cease to exist and be converted into
and become exchangeable for one share of Holdings Common Stock (the "IWL
Merger Consideration," and such ratio of IWL Common Stock to Holdings Common
Stock being herein referred to as the "IWL Exchange Ratio").
(ii) Each share of the common stock, par value $.01 per share (the
"Company Common Stock"), of the Company issued and outstanding immediately
before the Effective Time (other than those held in the treasury of the
Company and any Dissenters' Shares (as defined and to the extent provided in
Section 1.7(a)) and all rights in respect thereof shall at the Effective
Time, without any
3
<PAGE>
action on the part of any holder thereof, forthwith cease to exist and be
converted into and become exchangeable for that number of shares of Holdings
Common Stock set forth in Exhibit 1.6(a) attached hereto (the "Company
Merger Consideration," and such ratio of the Company Common Stock to
Holdings Common Stock being herein referred to as the "Company Exchange
Ratio") (the IWL Exchange Ratio and the Company Exchange Ratio being
referred to herein collectively as the "Exchange Ratios").
(iii) Commencing immediately after the Effective Time, each certificate
which, immediately prior to the Effective Time, represented issued and
outstanding shares of IWL Common Stock or Company Common Stock shall
evidence the right to receive the IWL Merger Consideration or the Company
Merger Consideration, as the case may be, on the basis hereinbefore set
forth, but subject to the limitations set forth in this Section 1.6.
(iv) Each one percent (1%) of the Partnership Interests issued and
outstanding immediately before the Effective Time and all rights in respect
thereof shall at the Effective Time, without any action on the part of the
holder thereof (other than the execution and delivery by the holder thereof
of a Contribution Agreement with respect thereto), forthwith be exchanged
for that number of shares of Holdings Common Stock set forth in Exhibit
1.6(a) attached hereto (the "Interest Exchange Consideration").
(b) CANCELLATION OF TREASURY SHARES AND OF OUTSTANDING HOLDINGS COMMON
STOCK.
(i) At the Effective Time, each share of IWL Common Stock held in the
treasury of IWL immediately prior to the Effective Time, and each share of
Company Common Stock held in the treasury of the Company immediately prior
to the Effective Time, shall be canceled and retired and no shares of stock
or other securities of Holdings or either of the Surviving Corporations
shall be issuable, and no payment shall be made or other consideration shall
be given, with respect thereto.
(ii) At the Effective Time, the shares of Holdings Common Stock held by
IWL shall be canceled and retired and no shares of stock or other securities
of Holdings or any other corporation shall be issuable, and no payment or
other consideration shall be made, with respect thereto.
(c) CONVERSION OF COMMON STOCK OF THE MERGED CORPORATIONS INTO COMMON STOCK
OF THE SURVIVING CORPORATIONS.
(i) At the Effective Time, each share of the common stock of I-Sub
issued and outstanding immediately prior to the Effective Time and all
rights in respect thereof shall, without any action on the part of Holdings,
forthwith cease to exist and be converted into 1,000 validly issued, fully
paid and nonassessable shares of IWL Common Stock, with IWL being one of the
Surviving Corporations. Immediately after the Effective Time and upon
surrender by Holdings of the certificate representing the shares of the
common stock of I-Sub, IWL as one of the Surviving Corporations shall
deliver to Holdings an appropriate certificate or certificates representing
1,000 shares of IWL Common Stock created by conversion of the common stock
of I-Sub owned by Holdings as aforesaid.
(ii) At the Effective Time, each share of the common stock of C-Sub
issued and outstanding immediately prior to the Effective Time and all
rights in respect thereof shall, without any action on the part of Holdings,
forthwith cease to exist and be converted into 1,000 validly issued, fully
paid and nonassessable shares of Company Common Stock, with the Company
being one of the Surviving Corporations. Immediately after the Effective
Time and upon surrender by Holdings of the certificate representing the
shares of the common stock of C-Sub, the Company as one of the Surviving
Corporations shall deliver to Holdings an appropriate certificate or
certificates representing 1,000 shares of Company Common Stock created by
conversion of the common stock of C-Sub owned by Holdings as aforesaid.
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(d) EXCHANGE OF SHARES OTHER THAN TREASURY SHARES. Subject to the terms
and conditions hereof, at or prior to the Effective Time, Holdings shall appoint
an exchange agent to effect the exchange of shares of IWL Common Stock and
Company Common Stock (collectively, the "Shares") and the Partnership Interests
for Holdings Common Stock in accordance with the provisions of this Section 1.6
(the "Exchange Agent"). Upon the Effective Time, Holdings shall deposit, or
cause to be deposited, certificates representing Holdings Common Stock into
which the Shares have been converted in accordance with the provisions of
Section 1.6(a) hereof (such certificates, together with any dividends or
distributions with respect thereto, being herein referred to collectively as the
"Exchange Fund"). Commencing immediately after the Effective Time and until the
appointment of the Exchange Agent shall be terminated, each holder of a
certificate or certificates theretofore representing Shares may surrender the
same to the Exchange Agent, and, after the appointment of the Exchange Agent
shall be terminated, any such holder may surrender any such certificate to
Holdings. Such holder shall be entitled upon such surrender to receive in
exchange therefor a certificate or certificates representing the number of full
shares of Holdings Common Stock into which the Shares theretofore represented by
the certificate or certificates so surrendered shall have been converted in
accordance with the provisions of Section 1.6(a) hereof. All such shares of
Holdings Common Stock issued in accordance with the immediately preceding
sentence shall be deemed to have been issued at the Effective Time. Until so
surrendered and exchanged, each outstanding certificate which, prior to the
Effective Time, represented issued and outstanding Shares shall be deemed for
all corporate purposes of IWL and the Company, other than the payment of
dividends and other distributions, if any, to represent the right to receive the
IWL Merger Consideration or the Company Merger Consideration, as the case may
be. Unless and until any such certificate theretofore representing Shares is so
surrendered, no dividend or other distribution, if any, payable to the holders
of record of Holdings Common Stock as of any date subsequent to the Effective
Time shall be paid to the holder of such certificate in respect thereof. Upon
the surrender of any such certificate theretofore representing Shares, however,
the record holder of the certificate or certificates representing shares of
Holdings Common Stock issued in exchange therefor shall receive from the
Exchange Agent or from Holdings, as the case may be, payment of the amount of
dividends and other distributions, if any, which as of any date subsequent to
the Effective Time and until such surrender shall have become payable with
respect to such number of shares of Holdings Common Stock ("Pre-Surrender
Dividends"). No interest shall be payable with respect to the payment of Pre-
Surrender Dividends upon the surrender of certificates theretofore representing
Shares. After the appointment of the Exchange Agent shall have been terminated,
such holders of Holdings Common Stock that have not received payment of
Pre-Surrender Dividends shall look only to Holdings for payment thereof.
Notwithstanding the foregoing provisions of this Section 1.6(d) neither the
Exchange Agent nor any party hereto shall be liable to a holder of Shares for
any Holdings Common Stock or dividends or distributions thereon delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law or to a transferee pursuant to Section 1.6(e) hereof.
(e) TRANSFER BOOKS. The stock transfer books of IWL with respect to the
shares of IWL Common Stock and the stock transfer books of the Company with
respect to the shares of Company Common Stock shall each be closed at the
Effective Time and no transfer of any Shares will thereafter be recorded on any
of such stock transfer books. In the event of a transfer of ownership of Shares
that is not registered in the stock transfer records of IWL or the Company, as
the case may be, at the Effective Time, a certificate or certificates
representing the number of full shares of Holdings Common Stock into which such
Shares shall have been converted in accordance with Section 1.6(a) hereof shall
be issued to the transferee together with a cash payment in the amount of
Pre-Surrender Dividends, if any, in accordance with Section 1.6(d) hereof, if
the certificate or certificates representing such Shares is or are surrendered
as provided in Section 1.6(d) hereof, accompanied by all documents required to
evidence and effect such transfer and by evidence of payment of any applicable
stock transfer tax.
(f) FRACTIONAL SHARES. No fraction of a share of Holdings Common Stock
will be issued, but in lieu thereof each holder of shares of Company Common
Stock and each holder of Partnership Interests who would otherwise be entitled
to a fraction of a share of Holdings Common Stock (after aggregating all
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fractional shares of Holdings Common Stock to be received by such holder) shall
be entitled to receive from Holdings a whole share of Holdings Common Stock.
(g) OPTIONS TO PURCHASE COMPANY COMMON STOCK AND IWL COMMON STOCK.
(i) At the Effective Time, each option granted by IWL to purchase
shares of IWL Common Stock, or by the Company to purchase shares of Company
Common Stock, which is outstanding and unexercised immediately prior to the
Effective Time (each, an "Option" and collectively, "Options"), shall be
assumed by Holdings and converted into an option (a "Holdings Option") to
purchase shares of Holdings Common Stock in such amount and at such exercise
price as provided below and otherwise having the same terms and conditions
as are in effect immediately prior to the Effective Time:
(A) the number of shares of Holdings Common Stock to be subject
to the Holdings Option into which an Option is converted shall be
equal to the product of (x) the number of shares of IWL Common Stock
or Company Common Stock subject to the Option that is converted (the
"Converted Option") immediately prior to the Effective Time and (y)
the IWL Exchange Ratio (if the Converted Option related to IWL Common
Stock) or the Company Exchange Ratio (if the Converted Option related
to Company Common Stock), respectively, each rounded down to the
nearest whole share; and
(B) the exercise price per share of Holdings Common Stock for
each particular Holdings Option shall be equal to (x) if such
Holdings Option resulted from a Converted Option to acquire IWL
Common Stock, the exercise price per share under the Converted
Option, or (y) if such Holdings Option resulted from a Converted
Option to acquire Company Common Stock, (1) the exercise price per
share under the Converted Option divided by (2) the Company Exchange
Ratio, each of which shall be rounded up to the nearest whole cent.
The adjustments provided herein with respect to any Options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code. No options, if any, to
acquire Partnership Interests shall be assumed by Holdings.
(ii) Holdings shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdings Common Stock for delivery
upon exercise of Holdings Options in accordance with this Section 1.6(g). As
soon as practicable (and in no event later than 30 days) after the Effective
Time, Holdings shall file a registration statement on Form S-8 (or any
successor or other appropriate forms) or another appropriate form with
respect to the shares of Holdings Common Stock subject to the Holdings
Options and shall use its best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as
any of the Holdings Options remain outstanding.
(h) CERTAIN ADJUSTMENTS. Without limiting any other provision of this
Agreement, if, between the date of this Agreement and the Effective Time, the
outstanding shares of IWL Common Stock or of Company Common Stock shall be
changed into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock of IWL or the Company, as the case may be, shall be declared
thereon with a record date within such period, the Exchange Ratios established
pursuant to the provisions of Section 1.6(a) hereof shall be adjusted
accordingly to provide to the holders of IWL Common Stock and Company Common
Stock the same economic effect as contemplated by this Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend.
(i) MAXIMUM SHARES ISSUABLE. Notwithstanding anything to the contrary
contained herein, the maximum number of shares of Holdings Common Stock issuable
upon the conversion of shares of
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Company Common Stock hereunder and the Interest Exchange and upon the exercise
of Holdings Options that are the result of Converted Options related to Company
Common Stock that are assumed by Holdings hereunder is 10,647,918 shares of
Holdings Common Stock.
1.7 DISSENTERS' SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of capital stock of the Company ("Dissenters' Shares") with respect to
which the holder thereof ("Dissenter") ultimately receives payment pursuant to
Articles 5.11 through 5.13 of the Texas Business Corporation Act ("TBCA"), shall
not be converted into or represent a right to receive Holdings Common Stock
pursuant to Section 1.6, but the holder thereof shall only be entitled to such
rights as are granted by the TBCA. Pursuant to Article 5.11.B of the TBCA,
holders of IWL Common Stock shall not have dissenters' rights.
(b) Notwithstanding the provisions of Section 1.7(a), if after the
Effective Time a Dissenter loses the right to receive payment pursuant to
Articles 5.11 through 5.13 of the TBCA, then upon the occurrence of such event,
such holder's shares shall automatically be converted into and represent only
the right to receive Holdings Common Stock effective as of the Effective Time,
but upon surrender of the certificate representing such shares, without
prejudice to any corporate proceedings which may have been taken during the
interim period between the Effective Time and the occurrence of such event, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders during such interim period.
(c) With respect to any Dissenters' Shares, the Company shall give Holdings
(i) prompt notice of any written demands for appraisal of any shares of capital
stock of the Company, withdrawals of such demands, and any other instruments
served on the Company pursuant to the TBCA and received by the Company and (ii)
the opportunity to participate in all negotiations and proceedings which take
place prior to the Effective Time with respect to demands for appraisal under
the TBCA. The Company shall not, except with the prior written consent of
Holdings, voluntarily make any payment before the Effective Time with respect to
any demands for appraisal of capital stock of the Company or offer to settle or
settle any such demands.
(d) All Dissenters' Shares acquired by the Company shall be canceled after
payment therefor has been made in accordance with the TBCA.
1.8 NO FURTHER OWNERSHIP RIGHTS IN IWL COMMON STOCK, COMPANY COMMON STOCK
AND PARTNERSHIP INTERESTS. All shares of Holdings Common Stock issued upon the
conversion of shares of IWL Common Stock and Company Common Stock and upon the
Interest Exchange in accordance with the terms hereof shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of IWL
Common Stock and Company Common Stock and to such Partnership Interests,
respectively.
1.9 TAX CONSEQUENCES AND ACCOUNTING TREATMENT. It is intended by the
parties hereto that the formation of Holdings, I-Sub and C-Sub qualify as
tax-free incorporations pursuant to Section 351 of the Code, that the Interest
Exchange shall qualify as a tax-free exchange pursuant to Section 351 of the
Code, and that the Mergers shall constitute a reorganization within the meaning
of Section 368 of the Code, and that the Mergers and the Interest Exchange shall
be accounted for as a pooling of interests. Holdings, IWL, the Company, the
Partnership, I-Sub and C-Sub each agree that it will not take or omit to take
any action at any time after the date hereof which act or omission would cause
the Mergers not to qualify as a reorganization within the meaning of Section 368
of the Code or the Interest Exchange not to qualify as a tax-free exchange
pursuant to Section 351 of the Code, including without limitation:
(a) any sale, exchange, distribution, transfer or other disposition of the
assets of IWL, the Company or the Partnership that would cause the IWL Merger or
the Company Merger, as the case may be, to fail to satisfy the "continuity of
business enterprise" requirement of Section 1.368-1(d) of the Income Tax
Regulations or the "substantially all the properties" requirement of Section
368(a)(2)(E) of the Code;
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(b) any reacquisition of shares of Holdings Common Stock by Holdings;
(c) any issuance of additional shares of IWL Common Stock or Company Common
Stock or sale of IWL Common Stock or Company Common Stock that would result in
Holdings failing to obtain or losing control of IWL or the Company, as the case
may be, within the meaning of Section 368(c) of the Code; and
(d) any issuance of additional shares of Holdings Common Stock that would
cause the owners of IWL Common Stock, Company Common Stock and Partnership
Interests immediately prior to the consummation of the transactions contemplated
by this Agreement, as a group, to fail to have control of Holdings, within the
meaning of Section 368(c) of the Code, immediately after the consummation of the
transactions contemplated hereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Schedule attached hereto and
incorporated by reference herein (the "Company Disclosure Schedule"), the
Company hereby represents and warrants to Holdings and IWL (and, unless the
context indicates otherwise, all of such representations and warranties shall be
deemed made with respect to the Company, its Subsidiaries and their respective
predecessors, if any) that, as of the date hereof:
2.1 ORGANIZATION AND QUALIFICATION, SUBSIDIARIES. Each of the Company and
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization.
Each of the Company and its Subsidiaries has the requisite corporate power and
authority and any necessary governmental authority, franchise, license or permit
to own, operate or lease the properties that it purports to own, operate or
lease and to carry on its business as it is now being conducted, and is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned, operated or
leased or the nature of its activities makes such qualification necessary,
except for such failure which, when taken together with all other such failures,
would not reasonably be expected to have a Material Adverse Effect on the
Company. The Company's Subsidiaries are listed on Section 2.1 of the Company
Disclosure Schedule.
2.2 ARTICLES OF INCORPORATION AND BYLAWS. The Company has heretofore
furnished, or otherwise made available, to IWL a complete and correct copy of
the Articles of Incorporation and the Bylaws (or comparable governing
documents), each as amended to the date hereof, of the Company and each of its
Subsidiaries. Such Articles of Incorporation and Bylaws (or comparable governing
documents) are in full force and effect. Neither the Company nor any of its
Subsidiaries is in violation of any of the provisions of its respective Articles
of Incorporation or Bylaws (or comparable governing documents).
2.3 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Company Common Stock, of which as of the date hereof 10,398,954 shares
are issued and outstanding and 208,550 shares are issuable upon the exercise of
options outstanding under the Company's stock option plans listed on Section 2.3
of the Company Disclosure Schedule. Since January 1, 1997, no shares of Company
Common Stock have been issued. Except as set forth in Section 2.3 of the Company
Disclosure Schedule, there are no outstanding Company Equity Rights. For
purposes of this Agreement, "Company Equity Rights" shall mean subscriptions,
options, warrants, calls, commitments, agreements, conversion rights or other
rights of any character (contingent or otherwise) to purchase or otherwise
acquire from the Company or any of the Company's Subsidiaries at any time, or
upon the happening of any stated event, any shares of the capital stock of the
Company.
(b) Section 2.3 of the Company Disclosure Schedule sets forth for each
outstanding Company Equity Right the name of the holder of such Company Equity
Right, the number of shares subject to such Company Equity Right, the exercise
price of such Company Equity Right, the number of shares as to
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which such Company Equity Right is exercisable, and, if the exercisability of
such Company Equity Right will be accelerated in any way by the transactions
contemplated by this Agreement, an indication of the extent of such
acceleration. Section 2.3 of the Company Disclosure Schedule also describes any
repricing of any Company Equity Rights which has taken place since January 1,
1993. The Company has made available to IWL copies of all agreements relating to
Company Equity Rights.
(c) Since January 1, 1993, the Company has not repurchased any of its
capital stock, nor has any Person other than the Company shareholders and the
holders of Company Equity Rights listed in Section 2.3 of the Company Disclosure
Schedule owned, or had any right to acquire, any capital stock of the Company.
(d) There are no outstanding obligations of the Company or any of the
Company's Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company.
(e) All of the issued and outstanding shares of Company Common Stock were
validly issued (free of preemptive rights) and are fully paid and nonassessable.
The Company shareholders and the number of shares of Company Common Stock owned
beneficially and of record by each Company shareholder are listed in Section 2.3
of the Company Disclosure Schedule. The Company shareholders are the record and
beneficial owners of all of the shares of Company Common Stock, free and clear
of any liens, encumbrances, pledges, security interests, voting agreements or
claims of any nature whatsoever.
(f) All of the outstanding capital stock of each of the Company's
Subsidiaries was duly authorized and validly issued (free of preemptive rights)
and is fully paid and nonassessable, and, except as set forth in Section 2.3 of
the Company Disclosure Schedule, is owned by the Company free and clear of any
liens, security interests, pledges, agreements, claims, charges or encumbrances.
Except as set forth in Section 2.3 of the Company Disclosure Schedule, there are
no existing subscriptions, options, warrants, calls, commitments, agreements,
conversion rights or other rights of any character (contingent or otherwise) to
purchase or otherwise acquire from the Company or any of the Company's
Subsidiaries at any time, or upon the happening of any stated event, any shares
of the capital stock of any of the Company's Subsidiaries, or any securities
convertible into or exercisable for shares of the capital stock of any of the
Company's Subsidiaries, whether or not presently issued or outstanding and there
are no outstanding obligations of the Company or any of the Company's
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of any of the Company's Subsidiaries. Except for equity interests
disclosed in Section 2.3 of the Company Disclosure Schedule and equity interests
in its Subsidiaries, the Company does not directly or indirectly own any equity
interest in any other Person. Each of the Company's Subsidiaries is a wholly
owned Subsidiary.
(g) Except as disclosed in Section 2.3 of the Company Disclosure Schedule,
there are no shareholder agreements, voting trusts or other agreements or
understandings to which the Company or any Subsidiary is a party or to which it
is bound relating to the voting or registration of any shares of capital stock
of the Company or any Subsidiary. The Company has not taken any action that
would result in, nor is the Company a party to any agreement, arrangement or
understanding not disclosed in Section 2.3 of the Company Disclosure Schedule
that would result in any options to purchase Company Common Stock that are
unvested becoming vested in connection with or as a result of the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
2.4 AUTHORITY. The Company has all requisite corporate power and authority
to enter into this Agreement and to consummate the Company Merger and the other
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company enforceable in accordance with
its terms. The execution and delivery of this Agreement by the Company does not,
and the consummation of the transactions contemplated hereby will not result in
any violation of, or default under (with or without notice or lapse of time, or
both), or give rise
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to a right of termination, cancellation or acceleration of any obligation or
loss of a material benefit under (a) any provision of the Articles of
Incorporation or Bylaws of the Company or (b) any material mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with any
court, administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity"), is required by or with respect to the
Company in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (a) the filing
of the Articles of Merger with the Secretary of State of Texas and (b) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required by the Nasdaq National Market or under applicable
state and federal securities laws.
2.5 COMPANY FINANCIAL STATEMENTS. Section 2.5 of the Company Disclosure
Schedule sets forth the Company's audited financial statements (balance sheets,
income statements and statements of cash flows) as of and for the fiscal years
ended December 31, 1996 and 1995, the Company's compiled financial statements
for the fiscal year ended December 31, 1994, and the Company's reviewed
financial statements for the nine months ended September 30, 1997 (collectively,
the "Company Financial Statements"). The Company Financial Statements are
complete and correct in all material respects and, except as set forth in
Section 2.5 of the Company Disclosure Schedule, have been prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a basis
consistent throughout the periods indicated and consistent with each other
(except that the compiled and reviewed Company Financial Statements do not
contain the notes necessary to be in accordance with GAAP and the reviewed
Company Financial Statements are subject to normal year-end adjustments). The
Company Financial Statements present fairly the financial condition and
operating results of the Company and its Subsidiaries as of the dates and for
the periods indicated therein. The reviewed balance sheet of the Company as of
September 30, 1997 is hereinafter referred to as the "Company Balance Sheet."
2.6 NO UNDISCLOSED LIABILITIES. The Company does not have any liabilities
or obligations, either accrued or contingent, whether or not required to be
reflected in financial statements prepared in accordance with GAAP, and whether
due or to become due, except: (a) liabilities reflected in the Company Balance
Sheet, (b) liabilities specifically described in this Agreement or in the
Company Disclosure Schedule or (c) liabilities not exceeding $50,000 in the
aggregate incurred in the ordinary course of business since the date of the
Company Balance Sheet.
2.7 NO CHANGES. Except as set forth in Section 2.7 of the Company
Disclosure Schedule or as expressly contemplated by this Agreement, since the
date of the Company Balance Sheet there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of business as
conducted on that date;
(b) capital expenditure or inventory purchase by the Company exceeding
$25,000 individually or $100,000 in the aggregate, except pursuant to existing
contracts listed in Section 2.12 of the Company Disclosure Schedule;
(c) destruction, damage to, or loss of any assets (including, without
limitation, intangible assets) of the Company (whether or not covered by
insurance), either individually or in the aggregate, exceeding $25,000;
(d) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates, any change in policies in making
or reversing accruals, or any change in capitalization of software development
costs) by the Company;
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(f) declaration, setting aside, or payment of a dividend or other
distribution in respect of the shares of the Company, or any direct or indirect
redemption, purchase or other acquisition by the Company of any of its shares;
(g) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors or employees, or the
declaration, payment, or commitment or obligation of any kind for the payment by
the Company of a bonus or other additional salary or compensation to any such
person except for year-end bonuses paid in the ordinary course of business
consistent with past practice;
(h) acquisition, sale or transfer of any asset of the Company except in the
ordinary course of business;
(i) formation, amendment or termination of any material distribution
agreement or any material contract, agreement or license to which the Company is
a party, other than termination by the Company pursuant to the terms thereof;
(j) loan by the Company to any Person or guaranty by the Company of any
loan;
(k) waiver or release of any material right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company except in the ordinary course of business;
(l) the commencement or notice or, to the knowledge of the Company, threat
of commencement of any governmental proceeding against or investigation of the
Company or its affairs;
(m) other event or condition of any character relating to the Company or
the Company's business that has or would be expected to have a Material Adverse
Effect on the Company;
(n) issuance, sale or redemption by the Company of any of its shares or of
any other of its securities, other than pursuant to the exercise of existing
options;
(o) change in pricing or royalties set or charged by the Company except
pursuant to the terms of existing contracts; or
(p) negotiation or agreement by the Company to do any of the things
described in the preceding clauses (a) through (o) (other than negotiations with
IWL and its representatives or any other Person regarding the transactions
contemplated by this Agreement).
2.8 TAX AND OTHER RETURNS AND REPORTS.
(a) TAX RETURNS AND AUDITS. Except as set forth in Section 2.8 of the
Company Disclosure Schedule, each of the Company and its Subsidiaries has
prepared and filed all federal, state, local and foreign returns, estimates,
information statements and reports required to be filed by any of them
relating to any and all Taxes relating or attributable to the Company, its
Subsidiaries, or the assets or operations of the Company or its Subsidiaries
("Company Returns"), and such Company Returns are true and correct in all
material respects and have been completed in accordance with applicable law.
For the purposes of this Agreement, a "Tax" or, collectively, "Taxes," means
any and all federal, state, local and foreign taxes, assessments and other
governmental charges, duties, impositions and liabilities, including taxes
based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll, recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and
any obligations under any agreements or arrangements with any other Person
with respect to such amounts. Except as set forth in Section 2.8 of the
Company Disclosure Schedule, each of the Company and its Subsidiaries has
paid all Taxes required to be paid with respect to such Company Returns and
has withheld with respect to its employees all federal and state income
Taxes, FICA, FUTA and other Taxes it is required to withhold. The accruals
for Taxes on the books and records of each of the Company and its
Subsidiaries are sufficient to discharge the Taxes for all periods (or the
portion of any period) ending on or prior to the Closing Date. Neither the
Company
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nor any of its Subsidiaries is delinquent in the payment of any Tax nor,
except as set forth in Section 2.8 of the Company Disclosure Schedule, to
the knowledge of the Company, is there any Tax deficiency outstanding,
proposed or assessed against the Company or any of its Subsidiaries nor has
the Company or any of its Subsidiaries executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax. The audits of each Company Return that has been audited by the
relevant authorities or for which the statute of limitations has been waived
or extended have been closed and neither the Company nor any of its
Subsidiaries has received any written or oral notification that an audit or
other examination of any Company Return is presently in progress. All such
Company Returns that have been audited or for which the statute of
limitations has been waived are listed in Section 2.8 of the Company
Disclosure Schedule. Except as set forth in Section 2.8 of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries has any
material liabilities for unpaid Taxes, whether asserted or unasserted, known
or unknown, contingent or otherwise and neither the Company nor any of its
Subsidiaries has any knowledge of any basis for the assertion of any such
liability attributable to the Company, its Subsidiaries or the assets or
operations of the Company or its Subsidiaries. Except as set forth in
Section 2.8 of the Company Disclosure Schedule, neither the Company nor any
of its Subsidiaries is (nor have they ever been) required to join with any
other entity in the filing of a consolidated tax return for federal tax
purposes or a consolidated or combined return or report for state tax
purposes. Neither the Company nor any of its Subsidiaries is a party to or
bound by any tax indemnity, tax sharing or tax allocation agreement. There
are (and as of immediately following the Closing there will be) no liens on
the assets of the Company or any of its Subsidiaries relating to or
attributable to Taxes, except for liens for Taxes not yet due and payable or
liens for Taxes being contested by appropriate proceedings. Neither the
Company nor any of its Subsidiaries has any knowledge of any basis for the
assertion of any claim which, if adversely determined, would result in liens
on the assets of the Company or its Subsidiaries. There is no contract,
agreement, plan or arrangement, including, but not limited to, the
provisions of this Agreement, covering any employee or former employee of
the Company or any of its Subsidiaries that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to Sections 280G, 162 or 404 of the Code.
(b) NO PENALTY. Neither the Company nor any of its Subsidiaries is
subject to any penalty by reason of a violation of any order, rule or
regulation of, or a default with respect to any Company Return, report or
declaration required to be filed with, any Governmental Entity to which it
is subject.
2.9 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement binding
upon, or judgment, injunction, order or decree entered against, the Company
under which the Company is prohibited from conducting or engaging in any line of
business.
2.10 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) The Company owns no real property. Section 2.10(a) of the Company
Disclosure Schedule sets forth a true and complete list of all real property
leased by the Company and the aggregate annual rental or other fee payable under
any such lease. All such leases are in good standing, valid and effective in
accordance with their respective terms, and there is not with respect to the
Company and, to the knowledge of the Company, any other parties to such leases,
under any of such leases any existing default or event of default (or event
which with notice or lapse of time, or both, would constitute a default).
(b) Except as set forth in Section 2.10(b) of the Company Disclosure
Schedule, the Company holds good and valid title to (or, in the case of leased
properties, assets and rights of way, valid leasehold interests in) all of its
tangible properties, assets and rights of way, real, personal and mixed, used in
its business, free and clear of any liens, charges, pledges, security interests
or other encumbrances. The Company has valid and subsisting rights of way to use
all real or personal property in or through which the Company's owned or leased
optic or other fiber lines are currently located or situated.
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(c) All items of equipment, including optic or other fiber lines, whether
owned or leased, having an individual value of $5,000 or more (the "Equipment")
used by the Company in the conduct of its business are listed in Section 2.10(c)
of the Company Disclosure Schedule, except individual pieces of equipment owned
by the Company with an individual value of less than $5,000. The Equipment is,
taken as a whole, (i) adequate for the conduct of the business of the Company as
presently conducted, (ii) suitable for the uses to which it is currently
employed, (iii) in good operating condition, (iv) regularly and properly
maintained, ordinary wear and tear excepted, and (v) not obsolete, dangerous or
in need of renewal or replacement.
2.11 INTELLECTUAL PROPERTY.
(a) The Company owns, or is licensed to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
maskworks, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material
(excluding Company Commercial Software Rights (as defined in Section 2.11(b)
below)) that are used or currently proposed by the Company to be used in the
business of the Company as currently conducted or as currently proposed to
be conducted by the Company (the "Company Intellectual Property Rights").
Section 2.11(a) of the Company Disclosure Schedule (i) sets forth a complete
list of all patents, patent applications, registered trademarks, material
unregistered copyrights, trade names and service marks, and any applications
therefor, included in the Company Intellectual Property Rights; (ii)
specifies the jurisdictions in which each such Company Intellectual Property
Right has been issued or registered or in which an application for such
issuance and registration has been filed, including the respective
registration or application numbers and the names of all registered owners,
together with a list of all of the Company's currently marketed software
products and a list of which, if any, of such software products that have
been registered for copyright protection with the United States Copyright
Office and any foreign offices and by whom such items have been registered
and (iii) as to each such Company Intellectual Property Right, specifies
whether it is owned by the Company or licensed to the Company by another
Person and, in the cases of any license, sets forth the licensor and the
term of such license. Section 2.11(a) of the Company Disclosure Schedule
also sets forth a complete list of all licenses, sublicenses and other
agreements pursuant to which the Company has licensed any other Person to
use any Company Intellectual Property Right or other trade secret material
to the Company, and includes the identity of such licensees, provided,
however, that standard end user licenses (i.e., those licenses granted
pursuant to the form clearly marked as the Company's "standard" form and
delivered to IWL by the Company) to object code versions of the Company's
software ("End-User Licenses") need not be listed. The Company is not, nor
will it be as a result of the execution and delivery of this Agreement or
the performance of its obligations hereunder, in violation of any license,
sublicense or agreement described on such list. The Company is the sole and
exclusive owner of, with all right, title and interest in and to (free and
clear of any liens or encumbrances other than End User Licenses), those
Company Intellectual Property Rights which the Company purports to own, and
has sole and exclusive rights, and is not contractually obligated to pay any
compensation to any third party in respect thereof to the use thereof or the
material covered thereby in connection with the services or products in
respect of which such Company Intellectual Property Rights are being used.
With respect to Company Intellectual Property Rights licensed to the
Company, the Company has sufficient rights under the license agreements
relating thereto to enable the Company to use such Company Intellectual
Property Rights in its business as currently conducted and as proposed to be
conducted without payment of royalties or other compensation to the licensor
thereof. No claims with respect to the Company Intellectual Property Rights
have been asserted or, to the knowledge of the Company, are threatened by
any Person (i) to the effect that the manufacture, sale, licensing or use of
any product as, now used, sold or licensed or proposed for use, sale or
license by the Company infringes on any copyright, patent, trade mark,
service mark or trade secret, (ii) against the use by the Company of any
trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and
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applications used in the Company's business as currently conducted or as
proposed by the Company to be conducted, or (iii) challenging the ownership,
validity or effectiveness of any of the Company Intellectual Property
Rights. Except as set forth in Section 2.11(a) of the Company Disclosure
Schedule, all registered and material unregistered trademarks, service marks
and copyrights held by the Company are valid and subsisting. To the
knowledge of the Company, there is no material unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property
Rights by any third party, including any employee or former employee of the
Company. No Company Intellectual Property Right owned exclusively by the
Company or product of the Company is subject to any outstanding order,
judgment, decree, stipulation or agreement restricting in any manner the
licensing thereof by the Company. There is no outstanding order, judgment,
decree or stipulation on the Company, and the Company is not party to any
agreement, restricting in any manner the licensing of the Company's products
by the Company. Except for End User Licenses or as otherwise set forth in
Section 2.11(a) of the Company Disclosure Schedule, the Company has not
entered into any agreement to indemnify any Person against any charge of
infringement of any Company Intellectual Property Right.
(b) "Company Commercial Software Rights" means packaged commercially
available software programs generally available to the public through retail
dealers in computer software which have been licensed to the Company
pursuant to End-User Licenses and which are used in the Company's business
but are in no way a component of or incorporated in any of the Company's
products and related trademarks, technology and know-how. To the knowledge
of the Company, the Company has not breached or violated the terms of its
license, sublicense or other agreement relating to any Company Commercial
Software Rights and has a valid right to use such Company Commercial
Software Rights under such license and agreements. No claims with respect to
the Company Commercial Software Rights have been asserted or, to the
knowledge of the Company, are threatened by any Person against the Company.
To the knowledge of the Company, there is no material unauthorized use,
infringement or misappropriation of any of the Company Commercial Software
Rights by the Company or any employee or former employee of the Company
during the period of their employment.
2.12 AGREEMENTS, CONTRACTS AND COMMITMENTS. Other than those listed in
Section 2.12 of the Company Disclosure Schedule, the Company does not have, is
not a party to nor is it bound by:
(a) any collective bargaining agreements,
(b) any agreements that contain any unpaid severance liabilities or
obligations,
(c) any bonus, deferred compensation, incentive compensation, option,
pension, profit-sharing or retirement plans, or any other employee benefit
plans or arrangements,
(d) any employment or consulting agreement, contract or commitment
(other than employment letters) with an employee or individual consultant or
salesperson or consulting or sales agreement, contract or commitment with a
firm or other organization, not terminable by the Company on thirty days
notice without liability,
(e) any stock option plan, stock appreciation right plan or stock
purchase plan,
(f) any insurance policy, fidelity or surety bond or completion bond not
listed in Section 2.21 of the Company Disclosure Schedule,
(g) any lease of personal property having a value individually in excess
of $25,000,
(h) any agreement of indemnification or guaranty not entered into in the
ordinary course of business,
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(i) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or
compete with any Person,
(j) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $25,000,
(k) any agreement, contract or commitment relating to the disposition or
acquisition of assets not in the ordinary course of business or any
ownership interest in any corporation, partnership, joint venture or other
business enterprise,
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit, including guaranties referred to in clause (h)
hereof,
(m) any purchase order or contract for the purchase of raw materials or
acquisition of assets involving $25,000 or more in any single instance or
$100,000 or more in the aggregate,
(n) any construction contracts involving $25,000 or more in any single
instance or $100,000 or more in the aggregate,
(o) any distribution, joint marketing or development agreement,
(p) any lease for switches or any other machinery, equipment or other
personal property involving payment of aggregate rentals in excess of
$25,000,
(q) any contract pursuant to which the Company has access to the
telephone network of another Person other than the Company's internal
commercial telephone service and any contracts for the resale of any network
capacity of the Company,
(r) any agreement, contract, lease or easement pursuant to which the
Company has the right of way to use any premises or real property to locate
and/or install fiber lines on, under or through such premises or real
property,
(s) any agreement or commitment obligating the Company to deliver any
product or service at a price which does not cover the cost (including
labor, materials and production overhead), plus a reasonable profit margin,
for such product or service,
(t) any joint venture, partnership or other cooperative arrangement or
agreement involving a sharing of profits or losses,
(u) any other agreement, contract or commitment which involves $25,000
or more and is not cancelable without penalty within thirty (30) days, or
(v) any agreement which is otherwise material to the Company's business.
The Company has not breached, or received any claim or threat that it has
breached, any of the terms or conditions of any material agreement, contract or
commitment to which it is bound (including, but not limited to, those set forth
in Section 2.12 or any other section of the Company Disclosure Schedule) in such
manner as would permit any other party to cancel or terminate the same. Each
agreement, contract or commitment to which the Company is a party and that is
required to be set forth in the Company Disclosure Schedule is in full force and
effect and, except as otherwise disclosed, is not subject to any material
default thereunder by any party thereto. The Company is not bound by any
material contract, agreement, license, lease or other commitment, a copy of
which has not been previously provided or made available to IWL. The Company
after making an inquiry of all of its officers, directors, shareholders and
appropriate employees does not have any reason to expect that any change may
occur in the relationships of the Company with its suppliers or customers as a
result of the Mergers or the Interest Exchange, which change would have a
Material Adverse Effect on the Company. No supplier of or customer of the
Company has indicated within the past year that it will stop, or decrease the
rate of supplying or
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purchasing materials, products, or services to or from the Company, as a result
of the Mergers or the Interest Exchange. Except as described in Section 2.4, no
consents, waivers or approvals under any of the Company's material agreements,
contracts, licenses or leases are necessary in order to preserve the benefits
thereunder for the Surviving Corporation or otherwise to avoid any breach,
default or right of termination or other right as a result of the Mergers or the
Interest Exchange.
2.13 INTERESTED PARTY TRANSACTIONS. Except as set forth in Section 2.13 of
the Company Disclosure Schedule, no officer, director or shareholder of the
Company (nor any parent, sibling, descendant or spouse of any of such persons,
or any trust, partnership, corporation or other entity in which any of such
persons has or has had an interest), has or has had, directly or indirectly, (a)
an interest in any entity which furnished or sold, or furnishes or sells,
services or products which the Company furnished or sells, or proposes to
furnish or sell, or (b) any interest in any entity which purchases from or sells
or furnishes to the Company any goods or services, or (c) a beneficial interest
in any contract or agreement required to be set forth in Section 2.12 of the
Company Disclosure Schedule; provided, that ownership of no more than five
percent (5%) of the outstanding voting stock of a publicly traded corporation
shall not be deemed an "interest in any entity" for purposes of this Section
2.13.
2.14 GOVERNMENTAL AUTHORIZATIONS. Section 2.14 of the Company Disclosure
Schedule accurately lists each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization issued to
the Company (a) pursuant to which the Company currently operates or holds any
interest in any of its properties or (b) which is required for the operation of
its business as currently conducted or the holding of any such interest as
currently held (herein collectively called the "Company Authorizations"). The
Company Authorizations are in full force and effect and constitute all the
authorizations required to permit the Company to operate or conduct its business
as currently conducted or hold any interest in its properties as currently held.
2.15 LITIGATION. Section 2.15 of the Company Disclosure Schedule
accurately lists all suits, actions and legal, administrative, arbitration or
other proceedings and governmental investigations and all other claims pending
against the Company or, to the knowledge of the Company, threatened or which the
Company expects will ultimately be threatened or commenced against the Company.
None of such suits, actions, proceedings, investigations or claims seek to
prevent the consummation of the Mergers or the Interest Exchange. There is no
judgment, decree or order enjoining the Company in respect of, or the effect of
which is to prohibit, any business practice or the acquisition of any property
or the conduct of business of the Company. Section 2.15 of the Company
Disclosure Schedule also lists all suits and legal actions initiated by the
Company which are still pending or which have been concluded in the last two
years.
2.16 ACCOUNTS RECEIVABLE. All accounts receivable of the Company shown in
the Company Balance Sheet arose in the ordinary course of business and, to the
extent not previously collected, are collectible (except to the extent reserved
against as reflected in the Company Financial Statements) and are carried at
values determined in accordance with GAAP consistently applied. To the knowledge
of the Company, none of the accounts receivable of the Company outstanding as of
the date hereof is subject to any claim of offset, recoupment, set off or
counterclaim and there are no facts or circumstances (whether asserted or
unasserted) that would give rise to any such claim. No accounts receivable are
contingent upon the performance by the Company of any obligation or contract
except for the Company's maintenance obligations under its maintenance
agreements (although no customer has claimed that the Company has failed to
perform its maintenance obligations). No Person has any lien, charge, pledge,
security interest or other encumbrance on any of the Company's accounts
receivable and no agreement for deduction or discount has been made with respect
to any of such accounts receivable, except for liens granted to Bank One Texas,
N.A. under the Company's revolving line of credit.
2.17 MINUTE BOOKS AND STOCK RECORDS. The minute books of the Company and
its Subsidiaries made available to counsel for IWL contain minutes of all
meetings of directors and shareholders (or consents in
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lieu of such meetings) accurate in all material respects since the respective
times of incorporation of the Company and its Subsidiaries. The stock records of
the Company and its Subsidiaries made available to counsel for IWL contain an
accurate record of all stock issuances and stock transfers of the Company Common
Stock.
2.18 ENVIRONMENTAL AND OSHA.
(a) The Company has complied in all material respects with all laws
(including rules and regulations thereunder) of federal, state and local
Governmental Entities concerning the environment, public health and safety,
and employee health and safety, and no charge, complaint, action, suit,
proceeding, hearing, known investigation, claim, demand, or notice has been
filed or commenced against the Company alleging any failure to comply with
any such law or regulation.
(b) The Company has no obligation to take remedial action with respect
to any conditions nor does the Company have any liability, and there is no
basis related to the Company's past or present operations, for any present
charge, complaint, action, suit, proceeding, hearing, known investigation,
claim, or demand giving rise to any liability or obligation to take any
remedial action under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, the Resource Conservation and Recovery Act of
1976, the Federal Water Pollution Control Act of 1972, the Clean Air Act of
1970, the Safe Drinking Water Act of 1974, the Toxic Substances Control Act
of 1976, or the Emergency Planning and Community Right-to-Know Act of 1986
(each as amended), or any other law (or rule or regulation thereunder) of
any federal, state or local Governmental Entity, concerning the release or
the threatened release of hazardous substances, public health and safety,
pollution or protection of the environment (collectively, the "Environmental
Laws").
(c) The Company has no liability relating to, and it has not handled or
disposed of any substance, arranged for the disposal of any substance, or
owned or operated any property or facility in violation of any Environmental
Law.
(d) The Company has no liability for, and there is no basis for, any
present charge, complaint, action, suit, proceeding, hearing, investigation,
claim, or demand against the Company giving rise to any material liability
under the Occupational Safety and Health Act, as amended, or any other law
(or rule or regulation thereunder) of any federal, state or local
Governmental Entity concerning employee health and safety (collectively,
"Employee Safety Laws").
(e) The Company has no liability relating to, and, to the knowledge of
the Company, the Company has not exposed any of the Company's employees to
any substances or conditions that could form the basis for, any present
charge, complaint, action, suit, proceeding, hearing, investigation, claim,
or demand (under the common law or pursuant to statute) against the Company
giving rise to material liability for any illness of or personal injury to
any employee.
(f) The Company has been in compliance with all the terms and conditions
of all permits, licenses, and other authorizations of Governmental Entities
which are required under any Environmental Law or Employee Safety Law.
(g) All properties and equipment used by the Company are free of
asbestos, PCB's and other Extremely Hazardous Substances (as defined in
Section 302 of the Emergency Planning and Community Right-to-Know Act of
1986, as amended). To the knowledge of the Company, no pollutant,
contaminant, chemical, or industrial, hazardous, or toxic material or waste
has been buried, stored, spilled, leaked, discharged, emitted, or released
on any real property that the Company has ever owned, or that the Company
now leases or has ever leased.
2.19 BROKERS' AND FINDERS' FEES. Except pursuant to an advisory agreement
with Hoak, Breedlove & Wesneski, Inc. (the arrangements with which have been
disclosed to IWL prior to the date hereof), the Company has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders,
fees
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or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.20 LABOR MATTERS. The Company is in compliance with all currently
applicable laws and regulations respecting employment, discrimination in
employment, terms and conditions of employment and wages and hours and
employment practices, and is not engaged in any unfair labor practice. The
Company has not received any notice from any Governmental Entity of, and to the
knowledge of the Company there has not been asserted before any Governmental
Entity, any claim, action or proceeding to which the Company is a party or
involving the Company, and there is neither pending nor, to the knowledge of the
Company, threatened any investigation or hearing concerning the Company arising
out of or based upon any such laws, regulations or practices. There are no
pending claims against the Company under any workers compensation plan or policy
or for long term disability. The Company has complied in all material respects
with all applicable health care benefit continuation provisions of Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA") and has no obligations with
respect to any former employees or qualified beneficiaries thereunder. Section
2.20 of the Company Disclosure Schedule lists all current employees of the
Company and their current salary and vacation accruals.
2.21 INSURANCE. Section 2.21 of the Company Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, software errors and omissions, employees, officers and
directors of the Company as well as all claims made under any insurance policy
by the Company since January 1, 1993 (other than claims under the Company's
medical and dental insurance plans). There is no claim by the Company pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds (other than
claims made under the Company's medical and dental insurance plans). The Company
has provided or made available to IWL copies of all such insurance policies and
fidelity bonds and all claims made by the Company under its insurance policies
(other than claims under the Company's medical and dental plans). All premiums
payable under all such policies and bonds have been paid and the Company is
otherwise in compliance in all material respects with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). Such policies of insurance and bonds are of the type and in amounts
customarily carried by Persons conducting businesses similar to those of the
Company. The Company does not know of any threatened termination of or proposed
material premium increase with respect to any of such policies. The Company has
never been denied insurance coverage nor has any insurance policy of the Company
ever been canceled for any reason.
2.22 INVENTORY. The inventory appearing on the Company Financial
Statements, or thereafter acquired or produced, conforms in all material
respects with the Company's applicable specifications and warranties and have
been produced in compliance with the Company's quality control procedures and
consist only of items of a quality and quantity useable or saleable by the
Company in the ordinary course of business. All such inventory is merchantable
and fit for the purpose for which it was procured or manufactured, and none of
which is obsolete, damaged or defective in any amount. Such inventory is owned
by the Company and is not subject to any liens, charges, pledges, security
interests or other encumbrances.
2.23 COMPLIANCE WITH LAWS.
(a) The Company has complied in all material respects with, is not in
violation of, and has not received any notices of violation with respect to
any federal, state or local statute, law or regulation with respect to the
conduct of its business or the ownership or operation of its business,
assets or properties. No charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand, or notice has been filed or commenced
against alleging any failure to comply with any such law or regulation.
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(b) The Company has not violated in any respect, or received a notice or
charge asserting any violation of the Sherman Act, the Clayton Act, the
Robinson-Patman Act, or the Federal Trade Commission Act, each as amended.
(c) The Company has not, and none of the officers, directors,
shareholders or employees of the Company have, on behalf of the Company:
(i) made or agreed to make any contribution, payment or gift of
funds or property to any governmental official, employee, or agent where
either the contribution, payment, or gift or the purpose thereof was
illegal under the laws of any federal, state or local jurisdiction; or
(ii) established or maintained any unrecorded fund or asset for any
purpose, or intentionally made any false or inaccurate entries on any of
its books and/or records; or
(iii) made or agreed to make any contribution, or reimbursed any
political gift or contribution made by any other Person, to any candidate
for federal, state or local public office; or
(iv) been involved in the disbursement or receipt of funds outside
of the normal internal control systems of accountability or been involved
in the improper or inaccurate recording of material payments,
disbursements or receipts.
2.24 REGISTRATION STATEMENT; JOINT PROXY STATEMENT. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference, and reviewed by the Company prior to
such inclusion or incorporation by reference, in the registration statement to
be filed with the SEC by Holdings in connection with the issuance of shares of
Holdings Common Stock in the Mergers and the Interest Exchange (the
"Registration Statement") will, at the time the Registration Statement becomes
effective under the Securities Act of 1933, as amended (the "Securities Act"),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. None
of the information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference, and reviewed by the Company prior to
such inclusion or incorporation by reference, in the joint proxy statement, in
definitive form, relating to the meetings of the IWL and the Company
shareholders to be held in connection with the Mergers, or in the related proxy
and notice of meeting, or soliciting material used in connection therewith
(referred to herein collectively as the "Joint Proxy Statement") will, at the
dates mailed to shareholders and at the times of the IWL shareholders' meeting
and the Company shareholders' meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event with respect to the Company, its officers and
directors or any of its Subsidiaries should occur which is required to be
described in an amendment of, or a supplement to, the Registration Statement or
the Joint Proxy Statement, the Company shall promptly so advise IWL and
Holdings. The Company will promptly disseminate any such amendment or supplement
to the shareholders of the Company.
2.25 ACCOUNTING MATTERS. Neither the Company nor, to its best knowledge,
any of its affiliates has through the date hereof taken or agreed to take any
action that would prevent the business combination to be effected by the Mergers
and the Interest Exchange from being accounted for as a "pooling of interests."
2.26 FIRPTA. The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.27 EMPLOYEE BENEFIT PLANS.
(a) Section 2.27 of the Company Disclosure Schedule lists all employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
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and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
employee of the Company, any trade or business (whether or not incorporated)
which is a member or which is under common control with the Company (a "Company
ERISA Affiliate") within the meaning of Section 414 of the Code, or any
Subsidiary of the Company (together, the "Company Employee Plans"), and a copy
of each such Company Employee Plan has been provided or made available to IWL.
(b) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person except as required by
applicable law, including, but not limited to, COBRA; (ii) all Company Employee
Plans are in compliance in all material respects with the requirements
prescribed by any and all applicable statutes (including ERISA and the Code),
orders, or governmental rules and regulations currently in effect with respect
thereto (including all applicable requirements for notification to participants
or beneficiaries or the Department of Labor, Internal Revenue Service (the
"IRS") or Secretary of the Treasury), and the Company has performed in all
material respects all obligations required to be performed by it under, is not
in default under or violation of, and has no knowledge of any default or
violation by any other party to, any of the Company Employee Plans; (iii) each
Company Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code either has
received a favorable determination letter with respect to each such Company
Employee Plan from the IRS or still has a remaining period of time under
applicable Treasury Regulations or IRS pronouncements in which to apply for such
a determination letter and to make any amendments necessary to obtain a
favorable determination; and (iv) no Company Employee Plan is or within the
prior six (6) years has been subject to, and the Company has not incurred and
does not expect to incur any liability under, Title IV of ERISA or Section 412
of the Code and (v) nothing in any Company Employee Plan precludes or interferes
with Holdings' ability to cause the Company to terminate (or consolidate, at
Holdings' option) any Company Employee Plan after the Closing, provided that (A)
the Company Employee Plans may be terminated prospectively only, subject to
rights accrued by the Company's employees at the time of such termination and
(B) not more than sixty days notice may be required to terminate certain Company
Employee Plans.
(c) None of the following now exists or has existed within the six-year
period ending on the date hereof with respect to any Company Employee Plan: (i)
any act or omission by the Company constituting a violation of Section 402 or
403 or, to the knowledge of the Company, Section 404 or 405 of ERISA; (ii) to
the knowledge of the Company, any act or omission by the Company which
constitutes a violation of Sections 406 and 407 of ERISA and is not exempted by
Section 408 of ERISA or which constitutes a violation of Section 4975(c) of the
Code and is not exempted by Section 4975(d) of the Code; (iii) any act or
omission by the Company constituting a violation of Section 503 or 511 or, to
the knowledge of the Company, Section 510 of ERISA; or (iv) any act or omission
by the Company which could give rise to liability under Section 502 of ERISA or
under Sections 4979 or 4975 through 4980 of the Code or any other provisions of
ERISA or the Code.
(d) Each Company Employee Plan has been maintained in substantial
compliance with its terms, and all contributions, premiums or other payments due
from the Company or any of its Subsidiaries to (or under) any such Company
Employee Plan have been fully paid or adequately provided for on the Company
Financial Statements for the most recently ended fiscal year. All accruals
thereon (including, where appropriate, proportional accruals for partial
periods) have been made in accordance with GAAP consistently applied on a
reasonable basis. There has been no amendment, written interpretation or
announcement (whether or not written) by the Company with respect to, or change
in employee participation or coverage under, any Company Employee Plan that
would increase materially the expense of maintaining such plans or arrangements,
individually or in the aggregate, above the level of expense incurred with
respect thereto for the most recently ended fiscal year.
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(e) The Company has made available to IWL complete, accurate and current
copies of all Company Employee Plans and all amendments, documents,
correspondence addressed to the Company and filings relating thereto, including
but not limited to any statements, filings, reports or returns filed with any
governmental agency with respect to the Company Employee Plans at any time
within the three-year period ending on the date hereof.
2.28 OWNERSHIP OF SECURITIES. As of the date hereof, none of the Company
or any of its affiliates or associates (as such terms are defined under the
Exchange Act), (a)(i) beneficially owns, directly or indirectly, or (ii) is
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of IWL that in the aggregate represent 10% or more of the outstanding
shares of IWL Common Stock, or (b) is an "affiliated shareholder" of IWL within
the meaning of Article XIII of the TBCA. Neither the Company nor any of its
Subsidiaries owns any shares of IWL Common Stock.
2.29 CERTAIN REGULATORY MATTERS.
(a) Except as disclosed in Section 2.29 of the Company Disclosure Schedule,
and except for billing disputes with customers arising in the ordinary course of
business that in the aggregate involve immaterial amounts, there are no
proceedings or, to the Company's knowledge, investigations pending or threatened
before any domestic or foreign court, administrative, governmental or regulatory
body in which any of the following matters are being considered which could
reasonably be expected to have a Material Adverse Effect on the Company, nor has
the Company or any of its Subsidiaries received written notice or inquiry from
any such body, government official, consumer advocacy or similar organization or
any private party indicating that any of such matters should be considered or
may become the object of consideration or investigation which could reasonably
be expected to have a Material Adverse Effect on the Company: (i) reduction of
rates charged to customers; (ii) reduction of earnings; (iii) refunds of amounts
previously charged to customers; (iv) failure to meet any expense,
infrastructure, service quality or other commitments previously made to or
imposed by any administrative, governmental or regulatory body; or (v) increase
in termination or access charges or other rates paid or payable by the Company
to its suppliers.
(b) Except as disclosed in Section 2.29 of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries has any outstanding commitments
(and no such obligations have been imposed upon the Company and remain
outstanding) regarding (i) reduction of rates charged to customers; (ii)
reduction of earnings; (iii) refunds of amounts previously charged to customers;
or (iv) expenses, infrastructure expenditures, service quality or other
regulatory requirements to or by any domestic or foreign court, administrative,
governmental or regulatory body, government official, consumer advocacy or
similar organization, in each case which could reasonably be expected to have a
Material Adverse Effect on the Company.
(c) The Company has not transferred, sold any interest in, or otherwise
diluted its control over any federal or state regulatory licenses, certificates,
approvals or other authorizations under which it operates, and the transfer of
such authorizations, subject to regulatory approval, would not violate the terms
of any agreement to which the Company is a party or by which the Company is
bound, or impinge the rights of any third party.
(d) The Company has no current liability (and there is no basis for any
present or future charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand against the Company giving rise to any
liability) arising out of any injury to persons or property as a result of the
ownership, possession, or use of any product manufactured, sold, leased, or
delivered by the Company. Any such claims would be fully covered to the extent
of the dollar limitations of the Company's product liability insurance. There
are no recalls, threatened or pending, and no federal investigative reports have
been filed or were required to have been filed with respect to any of the
Company's products.
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2.30 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by the Company in this Agreement, nor any statement made in any Schedule,
Exhibit or certificate furnished by the Company pursuant to this Agreement, when
read in their entirety, contains or will contain any untrue statement of a
material fact at the Effective Time, or omits or will omit to state any material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which made, not misleading. No warranty or
representation shall be deemed to have been made by the Company except for the
warranties and representations set forth in this Agreement and the Exhibits,
Schedules and certificates delivered pursuant hereto.
ARTICLE IIA
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
Except as set forth in the Partnership Disclosure Schedule attached hereto
and incorporated by reference herein (the "Partnership Disclosure Schedule"),
the Partnership hereby represents and warrants to Holdings and IWL (and, unless
the context indicates otherwise, all of such representations and warranties
shall be deemed made with respect to the Partnership and its predecessor, if
any) that, as of the date hereof:
2A.1 ORGANIZATION AND QUALIFICATION, SUBSIDIARIES. The Partnership is a
limited partnership duly formed and validly existing under the laws of the State
of Texas. The Partnership has the requisite partnership power and authority and
any necessary governmental authority, franchise, license or permit to own,
operate or lease the properties that it purports to own, operate or lease and to
carry on its business as it is now being conducted, and is duly qualified as a
foreign partnership to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, operated or leased or
the nature of its activities makes such qualification necessary, except for such
failure which, when taken together with all other such failures, would not
reasonably be expected to have a Material Adverse Effect on the Partnership. The
Partnership does not have any Subsidiaries.
2A.2 AGREEMENT OF LIMITED PARTNERSHIP. The Partnership has heretofore
furnished, or otherwise made available to IWL, a complete and correct copy of
the Agreement of Limited Partnership (or comparable governing documents), as
amended to the date hereof, of the Partnership and its Certificate of Limited
Partnership. The Agreement of Limited Partnership (or comparable governing
documents) is in full force and effect.
2A.3 PARTNERSHIP INTERESTS.
(a) Section 2A.3 of the Partnership Disclosure Schedule sets forth all of
the outstanding Partnership Interests, all of which were validly issued in
accordance with the terms of the Agreement of Limited Partnership of the
Partnership and are fully paid and nonassessable. Except as set forth in Section
2A.3 of the Partnership Disclosure Schedule, there are no outstanding
Partnership Equity Rights. For purposes of this Agreement, "Partnership Equity
Rights" shall mean subscriptions, options, warrants, calls, commitments,
agreements, conversion rights or other rights of any character (contingent or
otherwise) to purchase or otherwise acquire from the Partnership at any time, or
upon the happening of any stated event, any interest in the Partnership.
(b) There are no outstanding obligations of the Partnership to repurchase,
redeem or otherwise acquire any Partnership Interest.
(c) Except as set forth in section 2A.3 of the Partnership Disclosure
Schedule, there are no liens, security interests, pledges, agreements, claims,
charges or encumbrances on any of the Partnership Interests. Except for equity
interests disclosed in Section 2A.3 of the Partnership Disclosure Schedule, the
Partnership does not directly or indirectly own any equity interest in any other
Person.
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(d) Except as disclosed in Section 2A.3 of the Partnership Disclosure
Schedule, there are no partner agreements, voting trusts or other agreements or
understandings to which the Partnership is a party or to which it is bound
relating to the voting of any Partnership Interest.
2A.4 AUTHORITY. The Partnership has all requisite partnership power and
authority to enter into this Agreement and to consummate the Interest Exchange
and the other transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by the General Partner on behalf of the Partnership. This
Agreement has been duly executed and delivered by the General Partner on behalf
of the Partnership and constitutes the valid and binding obligation of the
Partnership enforceable in accordance with its terms. The execution and delivery
of this Agreement by the Partnership does not and the consummation of the
transactions contemplated hereby will not result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a material benefit under (a) any provision of the Agreement of Limited
Partnership of the Partnership or (b) any material mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Partnership or its properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with any
Governmental Entity is required by or with respect to the Partnership in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (a) the filing of an
amendment to the Partnership's certificate of limited partnership with the
Secretary of State of Texas and (b) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required by
the Nasdaq National Market or under applicable state and federal securities
laws.
2A.5 PARTNERSHIP FINANCIAL STATEMENTS. Section 2A.5 of the Partnership
Disclosure Schedule sets forth the Partnership's audited financial statements
(balance sheets, income statements and statements of cash flows) as of and for
the fiscal years ended December 31, 1996 and 1994 and for the six months ended
June 30, 1995, and the Partnership's reviewed financial statements for the nine
months ended September 30, 1997 (collectively, the "Partnership Financial
Statements"). The Partnership Financial Statements are complete and correct in
all material respects and, except as set forth in Section 2A.5 of the
Partnership Disclosure Schedule, have been prepared in accordance with GAAP
applied on a basis consistent throughout the periods indicated and consistent
with each other (except that the reviewed Partnership Financial Statements do
not contain the notes necessary to be in accordance with GAAP and are subject to
normal year-end adjustments). The Partnership Financial Statements present
fairly the financial condition and operating results of the Partnership and its
Subsidiaries as of the dates and for the periods indicated therein. The reviewed
balance sheet of the Partnership as of September 30, 1997 is hereinafter
referred to as the "Partnership Balance Sheet."
2A.6 NO UNDISCLOSED LIABILITIES. The Partnership does not have any
liabilities or obligations, either accrued or contingent, whether or not
required to be reflected in financial statements prepared in accordance with
GAAP, and whether due or to become due, except: (a) liabilities reflected in the
Partnership Balance Sheet, (b) liabilities specifically described in this
Agreement or in the Partnership Disclosure Schedule or (c) liabilities not
exceeding $50,000 in the aggregate incurred in the ordinary course of business
since the date of the Partnership Balance Sheet.
2A.7 NO CHANGES. Except as set forth in Section 2A.7 of the Partnership
Disclosure Schedule or as contemplated by this Agreement, since the date of the
Partnership Balance Sheet there has not been, occurred or arisen any:
(a) transaction by the Partnership except in the ordinary course of
business as conducted on that date;
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(b) capital expenditure or inventory purchase by the Partnership exceeding
$25,000 individually or $100,000 in the aggregate, except pursuant to existing
contracts listed in Section 2A.12 of the Partnership Disclosure Schedule;
(c) destruction, damage to, or loss of any assets (including without
limitation intangible assets) of the Partnership (whether or not covered by
insurance), either individually or in the aggregate, exceeding $25,000;
(d) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates, any change in policies in making
or reversing accruals, or any change in capitalization of software development
costs) by the Partnership;
(f) declaration, setting aside, or payment of a distribution in respect of
the Partnership Interests, or any direct or indirect redemption, purchase or
other acquisition by the Partnership of any of its interests;
(g) increase in the salary or other compensation payable or to become
payable by the Partnership to any of its employees, or the declaration, payment,
or commitment or obligation of any kind for the payment by the Partnership of a
bonus or other additional salary or compensation to any person except for
year-end distributions and bonuses paid in the ordinary course of business
consistent with past practice;
(h) acquisition, sale or transfer of any asset of the Partnership except in
the ordinary course of business;
(i) formation, amendment or termination of any material distribution
agreement or any material contract, agreement or license to which the
Partnership is a party, other than termination by the Partnership pursuant to
the terms thereof,
(j) loan by the Partnership to any Person or guaranty by the Partnership of
any loan;
(k) waiver or release of any material right or claim of the Partnership,
including any write-off or other compromise of any account receivable of the
Partnership except in the ordinary course of business;
(l) the commencement or notice or, to the knowledge of the Partnership,
threat of commencement of any government proceeding against or investigation of
the Partnership or its affairs;
(m) other event or condition of any character relating to the Partnership
or the Partnership's business that has or would be expected to have a Material
Adverse Effect on the Partnership;
(n) issuance, sale or redemption by the Partnership of any interest in the
Partnership;
(o) change in pricing or royalties set or charged by the Partnership except
pursuant to the terms of existing contracts; or
(p) negotiation or agreement by the Partnership to do any of the things
described in the preceding clauses (a) through (o) (other than negotiations with
parent and its representatives or any other Person regarding the transactions
contemplated by this Agreement).
2A.8 TAX AND OTHER PARTNERSHIP RETURNS AND REPORTS.
(a) TAX PARTNERSHIP RETURNS AND AUDITS. Except as set forth in Section 2A.8
of the Partnership Disclosure Schedule, the Partnership has prepared and filed
all federal, state, local and foreign returns, estimates, information statements
and reports required to be filed by any of them relating to any and all Taxes
relating or attributable to the Partnership or the assets or operations of the
Partnership ("Partnership Returns"), and such Partnership Returns are true and
correct in all material respects and have been completed in accordance with
applicable law. Except as set forth in Section 2A.8 of the Partnership
Disclosure Schedule, the Partnership has paid all Taxes required to be paid by
the Partnership with respect to such Partnership Returns and has withheld with
respect to its employees all federal and state income
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Taxes, FICA, FUTA and other Taxes it is required to withhold. The accruals for
Taxes on the books and records of the Partnership are sufficient to discharge
the Taxes payable by the Partnership for all periods (or the portion of any
period) ending on or prior to the Closing Date. The Partnership is not
delinquent in the payment of any Tax nor, except as set forth in Section 2A.8 of
the Partnership Disclosure Schedule, is there any Tax deficiency outstanding, to
the knowledge of the Partnership, proposed or assessed against the Partnership
nor has the Partnership executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax. The audits of
each Partnership Return that has been audited by the relevant authorities or for
which the statute of limitations has been waived or extended have been closed
and the Partnership has not received any written or oral notification that an
audit or other examination of any Partnership Return is presently in progress.
All such Partnership Returns that have been audited or for which the statute of
limitations has been waived are listed in Section 2A.8 of the Partnership
Disclosure Schedule. Except as set forth in Section 2A.8 of the Partnership
Disclosure Schedule, the Partnership does not have any material liabilities for
unpaid Taxes, whether asserted or unasserted, known or unknown, contingent or
otherwise and the Partnership has no knowledge of any basis for the assertion of
any such liability attributable to the Partnership or the assets or operations
of the Partnership. The Partnership is not (nor has it ever been) required to
join with any other entity in the filing of a consolidated tax return for
federal tax purposes or a consolidated or combined return or report for state
tax purposes. Except as set forth in Section 2A.8 of the Partnership Disclosure
Schedule, the Partnership is not a party to or bound by any tax indemnity, tax
sharing or tax allocation agreement. There are (and as of immediately following
the Closing there will be) no liens on the assets of the Partnership relating to
or attributable to Taxes, except for liens for Taxes not yet due and payable or
liens for Taxes being contested by appropriate proceedings. The Partnership has
no knowledge of any basis for the assertion of any claim which, if adversely
determined, would result in liens on the assets of the Partnership. There is no
contract, agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of the
Partnership that, individual or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Sections 280G, 162A or 404
of the Code.
(b) NO PENALTY. The Partnership is not subject to any penalty by reason of
a violation of any order, rule or regulation of, or a default with respect to
any Partnership Return, report or declaration required to be filed with any
Governmental Entity to which it is subject.
2A.9 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement binding
upon, or judgment, injunction, order or decree entered against, the Partnership
under which the Partnership is prohibited from conducting or engaging in any
line of business.
2A.10 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) The Partnership owns no real property except as set forth in Section
2A.10(a) of the Partnership Disclosure Schedule. Section 2A.10(a) of the
Partnership Disclosure Schedule sets forth a true and complete list of all real
property leased by the Partnership and the aggregate annual rental or other fee
payable under any such lease. All such leases are in good standing, valid and
effective in accordance with their respective terms, and there is not with
respect to the Partnership and, to the knowledge of the Partnership, any other
parties to such leases, under any of such leases any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default).
(b) Except as set forth in Section 2A.10(b) of the Partnership Disclosure
Schedule, the Partnership holds good and valid title to (or, in the case of
leased properties, assets and rights of way, valid leasehold interests in) all
of its tangible properties, assets and rights of way, real, personal and mixed,
used in its business, free and clear of any liens, charges, pledges, security
interests or other encumbrances. The Partnership has valid and subsisting rights
of way to use all real or personal property in or through which the
Partnership's owned or leased optic or other fiber lines are currently located
or situated.
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(c) The Equipment used by the Partnership in the conduct of its business is
listed in Section 2A.10(c) of the Partnership Disclosure Schedule, except
individual pieces of equipment owned by the Partnership with an individual value
of less than $5,000. The Equipment is, taken as a whole, (i) adequate for the
conduct of the business of the Partnership as currently conducted, (ii) suitable
for the uses to which it is currently employed, (iii) in good operating
condition, (iv) regularly and properly maintained, ordinary wear and tear
excepted, and (v) not obsolete, dangerous or in need of renewal or replacement.
2A.11 INTELLECTUAL PROPERTY.
(a) The Partnership owns, or is licensed to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
maskworks, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material
(excluding Partnership Commercial Software Rights (as defined in Section
2A.11(b) below)) that are used or currently proposed by the Partnership to be
used in the business of the Partnership as currently conducted or as currently
proposed to be conducted by the Partnership (the "Partnership Intellectual
Property Rights"). Section 2A.11(a) of the Partnership Disclosure Schedule (i)
sets forth a complete list of all patents, patent applications, registered
trademarks, material unregistered copyrights, trade names and service marks, and
any applications therefor, included in the Partnership Intellectual Property
Rights; (ii) specifies the jurisdictions in which each such Partnership
Intellectual Property Right has been issued or registered or in which an
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners, together with a list of all of the Partnership's currently marketed
software products and a list of which, if any, of such software products that
have been registered for copyright protection with the United States Copyright
Office and any foreign offices and by whom such items have been registered and
(iii) as to each such Partnership Intellectual Property Right, specifies whether
it is owned by the Partnership or licensed to the Partnership by another Person
and, in the cases of any licenses, sets forth the licensor and the term of such
license. Section 2A.11(a) of the Partnership Disclosure Schedule also sets forth
a complete list of all licenses, sublicenses and other agreements pursuant to
which the Partnership has licensed any other Person to use any Partnership
Intellectual Property Right or other trade secret material to the Partnership,
and includes the identity of such licensees, provided, however, that End-User
Licenses need not be listed. The Partnership is not, nor will it be as a result
of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any license, sublicense or agreement
described on such list. The Partnership is the sole and exclusive owner of, with
all right, title and interest in and to (free and clear of any liens or
encumbrances other than End-User Licenses), those Partnership Intellectual
Property Rights which the Partnership purports to own, and has sole and
exclusive rights, and is not contractually obligated to pay any compensation to
any third party in respect thereof to the use thereof or the material covered
thereby in connection with the services or products in respect of which such
Partnership Intellectual Property Rights are being used. With respect to
Partnership Intellectual Property Rights licensed to the Partnership, the
Partnership has sufficient rights under the license agreements relating thereto
to enable the Partnership to use such Partnership Intellectual Property Rights
in its business as currently conducted and as proposed to be conducted without
payment of royalties or other compensation to the licensor thereof. No claims
with respect to the Partnership Intellectual Property Rights have been asserted
or, to the knowledge of the Partnership, are threatened by any Person, (i) to
the effect that the manufacture, sale, licensing or use of any product as now
used, sold or licensed or proposed for use, sale or license by the Partnership
infringes on any copyright, patent, trade mark service mark or trade secret,
(ii) against the use by the Partnership of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the Partnership's business as currently conducted or as
proposed by the Partnership to be conducted, or (iii) challenging the ownership,
validity or effectiveness of any of the Partnership Intellectual Property
Rights. Except as set forth in Section 2A.11(a) of the Partnership Disclosure
Schedule, all registered and material unregistered trademarks, service marks and
copyrights held by the Partnership are valid and subsisting. To the knowledge of
the Partnership, there is no material unauthorized use, infringement or
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misappropriation of any of the Partnership Intellectual Property Rights by any
third party, including any employee or former employee of the Partnership. No
Partnership Intellectual Property Right owned exclusively by the Partnership or
product of the Partnership is subject to any outstanding order, judgment,
decree, stipulation or agreement restricting in any manner the licensing thereof
by the Partnership. There is no outstanding order, judgment, decree or
stipulation on the Partnership, and the Partnership is not a party to any
agreement, restricting in any manner the licensing of the Partnership's products
by the Partnership. Except for End-User Licenses or as otherwise set forth in
Section 2A.11(a) of the Partnership Disclosure Schedule, the Partnership has not
entered into any agreement to indemnify any Person against any charge of
infringement of any Partnership Intellectual Property Right.
(b) "Partnership Commercial Software Rights" means packaged commercially
available software programs generally available to the public through retail
dealers in computer software which have been licensed to the Partnership
pursuant to End-User Licenses and which are used in the Partnership's business
but are in no way a component of or incorporated in any of the Partnership's
products and related trademarks, technology and know-how. To the knowledge of
the Partnership, the Partnership has not breached or violated the terms of its
license, sublicense or other agreement relating to any Partnership Commercial
Software Rights and has a valid right to use such Partnership Commercial
Software Rights under such license and agreements. No claims with respect to the
Partnership Commercial Software Rights have been asserted or, to the knowledge
of the Partnership, are threatened by any Person against the Partnership. To the
knowledge of the Partnership, there is no material unauthorized use,
infringement or misappropriation of any of the Partnership Commercial Software
Rights by the Partnership or any employee or former employee of the Partnership
during the period of their employment.
2A.12 AGREEMENTS, CONTRACTS AND COMMITMENTS. Other than those listed in
Section 2A.12 of the Partnership Disclosure Schedule, the Partnership does not
have, is not a party to nor is it bound by:
(a) any collective bargaining agreements,
(b) any agreements that contain any unpaid severance liabilities or
obligations,
(c) any bonus, deferred compensation, incentive compensation, option,
pension, profit-sharing or retirement plans, or any other employee benefit plans
or arrangements,
(d) any employment or consulting agreement, contract or commitment (other
than employment letters) with an employee or individual consultant or
salesperson or consulting or sales agreement, contract or commitment with a firm
or other organization, not terminable by the Partnership on thirty days notice
without liability,
(e) any insurance policy, fidelity or surety bond or completion bond not
listed in Section 2A.20 of the Partnership Disclosure Schedule,
(f) any lease of personal property having a value individually in excess of
$25,000,
(g) any agreement of indemnification or guaranty not entered into in the
ordinary course of business,
(h) any agreement, contract or commitment containing any covenant limiting
the freedom of the Partnership to engage in line of business or compete with any
Person,
(i) any agreement, contract or commitment relating to capital expenditures
and involving future obligations in excess of $25,000,
(j) any agreement, contract or commitment relating to the disposition or
acquisition of assets not in the ordinary course of business or any ownership
interest in any corporation, partnership, joint venture or other business
enterprise,
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(k) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (g) hereof,
(l) any purchase order or contract for the purchase of raw materials or
acquisition of assets involving $25,000 or more in any single instance or
$100,000 or more in the aggregate,
(m) any construction contracts involving $25,000 or more in any single
instance or $100,000 or more in the aggregate,
(n) any distribution, joint marketing or development agreement,
(o) any lease for switches or any other machinery, equipment or other
personal property involving payment of aggregate rentals in excess of $25,000,
(p) any contract pursuant to which the Partnership has access to the
telephone network of another Person other than the Partnership's internal
commercial telephone service and any contracts for the resale of any network
capacity of the Partnership,
(q) any agreement, contract, lease or easement pursuant to which the
Partnership has the right of way to use any premises or real property to locate
and/or install fiber lines on, under or through such premises or real property,
(r) any agreement or commitment obligating the Partnership to deliver any
product or service at a price which does not cover the cost (including labor,
materials and production overhead), plus a reasonable profit margin, for such
product or service,
(s) any joint venture, partnership or other cooperative arrangement or
agreement involving a sharing or profits or losses,
(t) any other agreement, contract or commitment which involves $25,000 or
more and is not cancelable without penalty within thirty (30) days, or
(u) any agreement which is otherwise material to the Partnership's
business.
The Partnership has not breached, or received any claim or threat that it
has breached, any of the terms or conditions of any material agreement, contract
or commitment to which it is bound (including, but not limited to, those set
forth in Section 2A.12 or any other section of the Partnership Disclosure
Schedule) in such manner as would permit any other party to cancel or terminate
the same. Each agreement, contract or commitment to which the Partnership is a
party and that is required to be set forth in the Partnership Disclosure
Schedule is in full force and effect and, except as otherwise disclosed, is not
subject to any material default thereunder by any party thereto. The Partnership
is not bound by any material contract, agreement, license, lease or other
commitment, a copy of which has not been previously provided or made available
to IWL. The Partnership, after making an inquiry of all of its employees and
Partners and their respective officers, directors, shareholders and appropriate
employees, does not have any reason to expect that any change may occur in the
relationships of the Partnership with its suppliers or customers as a result of
the Interest Exchange, which change would have a Material Adverse Effect on the
Partnership. No supplier of or customer of the Partnership has indicated within
the past year that it will stop, or decrease the rate of supplying or purchasing
materials, products, or services to or from the Partnership, as a result of the
Mergers or the Interest Exchange. Except as described in Section 2A.4, no
consents, waivers or approvals under any of the Partnership's material
agreements, contacts, licenses or leases are necessary in order to preserve the
benefits thereunder for the Surviving Corporation or otherwise to avoid any
breach, default or right of termination or other right as a result of the
Mergers or the Interest Exchange.
2A.13 INTERESTED PARTY TRANSACTIONS. Except as set forth in Section 2A.13
of the Partnership Disclosure Schedule, no Partner or any officer, director or
shareholder of such Partner (nor any parent, sibling,
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descendant or spouse of any of such persons, or any trust, partnership,
corporation or other entity in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (a) an interest in any entity
which furnished or sold, or furnishes or sells, services or products which the
Partnership furnished or sells, or proposes to furnish or sell, or (b) any
interest in any entity which purchases from or sells or furnishes to the
Partnership any goods or services, or (c) a beneficial interest in any contract
or agreement required to be set forth in Section 2A.12 of the Partnership
Disclosure Schedule; provided, that ownership of no more than five percent (5%)
of the outstanding voting stock of a publicly traded corporation shall not be
deemed an "interest of any entity" for purposes of this Section 2A.13.
2A.14 GOVERNMENTAL AUTHORIZATIONS. Section 2A.14 of the Partnership
Disclosure Schedule accurately lists each federal, state, county, local or
foreign governmental consent, license, permit, grant, or other authorization
issued to the Partnership (a) pursuant to which the Partnership currently
operates or holds any interest in any of its properties or (b) which is required
for the operation of its business as currently conducted or the holding of any
such interest as currently held (herein collectively called the "Partnership
Authorizations"). The Partnership Authorizations are in full force and effect
and constitute all the authorizations required to permit the Partnership to
operate or conduct its business as currently conducted or hold any interest in
its properties as currently held.
2A.15 LITIGATION. Section 2A.15 of the Partnership Disclosure Schedule
accurately lists all suits, actions and legal, administrative, arbitration or
other proceedings and governmental investigations and all other claims pending
against the Partnership or, to the knowledge of the Partnership, threatened or
which the partnership expects will ultimately be threatened or commenced against
the Partnership. None of such suits, actions, proceedings, investigations or
claims seek to prevent the consummation of the Mergers or the Interest Exchange.
There is no judgment, degree or order enjoining the Partnership in respect of,
or the effect of which is to prohibit, any business practice or the acquisition
of any property or the conduct of business of the Partnership. Section 2A.15 of
the Partnership Disclosure Schedule also lists all suits and legal actions
initiated by the Partnership which are still pending or which have been
concluded in the last two years.
2A.16 ACCOUNTS RECEIVABLE. All accounts receivable of the Partnership
shown in the Partnership Balance Sheet arose in the ordinary course of business
and, to the extent not previously collected, are collectible (except to the
extent reserved against as reflected in the Partnership's Partnership Financial
Statements) and are carried at values determined in accordance with GAAP
consistently applied. To the knowledge of the Partnership, none of the accounts
receivable of the Partnership outstanding as of the date hereof is subject to
any claim of offset, recoupment, set off or counterclaim, and there are no facts
or circumstances (whether asserted or unasserted) that would give rise to any
such claim. No accounts receivable are contingent upon the performance by the
Partnership of any obligation or contract except for the Partnership's
maintenance obligations under its maintenance agreements (although no customer
has claimed that the Partnership has failed to perform its maintenance
obligations). No Person has any lien, charge, pledge, security interest or other
encumbrance on any of the Partnership's accounts receivable and no agreement for
deduction or discount has been made with respect to any of such accounts
receivable, except for liens granted to Bank One Texas, N.A. under the
Partnership's revolving line of credit.
2A.17 ENVIRONMENTAL AND OSHA.
(a) The Partnership has complied in all material respects with all
Environmental Laws and Employee Safety Laws, and no charge, action, suit,
proceeding, hearing, known investigation, claim, damage, or notice has been
filed or commenced against the Partnership alleging any failure to comply with
any such law or regulation.
(b) The Partnership has no obligation to take remedial action with respect
to any conditions nor does the Partnership have any liability, and there is no
basis related to the Partnership's past or present operations, for any present
charge, complaint, action, suit, proceeding, hearing, investigation, claim, or
demand giving rise to any liability or obligation to take any remedial action
under any Environmental Law.
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(c) Except as set forth in Section 2A.17(c) of the Partnership Disclosure
Schedule, the Partnership has no liability relating to, and it has not handled
or disposed of any substance, arranged for the disposal of any substance, or
owned or operated any property or facility in violation of any Environmental
Law.
(d) The Partnership has no liability for, and there is no basis for, any
present or future charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand against the Partnership giving rise to any
material liability under any Employee Safety Laws.
(e) The Partnership has no liability relating to, and to the knowledge of
the Partnership, the Partnership has not exposed any of the Partnership's
employees to any substances or conditions that could form the basis for, any
present charge, complaint, action, suit, proceeding, hearing, investigation,
claim, or demand (under the common law or pursuant to statute) against the
Partnership giving rise to material liability for any illness of or personal
injury to any employee.
(f) The Partnership has been in compliance with all the terms and
conditions of all permits, licenses, and other authorizations of Governmental
Entities which are required under any Environmental Law or Employee Safety Law.
(g) All properties and equipment used by the Partnership are free of
asbestos, PCB's and other Extremely Hazardous Substances (as defined in Section
302A of the Emergency Planning and Community Right-to-Know Act of 1986, as
amended). To the knowledge of the Partnership, no pollutant, contaminant,
chemical, or industrial, hazardous, or toxic material or waste has been buried,
stored, spilled, leaked, discharged, emitted, or released on any real property
that the Partnership has ever owned, or that the Partnership now leases or has
ever leased.
2A.18 BROKERS' AND FINDERS' FEES. The Partnership has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders,
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
2A.19 LABOR MATTERS. The Partnership is in compliance in all material
respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment and
wages and hours and employment practices, and is not engaged in any unfair labor
practice. The Partnership has not received any notice from any Governmental
Entity of, and to the knowledge of the Partnership there has not been asserted
before any Governmental Entity, any claim of action or proceeding to which the
Partnership is a party or involving the Partnership, and there is neither
pending nor, to the knowledge of the Partnership, threatened any investigation
or hearing concerning the Partnership arising out of or based upon any such
laws, regulations or practices. There are no pending claims against the
Partnership under any workers compensation plan or policy or for long term
disability. The Partnership has complied in all material respects with all
applicable health care benefit continuation provisions of COBRA and has no
obligations with respect to any former employees or qualified beneficiaries
thereunder. Section 2A.19 of the Partnership Disclosure Schedule lists all
current employees of the Partnership and their current salary and vacation
accruals.
2A.20 INSURANCE. Section 2A.20 of the Partnership Disclosure Schedule
lists all insurance policies and fidelity bonds covering the assets, business,
equipment, properties, operations, software errors and omissions, employees,
officers and directors of the Partnership as well as all claims made under any
insurance policy by the Partnership since January 1, 1993 (other than claims
under the Partnership's medical and dental insurance plans). There is no claim
by the Partnership pending under any of such policies or bonds as to which
coverage has been questioned, denied or disputed by the underwriters of such
policies or bonds as to which coverage has been questions, denied or disputed by
the underwriters of such policies or bonds (other than claims made under the
Partnership's medical and dental insurance plans). The Partnership has provided
or made available to IWL copies of all such insurance policies and fidelity
bonds and all claims made by the Partnership under its insurance policies (other
than claims under the Partnership's medical and dental plans). All premiums
payable under all such policies and bonds have been
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paid and the Partnership is otherwise in compliance in all material respects
with the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). Such policies of insurance and bonds
are of the type and in amounts customarily carried by Persons conducting
businesses similar to those of the Partnership. The Partnership does not know of
any threatened termination of or proposed material premium increase with respect
to any of such policies. The Partnership has never been denied insurance
coverage nor has any insurance policy of the Partnership ever been canceled for
any reason.
2A.21 INVENTORY. The inventory appearing on the Partnership Financial
Statements, or thereafter acquired or produced, conforms in all material
respects with the Partnership's applicable specifications and warranties and
have been produced in compliance with the Partnership's quality control
procedures and consist only of items of a quality and quantity useable or
saleable by the Partnership in the ordinary course of business. All such
inventory is merchantable and fit for the purpose for which it was procured or
manufactured, and none of which is obsolete, damaged or defective in any amount.
Such inventory is owned by the Partnership and is not subject to any liens,
charges, pledges, security interests or other encumbrances.
2A.22 COMPLIANCE WITH LAWS.
(a) The Partnership has complied in all material respects with, is not in
violation of, and has not received any notices of violation with respect to any
federal, state or local statute, law or regulation with respect to the conduct
of its business or the ownership or operations of its business, assets or
properties. No charge, complaint, action, suit, proceeding, hearing, known
investigation, claim, demand, or notice has been filed or commenced against
alleging any failure to comply with any such law or regulation.
(b) The Partnership has not violated in any respect, or received a notice
or charge asserting any violation of the Sherman Act, the Clayton Act, the
Robinson-Patman Act, or the Federal Trade Commission Act, each as amended.
(c) The Partnership has not, and none of the Partners or employees of the
Partnership have, on behalf of the Partnership:
(i) made or agreed to make any contribution, payment or gift of funds
or property to any governmental official, employee, or agent where either
the contribution, payment, or gift or the purpose thereof was illegal under
the laws of any federal, state or local jurisdiction; or
(ii) established or maintained any unrecorded fund or asset for any
purpose, or intentionally made any false or inaccurate entries on any of its
books and/or records; or
(iii) made or agreed to make any contribution, or reimbursed any
political gift or contribution made by any other Person, to any candidate
for federal, state or local public office; or
(iv) been involved in the disbursement or receipt of funds outside
of the normal internal control systems of accountability or been involved
in the improper or inaccurate recording of material payments,
disbursements or receipts.
2A.23 REGISTRATION STATEMENT; JOINT PROXY STATEMENT. None of the
information supplied or to be supplied by or on behalf of the Partnership for
inclusion or incorporation by reference, and reviewed by the Partnership prior
to such inclusion or incorporation by reference, in the Registration Statement
will, at the time the Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied or to be supplied by or on
behalf of the Partnership for inclusion or incorporation by reference, and
reviewed by the Partnership prior to such inclusion or incorporation by
reference, in the Joint Proxy Statement will, at the dates mailed to
shareholders and at the times of the IWL shareholders' meeting and the Partners'
meeting, contain any untrue statement of a material fact or
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omit to state any material fact required to be stated therein a necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time any
event with respect to the Partnership or its Partners should occur which is
required to be described in an amending of, or a supplement to, the Registration
Statement or the Joint Proxy Statement, the Partnership shall promptly so advise
IWL. The Partnership will promptly disseminate any such amendment or supplement
to the Partners of the Partnership.
2A.24 ACCOUNTING MATTERS. Neither the Partnership nor, to its knowledge,
any of its affiliates has through the date hereof taken or agreed to take any
action that would prevent the business combination to be effected by the Mergers
and the Interest Exchange from being accounted for as a "pooling of interests."
2A.25 FIRPTA. The Partnership is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2A) of the Code.
2A.26 EMPLOYEE BENEFIT PLANS.
(a) Section 2A.26 of the Partnership Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
incentive, deferred compensation, supplemental retirement, severance and
other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
employee of the Partnership (together, the "Partnership Employee Plans"),
and a copy of each such Partnership Employee Plan has been provided or made
available to IWL.
(b) (i) None of the Partnership Employee Plans promises to provides
retiree medical or other retiree welfare benefits to any person except as
required by applicable law, including but not limited to COBRA; (ii) all
Partnership Employee Plans are in compliance in all material respects with
the requirements prescribed by any and all applicable statues (including
ERISA and the Code), orders, or governmental rules and regulations currently
in effect with respect thereto (including all applicable requirements for
the notification to participants or beneficiaries or the Department of
Labor, IRS or Secretary of the Treasury), and the Partnership has performed
in all material respects all obligations required to be performed by it
under, is not in default under or violation of, and has no knowledge of any
default or violation by any other party to, any of the Partnership Employee
Plans; (iii) each Partnership Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code either has received a favorable determination letter and
to make any amendments necessary to obtain a favorable determination; and
(iv) no Partnership Employee Plan is or within the prior six (6) years has
been subject to, and the Partnership has not incurred and does not expect to
incur any liability under, Title IV or ERISA or Section 412A of the Code and
(v) nothing in any Partnership Employee Plan precludes or interferes with
Holdings' ability to cause the Partnership to terminate (or consolidate, at
Holdings' option) any Partnership Employee Plan after the Closing, provided
that (A) the Partnership Employee Plan may be terminated prospectively only,
subject to rights accrued by the Partnership's employees at the time of such
termination and (B) not more than sixty days notice may be required to
terminate certain Partnership Employee Plans.
(c) None of the following now exists or has existed within the six-year
period ending on the date hereof with respect to any Partnership Employee
Plan: (i) any act or omission by the Partnership constituting a violation of
Section 402A or 403 or, to the knowledge of the Partnership, Section 404 or
405 of ERISA; (ii) to the knowledge of the Partnership, any act or omission
by the Partnership which constitutes a violation of Sections 406 and 407 of
ERISA and is not exempted by Section 408 of ERISA or which constitutes a
violation of Section 4975(c) of the Code and is not exempted by Section
4975(d) of the Code; (iii) any act or omission by the Partnership
constituting a violation of Section 503 or 511, to the knowledge of the
Partnership, Section 510 of ERISA; or (iv) any act or
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omission by the Partnership which could give rise to liability under Section
502A of ERISA or under Sections 4979 or 4975 through 4980 of the Code or any
other provisions of ERISA or the Code.
(d) Each Partnership Employee Plan has been maintained in substantial
compliance with its terms, and all contributions, premiums or other payments
due from the Partnership to (or under) any such Partnership Employee Plan
have been fully paid or adequately provided for on the Partnership Financial
Statements for the most recently ended fiscal year. All accruals thereon
(including, where appropriate proportional accruals for partial periods have
been made in accordance with GAAP consistently applied on a reasonable
basis. There has been no amendment, written interpretation or announcement
(whether or not written) by the Partnership with respect to, or change in
employee participation or coverage under, any Partnership Employee Plan that
would increase materially the expense of maintaining such plans or
arrangements, individually or in the aggregate, above the level of expense
incurred with respect thereto for the most recently ended fiscal year.
(e) The Partnership has made available to IWL complete, accurate and
current copies of all Partnership Employee Plans and all amendments,
documents, correspondence addressed to the Partnership and filings relating
thereto, including but not limited to any statements, filings, reports or
returns filed with any governmental agency with respect to the Partnership
Employee Plans at any time within the three-year period ending on the date
hereof.
2A.27 OWNERSHIP OF SECURITIES. As of the date hereof, none of the
Partnership or any of its affiliates or associates (as such terms are defined
under the Exchange Act), (a)(i) beneficially owns, directly or indirectly, or
(ii) is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of IWL that in the aggregate represent 10% or more of the outstanding
shares of IWL Common Stock, or (b) is an "affiliated shareholder" of IWL within
the meaning of Article XIII of the TBCA. Neither the Partnership nor any of its
Partners own any shares of IWL Common Stock.
2A.28 CERTAIN REGULATORY MATTERS.
(a) Except as disclosed in Section 2A.28 of the Partnership Disclosure
Schedule and except for billing disputes with customers arising in the
ordinary course of business that in the aggregate involve immaterial
amounts, there are no proceedings or, to the Partnership's knowledge,
investigations pending or threatened before any domestic or foreign court,
administrative, governmental or regulatory body in which any of the
following matters are being considered which could reasonably be expected to
have a Material Adverse Effect on the Partnership, nor has the Partnership
received written notice or inquiry from any such body, government official,
advocacy or similar organization or any private party indicating that any of
such matters should be considered or may become the object of consideration
or investigation which could reasonably be expected to have a Material
Adverse Effect on the Partnership: (i) reduction of rates charged to
customers; (ii) reduction of earnings; (iii) refunds of amounts previously
charged to customers; (iv) failure to meet any expense, infrastructure,
service quality or other commitments previously made to or imposed by any
administrative, governmental or regulatory body; or (v) increase in
termination or access charges or other rates paid or payable by the
Partnership to its suppliers.
(b) Except as disclosed in Section 2A.28 of the Partnership Disclosure
Schedule, the Partnership has no outstanding commitments (and no such
obligations have been imposed upon the Partnership and remain outstanding)
regarding (i) reduction of rates charged to customers; (ii) reduction of
earnings; (iii) refunds of amounts previously charged to customers; or (iv)
expenses, infrastructure expenditures, service quality or other regulatory
requirements to or by any domestic or foreign court, administrative,
governmental or regulatory body, government official, consumer advocacy or
similar organization, in each case which could reasonably be expected to
have a Material Adverse Effect on the Partnership.
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(c) The Partnership has not transferred, sold any interest in, or
otherwise diluted its control over any federal or state regulatory licenses,
certificates, approvals or other authorizations under which it operates, and
the transfer of such authorizations, subject to regulatory approval, would
not violate the terms of any agreement to which the Partnership is a party
or by which the Partnership is bound, or impinge the rights of any third
party.
(d) The Partnership has no current liability (and there is no basis for
any present or future charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand against the Partnership giving rise to any
liability) arising out of any injury to persons or property as a result of
the ownership, possession, or use of any product manufactured, sold, leased,
or delivered by the Partnership. Any such claims would be fully covered to
the extent of the dollar limitations of the Partnership's product liability
insurance. There are no recalls, threatened or pending, and no federal
investigative reports have been filed or were required to have been filed
with respect to any of the Partnership's products.
2A.29 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by the Partnership in this Agreement, nor any statement made in any
Schedule, Exhibit or certificate furnished by the Partnership pursuant to this
Agreement, when read in their entirety, contains or will contain any untrue
statement of a material fact at the Effective Time, or omits or will omit to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading. No warranty or representation shall be deemed to have been made by
the Partnership except for the warranties and representations set forth in this
Agreement and the Exhibits, Schedules and certificates delivered pursuant
hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF IWL AND THE MERGER SUBSIDIARIES
Except as set forth in the IWL Disclosure Schedule attached hereto and
incorporated by reference herein (the "IWL Disclosure Schedule"), and subject to
Section 3.31, IWL and I-Sub and C-Sub (collectively, the "Merger Subsidiaries")
hereby jointly and severally represent and warrant to the Company and the
Partnership (and, unless the context indicates otherwise, all of such
representations and warranties shall be deemed made with respect to IWL and the
Merger Subsidiaries, their respective Subsidiaries (other than as set forth in
Section 3.31) and their respective predecessors, if any) that, as of the date
hereof:
3.1 ORGANIZATION, STANDING AND POWER. Each of IWL and its Subsidiaries
(including each Merger Subsidiary) is a corporation duly organized, validly
existing and in good standing under the laws of its state or other jurisdiction
of incorporation. Each of IWL and its Subsidiaries has the corporate power to
own its properties and to carry on its business as now being conducted and as
proposed to be conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would have
a Material Adverse Effect on IWL and its Subsidiaries taken as a whole. IWL has
made available a true and correct copy of the Articles of Incorporation and
Bylaws of each of IWL and its Subsidiaries, as amended to date, to counsel for
the Company and the Partnership.
3.2 CAPITAL STRUCTURE.
(a) The authorized stock of IWL consists of 100,000,000 shares of common
stock, par value $0.01 per share, of which 3,754,230 shares were issued and
outstanding as of December 31, 1997, and 10,000,000 shares of preferred
stock, par value $.01 per share, of which no shares are issued or
outstanding as of the date hereof. The authorized capital stock of Holdings
consists 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. The
authorized capital stock of each Merger Subsidiary consists of 1,000 shares
of common stock, par value $0.01 per share. Holdings has 1,000 shares of
common stock issued and outstanding as of the date hereof, which are held by
IWL, and I-Sub and C-Sub each have 1,000 shares
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of common stock issued and outstanding as of the date hereof, which are held
by Holdings. All such shares have been duly authorized, and all such issued
and outstanding shares have been validly issued (free of preemptive rights),
are fully paid and nonassessable and are free of any liens or encumbrances
other than any liens or encumbrances created by or imposed upon the holders
thereof. IWL has also reserved (i) 146,695 shares of IWL Common Stock for
issuance to employees and consultants pursuant to IWL's Employee Incentive
Stock Option Plan, (ii) 300,000 shares of IWL Common Stock for issuance to
employees and consultants pursuant to IWL's 1997 Stock Option Plan, and
(iii) 100,000 shares of Common Stock for issuance to outside directors of
IWL under IWL's 1997 Director Stock Option Plan. Except as set forth in the
preceding sentence and except as set forth in Section 3.2 of the IWL
Disclosure Schedule, IWL has not reserved any shares of its capital stock
for future issuance.
(b) Except as set forth in Section 3.2 of the IWL Disclosure Schedule,
there are no outstanding IWL Equity Rights. For purposes of this Agreement,
"IWL Equity Rights" shall mean subscriptions, options, warrants, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) to purchase or otherwise acquire from IWL or any
of IWL's Subsidiaries at any time, or upon the happening or any stated
event, any shares of the capital stock of IWL.
(c) Section 3.2 of the IWL Disclosure Schedule sets forth for each
outstanding IWL Equity Right the name of the holder of such IWL Equity
Right, the number of shares subject to such IWL Equity Right, the exercise
price of such IWL Equity Right and the number of shares as to which such IWL
Equity Right is exercisable, and, if the exercisabilty of such IWL Equity
Right will be accelerated in any way by the transactions contemplated by
this Agreement, an indication of the extent of such acceleration. Section
3.2 of the IWL Disclosure Schedule also describes any repricing of any IWL
Equity Rights which has taken place since January 1, 1993. IWL has made
available to the Company and the Partnership copies of all agreements
relating to IWL Equity Rights.
(d) Since January 1, 1993, IWL has not repurchased any of its capital
stock.
(e) There are no outstanding obligations of IWL or any of IWL's
Subsidiaries or of ICEL to repurchase, redeem or otherwise acquire any
shares of capital stock of IWL.
(f) All of the outstanding capital stock of each of IWL's Subsidiaries
was duly authorized and validly issued (free of preemptive rights) and is
fully paid and nonassessable, and, except as set forth in Section 3.2 of the
IWL Disclosure Schedule or in Section 3.2(a), is owned by IWL free and clear
of any liens, security interests, pledges, agreements, claims, charges or
encumbrances. IWL owns all of the issued and outstanding shares of capital
stock of ICEL. Except as set forth in Section 3.2 of the IWL Disclosure
Schedule, there are no existing subscriptions, options, warrants, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) to purchase or otherwise acquire from IWL, any of
IWL's Subsidiaries or ICEL at any time, or upon the happening of any stated
event, any shares of the capital stock of any IWL's Subsidiaries or of ICEL,
or any securities convertible into or exercisable for shares of capital
stock of any of IWL's Subsidiaries or of ICEL, whether or not presently
issued or outstanding and there are no outstanding obligations of IWL or of
any of IWL's Subsidiaries or of ICEL to repurchase, redeem or otherwise
acquire any shares of capital stock of any of IWL's Subsidiaries or of ICEL.
Except for equity interests disclosed in Section 3.2 of the IWL Disclosure
Schedule and equity interests in its Subsidiaries, IWL does not directly or
indirectly own any equity interest in any other Person. Each of IWL's
Subsidiaries is a wholly owned Subsidiary.
(g) Except as disclosed in Section 3.2 of the IWL Disclosure Schedule,
there are no shareholder agreements, voting trusts or other agreements or
understandings to which IWL, any Subsidiary or ICEL is a party or to which
it is bound relating to the voting or registration of any shares of capital
stock of IWL or any Subsidiary. IWL has not taken any action that would
result in, nor is IWL a party to any agreement, arrangement or understanding
not disclosed in Section 3.2 of the IWL Disclosure Schedule that would
result in, any options to purchase IWL Common Stock that are unvested
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becoming vested in connection with or as a result of the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(h) The shares of Holdings Common Stock to be issued pursuant to the
Mergers and in the Interest Exchange will be duly authorized, validly
issued, fully paid, and nonassessable.
3.3 AUTHORITY. IWL and the Merger Subsidiaries have all requisite
corporate power and authority to enter into this Agreement and to consummate the
Mergers and the Interest Exchange and the other transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of IWL and the Merger Subsidiaries. This Agreement
has been duly executed and delivered by IWL and the Merger Subsidiaries and
constitutes the valid and binding obligations of IWL and the Merger Subsidiaries
enforceable in accordance with its terms. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, result in any violation of, or default under (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to loss of a material benefit under (a) any
provision of the Articles of Incorporation or Bylaws of IWL and the Merger
Subsidiaries or (b) any mortgage, indenture, lease, contract or other agreement
or instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to IWL or its properties
or assets, other than any such violations, defaults, terminations, cancellations
or accelerations which individually or in the aggregate would not have a
Material Adverse Effect on the ability of IWL to consummate the transactions
contemplated hereby (or which have been consented to or waived on or prior to
the Closing Date). Except as set forth in Section 3.3 of the IWL Disclosure
Schedule, no consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to IWL and the Merger Subsidiaries in connection with the execution and
delivery of this Agreement by IWL and the Merger Subsidiaries or the
consummation by IWL and the Merger Subsidiaries of the transactions contemplated
hereby, except for (a) the filing of the Articles of Merger with the Secretary
of State of Texas, (b) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required by the Nasdaq
National Market or under applicable state and federal securities laws, (c) any
consents or approvals required by the Federal Communications Commission ("FCC")
or any state public utility commissions, and (d) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a Material Adverse Effect on the ability of IWL and the
Merger Subsidiaries to consummate the transactions contemplated hereby.
3.4 SEC DOCUMENTS; IWL FINANCIAL STATEMENTS. IWL has furnished or made
available to the Company and the Partnership a true and complete copy of its
Form 10-K for the fiscal year ended June 30, 1997, and its Form 10-Q for the
quarter ended September 30, 1997 (collectively, the "SEC Documents"), which IWL
filed under the Exchange Act with the SEC. As of their respective filing dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading, except to the extent corrected by a
subsequently filed document with the SEC. The financial statements of IWL,
including the notes thereto, included in the SEC Documents (the "IWL Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP consistently
applied (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
the consolidated financial position of IWL at the dates thereof and of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring audit adjustments).
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3.5 BROKERS AND FINDERS' FEES. Except for Cruttenden Roth Incorporated
(the arrangements with which have been disclosed to the Company prior to the
date hereof), IWL has not incurred, and will not incur, directly or indirectly,
any liability for brokerage or finders' fees or agents' commissions, advisory
fees or any similar charges in connection with this Agreement, the Mergers, the
Interest Exchange or any other transaction contemplated hereby.
3.6 REGISTRATION STATEMENT; JOINT PROXY STATEMENT. None of the information
supplied or to be supplied by or on behalf of IWL for inclusion or incorporation
by reference, and reviewed by IWL prior to such inclusion or incorporation by
reference, in the Registration Statement will, at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by or on behalf of IWL for inclusion or
incorporated by reference, and reviewed by IWL prior to such inclusion or
incorporation by reference, in the Joint Proxy Statement will, at the dates
mailed to shareholders and at the times of the IWL shareholders' meeting and the
Company shareholders' meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time, any
event with respect to IWL, its officers and directors or any of its Subsidiaries
should occur which is required to be described in an amendment of, or a
supplement to, the Registration Statement or the Joint Proxy Statement, IWL
shall promptly so advise the Company. IWL will promptly disseminate any such
amendment or supplement (which the Company shall have a reasonable opportunity
to review) to the shareholders of IWL.
3.7 OPINION OF FINANCIAL ADVISOR. IWL has received the oral opinion of
Cruttenden Roth Incorporated on the date hereof, to the effect that, as of the
date hereof, the IWL Exchange Ratio is fair from a financial point of view to
the shareholders of IWL and that the Company Merger Consideration is fair from a
financial point of view to IWL, and will, within two business days of the date
hereof, have received the written opinion of Cruttenden Roth Incorporated to
such effect.
3.8 OWNERSHIP OF SECURITIES. As of the date hereof, neither IWL nor, to
IWL's knowledge, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (a)(i) beneficially owns, directly or indirectly, or
(ii) is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of the Company that in the aggregate represent 10% or more of the
outstanding shares of Company Common Stock, nor (b) is an "affiliated
shareholder" of the Company within the meaning of Article XIII of the TBCA.
Neither IWL nor any of the Merger Subsidiaries owns any shares of Company Common
Stock.
3.9 LITIGATION. Except as set forth in the SEC Documents or in Section 3.9
of the IWL Disclosure Schedule, there are no suits, actions or legal,
administrative, arbitration or other proceedings or governmental investigations
against IWL or any of the Merger Subsidiaries pending or, to IWL's knowledge,
threatened which (a) if determined adversely to IWL, could be expected to result
in a Material Adverse Effect on IWL, or (b) seek to prevent the consummation of
the Mergers or the Interest Exchange.
3.10 NO UNDISCLOSED LIABILITIES. IWL does not have any liabilities or
obligations, either accrued or contingent, whether or not required to be
reflected in financial statements prepared in accordance with GAAP, and whether
due or to become due, except: (a) liabilities reflected in the SEC Documents,
(b) liabilities specifically described in this Agreement or in the IWL
Disclosure Schedule or (c) liabilities not exceeding $50,000 in the aggregate
incurred in the ordinary course of business since September 30, 1997.
3.11 NO CHANGES. Except as set forth in Section 3.11 of the IWL Disclosure
Schedule or as contemplated by this Agreement, since September 30, 1997 there
has not been, occurred or arisen any:
(a) transaction by IWL except in the ordinary course of business as
conducted on that date;
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(b) capital expenditure or inventory purchase by IWL exceeding $25,000
individually or $100,000 in the aggregate, except pursuant to existing contracts
listed in Section 3.16 of the IWL Disclosure Schedule;
(c) destruction, damage to, or loss of any assets (including without
limitation intangible assets) of IWL (whether or not covered by insurance),
either individually or in the aggregate, exceeding $25,000;
(d) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates, any change in policies in making
or reversing accruals, or any change in capitalization of software development
costs) by IWL;
(f) declaration, setting aside, or payment of a dividend or other
distribution in respect of the shares of IWL, or any direct or indirect
redemption, purchase or other acquisition by IWL of any of its shares;
(g) increase in the salary or other compensation payable or to become
payable by IWL to any of its officers, directors or employees, or the
declaration, payment, or commitment or obligation of any kind for the payment by
IWL of a bonus or other additional salary or compensation to any such person
except for year-end bonuses paid in the ordinary course of business consistent
with past practice;
(h) acquisition, sale or transfer or any asset of IWL except in the
ordinary course of business;
(i) formation, amendment or termination of any material distribution
agreement or any material contract, agreement or license to which IWL is a
party, other than termination by IWL pursuant to the terms thereof;
(j) loan by IWL to any Person or guaranty by IWL of any loan;
(k) waiver or release of any material right or claim of IWL, including any
write-off or other compromise of any account receivable of IWL except in the
ordinary course of business;
(l) the commencement or notice or, to the knowledge of IWL, threat of
commencement of any governmental proceeding against or investigation of IWL or
its affairs;
(m) other event or condition of any character relating to IWL or IWL's
business that has or would be expected to have a Material Adverse Effect on IWL;
(n) issuance, sale or redemption by IWL of any of its shares or of any
other of its securities, other than pursuant to the exercise of existing
options;
(o) change in pricing or royalties set or charged by IWL except pursuant to
the terms of existing contracts; or
(p) negotiation or agreement by IWL to do any of the things described in
the preceding clauses (a) through (o) (other than negotiations with IWL and its
representatives or any other Person regarding the transactions contemplated by
this Agreement).
3.12 TAX AND OTHER RETURNS AND REPORTS.
(a) TAX RETURNS AND AUDITS. Except as set forth in Section 3.12 of the IWL
Disclosure Schedule, each of IWL and its Subsidiaries has prepared and filed all
federal, state, local and foreign returns, estimates, information statements and
reports required to be filed by any of them relating to any and all Taxes
relating or attributable to IWL, its Subsidiaries, or the assets or operations
of IWL or its Subsidiaries ("IWL Returns"), and such IWL Returns are true and
correct in all material respects and have been completed in accordance with
applicable law. Except as set forth in Section 3.12 of the IWL Disclosure
Schedule, each of IWL and its Subsidiaries has paid all Taxes required to be
paid with respect to such IWL Returns and has withheld with respect to its
employees all federal and state income Taxes, FICA, FUTA and other Taxes it is
required to withhold. The accruals for Taxes on the books and records of each of
IWL and its Subsidiaries are sufficient to discharge the Taxes for all periods
(or the portion of any period)
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ending on or prior to the Closing Date. Neither IWL nor any of its Subsidiaries
is delinquent in the payment of any Tax nor, except as set forth in Section 3.12
of the IWL Disclosure Schedule, to the knowledge of IWL is there any Tax
deficiency outstanding, proposed or assessed against IWL or any of its
Subsidiaries nor has IWL or any of its Subsidiaries executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax. The audits of each IWL Return that has been audited by
the relevant authorities or for which the statute of limitations has been waived
or extended have been closed, and neither IWL nor any of its Subsidiaries has
received any written or oral notification that an audit or other examination of
any Return of IWL or any of its Subsidiaries is presently in progress. All such
IWL Returns that have been audited or for which the statute of limitations has
been waived are listed in Section 3.12 of the IWL Disclosure Schedule. Except as
set forth in Section 3.12 of the IWL Disclosure Schedule, neither IWL nor any of
its Subsidiaries has any material liabilities for unpaid Taxes, whether asserted
or unasserted, known or unknown, contingent or otherwise and neither IWL nor any
of its Subsidiaries has any knowledge of any basis for the assertion of any such
liability attributable to IWL, its Subsidiaries or the assets or operations of
IWL or its Subsidiaries. Neither IWL nor any of its Subsidiaries is (nor have
they ever been) required to join with any other entity in the filing of a
consolidated tax return for federal tax purposes or a consolidated or combined
return or report for state tax purposes. Except as set forth in Section 3.12 of
the IWL Disclosure Schedule, neither IWL nor any of its Subsidiaries is a party
to or bound by any tax indemnity, tax sharing or tax allocation agreement. There
are (and as of immediately following the Closing there will be) no liens on the
assets of IWL or any of its Subsidiaries relating to or attributable to Taxes,
except for liens for Taxes not yet due and payable or liens for Taxes being
contested by appropriate proceedings. Neither IWL nor any of its Subsidiaries
has any knowledge of any basis for the assertion of any claim which, if
adversely determined, would result in liens on the assets of IWL or
Subsidiaries. There is no contract, agreement, plan or arrangement, including
but not limited to the provisions of this Agreement, covering any employee or
former employee of IWL or any of its Subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 162 or 404 of the Code.
(b) NO PENALTY. Neither IWL nor any of its Subsidiaries is subject to any
penalty by reason of a violation of any order, rule or regulation of, or a
default with respect to any IWL Return, report or declaration required to be
filed with, any Governmental Entity to which it is subject.
3.13 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement binding
upon, or judgment, injunction, order or decree entered against, IWL under which
IWL is prohibited from conducting or engaging in any line of business.
3.14 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) IWL owns no real property other than as set forth in Section 3.14(a) of
the IWL Disclosure Schedule. Section 3.14(a) of the IWL Disclosure Schedule also
sets forth a true and complete list of all real property leased by IWL and the
aggregate annual rental or other fee payable under any such lease. All such
leases are in good standing, valid and effective in accordance with their
respective terms, and there is not with respect to IWL and, to the knowledge of
IWL, any other parties to such leases, under any of such leases any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) Except as set forth in Section 3.14(b) of the IWL Disclosure Schedule,
IWL holds good and valid title to (or, in the case of leased properties, assets
and rights of way, valid leasehold interests in) all of its tangible properties,
assets and rights of way, real, personal and mixed, used in its business, free
and clear of any liens, charges, pledges, security interests or other
encumbrances.
(c) The Equipment used by IWL in the conduct of its business is listed in
Section 3.14(c) of the IWL Disclosure Schedule, except individual pieces of
equipment owned by IWL with an individual value of less than $5,000. The
Equipment is, taken as a whole, (i) adequate for the conduct of the business of
IWL as presently conducted, (ii) suitable for the uses to which it is currently
employed, (iii) in good operating
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condition, (iv) regularly and properly maintained, ordinary wear and tear
excepted, and (v) not obsolete, dangerous or in need of renewal or replacement.
3.15 INTELLECTUAL PROPERTY.
(a) IWL owns, or is licensed to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskwork, schematics,
technology, know-how, computer software programs or applications and tangible or
intangible proprietary information or material (excluding IWL Commercial
Software Rights (as defined in Section 3.15(b) below)) that are used or
currently proposed by IWL to be used in the business of IWL as currently
conducted or as currently proposed to be conducted by IWL (the "IWL Intellectual
Property Rights"). Section 3.15(a) of the IWL Disclosure Schedule (i) sets forth
a complete list of all patents, patent applications, registered trademarks,
material unregistered copyrights, trade names and service marks, and any
applications therefor, included in IWL Intellectual Property Rights; (ii)
specifies the jurisdictions in which each such IWL Intellectual Property Right
has been issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners, together with a list
of all of IWL's currently marketed software products and list of names of all
registered owners, if any, of such software products that have been registered
for copyright protection with the United States Copyright Office and any foreign
offices and by whom such items have been registered and (iii) as to each such
IWL Intellectual Property Right, specifies whether it is owned by IWL or
licensed to IWL by another Person and, in the cases of any license, sets forth
the licensor and the term of such license. Section 3.15(a) of the IWL Disclosure
Schedule also sets forth a complete list of all licenses, sublicenses and other
agreements pursuant to which IWL has licensed any other Person to use any IWL
Intellectual Property Right or other trade secret material to IWL, and includes
the identity of such licenses; provided, however, that IWL's End-User Licenses
need not be listed. IWL is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder, in
violation of any license, sublicense or agreement described on such list. IWL is
the sole and exclusive owner of, with all right, title and interest in and to
(free and clear of any liens or encumbrances), those IWL Intellectual Property
Rights which IWL purports to own, and has sole and exclusive rights, and is not
contractually obligated to pay any compensation to any third party in respect
thereof to the use thereof or the material covered thereby in connection with
the services or products in respect of which such IWL Intellectual Property
Rights are being used. With respect to IWL Intellectual Property Rights licensed
to IWL, IWL has sufficient rights under the license agreements relating thereto
to enable IWL to use such IWL Intellectual Property Rights in its business as
currently conducted and as proposed to be conducted without payment of royalties
or other compensation to the licensor thereof. No claims with respect to IWL
Intellectual Property Rights have been asserted or, to the knowledge of IWL, are
threatened by any Person, (i) to the effect that the manufacture, sale,
licensing or use of any product as, now used, sold or licensed or proposed for
use, sale or license by IWL infringes on any copyright, patent, trade mark
service mark or trade secret, (ii) against the use by IWL of any trademarks,
trade names, trade secrets, copyrights, patents, technology, know-how or
computer software programs and applications used in IWL's business as currently
conducted or as proposed by IWL to be conducted, or (iii) challenging the
ownership, validity or effectiveness of any IWL Intellectual Property Rights.
Except as set forth in Section 3.15(a) of the IWL Disclosure Schedule, all
registered and material unregistered trademarks, service marks and copyrights
held by IWL are valid and subsisting. To the knowledge of IWL, there is no
material unauthorized use, infringement or misappropriation of any of IWL
Intellectual Property Rights by any third party, including any employee or
former employee of IWL. No IWL Intellectual Property Right owned exclusively by
IWL or product of IWL is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting in any manner the licensing thereof by IWL.
There is no outstanding order, judgment, decree or stipulation on IWL, and IWL
is not party to any agreement, restricting in any manner the licensing of IWL's
products by IWL. Except for End User Licenses or as otherwise set forth in
Section 3.15(a) of the IWL Disclosure Schedule, IWL has not entered into any
agreement to indemnify any Person against any charge of infringement of any IWL
Intellectual Property Rights.
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(b) "IWL Commercial Software Rights" means packaged commercially available
software programs generally available to the public through retail dealers in
computer software which have been licensed to IWL pursuant to End-User Licenses
and which are used in IWL's business but are in no way a component of or
incorporated in any of IWL's products and related trade markets, technology and
know-how. To the knowledge of IWL, IWL has not breached or violated the terms of
its license, sublicense or other agreement relating to any IWL Commercial
Software Rights and has a valid right to use such IWL Commercial Software Rights
under such license and agreements. No claims with respect to the IWL Commercial
Software Rights have been asserted or, to the knowledge of IWL, are threatened
by any Person against IWL. To the knowledge of IWL, there is no material
unauthorized use, infringement or misappropriation of any of the IWL Commercial
Software Rights by IWL or any employee or former employee of IWL during the
period of their employment.
3.16 AGREEMENTS, CONTRACTS AND COMMITMENTS. Other than those listed in
Section 3.16 of the IWL Disclosure Schedule, IWL does not have, is not a party
to nor is it bound by:
(a) any collective bargaining agreement;
(b) any agreements that contain any unpaid severance liabilities or
obligations;
(c) any bonus, deferred compensation, incentive compensation, option,
pension, profit-sharing or retirement plans, or any other employee benefit plans
or arrangements;
(d) any employment or consulting agreement, contract or commitment (other
than employment letters) with an employee or individual consultant or
salesperson or consulting or sales agreement, contract or commitment with a firm
or other organization, not terminable by IWL on thirty days notice without
liability;
(e) any stock option plan, stock appreciation right plan or stock purchase
plan;
(f) any insurance policy, fidelity or surety bond or completion bond not
listed in Section 3.21 of the IWL Disclosure Schedule;
(g) any lease of personal property having a value individually in excess of
$25,000;
(h) any agreement of indemnification or guaranty not entered into in the
ordinary course of business;
(i) any agreement, contract or commitment containing any covenant limiting
the freedom of IWL to engage in any line of business or compete with any Person;
(j) any agreement, contract or commitment relating to capital expenditures
and involving future obligations in excess of $25,000;
(k) any agreement, contract or commitment relating to the disposition or
acquisition of assets not in the ordinary course of business or any ownership
interest in any corporation, partnership, joint venture or other business
enterprise;
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to the clause (h) hereof;
(m) any purchase order or contract for the purchase of raw materials or
acquisition of assets involving $25,000 or more in any single instance or
$100,000 or more in the aggregate;
(n) any construction contracts involving $25,000 or more in any single
instance or $100,000 or more in the aggregate;
(o) any distribution, joint marketing or development agreements;
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(p) any lease for switches or any other machinery, equipment or other
personal property involving payment of aggregate rentals in excess of $25,000;
(q) any contract pursuant to which IWL has access to the telephone network
of another Person other than IWL's internal commercial telephone service and any
contracts for the resale of any network capacity of IWL;
(r) any agreement, contract, lease or easement pursuant to which IWL has
the right of way to use any premises or real property to locate and/or install
fiber lines on, under or through such premises or real property;
(s) any agreement or commitment obligating IWL to deliver any product or
service at a price which does not cover the cost of (including labor, materials
and production overhead), plus a reasonable profit margin, for such product or
service;
(t) any joint venture, partnership or other cooperative arrangement or
agreement involving a sharing of profits or losses;
(u) any other agreement contract or commitment which involves $25,000 or
more and is not cancelable without penalty within thirty (30) days; or
(v) any agreement which is otherwise material to IWL's business.
IWL has not breached, or received any claim or threat that it has breached,
any of the terms or conditions of any material agreement, contract or commitment
to which it is bound (including, but not limited to, those set forth in Section
3.16 or any other section of the IWL Disclosure Schedule) in such manner as
would permit any other party to cancel or terminate the same. Each agreement,
contract or commitment to which IWL is party and that is required to be set
forth in the IWL Disclosure Schedule is in full force and effect and, except as
otherwise disclosed, is not subject to any material default thereunder by any
party thereto. IWL is not bound by any material contract, agreement, license,
lease or other commitment, a copy of which has not been previously provided or
made available to the Company and the Partnership. IWL after making an inquiry
of all of its officers, directors, shareholders and appropriate employees does
not have any reason to expect that any change may occur in the relationships of
IWL with its suppliers or customers as a result of the Mergers or the Interest
Exchange, which change would be a Material Adverse Effect on IWL. No supplier of
or customer of IWL has indicated within the past year that it will stop, or
decrease the rate of supplying or purchasing materials, products, or services to
or from IWL, as a result of the Mergers or the Interest Exchange. Except as
described in Section 3.3, no consents, waivers or approvals under any of IWL's
material agreements, contracts, licenses or leases are necessary in order to
preserve the benefits thereunder for the Surviving Corporation or otherwise to
avoid any breach, default or right of termination or other right as a result of
the Mergers or the Interest Exchange.
3.17 GOVERNMENTAL AUTHORIZATIONS. Section 3.17 of the IWL Disclosure
Schedule accurately lists each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization issued to
IWL or statute, regulation, private treaty or agreement adopted or made for the
benefit for IWL or to which IWL is a party (a) pursuant to which IWL currently
operates or holds any interest in any of its properties or (b) which is required
for the operation of its business as currently conducted or the holding of any
such interest as currently held (herein collectively called the "IWL
Authorizations"). The IWL Authorizations are in full force and effect and
constitute all the authorizations required to permit IWL to operate or conduct
its business as currently conducted or hold any interest in its properties as
currently held.
3.18 ACCOUNTS RECEIVABLE. All accounts receivable shown in the IWL
Financial Statements arose in the ordinary course of business and, to the extent
not previously collected, are collectible (except to the extent reserved against
as reflected in the IWL Financial Statements) and are carried at values
determined in accordance with GAAP consistently applied. To the knowledge of
IWL, none of the accounts receivable
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of IWL outstanding as of the date hereof is subject to any claim of offset,
recoupment, set off or counterclaim and there are no facts or circumstances
(whether asserted or unasserted) that would give rise to any such claim. No
accounts receivable are contingent upon the performance by IWL of any obligation
or contract except for IWL's maintenance obligations under its maintenance
agreements (although no customer has claimed that IWL has failed to perform its
maintenance obligations). No Person has any lien, charge, pledge, security
interest or other encumbrance on any of IWL's accounts receivable and no
agreement for deduction or discount has been made with respect to any of such
accounts receivable, except for liens granted to Bank One Texas, N.A. under
IWL's line of credit.
3.19 MINUTE BOOKS AND STOCK RECORDS. The minute books of IWL and its
Subsidiaries made available to counsel for the Company and the Partnership
contain minutes of all meetings of directors and shareholders (or consents in
lieu of such meetings) accurate in all material respects since the respective
times of incorporation of IWL and its Subsidiaries.
3.20 LABOR MATTERS. IWL is in compliance with all currently applicable
laws and regulations respecting employment, discrimination in employment, terms
and conditions of employment and wages and hours and employment practices, and
is not engaged in any unfair labor practice. IWL has not received any notice
from any Governmental Entity of, and to the knowledge of IWL there has not been
asserted before any Governmental Entity, any claim, action or proceeding to
which IWL is a party or involving IWL, and there is neither pending nor, to the
knowledge of IWL, threatened any investigation or hearing concerning IWL arising
out of or based upon any such laws, regulations or practices. There are no
pending claims against IWL under any workers compensation plan or policy or for
long term disability. IWL has complied in all material respects with all
applicable health care benefit continuation provisions of COBRA and has no
obligations with respect to any former employees or qualified beneficiaries
thereunder. Section 3.20 of the IWL Disclosure Schedule lists all current
employees of IWL and their current salary and vacation accruals.
3.21 INSURANCE. Section 3.21 of the IWL Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, equipment,
properties, operations, software errors and omissions, employees, officers and
directors of IWL as well as all claims made under any insurance policy by IWL
since January 1, 1993 (other than claims under IWL's medical and dental
insurance plans and claims made with respect to insured losses which did not, in
the aggregate, have a Material Adverse Effect on IWL). There is no claim by IWL
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds
(other than claims made under IWL's medical and dental insurance plans). IWL has
provided or made available to the Company and the Partnership copies of all such
insurance policies and fidelity bonds and all claims made by IWL under its
insurance policies (other than claims under IWL's medical and dental plans). All
premiums payable under all such policies and bonds have been paid and IWL is
otherwise in compliance in all material respects with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). Such policies of insurance and bonds are of the type and in amounts
customarily carried by Persons conducting businesses similar to those of IWL.
IWL does not know of any threatened termination of or proposed material premium
increase with respect to any of such policies. IWL has never been denied
insurance coverage nor has any insurance policy of IWL ever been canceled for
any reason.
3.22 INVENTORY. The inventory appearing on the IWL Financial Statements,
or thereafter acquired or produced, conforms in all material respects with IWL's
applicable specifications and warranties and have been produced in compliance
with IWL's quality control procedures and consist only of items of a quality and
quantity useable or saleable by IWL in the ordinary course of business. All such
inventory is merchantable and fit for the purpose for which it was procured or
manufactured, and none of which is obsolete, damaged or defective in any amount.
Such inventory is owned by IWL and is not subject to any liens, charges,
pledges, security interests or other encumbrances.
3.23 COMPLIANCE WITH LAWS.
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(a) IWL has complied in all material respects with, is not in violation of,
and has not received any notices of violation with respect to any federal, state
or local state, law or regulation with respect to the conduct of business or the
ownership or operation of its business, assets or properties. No charge,
complaint, action, suit, proceeding, hearing, known investigation, claim,
demand, or notice has been filed or commenced against IWL alleging any failure
to comply with any such law or regulation.
(b) IWL has not violated in any respect, or received a notice or charge
asserting any violation of the Sherman Act, the Clayton Act, the Robinson-Patman
Act, or the Federal Trade Commission Act, each as amended.
(c) IWL has not, and none of the officers, directors, shareholders or
employees of IWL have, on behalf of IWL:
(i) made or agreed to make any contribution, payment or gift funds or
property to any governmental official, employee, or agent where either the
contribution, payment, or gift or the purpose thereof was illegal under the
laws of any federal, state or local jurisdiction; or
(ii) established or maintained any unrecorded fund or asset for any
purpose, or intentionally made any false or inaccurate entries on any of its
books and/or records; or
(iii) made or agreed to make any contribution, or reimbursed any
political gift or contribution made by any other Person, to any candidate
for federal, state or local public office; or
(iv) been involved in the disbursement or receipt of funds outside of
the normal internal control systems of accountability or been involved in
the improper or inaccurate recording of material payments, disbursements or
receipts.
3.24 FIRPTA. IWL is not, and has not been at any time, a "United States
real property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
3.25 EMPLOYEE BENEFIT PLANS.
(a) Section 3.25 of the IWL Disclosure Schedule lists all employee benefit
plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
employee of IWL, any trade or business (whether or not incorporated) which is a
member or which is under common control with IWL (an "IWL ERISA Affiliate")
within the meaning of Section 414 of the Code, or any Subsidiary of IWL
(together, the "IWL Employee Plans"), and a copy of each such IWL Employee Plan
has been provided or made available to the Company and the Partnership.
(b) (i) None of the IWL Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person except as required by applicable
law, including but not limited to COBRA; (ii) all IWL Employee Plans are in
compliance in all material respects with the requirements prescribed by any and
all applicable statutes (including ERISA and the Code), orders, or governmental
rules and regulations currently in effect with respect thereto (including all
applicable requirements for notification to participants or beneficiaries or the
Department of Labor, IRS or Secretary of the Treasury), and IWL has performed in
all material respects all obligations required to be performed by it under, is
not in default under or violation of, and has no knowledge of any default or
violation by any other party to, any of the IWL Employee Plans; (iii) each IWL
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code either has received a
favorable determination letter with respect to each such IWL Employee Plan from
the IRS or still has a remaining period of time under applicable Treasury
Regulations or IRS pronouncements in which to apply for such a determination
letter and to make any amendments necessary to obtain a favorable determination;
and
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(iv) no IWL Employee Plan is or within the prior six (6) years has been subject
to, and IWL has not incurred and does not expect to incur any liability under,
Title IV of ERISA or Section 412 of the Code.
(c) None of the following now exists or has existed within the six-year
period ending on the date hereof with respect to any IWL Employee Plan: (i) any
act or omission by IWL constituting a violation of Section 402 or 403 or, to the
knowledge of IWL, Section 404 or 405 of ERISA; (ii) to the knowledge of IWL, any
act or omission by IWL which constitutes a violation of Sections 406 and 407 of
ERISA and is not exempted by Section 408 of ERISA or which constitutes a
violation of Section 4975(c) of the Code and is not exempted by Section 4975(d)
of the Code; (iii) any act or omission by IWL constituting a violation of
Section 503 or 511 or, to the knowledge of IWL, Section 510 of ERISA; or (iv)
any act or omission by IWL which could give rise to liability under Section 502
of ERISA or under Sections 4979 or 4975 through 4980 of the Code or any other
provisions of ERISA or the Code.
(d) Each IWL Employee Plan has been maintained in substantial compliance
with its terms, and all contributions, premiums or other payments due from IWL
or any of its Subsidiaries to (or under) any such IWL Employee Plan have been
fully paid or adequately provided for on IWL Financial Statements for the most
recently ended fiscal year. All accruals thereon (including, where appropriate
proportional accruals for partial periods) have been made in accordance with
GAAP consistently applied on a reasonable basis. There has been no amendment,
written interpretation or announcement (whether or not written) by IWL with
respect to, or change in employee participation or coverage under, any IWL
Employee Plan that would increase materially the expense of maintaining such
plans or arrangements, individually or in the aggregate, above the level of
expense incurred with respect thereto for the most recently ended fiscal year.
(e) IWL has made available to the Company and the Partnership complete,
accurate and current copies of all IWL Employee Plans and all amendments,
documents, correspondence addressed to IWL and filings relating thereto,
including but not limited to any statements, filings, reports or returns filed
with any governmental agency with respect to the IWL Employee Plans at any time
within the three-year period ending on the date hereof.
3.26 CERTAIN REGULATORY MATTERS.
(a) Except as disclosed in Section 3.26 of the IWL Disclosure Schedule and
except for billing disputes with customers arising in the ordinary course of
business that in the aggregate involve immaterial amounts, there are no
proceedings or, to IWL's knowledge, investigations pending or, to IWL's
knowledge, threatened before any domestic or foreign court, administrative,
governmental or regulatory body in which any of the following matters are being
considered which could reasonably be expected to have a Material Adverse Effect
on IWL, nor has IWL or any of its Subsidiaries received written notice or
inquiry from any such body, government official, advocacy or similar
organization or any private party indicating that any of such matters should be
considered or may become the object of consideration or investigation which
could reasonably be expected to have a Material Adverse Effect on IWL: (i)
reduction of rates charged to customers; (ii) reduction of earnings; (iii)
refunds of amounts previously charged to customers; (iv) failure to meet any
expense, infrastructure, service quality or other commitments previously made to
or imposed by any administrative, governmental or regulatory body; or (v)
increase in termination or access charges or other rates paid or payable by IWL
to its suppliers.
(b) Except as disclosed in Section 3.26 of the IWL Disclosure Schedule,
neither IWL nor any of its Subsidiaries has any outstanding commitments (and no
such obligations have been imposed upon IWL and remain outstanding) regarding
(i) reduction of rates charged to customers; (ii) reduction of earnings; (iii)
refunds of amounts previously charged to customers; or (iv) expenses,
infrastructure expenditures, service quality or other regulatory requirements to
or by any domestic or foreign court, administrative, governmental or regulatory
body, government official, consumer advocacy or similar organization, in each
case which could reasonably be expected to have a Material Adverse Effect on
IWL.
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(c) IWL has not transferred, sold any interest in, or otherwise diluted its
control over any federal or state regulatory licenses, certificates, approvals
or other authorizations under which it operates, and the transfer of such
authorizations, subject to regulatory approval, would not violate the terms of
any agreement to which IWL is a party or by which is bound, or impinge the
rights of any third party.
(d) IWL has no current liability (and there is no basis for any present or
future charge, complaint, action, suit, proceeding, hearing, investigation,
claim, or demand against IWL giving rise to any liability) arising out of any
injury to persons or property as a result of the ownership, possession, or use
of any product manufactured, sold, leased, or delivered by IWL. Any such claims
would be fully covered to the extent of the dollar limitations of IWL's product
liability insurance. There are no recalls, threatened or pending, and no federal
investigative reports have been filed or were required to have been filed with
respect to any of IWL's products.
3.27 ACCOUNTING MATTERS. Neither IWL nor, to its knowledge, any of its
affiliates has through the date hereof taken or agreed to take any action that
would prevent the business combination to be effected by the Mergers and the
Interest Exchange from being accounted for as a "pooling of interests."
3.28 INTERESTED PARTY TRANSACTIONS. Except as set forth in Section 3.28 of
the IWL Disclosure Schedule, since June 30, 1994, no executive officer or
director of IWL (nor any parent, sibling, descendant or spouse of any of such
persons, or any trust, partnership, corporation or other entity in which any of
such persons has or has had an interest), has or has had, directly or
indirectly, (a) an interest in any entity which furnished or sold, or furnishes
or sells, services or products which IWL furnished or sells, or proposes to
furnish or sell, or (b) any interest in any entity which purchases from or sells
or furnishes to IWL any goods or services, or (c) a beneficial interest in any
contract or agreement required to be set forth in Section 3.16 of the IWL
Disclosure Schedule; provided, that ownership of no more than five percent (5%)
of the outstanding voting stock of a publicly traded corporation shall not be
deemed an "interest in any entity" for purposes of this Section 3.28.
3.29 ENVIRONMENTAL AND OSHA.
(a) IWL has complied in all material respects with all Environmental Laws
and Employee Safety Laws, and no charge, action, suit, proceeding, hearing,
known investigation, claim, damage, or notice has been filed or commenced
against IWL alleging any failure to comply with any such law or regulation.
(b) IWL has no obligation to take remedial action with respect to any
conditions nor does IWL have any liability, and there is no basis related to
IWL's past or present operations, for any present charge, complaint, action,
suit, proceeding, hearing, investigation, claim, or demand giving rise to any
liability or obligation to take any remedial action under any Environmental Law.
(c) IWL has no liability relating to, and it has not handled or disposed of
any substance, arranged for the disposal of any substance, or owned or operated
any property or facility in violation of any Environmental Law.
(d) IWL has no liability for, and there is no basis for, any present or
future charge, complaint, action, suit, proceeding, hearing, investigation,
claim, or demand against IWL giving rise to any material liability under any
Employee Safety Laws.
(e) IWL has no liability relating to, and to the knowledge of IWL, IWL has
not exposed any of IWL's employees to any substances or conditions that could
form the basis for, any present charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand (under the common law or pursuant to
statute) against IWL giving rise to material liability for any illness of or
personal injury to any employee.
(f) IWL has been in compliance with all the terms and conditions of all
permits, licenses, and other authorizations of Governmental Entities which are
required under any Environmental Law or Employee Safety Law.
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(g) All properties and equipment used by IWL are free of asbestos, PCB's
and other Extremely Hazardous Substances (as defined in Section 302A of the
Emergency Planning and Community Right-to-Know Act of 1986, as amended). To the
knowledge of IWL, no pollutant, contaminant, chemical, or industrial, hazardous,
or toxic material or waste has been buried, stored, spilled, leaked, discharged,
emitted, or released on any real property that IWL has ever owned, or that IWL
now leases or has ever leased.
3.30 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by IWL in this Agreement, nor any statement made in any Schedule, Exhibit
or certificate furnished by IWL pursuant to this Agreement, when read in their
entirety, contains or will contain any untrue statement of a material fact at
the Effective Time, or omits or will omit to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading. No warranty or representation
shall be deemed to have been made by IWL except for the warranties and
representations set forth in this Agreement and the Exhibits, Schedules and
certificates delivered pursuant hereto.
3.31 REPRESENTATIONS AND WARRANTIES WITH RESPECT TO ICEL. IWL hereby makes
for the benefit of the Company and the Partnership all of the representations
and warranties made by NERA Limited, Thomas Norman Blair and Margery Helen Blair
to IWL under the ICEL Stock Purchase Agreement (as defined below), which relates
to the acquisition by IWL of all of the stock of Integrated Communications and
Engineering Limited, a limited company incorporated in Scotland ("ICEL"),
including without limitation those set forth in Schedule 2 and Section 5 of the
ICEL Stock Purchase Agreement, but subject to the same limitations (including
limitations on liability), exclusions and exceptions as set forth in the ICEL
Stock Purchase Agreement; and IWL further represents and warrants that each of
such representations and warranties, as subject to such limitations, are true,
complete and correct in all material respects as of the date hereof.
Notwithstanding anything to the contrary contained in this Agreement, the
representations and warranties set forth in this Section 3.31 shall be subject
to the provisions relating to survivability of representations and warranties
set forth in Section 8.1 hereof. Notwithstanding anything to the contrary
contained herein, except for those instances in which express reference is made
to ICEL, none of the representations and warranties contained in Sections 3.1
through 3.30 shall be deemed made with respect to ICEL, and no warranty or
representation shall be deemed to have been made by IWL or the Merger
Subsidiaries herein with respect to ICEL except for the warranties and
representations set forth in this Section 3.31.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF THE COMPANY AND THE PARTNERSHIP. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, each of the Company and the
Partnership agrees (except to the extent that IWL shall otherwise consent in
writing), to carry on its business in the usual regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use all commercially reasonable efforts
consistent with past practice and policies to preserve intact the Company's and
the Partnership's respective present business organizations, keep available the
services of its present officers and respective key employees, and preserve
their respective relationships with customers, suppliers, distributors,
licensors, licensees and others having business dealings with it. The Company
and the Partnership shall promptly notify IWL of any event or occurrence not in
the ordinary course of business of the Company and the Partnership which could
have a Material Adverse Effect on the Company and the Partnership, respectively.
Except as expressly contemplated by this Agreement or as set forth in Section
4.1 of the Company and Partnership Disclosure Schedule, the Company and the
Partnership shall not, without the prior written consent of IWL (which consent
shall not require the approval of the Board of Directors of IWL):
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(a) Enter into any commitment or transaction involving more than $500,000
of products and services of the Company and the Partnership;
(b) Grant any severance or termination pay in excess of $10,000 (i) to any
director or (ii) to any employees, except payments made pursuant to written
agreements outstanding on the date hereof;
(c) Except for End-User Licenses, transfer to any Person any rights to the
Company Intellectual Property Rights or the Partnership Intellectual Property
Rights;
(d) Enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing or other rights of any type or scope with respect to
any products of the Company or the Partnership, or the Company or the
Partnership terminates or assigns any such agreement;
(e) Violate, amend or otherwise modify the terms of any of the contracts or
agreements required to be set forth in the Company or the Partnership Disclosure
Schedule except in the ordinary course of business;
(f) Commence any litigation except for normal collection actions;
(g) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of the Company's capital
stock, or split, combine or reclassify any of the Company's capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of capital stock of the Company, or repurchase
or otherwise acquire, directly or indirectly, any shares of its capital stock;
(h) Issue, deliver, sell, grant (whether or not there are shares available
for grant under any stock option plans) or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of the
Company's capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, except for the issuance of shares pursuant to the exercise of
employee stock options granted prior to the date hereof;
(i) Except as provided in the Articles of Merger, cause or permit any
amendments to the Company's Articles of Incorporation or Bylaws or the
Partnership's Agreement of Limited Partnership;
(j) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company or the Partnership;
(k) Sell, lease, license or otherwise dispose of any of its properties or
assets which are material individually or in the aggregate, to the business of
the Company or the Partnership, except in the ordinary course of business;
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or the
Partnership or guarantee any debt securities of others in excess of $10,000,
except pursuant to existing bank credit facilities or lines of credit;
(m) Adopt or amend any employee benefit or option plan, grant any
additional options to acquire shares of capital stock of the Company or any
Subsidiary under any employee benefit or option plans (whether or not the
issuance of such options is authorized by such plans), or enter into any
employment contract, pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates of its employees
other than raises in compensation payable to employees that are granted on their
respective anniversary dates and are consistent with the Company's or the
Partnership's, as the case may be, past practice;
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(n) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;
(o) Pay, discharge or satisfy in an amount in excess of $25,000 in any one
case (or $100,000 in the aggregate) any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against the Company Financial Statements or
the Partnership Financial Statements;
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Take any action which the Company or the Partnership, as the case may
be, knows or should know would jeopardize the ability of the parties hereto to
account for the Mergers and the Interest Exchange as a pooling of interests; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of the Company or the
Partnership contained in this Agreement materially untrue or incorrect.
4.2 NO SOLICITATION. Prior to the Effective Time, the Company and the
Partnership will not (and will not permit any of the Company's officers,
directors, shareholders affiliated with any officer or director or the Company's
agents, representatives or affiliates to) directly or indirectly, take any of
the following actions with any party other than IWL and its designees:
(a) Solicit, encourage, initiate, accept or participate in any negotiations
or discussions with respect to, any offer or proposal to acquire all or
substantially all of the Company's or the Partnership's business and properties,
or capital stock or Partnership Interests, as the case may be, whether by
merger, purchase of assets, tender offer or otherwise, or agree to any such
offer or proposal,
(b) Except for disclosures made to financial institutions and others in the
ordinary course of business, disclose any information not customarily disclosed
to any Person other than its attorneys or financial advisors concerning the
Company's or the Partnership's business and properties or afford to any Person
or entity access to its properties, books or records, or
(c) Assist or cooperate with any Person to make any proposal to purchase
all or any part of the Company's capital stock or assets or agree to any such
proposal, other than selling its products and licensing of software in the
ordinary course of business.
4.3 CONDUCT OF BUSINESS OF IWL. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, IWL agrees (except to the extent that the Company and the
Partnership shall otherwise consent in writing), to carry on its business in the
usual regular and ordinary course in substantially the same manner as heretofore
conducted and, to the extent consistent with such business, use all commercially
reasonable efforts consistent with past practice and policies to preserve intact
IWL's present business organizations, keep available the services of its present
officers and key employees and preserve their relationships with customers,
suppliers, distributors, licensors, licensees and others having business
dealings with it. IWL shall promptly notify the Company and the Partnership of
any event or occurrence not in the ordinary course of business of IWL which
could have a Material Adverse Effect on IWL. Except as expressly contemplated by
this Agreement or as set forth in Section 4.3 of the IWL Disclosure Schedule,
IWL shall not, without the prior written consent of the Company and the
Partnership (which consent shall not require the approval of the Board of
Directors of the Company or the General Partner):
(a) Enter into any commitment or transaction involving more than $500,000
of products and services of IWL;
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(b) Grant any severance or termination pay in excess of $10,000 (i) to any
director or (ii) to any employee, except payments made pursuant to written
agreements outstanding on the date hereof;
(c) Except for End-User Licenses, transfer to any Person any rights to the
IWL Intellectual Property Rights;
(d) Enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing or other rights of any type or scope with respect to
any products of IWL, or IWL terminates or assigns any such agreement;
(e) Violate, amend or otherwise modify the terms of any of the contracts or
agreements required to be set forth in the IWL Disclosure Schedule except in the
ordinary course of business;
(f) Commence any litigation except for normal collection actions, other
than litigation with IEX Corporation or CLG, Inc. arising out of or resulting
from the dispute described in Section 3.9 of the IWL Disclosure Schedule;
(g) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu or in substitution for
shares of capital stock of IWL, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock.
(h) Issue, deliver, sell, grant (whether or not there are shares available
for grant under any stock option plans) or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, except
for the issuance of shares pursuant to the exercise of employee stock options
granted prior to the date hereof;
(i) Except as provided in the Articles of Merger, cause or permit any
amendments to its Articles of Incorporation or Bylaws;
(j) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
IWL;
(k) Sell, lease, license or otherwise dispose of any of its properties or
assets which are material individually or in the aggregate, to the business of
IWL, except in the ordinary course of business;
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of IWL or guarantee any debt
securities of others in excess of $10,000, except pursuant to existing bank
credit facilities, existing lines of credit or other existing agreements
referred to in Section 3.16 of the IWL Disclosure Schedule;
(m) Adopt or amend any employee benefit or option plan, grant any
additional options to acquire shares of capital stock of IWL or any Subsidiary
under any employee benefit or option plans (whether or not the issuance of such
options is authorized by such plans), or enter into any employment contract, pay
any special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its employees other than raises in
compensation payable to employees that are granted on their respective
anniversary dates and are consistent with IWL's past practice;
(n) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;
(o) Pay, discharge or satisfy in an amount in excess of $25,000 in any one
case (or $100,000 in the aggregate) any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or
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otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in the IWL
Financial Statements;
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(q) Take any action which IWL knows or should know would jeopardize the
ability of the parties hereto to account for the Mergers or the Interest
Exchange as a pooling of interests; or
(r) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.3(a) through (q) above, or any action which would make
any of the representations or warranties or covenants of IWL contained in this
Agreement materially untrue or incorrect.
4.4 CONTROL OF OTHER PARTY'S BUSINESS; TRANSITION PLANNING. Nothing
contained in this Agreement shall give IWL, directly or indirectly, the right to
control or direct the Company's or the Partnership's operations prior to the
Effective Time. Nothing contained in this Agreement shall give the Company or
the Partnership, directly or indirectly, the right to control or direct IWL's
operations prior to the Effective Time. Prior to the Effective Time, each of the
Company, the Partnership, and IWL shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision over its
respective operations. Subject to the foregoing, Ignatius W. Leonards, as Chief
Executive Officer of IWL, and Jere W. Thompson, Jr., as President of the
Company, jointly shall be responsible for coordinating all aspects of transition
planning and implementation relating to the Mergers and the Interest Exchange
and the other transactions contemplated hereby. If either such person ceases to
be chief executive officer of his company for any reason, such person's
successor shall assume his predecessor's responsibilities under this Section
4.4. During the period between the date of this Agreement and the Effective
Time, Messrs. Leonards and Thompson jointly shall (i) examine various
alternatives regarding the manner in which to best organize and manage the
businesses of IWL, the Partnership and the Company after the Effective Time and
(ii) coordinate policies and strategies with respect to regulatory authorities
and bodies, in all cases subject to applicable and regulation.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 JOINT PROXY STATEMENT AND THE REGISTRATION STATEMENT.
(a) Holdings shall register the issuance of the shares of Holdings Common
Stock to be issued in the Mergers and the Interest Exchange under the Securities
Act and any blue sky law under which registration or a qualification is
required. In connection therewith, as promptly as practicable after the
execution and delivery of this Agreement, the parties hereto shall prepare and
file with the SEC the Registration Statement, which (i) shall be a Registration
Statement on Form S-4, (ii) shall register the issuance of the shares of
Holdings Common Stock to be issued in the Mergers and the Interest Exchange, and
(iii) shall contain a joint proxy statement/prospectus for IWL, the Company and
the Partnership. The parties shall use commercially reasonable efforts to have
the Registration Statement declared effective by the SEC. Upon the SEC declaring
the Registration Statement effective, IWL, the Company and the Partnership shall
mail to the holders of record of shares of IWL Common Stock, Company Common
Stock and Partnership Interests, the Joint Proxy Statement/Prospectus, provided,
however, that IWL, the Partnership and the Company shall not mail or otherwise
furnish the Joint Proxy Statement/Prospectus to their respective shareholders or
to the Partners unless and until:
(i) IWL shall have received (and included as an exhibit or appendix to
the Joint Proxy Statement/Prospectus) a letter from Cruttenden Roth
Incorporated, dated as of, or within two
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business days preceding, the date of the first mailing of the Joint Proxy
Statement, to the effect set forth in Section 3.7 hereof;
(ii) IWL shall have received a letter of KPMG Peat Marwick, LLP, dated
a date within two business days prior to the date of the first mailing of
the Joint Proxy Statement, and addressed to IWL, in form and substance
reasonably satisfactory to IWL and customary in scope and substance for
"cold comfort" letters delivered by independent public accountants in
connection with registration statements on Form S-4 with respect to the
financial statements of the Company and the Partnership included in the
Joint Proxy Statement and the Registration Statement;
(iii) the Company and the Partnership shall have received a letter of
KPMG Peat Marwick, LLP, dated a date within two business days prior to the
date of the first mailing of the Joint Proxy Statement, and addressed to the
Company and the Partnership, in form and substance reasonably satisfactory
to the Company and the Partnership and customary in scope and substance for
"cold comfort" letters delivered by independent public accountants in
connection with registration statements on Form S-4 with respect to the
financial statements of IWL included in the Joint Proxy Statement and the
Registration Statement;
(iv) each of the IWL Shareholders Agreement and the Owners Agreement
shall have been fully executed and delivered by all signatories thereto;
(v) each of Ignatius W. Leonards, Byron M. Allen, Jere W. Thompson,
Sr., Jere W. Thompson, Jr., Mark Langdale, Tim Rogers, Tim Terrell and Scott
Roberts shall have executed and delivered to Holdings a lock-up agreement in
form and substance reasonably satisfactory to Holdings (provided that the
lock-up period shall expire on or prior to the date that Holdings publicly
announces financial results covering at least 30 days of combined operations
of IWL, the Partnership and the Company); and
(vi) such Joint Proxy Statement/Prospectus shall include audited
financial statements (balance sheets, income statements and statements of
cash flows) for the Company and the Partnership as of and for the fiscal
years ended December 31, 1997, 1996 and 1995 (which shall have been audited
by KPMG Peat Marwick, LLP).
(b) The parties hereto will use their respective best efforts to cause the
letters referred to in clauses (ii) and (iii) above to be delivered and will
cooperate in the preparation of the Joint Proxy Statement and the Registration
Statement and in having the Registration Statement declared effective as soon as
practicable.
5.2 IWL AND COMPANY SHAREHOLDERS' MEETINGS, PARTNERS' MEETING, AND
CONSUMMATION OF THE MERGERS AND THE INTEREST EXCHANGE.
(a) At the earliest reasonably practicable time following the execution and
delivery of this Agreement, each of IWL and the Company shall promptly take all
action necessary in accordance with the TBCA and its Articles of Incorporation
and Bylaws to convene a meeting of their respective shareholders (each, a
"Shareholders Meeting"). Each of IWL and the Company shall use all commercially
reasonable efforts to solicit from its respective shareholders proxies to be
voted at its Shareholders Meeting in favor of this Agreement pursuant to the
Joint Proxy Statement and each of IWL and the Company shall include in the Joint
Proxy Statement the recommendation of its Board of Directors in favor of this
Agreement and the Mergers. Each of the parties hereto shall take all other
action necessary or, in the opinion of the other parties, reasonably advisable
to promptly and expeditiously secure any vote or consent of shareholders
required by the TBCA and such party's Articles of Incorporation and Bylaws to
effect the Mergers. At the earliest reasonably practicable time following the
execution and delivery of this Agreement, the Partnership shall promptly take
all action necessary in accordance with the Texas Revised Limited Partnership
Act ("TRLPA") and its Agreement of Limited Partnership to convene a meeting of
the Partners. The
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Partnership shall use all commercially reasonable efforts to solicit from its
Partners proxies to be voted at such meeting in favor of this Agreement and the
Interest Exchange pursuant to the Joint Proxy Statement.
(b) Upon the terms and subject to the conditions hereof and as soon as
practicable after the conditions set forth in Article VI hereof have been
fulfilled or waived, each of the parties shall execute in the manner required by
the TBCA and TRLPA and deliver to and file with the Secretary of State of the
State of Texas, such instruments and agreements as may be required by the TBCA
and TRLPA, and the parties shall take all such other and further actions as may
be required by law to make the Mergers and the Interest Exchange effective.
5.3 ACCESS TO INFORMATION. Each of the parties hereto shall afford the
other parties and their respective accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of its properties, books,
contracts, commitments and records, and (b) all other information concerning the
business, properties and personnel of such party as may be reasonably requested.
IWL, the Partnership and the Company agree to provide to the other parties'
respective accountants, counsel and other representatives copies of internal
financial statements promptly upon reasonable request. No information or
knowledge obtained in any investigation pursuant to this Section 5.3 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Mergers and
the Interest Exchange.
5.4 CONFIDENTIALITY. From the date hereof to and including the Effective
Time, the parties hereto shall maintain, and cause their directors, officers,
employees, agents and advisors to maintain, in confidence and not disclose or
use for any purpose, except the evaluation of the transactions contemplated
hereby and the accuracy of the respective representations and warranties of the
parties hereto contained herein, information concerning the other parties hereto
and obtained directly or indirectly from such parties, or their directors,
officers, employees, agents or advisors, except such information as is or
becomes (a) available to the non-disclosing party from third parties not subject
to an undertaking of confidentiality or secrecy; (b) generally available to the
public other than as a result of a breach by the non-disclosing party hereunder;
or (c) required to be disclosed under applicable law; and except such
information as was in the possession of such party prior to obtaining such
information from such other party as to which the fact of prior possession such
possessing party shall have the burden of proof. Each of IWL, the Company and
the Partnership agrees that all information so received from the other party
shall be deemed received pursuant to the confidentiality agreement, dated
December 2, 1997, heretofore executed and delivered by IWL and the Company (the
"Confidentiality Agreement") and such party shall, and shall cause its
Subsidiaries and each of its and their respective officers, directors,
employees, financial advisors and agents, to comply with the provisions of the
Confidentiality Agreement with respect to such information and the provisions of
the Confidentiality Agreement are hereby incorporated herein by reference with
the same effect as if fully set forth herein. In the event that the transactions
contemplated hereby shall not be consummated, all such information which shall
be in writing shall be returned to the party furnishing the same, including to
the extent reasonably practicable, copies or reproductions thereof which may
have been prepared.
5.5 EXPENSES. Subject to Section 5.12, whether or not the Mergers and the
Interest Exchange are consummated, all expenses incurred in connection with this
Agreement shall be the obligation of the party incurring such expenses, except
that expenses incurred in connection with the printing of the Joint Proxy
Statement and the Registration Statement shall be shared equally by IWL and the
Company.
5.6 PUBLIC DISCLOSURE. Unless otherwise required by law or the
requirements of the Nasdaq National Market, prior to the Effective Time, no
disclosure (whether or not in response to an inquiry) of the subject matter of
this Agreement shall be made by any party hereto unless approved by IWL, the
Company and the Partnership prior to release, provided that such approval shall
not be unreasonably withheld. Notwithstanding the above, the IWL may make such
public disclosures without the consent of
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the Company to the extent reasonably necessary to comply with IWL's securities
laws disclosure requirements, as determined by IWL.
5.7 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, as promptly as practicable after the date hereof, IWL, the Company and
the Partnership shall (a) use all commercially reasonable efforts to cooperate
with each other in (i) determining which filings are required to be made prior
to the Closing Date with, and which material consents, approvals, permits, or
authorizations are required to be obtained prior to the Closing Date from,
governmental or regulatory authorities of the United States, the several states
or the District of Columbia, the Commonwealth of Puerto Rico, and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby and (ii) timely
making all such filings and timely seeking all such consents, approvals,
permits, or authorizations, including without limitation all applicable state
regulatory approvals, and (b) use all commercially reasonable efforts to take,
or cause to be taken, all other actions and do, or cause to be done, all other
things necessary or appropriate to consummate the transactions contemplated by
this Agreement, as soon as practicable. The parties acknowledge that certain
actions may be necessary with respect to the foregoing in making notifications
and obtaining clearances, consents, approvals, waivers, or similar third party
actions that are material to the consummation of the transactions contemplated
hereby, and each party agrees to take all commercially reasonable actions as are
necessary to complete such notifications and obtain such clearances, approvals,
waivers, or third party actions except where such consequence, event, or
occurrence would not have a Material Adverse Effect on IWL, the Company or the
Partnership, as the case may be.
5.8 AFFILIATE AGREEMENT. Each of the Company and IWL shareholders and each
of the Partners designated by Holdings as an "Affiliated Shareholder " (the
"Affiliated Shareholders") agrees to execute, on or prior to the Effective Time,
an Affiliate Agreement with respect to Rule 145 under the Securities Act in the
form agreed upon by the parties hereto. Holdings shall be entitled to place on
the certificates evidencing any Holdings Common Stock to be received by any
Affiliated Shareholder pursuant to the terms of this Agreement the legends set
forth in the Affiliate Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for Holdings Common Stock, consistent with
the terms of such Affiliate Agreement.
5.9 COMPLIANCE.
(a) In consummating the Mergers, the Interest Exchange and the other
transactions contemplated hereby, the Company and the Partnership shall comply
in all material respects with the provisions of the Exchange Act and the
Securities Act and shall comply, and/or cause its Subsidiaries to comply or to
be in compliance, in all material respects, with all other applicable laws.
(b) In consummating the Mergers, the Interest Exchange and the other
transactions contemplated hereby, IWL shall comply in all material respects with
the provisions of the Exchange Act and the Securities Act and shall comply,
and/or cause its Subsidiaries (including the Merger Subsidiaries) to comply or
to be in compliance, in all material respects, with all other applicable laws.
5.10 BLUE SKY LAWS. Holdings shall take such steps as may be necessary to
comply with the federal securities laws and with the securities and blue sky
laws of all other jurisdictions which are applicable to the issuance of Holdings
Common Stock pursuant hereto (such determination shall be made based on the
shareholder and optionee addresses furnished to Holdings by IWL and the
Company). IWL, the Company and the Partnership shall use commercially reasonable
efforts to assist Holdings as may be necessary to comply with the federal
securities laws and with the securities and blue sky laws of all other
jurisdictions which are applicable in connection with the issuance of Holdings
Common Stock pursuant hereto.
5.11 BEST EFFORTS, ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each of
the parties to this Agreement shall use commercially reasonable efforts to
effectuate the transactions contemplated hereby and to fulfill and cause to be
fulfilled the conditions to closing under this Agreement. Each party hereto, at
the
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request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.12 EMPLOYMENT AGREEMENTS. On or prior to the date hereof, each of
Ignatius W. Leonards, Byron M. Allen, Errol Olivier, Richard H. Roberson and
Bryan Olivier, who are currently IWL employees, and Jere W. Thompson, Jr., Scott
Roberts, Tim Rogers and Tim Terrell, who are currently Company employees, shall
enter into an employment agreement (which shall include covenants not to
compete) in substantially the form attached hereto as Exhibit 5.12 with Holdings
(the "Employment Agreements"). None of such employees shall have any right,
remedy or cause of action under this Section 5.12, nor shall they be third party
beneficiaries of this Section 5.12. Prior to the Effective Time, the Company
shall bear and be responsible for the performance of all of Holdings'
obligations under the Employment Agreements with the Company employees and IWL
shall bear and be responsible for the performance of all of Holdings'
obligations under the Employment Agreements with the IWL employees, in each case
including without limitation obligations to pay base compensation and bonus (if
any), tax withholding and payment obligations (including with respect to FICA,
Medicare and all other similar taxes) and employee expense reimbursement
obligations. Prior to the Effective Time, each of IWL and the Company shall
reimburse the other for any expenses incurred by the other that were the
responsibility hereunder of IWL or the Company, as the case may be.
5.13 POOLING ACCOUNTING. IWL, the Partnership and the Company shall each
use commercially reasonable efforts to cause the business combination to be
effected by the Mergers and the Interest Exchange to be accounted for as a
pooling of interests. Each of IWL, the Partnership and the Company shall use
commercially reasonable efforts to cause its "affiliates" (within the meaning of
Rule 145 promulgated under the Securities Act) not to take any action that would
adversely affect the ability of the parties hereto to account for the business
combination to be effected by the Mergers and the Interest Exchange as a pooling
of interests. The Affiliate Agreements to be entered into by the Affiliated
Shareholders shall require the Affiliated Shareholders not to sell, exchange,
transfer, pledge, dispose of, offer for sale or grant an option to purchase any
shares of the Holdings Common Stock during the period which begins on the date
hereof and ends on the third day after Holdings publicly announces financial
results covering at least 30 days of combined operations of IWL, the Partnership
and the Company.
5.14 NASDAQ LISTING. Holdings agrees to use its best efforts to authorize
for listing on the Nasdaq National Market the shares of Holdings Common Stock
issuable, and those required to be reserved for issuance, in connection with the
Mergers and the Interest Exchange, upon official notice of issuance.
5.15 POST-MERGER BOARD OF DIRECTORS AND OFFICERS OF HOLDINGS. Following
the Effective Time, Holdings shall use commercially reasonable efforts to (a)
cause the Board of Directors of Holdings to consist of Ignatius W. Leonards,
Byron M. Allen, Jere W. Thompson, Jr., Mark Langdale, Tim Rogers, one outside
director designated by IWL and one outside director designated by the Company
(provided that IWL and the Company shall each have the right to veto the other's
designee) and (b) cause the officers of Holdings to consist of Jere W. Thompson,
Jr., Chief Executive Officer, Ignatius W. Leonards, President, Byron M. Allen,
Executive Vice President, and Richard H. Roberson, Controller, Treasurer and
Secretary. Holdings shall take all action necessary to amend its Articles of
Incorporation as of the Effective Time to change its name to "CapRock
Communications Corp." or such other name as may be agreed upon by the parties.
5.16 NO REGISTRATION RIGHTS. Holdings shall not be required to amend or
maintain the effectiveness of the Registration Statement for any purposes,
including without limitation for the purpose of permitting resale of the shares
of Holdings Common Stock received pursuant hereto by the Persons who may be
deemed to be "affiliates" of Holdings, IWL, the Company or the Partnership
within the meaning of Rule 145 promulgated under the Securities Act.
5.17 NOTIFICATION OF CERTAIN MATTERS. Each of IWL, the Partnership and the
Company shall give prompt notice to the other of the following:
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(a) the occurrence or nonoccurrence of any event whose occurrence or
nonoccurrence would be likely to cause either (i) any representation or warranty
of such party contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time, or (ii)
directly or indirectly, any Material Adverse Effect with respect to such party;
(b) any material failure of such party, or any officer, director, employee
or agent of any thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder;
(c) any facts relating to such party which would make it necessary or
advisable to amend the Joint Proxy Statement or the Registration Statement in
order to make the statements therein not misleading or to comply with applicable
law;
(d) any notice of, or other communication relating to, a default or event
which, with notice or lapse of time or both, would become a default, received by
it or any of its Subsidiaries subsequent to the date of this Agreement and prior
to the Effective Time, under any contract or agreement material to the financial
condition, properties, businesses or results of operations of it and its
Subsidiaries taken as a whole to which it or any of its Subsidiaries is a party
or is subject; and
(e) any notice or other communication from any third party alleging that
the consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement; provided, however, that the
delivery of any notice pursuant to this Section 5.17 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
ARTICLE VI
CONDITIONS TO THE MERGERS AND THE INTEREST EXCHANGE
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGERS AND THE
INTEREST EXCHANGE. The respective obligations of each party to this Agreement
to effect the Mergers and the Interest Exchange shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) SHAREHOLDER APPROVAL. The Mergers and the Interest Exchange and
this Agreement shall have been approved and adopted by the requisite vote of
the shareholders of each of IWL and the Company in accordance with the TBCA
and of the Partners in accordance with TRLPA and/or the Agreement of Limited
Partnership of the Partnership;
(b) LEGALITY. No federal, state or foreign statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the Mergers and the Interest Exchange
illegal or otherwise prohibiting the consummation of the Mergers and the
Interest Exchange;
(c) REGULATORY MATTERS. All authorizations, consents, orders or
approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental body, agency or official (all
of the foregoing, "Consents") which are necessary for the consummation of
the transactions contemplated hereby (including any consents or approvals
required by the FCC or any state public utility commissions), other than
immaterial Consents the failure to obtain which would have no material
adverse effect on the consummation of the transactions contemplated hereby
and no Material Adverse Effect on Holdings or the Surviving Corporations,
shall have been filed, have occurred or have been obtained (all such
permits, approvals, filings and consents and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals") and all
such Requisite Regulatory Approvals shall be in full force and effect,
provided, however, that a Requisite Regulatory Approval shall not be deemed
to have been obtained if in connection with the grant thereof there shall
have been an imposition by any state or federal governmental body, agency or
official of any condition, requirement, restriction or change of regulation,
or any other action directly
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or indirectly related to such grant taken by such governmental body, which
would reasonably be expected to either (i) have a Material Adverse Effect on
Holdings or the Surviving Corporations, or (ii) prevent the parties hereto
from realizing in all material respects the economic benefits of the
transactions contemplated by this Agreement that such parties currently
anticipate receiving therefrom; provided further, however, that until such
time as the Requisite Regulatory Approvals have been obtained, there shall
be no change in the ownership or management of IWL, the Company or the
Partnership and no transfer of control whatsoever over the governmental
authorizations held by IWL, the Company or the Partnership except insofar as
such change in ownership or management or transfer of control may be
completed without obtaining regulatory approval in order to comply with
applicable federal, state and local laws, rules, regulations and policies;
(d) REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective prior to the mailing by IWL, the Company and the
Partnership of the Joint Proxy Statement to their respective shareholders
and Partners, as applicable, no stop order suspending the effectiveness of
the Registration Statement shall then be in effect, and no proceedings for
that purpose shall then be threatened by the SEC or shall have been
initiated by the SEC and not concluded or withdrawn;
(e) BLUE SKY. All state securities or blue sky permits or approvals
required to carry out the transactions contemplated hereby shall have been
received;
(f) NASDAQ LISTING. The shares of Holdings Common Stock into which the
shares of IWL Common Stock, Company Common Stock and Partnership Interests
will be converted pursuant to Article II hereof and the shares of Holdings
Common Stock issuable upon the exercise of Holdings Options pursuant to
Section 1.6 hereof shall have been duly approved for listing on the Nasdaq
National Market, subject to official notice of issuance; and
(g) LOCK-UP AGREEMENTS. All of the lock-up agreements required to be
executed pursuant to Section 5.1(a) shall have been executed and delivered
to Holdings.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE
PARTNERSHIP. The obligations of the Company and the Partnership to consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company and the Partnership:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of IWL and the Merger Subsidiaries in this Agreement shall be
true and correct in all material respects on and as of the Effective Time as
though such representations and warranties were made on and as of such time
and IWL and the Merger Subsidiaries shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by them as of the
Effective Time.
(b) CERTIFICATE OF IWL. Each of the Company and the Partnership shall
have been provided with a certificate executed on behalf of IWL by its Chief
Executive Officer or its Chief Financial Officer to the effect that, as of
the Effective Time:
(i) all representations and warranties made by IWL and the Merger
Subsidiaries under this Agreement are true and complete in all material
respects; and
(ii) all covenants, obligations and conditions of this Agreement to be
performed by IWL and the Merger Subsidiaries on or before such date have
been so performed in all material respects.
(c) LEGAL OPINIONS. (i) The Company and the Partnership shall have
received a legal opinion from Munsch Hardt Kopf Harr & Dinan, P.C. and from
IWL's regulatory counsel as to corporate and regulatory matters, each dated
as of the Closing Date and each in form and substance reasonably
satisfactory to the Company and the Partnership; (ii) the Company and the
Partnership shall have received an opinion from Hughes & Luce, L.L.P.,
counsel to the Company and the Partnership, dated
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as of the Closing Date, in form and substance reasonably satisfactory to the
Company and the Partnership, substantially to the effect that, on the basis
of the facts, representations and assumptions set forth in such opinion: (A)
no gain or loss will be recognized for federal income tax purposes by
Holdings, the Company or C-Sub as a result of the formation of Holdings and
C-Sub and the Merger of C-Sub with and into the Company; (B) no gain or loss
will be recognized for federal income tax purposes by the shareholders of
the Company upon their exchange of Company Common Stock for the Company
Merger Consideration pursuant to such Company Merger; and (C) no gain or
loss will be recognized for federal income tax purposes by the Partners upon
their exchange of Partnership Interests for shares of Holdings Common Stock
pursuant to the Interest Exchange; and (iii) IWL shall have received the
opinion described in Section 6.3(e)(ii) hereof, in form and substance
reasonably satisfactory to the Company.
(d) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
event, fact or condition that has had or reasonably would be expected to
have a Material Adverse Effect on IWL.
(e) SATISFACTORY FORM OF LEGAL AND ACCOUNTING MATTERS. The form, scope
and substance of all legal, tax and accounting matters contemplated hereby
and all closing documents and other papers delivered hereunder shall be
reasonably acceptable to the Company's and the Partnership's counsel and
accountants.
(f) AFFILIATE AGREEMENTS. The Company and the Partnership shall have
received from each IWL Affiliated Shareholder an executed Affiliate
Agreement, which shall be in full force and effect.
(g) EMPLOYMENT AGREEMENTS. The Employment Agreements shall have been
duly executed and delivered and shall be in full force and effect.
(h) IWL SHAREHOLDERS AGREEMENT. The IWL Shareholders Agreement shall
have been executed and delivered to the Company and the Partnership on or
prior to the date hereof.
(i) POOLING OF INTERESTS LETTER. Each of the Company and the
Partnership shall have received a letter from KPMG Peat Marwick, LLP to the
effect that the Mergers and the Interest Exchange qualify for "pooling of
interests" accounting treatment under Accounting Principles Board Opinion
No. 16 if consummated in accordance with this Agreement.
(j) RELEASE OF GUARANTIES. The guaranties made by Mr. Jere W.
Thompson, Jr. and Mr. Mark Langdale of the indebtedness of the Partnership
to Bank One Texas, N.A. shall have been released and terminated.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF IWL AND THE MERGER
SUBSIDIARIES. The obligations of IWL and the Merger Subsidiaries to consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
IWL:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of the Company and the Partnership in this Agreement shall be
true and correct in all material respects on and as of the Effective Time as
though such representations and warranties were made on and as of such time,
and the Company and the Partnership shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it as of the
Effective Time.
(b) CERTIFICATE OF THE COMPANY AND THE PARTNERSHIP. IWL and the Merger
Subsidiaries shall have been provided with certificates executed on behalf
of the Company by its President and the Partnership by its General Partner
to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and the
Partnership under this Agreement are true and complete in all material
respects; and
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(ii) all covenants, obligations and conditions of this Agreement to be
performed by the Company or the Partnership, as the case may be, on or
before such date have been so performed in all material respects.
(c) THIRD PARTY CONSENTS. The Company and the Partnership shall have
obtained the consents listed in Section 6.3(c) of the Company and
Partnership Disclosure Schedule, as well as the consent or approval of each
other Person whose consent or approval shall be required under any agreement
or instrument in order to permit the consummation of the transactions
contemplated hereby except those which the failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect on Holdings
or the Surviving Corporations.
(d) SATISFACTORY FORM OF LEGAL AND ACCOUNTING MATTERS. The form, scope
and substance of all legal, tax and accounting matters contemplated hereby
and all closing documents and other papers delivered hereunder shall be
reasonably acceptable to IWL's counsel and accountants.
(e) LEGAL OPINIONS. (i) IWL and the Merger Subsidiaries shall have
received a legal opinion from Hughes & Luce, L.L.P. and from regulatory
counsel to the Company and the Partnership as to corporate and regulatory
matters, each dated as of the Closing Date and each in form and substance
reasonably satisfactory to IWL; (ii) IWL shall have received an opinion from
Munsch Hardt Kopf Harr & Dinan, P.C., dated as of the Closing Date in form
and substance reasonably satisfactory to the Company and the Partnership,
substantially to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion: (A) no gain or loss will be
recognized for federal income tax purposes by Holdings, IWL or I-Sub as a
result of the formation of Holdings and I-Sub and the Merger of I-Sub with
and into IWL; and (B) no gain or loss will be recognized for federal income
tax purposes by the shareholders of IWL upon their exchange of IWL Common
Stock solely for Holdings Common Stock pursuant to such IWL Merger; and
(iii) the Company and the Partnership shall have received the opinion
described in Section 6.2(c)(ii) hereof, in form and substance reasonably
satisfactory to IWL.
(f) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
event, fact or condition which has had or reasonably would be expected to
have a Material Adverse Effect on Holdings, the Company, the Partnership or
the Surviving Corporations since the date hereof.
(g) AFFILIATE AGREEMENTS. IWL shall have received from each Company
and Partnership Affiliated Shareholder an executed Affiliate Agreement,
which shall be in full force and effect.
(h) EMPLOYMENT AGREEMENTS. The Employment Agreements shall have been
duly executed and delivered and shall be in full force and effect.
(i) OWNERS AGREEMENT. The Owners Agreement shall have been executed
and delivered to IWL on or prior to the date hereof.
(j) CONTRIBUTION AGREEMENTS. Each Partner shall have executed and
delivered to IWL a Contribution Agreement in respect of such Partner's
Partnership Interest, shall have consented to the transfers of Partnership
Interests contemplated by the Interest Exchange and shall have consented to
the substitution of the Company as the new General Partner of the
Partnership and of Holdings as the new limited partner of the Partnership.
(k) POOLING ACCOUNTING. IWL shall have received a letter from KPMG
Peat Marwick, LLP to the effect that the Mergers and the Interest Exchange
qualify for "pooling of interests" accounting treatment under Accounting
Principles Board Opinion No. 16 if consummated in accordance with this
Agreement.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time before the
Effective Time, in each case as authorized by the respective Board of Directors
of IWL or the Company or by the General Partner:
(a) By mutual written consent of each of IWL, the Company and the General
Partner;
(b) By either IWL, on the one hand, or the Company and the Partnership, on
the other hand, if the Mergers and the Interest Exchange shall not have been
consummated on or before December 31, 1998 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date; and provided,
further, that if on the Termination Date the conditions to the Closing set forth
in Section 6.1(c) shall not have been fulfilled, but all other conditions to the
Closing shall be fulfilled or shall be capable of being fulfilled, then the
Termination Date shall be extended to a date that is one year from the date
hereof;
(c) By either IWL, the Company or the Partnership if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action (which
order, decree or ruling the parties hereto shall use their commercially
reasonable efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order, decree, ruling or other action shall have become final and nonappealable;
(d) By either IWL, on the one hand, or the Company and the Partnership, on
the other hand, if another party shall have breached, or failed to comply with,
in any material respect any of its obligations under this Agreement or any
representation or warranty made by such party shall have been incorrect in any
material respect when made or shall have since ceased to be true and correct in
any material respect, and such breach, failure or misrepresentation is not cured
within 30 days after notice thereof and such breaches, failures or
misrepresentations, individually or in the aggregate and without regard to
materiality qualifiers contained therein, results or would reasonably be
expected to result in a Material Adverse Effect on IWL, on the one hand, or the
Company or the Partnership, on the other hand, as the case may be;
(e) By either IWL, on the one hand, or the Company and the Partnership, on
the other hand, upon the occurrence of a Material Adverse Effect on another
party or an event which could reasonably be expected to result in a Material
Adverse Effect on the other;
(f) (i) by IWL (A) if the Board of Directors or any committee of the Board
of Directors of the Company or the General Partner (w) shall withdraw or modify
in any adverse manner its approval or recommendation of this Agreement or the
Mergers or the Interest Exchange, (x) shall fail to reaffirm such approval or
recommendation upon IWL's request, (y) shall approve or recommend any
acquisition of the Company or the Partnership or a material portion of their
respective assets or any tender offer for shares of their capital stock or
partnership interests, in each case, other than by a party hereto or an
affiliate thereof, or (z) shall resolve to take any of the foregoing specified
actions or (B) if the Board of Directors or any committee of the Board of
Directors of IWL (x) shall withdraw or modify in any adverse manner its approval
or recommendation of this Agreement or the Mergers or the Interest Exchange, (y)
shall approve or recommend any acquisition of IWL or a material portion of its
assets or any tender offer for shares of its capital stock, in each case, other
than by a party hereto or an affiliate thereof, or (z) shall resolve to take any
of the foregoing specified actions; or (ii) by the Company and the Partnership
(A) if the Board of Directors or any committee of the Board of Directors of IWL
(w) shall withdraw or modify in any adverse manner its approval or
recommendation of this Agreement or the Mergers or the Interest Exchange, (x)
shall fail to reaffirm such approval or recommendation upon the request of the
Company or the Partnership, (y) shall approve or recommend any acquisition of
IWL or a material portion of its assets or
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any tender offer for shares of its capital stock, in each case, other than by a
party hereto or an affiliate thereof, or (z) shall resolve to take any of the
foregoing specified actions or (B) if the Board of Directors or any committee of
the Board of Directors of the Company or the General Partner (x) shall withdraw
or modify in any adverse manner its approval or recommendation of this Agreement
or the Mergers or the Interest Exchange, (y) shall approve or recommend any
acquisition of the Company or the Partnership or a material portion of their
respective assets or any tender offer for shares of their capital stock or
partnership interests, in each case, other than by a party hereto or an
affiliate thereof, or (z) shall resolve to take any of the foregoing specified
actions;
(g) By either (i) IWL (A) if any of the required approvals of the
shareholders or Partners, as the case may be, of the Company and the
Partnership, as the case may be, shall fail to have been obtained at a duly held
shareholders or Partners' meeting, as the case may be, of the Company or the
Partnership, including any adjournments thereof, or (B) if the required approval
of the shareholders of IWL shall fail to have been obtained at a duly held
shareholders meeting of IWL, including any adjournments thereof; or (ii) the
Company and the Partnership (A) if any of the required approvals of the
shareholders or Partners, as the case may be, of the Company and the
Partnership, as the case may be, shall fail to have been obtained at a duly held
shareholders or Partners' meeting, as the case may be, of the Company or the
Partnership, including any adjournments thereof, or (B) if the required approval
of the shareholders of IWL shall fail to have been obtained at a duly held
shareholders meeting of IWL, including any adjournments thereof;
(h) By the Company or the Partnership, prior to the approval of this
Agreement by the shareholders of the Company or the Partners, as the case may
be, upon two business days' prior notice to IWL, if, as a result of an
Acquisition Proposal received by the Company or the Partnership from a Person
other than a party to this Agreement or any of its affiliates, the Board of
Directors of the Company or the General Partner, as the case may be, determines
in good faith, on the basis of oral or written advice of outside counsel, that
their fiduciary obligations under applicable law require that such Acquisition
Proposal be accepted; provided, however, that (i) the Board of Directors of the
Company or the General Partner shall have concluded in good faith, after
considering applicable provisions of law, on the basis of oral or written advice
of outside counsel, that such action is necessary for the Board of Directors or
the General Partner to act in a manner consistent with its fiduciary duties
under applicable law and (ii) prior to any such termination, the Company or the
Partnership shall, and shall cause its respective financial and legal advisors
to, negotiate with IWL to adjust the terms and conditions of this Agreement to
provide the opportunity for the Company or the Partnership to proceed with the
transactions contemplated hereby; or
(i) By IWL, prior to the approval of this Agreement by the shareholders of
the IWL upon two business days' prior notice to the Company and the Partnership,
if, as a result of an Acquisition Proposal received by IWL from a Person other
than a party to this Agreement or any of its affiliates, the Board of Directors
of IWL determines in good faith, on the basis of oral or written advice of
outside counsel that their fiduciary obligations under applicable law require
that such Acquisition Proposal be accepted; provided however, that (i) the Board
of Directors of IWL shall have concluded in good faith, after considering
applicable provisions of law, on the basis of oral or written advice of outside
counsel, that such action is necessary for the Board of Directors to act in a
manner consistent with its fiduciary duties under applicable law and (ii) prior
to any such termination, IWL shall, and shall cause its respective financial and
legal advisors to, negotiate with the Company and the Partnership to adjust the
terms and conditions of this Agreement to provide the opportunity for IWL to
proceed with the transactions contemplated hereby;
provided further, however, that no termination shall be effective pursuant to
Sections 7.1(f), (g), (h) or (i) under circumstances in which a termination fee
is payable by IWL, on the one hand, or the Company and the Partnership, on the
other hand, under Section 7.2(b) or (c) unless concurrently with such
termination, such termination fee is paid in full by IWL, on the one hand, or
the Company and the Partnership, on the other hand, in accordance with the
provisions of Sections 7.2(b) or (c), as applicable.
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7.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section
7.1 hereof, and subject to the provisions of Section 8.1 hereof, this Agreement
shall forthwith become void and there shall be no liability on the part of any
of the parties hereto, except (i) as set forth in this Section 7.2 and in
Sections 2.19, 2.24, 2A.18, 2A.23, 3.5, 3.6 and 8.10 hereof, and (ii) nothing
herein shall relieve any party hereto from liability for any willful breach
hereof.
(b) If (i) this Agreement (A) is terminated by IWL pursuant to Section
7.1(f)(i)(A) or Section 7.1(g)(i)(A) or by the Company or the Partnership
pursuant to Section 7.1(f)(ii)(B), Section 7.1(g)(ii)(A) or Section 7.1(h)
hereof, or (B) is terminated as a result of the Company's or the Partnership's
material breach of Section 5.2 hereof which is not cured within 30 days after
notice thereof to the Company or the Partnership, as appropriate, and (ii) at
the time of such termination or prior to the meeting of the Company's
shareholders or the Partners there shall have been an Acquisition Proposal
involving the Company or any of its Subsidiaries or the Partnership (whether or
not such offer shall have been rejected or shall have been withdrawn prior to
the time of such termination or of the meeting), the Company or the Partnership,
as the case may be, shall pay to IWL a termination fee of $2.5 million, which
shall be payable in cash at the date of termination.
(c) If (i) this Agreement (A) is terminated by the Company or the
Partnership pursuant to Section 7.1(f)(ii)(A) or Section 7.1(g)(ii)(B) or by IWL
pursuant to Section 7.1(f)(i)(B), Section 7.1(g)(i)(B) or Section 7.1(i), or (B)
is terminated as a result of IWL's material breach of Section 5.2 hereof which
is not cured within 30 days after notice thereof to IWL, and (ii) at the time of
such termination or prior to the meeting of IWL's shareholders there shall have
been an Acquisition Proposal involving IWL or any of its Subsidiaries (whether
or not such offer shall have been rejected or shall have been withdrawn prior to
the time of such termination or of the meeting), IWL shall pay to the Company
and the Partnership an aggregate termination fee of $2.5 million, which shall be
payable in cash at the date of termination.
(d) The Company, the Partnership, and IWL agree that the agreements
contained in Section 7.2(b) and Section 7.2(c) above are an integral part of the
transactions contemplated by this Agreement and constitute liquidated damages
and not a penalty. If any party fails to promptly pay any fee due under Section
7.2(b) or Section 7.2(c), then such party shall pay the costs and expenses
(including reasonable legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced prime rate of Bank One Texas, N.A. from the date such fee was required
to be paid.
7.3 AMENDMENT. This Agreement may be amended by the parties hereto
pursuant to a writing adopted by action taken by all of the parties at any time
before the Effective Time; provided, however, that, after approval of the
Mergers and the Interest Exchange by the shareholders of IWL or the Company or
the Partners, whichever shall occur first, no amendment may be made which would
(a) alter or change the amount or kinds of consideration to be received by the
holders of shares of IWL Common Stock or Company Common Stock and the
Partnership Interests upon consummation of the Mergers and the Interest
Exchange, (b) alter or change any term of the Articles of Incorporation of the
Surviving Corporations, or (c) alter or change any of the terms and conditions
of this Agreement if such alteration or change would adversely affect the
holders of any class or series of securities of Holdings, IWL, the Company or
the Partnership. This Agreement may not be amended except by an instrument in
writing signed by the parties.
7.4 WAIVER. At any time before the Effective Time, any party may (a)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party to any such extension or waiver shall be valid
only as against such party and only if set forth in an instrument in writing
signed by such party.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All covenants to be
performed prior to the Effective Time, and all representations and warranties in
this Agreement or in any instrument delivered pursuant to this Agreement
(including the Affiliate Agreements) shall survive the Mergers and the Interest
Exchange and continue until the earlier of (i) the date one year following the
Effective Time or (ii) the date Holdings publicly announces financial results
covering at least 30 days of combined operations of IWL, the Partnership and the
Company, provided that any representation or warranty relating or pertaining to
Company Taxes shall terminate upon the expiration of all applicable statutes of
limitations relevant to Company Taxes or Tax matters. All covenants to be
performed after the Effective Time shall continue indefinitely.
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given and received if delivered personally or by
commercial delivery service, or three business days after being mailed by
registered or certified mail (return receipt requested) or sent via telecopy to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to IWL or any Merger Subsidiary, to:
IWL Communications, Inc.
12000 Aerospace Avenue, Suite 200
Houston, Texas 77034
Attn: Chief Executive Officer
Facsimile No.: (281) 929-1004
with a copy to:
Munsch Hardt Kopf Harr & Dinan, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, Texas 75202-2790
Attn: A. Michael Hainsfurther, Esq.
Facsimile No.: (214) 855-7584
(b) if to the Company, to:
CapRock Communications Corp.
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
Attn: Jere W. Thompson, Jr.
Facsimile No.: (972) 788-4243
or if to the Partnership, to:
CapRock Fiber Network, Ltd.
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
Attn: Jere W. Thompson, Jr.
Facsimile No.: (972) 788-4243
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each with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attn: Dudley W. Murrey, Esq.
Facsimile No.: (214) 939-6100
8.3 INTERPRETATION. When a reference is made in this Agreement to
Schedules or Exhibits, such reference shall be to a Schedule or Exhibit to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The Disclosure Schedules and
Exhibits to this Agreement are hereby incorporated by reference into and made a
part of this Agreement for all purposes.
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 MISCELLANEOUS. This Agreement and the documents and instruments and
other agreements among the parties hereto (including the Confidentiality
Agreement) (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral among the parties with respect to the subject matter
hereof, including the parties' letter of intent with respect to this
transaction, but excluding the Confidentiality Agreement; (b) are not intended
to confer upon any other Person any rights or remedies hereunder; and (c) shall
not be assigned by operation of law or otherwise except as otherwise
specifically provided.
8.6 GOVERNING LAW. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Texas. All parties hereto agree to submit to the jurisdiction of the federal and
state courts of the State of Texas, and further agree that service of documents
commencing any suit therein may be made as provided in Section 8.2.
8.7 ATTORNEYS' FEES. If any party to this Agreement brings an action
against another party to this Agreement to enforce its rights under this
Agreement, the prevailing party shall be entitled to recover its reasonable
costs and expenses, including reasonable attorneys' fees and costs, incurred in
connection with such action, including any appeal of such action.
8.8 ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, shall be settled by arbitration in Dallas,
Texas, in accordance with the rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
8.9 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the
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parties hereto as closely as possible in an acceptable manner to the end that
the transactions contemplated hereby are fulfilled to the maximum extent
possible.
8.11 DEFINITIONS. Terms used herein with initial capital letters shall
have the respective meanings set forth below:
"Acquisition Proposal" shall mean a proposal or offer for a tender or
exchange offer, merger, consolidation or other business combination involving
the Company or the Partnership or any proposal to acquire in any manner a
substantial equity interest in, or all or substantially all of the assets of the
Company or the Partnership.
"Affiliated Shareholders" has the meaning set forth in Section 5.8.
"Agreement" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Articles of Merger" shall have the meaning set forth in Section 1.2(a).
"Closing" shall have the meaning set forth in Section 1.2(c).
"Closing Date" shall have the meaning set forth in Section 1.2(c).
"COBRA" shall have the meaning set forth in Section 2.20.
"Code" shall have the meaning set forth in Recital F to this Agreement.
"Company" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"Company Authorizations" shall have the meaning set forth in Section 2.14.
"Company Balance Sheet" shall have the meaning set forth in Section 2.5.
"Company Commercial Software Rights" shall have the meaning set forth in
Section 2.11(b).
"Company Common Stock" shall have the meaning set forth in Section 1.6(a).
"Company Disclosure Schedule" shall have the meaning set forth in the
introductory paragraph of Article II.
"Company Employee Plans" shall have the meaning set forth in Section
2.27(a).
"Company Equity Rights" shall have the meaning set forth in Section 2.3(a).
"Company ERISA Affiliates" shall have the meaning set forth in Section
2.27(a).
"Company Exchange Ratio" shall have the meaning set forth in Section 1.6(a).
"Company Financial Statements" shall have the meaning set forth in Section
2.5.
"Company Intellectual Property Rights" shall have the meaning set forth in
Section 2.11(a).
"Company Merger" shall have the meaning set forth in Recital A to this
Agreement.
"Company Merger Consideration" shall have the meaning set forth in Section
1.6(a).
"Company Returns" shall have the meaning set forth in Section 2.8(a).
"Confidentiality Agreement" shall have the meaning set forth in Section 5.4.
"Consents" shall have the meaning set forth in Section 6.1(c).
"Contribution Agreement" shall have the meaning set forth in Section 1.2(b).
"Converted Option" shall have the meaning set forth in Section 1.6(g).
"C-Sub" shall have the meaning set forth in the introductory paragraph of
this Agreement.
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"Dissenter" shall have the meaning set forth in Section 1.7(a).
"Dissenters' Shares" shall have the meaning set forth in Section 1.7(a).
"Effective Time" shall have the meaning set forth in Section 1.2(a).
"Employee Safety Laws" shall have the meaning set forth in Section 2.18(d).
"Employment Agreement" shall have the meaning set forth in Section 5.12.
"End-User Licenses" shall have the meaning set forth in Section 2.11(a).
"Environmental Law" shall have the meaning set forth in Section 2.18(b).
"Equipment" shall have the meaning set forth in Section 2.10(c).
"ERISA" shall have the meaning set forth in Section 2.27(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 1.6(d).
"Exchange Fund" shall have the meaning set forth in Section 1.6(d).
"Exchange Ratios" shall have the meaning set forth in Section 1.6(a).
"FCC" shall have the meaning set forth in Section 3.3.
"GAAP" shall have the meaning set forth in Section 2.5.
"General Partner" shall have the meaning set forth in Recital A to this
Agreement.
"Governmental Entity" shall have the meaning set forth in Section 2.4.
"Holdings" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"Holdings Common Stock" shall have the meaning set forth in Recital A to
this Agreement.
"Holdings Option" shall have the meaning set forth in Section 1.6(g).
"ICEL" shall have the meaning set forth in Section 3.31.
"ICEL Stock Purchase Agreement" shall mean that certain Agreement dated
January 21, 1998, among IWL, NERA Limited, and Thomas Norman Blair and Margery
Helen Blair for the sale and purchase of the whole of the issued share capital
of ICEL, including all schedules and exhibits attached thereto.
"Interest Exchange" shall have the meaning set forth in Recital A to this
Agreement.
"Interest Exchange Consideration" shall have the meaning set forth in
Section 1.6(a).
"IRS" shall have the meaning set forth in Section 2.27(b).
"I-Sub" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"IWL" shall have the meaning set forth in the introductory paragraph of this
Agreement.
"IWL Authorizations" shall have the meaning set forth in Section 3.17.
"IWL Commercial Software Rights" shall have the meaning set forth in Section
3.15(b).
"IWL Common Stock" shall have the meaning set forth in Section 1.6(a).
"IWL Disclosure Schedule" shall have the meaning set forth in the
introductory paragraph of Article III.
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"IWL Employee Plans" shall have the meaning set forth in Section 3.25(a).
"IWL Equity Rights" shall have the meaning set forth in Section 3.2(b).
"IWL ERISA Affiliate" shall have the meaning set forth in Section 3.25(a).
"IWL Exchange Ratio" shall have the meaning set forth in Section 1.6(a).
"IWL Financial Statements" shall have the meaning set forth in Section 3.4.
"IWL Intellectual Property Rights" shall have the meaning set forth in
Section 3.15(a).
"IWL Merger" shall have the meaning set forth in Recital A to this
Agreement.
"IWL Merger Consideration" shall have the meaning set forth in Section
1.6(a).
"IWL Returns" has the meaning set forth in Section 3.12(a).
"IWL Shareholders Agreement" shall have the meaning set forth in Recital E
to this Agreement.
"Joint Proxy Statement" shall have the meaning set forth in Section 2.24.
"Limited Partners" shall have the meaning set forth in Section 1.2(b).
"Material Adverse Effect" shall mean any change in or effect on the business
of the referenced corporation or partnership or any of its Subsidiaries that is
or will be materially adverse to the business, operations (including the income
statement), properties (including intangible properties), condition (financial
or otherwise), assets, liabilities or regulatory status of such referenced
corporation and its Subsidiaries taken as a whole, but shall not include the
effects of changes that are generally applicable in (a) the United States
economy or (b) the United States securities markets if, in any of (a) or (b),
the effect on IWL, the Company or the Partnership (as the case may be) and its
respective Subsidiaries, taken as a whole, is not disproportionate relative to
the effect on the other and its Subsidiaries, taken as a whole.
"Merged Corporation" shall have the meaning set forth in Section 1.6.
"Merger Subsidiary" shall have the meaning set forth in the introductory
paragraph of Article III.
"Mergers" shall have the meaning set forth in Recital A to this Agreement.
"Options" shall have the meaning set forth in Section 1.6(g).
"Owners Agreement" shall have the meaning set forth in Recital D to this
Agreement.
"Partners" shall have the meaning set forth in Section 1.2(b).
"Partnership" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"Partnership Authorizations" shall have the meaning set forth in Section
2A.14.
"Partnership Balance Sheet" shall have the meaning set forth in Section
2A.5.
"Partnership Commercial Software Rights" shall have the meaning set forth in
Section 2A.11(b).
"Partnership Disclosure Schedule" shall have the meaning set forth in the
introductory paragraph of Article IIA.
"Partnership Employee Plans" shall have the meaning set forth in Section
2A.26(a).
"Partnership Equity Rights" shall have the meaning set forth in Section
2A.3(a).
"Partnership Financial Statements" shall have the meaning set forth in
Section 2A.5.
"Partnership Intellectual Property Rights" shall have the meaning set forth
in Section 2A.11(a).
"Partnership Interests" shall have the meaning set forth in Recital A to
this Agreement.
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"Partnership Returns" shall have the meaning set forth in Section 2A.8(a).
"Person" means an individual, corporation, partnership, limited liability
company, association, trust, unincorporated organization, entity or group (as
defined in the Exchange Act).
"Pre-Surrender Dividends" shall have the meaning set forth in Section
1.6(d).
"Registration Statement" shall have the meaning set forth in Section 2.24.
"Requisite Regulatory Approvals" shall have the meaning set forth in Section
6.1(c).
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 3.4.
"Securities Act" shall have the meaning set forth in Section 2.24.
"Shareholders' Meeting" shall have the meaning set forth in Section 5.2(a).
"Shares" shall have the meaning set forth in Section 1.6(d).
"Subsidiary" means any corporation or other legal entity of which IWL, the
Company or the Partnership, as the case may be (either alone or through or
together with any other Subsidiary or Subsidiaries), owns, directly or
indirectly, more than 50% of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the board of directors
or other governing body of such corporation or other legal entity, except that
in the case of IWL, ICEL shall not, for any purposes of this Agreement, be
considered a Subsidiary of IWL.
"Surviving Corporation" shall have the meaning set forth in Section 1.1.
"Tax" or "Taxes" shall have the meaning set forth in Section 2.8(a).
"TBCA" shall have the meaning set forth in Section 1.7(a).
"Termination Date" shall have the meaning set forth in Section 7.1(b).
"TRLPA" shall have the meaning set forth in Section 5.2(a).
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IN WITNESS WHEREOF, Holdings, IWL, the Merger Subsidiaries, the Company and
the Partnership have caused this Agreement to be signed by themselves or their
duly authorized respective officers or general partners, all as of the date
first written above.
<TABLE>
<S> <C> <C>
IWL HOLDINGS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
IWL COMMUNICATIONS, INCORPORATED
By: /s/ IGNATIUS W. LEONARDS
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
IWL ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
CAPROCK ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.
Its: General Partner
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
</TABLE>
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FIRST AMENDMENT TO AGREEMENT AND
PLAN OF MERGER AND PLAN OF EXCHANGE
This FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND PLAN OF EXCHANGE
(this "Amendment") is made and entered into as of April 30, 1998, among IWL
Communications, Incorporated, a Texas corporation ("IWL"), IWL Holdings Corp., a
Texas corporation ("Holdings"), IWL Acquisition Corp., a Texas corporation
("I-Sub") and a wholly owned subsidiary of Holdings, CapRock Communications
Corp., a Texas corporation (the "Company"), CapRock Acquisition Corp., a Texas
corporation ("C-Sub") and a wholly owned subsidiary of Holdings, and CapRock
Fiber Network, Ltd., a Texas limited partnership (the "Partnership").
RECITALS:
A. IWL, Holdings, I-Sub, the Company, C-Sub and the Partnership previously
entered into that certain Agreement and Plan of Merger and Plan of Exchange
dated as of February 16, 1998 (the "Merger Agreement") pursuant to which, among
other things, (a) IWL and I-Sub are to combine into a single company through the
statutory merger of I-Sub with and into IWL (the "IWL Merger"), (b) the Company
and C-Sub are to combine into a single company through the statutory merger of
C-Sub with and into the Company (the "Company Merger" and, together with the IWL
Merger, the "Mergers"), and (c) upon consummation of the Mergers, all of the
general and limited partnership interests in the Partnership are to be exchanged
for shares of the common stock, par value $.01 per share, of Holdings (the
"Holdings Common Stock") in the manner and order as set forth in the Merger
Agreement.
B. The parties hereto desire to enter into this Amendment to amend certain
terms of the Merger Agreement. Capitalized terms not otherwise defined herein
shall have the meaning given to such terms by the Merger Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1. AMENDMENTS. Section 2.3 of the Company Disclosure Schedule is hereby
deleted in its entirety and, as of the date hereof, replaced with the
Section 2.3 of the Company Disclosure Schedule attached to this Amendment
and made a part hereof. Exhibit 1.6(a) to the Merger Agreement is hereby
deleted in its entirety and, as of the date hereof, replaced with Exhibit
1.6(a) attached to this Amendment and made a part hereof.
2. IWL OPTIONS. All references in the Merger Agreement to "Options" and to
"Holdings Options" shall include any IWL Equity Rights, including warrants,
that are listed in Section 3.2 of the IWL Dislcosure Schedule.
3. PAYMENT OF TERMINATION FEE. Section 7.2(b) of the Merger Agreement provides
that in certain events, as specified therein, the Company or the
Partnership, as the case may be, will be required to pay to IWL a
termination fee of $2,500,000 (the "Termination Fee"). In the event that the
Company and/or the Partnership is required to pay the Termination Fee under
Section 7.2(b) of the Merger Agreement, then the Company shall pay
$1,875,000 of the Termination Fee to IWL and the Partnership shall pay
$625,000 of the Termination Fee (for an aggregate of $2,500,000) to IWL.
Section 7.2(c) of the Merger Agreement provides that in certain events, as
specified therein, IWL will be required to pay to the Company and the
Partnership an aggregate Termination Fee of $2,500,000. In the event that
IWL is required to pay the Termination Fee under Section 7.2(c) of the
Merger Agreement, then IWL shall pay $1,875,000 of the Termination Fee to
the Company and shall pay $625,000 of the Termination Fee (for an aggregate
of $2,500,000) to the Partnership.
4. NO OTHER CHANGES. Except as expressly amended herein, the Merger Agreement
shall remain unchanged and shall continue in full force and effect.
<PAGE>
5. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
will become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart. Counterparts of this
Amendment, and any signatures thereon, transmitted by facsimile will be
deemed originals for all purposes.
6. GOVERNING LAW. This Amendment shall be governed in all respects, including
validity, interpretation and effect, by the laws of the Sate of Texas.
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IN WITNESS WHEREOF, Holdings, IWL, I-Sub, the Company, C-Sub, and the
Partnership have caused this Agreement to be signed by themselves or their duly
authorized respective officers or general partners, all as of the date first
written above.
<TABLE>
<S> <C> <C>
IWL HOLDINGS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
IWL COMMUNICATIONS, INCORPORATED
By: /s/ IGNATIUS W. LEONARDS
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
IWL ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
CAPROCK ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.
Its: General Partner
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
</TABLE>
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SECOND AMENDMENT TO AGREEMENT AND
PLAN OF MERGER AND PLAN OF EXCHANGE
This SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND PLAN OF EXCHANGE
(this "Amendment") is made and entered into as of June 20, 1998, among IWL
Communications, Incorporated, a Texas corporation ("IWL"), CapRock
Communications Corp., a Texas corporation formerly known as IWL Holdings Corp.
("Holdings"), IWL Acquisition Corp., a Texas corporation ("I-Sub") and a wholly
owned subsidiary of Holdings, CapRock Telecommunications Corp., a Texas
corporation formerly known as CapRock Communications Corp. (the "Company"),
CapRock Acquisition Corp., a Texas corporation ("C-Sub") and a wholly owned
subsidiary of Holdings, and CapRock Fiber Network, Ltd., a Texas limited
partnership (the "Partnership").
RECITALS:
A. IWL, Holdings, I-Sub, the Company, C-Sub and the Partnership previously
entered into that certain Agreement and Plan of Merger and Plan of Exchange
dated as of February 16, 1998, as amended by the First Amendment to Agreement
and Plan of Merger and Plan of Exchange dated April 30, 1998 by and among such
parties (as amended, the "Merger Agreement"), pursuant to which, among other
things, (a) IWL and I-Sub are to combine into a single company through the
statutory merger of I-Sub with and into IWL (the "IWL Merger"), (b) the Company
and C-Sub are to combine into a single company through the statutory merger of
C-Sub with and into the Company (the "Company Merger" and, together with the IWL
Merger, the "Mergers"), and (c) in connection with the Mergers, all of the
general and limited partnership interests in the Partnership are to be exchanged
for shares of the common stock, par value $.01 per share, of Holdings in the
manner and order as set forth in the Merger Agreement.
B. The parties hereto desire to enter into this Amendment to amend certain
terms of the Merger Agreement. Capitalized terms not otherwise defined herein
shall have the meaning given to such terms by the Merger Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1. AMENDMENT TO SECTION 1.1. Section 1.1 of the Merger Agreement, titled "THE
MERGERS AND THE INTEREST EXCHANGE," is hereby amended in its entirety to
read, as of the date hereof, as follows:
"On the Closing Date and subject to and upon the terms and conditions of this
Agreement and the applicable laws of Texas, the following actions shall
occur in the following order: (a) I-Sub shall be merged with and into IWL in
the IWL Merger, the separate corporate existence of I-Sub shall cease, and
IWL shall continue as the surviving corporation in the IWL Merger, (b) after
consummation of the IWL Merger and prior to consummation of the Company
Merger, all of the outstanding Partnership Interests of the Partnership
shall be contributed to Holdings pursuant to, and in the order contemplated
by, the Interest Exchange, and (c) after consummation of the IWL Merger and
the Interest Exchange, C-Sub shall be merged with and into the Company in
the Company Merger, the separate corporate existence of C-Sub shall cease,
and the Company shall continue as the surviving corporation in the Company
Merger. The Company and IWL as the surviving corporations after the Mergers
are hereinafter sometimes collectively referred to as the "Surviving
Corporations" and individually as a "Surviving Corporation.""
2. AMENDMENT TO SECTIONS 1.2(A) AND (B). Sections 1.2(a) and (b) of the Merger
Agreement are each hereby amended in their entirety to read, as of the date
hereof, as follows:
"(a) As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VI (and prior to the consummation of the
Interest Exchange), the parties hereto shall cause the IWL
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Merger to be consummated by filing Articles of Merger ("Articles of Merger")
with the Secretary of State of Texas in such form as required by, and
executed in accordance with the relevant provisions of, the laws of the
State of Texas and, after consummation of the Interest Exchange, the parties
hereto shall cause the Company Merger to be consummated by filing Articles
of Merger with the Secretary of State of Texas in such form as required by,
and executed in accordance with the relevant provisions of, the laws of the
State of Texas (the time at which both such filings have been made in Texas
and the Secretary of State of the State of Texas has issued a certificate of
merger with respect to both of the IWL Merger and the Company Merger is
referred to herein as the "Effective Time").
(b) On the Closing Date (and after consummation of the IWL Merger but prior
to consummation of the Company Merger), (i) the General Partner shall
execute and deliver to Holdings a contribution agreement substantially in
the form agreed upon by the parties hereto (a "Contribution Agreement")
pursuant to which the General Partner shall contribute its general
Partnership Interest in the Partnership to Holdings, (ii) immediately
thereafter, Holdings shall (pursuant to the terms of such Contribution
Agreement) contribute the general Partnership Interest in the Partnership to
C-Sub (the intention of the parties hereto being that the Company, upon
consummation of the Company Merger, will acquire by operation of law the
general Partnership Interest being contributed by Holdings to C-Sub), and
(iii) immediately following the consummation of the contribution of the
general Partnership Interest to C-Sub, each of the limited partners in the
Partnership (the "Limited Partners" and, collectively with the General
Partner, the "Partners") shall execute and deliver to Holdings a
Contribution Agreement pursuant to which the Limited Partners shall
contribute their respective limited Partnership Interests in the Partnership
to Holdings. Notwithstanding anything to the contrary contained herein, all
of the contributions of Partnership Interests referred to in the immediately
preceding sentence shall be deemed to have occurred immediately after
consummation of the IWL Merger and immediately prior to consummation of the
Company Merger. Reasonably promptly after the Effective Time, the
Partnership shall file a certificate of amendment to its certificate of
limited partnership to reflect that the Company has become the new general
partner of the Partnership and that the General Partner is the withdrawing
general partner. The Partnership and the General Partner hereby consent to
(and each Contribution Agreement delivered hereunder by a Limited Partner
shall include such Limited Partner's consent to) the transfers of the
Partnership Interests contemplated by this Agreement and hereby agree (and
each Contribution Agreement delivered hereunder by a Limited Partner shall
include such Limited Partner's agreement) that, effective at the Effective
Time and subject to the consummation of the transactions contemplated
hereby, Holdings shall become a substituted limited partner in the
Partnership and, at the Effective Time, the Company shall become a
substituted general partner in the Partnership and the status of the
Partners as partners in the Partnership shall cease. The Company hereby
elects, effective as of the Effective Time and subject to the consummation
of the transactions contemplated hereby, to reconstitute the Partnership, to
continue as the general partner of the Partnership and to continue the
Partnership and its business."
3. AMENDMENT TO SECTION 1.4(B). Section 1.4(b) of the Merger Agreement is
hereby amended in its entirety to read, as of the date hereof, as follows:
"(b) The Articles of Incorporation (as may be amended by the Articles of
Merger) and the Bylaws of the Company and IWL as in effect immediately prior
to the Effective Time as to the Company Merger and the IWL Merger,
respectively, shall be the Articles of Incorporation and Bylaws of the
Company and IWL, respectively, each as a Surviving Corporation, until
thereafter amended."
4. AMENDMENT TO SECTION 1.6(A)(I). Section 1.6(a)(i) of the Merger Agreement
is hereby amended in its entirety to read, as of the date hereof, as
follows:
"(i) Each share of the common stock, par value $.01 per share (the "IWL
Common Stock"), of IWL issued and outstanding immediately before the
Effective Time (other than those held in the treasury of IWL) and all rights
in respect thereof shall at the Effective Time, without any action on the
part of
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<PAGE>
any holder thereof, forthwith cease to exist and be converted into and
become exchangeable for that number of shares of Holdings Common Stock set
forth on Exhibit 1.6(a) attached hereto (the "IWL Merger Consideration" and
such ratio of IWL Common Stock to Holdings Common Stock being herein
referred to as the "IWL Exchange Ratio").
5. AMENDMENT TO SECTION 1.6(A)(IV). Section 1.6(a)(iv) of the Merger Agreement
is hereby amended in its entirety to read, as of the date hereof, as
follows:
"(iv) Each one percent (1%) of the Partnership Interests issued and
outstanding immediately before the Effective Time and all rights in respect
thereof shall, upon execution and delivery to Holdings by the holder thereof
of the Contribution Agreement with respect thereto and without any further
action on the part of the holder thereof, forthwith be exchanged for that
number of shares of Holdings Common Stock set forth on Exhibit 1.6(a)
attached hereto (the "Interest Exchange Consideration")."
6. AMENDMENT TO EXHIBIT 1.6(A). Exhibit 1.6(a) to the Merger Agreement, titled
"COMPANY MERGER CONSIDERATION AND INTEREST EXCHANGE CONSIDERATION," is
hereby deleted in its entirety and, as of the date hereof, replaced with
Exhibit 1.6(a), titled "COMPANY MERGER CONSIDERATION, INTEREST EXCHANGE
CONSIDERATION AND IWL MERGER CONSIDERATION," attached to this Amendment and
made a part hereof.
7. AMENDMENT TO SECTION 1.6(F). Section 1.6(f) of the Merger Agreement is
hereby amended in its entirety to read, as of the date hereof, as follows:
"(f) FRACTIONAL SHARES. No fraction of a share of Holdings Common Stock will
be issued, but in lieu thereof each holder of shares of IWL Common Stock,
each holder of shares of Company Common Stock and each holder of Partnership
Interests who would otherwise be entitled to a fraction of a share of
Holdings Common Stock (after aggregating all fractional shares of Holdings
Common Stock to be received by such holder) shall be entitled to receive
from Holdings a whole share of Holdings Common Stock."
8. AMENDMENT TO SECTION 1.6(G)(I)(B). Section 1.6(g)(i)(B) of the Merger
Agreement is hereby amended in its entirety to read, as of the date hereof,
as follows:
"(B) the exercise price per share of Holdings Common Stock for each
particular Holdings Option shall be equal to, respectively, (x) the exercise
price per share under the Converted Option divided by (y) the IWL Exchange
Ratio (if the Converted Option related to IWL Common Stock) or the Company
Exchange Ratio (if the Converted Option related to the Company Common
Stock), each of which shall be rounded up to the nearest whole cent."
9. AMENDMENT TO SECTION 1.6(I). Section 1.6(i) of the Merger Agreement is
hereby amended in its entirety to read, as of the date hereof, as follows:
"(i) MAXIMUM SHARES ISSUABLE. Notwithstanding anything to the contrary
contained herein, the maximum number of shares of Holdings Common Stock
issuable upon the conversion of shares of Company Common Stock hereunder and
the Interest Exchange and upon the exercise of Holdings Options that are the
result of Converted Options related to Company Common Stock that are assumed
by Holdings hereunder is 25,277,816 shares of Holdings Common Stock."
10. AMENDMENTS TO ARTICLE VI. Article VI of the Merger Agreement, titled
"CONDITIONS TO THE MERGERS AND THE INTEREST EXCHANGE," is hereby amended as
set forth in this Section 10 of this Amendment. First, the parties hereby
agree that the Requisite Regulatory Approvals referred to in Section 6.1(c)
of the Merger Agreement shall, with respect to any approvals the parties are
seeking to obtain from the FCC and state public utility commissions, include
any approvals required to be obtained from the FCC and the state public
utility commissions or other authority which governs the provision of
telecommunications services in the States of Texas, Louisiana, Arkansas and
Oklahoma and shall not include the approvals of any other state public
utility commissions (such other approvals hereby being deemed to be
immaterial Consents for purposes of Section 6.1(c) of the Merger Agreement
and the term
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<PAGE>
"Requisite Regulatory Approvals" to include only those required to be
obtained by this Amendment). Second, the conditions set forth in Sections
6.1(g), 6.2(b), (e), (f), (g), (h) and (j) of the Merger Agreement shall no
longer be conditions to the obligations of the Company and the Partnership
to consummate and effect the Merger Agreement and the transactions
contemplated thereby; the parties who are required to perform such
conditions shall still be required to perform such conditions (including
without limitation executing and delivering any documents or instruments
required thereby), provided that any failure of any party to so perform any
such condition shall no longer excuse the Company or the Partnership from
their respective obligations to consummate and effect the Merger Agreement
and the transactions contemplated thereby. Third, the conditions set forth
in Sections 6.1 (g), 6.3(b), (c) (other than the consent of Bank One Texas,
N.A.), (d), (g), (h) and (i) of the Merger Agreement shall no longer be
conditions to the obligations of IWL and the Merger Subsidiaries to
consummate and effect the Merger Agreement and the transactions contemplated
thereby; the parties who are required to perform such conditions shall still
be required to perform such conditions (including without limitation
executing and delivering any documents or instruments required thereby),
provided that any failure of any party to so perform any such condition
shall no longer excuse IWL and the Merger Subsidiaries from their respective
obligations to consummate and effect the Merger Agreement and the
transactions contemplated thereby. Fourth, the parties hereto agree that
neither an increase or decrease in the price of the shares of IWL Common
Stock as reported on the NASDAQ National Market System nor any litigation
arising therefrom or as a result of the modification of the exchange ratio
in this amendment shall ever be deemed to be an event that has a Material
Adverse Effect on any of the parties to the Merger Agreement. Finally, the
Company and the Partnership hereby agree that the modifications of the
Company Exchange Ratio and the Interest Exchange Consideration made to the
Merger Agreement in this Amendment address and take into account all factors
of which they are aware, including, but not limited to, IWL's failure to
meet earnings or income projections or models, that could be deemed to be or
give rise to a Material Adverse Effect, including any Material Adverse
Effect that could be deemed to arise from any representation or warranty of
IWL not being true and correct as of the date hereof or at the Effective
Time or any failure of IWL to perform and comply with all covenants,
obligations and conditions required to be performed and complied with by it
as of the Effective Time.
11. AMENDMENT TO SECTION 6.3(J). Section 6.3(j) of the Merger Agreement is
hereby amended in its entirety to read, as of the date hereof, as follows:
"(j) CONTRIBUTION AGREEMENTS. The General Partner and Limited Partners
holding, in the aggregate, at least 80% of the limited Partnership Interests
in the Partnership each shall have executed and delivered to Holdings a
Contribution Agreement in respect of such Partner's Partnership Interest
(and shall not have withdrawn such contribution), shall have consented to
the transfers of Partnership Interests contemplated by the Interest Exchange
and shall have consented to the substitution of the Company as the new
General Partner of the Partnership and of Holdings as the new limited
partner of the Partnership."
12. AMENDMENTS TO SECTION 7.1. Sections 7.1(f), (g), (h) and (i) of the Merger
Agreement are each hereby deleted in their entirety and new Sections 7.1(f)
and (g) are hereby added to the Merger Agreement to read, as of the date
hereof, as follows:
"(f) by IWL (i) if the Board of Directors or any committee of the Board of
Directors of the Company or the General Partner shall withdraw or modify in
any adverse manner its approval or recommendation of this Agreement or the
Mergers or the Interest Exchange; (ii) (A) if any of the required approvals
of the shareholders or Partners, as the case may be, of the Company and the
Partnership, as the case may be, shall fail to have been obtained at a duly
held shareholders or Partners' meeting, as the case may be, of the Company
or the Partnership, including any adjournments thereof, or (B) if the
Partnership Interest of the General Partner and at least 80% of the
Partnership Interests of the Limited Partners are not properly tendered in
the Interest Exchange without being withdrawn; (iii) if
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<PAGE>
the required approval of the shareholders of IWL shall fail to have been
obtained at a duly held shareholders meeting of IWL, including any
adjournments thereof; or (iv) prior to the approval of this Agreement by the
shareholders of IWL upon two business days' prior notice to the Company and
the Partnership, if, as a result of an Acquisition Proposal received by IWL
from a Person other than a party to this Agreement or any of its affiliates,
the Board of Directors of IWL determines in good faith, on the basis of oral
or written advice of outside counsel that their fiduciary obligations under
applicable law require that such Acquisition Proposal be accepted, provided
however, that (A) the Board of Directors of IWL shall have concluded in good
faith, after considering applicable provisions of law, on the basis of oral
or written advice of outside counsel, that such action is necessary for the
Board of Directors to act in a manner consistent with its fiduciary duties
under applicable law and (B) prior to any such termination, IWL shall, and
shall cause its respective financial and legal advisors to, negotiate with
the Company and the Partnership to adjust the terms and conditions of this
Agreement to provide the opportunity for IWL to proceed with the
transactions contemplated hereby; or
(g) by the Company and the Partnership (i) if the Board of Directors or any
committee of the Board of Directors of IWL shall withdraw or modify in any
adverse manner its approval or recommendation of this Agreement or the
Mergers or the Interest Exchange; (ii) if the required approval of the
shareholders of IWL shall fail to have been obtained at a duly held
shareholders meeting of IWL, including any adjournments thereof; (iii) if
any of the required approvals of the shareholders or Partners, as the case
may be, of the Company and the Partnership, as the case may be, shall fail
to have been obtained at a duly held shareholders or Partners' meeting, as
the case may be, of the Company or the Partnership, including any
adjournments thereof (or if the General Partner and Limited Partners
holding, in the aggregate, at least 80% of the limited Partnership Interests
in the Partnership shall have failed to execute and deliver to Holdings, and
not withdraw, Contribution Agreements in respect of such Partners'
Partnership Interests); or (iv) prior to the approval of this Agreement by
the shareholders of the Company or the Partners, as the case may be, upon
two business days' prior notice to IWL, if, as a result of an Acquisition
Proposal received by the Company or the Partnership from a Person other than
a party to this Agreement or any of its affiliates, the Board of Directors
of the Company or the General Partner, as the case may be, determines in
good faith, on the basis of oral or written advice of outside counsel, that
their fiduciary obligations under applicable law require that such
Acquisition Proposal be accepted, provided, however, that (A) the Board of
Directors of the Company or the General Partner shall have concluded in good
faith, after considering applicable provisions of law, on the basis of oral
or written advice of outside counsel, that such action is necessary for the
Board of Directors or the General Partner to act in a manner consistent with
its fiduciary duties under applicable law and (B) prior to any such
termination, the Company or the Partnership shall, and shall cause its
respective financial and legal advisors to, negotiate with IWL to adjust the
terms and conditions of this Agreement to provide the opportunity for the
Company or the Partnership to proceed with the transactions contemplated
hereby;
provided further, however, that no termination shall be effective pursuant to
Sections 7.1(f) or (g) under circumstances in which a termination fee is
payable by IWL, on the one hand, or the Company and the Partnership, on the
other hand, under Section 7.2(b) or (c) unless concurrently with such
termination, such termination fee is paid in full by IWL, on the one hand,
or the Company and the Partnership, on the other hand, in accordance with
the provisions of Sections 7.2(b) or (c), as applicable."
13. AMENDMENTS TO SECTION 7.2. Sections 7.2(b) and (c) of the Merger Agreement
are each hereby amended in their entirety to read, as of the date hereof, as
follows:
"(b) If this Agreement (i) is terminated by IWL pursuant to Section 7.1(f)(i)
or (ii) or by the Company or the Partnership pursuant to Section 7.1(g)(iii)
or (iv), or (ii) is terminated as a result of the Company's or the
Partnership's material breach of Section 5.2 hereof which is not cured
within 30
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<PAGE>
days after notice thereof to the Company or the Partnership, as appropriate,
the Company shall pay to IWL a termination fee of $1,875,000 and the
Partnership shall pay to IWL a termination fee of $625,000 (for an aggregate
termination fee of $2.5 million), which shall be payable in cash at the date
of termination.
(c) If this Agreement (i) is terminated by the Company or the Partnership
pursuant to Section 7.1(g)(i) or (ii) or by IWL pursuant to Section
7.1(f)(iii) or (iv), or (ii) is terminated as a result of IWL's material
breach of Section 5.2 hereof which is not cured within 30 days after notice
thereof to IWL, IWL shall pay to the Company a termination fee of $1,875,000
and shall pay to the Partnership a termination fee of $625,000 (for an
aggregate termination fee of $2.5 million), which shall be payable in cash
at the date of termination."
14. AMENDMENT TO DISCLOSURE SCHEDULES. Section 2.3 of the Company Disclosure
Schedule is hereby deleted in its entirety and, as of the date hereof,
replaced with the Section 2.3 of the Company Disclosure Schedule attached to
this Amendment and made a part hereof. Section 2A.3 of the Partnership
Disclosure Schedule is hereby deleted in its entirety and, as of the date
hereof, replaced with the Section 2A.3 of the Partnership Disclosure
Schedule attached to this Amendment and made a part hereof. Section 3.2 of
the IWL Disclosure Schedule is hereby deleted in its entirety and, as of the
date hereof, replaced with Section 3.2 of the IWL Disclosure Schedule
attached to this Amendment and made a part hereof.
15. TIMING OF TRANSACTIONS. Notwithstanding anything to the contrary contained
in the Merger Agreement, it is the intent of the parties hereto that on the
Closing Date, the IWL Merger shall be deemed to be consummated first, the
Interest Exchange shall be deemed to be consummated after consummation of
the IWL Merger and prior to consummation of the Company Merger, and the
Company Merger shall be deemed to be consummated after consummation of the
IWL Merger and the Interest Exchange, and to the extent any provision of the
Merger Agreement conflicts with or is inconsistent with this Section 15 of
this Amendment, this Section 15 of this Amendment shall control and such
provision of the Merger Agreement is hereby deemed to be modified to the
extent necessary to make such provision consistent with this Section 15 of
this Amendment.
16. CERTAIN WAIVERS. Each of the parties hereby consents to the following
actions (and to the extent any such action was taken prior to the date
hereof, hereby waives any breach or violation of the Merger Agreement that
may have resulted from the taking of such action), which consent and waiver
shall be valid for all purposes under the Merger Agreement, including
Sections 4.1 and 4.3 thereof: (i) the change by Holdings of its name from
IWL Holdings Corp. to CapRock Communications Corp., the increase in
Holdings' authorized capital stock to 220 million shares, of which 200
million shares shall be common stock and 20 million shares shall be
preferred stock, and any amendments to the Articles of Incorporation of
Holdings required to effectuate such name change and increase in capital
stock, (ii) the change by the Company of its name from CapRock
Communications Corp. to CapRock Telecommunications Corp. and any amendments
to the Articles of Incorporation of the Company required to effectuate such
name change, (iii) the election by the Partnership to be taxed, effective as
of January 1, 1998, as a corporation for federal income tax purposes, (iv)
the incurrence of indebtedness by Holdings, the Company, the Partnership and
IWL in an aggregate amount not to exceed $300,000,000 whether as obligor,
co-obligor, guarantor or co-guarantor pursuant to that certain Rule 144A
offering of notes being sold initially to various investment banks as
initial purchasers to be described an Offering Memorandum (the "Offering
Memorandum"), (v) the consummation by Holdings, the Company and/or the
Partnership of the transactions described in the Offering Memorandum (and
the execution and delivery of documents in connection therewith) with
respect to the development and ownership of the proprietary software
platform ("System") that is being jointly developed by the Company and
Thompson Technology, Inc., a Texas corporation ("TTI") that is owned by
David Thompson, including with respect to the continued funding and the
future licensing and ownership of the System, (vi) the employment by
Holdings and/or the Company of Kevin W.
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McAleer as Senior Vice President and Chief Financial Officer and the
execution and delivery of an employment agreement with Mr. McAleer in
connection therewith, and (vii) the sale by IWL of its digital radio
telephone (DRT) products to one or more purchasers and on terms and
conditions, satisfactory to IWL in its sole and unreviewable discretion (and
take any foreclosure or related action in connection therewith). The consent
and waiver granted hereby shall not extend to or be valid with respect to
any other action taken or proposed to be taken by any party to the Merger
Agreement which requires the consent of any other party or parties to the
Merger Agreement.
17. NO OTHER CHANGES. Except as expressly amended herein, the Merger Agreement
shall remain unchanged and shall continue in full force and effect.
18. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
will become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart. Counterparts of this
Amendment, and any signatures thereon, transmitted by facsimile will be
deemed originals for all purposes.
19. GOVERNING LAW. This Amendment shall be governed in all respects, including
validity, interpretation and effect, by the laws of the Sate of Texas.
IN WITNESS WHEREOF, Holdings, IWL, I-Sub, the Company, C-Sub, and the
Partnership have caused this Agreement to be signed by themselves or their duly
authorized respective officers or general partners, all as of the date first
written above.
<TABLE>
<S> <C> <C>
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
IWL COMMUNICATIONS, INCORPORATED
By: /s/ IGNATIUS W. LEONARDS
-----------------------------------------
Its: President
-----------------------------------------
IWL ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
CAPROCK TELECOMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
CAPROCK ACQUISITION CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.
Its: General Partner
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Its: President
-----------------------------------------
</TABLE>
8
<PAGE>
THIRD AMENDMENT, AGREEMENT AND ACKNOWLEDGMENT OF
RECEIPT OF REGULATORY APPROVALS
This THIRD AMENDMENT, AGREEMENT AND ACKNOWLEDGMENT OF RECEIPT OF REGULATORY
APPROVALS (this "Agreement") is made and entered into as of July 8, 1998, among
IWL Communications, Incorporated, a Texas corporation ("IWL"), CapRock
Communications Corp., a Texas corporation formerly known as IWL Holdings Corp.
("Holdings"), IWL Acquisition Corp., a Texas corporation ("I-Sub") and a wholly
owned subsidiary of Holdings, CapRock Telecommunications Corp., a Texas
corporation formerly known as CapRock Communications Corp. (the "Company"),
CapRock Acquisition Corp., a Texas corporation ("C-Sub") and a wholly owned
subsidiary of Holdings, and CapRock Fiber Network, Ltd., a Texas limited
partnership (the "Partnership").
RECITALS:
A. IWL, Holdings, I-Sub, the Company, C-Sub and the Partnership previously
entered into that certain Agreement and Plan of Merger and Plan of Exchange
dated as of February 16, 1998, as amended by the First Agreement to Agreement
and Plan of Merger and Plan of Exchange dated April 30, 1998 and the Second
Agreement to Agreement and Plan of Merger and Plan of Exchange dated June 20,
1998, by and among such parties (as amended, the "Merger Agreement"), pursuant
to which, among other things, (a) IWL and I-Sub are to combine into a single
company through the statutory merger of I-Sub with and into IWL (the "IWL
Merger"), (b) the Company and C-Sub are to combine into a single company through
the statutory merger of C-Sub with and into the Company (the "Company Merger"
and, together with the IWL Merger, the "Mergers"), and (c) in connection with
the Mergers, all of the general and limited partnership interests in the
Partnership are to be exchanged for shares of the common stock, par value $.01
per share, of Holdings in the manner and order as set forth in the Merger
Agreement ("Interest Exchange").
B. The parties hereto desire to enter into this Agreement to confirm the
receipt of all Requisite Regulatory Approvals as defined in the Merger Agreement
from the FCC and state public utility commissions and to confirm the receipt of
an opinion of the financial advisor to IWL. Capitalized terms not otherwise
defined herein shall have the meaning given to such terms by the Merger
Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1. Section 3.7 of the Merger Agreement is hereby amended and restated as
follows:
"3.7 OPINION OF FINANCIAL ADVISOR. IWL has received the written
opinion of Cruttenden Roth Incorporated on the date thereof, to the
effect that, as of the date thereof, the relative exchange ratios
whereby the current holders of IWL Common Stock would hold approximately
15%, and the current holders of the Company Common Stock and the
Partnership Interests together would hold approximately 85% of the
outstanding shares of Holdings Common Stock on a diluted basis after the
Mergers and the Interest Exchange was fair from a financial point of
view to the shareholders of IWL."
2. Article VI of the Merger Agreement, titled "CONDITIONS TO THE MERGERS AND
THE INTEREST EXCHANGE" provides that Requisite Regulatory Approvals were to
be obtained from the FCC and the state public utility commissions or other
authority which governs the provision of telecommunications services in the
States of Texas, Louisiana, Arkansas and Oklahoma ("Specified States"). The
parties hereby agree that all of the Requisite Regulatory Approvals have
been obtained from the FCC and the Specified States and that no other
Requisite Regulatory Approvals are required in order for the combined
business (following the Mergers and the Interest Exchange) to provide
telecommunications services in the states of Texas, Louisiana, Arkansas and
Oklahoma. The parties specifically waive the receipt of any regulatory
approvals in the state of Texas regarding CapRock's SPCOA status and waive
the receipt of any other regulatory approvals from the FCC or the Specified
States not already obtained
<PAGE>
for the provision of telecommunications services and amend the Merger
Agreement to the extent necessary to provide that no Requisite Regulatory
Approvals are to be obtained except those listed on Exhibit A attached
hereto and incorporated herein by reference, all of which have been
obtained.
3. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
will become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart. Counterparts of this
Agreement, and any signatures thereon, transmitted by facsimile will be
deemed originals for all purposes.
4. GOVERNING LAW. This Agreement shall be governed in all respects, including
validity, interpretation and effect, by the laws of the State of Texas.
IN WITNESS WHEREOF, Holdings, IWL, I-Sub, the Company, C-Sub, and the
Partnership have caused this Agreement to be signed by themselves or their duly
authorized respective officers or general partners, all as of the date first
written above.
CAPROCK COMMUNICATIONS CORP.
By: /s/ Jere W. Thompson, Jr.
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
IWL COMMUNICATIONS, INCORPORATED
By: /s/ Ignatius W. Leonards
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
IWL ACQUISITION CORP.
By: /s/ Jere W. Thompson, Jr.
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
CAPROCK TELECOMMUNICATIONS CORP.
By: /s/ Jere W. Thompson, Jr.
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
2
<PAGE>
CAPROCK ACQUISITION CORP.
By: /s/ Jere W. Thompson, Jr.
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.
Its: General Partner
By: /s/ Jere W. Thompson, Jr.
--------------------------------------
Its: President
--------------------------------------
3
<PAGE>
APPENDIX II
[TO COME]
<PAGE>
APPENDIX III
ARTICLES OF INCORPORATION
OF
IWL HOLDINGS CORP.
The undersigned natural person of the age of eighteen (18) years or more,
acting as an incorporator of a corporation under the Texas Business Corporation
Act, hereby adopts the following Articles of Incorporation for such corporation:
ARTICLE I
NAME
The name of the corporation (the "Corporation") is IWL Holdings Corp.
ARTICLE II
DURATION
The period of its duration is perpetual.
ARTICLE III
PURPOSE
The purposes for which the Corporation is organized are to buy, sell, lease
and deal in goods, services, personal property and real property of every nature
and description, and to transact any or all lawful business for which
corporations may be incorporated under the Texas Business Corporation Act.
ARTICLE IV
SHARES
A. CAPITALIZATION. The aggregate number of shares that the Corporation is
authorized to issue is One Hundred Ten Million (110,000,000) shares, consisting
of:
1. One Hundred Million (100,000,000) shares of Common Stock having a
par value of One Cent ($.01) per share; and
2. Ten Million (10,000,000) shares of Preferred Stock having a par
value of One Cent ($.01) per share.
B. SERIES OF SHARES ESTABLISHED BY BOARD OF DIRECTORS.
The Preferred Stock may be issued from time to time in one (1) or more
series. The Board of Directors is hereby authorized, by filing a statement
pursuant to Article 2.13 of the Texas Business Corporation Act, to fix or
determine from time to time the designations, preferences, limitations and
relative rights including voting rights of the shares of any series to the same
extent that such designations, preferences, limitations, and relative rights
could be stated if fully set forth in the articles of incorporation, but subject
to and within the limitations set forth in the articles of incorporation. Such
authority includes, without limitation, the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then issued. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status of authorized, but unissued shares
<PAGE>
of the class of shares from which such series was established that they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
C. COMMON STOCK.
1. Shares of Common Stock may be issued by the Corporation from time to
time for such consideration as may lawfully be fixed by the Board of
Directors.
2. The Common Stock shall be entitled to one (1) vote per share on all
matters.
3. Subject to the prior rights and preferences of the Preferred Stock
and subject to the provisions and conditions set forth in the foregoing
Section B of this Article IV, or in any resolution or resolutions providing
for the issue of a series of Preferred Stock, and to the extent permitted by
the laws of the State of Texas, the holders of Common Stock shall be
entitled to receive such cash dividends as may be declared and made payable
by the Board of Directors.
4. After payment shall have been made in full to the holders of any
series of Preferred Stock having preferred liquidation rights, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the remaining assets and funds of the
Corporation shall be distributed among the holders of the Common Stock
according to their respective shares.
ARTICLE V
DENIAL OF PREEMPTIVE RIGHTS
No holder of any shares of any class of stock of the Corporation shall,
solely as a result of being such holder, have any preemptive or preferential
right to receive, purchase or subscribe to (a) any unissued or treasury shares
of any class of stock (whether now or hereafter authorized) of the Corporation,
(b) any obligations or evidences of indebtedness or other securities of the
Corporation convertible into or exchangeable for, or carrying or accompanied by
any rights to receive, purchase or subscribe to any such unissued or treasury
shares, (c) any right of subscription to or to receive, or any warrant or option
for the purchase of, any thereof, or (d) any other securities that may be issued
or sold by the Corporation other than such (if any) as the Board of Directors of
the Corporation, in its sole and absolute discretion, may determine from time to
time. Notwithstanding the above, the Corporation may by contract grant
preemptive rights from time to time.
ARTICLE VI
ACTION WITHOUT A MEETING
Any action required by the Texas Business Corporation Act to be taken at any
annual or special meeting of shareholders, or any action that may be taken at
any annual or special meeting of shareholders, may be taken without a meeting,
without prior notice, and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holder or holders of
shares having not less than the minimum number of votes that would be necessary
to take such action at a meeting at which the holders of all shares entitled to
vote on the action were present and voted.
ARTICLE VII
NONCUMULATIVE VOTING
Directors shall be elected by majority vote. No shareholder of the
Corporation shall have the right to cumulate his votes.
2
<PAGE>
ARTICLE VIII
COMMENCEMENT OF BUSINESS
The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00) consisting of money, labor done, or property actually received.
ARTICLE IX
REGISTERED OFFICE AND AGENT
The street address of the initial registered office of the Corporation is
350 N. St. Paul, Suite 2900, Dallas, Texas 75201, and the name of its initial
registered agent at such address is CT Corporation System.
ARTICLE X
INITIAL DIRECTORS
The number of directors constituting the initial Board of Directors is five
(5), and the name and address of each person who is to serve as director until
the first annual meeting of the shareholders or until such person's successor is
elected and qualified are:
<TABLE>
<S> <C>
Ignatius W. Leonards 12000 Aerospace Avenue
Suite 200
Houston, Texas 77034
Byron M. Allen 12000 Aerospace Avenue
Suite 200
Houston, Texas 77034
Jere W. Thompson, Two Galleria Tower, Suite 1925
Jr. 13455 Noel Road
Dallas, Texas 75240-6638
Mark Langdale Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
Tim Rogers Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
</TABLE>
ARTICLE XI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The directors and officers of the Corporation shall be indemnified by the
Corporation in a manner and to the maximum extent permitted by applicable state
or federal law as in effect from time to time.
ARTICLE XII
LIMITATION OF DIRECTORS' LIABILITY
A director of the Corporation shall not be liable to the Corporation or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this Article shall not authorize the
elimination or limitation of the liability of a director to the extent the
director is found liable for:
3
<PAGE>
(1) a breach of the director's duty of loyalty to the Corporation or its
shareholders;
(2) an act or omission not in good faith that constitutes a breach of
duty of the director to the Corporation or an act or omission that involves
intentional misconduct or a knowing violation of the law;
(3) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of
the director's office; or
(4) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
ARTICLE XIII
LIMITATION OF SHAREHOLDERS' LIABILITY
A holder of shares, an owner of any beneficial interest in the shares, or a
subscriber for shares whose subscription has been accepted shall be under no
obligation to the Corporation or to its obligees with respect to:
(1) such shares other than the obligation to pay the Corporation the
full amount of the consideration fixed in compliance with Article 2.15 of
the Texas Business Corporation Act, for which such shares were or are to be
issued;
(2) any contractual obligation of the Corporation on the basis of actual
or constructive fraud, or a sham to perpetrate a fraud, unless the obligee
demonstrates that the holder, owner, or subscriber caused the Corporation to
be used for the purpose of perpetrating, and did perpetrate, an actual fraud
on the obligee primarily for the direct personal benefit of the holder,
owner, or subscriber; or
(3) any contractual obligation of the Corporation on the basis of the
failure of the Corporation to observe any corporate formality, including,
without limitation:
(a) the failure to comply with any requirement of the Texas Business
Corporation Act or the Articles of Incorporation or Bylaws of the
Corporation;
(b) the failure to observe any requirement prescribed by the Texas
Business Corporation Act or by the Articles of Incorporation or Bylaws
for acts to be taken by the Corporation, its Board of Directors, or
shareholders.
ARTICLE XIV
VOTING REQUIREMENTS
With respect to any matter for which the affirmative vote of the holders of
a specified portion of the shares entitled to vote is required by the Texas
Business Corporation Act, the act of the shareholders on that matter shall be
the affirmative vote of the holders of a majority of the shares entitled to vote
on that matter, rather than the affirmative vote otherwise required by the Texas
Business Corporation Act. In addition, with respect to any matter for which the
affirmative vote of the holders of a specified portion of the shares of any
class is required by the Texas Business Corporation Act, the act of the holders
of shares of that class on that matter shall be the affirmative vote of the
holders of a majority of shares of that class, rather than the affirmative vote
of the holders of shares of that class otherwise required by the Texas Business
Corporation Act.
4
<PAGE>
ARTICLE XV
ANTI-TAKEOVER STATUTE
The Corporation hereby expressly elects to not be governed by Part Thirteen
(the Business Combination Law) of the Texas Business Corporation Act.
ARTICLE XVI
INCORPORATOR
The name and address of the incorporator are:
Mark A. Kopidlansky
1445 Ross Avenue, Suite 4000
Dallas, Texas 75202-2790
IN WITNESS WHEREOF, I have hereunto set my hand this the 2nd day of
February, 1998.
/s/ MARK A. KOPIDLANSKY
--------------------------------------
Mark A. Kopidlansky, Incorporator
5
<PAGE>
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
IWL HOLDINGS CORP.
(THE "CORPORATION")
Pursuant to the provisions of Article 4.04 of the Texas Business Corporation
Act, the Corporation adopts the following Articles of Amendment to its Articles
of Incorporation.
ARTICLE ONE
The name of the Corporation is IWL Holdings Corp.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted by the
shareholders of the Corporation on February 16, 1998, so as to amend the name of
the Corporation.
Article I of the Articles of Incorporation is hereby amended to read in its
entirety as follows:
"ARTICLE I
NAME
The name of the Corporation is CapRock Communications Corp."
Article IV of the Articles of Incorporation is hereby amended to read in its
entirety as follows:
"ARTICLE IV
SHARES
A. CAPITALIZATION. The aggregate number of shares that the Corporation is
authorized to issue is Two Hundred Twenty Million (220,000,000) shares,
consisting of:
1. Two Hundred Million (200,000,000) shares of Common Stock having a par
value of One Cent ($.01) per share; and
2. Twenty Million (20,000,000) shares of Preferred Stock having a par value
of One Cent ($.01) per share.
B. SERIES OF SHARES ESTABLISHED BY BOARD OF DIRECTORS.
The Preferred Stock may be issued from time to time in one (1) or more
series. The Board of Directors is hereby authorized, by filing a statement
pursuant to Article 2.13 of the Texas Business Corporation Act, to fix or
determine from time to time the designations, preferences, limitations and
relative rights including voting rights of the shares of any series to the same
extent that such designations, preferences, limitations, and relative rights
could be stated if fully set forth in the articles of incorporation, but subject
to and within the limitations set forth in the articles of incorporation. Such
authority includes, without limitation, the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then issued. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status of authorized, but unissued shares of the class
of shares from which such series was established that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
<PAGE>
C. COMMON STOCK.
1. Shares of Common Stock may be issued by the Corporation from time to
time for such consideration as may lawfully be fixed by the Board of Directors.
2. The Common Stock shall be entitled to one (1) vote per share on all
matters.
3. Subject to the prior rights and preferences of the Preferred Stock and
subject to the provisions and conditions set forth in the foregoing Section B of
this Article IV, or in any resolution or resolutions providing for the issue of
a series of Preferred Stock, and to the extent permitted by the laws of the
State of Texas, the holders of Common Stock shall be entitled to receive such
cash dividends as may be declared and made payable by the Board of Directors.
4. After payment shall have been made in full to the holders of any series
of Preferred Stock having preferred liquidation rights, upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the remaining assets and funds of the Corporation shall be
distributed among the holders of the Common Stock according to their respective
shares."
ARTICLE THREE
The number of shares of the Corporation outstanding at the time of such
adoption was 1,000, and the number of shares entitled to vote thereon was 1,000.
ARTICLE FOUR
The holders of all shares outstanding and entitled to vote on said amendment
have signed a consent in writing adopting said amendment and any written notice
required by Article 9.10 has been given.
ARTICLE FIVE
The amendment does not involve any exchange, reclassification or
cancellation of issued shares of the Corporation.
ARTICLE SIX
The amendment does not effect a change in the amount of stated capital of
the Corporation.
<TABLE>
<S> <C> <C>
IWL HOLDINGS CORP.
A Texas Corporation
By: /s/ IGNATIUS W. LEONARDS
-----------------------------------------
Its: President
</TABLE>
Dated: May 3, 1998
2
<PAGE>
APPENDIX IV
BYLAWS
OF
IWL HOLDINGS CORP.
<PAGE>
BYLAWS
OF
IWL HOLDINGS CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I. Offices.
1.01. Principal Office.
1.02. Other Offices.
ARTICLE II. Meetings of Shareholders.
2.01. Place of Meetings.
2.02. Annual Meeting.
2.03. List of Shareholders.
2.04. Special Meetings.
2.05. Notice.
2.06. Quorum.
2.07. Voting on Matters Other than the Election of Directors.
2.08. Voting in the Election of Directors.
2.09. Voting Procedure.
2.10. Action Without a Meeting.
2.11. Telephone Meetings.
ARTICLE III. Directors.
3.01. Management.
3.02. Number; Election.
3.03. Change in Number.
3.04. Election of Directors.
3.05. Place of Meetings.
3.06. First Meetings.
3.07. Regular Meetings.
3.08. Special Meetings.
3.09. Quorum.
3.10. Removal.
3.11. Vote of Directors to Fill Vacancy.
3.12. Vote of Shareholders to Fill Vacancy.
3.13. Action Without Meeting; Telephone Meetings.
3.14. Chairman of the Board.
3.15. Compensation.
3.16. Committees.
ARTICLE IV. Notices.
4.01. Method.
4.02. Waiver.
ARTICLE V. Officers.
5.01. Officers.
5.02. Election.
5.03. Compensation.
5.04. Removal and Vacancies.
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
5.05. Chief Executive Officer.
<S> <C> <C>
5.06. President.
5.07. Vice Presidents.
5.08. Secretary.
5.09. Assistant Secretaries.
5.10. Treasurer.
5.11. Assistant Treasurers.
ARTICLE VI. Certificates Representing Shares.
6.01. Certificates.
6.02. Lost Certificates.
6.03. Transfer of Shares.
6.04. Registered Shareholders.
6.05. Fixing Record Date for Matters Other Than Consents to Action.
6.06. Fixing Record Date for Consents to Action.
6.07. Distribution Held in Suspense.
6.08. Joint Owners of Shares.
ARTICLE VII. General Provisions.
7.01. Distributions.
7.02. Reserves.
7.03. Checks.
7.04. Fiscal Year.
7.05. Seal.
7.06. Indemnification.
7.07. Transactions with Directors and Officers.
7.08. Amendments.
7.09. Table of Contents; Headings.
</TABLE>
ii
<PAGE>
BYLAWS
OF
IWL HOLDINGS CORP.
(THE "CORPORATION")
ARTICLE I.
OFFICES
Section 1.01. PRINCIPAL OFFICE. The principal business office of the
Corporation shall be at 12000 Aerospace Avenue, Suite 200, Houston, Texas 77034.
Section 1.02. OTHER OFFICES. The Corporation may also have offices at such
other places, both within and without the State of Texas, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE OF MEETINGS. Meetings of shareholders for all purposes
may be held at such time and place, within or without the State of Texas, as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
Section 2.02. ANNUAL MEETING. An annual meeting of the shareholders,
commencing with the year 1997, shall be held in each year on a date to be
determined by the Board of Directors, at which meeting the shareholders shall
elect a Board of Directors, and transact such other business as may properly be
brought before the meeting.
Section 2.03. LIST OF SHAREHOLDERS. The officer or agent having charge of
the share transfer records shall make, at least ten (10) days before each
meeting of the shareholders, a complete list of the shareholders entitled to
vote at said meeting, arranged in alphabetical order with the address of and the
number of voting shares held by each, which list, for a period of ten (10) days
prior to such meeting, shall be kept on file at the registered office or
principal place of business of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall be produced and kept open at the time and place of the meeting during the
whole time thereof, and shall be subject to the inspection of any shareholder
who may be present. The original share transfer records shall be prima facie
evidence as to the shareholders who are entitled to examine such list or
transfer records or to vote at any such meeting of shareholders.
Section 2.04. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation or by these Bylaws, may be called by the Chief
Executive Officer, the President, the Board of Directors, or the holders of not
less than ten percent (10%) of all shares entitled to vote at the meetings.
Business transacted at all special meetings shall be confined to the purposes
stated in the notice of the meeting.
Section 2.05. NOTICE. Written or printed notice stating the place, day and
hour of the meeting, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten (10) nor
more than sixty (60) days before the date of the meeting, either personally or
by mail by or at the direction of the Chief Executive Officer, the President,
the Secretary or the officer or person calling the meeting, to each shareholder
entitled to vote at the meeting; provided, however, in the event of a merger or
consolidation, such notice shall be delivered not less than twenty (20) days
before the meeting.
Section 2.06. QUORUM. Unless otherwise provided in the Articles of
Incorporation, a quorum shall be present at a meeting of shareholders if the
holders of a majority of the shares entitled to vote are
1
<PAGE>
represented at the meeting in person or by proxy. Unless otherwise provided in
the Articles of Incorporation or these Bylaws, once a quorum is present at a
meeting of shareholders, the shareholders represented in person or by proxy at
the meeting may conduct such business as may be properly brought before the
meeting until it is adjourned, and the subsequent withdrawal from the meeting of
any shareholder or the refusal of any shareholder represented in person or by
proxy to vote shall not affect the presence of a quorum at the meeting. Unless
otherwise provided in the Articles of Incorporation, the shareholders
represented in person or by proxy at a meeting of shareholders at which a quorum
is not present may adjourn the meeting until such time and to such place as may
be determined by a vote of the holders of a majority of the shares represented
in person or by proxy at that meeting.
Section 2.07. VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With
respect to any matter other than the election of directors or a matter for which
the affirmative vote of the holders of a specified portion of the shares
entitled to vote is required by law, the affirmative vote of the holders of a
majority of the shares entitled to vote on that matter and represented in person
or by proxy at a meeting of shareholders at which a quorum is present shall be
the act of the shareholders unless otherwise provided in the Articles of
Incorporation or these Bylaws.
Section 2.08. VOTING IN THE ELECTION OF DIRECTORS. Directors shall be
elected by a plurality of the votes cast by the holders of shares entitled to
vote in the election of directors at a meeting of shareholders at which a quorum
is present unless otherwise provided in the Articles of Incorporation or these
Bylaws.
Section 2.09. VOTING PROCEDURE. Each outstanding share of common stock
shall be entitled to one (1) vote on each matter submitted to a vote at a
meeting of shareholders, except to the extent that the voting rights of the
shares of any class or classes are limited or denied by the Articles of
Incorporation. At any meeting of the shareholders, every shareholder having the
right to vote shall be entitled to vote either in person or by proxy executed in
writing subscribed by the shareholder. A telegram, telex, cablegram or similar
transmission by the shareholder, or a photographic, photostatic, facsimile or
similar reproduction of a writing executed by the shareholder shall be treated
as an execution in writing for purposes of this section. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy. Each proxy shall be revocable unless the proxy form
conspicuously states that the proxy is irrevocable and the proxy is coupled with
an interest.
Section 2.10. ACTION WITHOUT A MEETING. Except as otherwise provided
below, any action required or permitted to be taken at a meeting of the
shareholders of the Corporation may be taken without a meeting if a consent in
writing setting forth the action so taken shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof, and
such consent shall have the same force and effect as a unanimous vote of the
shareholders.
The Articles of Incorporation may provide that any action required by the
Texas Business Corporation Act to be taken at any annual or special meeting of
shareholders, or any action that may be taken at any annual or special meeting
of shareholders, may be taken without a meeting, without prior notice, and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holder or holders of shares having not less than
the minimum number of votes that would be necessary to take such action at a
meeting at which the holders of all shares entitled to vote on the action were
present and voted. If the Articles of Incorporation make such a provision, then
such written consent shall bear the date of signature of each shareholder who
signs the consent. No written consent shall be effective to take the action that
is the subject of the consent unless, within sixty (60) days after the date of
the earliest dated consent delivered to the Corporation in the manner required
by the Texas Business Corporation Act, a consent or consents signed by the
holder or holders of shares having not less than the minimum number of votes
that would be necessary to take the action that is the subject of the consent
are delivered to the Corporation by delivery to its registered office, its
principal place of business, or an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of shareholders are
recorded. Delivery shall be by hand or certified or registered mail, return
receipt requested. Delivery to the
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Corporation's principal place of business shall be addressed to the president or
principal executive officer of the Corporation.
A telegram, telex, cablegram, or similar transmission by a shareholder, or a
photographic, photostatic, facsimile or similar reproduction of a writing signed
by a shareholder shall be regarded as signed by the shareholder for purposes of
this section. Prompt notice of the taking of any action by shareholders without
a meeting by less than unanimous written consent shall be given to those
shareholders who did not consent in writing to the action.
Section 2.11. TELEPHONE MEETINGS. Subject to applicable notice provisions
and unless otherwise restricted by the Articles of Incorporation, shareholders
may participate in and hold a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in such meeting shall
constitute presence in person at such meeting, except where a person's
participation is for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
ARTICLE III.
DIRECTORS
Section 3.01. MANAGEMENT. The powers of the Corporation shall be exercised
by or under the authority of, and the business affairs of the Corporation shall
be managed under the direction of the Board of Directors that may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute or by the Articles of Incorporation or by these Bylaws directed or
required to be exercised or done by the shareholders. The Board of Directors
shall keep regular minutes of its proceedings.
Section 3.02. NUMBER; ELECTION. The directors of the Corporation shall
consist of not less than one (1) director, as determined from time to time by
resolution of the shareholders or the Board of Directors of the Corporation.
Directors need not be shareholders or residents of the State of Texas. The
directors shall be elected at the annual meeting of the shareholders by the
holders of shares entitled to vote in the election of directors and, except as
hereinafter provided, each director elected shall hold office for the term for
which such director is elected and until such director's successor shall have
been elected and shall qualify.
Section 3.03. CHANGE IN NUMBER. The number of directors may be increased
or decreased from time to time by resolution of the shareholders or the Board of
Directors of the Corporation, but no decrease shall have the effect of
shortening the term of any incumbent director.
Section 3.04. ELECTION OF DIRECTORS. Directors shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors at a meeting of shareholders at which a quorum is present
unless otherwise provided in the Articles of Incorporation or these Bylaws. At
every election of directors, each shareholder shall have the right to vote in
person or by proxy the number of voting shares owned by such shareholder for as
many persons as there are directors to be elected and for whose election such
shareholder has a right to vote. Cumulative voting shall be prohibited.
Section 3.05. PLACE OF MEETINGS. The directors of the Corporation may hold
their meetings, both regular and special, either inside or outside of the State
of Texas.
Section 3.06. FIRST MEETINGS. The first meeting of each newly elected
Board shall be held without further notice immediately following the annual
meeting of shareholders, and at the same place, unless by unanimous consent of
the directors then elected and serving, such time or place shall be changed.
Section 3.07. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board.
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Section 3.08. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chief Executive Officer or the President on three (3) days'
notice to each director, either personally or by mail or by telegram and shall
be called by the Chief Executive Officer or the President or any officer in like
manner and on like notice on the written request of two (2) or more of the
directors. Except as may be otherwise expressly provided by law or by the
Articles of Incorporation or by these Bylaws, neither the business to be
transacted at nor the purpose of any special meeting need be specified in a
notice or waiver of notice of such meeting.
Section 3.09. QUORUM. At all meetings of the Board of Directors, the
presence of a majority of the number of the directors fixed by or in the manner
provided in the Articles of Incorporation or these Bylaws shall constitute a
quorum for the transaction of business unless a greater number is required by
law, the Articles of Incorporation or the Bylaws. The act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors unless the act of a greater number is required by law,
the Articles of Incorporation or by these Bylaws. If a quorum shall not be
present at any meeting of directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.10. REMOVAL. At any meeting of the shareholders called expressly
for such purpose, any director or the entire Board of Directors may be removed
either with or without cause by the affirmative vote of the holders of a
majority of the shares entitled to vote at an election of such directors.
Section 3.11. VOTE OF DIRECTORS TO FILL VACANCY. Any vacancy occurring in
the initial Board of Directors before the issuance of shares may be filled by
the affirmative vote or written consent of a majority of the incorporators or by
the affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors. Any vacancy subsequently occurring in the
Board of Directors after the issuance of shares may be filled in accordance with
Section 3.12 of this Article III or may be filled by the affirmative vote of a
majority of the remaining directors though less than a quorum of the Board of
Directors. A director elected to fill a vacancy shall be elected for the
unexpired term of such director's predecessor in office. A directorship to be
filled by reason of an increase in the number of directors may be filled in
accordance with Section 3.12 of this Article III or, subject only to any
limitations then contained in the Texas Business Corporation Act relating to the
number of directors that may be elected by the Board of Directors to fill
newly-created directorships, may be filled by the Board of Directors for a term
of office continuing only until the next election of one (1) or more directors
by the shareholders.
Section 3.12. VOTE OF SHAREHOLDERS TO FILL VACANCY. Any vacancy occurring
in the Board of Directors or any directorship to be filled by reason of an
increase in the number of directors may be filled by election at any annual or
special meeting of shareholders called for that purpose.
Section 3.13. ACTION WITHOUT MEETING; TELEPHONE MEETINGS. Unless otherwise
restricted by the Articles of Incorporation or these Bylaws, any action required
or permitted to be taken at a meeting of the Board of Directors or of any
committee designated by the Board of Directors may be taken without a meeting if
a consent in writing, setting forth the action so taken is signed by all the
members of the Board of Directors or committee, as the case may be. Such consent
shall have the same force and effect as a unanimous vote at a meeting and may be
stated as such in any document or instrument filed with the Secretary of State.
Subject to applicable notice provisions and unless otherwise restricted by the
Articles of Incorporation or these Bylaws, members of the Board of Directors or
members of any committee designated by the Board of Directors may participate in
and hold a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such meeting shall constitute presence in
person at such meeting, except where a person participates in the meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
Section 3.14. CHAIR OF THE BOARD. The Board of Directors may elect a Chair
of the Board to preside at their meetings and perform such other duties as the
Board may from time to time assign to the Chair.
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Section 3.15. COMPENSATION. Directors, as such, shall not receive any
stated salary for their services, but, by resolution of the Board a fixed sum
and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board; provided that nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of any committee
designated by the Board may, by resolution of the Board of Directors, be allowed
like compensation for attending committee meetings.
Section 3.16. COMMITTEES. The Board of Directors, by resolution adopted by
a majority of the full Board of Directors, may designate from among its members
one (1) or more committees, each of which shall be comprised of one (1) or more
of its members and may designate one (1) or more of its members as alternate
members of any committee, who may, subject to any limitations imposed by the
Board of Directors, replace absent or disqualified members at any meeting of
that committee. Any such committee, except to the extent provided in said
resolution, shall have and may exercise all of the authority of the Board of
Directors in the management of the business and affairs of the Corporation,
except where action of the full Board of Directors is required by law or by the
Articles of Incorporation. Any member of the committees may be removed by the
Board of Directors by the affirmative vote of a majority of the Board of
Directors, whenever in its judgment the best interests of the Corporation will
be served thereby. The committees shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
ARTICLE IV.
NOTICES
Section 4.01. METHOD. Whenever by statute, the Articles of Incorporation
or these Bylaws, notice is required to be given to any director or shareholder,
and no provision is made as to how such notice shall be given, it shall not be
construed to mean personal notice, but any such notice may be given in writing,
either personally or by mail, postage prepaid, addressed to such director or
shareholder at such address as appears on the share transfer records of the
Corporation or in any other method permitted by law. Any notice required or
permitted to be given by mail shall be deemed to be given at the time when the
same shall be thus deposited in the United States mail as aforesaid.
Section 4.02. WAIVER. Whenever any notice is required to be given to any
shareholder or director of the Corporation by law, the Articles of Incorporation
or these Bylaws, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated in such notice,
shall be deemed equivalent to the giving of such notice. Attendance of a
shareholder or director at a meeting shall constitute a waiver of notice of such
meeting, except where a shareholder or director attends for the express purpose
of objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened. Consent in writing by a shareholder or
director to any action taken or resolution adopted by the shareholders or
directors of the Corporation shall constitute a waiver of any and all notices
required to be given in connection with such action or resolution.
ARTICLE V.
OFFICERS
Section 5.01. OFFICERS. The officers of the Corporation shall be elected
by the Board of Directors and shall be at least a President and a Secretary. The
Board of Directors may also choose a Chair of the Board, a Chief Executive
Officer, a Treasurer, and one (1) or more Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries,
Assistant Treasurers, or such other officers as the Board of Directors shall
elect. Any two or more offices may be held by the same person.
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Section 5.02. ELECTION. The Board of Directors at its first meeting after
each annual meeting of shareholders shall choose a President and a Secretary and
may choose a Chair of the Board, a Chief Executive Officer, a Treasurer and one
(1) or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents,
Assistant Vice Presidents, Assistant Secretaries or Assistant Treasurers, none
of whom need be a member of the Board of Directors, a shareholder or a resident
of the State of Texas. The Board of Directors may appoint such other officers
and agents as it shall deem necessary, who shall be appointed for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors.
Section 5.03. COMPENSATION. The compensation of all officers and agents of
the Corporation shall be fixed by the Board of Directors.
Section 5.04. REMOVAL AND VACANCIES. Each officer of the Corporation shall
hold office until such officer's successor is chosen and qualified in such
officer's stead or until such officer's death or until such officer's
resignation or removal from office. Any officer or agent or member of a
committee elected or appointed by the Board of Directors may be removed by a
majority of the members of the Board of Directors represented at a meeting of
the Board of Directors at which a quorum is represented, whenever in its
judgment the best interests of the Corporation will be served thereby; but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
Section 5.05. CHIEF EXECUTIVE OFFICER. The Board of Directors may, but
shall not be required to, elect a Chief Executive Officer. If so elected, the
Chief Executive Officer shall preside at all meetings of the shareholders and
the Board of Directors unless the Board shall choose to elect a Chair of the
Board, in which event the Chief Executive Officer shall preside at shareholders'
and Board of Directors' meetings in the absence of the Chair of the Board of
Directors. The Chief Executive Officer shall have general and active management
of the business and affairs of the Corporation, shall see that all orders and
resolutions of the Board are carried into effect, and shall perform such other
duties as the Board of Directors shall prescribe. Such duties shall be performed
by the President of the Corporation if the Board of Directors does not elect a
Chief Executive Officer.
Section 5.06. PRESIDENT. The President shall preside at all meetings of
the shareholders and the Board of Directors unless the Board shall choose to
elect a Chair of the Board or a Chief Executive Officer, in which event the
President shall preside at shareholders' and Board of Directors' meetings in the
absence of the Chair of the Board of Directors or the Chief Executive Officer,
as the case may be. The President shall have general and active management of
the day-to-day operations of the Corporation and such other duties as the Board
of Directors or the Chief Executive Officer shall prescribe.
Section 5.07. VICE PRESIDENTS. Each Vice President shall have only such
powers and perform only such duties as the Board of Directors may from time to
time prescribe or as the Chief Executive Officer or the President may from time
to time delegate to such Vice President.
Section 5.08. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the shareholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the Executive Committee when required. The Secretary
shall give, or cause to be given, notice of all meetings of the share-holders
and special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or the Chief Executive
Officer or the President, under whose supervision the Secretary shall be. The
Secretary shall keep in safe custody the seal of the Corporation and affix the
same to any instrument requiring it, and, when so affixed, it shall be attested
by the Secretary's signature or by the signature of the Treasurer or an
Assistant Secretary.
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Section 5.09. ASSISTANT SECRETARIES. Each Assistant Secretary shall have
only such powers and perform only such duties as the Board of Directors may from
time to time prescribe or as the Chief Executive Officer or the President may
from time to time delegate.
Section 5.10. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements of the Corporation and shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer or the President and directors, at the regular
meetings of the Board, or whenever they may require it, an account of all the
Treasurer's transactions as Treasurer and of the financial condition of the
Corporation, and shall perform such other duties as the Board of Directors may
prescribe. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such form in such sum, and with surety or sureties as
shall be satisfactory to the Board for the faithful performance of the duties of
the Treasurer's office and for the restoration to the Corporation, in case of
the Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money, and other property of whatever kind in the
Treasurer's possession or under the Treasurer's control belonging to the
Corporation.
Section 5.11. ASSISTANT TREASURERS. Each Assistant Treasurer shall have
only such powers and perform only such duties as the Board of Directors may from
time to time prescribe.
ARTICLE VI.
CERTIFICATES REPRESENTING SHARES
Section 6.01. CERTIFICATES. Certificates in such form as may be determined
by the Board of Directors shall be delivered representing all shares to which
shareholders are entitled. Such certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued. Each
certificate shall state on the face thereof the holder's name, the number and
class of shares, and the par value of such shares or a statement that such
shares are without par value. They shall be signed by the Chief Executive
Officer, the President or a Vice President and the Secretary or an Assistant
Secretary and may be sealed with the seal of the Corporation or a facsimile
thereof. If any certificate is countersigned by a transfer agent, or an
assistant transfer agent or registered by a registrar, other than the
Corporation or an employee of the Corporation, the signature of any such officer
may be facsimile. Shares may not be issued until the full amount of the
consideration, fixed as provided by law, has been paid.
Section 6.02. LOST CERTIFICATES. The Board of Directors may direct a new
certificate representing shares to be issued in place of any certificate
theretofore issued by the Corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost or destroyed. When authorizing such issue of a new
certificate, the Board of Directors, in its discretion and as a condition
precedent to the issuance thereof, may require the owner of such lost or
destroyed certificate, or such owner's legal representative, to advertise the
same in such manner as it shall require and/or give the Corporation a bond in
such form, in such sum, and with such surety or sureties as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost or destroyed.
Section 6.03. TRANSFER OF SHARES. Except as is otherwise provided in these
Bylaws, shares of stock shall be transferable only on the books of the
Corporation by the holder thereof in person or by such holder's duly authorized
attorney. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate representing shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation or the transfer agent
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of the Corporation to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 6.04. REGISTERED SHAREHOLDERS. Unless otherwise provided by
statute, the Corporation may regard the person in whose name any shares issued
by the Corporation are registered in the share transfer records of the
Corporation at any particular time (including, without limitation as of a record
date fixed pursuant to Sections 6.05 and 6.06) as the owner of those shares at
that time for purposes of voting those shares, receiving distributions thereon
or notices in respect thereof, transferring those shares, exercising rights of
dissent with respect to those shares, exercising or waiving any preemptive right
with respect to those shares, entering into agreements with respect to those
shares in accordance with the Texas Business Corporation Act or giving proxies
with respect to those shares. Neither the Corporation nor any of its officers,
directors, employees or agents shall be liable for regarding that person as the
owner of those shares at that time for those purposes, regardless of whether
that person possesses a certificate for those shares.
Section 6.05. FIXING RECORD DATE FOR MATTERS OTHER THAN CONSENTS TO
ACTION. For the purpose of determining shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or entitled to
receive a distribution by the Corporation (other than a distribution involving a
purchase or redemption by the Corporation of any of its own shares) or a share
dividend, or in order to make a determination of shareholders for any other
proper purpose (other than determining shareholders entitled to consent to
action by shareholders proposed to be taken without a meeting of shareholders),
the Board of Directors may provide that the share transfer records shall be
closed for a stated period but not to exceed, in any case, sixty (60) days. If
the share transfer records shall be closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
records shall be closed for at least ten (10) days immediately preceding such
meeting. In lieu of closing the share transfer records, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than sixty (60) days, and, in
the case of a meeting of shareholders, not less than ten (10) days, prior to the
date on which the particular action requiring such determination of shareholders
is to be taken. If the share transfer records are not closed and no record date
is fixed for the determination of shareholders entitled to notice of or to vote
at a meeting of shareholders, or shareholders entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, the date on which such notice of
the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such distribution or share dividend is adopted, as the case
may be, shall be the record date for such determination of shareholders. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this Section, such determination shall apply to any
adjournment thereof, except where the determination has been made through the
closing of the share transfer records and the stated period of closing has
expired.
Section 6.06. FIXING RECORD DATE FOR CONSENTS TO ACTION. Unless a record
date shall have previously been fixed or determined pursuant to this Article VI,
whenever action by shareholders is proposed to be taken by consent in writing
without a meeting of shareholders, the Board of Directors may fix a record date
for the purpose of determining shareholders entitled to consent to that action,
which record date shall not precede, and shall not be more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors. If no record date has been fixed by the Board of
Directors and the prior action of the Board of Directors is not required by the
Texas Business Corporation Act, the record date for determining shareholders
entitled to consent to action in writing without a meeting shall be the first
date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office, its principal place of business, or an officer or agent of
the Corporation having custody of the books in which proceedings of meetings of
shareholders are recorded. Delivery shall be by hand or by certified or
registered mail, return receipt requested. Delivery to the Corporation's
principal place of business shall be addressed to the
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President or the principal executive officer of the Corporation. If no record
date shall have been affixed by the Board of Directors and prior action of the
Board of Directors is required by statute, the record date for determining
shareholders entitled to consent to action in writing without a meeting shall be
at the close of business on the date on which the Board of Directors adopts
resolution taking such prior action.
Section 6.07. DISTRIBUTION HELD IN SUSPENSE. Distributions made by the
Corporation, including those that were payable but not paid to a holder of
shares or to such holder's heirs, successors or assigns, and have been held in
suspense by the Corporation or were paid or delivered by it into an escrow
account or to a trustee or custodian, shall be payable by the Corporation,
escrow agent, trustee or custodian to the holder of the shares as of the record
date determined for that distribution as provided in Section 6.05, or to such
holder's heirs, successors or assigns.
Section 6.08. JOINT OWNERS OF SHARES. When shares are registered on the
books of the Corporation in the names of two (2) or more persons as joint owners
with the right of survivorship, after the death of a joint owner and before the
time that the Corporation receives actual written notice that parties other than
the surviving joint owner or owners claim an interest in the shares or any
distributions thereon, the Corporation may record on its books and otherwise
effect the transfer of those shares to any person, firm, or Corporation
(including that surviving joint owner individually) and pay any distributions
made in respect of those shares, in each case as if the surviving joint owner or
owners were the absolute owners of the shares. The Corporation permitting such a
transfer by and making any distribution to such a surviving joint owner or
owners before the receipt of written notice from other parties claiming an
interest in those shares or distributions is discharged from all liability for
the transfer or payment so made; provided, however, that the discharge of the
Corporation from liability and the transfer of full legal and equitable title of
the shares in no way affects, reduces, or limits any cause of action existing in
favor of any owner of an interest in those shares or distributions against the
surviving owner or owners.
ARTICLE VII.
GENERAL PROVISIONS
Section 7.01. DISTRIBUTIONS. Distributions upon the outstanding shares of
the Corporation, subject to the provisions of the Articles of Incorporation, may
be declared by the Board of Directors at any regular or special meeting.
Distributions may be paid in cash, in property or in shares of the Corporation,
subject to the provisions of the statutes and the Articles of Incorporation.
Section 7.02. RESERVES. There may be created by resolution of the Board of
Directors out of the surplus of the Corporation such reserve or reserves as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize distributions, or to repair or maintain any
property of the Corporation, or for such other purposes as the Board of
Directors shall think beneficial to the Corporation, and the Board of Directors
may modify or abolish any such reserve in the manner in which it was created.
Section 7.03. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 7.04. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 7.05. SEAL. The corporate seal shall be kept in the safe custody
of the Secretary of the Corporation and shall have inscribed thereon the name of
the Corporation and may be in such form as the Board of Directors may determine.
Said seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
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Section 7.06. INDEMNIFICATION. The Corporation shall have the authority to
and shall indemnify and advance expenses to the directors, officers, employees,
agents of the Corporation or any other persons serving at the request of the
Corporation in such capacities in a manner and to the maximum extent permitted
by applicable state or federal law. The Corporation may purchase and maintain
liability insurance or make other arrangements for such obligations to the
extent permitted by the Texas Business Corporation Act.
Section 7.07. TRANSACTIONS WITH DIRECTORS AND OFFICERS. No contract or
transaction between the Corporation and one (1) or more of its directors or
officers, or between the Corporation and any other Corporation, partnership,
association, or other organization in which one (1) or more of its directors or
officers are directors or officers or have a financial interest, shall be void
or voidable solely for this reason, solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof that authorizes the contract or transaction, or solely because his, her,
its or their votes are counted for such purpose, if:
(1) The material facts as to such person's relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(2) The material facts as to such person's relationship or interest and
as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or
(3) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the shareholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee that authorizes
the contract or transaction.
Section 7.08. AMENDMENTS. The Board of Directors may amend or repeal the
Bylaws of the Corporation or adopt new Bylaws, unless: (1) the Articles of
Incorporation or the Texas Business Corporation Act reserves the power
exclusively to the shareholders in whole or part; or (2) the shareholders in
amending, repealing or adopting a particular bylaw expressly provide that the
Board of Directors may not amend or repeal that bylaw. Unless the Articles of
Incorporation or a bylaw adopted by the shareholders provides otherwise as to
all or some portion of the Bylaws, the shareholders may amend, repeal or adopt
the Bylaws even though the Bylaws may also be amended, repealed or adopted by
the Board of Directors.
Section 7.09. TABLE OF CONTENTS; HEADINGS. The Table of Contents and
headings used in these Bylaws have been inserted for convenience only and do not
constitute matters to be construed in interpretation.
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CERTIFICATE BY SECRETARY
The undersigned, being the Secretary of the Corporation, hereby certifies
that the foregoing code of Bylaws was duly adopted by the directors of said
Corporation effective on February 3, 1998.
/s/ RICHARD H. ROBERSON
--------------------------------------
Secretary
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APPENDIX V
ART. 5.11 RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation if special authorization of
the shareholders is required by this Act and the shareholders hold shares of a
class or series that was entitled to vote thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series, shares
of which are on the record date fixed to determine the shareholders entitled to
vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation system) or
designated as a national market security on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for the shareholder's shares any consideration that
is different than the consideration (other than cash in lieu of fractional
shares that the shareholder would otherwise be entitled to receive) to be
provided to any other holder of shares of the same class or series of shares
held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger or
the plan of exchange to accept for the shareholder's shares any consideration
other than:
(a) shares of a domestic or foreign corporation that, immediately after the
effective time of the merger or exchange, will be part of a class or series,
shares of which are:
(i) listed, or authorized for listing upon official notice of issuance, on a
national securities exchange;
(ii) approved for quotation as a national market security on an interdealer
quotation system by the National Association of Securities Dealers, Inc., or
successor entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be received; or
(c) any combination of the securities and cash described in Subdivisions (a)
and (b) of this subsection.
ART. 5.12 PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
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(1)(a) With respect to proposed corporate action that is submitted to a vote
of shareholders at a meeting, the shareholder shall file with the corporation,
prior to the meeting, a written objection to the action, setting out that the
shareholder's right to dissent will be exercised if the action is effective and
giving the shareholder's address, to which notice thereof shall be delivered or
mailed in that event. If the action is effected and the shareholder shall not
have voted in favor of the action, the corporation, in the case of action other
than a merger, or the surviving or new corporation (foreign or domestic) or
other entity that is liable to discharge the shareholder's right of dissent, in
the case of a merger, shall, within ten (10) days after the action is effected,
deliver or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery or
mailing of the notice, make written demand on the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, for
payment of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the day immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the shares owned
by the shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the ten (10) day
period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents filed by the
corporation with the Secretary of State to effect the action. If the shareholder
shall not have consented to the taking of the action, the shareholder may,
within twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the shareholder's
shares. The fair value of the shares shall be the value thereof as of the date
the written consent authorizing the action was delivered to the corporation
pursuant to Section A of Article 9.10 of this Act, excluding any appreciation or
depreciation in anticipation of the action. The demand shall state the number
and class of shares owned by the dissenting shareholder and the fair value of
the shares as estimated by the shareholder. Any shareholder failing to make
demand within the twenty (20) day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
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B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
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G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13 PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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APPENDIX VI
CAPROCK COMMUNICATIONS CORP.
1998 EQUITY INCENTIVE PLAN
Adopted , 1998
1. PURPOSE OF THE PLAN.
The purpose of the Plan is to provide a means by which selected Employees of
and Consultants to the Company and its Affiliates may be given an opportunity to
acquire a proprietary interest in the Company. Under the Plan, the Company may
provide various types of long-term incentive awards, including Stock Options,
Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Reload
Options and Other Stock-Based Awards, in order to retain the services of persons
who are now Employees of or Consultants to the Company and its Affiliates, to
secure and retain the services of new Employees and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates. Stock Options granted under the Plan may be
Incentive Stock Options or Nonqualified Stock Options, as determined by the
Committee at the time of grant of an Option and subject to the applicable
provisions of Section 422 of the Code and the regulations promulgated
thereunder.
2. DEFINITIONS.
As used herein, the following definitions shall apply:
(a) "Affiliate" means, with respect to any Person, any Parent or Subsidiary
of such Person, whether such Parent or Subsidiary is now or hereafter existing.
(b) "Agreement" means the agreement between the Company and the Holder
setting forth the terms and conditions of an Award under the Plan.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options are, or will be, granted under the
Plan.
(d) "Award" means an award of Options, Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Stock Reload Options or Other Stock-Based
Awards under the Plan.
(e) "Beneficial Owner" means a "beneficial owner" as defined in Rule 13d-3
of the Exchange Act.
(f) "Board" means the Board of Directors of the Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Change of Control" means the occurrence at any time after the
effective time of the Mergers of (i) any Person or Group of Persons becoming for
the first time the Beneficial Owner, directly or indirectly, of more than fifty
percent (50%) of the total combined voting power of all classes of capital stock
of the Company normally entitled to vote for the election of directors of the
Company ("Voting Stock"), other than as a result of a transfer or series of
related transfers of Voting Stock from a Person or Group of Persons who
immediately prior to such transfer or transfers was the Beneficial Owner, and
who after giving effect to such transfer or transfers continues to be the
Beneficial Owner, of more than fifty percent (50%) of the Voting Stock of the
Company; (ii) a merger (other than the Mergers) or consolidation of the Company
with or into another Person or the merger of another Person into the Company as
a consequence of which those Persons who held all of the Voting Stock of the
Company immediately prior to such merger or consolidation do not hold either
directly or indirectly a majority of the Voting Stock of the Company (or, if
applicable, the surviving company of such merger or consolidation) after the
consummation of such merger or consolidation; (iii) the sale of all or
substantially all of the assets of the Company to any Person or Group of Persons
(other than to an entity which owns a majority or more of the Common Stock of
the Company, a Subsidiary of the Company, or to an entity whose equity interests
are owned directly or indirectly by the Company or by an entity which owns
directly or indirectly a majority or more of the
<PAGE>
Common Stock of the Company); or (iv) any event or series of events (which event
or series of events must include a proxy fight or proxy solicitation with
respect to the election of directors of the Company made in opposition to the
nominees recommended by the Continuing Directors) during any period of 12
consecutive months all or any portion of which is after the effective time of
the Mergers, as a result of which a majority of the Board of Directors of the
Company consists of individuals other than Continuing Directors; provided,
however, that a "Change of Control" shall not be deemed to have occurred as a
result of the Mergers.
(i) "Committee" means the Compensation Committee of the Board of Directors.
(j) "Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
(k) "Company" means CapRock Communications Corp.
(l) "Consultant" means (i) any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services and (ii) any Director of the Company, whether such
Director is compensated for such services or not.
(m) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company or any Affiliate is not
interrupted or terminated. Continuous Status as an Employee or Consultant shall
not be considered interrupted in the case of (i) any leave of absence approved
by the Company or (ii) transfers between locations of the Company or between the
Company or any Affiliate or any successor. A leave of absence approved by the
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed 90 days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 91st day of such leave any Incentive Stock Option held
by the Holder shall cease to be treated for tax purposes as an Incentive Stock
Option and shall be treated for tax purposes as a Nonqualified Stock Option.
(n) "Deferred Stock" means Stock to be received at the end of a specified
deferral period under an Award made pursuant to Section 10 below.
(o) "Director" means a member of the Board of Directors of the Company.
(p) "Employee" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. The payment of a Director's fee
by the Company shall not be sufficient to constitute "employment" by the
Company.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(r) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system for the
last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Committee deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be
the mean between the high bid and low asked prices for the Common Stock on
the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the
Committee.
(s) "Group" means a "group" as such term is used in Section 13(d)(3) of the
Exchange Act.
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(t) "Holder" means a person who has received an Award under the Plan.
(u) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(v) "Mergers" means the proposed combination of the businesses of CapRock
Telecommunications Corp., CapRock Fiber Network, Ltd., and IWL Communications
contemplated by the Agreement and Plan of Merger and Plan of Exchange entered
into on February 16, 1998.
(w) "Nonqualified Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(x) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(y) "Option" means a Stock Option granted pursuant to the Plan.
(z) "Option Agreement" shall mean the written option agreement,
substantially in the form attached hereto as EXHIBIT A(or such other form as may
be approved by the Committee for use under the Plan pursuant to Section 3(b)(v)
hereof), between the Company and Holder evidencing the grant of an Option.
(aa) "Optioned Stock" means the Common Stock subject to an Option.
(bb) "Other Stock-Based Awards" means awards (other than Stock Options,
Stock Appreciation Rights, Restricted Stock, Deferred Stock and Stock Reload
Options) denominated or payable in, valued in whole or in part by reference to,
or otherwise based on, or related to shares of Common Stock.
(cc) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(dd) "Person" means an individual or entity.
(ee) "Plan" means this 1998 Equity Incentive Plan.
(ff) "Restricted Stock" means Stock, received under an Award made pursuant
to Section 9 below, that is subject to restrictions under said Section 9.
(gg) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor rule thereto.
(hh) "Section 16(b)" means Section 16(b) of the Exchange Act.
(ii) "SAR Value" means the excess of the Fair Market Value of one share of
Common Stock over the exercise price per share specified in a related Stock
Option in the case of a Stock Appreciation Right granted in tandem with a Stock
Option and the Stock Appreciation Right price per share in the case of a Stock
Appreciation Right awarded on a free standing basis, in each case multiplied by
the number of shares in respect of which the Stock Appreciation Right shall be
exercised, on the date of exercise.
(jj) "Share" means a share of the Common Stock of the Company.
(kk) "Stock" means the Common Stock of the Company.
(ll) "Stock Appreciation Right' means the right, pursuant to an Award
granted under Section 8 hereof, to recover an amount equal to the SAR Value.
(mm) "Stock Option" means any Option to purchase shares of Stock which is
granted pursuant to the Plan.
(nn) "Stock Reload Option" means any option granted under Section 7(e) as a
result of the payment of the exercise price of a Stock Option and/or the
withholding tax related thereto in the form of Stock owned by the Holder or the
withholding of Stock by the Company.
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(oo) "Subsidiary" "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code, including
without limitation, in the case of the Company, IWL Communications, Incorporated
and CapRock Telecommunications Corp. (f/k/a CapRock Communications Corp.) and
including without limitation CapRock Fiber Network, Ltd.
(pp) "Tandem Stock Appreciation Right" means a Stock Appreciation Right
granted in tandem with all or part of any Stock Option granted under the Plan.
3. ADMINISTRATION OF THE PLAN.
(a) PLAN ADMINISTRATION. The Plan at all times shall be administered by
the Committee, which shall be comprised solely of not less than two members who
shall be (i) "Non-Employee Directors" within the meaning of Rule 16b-3 and (ii)
unless otherwise determined by the Board of Directors, "outside directors"
within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section
162(m) of the Code.
(b) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan and
subject to the approval of any relevant authorities, including the approval, if
required, of any stock exchange upon which the Common Stock is listed, the
Committee shall have the full authority to award: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock
Reload Options and/or (vi) Other Stock-Based Awards. For purposes of
illustration and not of limitation, the Committee shall have the authority
(subject to the express provisions of the Plan):
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Consultants and Employees to whom Awards may from
time to time be granted hereunder;
(iii) to determine whether and to what extent Awards or any combination
thereof are granted hereunder;
(iv) to determine the number of Shares to be covered by each such Award
granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price of an Option; any
specified performance goals or other criteria which must be attained for the
vesting of an Award; any restrictions or limitations; and any vesting,
exchange, surrender, cancellation, acceleration, termination, exercise or
forfeiture provisions; and
(vii) to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Committee shall be final and binding on all Holders of
any Awards. No member of the Board or any Committee administering the Plan shall
be liable for any action taken or determination made in good faith with respect
to the Plan or any Option granted hereunder.
4. STOCK SUBJECT TO THE PLAN.
The maximum aggregate number of Shares that may be acquired by Holders of
any Awards granted under the Plan is 5,000,000 Shares and the maximum number of
Shares that may be acquired by an individual Holder under the Plan shall not
exceed 2,500,000 (in each case subject to adjustment as provided in Section 12
of the Plan). The Shares may be authorized but unissued or reacquired Common
Stock.
If any shares of Stock that have been granted pursuant to a Stock Option
cease to be subject to a Stock Option, or if any shares of Stock that are
subject to any Stock Appreciation Right, Restricted Stock, Deferred Stock award,
Reload Stock Option or Other Stock-Based Award granted hereunder are forfeited
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or any such award otherwise terminates without a payment being made to the
Holder in the form of Stock, such shares shall again be available for
distribution in connection with future grants and awards under the Plan. Only
net shares issued upon a stock-for-stock exercise (including stock used for
withholding taxes) shall be counted against the number of shares available under
the Plan.
5. ELIGIBILITY.
(a) Awards may be made or granted to key employees, officers, directors and
consultants of the Company who are deemed to have rendered or to be able to
render significant services to the Company or its Subsidiaries and who are
deemed to have contributed or to have the potential to contribute to the success
of the Company. No Incentive Stock Option shall be granted to any person who is
not an employee of the Company or a Subsidiary at the time of grant.
(b) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonqualified Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company or any Affiliate) exceeds $100,000, such Options shall be treated for
tax purposes as Nonqualified Stock Options. For purposes of this Section 5(b),
Incentive Stock Options shall be taken into account in the order in which they
were granted. For purposes of this Section 5(b), the Fair Market Value of the
Shares shall be determined as of the time the Option with respect to such Shares
is granted.
(c) Neither the Plan nor any Award shall confer upon any Holder any right
with respect to continuation of his or her employment or consulting relationship
with the Company or any Affiliate, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per Share exercise price for the Shares to be issued upon exercise
of an Option shall be such price as is determined by the Committee, but in the
case of an Incentive Stock Option:
(i) granted to an Employee who, at the time of grant of such Option,
owns stock representing more than ten percent (10%) of the voting power of
all classes of stock of the Company or any Affiliate, the per Share exercise
price shall not be less than 110% of the Fair Market Value per Share on the
date of grant; and
(ii) granted to any other Employee, the per Share exercise price shall
not be less than 100% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Committee (and, in the case of an Incentive Stock Option, shall be determined at
the time of grant). Such consideration shall be paid, to the extent permitted by
applicable statutes and regulations at the time the Option is exercised, either
(i) in cash or check, or (ii) at the discretion of the Committee, in one or a
combination of the following ways (which may be in combination with or in lieu
of payment by cash or check): (A) by delivery to the Company of other Shares of
Common Stock of the Company to be valued at their Fair Market Value on the
exercise date, (B) according to a deferred payment or other arrangement with the
Person to whom the Option is granted or to whom the Option is transferred
pursuant to Section 15, (C) withholding of Shares that would otherwise be issued
upon the exercise of the Option, valued at their Fair Market Value on the
exercise date, or (D) in any other form of legal consideration that may be
acceptable to the Committee. In making its determination as to the type of
consideration to accept, the Committee shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company. In addition,
such consideration shall be accompanied by the delivery by the Optionee of a
properly executed exercise notice together with
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such other documentation as the Committee and a broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price.
7. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Committee, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan. The total number of Shares subject to an Option may, but need not, be
allotted in periodic installments (which may, but need not, be equal). The
Option Agreement may provide that from time to time during each of such
installment periods, the Option may become exercisable with respect to some or
all of the Shares allotted to that period and may be exercised with respect to
some or all of the Shares allotted to such period and/or any prior period as to
which the Option became vested but was not fully exercised.
An Option may not be exercised for a fraction of a Share. Exercise of an
Option in any manner shall result in a decrease in the number of Shares that
thereafter may be available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
Subject to Section 18, an Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the Person entitled to exercise the Option
and full payment for the Shares with respect to which the Option is exercised
has been received by the Company. To the extent required by applicable federal,
state, local or foreign law, an Optionee shall make arrangements satisfactory to
the Company for the satisfaction of any withholding tax obligations that arise
by reason of an Option exercise or any sale of Shares, which obligations may, as
authorized by the Committee, consist of any consideration and method of payment
allowable under Section 6(b) hereof. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote, receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Option. No adjustment shall be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 12 hereof.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
paragraph (c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant, such Optionee may exercise his or her
Option to the extent that the Optionee was entitled to exercise it at the date
of such termination; provided, however, that such Option may be exercised only
within such period of time as is determined by the Committee at the date of
grant. Such time period shall not, in the case of an Incentive Stock Option,
exceed three (3) months after the date of such termination and shall not, in any
case, be later than the expiration date of the term of such Option as set forth
in the Option Agreement. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan. An Optionee's Continuous Status as an Employee or Consultant shall
not be terminated in the event of Optionee's change of status from an Employee
to a Consultant or from a Consultant to an Employee; provided, however, that in
the event of an Optionee's change of status from an Employee to a Consultant,
any Incentive Stock Option granted to such Employee shall automatically cease to
be treated for tax purposes as an Incentive Stock Option and shall be treated
for tax purposes as a Nonqualified Stock Option on the day three months and one
day following such change of status.
(c) DISABILITY OF OPTIONEE. In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of his or her
disability, the Optionee may, but only within twelve (12) months from the date
of such termination (and in no event later than the expiration date of the term
of
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such Option as set forth in the Option Agreement), exercise the Option to the
extent he or she otherwise was entitled to exercise it at the date of such
termination. If such disability is not a "disability" as such term is defined in
Section 22(e)(3) of the Code, then in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically cease to be treated for tax purposes
as an Incentive Stock Option and shall be treated for tax purposes as a
Nonqualified Stock Option on the day three months and one day following such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate, and the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement) by the Optionee's estate or by any
Person who acquired the right to exercise the Option by bequest or inheritance
(the "Option Beneficiary"), but only to the extent that the Optionee was
entitled to exercise the Option on the date of death. To the extent that, at the
time of death, the Optionee was not entitled to exercise the Option, or if the
Option Beneficiary does not exercise the Option within the time specified
herein, the Option shall terminate and the Shares covered by such Option shall
revert to the Plan.
(e) STOCK RELOAD OPTION. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Non-Qualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price of the Fair Market Value as of the date of
the Stock Reload Option grant. Unless the Committee determines otherwise, a
Stock Reload Option may be exercised commencing one year after it is granted and
shall expire on the date of expiration of the Option to which the Stock Reload
Option is related.
8. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in tandem
with (i.e., Tandem Stock Appreciation Right) or in conjunction with all or part
of any Stock Option granted under the Plan or may be granted on a free-standing
basis. In the case of a Non-Qualified Stock Option, a Tandem Stock Appreciation
Right may be granted either at or after the time of the grant of such
Non-Qualified Stock Option. In the case of an Incentive Stock Option, a Tandem
Stock Appreciation Right may be granted only at the time of the grant of such
Incentive Stock Option.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
the following terms and conditions:
(i) EXERCISABILITY. Tandem Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Stock
Options to which they relate shall be exercisable in accordance with the
provisions of Section 7 hereof and this Section 8 and may be subject to the
Code with respect to related Incentive Stock Options and such additional
limitations on exercisability as shall be determined by the Committee and
set forth in the Agreement. Other Stock Appreciation Rights shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee and set forth in the Agreement.
(ii) TERMINATION. A Tandem Stock Appreciation Right shall terminate
and shall no longer be exercisable upon the termination or exercise of the
related Stock Option, except that, unless otherwise determined by the
Committee at the time of grant, a Tandem Stock Appreciation Right granted
with respect to less than the full number of shares covered by a related
Stock Option shall not be reduced until after the number of shares remaining
under the related Stock Option equals the number of shares covered by the
Tandem Stock Appreciation Right.
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(iii) METHOD OF EXERCISE. A Tandem Stock Appreciation Right may be
exercised by a Holder by surrendering the applicable portion of the related
Stock Option. Upon such exercise and surrender, the Holder shall be entitled
to receive such amount in the form determined pursuant to Section 8(b)(iv)
below. Stock Options which have been so surrendered, in whole or in part,
shall no longer be exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised.
(iv) RECEIPT OF SAR VALUE. Upon the exercise of a Stock Appreciation
Right, a Holder shall be entitled to receive up to, but not more than, an
amount in cash and/or shares of Stock equal to the SAR Value with the
Committee having the right to determine the form of payment.
(v) SHARES AFFECTED UPON PLAN. Upon the exercise of a Tandem Stock
Appreciation Right, the Stock Option or part thereof to which such Tandem
Stock Appreciation Right is related shall be deemed to have been exercised
for the purpose of the limitation set forth in Section 4 hereof on the
number of shares of Common Stock to be issued under the Plan, but only to
the extent of the number of shares, if any, issued under the Tandem Stock
Appreciation Right at the time of exercise based upon the SAR Value.
9. RESTRICTED STOCK.
(a) GRANT. Shares of Restricted Stock may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such Awards
may be subject to forfeiture ("Restriction Period"), the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
Awards.
(b) TERMS AND CONDITIONS. Each Restricted Stock Award shall be subject to
the following terms and conditions:
(i) CERTIFICATES. Restricted Stock, when issued, will be represented
by a stock certificate or certificates registered in the name of the Holder
to whom such Restricted Stock shall have been awarded. During the
Restriction Period, certificates representing the Restricted Stock and any
securities constituting Retained Distributions (as defined below) shall bear
a legend to the effect that ownership of the Restricted Stock (and such
Retained Distributions), and the enjoyment of all rights appurtenant
thereto, are subject to the restrictions, terms and conditions provided in
the Plan and the Agreement. Such certificates shall be deposited by the
Holder with the Company, together with stock powers or other instruments of
assignment, each endorsed in blank, which will permit transfer to the
Company of all or any portion of the Restricted Stock and any securities
constituting Retained Distributions that shall be forfeited or that shall
not become vested in accordance with the Plan and the Agreement.
(ii) RIGHTS OF HOLDER. Restricted Stock shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Holder
will have the right to vote such Restricted Stock, to receive and retain all
regular cash dividends and other cash equivalent distributions as the Board
may in its sole discretion designate, pay or distribute on such Restricted
Stock and to exercise all other rights, powers and privileges of a holder of
Common Stock with respect to such Restricted Stock, with the exceptions that
(A) the Holder will not be entitled to delivery of the stock certificate or
certificates representing such Restricted Stock until the Restriction Period
shall have expired and unless all other vesting requirements with respect
thereto shall have been fulfilled; (B) the Company will retain custody of
the stock certificate or certificates representing the Restricted Stock
during the Restriction Period; (C) other than regular cash dividends and
other cash equivalent distributions as the Board may in its sole discretion
designate, pay or distribute, the Company will retain custody of all
distributions ("Retained Distributions") made or declared with respect to
the Restricted Stock (and
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such Retained Distributions will be subject to the same restrictions, terms
and conditions as are applicable to the Restricted Stock) until such time,
if ever, as the Restricted Stock with respect to which such Retained
Distributions shall have been made, paid or declared shall have become
vested and with respect to which the Restriction Period shall have expired;
(D) a breach of any of the restrictions, terms or conditions contained in
this Plan or the Agreement or otherwise established by the Committee with
respect to any Restricted Stock or Retained Distributions will cause a
forfeiture of such Restricted Stock and any Retained Distributions with
respect thereto.
(iii) VESTING: FORFEITURE. Upon the expiration of the Restriction
Period with respect to each Award of Restricted Stock and the satisfaction
of any other applicable restrictions, terms and conditions (A) all or part
of such Restricted Stock shall become vested in accordance with the terms of
the Agreement, and (B) any Retained Distributions with respect to such
Restricted Stock shall become vested to the extent that the Restricted Stock
related thereto shall have become vested. Any such Restricted Stock and
Retained Distributions that do not vest shall be forfeited to the Company
and the Holder shall not thereafter have any rights with respect to such
Restricted Stock and Retained Distributions that shall have been so
forfeited.
10. DEFERRED STOCK.
(a) GRANT. Shares of Deferred Stock may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the eligible persons to whom and the time or times at which grants of Deferred
Stock shall be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of the period ("Deferral Period") during which, and the
conditions under which receipt of the shares will be deferred, and all the other
terms and conditions of the Awards.
(b) TERMS AND CONDITIONS. Each Deferred Stock Award shall be subject to
the following terms and conditions:
(i) CERTIFICATES. At the expiration of the Deferral Period (or the
Additional Deferral Period referred to in Section 10(b)(iii) below, where
applicable), share certificates shall be delivered to the Holder, or his
legal representative, representing the number equal to the shares covered by
the Deferred Stock Award.
(ii) VESTING; FORFEITURE. Upon the expiration of the Deferral Period
(or the Additional Deferral Period, where applicable) with respect to each
Award of Deferred Stock and the satisfaction of any other applicable
limitations, terms or conditions, such Deferred Stock shall become vested in
accordance with the terms of the Agreement. Any Deferred Stock that does not
vest shall be forfeited to the Company and the Holder shall not thereafter
have any rights with respect to such Deferred Stock that has been so
forfeited.
(iii) ADDITIONAL DEFERRAL PERIOD. A Holder may request to, and the
Committee may at any time, defer the receipt of an Award (or an installment
of an Award) for an additional specified period or until a specified event
("Additional Deferral Period"). Subject to any exceptions adopted by the
Committee, such request must generally be made at least one year prior to
expiration of the Deferral Period for such Deferred Stock Award (or such
installment).
11. OTHER STOCK-BASED AWARDS.
(a) GRANT AND EXERCISE. Other Stock-Based Awards may be awarded, subject
to limitations under applicable law, that are denominated or payable in, valued
in whole or in part by reference to, or otherwise based on, or related to,
shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and Awards valued by reference to the value of securities
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of or the performance of specified Subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other Awards under
this Plan or any other plan of the Company.
(b) ELIGIBILITY FOR OTHER STOCK-BASED AWARDS. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such Other Stock-Based Awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such Awards, and all other terms and conditions
of the Awards.
(c) TERMS AND CONDITIONS. Each Other Stock-Based Award shall be subject to
such terms and conditions as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Award, and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Awards have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Award, as well as the price per share of Common Stock covered by each such
outstanding Award, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company.
The conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible or
exchangeable into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or exercise price of
shares of Common Stock subject to an Award.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, the Committee shall notify the Holder at least
fifteen (15) days prior to such proposed action. To the extent it has not been
previously exercised, the Award shall terminate immediately prior to the
consummation of such proposed action; provided, however, that the Committee may,
in the exercise of its sole discretion in such instances, declare that any Award
shall terminate as of an earlier date fixed by the Committee and give each
Holder the right to exercise his or her rights as to all or any part of the
Award, including Shares as to which the Award would not otherwise be
exercisable.
(c) MERGER OR ASSET SALE. Subject to Section 12(d), in the event of the
merger of the Company into, or the consolidation of the Company with, another
corporation in which the shareholders of the Company receive cash or securities
of another issuer, or any combination thereof, in exchange for their shares of
Common Stock, or the sale of all or substantially all of the assets of the
Company, each outstanding Award shall be assumed or an equivalent option or
right substituted by the successor corporation or an Affiliate of the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the Award, the Holder shall fully vest in and have the right to
exercise the Award (provided it has not already terminated), including Shares as
to which it would not otherwise be vested or exercisable. If an Award becomes
fully vested and exercisable in lieu of assumption or substitution in the event
of a merger, consolidation or sale of assets, the Committee shall notify the
Holder that the Award shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Award shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Award shall
be considered assumed if, following the merger, consolidation or sale of assets,
the option substituted for such Award confers the right to purchase or receive,
for each Share of Stock subject to the Award immediately prior to the merger,
consolidation or sale of assets, the per Share consideration (whether stock,
cash, or other securities or property) received in the merger, consolidation or
sale of assets by holders of Common Stock (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
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majority of the outstanding Shares); provided, however, that if such
consideration received in the merger, consolidation or sale of assets is not
solely common stock of the successor corporation or its Parent (if any), the
Committee may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Award, for each Share of
Stock subject to the Award, to be solely common stock of the successor
corporation or its Parent (if any) equal in fair market value to the per Share
consideration received by holders of Common Stock in the merger, consolidation
or sale of assets.
(d) CHANGE OF CONTROL. Notwithstanding anything to the contrary, the
Committee may grant Awards which provide for the acceleration of the vesting of
Shares subject to the Award upon a Change of Control. Such provisions shall be
set forth in the Agreement.
(e) FURTHER ADJUSTMENTS. In the event of any change of a type described in
paragraphs (a) or (c) above, the Committee shall make any further adjustment to
the maximum number of Shares which may be acquired under the Plan pursuant to
the exercise of Awards, the maximum number of Shares for which Awards may be
granted to any one Employee and the number of Shares and price per Share subject
to outstanding Awards as shall be equitable to prevent dilution or enlargement
of rights under such Awards, and the determination of the Committee as to these
matters shall be conclusive and binding on the Holder; provided, however, that
(i) each such adjustment with respect to an Incentive Option shall comply with
the rules of Section 424(a) of the Code (or any successor provision) and (ii) in
no event shall any adjustment be made which would render any Incentive Stock
Option granted hereunder other than an "incentive stock option" as defined in
Section 422 of the Code.
(f) NO LIMITATION ON RIGHT TO MERGE, ETC. The grant of Awards pursuant to
the Plan shall not restrict in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, or sell or
transfer all or any part of its business or assets.
13. TERM OF PLAN.
The Plan shall become effective upon the earlier to occur of its adoption by
the Committee or its approval by the shareholders of the Company, as described
in Section 21 of the Plan. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 17 of the Plan.
14. TERM OF OPTIONS.
The term of each Option shall be the term stated in the Option Agreement;
provided, however, that the term shall be no more than ten (10) years from the
date of grant thereof; and provided further that in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Affiliate, the term of the Option shall
be no more than five (5) years from the date of grant thereof.
15. NON-TRANSFERABILITY OF AWARDS.
An Incentive Stock Option shall not be transferrable except by will or by
the laws of descent and distribution and shall be exercisable during the
lifetime of the Person to whom the Incentive Stock Option is granted only by
such Person. Any other Award, including a Nonqualified Stock Option, shall not
be transferrable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, as defined by the Code or by
Title I of the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder (a "QDRO"), and shall be exercisable during the lifetime of
the Person to whom the Option is granted only by such Person or any transferee
pursuant to a QDRO.
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16. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be the date on which
the Committee makes the determination granting such Award, or such other date as
is determined by the Committee. Notice of the determination shall be given to
each Employee or Consultant to whom an Award is so granted within a reasonable
time after the date of such grant.
17. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may amend or terminate the Plan in any respect whatsoever,
provided that any such amendment or termination of the Plan shall not affect
Award already granted and such Award shall remain in full force and effect as if
the Plan had not been amended or terminated. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 (or any other applicable law
or regulation, including the requirements of the NASD or an established stock
exchange), the Company shall obtain shareholder approval of any Plan amendment
in such a manner and to such a degree as required.
18. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued pursuant to an Award unless the issuance and
delivery of such Shares pursuant thereto shall comply with all relevant
Applicable Laws, including, without limitation, the Securities Act of 1933, as
amended (the "Securities Act"), the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed or any automatic quotation system upon which the
Shares may then be quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
The Company may require any Optionee or other Holder, as a condition of
receiving Shares pursuant to an Award, (i) to give written assurances
satisfactory to the Company as to the Holder's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matter, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Award; (ii) to give written assurances satisfactory to the
Company stating that such Person is acquiring the Shares subject to the Award
for such Person's own account and not with any present intention of selling or
otherwise distributing such Shares; and (iii) to deliver such other
documentation as may be necessary to comply with federal and state securities
laws. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the Shares upon the
exercise of the Award has been registered under a then currently effective
registration statement under the Securities Act and all applicable state
securities laws, or (ii) as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Shares, and may enter stop-transfer orders
against the transfer of the Shares issued upon the exercise of an Award.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
19. RESERVATION OF SHARES.
The Company, during the term of the Plan, shall at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
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<PAGE>
20. AGREEMENTS.
Options shall be evidenced by Option Agreements in such form as the
Committee shall approve from time to time. Other Awards shall be evidenced by
similar Agreements.
21. SHAREHOLDER APPROVAL.
Continuance of the Plan shall be subject to approval by the shareholders of
the Company within twelve (12) months before or after the date the Plan is
adopted. Such shareholder approval shall be obtained to the extent and in manner
required under Applicable Laws and the rules of any stock exchange upon which
the Common Stock is listed or any automatic quotation system upon which the
Common Stock is quoted.
22. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options or other Awards shall
constitute general funds of the Company.
23. MISCELLANEOUS.
(a) ACCELERATION OF VESTING. The Committee shall have the power to
accelerate the time at which an Award may first be exercised or the time during
which an Award or any part thereof will vest, notwithstanding the provisions in
the Award Agreement stating the time at which it may first be exercised or the
time during which it will vest.
(b) RULE 16B-3. With respect to Persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such Persons all
transactions shall be subject to such conditions regardless of whether they are
expressly set forth in the Plan or the Award Agreement. To the extent any
provision of the Plan or action by the Committee fails to so comply, it shall
not apply to such Persons or their transactions and shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
(c) GRANTS EXCEEDING ALLOTTED SHARES. If the number of shares of Stock
subject to an Award granted pursuant to the Plan exceeds, as of the date of
grant, the number of Shares that may be issued under the Plan without additional
shareholder approval, such Award shall be void with respect to such excess
Shares, unless shareholder approval of an amendment sufficiently increasing the
number of Shares subject to the Plan is timely obtained in accordance with
Section 17 of the Plan.
(d) NOTICE. Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Secretary of the Company and
shall become effective when it is received. Any written notice to Holders
required by any provisions of the Plan shall be addressed to the Holder at the
address on file with the Company and shall become effective three days after it
is mailed by certified mail, postage prepaid to such address or at the time of
delivery if delivered sooner by messenger or overnight courier.
(e) SAVINGS CLAUSE. Notwithstanding any other provision hereof, the Plan
is intended to qualify as a plan pursuant to which Incentive Stock Options may
be issued under Section 422 of the Code. If the Plan or any provision of the
Plan shall be held to be invalid or to fail to meet the requirements of Section
422 of the Code or the regulations promulgated thereunder, such invalidity or
failure shall not affect the remaining parts of the Plan, but rather it shall be
construed and enforced as if the Plan or the affected provision thereof, as the
case may be, complied in all respects with the requirements of Section 422 of
the Code.
(f) GOVERNING LAW. The Plan and all rights and obligations thereunder
shall be construed in accordance with and governed by the laws of the State of
Texas without regard to its conflict of laws rules.
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<PAGE>
EXHIBIT A
CAPROCK COMMUNICATIONS CORP.
1998 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's name and address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of this Option Agreement and the Plan,
including the provisions thereof relating to increases in the number of shares
covered by this Option upon the occurrence of certain specified events, as
follows:
<TABLE>
<S> <C>
Grant Number.................................
Date of Grant................................
Vesting Commencement Date....................
Exercise Price per Share..................... $
Total Number of Shares Granted...............
Total Exercise Price......................... $
Type of Option: Incentive Stock Option
Nonqualified Stock Option
Term/Expiration Date:
(No more than 10 years from date of grant, 5
years for certain grants)
</TABLE>
VESTING SCHEDULE
This Option may be exercised, in whole or in part, in accordance with the
following schedule. Except only as specifically provided elsewhere herein or in
the Plan, this Option shall be exercisable in the following cumulative
installments:
[NOTE: TO BE COMPLETED UPON GRANT OF OPTIONS]
TERMINATION PERIOD
You may exercise this Option for three months (or such shorter period
provided for elsewhere herein) after your employment or consulting relationship
with the Company terminates, or for such longer period upon your death or
disability as provided in the Plan. If your status changes from Employee to
Consultant or Consultant to Employee, this Option Agreement shall remain in
effect. In no case may you exercise this Option after the Term/Expiration Date
as provided above. Notwithstanding the foregoing, in the event the Company
terminates your employment for Cause (as defined below), this Option will
terminate on the date of the termination of your employment and will not be
exercisable thereafter. For purposes of this Agreement, "Cause" means the
occurrence of any of the following events or reasons:
(a) Optionee's conviction for a felony offense or commission by Optionee of
any act abhorrent to the community that the Company considers materially
damaging to or tending to discredit the reputation of the Company;
(b) Dishonesty, fraud, willful misconduct, unlawful discrimination or theft
on the part of Optionee;
14
<PAGE>
(c) Optionee's using for his or her own benefit any confidential or
proprietary information of the Company, or willfully or negligently divulging
any such information to third parties without the prior written consent of the
Company;
(d) Optionee's public drunkenness, public use of illegal substances or drugs
or the use, possession, distribution or being under the influence of alcohol or
illegal substances or drugs in the workplace (the only exception is that
Optionee may consume alcohol reasonably and responsibly, if he or she so
chooses, at legitimate business events and functions where alcohol is legally
available); or
(e) the determination by the Company that Optionee has continually failed or
refused to comply, after notice of and a reasonable opportunity to cure such
failure or refusal, with the policies, standards, regulations, instructions, or
directions of the Company as they currently exist or as they may be modified
from time to time.
II. AGREEMENT
1. GRANT OF OPTION. CapRock Communications Corp. (the "Company") hereby
grants to the Optionee named in Section I hereof (the "Optionee") an option
(the"Option") to purchase the total number of shares of Common Stock (the
"Shares") set forth in Section I hereof, at the exercise price per share set
forth in Section I hereof (the "Exercise Price") subject to the terms,
definitions and provisions of the 1998 Stock Option Plan (the "Plan") adopted by
the Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option Agreement.
If designated in Section I hereof as an Incentive Stock Option, this Option
is intended (subject to Section 5(b) of the Plan) to qualify as an Incentive
Stock Option as defined in Section 422 of the Code.
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in
accordance with the Vesting Schedule set out in Section I hereof and with the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, disability or other termination of the employment or
consulting relationship, this Option shall be exercisable in accordance with the
applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice
(in the form attached hereto as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
The Optionee shall, upon notification of the amount due (if any) as a result
of the exercise of the Option and prior to or concurrent with delivery of the
certificate representing the Shares, pay to the Company as provided in the Plan
amounts necessary to satisfy applicable federal, state and local tax withholding
requirements.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed
or any automatic quotation system upon which the Shares may then be quoted.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
15
<PAGE>
3. METHOD OF PAYMENT. The purchase price of Optioned Shares acquired
pursuant to the Option shall be paid as set forth in the Plan. THE USE OF SHARES
OF STOCK ACQUIRED OR TO BE ACQUIRED TO PAY FOR EXERCISED SHARES MAY HAVE INCOME
TAX CONSEQUENCES FOR THE OPTIONEE.
4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, and may
not be exercised if the issuance of such Shares upon such exercise or the method
of payment of consideration for such shares would constitute a violation of any
applicable federal or state securities or other law or regulation, including any
rule under Part 207 of Title 12 of the Code of Federal Regulations as
promulgated by the Federal Reserve Board.
5. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution or
as otherwise set forth in the Plan and may be exercised during the lifetime of
Optionee only by Optionee or a permitted transferee as set forth in the Plan.
The terms of the Plan and this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
6. TERM OF OPTION. This Option may be exercised only within the term set
out in Section I hereof, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Sections 5 and 6 of the Plan regarding Options designated as Incentive Stock
Options and Options granted to more than ten percent (10%) shareholders shall
apply to this Option.
7. TAX CONSEQUENCES. The grant and/or exercise of the Option will have
federal and state income tax consequences. THE OPTIONEE SHOULD CONSULT A TAX
ADVISER UPON THE GRANT OF THE OPTION AND BEFORE EXERCISING THE OPTION OR
DISPOSING OF THE SHARES ACQUIRED UPON EXERCISE, PARTICULARLY WITH RESPECT TO HIS
OR HER STATE'S TAX LAWS.
8. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and this Option Agreement may not be
amended except by means of a writing signed by the Company and Optionee. This
Option Agreement is governed by Texas law except for that body of law pertaining
to conflict of laws.
9. WARRANTIES, REPRESENTATIONS AND COVENANTS. The undersigned Optionee
warrants and represents that he or she has reviewed the Plan and this Option
Agreement in their entirety, has had an opportunity to obtain the advice of
counsel prior to executing this Option Agreement and fully understands all
provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Committee
upon any questions relating to the Plan and Option Agreement. Optionee further
agrees to notify the Company upon any change in the residence address indicated
below. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS OPTION AGREEMENT, NOR IN THE PLAN, WHICH IS INCORPORATED
HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE
IN ANY
16
<PAGE>
WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
<TABLE>
<S> <C> <C>
CAPROCK COMMUNICATIONS CORP.
By:
-----------------------------------------
Name: --------------------------------------
Title: ---------------------------------------
</TABLE>
OPTIONEE:
--------------------------------------
Signature
--------------------------------------
Print Name
--------------------------------------
Residence Address
--------------------------------------
Area Code/Telephone Number
17
<PAGE>
EXHIBIT A
CAPROCK COMMUNICATIONS CORP.
1998 EQUITY INCENTIVE PLAN
EXERCISE NOTICE
CapRock Communications Corp.
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, , 199 , the
undersigned ("Purchaser") hereby elects to purchase shares (the
"Shares") of the Common Stock of CapRock Communications Corp. (the "Company")
under and pursuant to the 1998 Stock Option Plan (the "Plan") and the Stock
Option Agreement dated , 199 (the "Option Agreement"). The purchase
price for the Shares shall be $ , as specified in the Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares of . THE USE OF SHARES OF
STOCK ACQUIRED OR TO BE ACQUIRED FOR EXERCISED SHARES MAY HAVE INCOME TAX
CONSEQUENCES FOR THE OPTIONEE.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. The Purchaser shall not be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any Shares
subject for which such Option is exercised including, but not limited to, rights
to vote or to receive dividends unless and until the Purchaser has satisfied all
requirements for exercise of the Option pursuant to its terms, the certificates
evidencing such Shares have been issued and the Purchaser has become a record
holder of such Shares. A share certificate for the number of Shares so acquired
shall be issued to the Optionee as soon as practicable after exercise of the
Option. No adjustment will be made for a dividend or other right for which the
record date is prior to the date all the conditions set forth above are
satisfied, except as provided in Section 12 of the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and this Agreement
18
<PAGE>
may not be amended except by means of a writing signed by the Company and
Purchaser. This Agreement is governed by Texas law except for that body of law
pertaining to conflict of laws.
<TABLE>
<S> <C>
Submitted by: Accepted by:
PURCHASER: CAPROCK COMMUNICATIONS CORP.
Signature By:
Print Name Its:
Address: Address:
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
- --------------------------------------------
- --------------------------------------------
</TABLE>
19
<PAGE>
APPENDIX VII
CAPROCK COMMUNICATIONS CORP.
1998 DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of this 1998 Director Stock Option Plan (the
"Plan") of CapRock Communications Corp., a Texas corporation (the "Company"), is
to encourage ownership in the Company by outside 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.
2. ELIGIBILITY. Options (each, an "Option") to purchase shares ("Shares")
of the Company's common stock, par value $.01 per share ("Common Stock"), may be
granted only to Outside Directors. An "Outside Director" is a member of the
Board of Directors of the Company ("Board of Directors") that is not an Employee
(each, an "Optionee"). "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient to
constitute "employment" by the Company. A "Parent" means a "parent corporation,"
whether now or hereafter existing, as defined in Section 424(e) of the Internal
Revenue Code of 1986, as amended to date and as it may be hereafter amended from
time to time (the "Code"), and a "Subsidiary" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. ADMINISTRATION
(a) BOARD OF DIRECTORS. The Board of Directors of the Company shall
supervise and administer the Plan in compliance with the rules under Rule
16b-3 or any successor rule thereto ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
questions of interpretation of the Plan or of any Options issued under it
shall be determined by the Board of Directors and such determination shall
be final and binding upon all persons having an interest in the Plan. In the
event the Board of Directors so determines, a committee designated by the
Board of Directors will administer the Plan, which committee shall be
constituted to comply with the rules under Rule 16b-3 relating to the
administration of employee benefit plans for Outside Directors, and all
references in the Plan to the Board of Directors shall be deemed to be a
reference to such committee.
(b) POWERS OF THE BOARD OF DIRECTORS. Subject to the provisions of the
Plan and subject to the approval of any relevant authorities, including the
approval, if required, of any national market system or established stock
exchange upon which the Common Stock is quoted or listed, the Board of
Directors shall have the authority in its discretion to, among other things:
(i) determine the Fair Market Value of the Common Stock. For
purposes of the Plan, the "Fair Market Value" means, as of any date, the
value of Common Stock determined as follows: (A) if the Common Stock is
listed on any established stock exchange or a national market system,
including without limitation the Nasdaq National Market or The Nasdaq
SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall
be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last
market trading day prior to the time of determination, as reported in The
Wall Street Journal or such other source as the Board of Directors deems
reliable; (B) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the day of
determination; or (C) in the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Board of Directors.
(ii) determine the recipients of Options and the number of Shares to
be covered by each Option granted hereunder, including the number of
Shares to be covered by Options to be granted to any Optionee;
<PAGE>
(iii) determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time
or times when Options may be exercised, any vesting, acceleration or
waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or the Shares relating thereto, based in each case
on such factors as the Board of Directors, in its sole discretion, shall
determine; and
(iv) construe and interpret the terms of the Plan and awards granted
pursuant to the Plan, and to amend or terminate the Plan as provided for
in Section 10 hereof.
4. STOCK SUBJECT TO THE PLAN
(a) MAXIMUM NUMBER OF SHARES. The maximum number of Shares which may
be issued under the Plan shall be 400,000 shares of Common Stock, subject to
adjustment as provided in Section 9 below.
(b) TERMINATION OF OPTIONS. If any Option shall for any reason expire
or otherwise terminate without having been exercised in full, the Shares not
purchased under such Option shall revert to and again become available for
issuance under the Plan unless the Plan shall have terminated; provided,
however, that shares of Common Stock that have been actually issued under
the Plan shall not be returned to the Plan and shall not become available
for future issuance under the Plan. Shares that are withheld as payment of
the Exercise Price of any Options (as set forth in Section 5(e)) shall be
deemed issued for purposes of this Section.
(c) STOCK SUBJECT TO THE PLAN. The stock subject to the Plan may be
unissued shares or reacquired Shares, bought on the market or otherwise.
5. TERMS, CONDITIONS AND FORM OF OPTIONS
(a) OPTION AGREEMENT
Each option agreement governing an Option ("Option Agreement") shall be
substantially in the form attached hereto as EXHIBIT A. In the event any
provisions of the Option Agreement and the Plan conflict, the provisions of
the Plan shall control. The provisions of separate Options need not be
identical, but each Option Agreement shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of
each of the following provisions set forth in this Section 5.
(b) OPTIONS NON-TRANSFERABLE. No Option shall be transferred,
assigned, pledged or hypothecated by the Optionee or be made subject to
execution, attachment or similar process otherwise than by will, by the laws
of descent and distribution, or pursuant to a qualified domestic relations
order, as defined in the Code or Title I of the Employee Retirement Security
Act of 1974, as amended ("ERISA"), or the rules thereunder ("QDRO"), and
shall be exercised during the lifetime of the Optionee only by such person
or any transferee pursuant to a QDRO.
(c) EXERCISE PERIOD. Subject to Section 7, each Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board of Directors and as shall be permissible under the
terms of the Plan. The total number of Shares subject to an Option may, but
need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each
of such installment periods, the Option may become exercisable with respect
to some or all of the Shares allotted to that period and may be exercised
with respect to some or all of the Shares allotted to such period and/or any
prior period as to which the Option became vested but was not fully
exercised. In the event an Optionee ceases to serve as a director of the
Company, each such Option may be exercised by the Optionee or by a permitted
transferee (or, in the event of such person's death, by such person's
administrator, executor or heirs) at any time within 3 months after the
Optionee ceases to serve as a director, but only to the extent
2
<PAGE>
such Option was exercisable at the time of such cessation of service.
Notwithstanding the foregoing, no Option shall be exercisable after the
expiration of 10 years from the date of grant.
(d) EXERCISE PROCEDURE. Subject to Section 12, an Option shall be
deemed to be exercised when written notice ("Exercise Notice") of such
exercise has been given to the Company in accordance with the terms of the
Option Agreement by the person or entity entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Each person or entity who exercises an
Option shall, upon notification of the amount due (if any) and prior to or
concurrent with delivery of the certificate representing the Shares, pay by
cash or check to the Company all amounts necessary to satisfy applicable
federal, state and local tax withholding requirements. No Option may at any
time be exercised with respect to a fractional share.
(e) PAYMENT OF EXERCISE PRICE. The purchase price of stock acquired
pursuant to an Option shall be paid, to the extent permitted by applicable
statutes and regulations at the time the Option is exercised, either (i) in
cash or check, or (ii) at the discretion of the Board of Directors, in one
or a combination of the following ways (which may be in combination with or
in lieu of payment by cash or check): (A) by delivery to the Company of
other Shares of Common Stock of the Company to be valued at their Fair
Market Value on the exercise date, (B) according to a deferred payment or
other arrangement with the person to whom the Option is granted or to whom
the Option is transferred pursuant to Section 5(b), (C) withholding of
Shares that would otherwise be issued upon the exercise of the Option,
valued at their Fair Market Value on the exercise date, or (D) in any other
form of legal consideration that may be acceptable to the Board of
Directors. In making its determination as to the type of consideration to
accept, the Board of Directors shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company. In
addition, such consideration shall be accompanied by the delivery by the
Optionee of a properly executed exercise notice together with such other
documentation as the Board of Directors and a broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
6. NONSTATUTORY OPTIONS. All Options granted under the Plan shall be
nonqualified Options not entitled to special tax treatment under Section 422 of
the Code.
7. EFFECTIVE DATE AND TERM
The Plan was adopted by the Board of Directors of the Company on
, 1998 and by the shareholders of the Company on , 1998
and became effective upon its adoption. The Plan shall continue in effect until
it is terminated by action of the Board, but such termination shall not affect
the terms of any outstanding Options.
8. LIMITATION OF RIGHTS
(a) NO RIGHT TO CONTINUE AS DIRECTOR. Neither the Plan, nor the
granting of an Option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain a director for any period of time.
(b) NO SHAREHOLDERS' RIGHTS FOR OPTIONEES. Neither an Optionee nor any
person to whom an Option is transferred pursuant to the Plan shall be deemed
to be the holder of, or to have any of the rights of a holder with respect
to, any Shares subject to such Option including, but not limited to, rights
to vote or to receive dividends, unless and until such person has satisfied
all requirements for exercise of the Option pursuant to its terms, the
certificates evidencing such Shares have been issued and such person has
become a record holder of such Shares.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the
3
<PAGE>
number of shares of Common Stock that have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option,
as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board of Directors,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible or exchangeable into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board of Directors shall
notify the Optionee at least fifteen (15) days prior to such proposed
action. To the extent it has not been previously exercised, the Option shall
terminate immediately prior to the consummation of such proposed action;
provided, however, that the Board of Directors may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate
as of an earlier date fixed by the Board of Directors and give each Optionee
the right to exercise his or her Option as to all or any part of the Shares
covered by such Option, including Shares as to which the Option would not
otherwise be exercisable.
(c) MERGER OR ASSET SALE. Subject to Section 9(d), in the event of the
merger of the Company into, or the consolidation of the Company with,
another corporation in which the shareholders of the Company receive cash or
securities of another issuer, or any combination thereof, in exchange for
their shares of Common Stock, or the sale of all or substantially all of the
assets of the Company, each outstanding Option shall be assumed or an
equivalent option or right substituted by the successor corporation or an
Affiliate of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option, the Optionee
shall fully vest in and have the right to exercise the Option (provided it
has not already terminated) as to all of the Shares covered by such Option,
including Shares as to which it would not otherwise be vested or
exercisable. If an Option becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger, consolidation or sale
of assets, the Board of Directors shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date
of such notice, and the Option shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option shall be considered
assumed if, following the merger, consolidation or sale of assets, the
option substituted for such Option confers the right to purchase or receive,
for each Share subject to the Option immediately prior to the merger,
consolidation or sale of assets, the per Share consideration (whether stock,
cash, or other securities or property) received in the merger, consolidation
or sale of assets by holders of Common Stock (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of
a majority of the outstanding Shares); provided, however, that if such
consideration received in the merger, consolidation or sale of assets is not
solely common stock of the successor corporation or its Parent (if any), the
Board of Directors may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the
Option, for each Share subject to the Option, to be solely common stock of
the successor corporation or its Parent (if any) equal in fair market value
to the per Share consideration received by holders of Common Stock in the
merger, consolidation or sale of assets. For purposes of this subsection
(c), "Affiliate" means, with respect to any individual or entity, any Parent
or Subsidiary of such individual or entity, whether such Parent or
Subsidiary is now or hereafter existing.
4
<PAGE>
(d) FURTHER ADJUSTMENTS. In the event of any change of a type
described in paragraphs (a) or (c) above, the Board of Directors shall make
any further adjustment to the maximum number of shares which may be acquired
under the Plan pursuant to the exercise of Options, the maximum number of
Shares for which Options may be granted to any one employee and the number
of Shares and price per Share subject to outstanding Options as shall be
equitable to prevent dilution or enlargement of rights under such Options,
and the determination of the Board of Directors as to these matters shall be
conclusive and binding on the Optionee.
(e) NO LIMITATION ON RIGHT TO MERGE, ETC. The grant of Options
pursuant to the Plan shall not restrict in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure or to merge, consolidate, dissolve,
liquidate, or sell or transfer all or any part of its business or assets.
10. AMENDMENT AND TERMINATION OF THE PLAN.
(a) The Board of Directors may at any time amend, alter, suspend or
discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. No amendment
of the Plan shall, without approval of the shareholders of the Company, (i)
increase the maximum number of Shares which may be subject to Options under
the Plan or the maximum number of Shares subject to Options that may be
granted to any individual Optionee under the Plan, (ii) modify the
requirements as to eligibility for Options under the Plan or (iii)
materially increase the benefits to Optionees under the Plan. In addition,
to the extent necessary and desirable to comply with Rule 16b-3, Section 422
of the Code or Section 162(m) of the Code (or any other Applicable Laws,
including the requirements of the NASD or any stock exchange upon which the
Shares may then be listed or any automatic quotation system upon which the
Shares may then be quoted), the Company shall obtain shareholder approval of
any Plan amendment in such a manner and to such a degree as required. For
purposes of this subsection (a), "Applicable Laws" means the legal
requirements relating to the administration of stock option plans under U.S.
state corporate laws, U.S. federal and state securities laws, the Code and
the applicable laws of any foreign country or jurisdiction where Options
are, or will be, granted under the Plan.
(b) Any amendment or termination of the Plan shall not affect Options
already granted, and such Options shall remain in full force and effect as
if the Plan had not been amended or terminated, unless mutually agreed
otherwise between the Optionee and the Board of Directors, which agreement
must be in writing and signed by the Optionee and the Company.
11. NOTICE
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Secretary of the Company and shall become
effective when it is received. Any written notice to Optionees required by any
provisions of the Plan shall be addressed to the Optionee at the address on file
with the Company and shall become effective three days after it is mailed by
certified mail, postage prepaid to such address or at the time of delivery if
delivered sooner by messenger or overnight courier.
12. REGULATORY APPROVAL, COMPLIANCE AND OTHER MATTERS.
(a) Options shall not be exercised, and Shares shall not be issued upon
such exercise, unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended ("the Securities Act"), the Exchange Act,
the rules and regulations thereunder and the requirements of any stock
exchange upon which such Shares may then be listed or approved for listing
upon notice of issuance, and such issuance shall be further subject to the
approval of counsel for the Company with respect to such compliance,
including the availability of an exemption from registration for the
issuance and sale of such Shares. The inability of the Company to obtain
5
<PAGE>
from any regulatory body the authority deemed by the Company to be necessary
for the lawful issuance and sale of any Shares under this Plan, or the
unavailability of an exemption from registration for the issuance and sale
of any Shares under this Plan, shall relieve the Company of any liability
with respect to the non-issuance or sale of such Shares.
(b) OTHER CONDITIONS. The Company may require any Optionee, or any
person or entity to whom an Option is transferred pursuant to the Plan, as a
condition to exercising any such Option, (i) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced
in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits
and risks of exercising the Option; (ii) to give written assurances
satisfactory to the Company stating that such person is acquiring the Shares
subject to the Option for such person's own account and not with any present
intention of selling or otherwise distributing the Shares; and (iii) to
deliver such other documentation as may be necessary to comply with federal
and state securities laws. These requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (i) the issuance of
the Shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act and all
applicable state securities laws, or (ii) as to any particular requirement,
a determination is made by counsel for the Company that such requirement
need not be met in the circumstances under the then applicable securities
laws. The Company may, upon advice of counsel to the Company, place legends
on stock certificates issued under the Plan as such counsel deems necessary
or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the
Shares and may enter stop transfer orders against the transfer of the Shares
issuable upon the exercised Options. The Company has no obligation to
undertake registration of Options or the Shares issuable upon the exercise
of Options.
(c) RULE 16B-3. With respect to persons subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 and with respect to such persons all
transactions shall be subject to such conditions regardless of whether they
are expressly set forth in the Plan or the Option Agreement. To the extent
any provision of the Plan or action by the Board of Directors fails to so
comply, it shall not apply to such persons or their transactions and shall
be deemed null and void, to the extent permitted by law and deemed advisable
by the Board of Directors.
13. GOVERNING LAW. The Plan and all rights and obligations thereunder
shall be construed in accordance with and governed by the laws of the State of
Texas without regard to its conflict of laws rules.
6
<PAGE>
EXHIBIT A
CAPROCK COMMUNICATIONS CORP.
DIRECTOR STOCK OPTION AGREEMENT
THIS DIRECTOR STOCK OPTION AGREEMENT (this "Agreement") is entered into
between CapRock Communications Corp., a Texas corporation (the "Company"), and
the person named on the signature page hereof ("Optionee") with the date of
grant of the option as set forth on such signature page.
To carry out the purposes of the CAPROCK COMMUNICATIONS CORP. 1998 DIRECTOR
STOCK OPTION PLAN (the "Plan"), by affording Optionee the opportunity to
purchase shares of common stock of the Company ("Common Stock"), and in
consideration of the mutual agreements and other matters set forth herein and in
the Plan, the Company and Optionee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to Optionee the
right and option ("Option") to purchase all or any part of the number of shares
of Common Stock as set forth on the signature page hereto, on the terms and
conditions set forth herein and in the Plan. The Optionee may review a copy of
the Plan at the office of the Secretary of the Company at Two Galleria Tower,
Suite 1925, 13455 Noel Road, Dallas, Texas 75240-6638. This Option shall not be
treated as an incentive stock option within the meaning of Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
2. VESTING SCHEDULE. Except only as specifically provided elsewhere
herein, the Option shall be exercisable in the following cumulative
installments:
[Note: To be completed upon grant of Options.]
3. PURCHASE PRICE. The purchase price of Common Stock purchased pursuant
to the exercise of this Option is set forth on the signature page hereto.
4. EXERCISE OF OPTION. This Option is exercisable by delivery of an
exercise notice, in the form attached as EXHIBIT A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment of
the aggregate Exercise Price as to all Exercised Shares.
5. METHOD OF PAYMENT. The purchase price of Exercised Shares acquired
pursuant to an Option shall be paid as set forth in the Plan.
6. NONTRANSFERABLE AND TERMINATION. This Option is not transferable by
Optionee otherwise than by will or the laws of descent and distribution, or
pursuant to a qualified domestic relations order, and may be exercised only by
Optionee during Optionee's lifetime, except as provided in the Plan.
7. TERM. This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The purchase price of
shares as to which this Option is exercised shall be paid in full at the time of
exercise for the consideration set forth in the Plan. No fraction of a share of
Common Stock shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof.
8. WITHHOLDING OF TAX. To the extent that the exercise of this Option or
the disposition of shares of Common Stock acquired by exercise of this Option
obligates the Company to withhold federal, state or local taxes the Optionee
shall pay such amounts to the Company upon request by delivery of cash or check
or in such other manner as is permitted by the Plan.
9. COMPLIANCE WITH SECURITIES LAWS. Optionee agrees that the shares of
Common Stock which Optionee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would constitute a violation
of any applicable securities laws, whether federal or state. Optionee also
<PAGE>
agrees (i) that the certificates representing the shares of Common Stock
purchased under this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to register the
transfer of the shares of Common Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the opinion
of counsel to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Common
Stock purchased under this Option.
10. TAX CONSEQUENCES. The grant and/or exercise of the Option will have
federal and state income tax consequences. THE OPTIONEE SHOULD CONSULT A TAX
ADVISER UPON THE GRANT OF THE OPTION AND BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES, PARTICULARLY WITH RESPECT TO HIS OR HER STATE'S TAX
LAWS.
11. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Optionee.
12. ENTIRE AGREEMENT AND GOVERNING LAW. The Plan is incorporated herein by
reference as a part of this Agreement. The Plan and this Agreement constitute
the entire agreement of the parties with respect to the subject matter hereof
and supersede in their entirety all prior undertakings and agreements of the
Company and Optionee with respect to the subject matter hereof, and this
Agreement may not be amended except by means of a writing signed by the Company
and Optionee. In the event of a conflict between the terms and conditions of
this Agreement and the Plan, the terms and conditions of the Plan shall control.
This Agreement is governed by Texas law except for that body of law pertaining
to conflict of laws.
13. MISCELLANEOUS. Optionee acknowledges receipt of a copy of the Plan and
hereby warrants and represents that he or she has reviewed the Plan and this
Agreement in their entirety, has had an opportunity to obtain the advice of
counsel prior to executing this Agreement and fully understands all of the
provisions of the Plan and this Agreement. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board of
Directors upon any questions relating to the Plan and this Agreement. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Optionee has executed
this Agreement, all as of the day and year first above written.
<TABLE>
<S> <C>
CAPROCK COMMUNICATIONS CORP.
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
----------------------------------------
--------------------- , Optionee
Address:
----------------------------------------
----------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Date of Grant:
-----------
Exercise Price Per Share:
-----------
Total Number of Optioned
Shares:
-----------
Total Exercise Price:
-----------
Type of Option: Nonqualified
Stock Option
Expiration Date:
-----------
</TABLE>
3
<PAGE>
CAPROCK COMMUNICATIONS CORP.
1998 DIRECTOR STOCK OPTION PLAN
EXERCISE NOTICE
CapRock Communications Corp.
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240-6638
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, , 199 , the
undersigned ("Purchaser") hereby elects to purchase shares (the "Shares")
of the Common Stock of CapRock Communications Corp. (the "Company") under and
pursuant to the 1998 Director Stock Option Plan (the "Plan") and the Director
Stock Option Agreement dated , 199 (the "Option Agreement"). The
per share exercise price for the Shares shall be $ , as specified in the
Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares or .
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares covered by such Option, notwithstanding the exercise
of the Option. A share certificate for the number of Shares so acquired shall be
issued to the Purchaser as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 9 of the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchaser or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and the Option Agreement are
incorporated herein by reference. This Exercise Notice, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and this Exercise
<PAGE>
Notice may not be amended except by means of a writing signed by the Company and
Purchaser. This Exercise Notice is governed by Texas law except for that body of
law pertaining to conflict of laws.
<TABLE>
<S> <C>
Submitted by: Accepted by:
PURCHASER CAPROCK COMMUNICATIONS CORP.
By:
- ------------------------------------ ------------------------------------
Signature
Its:
- ------------------------------------ ------------------------------------
Print Name
ADDRESS: ADDRESS:
Two Galleria Tower, Suite 1925
- ------------------------------------
13455 Noel Road
Dallas, Texas 75240-6638
- ------------------------------------
</TABLE>
2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XII of the Registrant's Amended and Restated Articles of
Incorporation provides the following:
"A director of the Corporation shall not be liable to the Corporation or
its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that this Article shall not
authorize the elimination or limitation of the liability of a director to
the extent the director is found liable for:
(1) a breach of the director's duty of loyalty to the Corporation or
its shareholders;
(2) an act or omission not in good faith that constitutes a breach of
duty of the director to the Corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law;
(3) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken within
the scope of the director's office;
(4) an act or omission for which the liability of a director is
expressly provided by an applicable statute."
Article XI of the Registrant's Amended and Restated Articles of
Incorporation provides the following:
"The directors and officers of the Corporation shall be indemnified by
the Corporation in a manner and to the maximum extent permitted by
applicable state or federal law as in effect from time to time."
Section 7.06 of the Registrant's Amended and Restated Bylaws provides the
following:
"The Corporation shall have the authority to and shall indemnify and
advance expenses to the Directors, officers, employees, and agents of the
Corporation or any other persons serving at the request of the
Corporation in such capacities in a manner and to the maximum extent
permitted by applicable state or federal law. The Corporation may
purchase and maintain liability insurance or make other arrangements for
such obligations to the extent permitted by the Texas Business
Corporation Act."
The Texas Business Corporation Act permits, and in some cases requires,
corporations to indemnify officers, directors, agents and employees who are or
have been a party to or are threatened to be made a party to litigation against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses under certain circumstances.
ITEM 21. EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<S> <S>
2.1 --Agreement and Plan of Merger and Plan of Exchange, dated as of February 16, 1998,
by and among IWL Communications, Incorporated, the Registrant, IWL Acquisition
Corp., CapRock Communications Corp., CapRock Acquisition Corp., and CapRock Fiber
Network, Ltd. (collectively, the "Parties"). The schedules to the Agreement and
Plan of Merger and Plan of Exchange and the appendices thereto have been omitted.
The Company will furnish supplementally to the Securities and Exchange Commission
any of the schedules or appendices upon request. (Included as Appendix I to the
Joint Proxy Statement/Prospectus.)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <S>
2.2 --First Amendment to Agreement and Plan of Merger and Plan of Exchange, dated as of
April 30, 1998, by and among the Parties. (Included in Appendix I to the Joint
Proxy Statement/Prospectus.)
2.3 --Second Amendment to Agreement and Plan of Merger and Plan of Exchange, dated as of
June 19, 1998, by and among the Parties. (Included in Appendix I to the Joint Proxy
Statement/Prospectus.)
2.4 --Third Amendment to Agreement and Plan of Merger and Plan of Exchange, dated as of
July 8, 1998, by and among the Parties. (Included in Appendix I to the Joint Proxy
Statement/Prospectus.)
3.1 --Articles of Incorporation of the Registrant. (Included as Appendix III to the Joint
Proxy Statement/Prospectus.)
3.2 --Bylaws of the Registrant. (Included as Appendix IV to the Joint Proxy
Statement/Prospectus.)
4.1 --Form of Indenture.*
4.2 --Form of Registration Rights Agreement.*
4.3 --Common Stock Specimen for shares of Common Stock of the Registrant.
4.4 --Form of Warrant Agreement between IWL and Cruttenden Roth Incorporated.
(incorporated by reference to Exhibit 1.2 to the IWL Communications, Incorporated
("IWL") Registration Statement on Form S-1, as amended, File No. 333-22801.)
4.5 --Registration Rights Agreement dated January 22, 1998 between IWL and Nera Limited.
4.6 --Registration Rights Agreement dated January 22, 1998 by and among IWL, Thomas
Norman Blair and Margaret Helen Blair.
5.1 --Opinion of Munsch Hardt Kopf Harr & Dinan, P.C. regarding validity of securities
being registered.
8.1 --Form of Opinion of Munsch Hardt Kopf Harr & Dinan, P.C. regarding certain federal
income tax matters.
8.2 --Form of Opinion of Hughes & Luce, L.L.P. regarding certain federal income tax
matters.
10.1 --CapRock Communications Corp. 1998 Equity Incentive Plan. (Included as Appendix V to
the Joint Proxy Statement/Prospectus.)
10.2 --CapRock Communications Corp. 1998 Director Stock Option Plan. (Included as Appendix
VI to the Joint Proxy Statement/Prospectus.)
10.3 --Form of IWL Shareholders Agreement, dated February 16, 1998, by and among CapRock
Communications Corp. and each of the shareholders party thereto. (Incorporated by
reference to Exhibit No. 99.2 to Form 8-K, dated February 16, 1998, as filed with
the Commission on March 3, 1998.)
10.4 --CapRock Owners Agreement, dated February 16, 1998, by and among the Registrant and
each of the owners party thereto. (Incorporated by reference to Exhibit No. 99.3 to
Form 8-K, dated February 16, 1998, as filed with the Commission on March 3, 1998.)
10.5 --Employment Agreement between the Registrant and Ignatius W. Leonards.+
10.6 --Employment Agreement between the Registrant and Byron M. Allen.+
10.7 --Employment Agreement between the Registrant and Errol Olivier.+
10.8 --Employment Agreement between the Registrant and Richard H. Roberson.+
10.9 --Employment Agreement between the Registrant and Bryan Olivier.+
10.10 --Employment Agreement between the Registrant and Jere W. Thompson, Jr.+
10.11 --Employment Agreement between the Registrant and Scott L. Roberts.+
10.12 --Employment Agreement between the Registrant and Timothy W. Rogers.+
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <S>
10.13 --Employment Agreement between the Registrant and Timothy M. Terrell.+
10.14 --Employment Agreement between the Registrant and Kevin W. McAleer.+
10.15 --Office Lease Agreement dated May 22, 1996, by and between Ellington Field, Ltd., a
Texas limited partnership and IWL. (incorporated by reference to Exhibit 10.5 to
the IWL Communications, Incorporated ("IWL") Registration Statement on Form S-1, as
amended, File No. 333-22801.)
10.16 --Satellite Information Network Service Agreement dated May 1, 1994, by and between
IWL and the Information Telegraphy Agency of Russia ITAR-TASS.# (incorporated by
reference to Exhibit 10.9 to IWL's Registration Statement on Form S-1, as amended,
File No. 333-22801.)
10.17 --Reseller Agreement dated December 31, 1996, by and between Alcatel Network Systems,
Inc. and IWL. (incorporated by reference to Exhibit 10.10 to IWL's Registration
Statement on Form S-1, as amended, File No. 333-22801.)#
10.18 --Form of Service Agreement. (incorporated by reference to Exhibit 10.12 to IWL's
Registration Statement on Form S-1, as amended, File No. 333-22801.)
10.19 --Lease Agreement dated November 18, 1996, by and between IWL and CLG, Inc.
(incorporated by reference to Exhibit 10.13 to IWL's Registration Statement on Form
S-1, as amended, File No. 333-22801.)
10.20 --Promissory Note dated September 20, 1996 payable by IWL to First Bank and Trust,
Cleveland, Texas. (incorporated by reference to Exhibit 10.15 to IWL's Registration
Statement on Form S-1, as amended, File No. 333-22801.)
10.21 --Loan Agreement and Security Agreement dated December 20, 1995 between IWL and
Marine Midland Business Loans, Inc. (incorporated by reference to Exhibit 10.16 to
IWL's Registration Statement on Form S-1, as amended, File No. 333-22801.)
10.22 --Second Amendment to Loan and Security Agreement dated as of May 7, 1997, between
IWL and Marine Midland Business Loans, Inc. (incorporated by reference to Exhibit
10.9 to IWL's Registration Statement on Form S-1, as amended, File No. 333-22801.)
10.23 --Promissory Note dated May 4, 1995 payable by IWL to Byron M. Allen. (incorporated
by reference to Exhibit 10.17 to IWL's Registration Statement on Form S-1, as
amended, File No. 333-22801.)
10.24 --Letter Agreement dated February 28, 1997, by and between IWL and Marine Midland
Bank as successor-in-interest to Marine Midland Business Loans, Inc. (incorporated
by reference to Exhibit 10.18 to IWL's Registration Statement on Form S-1, as
amended, File No. 333-22801.)
10.25 --Credit Agreement, dated August 1, 1997, executed by and between IWL and Bank One,
Texas, N.A. ("Lender"). (incorporated by reference to Exhibit 10.22 to IWL's Form
10K for the year ending June 30, 1997, File No. 0-22293.)
10.26 --Promissory Note, dated August 1, 1997, in the principal amount of $822,000.00,
executed by IWL, and made payable to Lender. (incorporated by reference to Exhibit
10.23 to IWL's Form 10K for the year ending June 30, 1997, File No. 0-22293.)
10.27 --Promissory Note, dated August 1, 1997, in the principal amount of $605,000.00,
executed by IWL, and made payable to Lender. (incorporated by reference to Exhibit
10.24 to IWL's Form 10K for the year ending June 30, 1997, File No. 0-22293.)
10.28 --Collateral Assignment and Security Agreement, dated August 1, 1997, executed by
Registrant, as assignor, and Lender, as assignee. (incorporated by reference to
Exhibit 10.25 to IWL's Form 10K for the year ending June 30, 1997, File No.
0-22293.)
</TABLE>
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<PAGE>
<TABLE>
<S> <S>
10.29 --Revolving Credit Agreement, dated August 1, 1997, executed by and between IWL and
Lender. (incorporated by reference to Exhibit 10.26 to IWL's Form 10K for the year
ending June 30, 1997, File No. 0-22293.)
10.30 --Promissory Note, dated August 1, 1997, in the principal amount of $5,000,000.00,
executed by IWL, and made payable to Lender. (incorporated by reference to Exhibit
10.27 to IWL's Form 10K for the year ending June 30, 1997, File No. 0-22293.)
10.31 --Security Agreement, dated August 1, 1997, executed by IWL, as debtor, and Lender,
as secured party. (incorporated by reference to Exhibit 10.28 to IWL's Form 10K for
the year ending June 30, 1997, File No. 0-22293.)
10.32 --Amended and Restated Credit Agreement, dated August 28, 1997, executed by and
between IWL and Lender. (incorporated by reference to Exhibit 10.29 to IWL's Form
10K for the year ending June 30, 1997, File No. 0-22293.)
10.33 --Promissory Note, dated August 28, 1997, in the principal amount of $1,055,000.00,
executed by IWL, and made payable to Lender. (incorporated by reference to Exhibit
10.30 to IWL's Form 10K for the year ending June 30, 1997, File No. 0-22293.)
10.34 --Telecommunications Equipment Lease Agreement dated as of June 1, 1997 between IWL
and Diamond Offshore Company. (incorporated by reference to Exhibit 10.4 to IWL's
Form 10K for the year ending June 30, 1997, File No. 0-22293.)#
10.35 --Sublease dated November 22, 1994 by and between CapRock Communications Corp. (n/k/a
CapRock Telecommunications Corp. ("CapRock")) and Arkwright Mutual Insurance
Company.+
10.36 --Loan and Security Agreement dated March 14, 1996 by and between CapRock and Bank
One, as amended.+
10.37 --Sixth Renewal Extension $2,500,000 Promissory Note dated December 31, 1997 payable
by CapRock to Bank One.+
10.38 --Promissory Note dated April 1, 1994, in the principal amount of $50,000 by CapRock
payable to Timothy M. Terrell.+
10.39 --Promissory Note dated April 1, 1994, in the principal amount of $50,000 by CapRock
payable to Timothy W. Rogers.+
10.40 --Promissory Note dated April 1, 1994, in the principal amount of $50,000 by CapRock
payable to Scott L. Roberts.+
10.41 --Form of CapRock Communications Commercial Application.+
10.42 --Form of CapRock Communications Commercial Agent Application.+
10.43 --Unlimited Guaranty dated March 9, 1996 by Jere W. Thompson, Jr. for the benefit of
Bank One.+
10.44 --Loan Agreement dated July 1, 1996 by and between CapRock Fiber Network, Ltd. (the
"Partnership") and Bank One, Texas, National Association.+
10.45 --$10,000,000 Promissory Note dated July 1, 1996 by and between the Partnership and
Bank One.+
10.46 --Guaranty dated July 1, 1996 by CapRock Systems, Inc. in favor of Bank One.+
10.47 --Guaranty dated July 1, 1996 by Mark Langdale in favor of Bank One.+
10.48 --Guaranty dated July 1, 1996 by Jere W. Thompson, Jr. in favor of Bank One.+
10.49 --Form of Note Purchase Agreement by and among the Registrant and various initial
purchasers.*
10.50 --Form of Contribution Agreement by the General Partner of the Partnership.+
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <S>
10.51 --First Amendment to Loan Agreement dated July 1, 1996 by and between the Partnership
and Bank One.
10.52 --Second Amendment to Loan Agreement dated April 29, 1998 by and between the
Partnership and Bank One.
10.53 --License Agreement dated June 16, 1998 by and between Telecommunications and
RiverRock Systems, Ltd.
16.1 --Letter re: Change in Accountants.+
21.1 --Subsidiaries of the Registrant.+
23.1 --Consent of KPMG Peat Marwick LLP.
23.2 --Consent of KPMG Peat Marwick LLP.
23.3 --Consent of KPMG Peat Marwick LLP.
23.4 --Consent of KPMG Peat Marwick LLP.
23.5 --Consent of Burds Reed & Mercer, P.C.
23.6 --Consent of Munsch Hardt Kopf Harr & Dinan, P.C. (Included in the opinion filed as
Exhibit 5.1 to this Registration Statement).
23.7 --Consent of Hughes & Luce, L.L.P.
23.8 --Consent of Cruttenden Roth Incorporated.+
24.1 --Power or Attorney.+
27.1 --Financial Data Schedule.+
99.1 --IWL Communications, Incorporated Proxy/Voting Instruction Card.+
99.2 --CapRock Telecommunications Corp. Proxy/Voting Instruction Card.+
99.3 --Consent of John R. Harris.+
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment.
# Confidential treatment was granted.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Registration Statement.
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
CAPROCK COMMUNICATIONS CORP.
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------------
Jere W. Thompson, Jr.
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer,
/s/ JERE W. THOMPSON, JR. Chairman of the Board,
- ------------------------------ and Director (Principal July 9, 1998
Jere W. Thompson, Jr. Executive Officer)
Senior Vice President and
* Chief Financial Officer
- ------------------------------ (Principal Accounting July 9, 1998
Kevin W. McAleer Officer)
* President, Vice Chairman
- ------------------------------ of the Board, and July 9, 1998
Ignatius W. Leonards Director
*
- ------------------------------ Executive Vice President July 9, 1998
Byron M. Allen and Director
*
- ------------------------------ Director July 9, 1998
Mark Langdale
*
- ------------------------------ Director July 9, 1998
Timothy W. Rogers
*
- ------------------------------ Director July 9, 1998
Christopher J. Amenson
*By: /s/ JERE W.
THOMPSON, JR.
- ------------------------------
Jere W. Thompson, Jr.
Attorney-in-Fact
II-7
<PAGE>
<TABLE>
<S> <C>
COMMON STOCK COMMON STOCK
NUMBER SHARES
C
----------- --------------
INCORPORATED UNDER THE LAWS SEE REVERSE SIDE FOR
OF THE STATE OF TEXAS CERTAIN DEFINITIONS
CUSIP 140667 10 6
[LOGO]
CAPROCK COMMUNICATIONS CORP.
THIS CERTIFIES THAT
SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES, $.01 PAR VALUE, OF THE COMMON STOCK OF
CAPROCK COMMUNICATIONS CORP.
transferable on the books of the Corporation by said owner in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate is not valid
unless countersigned by the Transfer Agent and Registrar.
WITNESS the seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ Richard H. Roberson [SEAL] /s/ Jere W. Thompson, Jr.
SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. BOX 1696
DENVER, COLORADO 80201
Transfer Agent and Registrar
By Authorized Signature
</TABLE>
<PAGE>
[LOGO]
No shareholder has any preemptive right to acquire any unissued or
treasury securities of the Company. A complete statement of the denial of
preemptive rights is set forth in the Company's Articles of Incorporation, as
amended (the "Articles of Incorporation"), on file in the office of the
Secretary of State of the State of Texas. The Company will furnish a copy of
the Articles of Incorporation to the record holder of this certificate,
without charge, on request to the Company at its principal place of business
or registered office. The Articles of Incorporation authorize the Company to
issue shares of more than one class of stock and the board of directors of the
Company have been granted the authority to fix and determine the designations,
preferences, limitations and relative rights thereof. The Company will furnish
a full statement of the designations, preferences, limitations and relative
rights of the shares of each class authorized to be issued to the record
holder of this certificate, without charge, upon written request to the
Company at its principal place of business or registered office.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --
TEN ENT -- as tenants by the entireties __________ Custodian __________
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants Under Uniform Gifts to Minors
in common Act_____________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto:
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE, OF ASSIGNEE
- -------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
DATED
---------------------------
NOTICE: X
THE SIGNATURE(S) TO THIS ------------------------------------
ASSIGNMENT MUST CORRESPOND WITH (SIGNATURE)
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR X
ENLARGEMENT OR ANY CHANGE ------------------------------------
WHATEVER. (SIGNATURE)
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
- -----------------------------------------------------------------------------
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Registration Rights Agreement")
is made as of January 22, 1998, by and among IWL Communications, Incorporated, a
Texas corporation ("IWL"), and Nera Limited incorporated in England and Wales
("Nera").
WHEREAS, Nera as a shareholder of Integrated Communications and Engineering
Limited ("ICEL") has sold its shares of ICEL to IWL in exchange for cash and for
the issuance of a certain number of the $.01 par value per share shares of
Common Stock of IWL ("IWL Common Stock") pursuant to that Agreement dated as of
January 22, 1998 (the "Share Purchase Agreement");
NOW THEREFORE, for good and valuable consideration, the parties hereby
agree as follows:
1. DEFINITIONS. As used in this Registration Rights Agreement:
a. "1934 Act" means the Securities Exchange Act of 1934, as amended.
b. "Act" means the Securities Act of 1933, as amended.
c. "Commission" means the Securities and Exchange Commission.
d. "Completion Date" means the date on which the completion of the
sale and purchase of all the issued shares in the capital of ICEL in accordance
with the Share Purchase Agreement occurs.
e. "Expiration Date" means the date that is two years after the
Completion Date.
f. "Form S-3" means such form under the Act as in effect on the date
hereof or any registration form under the Act subsequently adopted by the
Commission which similarly permits inclusion or incorporation of substantial
information by reference to other documents filed by IWL with the Commission.
g. "Holders" means (i) Nera, and (ii) any company which is a
permitted transferee of Registrable Securities from Nera pursuant to Section
12.6 of the Share Purchase Agreement.
h. "Registrable Securities" means the shares of IWL Common Stock
issued to the Holders pursuant to the Share Purchase Agreement rounded to the
nearest integral amount.
Terms not otherwise defined herein have the meanings given to them in the
Share Purchase Agreement.
2. REGISTRATION.
a. DEMAND REGISTRATION. From and after such time that IWL has
qualified for the use of Form S-3 (or a successor form), the Holders of at least
10% of the Registrable Securities shall have the right to request the
registration of Registrable Securities on Form S-3; provided, however, that IWL
shall not be required to effect more than three (3) such registrations under
this section 2(a) and in no event shall IWL be required to register Registrable
Securities with an aggregate market
<PAGE>
value of less than $100,000. Any such request shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended methods of disposition of such shares by such Holders. Upon receipt of
such request, IWL shall use commercially reasonable efforts to cause the
requested Registrable Securities to be registered under the Act so as to permit
the sale thereof, and in connection therewith shall prepare and file with the
Commission within 30 days following the receipt of such request a registration
statement in such form as is then available under the Act covering the
Registrable Securities; provided, however, that each requesting Holder shall
provide all such information and materials and take all such action as may be
required under the Act to be provided or taken by such requesting Holder in
order to permit IWL to comply with all applicable requirements of the Commission
and to obtain any desired acceleration of the effective date of such
registration statement, such provision of information and materials to be a
condition precedent to the obligations of IWL pursuant to this Registration
Rights Agreement.
b. "PIGGY BACK" REGISTRATIONS.
(i) If IWL shall determine to register any of its securities,
either for its own account or the account of a security
holder or holders exercising their registration rights,
other than a registration relating solely to employee
benefit plans, or other than a registration on any
registration form which does not permit secondary sales or
does not include substantially the same information as would
be required to be included in a registration statement
covering the sale of Registrable Securities, or other than a
registration relating solely to shares to be sold in a
transaction under Rule 145 of the Act, IWL will:
(A) Promptly give to each Holder of Registrable Securities
written notice thereof (which shall include the number
of shares IWL or other security holder proposes to
register and, if known, the name of the proposed
underwriter); and
(B) Use its commercially reasonable efforts to include in
such registration all the Registrable Securities
specified in a written request or requests, made by any
Holder within fifteen (15) days after the date of
delivery of the written notice from IWL described in
clause (A) above. If the underwriter advises IWL that
marketing considerations require a limitation on the
number of shares offered pursuant to any registration
statement, then subject to such limitation such shares
shall be registered in the following priority, (i)
FIRST, IWL may offer all of the securities it proposes
to register for its own account, (ii) SECOND, a holder
of securities who has exercised demand registration
rights for such registration shall be entitled to offer
all the securities it proposes to register, and (iii)
THIRD, any remaining securities requested to be
registered that may, in the opinion of the underwriter,
be sold, will be included in such registration pro rata
among all shareholders who are entitled to include
shares in such registration statement (subject to any
piggy back registration rights granted by IWL prior to
the date hereof that grant the holders of such rights
preferential treatment in the event of any market
cutbacks).
-2-
<PAGE>
(ii) IWL shall select the underwriter, if any, for an offering
made pursuant to this Section 2(b).
3. POSTPONEMENT OF REGISTRATION. Notwithstanding the provisions of
subsection 2(a) and (b) above, if (i) in the good faith judgment of the Board of
Directors of IWL, a registration requested pursuant to either of such
subsections would be seriously detrimental to IWL or would impede or require the
disclosure before it would otherwise be disclosed to the public of any pending
merger, sale, acquisition or other transaction then under consideration by the
Board of Directors ("Transaction Under Consideration"), and the Board of
Directors of IWL concludes, as a result, that it is in the best interests of IWL
to defer the filing of such registration statement at such time, and (ii) IWL
furnishes to the Holders who requested registration under such subparagraph a
certificate signed by the President of IWL stating that in the good faith
judgment of the Board of Directors of IWL, it would be seriously detrimental to
IWL for such registration statement to be filed in the near future, or that it
would impede or require the disclosure before it would otherwise be disclosed to
the public of any Transaction Under Consideration and that it is, in the best
interests of IWL to defer the filing of such registration statement, then IWL
shall have the right to defer such filing for the period during which such
disclosure would be seriously detrimental to IWL or during which time the filing
would impede or require the disclosure of a Transaction Under Consideration
before it is otherwise disclosed to the public, except that IWL may not defer
the filing for a period of more than ninety (90) days after receipt of a
request, and may not exercise its right of deferral more than once. In
addition, IWL shall not be required to effect any demand registrations pursuant
to Section 2(a) during any Lock-Up Period as defined in section 8 or within
ninety (90) days after the effective date of any other registration statement
filed by IWL (other than a registration statement on Form S-8).
4. OBLIGATIONS OF IWL. IWL shall (i) prepare and file with the Commission
the registration statement in accordance with Section 2 hereof with respect to
the shares of Registrable Securities requested to be registered and shall use
commercially reasonable efforts to cause such registration statement to become
effective as promptly as practicable after filing and to keep such registration
statement effective until the earlier of the sale of all securities registered
thereby or the expiration of ninety (90) days; (ii) prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary and comply with
the provisions of the Act with respect to the sale or other disposition of all
Registrable Securities proposed to be registered in such registration statement
until the earlier of the sale of all of the shares of Registrable Securities so
registered and the Expiration Date; (iii) furnish to each Holder such number of
copies of any prospectus (including any preliminary prospectus and any amended
or supplemented prospectus) in conformity with the requirements of the Act, and
such other documents, as such Holder may reasonably request in order to effect
the offering and sale of the shares of the Registrable Securities to be offered
and sold, but only while IWL shall be required under the provisions hereof to
cause the registration statement to remain current; (iv) use commercially
reasonable efforts to register or qualify the shares of the Registrable
Securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions as such Holder shall reasonably request (provided
that IWL shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such jurisdiction where it has not been qualified), and do any and all other
acts or things which may be necessary or advisable to enable each Holder to
consummate the public sale or other disposition of the Registrable Securities in
such jurisdictions; (v) notify each Holder upon the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing; (vi) so
long as the registration statement remains effective, promptly prepare, file and
furnish to each Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
-3-
<PAGE>
delivered to the purchasers of the Registrable Securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing; (vii) notify
each Holder, promptly after it shall receive notice thereof, of the date and
time the registration statement and each post-effective amendment thereto has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed; (viii) notify each Holder promptly of any
request by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information; and (ix) advise each
Holder, promptly after it shall receive notice or obtain knowledge thereof, of
the issuance of any stop order by the Commission suspending the effectiveness of
the registration statement or the initiation or threatening of any proceeding
for that purpose and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order should be issued.
5. AVAILABILITY OF FORM S-3. IWL shall use its best efforts to qualify
for registration on Form S-3 (or a successor form). However, if IWL is unable
to qualify for registration on Form S-3 (or a successor form), or if Form S-3
(or a successor form) is not otherwise available for use by IWL, IWL shall have
no obligations under Section 2(a) hereof. Pursuant to the eligibility
requirements to use Form S-3, the earliest that IWL could qualify to use Form
S-3 is June 12, 1998.
6. EXPENSES. IWL shall pay the out-of-pocket expenses incurred by IWL,
other than underwriting discounts and commissions attributable to the shares of
the Holders, in connection with any registration of Registrable Securities
pursuant to this Registration Rights Agreement, including, without limitation,
all Commission, Nasdaq Stock Market, NASD and blue sky registration and filing
fees, printing expenses, transfer agents' and registrars' fees, and the fees and
disbursements of IWL's outside counsel and independent accountants.
Notwithstanding the above, the fees and expenses of all counsel, accountants and
advisors of the Holders shall be paid by the Holders pro rata on the basis of
the number of their shares so registered.
7. INDEMNIFICATION. In the event of any offering registered pursuant to
this Registration Rights Agreement:
a. IWL will indemnify each Holder, and each underwriter which
facilitates the disposition of such Registered Securities, and each of their
respective officers and directors, and each person controlling such Holder or
underwriter within the meaning of Section 15 of the Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Registration Rights Agreement, against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading, or any violation by IWL of any rule or regulation
promulgated under the Act, or state securities laws, or common law, applicable
to IWL in connection with any such registration, qualification or compliance,
and will reimburse each Holder, underwriter and the respective officers,
directors and controlling persons thereof, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending any
such claim, loss, damage, liability or action, provided that IWL will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to IWL in an instrument
(including,
-4-
<PAGE>
but not limited to the Share Purchase Agreement of even date herewith) duly
executed by any Holder.
b. Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which registration, qualification or
compliance is being effected, indemnify IWL, each of its directors and officers
and its legal counsel and independent accountants, each underwriter, if any, of
IWL's securities covered by such a registration statement, and each person who
controls IWL or such underwriter within the meaning of Section 15 of the Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) or a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse IWL,
such directors, officers, legal counsel, independent accountants, underwriters
or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to IWL in an instrument duly executed by such Holder (including, but
not limited to the Share Purchase Agreement of even date herewith); provided,
however, that the obligations of such Holders hereunder shall be limited to an
amount equal to the net proceeds, after deduction of expenses and commissions,
to each such Holder of Registrable Securities sold as contemplated herein.
c. Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has written notice of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that if Holder is the Indemnified Party
and the defendants in any such action shall include both Holder, as the
Indemnified Party, and the Indemnifying Party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the Indemnifying Party, the Indemnified Party
shall have the right to select separate counsel to assert such legal defenses
and otherwise participate in the defense of such action on behalf of such
Indemnified Party and the fees and expenses of such counsel shall be paid by the
Indemnifying Party. The failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Registration Rights Agreement, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against such claim or
litigation is materially prejudiced as a result of such failure to give notice.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
d. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection a. or b. above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified party in connection
with the statements or omissions which resulted in such losses, claims, damages
or
-5-
<PAGE>
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or by such indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 7.d. were determined by
pro rata allocation (even if the Holders or any underwriters, or all of them
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 7.d. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The obligations of the Holders in
this Section 7.d. to contribute shall be several in proportion to the percentage
of principal amount of Registrable Securities registered or underwritten, as the
case may be, by them and not joint.
e. The obligations of IWL and each Holder under this Section 7 shall
survive the completion of any offering of stock in a registration statement
under this Registration Rights Agreement and otherwise.
8. HOLDBACK AGREEMENTS. Each Holder shall enter into such agreements
(including underwriting agreements and lock-up agreements) as the managing
underwriter of any offering made by IWL and/or made by any selling shareholders,
in each case of IWL's equity securities registered under the Act, shall
reasonably request; provided that any holdback shall not exceed a period of
sixty (60) days before the filing date of such registration and one hundred
eighty (180) days after the effective date thereof (the "Lock-up Period")
9. TERMINATION. The registration rights set forth in this Registration
Rights Agreement shall terminate with respect to a Holder on the Expiration Date
or such earlier time as such Registrable Securities are exchanged for or
converted into securities in a transaction registered under the Act or at such
earlier time as such Holder has sold all Registrable Securities.
10. NOTICES. Notices may be given in the manner set forth in the Share
Purchase Agreement.
11. GOVERNING LAWS. This Registration Rights Agreement shall be governed
by the laws of the State of Texas, U.S.A.
12. COUNTERPARTS. This Registration Rights Agreement may be executed in
multiple counterparts, each of which shall constitute an original, but all of
which shall constitute but one and the same instrument. One or more counterpart
to this Registration Rights Agreement may be delivered via telecopier, with the
intention that they shall have the same effect as an original counterpart
hereof.
Executed this 22nd day of January, 1998.
IWL COMMUNICATIONS, INCORPORATED
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<PAGE>
By: /s/ Ignatius W. Leonards
-------------------------
Its: President
------------------------
NERA LIMITED
By:
-------------------------
Its:
------------------------
-7-
<PAGE>
IWL COMMUNICATIONS, INCORPORATED
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Registration Rights Agreement")
is made as of January 22, 1998, by and among IWL Communications, Incorporated, a
Texas corporation ("IWL"), Thomas Norman Blair and Margery Helen Blair of
Kristiansund, Gartly, Huntley, Aberdeenshire ("Mr. and Mrs. Blair").
WHEREAS, Mr. and Mrs. Blair as shareholders of Integrated Communications
and Engineering Limited ("ICEL") have sold their shares of ICEL to IWL in
exchange for cash and for the issuance of a certain number of the $.01 par value
per share shares of Common Stock of IWL ("IWL Common Stock") pursuant to that
Agreement dated as of January 22, 1998 (the "Share Purchase Agreement");
NOW THEREFORE, for good and valuable consideration, the parties hereby
agree as follows:
1. DEFINITIONS. As used in this Registration Rights Agreement:
a. "1934 Act" means the Securities Exchange Act of 1934, as amended.
b. "Act" means the Securities Act of 1933, as amended.
c. "Commission" means the Securities and Exchange Commission.
d. "Completion Date" means the date on which the completion of the
sale and purchase of all the issued shares in the capital of ICEL in accordance
with the Share Purchase Agreement occurs.
e. "Expiration Date" means the date that is two years after the
Completion Date.
f. "Form S-3" means such form under the Act as in effect on the date
hereof or any registration form under the Act subsequently adopted by the
Commission which similarly permits inclusion or incorporation of substantial
information by reference to other documents filed by IWL with the Commission.
g. "Holders" means Mr. and Mrs. Blair.
h. "Registrable Securities" means the shares of IWL Common Stock
issued to the Holders pursuant to the Share Purchase Agreement rounded to the
nearest integral amount.
Terms not otherwise defined herein have the meanings given to them in the
Share Purchase Agreement.
2. REGISTRATION.
a. DEMAND REGISTRATION. From and after such time that IWL has
qualified for the use of Form S-3 (or a successor form), the Holders of at least
10% of the Registrable Securities shall have the right to request the
registration of Registrable Securities on Form S-3; provided, however,
<PAGE>
that IWL shall not be required to effect more than three (3) such registrations
under this section 2(a) and in no event shall IWL be required to register
Registrable Securities with an aggregate market value of less than $100,000.
Any such request shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by such Holders. Upon receipt of such request, IWL shall use
commercially reasonable efforts to cause the requested Registrable Securities to
be registered under the Act so as to permit the sale thereof, and in connection
therewith shall prepare and file with the Commission within 30 days following
the receipt of such request a registration statement in such form as is then
available under the Act covering the Registrable Securities; provided, however,
that each requesting Holder shall provide all such information and materials and
take all such action as may be required under the Act to be provided or taken by
such requesting Holder in order to permit IWL to comply with all applicable
requirements of the Commission and to obtain any desired acceleration of the
effective date of such registration statement, such provision of information and
materials to be a condition precedent to the obligations of IWL pursuant to this
Registration Rights Agreement.
b. "PIGGY BACK" REGISTRATIONS.
(i) If IWL shall determine to register any of its securities,
either for its own account or the account of a security
holder or holders exercising their registration rights,
other than a registration relating solely to employee
benefit plans, or other than a registration on any
registration form which does not permit secondary sales or
does not include substantially the same information as would
be required to be included in a registration statement
covering the sale of Registrable Securities, or other than a
registration relating solely to shares to be sold in a
transaction under Rule 145 of the Act, IWL will:
(A) Promptly give to each Holder of Registrable Securities
written notice thereof (which shall include the number
of shares IWL or other security holder proposes to
register and, if known, the name of the proposed
underwriter); and
(B) Use its commercially reasonable efforts to include in
such registration all the Registrable Securities
specified in a written request or requests, made by any
Holder within fifteen (15) days after the date of
delivery of the written notice from IWL described in
clause (A) above. If the underwriter advises IWL that
marketing considerations require a limitation on the
number of shares offered pursuant to any registration
statement, then subject to such limitation such shares
shall be registered in the following priority, (i)
FIRST, IWL may offer all of the securities it proposes
to register for its own account, (ii) SECOND, a holder
of securities who has exercised demand registration
rights for such registration shall be entitled to offer
all the securities it proposes to register, and (iii)
THIRD, any remaining securities requested to be
registered that may, in the opinion of the underwriter,
be sold, will be included in such registration pro rata
among all shareholders who are entitled to include
shares in such registration statement (subject to any
piggy back registration rights granted by IWL
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<PAGE>
prior to the date hereof that grant the holders of such
rights preferential treatment in the event of any
market cutbacks).
(ii) IWL shall select the underwriter, if any, for an offering
made pursuant to this Section 2(b).
3. POSTPONEMENT OF REGISTRATION. Notwithstanding the provisions of
subsection 2(a) and (b) above, if (i) in the good faith judgment of the Board of
Directors of IWL, a registration requested pursuant to either of such
subsections would be seriously detrimental to IWL or would impede or require the
disclosure before it would otherwise be disclosed to the public of any pending
merger, sale, acquisition or other transaction then under consideration by the
Board of Directors ("Transaction Under Consideration"), and the Board of
Directors of IWL concludes, as a result, that it is in the best interests of IWL
to defer the filing of such registration statement at such time, and (ii) IWL
furnishes to the Holders who requested registration under such subparagraph a
certificate signed by the President of IWL stating that in the good faith
judgment of the Board of Directors of IWL, it would be seriously detrimental to
IWL for such registration statement to be filed in the near future, or that it
would impede or require the disclosure before it would otherwise be disclosed to
the public of any Transaction Under Consideration and that it is, in the best
interests of IWL to defer the filing of such registration statement, then IWL
shall have the right to defer such filing for the period during which such
disclosure would be seriously detrimental to IWL or during which time the filing
would impede or require the disclosure of a Transaction Under Consideration
before it is otherwise disclosed to the public, except that IWL may not defer
the filing for a period of more than ninety (90) days after receipt of a
request, and may not exercise its right of deferral more than once. In
addition, IWL shall not be required to effect any demand registrations pursuant
to Section 2(a) during any Lock-Up Period as defined in section 8 or within
ninety (90) days after the effective date of any other registration statement
filed by IWL (other than a registration statement on Form S-8).
4. OBLIGATIONS OF IWL. IWL shall (i) prepare and file with the Commission
the registration statement in accordance with Section 2 hereof with respect to
the shares of Registrable Securities requested to be registered and shall use
commercially reasonable efforts to cause such registration statement to become
effective as promptly as practicable after filing and to keep such registration
statement effective until the earlier of the sale of all securities registered
thereby or the expiration of ninety (90) days; (ii) prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary and comply with
the provisions of the Act with respect to the sale or other disposition of all
Registrable Securities proposed to be registered in such registration statement
until the earlier of the sale of all of the shares of Registrable Securities so
registered and the Expiration Date; (iii) furnish to each Holder such number of
copies of any prospectus (including any preliminary prospectus and any amended
or supplemented prospectus) in conformity with the requirements of the Act, and
such other documents, as such Holder may reasonably request in order to effect
the offering and sale of the shares of the Registrable Securities to be offered
and sold, but only while IWL shall be required under the provisions hereof to
cause the registration statement to remain current; (iv) use commercially
reasonable efforts to register or qualify the shares of the Registrable
Securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions as such Holder shall reasonably request (provided
that IWL shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such jurisdiction where it has not been qualified), and do any and all other
acts or things which may be necessary or advisable to enable each Holder to
consummate the public sale or other disposition of the Registrable Securities in
such jurisdictions; (v) notify each Holder upon the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
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<PAGE>
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing; (vi) so
long as the registration statement remains effective, promptly prepare, file and
furnish to each Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of the Registrable Securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing; (vii) notify
each Holder, promptly after it shall receive notice thereof, of the date and
time the registration statement and each post-effective amendment thereto has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed; (viii) notify each Holder promptly of any
request by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information; and (ix) advise each
Holder, promptly after it shall receive notice or obtain knowledge thereof, of
the issuance of any stop order by the Commission suspending the effectiveness of
the registration statement or the initiation or threatening of any proceeding
for that purpose and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order should be issued.
5. AVAILABILITY OF FORM S-3. IWL shall use its best efforts to qualify
for registration on Form S-3 (or a successor form). However, if IWL is unable
to qualify for registration on Form S-3 (or a successor form), or if Form S-3
(or a successor form) is not otherwise available for use by IWL, IWL shall have
no obligations under Section 2(a) hereof. Pursuant to the eligibility
requirements to use Form S-3, the earliest that IWL could qualify to use Form
S-3 is June 12, 1998.
6. EXPENSES. IWL shall pay the out-of-pocket expenses incurred by IWL,
other than underwriting discounts and commissions attributable to the shares
of the Holders, in connection with any registration of Registrable Securities
pursuant to this Registration Rights Agreement, including, without
limitation, all Commission, Nasdaq Stock Market, NASD and blue sky
registration and filing fees, printing expenses, transfer agents' and
registrars' fees, and the fees and disbursements of IWL's outside counsel and
independent accountants. Notwithstanding the above, the fees and expenses of
all counsel, accountants and advisors of the Holders shall be paid by the
Holders pro rata on the basis of the number of their shares so registered.
7. INDEMNIFICATION. In the event of any offering registered pursuant to
this Registration Rights Agreement:
a. IWL will indemnify each Holder, and each underwriter which
facilitates the disposition of such Registered Securities, and each of their
respective officers and directors, and each person controlling such Holder or
underwriter within the meaning of Section 15 of the Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Registration Rights Agreement, against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading, or any violation by IWL of any rule or regulation
promulgated under the Act, or state securities laws, or common law, applicable
to IWL in connection with any such registration, qualification or compliance,
and will reimburse each Holder, underwriter and the respective officers,
directors and controlling persons thereof, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or
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<PAGE>
defending any such claim, loss, damage, liability or action, provided that IWL
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to IWL in an instrument
(including, but not limited to the Share Purchase Agreement of even date
herewith) duly executed by any Holder.
b. Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which registration, qualification or
compliance is being effected, indemnify IWL, each of its directors and officers
and its legal counsel and independent accountants, each underwriter, if any, of
IWL's securities covered by such a registration statement, and each person who
controls IWL or such underwriter within the meaning of Section 15 of the Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) or a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse IWL,
such directors, officers, legal counsel, independent accountants, underwriters
or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to IWL in an instrument duly executed by such Holder (including, but
not limited to the Share Purchase Agreement of even date herewith); provided,
however, that the obligations of such Holders hereunder shall be limited to an
amount equal to the net proceeds, after deduction of expenses and commissions,
to each such Holder of Registrable Securities sold as contemplated herein.
c. Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has written notice of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that if Holder is the Indemnified Party
and the defendants in any such action shall include both Holder, as the
Indemnified Party, and the Indemnifying Party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the Indemnifying Party, the Indemnified Party
shall have the right to select separate counsel to assert such legal defenses
and otherwise participate in the defense of such action on behalf of such
Indemnified Party and the fees and expenses of such counsel shall be paid by the
Indemnifying Party. The failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Registration Rights Agreement, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against such claim or
litigation is materially prejudiced as a result of such failure to give notice.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
d. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection a. or b. above in respect of any
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<PAGE>
losses, claims, damages or liabilities (or actions in respect thereof) referred
to therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and the indemnified
party in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by such indemnifying party or by such indemnified party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties
hereto agree that it would not be just and equitable if contribution pursuant to
this Section 7.d. were determined by pro rata allocation (even if the Holders or
any underwriters, or all of them were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in this Section 7.d. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The obligations of the Holders
in this Section 7.d. to contribute shall be several in proportion to the
percentage of principal amount of Registrable Securities registered or
underwritten, as the case may be, by them and not joint.
e. The obligations of IWL and each Holder under this Section 7 shall
survive the completion of any offering of stock in a registration statement
under this Registration Rights Agreement and otherwise.
8. HOLDBACK AGREEMENTS. Each Holder shall enter into such agreements
(including underwriting agreements and lock-up agreements) as the managing
underwriter of any offering made by IWL and/or made by any selling shareholders,
in each case of IWL's equity securities registered under the Act, shall
reasonably request; provided that any holdback shall not exceed a period of
sixty (60) days before the filing date of such registration and one hundred
eighty (180) days after the effective date thereof (the "Lock-up Period")
9. TERMINATION. The registration rights set forth in this Registration
Rights Agreement shall terminate with respect to a Holder on the Expiration Date
or such earlier time as such Registrable Securities are exchanged for or
converted into securities in a transaction registered under the Act or at such
earlier time as such Holder has sold all Registrable Securities.
10. NOTICES. Notices may be given in the manner set forth in the Share
Purchase Agreement.
11. GOVERNING LAWS. This Registration Rights Agreement shall be governed
by the laws of the State of Texas, U.S.A.
12. COUNTERPARTS. This Registration Rights Agreement may be executed in
multiple counterparts, each of which shall constitute an original, but all of
which shall constitute but one and the same instrument. One or more counterpart
to this Registration Rights Agreement may be
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<PAGE>
delivered via telecopier, with the intention that they shall have the same
effect as an original counterpart hereof.
Executed this 22nd day of January, 1998.
IWL COMMUNICATIONS, INCORPORATED
By: /s/ Ignatius W. Leonards
---------------------------------
Its: Chief Executive Officer
---------------------------------
/s/ Thomas Norman Blair
--------------------------------------
Thomas Norman Blair
/s/ Margery Helen Blair
--------------------------------------
Margery Helen Blair
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<PAGE>
(214) 855-7500
July 8, 1998
CapRock Communications Corp.
Two Galleria Tower, Suite 1925
13455 Noel Road
Dallas, Texas 75240
Gentlemen:
We have acted as counsel to CapRock Communications Corp., a Texas
corporation (the "Company"), and IWL Communications, Incorporated, a Texas
corporation ("IWL"), in connection with the preparation, authorization,
execution and delivery of, and the consummation of the transactions contemplated
by, the Agreement and Plan of Merger and Plan of Exchange (the "Agreement"),
dated as of February 16, 1998, by and among IWL, the Company, IWL Acquisition
Corp., CapRock Telecommunications Corp. ("Telecommunications"), CapRock
Acquisition Corp., and CapRock Fiber Network, Ltd. Pursuant to the Agreement,
the Company has filed with the Securities and Exchange Commission a Registration
Statement on Form S-4 (the "Registration Statement") in connection with the
issuance of shares of common stock, par value $.01 per share, of the Company
("Common Stock"). The Registration Statement contains the Joint Proxy Statement
of IWL and Telecommunications and the Prospectus with respect to the Common
Stock (the "Joint Proxy/Prospectus").
In our capacity as counsel to the Company and IWL and for the purpose of
rendering the opinions hereinafter expressed, we have relied solely upon the
documents, certificates and other items described on EXHIBIT A attached hereto
and have made no other investigation or inquiry.
This opinion letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this opinion letter should be
read in conjunction therewith. The general qualifications of the Accord apply
to all of the opinions set forth herein.
Based solely upon the foregoing, and subject to the qualifications,
limitations, and assumptions set forth in the Accord and set forth below, we are
of the opinion that the shares of Common Stock to be issued pursuant to the
Registration Statement have been duly authorized and, when issued as
contemplated by the Agreement, will be validly issued, fully paid and
nonassessable.
<PAGE>
CapRock Communications Corp.
July 8, 1998
Page 2
The opinion set forth above is limited to the substantive laws of the State
of Texas and no opinion is expressed herein as to matters governed by any other
law.
This opinion is rendered solely to you in connection with the foregoing
matters. This opinion may not be relied upon by you for any other purpose or
relied upon by or furnished to any other person without our prior written
consent.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and also to the use of our name in the Registration
Statement and the prospectus that is deemed to be a part thereof under the
caption "Legal Matters" as having passed upon certain legal matters in
connection with the shares of Common Stock to be issued pursuant to the
Registration Statement. By so consenting, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ MUNSCH HARDT KOPF
HARR & DINAN, P.C.
<PAGE>
EXHIBIT A
1. Articles of Incorporation of the Company, as amended, as certified by the
Secretary of State of Texas on July 3, 1998.
2. Bylaws of the Company.
3. Certificate of Existence for the Company issued by the Secretary of State
of Texas on July 3, 1998.
4. Certificate of Good Standing for the Company issued by the Texas
Comptroller's Office on July 6, 1998.
5. Telephone confirmation by the Secretary of State of Texas on the date
hereof that the Company is validly existing under the laws of the State of
Texas and telephone confirmation by the Texas Comptroller's Office on the
date hereof that the Company is in good standing.
6. Officers' Certificate of the Company in support of this opinion executed by
duly authorized officers of the Company, dated as of the date hereof,
certifying that the matters set forth therein are true and correct.
<PAGE>
[Form of Opinion to be issued as of Effective Date of Form S-4]
July __, 1998
IWL Communications, Incorporated
12000 Aerospace Avenue, Suite 200
Houston, TX 77034
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed merger (the "Merger") of IWL Acquisition Corp.
("I-Sub"), a Texas corporation and a direct wholly-owned subsidiary of
CapRock Communications Corp., a Texas corporation formerly known as IWL
Holdings Corp. ("Holdings"), with and into IWL Communications, Incorporated,
a Texas corporation ("IWL").
In formulating our opinion, we examined such documents as we deemed
appropriate, including the Agreement and Plan of Merger and Plan of Exchange
dated as of February 16, 1998, as amended, by and among IWL, Holdings, I-Sub,
CapRock Telecommunications Corp., a Texas corporation formerly known as
CapRock Communications Corp. ("Telecommunications"), CapRock Acquisition
Corp. ("C-Sub"), a Texas corporation and a direct wholly-owned subsidiary of
Holdings, and CapRock Fiber Network, Ltd., a Texas limited partnership (the
"Partnership") (the "Merger Agreement"), and the Joint Proxy
Statement/Prospectus dated July __, 1998 (the "Joint Proxy Statement")
included in the Registration Statement on Form S-4 (the "Registration
Statement"), as filed by Holdings with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended, (the
"Securities Act") on July 9, 1998. Unless otherwise indicated, any defined
terms used herein have the same meaning as in the Joint Proxy Statement.
Our opinion set forth below assumes (1) the consummation of the Merger
in the manner contemplated by, and in accordance with the terms set forth in,
the Merger Agreement, the Joint Proxy Statement and the Registration
Statement and (2) the accuracy and completeness of (i) the statements and
facts concerning the Merger set forth in the Merger Agreement, the Joint
Proxy Statement, and the Registration Statement, (ii) the facts that are the
subject of the representations of Holdings and I-Sub set
<PAGE>
IWL Communications, Incorporated
Page 2
July 9, 1998
forth in the certificate delivered to us by Holdings and dated the date
hereof, and (iii) the facts that are the subject of the representations of
IWL set forth in the certificate delivered to us by IWL and dated the date
hereof.
Based upon the facts and statements set forth above, our examination and
review of the documents referred to above and subject to the assumptions set
forth above, as of the date hereof we are of the opinion that, the material
federal income tax consequences of the Transaction to the holders of IWL
Common Stock, Holdings, IWL, and I-Sub, are as follows:
1. no gain or loss will be recognized for federal income tax
purposes by holders of IWL Common Stock upon their exchange of IWL Common
Stock solely for Holdings Common Stock pursuant to the Merger;
2. the aggregate tax basis of Holdings Common Stock received by a
holder of IWL Common Stock as a result of the Merger will be the same as
such stockholder's aggregate tax basis in the IWL Common Stock surrendered
in the exchange;
3. assuming that the shares of IWL Common Stock surrendered in the
exchange constitute capital assets in a stockholder's hands, the holding
period of the Holdings Common Stock held by former holders of IWL Common
Stock as a result of the exchange will include the period during which such
shareholder held the IWL Common Stock exchanged; and
4. no gain or loss will be recognized for federal income tax
purposes by Holdings, IWL or I-Sub as a result of the formation of Holdings
or I-Sub or as a result of the Merger.
We express no opinion concerning any tax consequences of the Merger, other
than those specifically set forth herein.
Our opinion is based on current provisions of the Internal Revenue Code
of 1986, as amended, Treasury Regulations promulgated thereunder, pertinent
judicial authorities, interpretive rulings of the Internal Revenue Service
and such other authorities as we have considered relevant all as in effect on
the date hereof, any of which may be changed at any time with retroactive
effect. Any change after the date hereof in applicable laws or in the facts
and circumstances surrounding the Merger, or any inaccuracy in the
statements, facts, assumptions and representations on which we have relied,
may affect the continuing validity of the opinion set forth herein. We
assume no responsibility to inform you of any such change or inaccuracy that
may occur or come to our attention.
<PAGE>
IWL Communications, Incorporated
Page 3
July 9, 1998
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name under the
headings "THE TRANSACTION--Certain United States Federal Income Tax
Consequences of the Mergers" and "LEGAL MATTERS" in the Joint Proxy Statement
and to the filing of this opinion as an Exhibit to the Registration
Statement. In giving this consent we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
[to be signed:
"Munsch Hardt Kopf
Harr & Dinan, P.C."]
<PAGE>
[LETTERHEAD]
July __, 1998
Writer's Direct Dial Number Other Offices
Austin
Houston
214/939-5500
DRAFT - FORM OF OPINION TO BE ISSUED AS OF EFFECTIVE DATE OF FORM S-4
CapRock Telecommunications Corp.
CapRock Fiber Network, Ltd.
Two Galleria Tower
13455 Noel Road, Suite 1925
Dallas, Texas 75240
Ladies and Gentlemen:
We have acted as counsel for CapRock Telecommunications Corp.
("TELECOMMUNICATIONS") and CapRock Fiber Network, Ltd. (the "PARTNERSHIP") in
connection with, and you have requested our opinion with respect to certain
federal income tax consequences of, the transaction in which the businesses of
Telecommunications, the Partnership, and IWL Communications, Incorporated
("IWL") will be combined (the "TRANSACTION"), as described in the Joint Proxy
Statement/Prospectus (the "PROXY STATEMENT") included in the Registration
Statement on Form S-4 (the "REGISTRATION STATEMENT"), as filed with the
Securities and Exchange Commission (the "COMMISSION") under the Securities Act
of 1933, as amended (the "SECURITIES ACT"). All capitalized terms used herein,
unless otherwise specified, have the meanings assigned to them in the Proxy
Statement.
In rendering this opinion, we have examined executed originals,
counterparts or copies identified to our satisfaction as being true copies of
the Proxy Statement, the Agreement and Plan of Merger (the "MERGER AGREEMENT"),
dated as of February 16, 1998, as amended, among IWL Holdings Corp., IWL, IWL
Acquisition Corp., Telecommunications, CapRock Acquisition Corp. ("C-SUB"), the
Partnership, and each of the other documents and agreements specifically
referenced in both the Merger Agreement and the Proxy Statement (collectively,
the "COMBINATION DOCUMENTS"). In addition, we have relied upon certain
representations made by officers and employees of Telecommunications, the
Partnership and IWL, including those contained in the certificates of certain
officers of Telecommunications, the Partnership and IWL dated as of the date
hereof. Where such representations are made to the best knowledge and belief of
the person making such representations, we have assumed the facts to be as so
represented. Among other representations and assumptions, we have relied on (i)
representations from IWL, Telecommunications and the Partnership that they have
no knowledge of contracts entered into by the holders of IWL Common Stock, the
holders of Telecommunications Common Stock, or the Partners to sell Holdings
Common Stock that would cause them as a group not to have control of Holdings
(as defined in Section 368(c) of the Internal Revenue Code of 1986, as
A Registered Limited Liability Partnership Including Professional Corporations
<PAGE>
CapRock Telecommunications Corp.
CapRock Fiber Network, Ltd.
July __, 1998
Page
amended (the "CODE")) immediately after the Closing and (ii) the assumption that
any such contracts now existing or entered into prior to the Closing are not and
will not be of an aggregate magnitude that would cause the holders of IWL Common
Stock, the holders of Telecommunications Common Stock, or the Partners as a
group not to have control of Holdings (as defined in Section 368(c) of the Code)
immediately after the Closing. Our opinion is conditioned on the initial and
continuing accuracy of the statements, representations, and covenants referred
to above and we have not independently verified the accuracy or completeness of
such statements, representations, and covenants.
Based upon the foregoing and subject to the assumptions, qualifications and
limitations set forth herein, we are of the opinion that the material federal
income tax consequences of the Transaction to the holders of Telecommunications
Common Stock, Telecommunications, Holdings, the Partners and the Partnership are
as follows:
1. No gain or loss will be recognized for federal income tax consequences
by holders of Telecommunications Common Stock upon their exchange of
Telecommunications Common Stock solely for Holdings Common Stock pursuant to the
Merger.
2. The aggregate tax basis of Holdings Common Stock received by a holder
of Telecommunications Common Stock as a result of the Merger will be the same as
such stockholder's aggregate tax basis in the Telecommunications Common Stock
surrendered in the exchange.
3. Assuming that the shares of Telecommunications Common Stock
surrendered in the exchange constitute capital assets in a stockholder's hands,
the holding period of the Holdings Common Stock held by former holders of
Telecommunications Common Stock as a result of the exchange will include the
period during which such shareholder held the Telecommunications Common Stock
exchanged.
4. No gain or loss will be recognized for federal income tax purposes by
Holdings, Telecommunications or C-Sub as a result of the formation of Holdings
or C-Sub or as a result of the Merger.
5. No gain or loss will be recognized for federal income tax purposes by
the Partners upon their exchange of Partnership Interests for Holdings Common
Stock in the Interest Exchange.
6. The aggregate tax basis of Holdings Common Stock received by a Partner
as a result of the Interest Exchange will be the same as such Partner's
aggregate tax basis in the Partnership Interest surrendered in the exchange.
<PAGE>
CapRock Telecommunications Corp.
CapRock Fiber Network, Ltd.
July __, 1998
Page 3
7. Assuming that the Partnership Interest surrendered in the Interest
Exchange constitutes a capital asset in a Partner's hands, the holding period of
the Holdings Common Stock held by the former Partner as a result of the Interest
Exchange will include the period during which such former Partner held the
Partnership Interest exchanged.
8. No gain or loss will be recognized for federal income tax purposes by
Holdings or the Partnership as a result of the Interest Exchange.
The foregoing opinions are subject to the following additional assumptions,
qualifications, and limitations:
(a) We have assumed: (i) that each transaction contemplated by the
Combination Documents will be closed in accordance with the terms of such
Combination Documents without modification or waiver; (ii) that the Combination
Documents constitute the only documents containing the substantive terms of such
transactions; and (iii) that the Combination Documents have been duly
authorized, executed and delivered by all the parties thereto and are valid and
legally enforceable obligations of each of the parties thereto.
(b) This opinion is based upon present Federal income tax law, including
relevant statutes, regulations, and interpretations thereof by the Internal
Revenue Service and relevant courts, all of which are subject to change,
including effectively retroactive change.
(c) This opinion letter is limited to the matters stated herein as of the
date hereof. We disavow any obligation to update this opinion letter or advise
you of any changes in our opinions in the event of changes in applicable law or
facts becoming effective after the date hereof or of any additional or newly
discovered information that is brought to our attention.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name under the
headings "THE TRANSACTION--Certain United States Federal Income Tax Consequences
of the Mergers" and "LEGAL MATTERS" in the Proxy Statement and to the filing of
this opinion as an Exhibit to the Registration Statement. In giving this
consent we do not thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
[TO BE SIGNED: "HUGHES & LUCE, L.L.P."]
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of
the 10th day of January, 1997 by and between CapRock Fiber Network
("Borrower") and Bank One, Texas, N.A. ("Bank").
W I T N E S S E T H
WHEREAS, Borrower and Bank have entered into that certain Loan Agreement
dated as of July 1, 1996, as modified by that certain Letter Agreement
between Borrower and Bank dated October 28, 1996 (as so modified, the
"Original Agreement"), for the purposes and consideration therein expressed,
pursuant to which Bank became obligated to make and made loans to Borrower as
therein provided; and
WHEREAS, Borrower and Bank desire to amend the Original Agreement for
the purposes set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Bank to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I - DEFINITIONS AND REFERENCES
Section 1.1. TERMS DEFINED IN THE ORIGINAL AGREEMENT. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Agreement shall have the same meanings whenever
used in this Amendment.
Section 1.2 OTHER DEFINED TERMS. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.
"AMENDMENT" means this First Amendment to Loan Agreement.
"AMENDMENT DOCUMENTS" means this Amendment, the Guarantor Consents
and the Renewal Note.
"GUARANTOR CONSENTS" means each of the Guarantor Consent and
Agreements, substantially in the form of Exhibit B hereto.
"LOAN AGREEMENT" means the Original Agreement as amended hereby.
"ORIGINAL NOTE" means the "Note" referred to and defined as such in
the Original Agreement.
<PAGE>
ARTICLE II - AMENDMENTS TO ORIGINAL AGREEMENT
Section 2.1 CREDIT FACILITY. The first sentence of Section 1 of the
Original Agreement is hereby amended in its entirety to read as follows:
"Subject to the terms and conditions set forth in this Loan
Agreement and the other agreements, instruments and documents
evidencing, securing, governing, guaranteeing and/or pertaining to the
Loans, as hereinafter defined (collectively, together with the Loan
Agreement, referred to hereinafter as the "LOAN DOCUMENTS"), Bank hereby
agrees to make advances to Borrower, on a non-revolving basis from time
to time during the period commencing on the date hereof and continuing
through and including 11:00 a.m. (Central time) on MARCH 31, 1997, an
aggregate amount not to exceed $10,000,000 (the "MAXIMUM LOAN AMOUNT")
in a single advance or in multiple advances, as may be requested by
Borrower from time to time."
Section 2.2 FINANCIAL COVENANTS. Subparagraphs (a), (d) and (e) of
Section 11 of the Original Agreement are hereby amended in their entirety to
read as follows:
"(a) CASH RESERVES. Borrower will maintain, at all times from and
after JUNE 30, 1997, cash reserves in an amount not less than $100,000."
"(d) NET INCOME. Beginning with the fiscal quarter ending JUNE 30,
1997, and for each fiscal quarter thereafter, Borrower's net income
after Tax Distributions for any fiscal quarter will not be less than
$1,000."
"(e) CAPITAL EXPENDITURES. Borrower will not make capital
expenditures in excess of (i) $7,500 during the three fiscal quarters
commencing with the fiscal quarter ending on June 30, 1997 and ending
with the fiscal quarter ending on December 31, 1997 and (ii) $10,000
during any fiscal year, commencing with the fiscal year ending
DECEMBER 31, 1998, without prior written approval of Bank which shall
not be unreasonably withheld."
Section 2.3. REPORTING REQUIREMENTS. Subparagraph (a) of Section 12 of
the Original Agreement is hereby amended in its entirety to read as follows:
"(a) As soon as available, and in any event within thirty (30) days
after the end of each month, COMMENCING WITH THE MONTH ENDING MARCH 31,
1997, a balance sheet, income statement and cash flows of Borrower as of
the end of such month, all in form and substance and in reasonable
detail satisfactory to Bank and duly certified (subject to year-end
review adjustments) by the President and/or Chief Financial Officer of
General Partner (i) as being true and correct in all material aspects to
the best of his or her knowledge and (ii) as having been prepared in
accordance with generally accepted accounting principles, consistently
applied;"'
Section 2.4 WAIVER RE: REPORTING REQUIREMENTS. Borrower acknowledges
that it has failed to deliver for each month since July 1996 the documents
required to be delivered under Section 12(a) of the Original Agreement. Bank
hereby waives any Event of Default arising directly therefrom.
-2-
<PAGE>
SECTION 2.5. WAIVER RE: PRINCIPAL PAYMENT. Borrower acknowledges that
it did not make the mandatory prepayment of principal due on December 31, 1996
in violation of paragraph 5 of the Original Note. Bank hereby waives any
Event of Default arising directly therefrom.
ARTICLE III. - CONDITIONS OF EFFECTIVENESS
SECTION 3.1. EFFECTIVE DATE. This Amendment shall become effective as
of the date first above written when and only when (i) Bank shall have
received, at Bank's office, a counterpart of this Amendment executed and
delivered by Borrower, (ii) Borrower shall have issued and delivered to Bank
a promissory note with appropriate insertions in the form attached hereto as
Exhibit A payable to the order of Bank on or before March 31, 2002 (such note
being herein called the "Renewal Note"), duly executed on behalf of Borrower,
dated the date hereof, and expressly renewing the Original Note, and (iii)
Bank shall have additionally received all of the following documents, each
document (unless otherwise indicated) being dated the date of receipt thereof
by Bank, duly authorized, executed and delivered, and in form and substance
satisfactory to Bank:
(a) GUARANTORS CONSENTS. The Guarantor Consents, executed and
delivered by each Guarantor.
(b) SUPPORTING DOCUMENTS. (i) A certificate of the Secretary and
President of General Partner dated the date of this Amendment certifying
(A) that all of the representations and warranties set forth in Article IV
hereof are true and correct at and as of the time of such effectiveness,
(B) that on the date hereof, $6,849,826.51 of Loans have been made to
Borrower from Bank and the Network is substantially completed through Edna
Regen #2, (C) that attached thereto is a true and complete copy of
resolutions adopted by the Board of Directors of General Partner
authorizing the execution, delivery and performance of this Amendment and
the Renewal Note and (D) the names and true signatures of the officers of
General Partner authorized to sign this Amendment and the Renewal Note and
(ii) such supporting documents as Bank may reasonably request.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF BORROWER. In order to
induce Bank to enter into this Amendment, Borrower represents and warrants to
Bank that:
(a) The representations and warranties contained in Section 7 of
the Original Agreement are true and correct at and as of the time of the
effectiveness hereof.
(b) Borrower and each Guarantor is duly authorized to execute and
deliver each Amendment Document to which it is a party and Borrower is and
will continue to be duly authorized to borrow and to perform its
obligations under the Loan Agreement. Borrower and each Guarantor which is
a corporation has duly taken all corporate action necessary to authorize
the execution and delivery of each Amendment Document to which it is a
party and to authorize the performance of its obligations thereunder.
(c) The execution and delivery by Borrower and each Guarantor of
each Amendment Document to which it is a party, the performance by
Borrower and each Guarantor of their obligations thereunder and the
consummation of the transactions contemplated thereby do not and will not
conflict with any provision of law, statute, rule
-3-
<PAGE>
or regulation or any organizational document of Borrower or any
Guarantor, or of any material agreement, judgment, license, order or
permit applicable to or binding upon Borrower or any Guarantor, or result
in the creation of any lien, charge or encumbrance upon any assets or
properties of Borrower or any Guarantor. Except for those which have been
duly obtained, no consent, approval, authorization or order of any court
or governmental authority or third party is required in connection with
the execution and delivery by Borrower and each Guarantor of each Amendment
Document to which it is a party or to consummate the transactions
contemplated hereby.
(d) When duly executed and delivered, the Loan Agreement and each
Amendment Document will be a legal and binding instrument and agreement
of Borrower and each Guarantor, to the extent each is a party thereto,
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency and similar laws applying to creditors' rights generally and by
principles of equity applying to creditors' rights generally.
ARTICLE V - MISCELLANEOUS
SECTION 5.1. RATIFICATION OF AGREEMENTS. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. Any
reference to the Note in any other Loan Document shall be deemed to be a
reference to the Renewal Note issued and delivered pursuant to this Amendment.
All Loan Documents (expressly including without limitation for purposes of
this paragraph, the Mortgage), as they may be amended or affected by the
various Amendment Documents, are hereby ratified and confirmed in all
respects. Any reference to the Loan Agreement in any Loan Document shall be
deemed to refer to this Amendment also. The execution, delivery and
effectiveness of the Amendment Documents shall not, except as expressly
provided herein or therein, operate as a waiver of any right, power or remedy
of Bank under the Loan Agreement or any other Loan Document nor constitute a
waiver of any provision of the Loan Agreement or any other Loan Document,
including without limitation Borrower's obligation to comply with Section
12(a) of the Loan Agreement and paragraph 5 of the Renewal Note.
SECTION 5.2. SURVIVAL OF AGREEMENTS. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loans and the issuance and delivery
of the Renewal Note, and shall further survive until all of the Obligations
are paid in full. All statements and agreements contained in any certificate
or instrument delivered by Borrower or General Partner hereunder or under the
Loan Agreement to Bank shall be deemed to constitute representations and
warranties by, or agreements and covenants of, Borrower under this Amendment
and under the Loan Agreement.
SECTION 5.3. LOAN DOCUMENTS. The Amendment Documents are Loan
Documents, and all provisions in the Loan Agreement pertaining to Loan
Documents apply hereto and thereto.
SECTION 5.4. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and any
applicable laws of the United States of America in all respects, including
construction, validity and performance.
SECTION 5.5. COUNTERPARTS. This Amendment may be separately executed
in counterparts and by the different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Amendment.
-4-
<PAGE>
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
[the remainder of this page intentionally left blank]
-5-
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
BANK ONE, TEXAS, N.A.
By: /s/ Gina A. Norris
----------------------------------
Gina A. Norris
Vice President
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.
General Partner
By: /s/ Jere W. Thompson, Jr.
----------------------------------
Jere W. Thompson, Jr.
President
-6-
<PAGE>
[EXECUTION]
SECOND AMENDMENT TO LOAN AGREEMENT
of
CAPROCK FIBER NETWORK, LTD.
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of
April 29, 1998 by and between CapRock Fiber Network, Ltd. ("Borrower") and
Bank One, Texas, N.A. ("Bank").
W I T N E S S E T H:
WHEREAS, Borrower and Bank have entered into that certain Loan Agreement
dated as of July 1, 1996 (as supplemented or amended to the date hereof, the
"Original Agreement"), for the purposes and consideration therein expressed,
pursuant to which Bank became obligated to make and made loans to Borrower as
therein provided; and
WHEREAS, Borrower and Bank desire to amend the Original Agreement for
the purposes set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Bank to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I. - DEFINITIONS AND REFERENCES
SECTION 1.1 TERMS DEFINED IN THE ORIGINAL AGREEMENT. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Agreement shall have the same meanings whenever
used in this Agreement.
SECTION 1.2 OTHER DEFINED TERMS. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.
"AMENDMENT" means this Second Amendment to Loan Agreement.
"AMENDMENT DOCUMENT" means this Amendment and the Guarantor Consents.
"GUARANTOR CONSENTS" means each of the Guarantor Consent and
Agreements, substantially in the form of Exhibit A hereto.
"LOAN AGREEMENT" means the Original Agreement as amended hereby.
ARTICLE II. - AMENDMENTS TO ORIGINAL AGREEMENT
Section 2.1. AFFIRMATIVE COVENANTS. The following Section 9(k) is
hereby added to Section 9 of the Original Agreement to provide as follows:
<PAGE>
"(k) MANDATORY PREPAYMENT IN FULL. Upon the completion of both
the Note Offering and the Merger, Borrower shall pay the Loan in full.
As used herein, "Note Offering" shall mean the note offering by Borrower
in the amount of at least $100,000,000 or more and "Merger" shall mean
the merger of CapRock Communications Corporation, Borrower and IWL
Communications Incorporated with CapRock Communications Corporation
being the surviving entity."
SECTION 2.2. FINANCIAL COVENANTS.
a. The first sentence of Section 11(b) of the Original Agreement is
hereby amended to read in its entirety as follows:
"(b) DEBT TEST. Borrower's Debt to Adjusted Income shall not be
greater than (A) 5.5 to 1.0 of each fiscal quarter through June 30, 1998
and (B) 4.5 to 1.0 as of September 30, 1998 and as of each fiscal quarter
thereafter."
b. Section 11(e) of the Original Agreement is hereby amended to read
in its entirety as follows:
"(e) CAPITAL EXPENDITURES. Borrower will not make capital
expenditures in excess of, (i) during the fiscal year ending December 31,
1998, $7,000,000 and (ii) for any fiscal year thereafter, $10,000,000
without the prior written approval of Bank, which shall not be unreasonably
withheld."
SECTION 2.3. EVENTS OF DEFAULT. The following Section 13(h) is hereby
added to Section 13 of the Original Agreement to provide as follows:
"(h) The failure of Borrower to have successfully completed the
Note Offering and the Merger (as defined in Section 9(k) above) by July 31,
1998."
SECTION 2.4. WAIVER RE: FINANCIAL COVENANTS. Bank hereby waives any
Event of Default occurring pursuant to Section 11(b) of the Loan Agreement
for the periods ending on or prior to March 31, 1998.
SECTION 2.5. RELEASE OF GUARANTIES. CapRock Communications Corporation
intends to merger with Borrower and IWL Communications Incorporated (the
"Merger"), with CapRock Communications Corporation being the surviving entity
(the "Surviving Entity"), pursuant to a Merger Agreement among all such
merged entities ("Merger Agreement"). Subject to the complete satisfaction
of the following conditions, as determined by Bank in its sole discretion,
Bank shall release the Guarantors from their obligations under the Guaranties:
(a) all of the terms and conditions of the Merger and the Merger
Agreement are approved by Bank;
(b) the Surviving Entity unconditionally assumes all indebtedness,
obligations and covenants of Borrower under the Loan Documents;
(c) all liens and security interests in favor of Bank encumbering
property of Borrower continue in full force and effect on such property
after the date of the Merger;
2
<PAGE>
(d) the Surviving Entity, upon the request of Bank, and at the
Surviving Entity's expense, executes and delivers to Bank any and all
documents as may be necessary to provide for the assumption described in
clause (b) above and to continue the liens and security interests
described in clause (c) above;
(e) counsel to Borrower delivers to Bank a legal opinion
certifying that (i) the Merger has been consummated, (ii) the Surviving
Entity has assumed all indebtedness, obligations and covenants of
Borrower under the Loan Documents, and (iii) all liens and security
interests in favor of Bank encumbering property of Borrower shall continue
to be effective after the effective date of the Merger; and
(f) No Default or Event of Default exists immediately prior to the
Merger.
ARTICLE III. - CONDITIONS OF EFFECTIVENESS
Section 3.1. EFFECTIVE DATE. This Amendment shall become effective as
of the date first above written when and only when Bank shall have received,
at Bank's office, and executed by, if applicable, Borrower or any Guarantor:
a. this Amendment;
b. a certificate of the Secretary of Borrower dated the date of this
Amendment certifying that attached thereto is a true and complete
copy of resolutions adopted by the Board of Directors of Borrower
authorizing the execution, delivery and performance of this
Amendment, certifying the names and true signatures of the officers
of Borrower authorized to sign this Amendment and certifying that
all of the representations and warranties set forth in Article IV
hereof are true and correct at and as of the time of such
effectiveness;
c. a Consent of each Guarantor; and
d. such supporting documents as Bank may reasonably request.
ARTICLE IV. - REPRESENTATIONS AND WARRANTIES
Section 4.1. REPRESENTATIONS AND WARRANTIES OF BORROWER. In order to
induce Bank to enter into this Amendment, Borrower represents and warrants to
Bank that:
(a) The representations and warranties contained in Section 7 of
the Original Agreement are true and correct at and as of the time of the
effectiveness hereof.
(b) Borrower and each Guarantor is duly authorized to execute and
deliver each Amendment Document to which it is a party and Borrower is
and will continue to be duly authorized to borrow and to perform its
obligations under the Loan Agreement. Borrower and each Guarantor which
is a corporation has duly taken all corporate action necessary to
authorize the execution and delivery of each Amendment Document to which
it is a party and to authorize the performance of its obligations
thereunder.
3
<PAGE>
(c) The execution and delivery by Borrower and each Guarantor of
each Amendment Document to which it is a party, the performance by
Borrower and each Guarantor of their obligations thereunder and the
consummation of the transactions contemplated thereby do not and will
not conflict with any provision of law, statute, rule or regulation or
any organizational document of Borrower or any Guarantor, or of any
material agreement, judgment, license, order or permit applicable to or
binding upon Borrower or any Guarantor, or result in the creation of any
lien, charge or encumbrance upon any assets or properties of Borrower or
any Guarantor. Except for those which have been duly obtained, no
consent, approval, authorization or order of any court or governmental
authority or third party is required in connection with the execution
and delivery by Borrower and each Guarantor of each Amendment Document
to which it is a party or to consummate the transactions contemplated
hereby.
(d) When duly executed and delivered, the Loan Agreement and each
Amendment Document will be a legal and binding instrument and agreement
of Borrower and each Guarantor, to the extent each is a party thereto,
enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency and similar laws applying to creditors' rights
generally and by principles of equity applying to creditors' rights
generally.
ARTICLE V. - MISCELLANEOUS
Section 5.1. RATIFICATION OF AGREEMENTS. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. All Loan
Documents, as they may be amended or affected by the various Amendment
Documents, are hereby ratified and confirmed in all respects. Any reference
to the Loan Agreement in any Loan Document shall be deemed to refer to this
Amendment also. The execution, delivery and effectiveness of the Amendment
Documents shall not, except as expressly provided herein or therein, operate
as a waiver of any right, power or remedy of Bank under the Loan Agreement or
any other Loan Document nor constitute a waiver of any provision of the Loan
Agreement or any other Loan Document, including without limitation Borrower's
obligation to comply with Section 12(a) of the Loan Agreement.
Section 5.2. SURVIVAL OF AGREEMENTS. All representatives, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loans, and shall further survive
until all of the Obligations are paid in full. All statements and agreements
contained in any certificate or instrument delivered by Borrower or General
Partner hereunder or under the Loan Agreement to Bank shall be deemed to
constitute representations and warranties by, or agreements and covenants of,
Borrower under this Amendment and under the Loan Agreement.
Section 5.3. LOAN DOCUMENTS. The Amendment Documents are Loan
Documents, and all provisions in the Loan Agreement pertaining to Loan
Documents apply hereto and thereto.
Section 5.4. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and any
applicable laws of the United States of America in all respects, including
construction, validity and performance.
Section 5.5. COUNTERPARTS. This Amendment may be separately executed
in counterparts and by the different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Amendment.
4
<PAGE>
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
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5
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IN WITNESS WHEREOF, this Amendment is executed as of the day first above
written.
BANK ONE, TEXAS, N.A.
By: /s/ GINA A. NORRIS
-----------------------------------
Gina A. Norris
Vice President
CAPROCK FIBER NETWORK, LTD.
By: CapRock Systems, Inc.,
General Partner
By: /s/ JERE W. THOMPSON, JR.
-----------------------------------
Jere W. Thompson, Jr.
President
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LICENSE AGREEMENT
This License Agreement (this "Agreement") is entered into by and between
CapRock Communications Corp. ("CapRock"), a Texas corporation, and RiverRock
Systems, Ltd. ("RiverRock"), a Texas limited partnership, and is made effective
beginning on the date of last signature to this Agreement (the "Effective
Date").
R E C I T A L S
WHEREAS, RiverRock owns the System, as defined below; and
WHEREAS, pursuant to the conveyances discussed in the Partnership Agreement
(as defined below) and as more fully documented herein, RiverRock desires to
grant to CapRock and CapRock desires to receive from RiverRock, a license to the
System, as more fully described herein; and
WHEREAS, RiverRock and CapRock desire to enter into this Agreement to
document the agreement of the parties.
T E R M S A N D C O N D I T I O N S
NOW, THEREFORE, for and in consideration of the mutual premises set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto do hereby agree
as follows:
1. DEFINITIONS. The parties hereto agree that the following definitions
shall apply to this Agreement:
a. "Initial Commitment Period" shall mean the first three (3) years from
the Effective Date. Notwithstanding the preceding sentence, if after
the first three (3) years from the Effective Date, RiverRock is
continuing to be physically located within CapRock's business premises
or if RiverRock continues to use CapRock's data for test purposes,
then the Initial Commitment Period shall extend until such time as
RiverRock relocates to a business location separate from CapRock's
premises and RiverRock discontinues use of CapRock's data for testing
purposes.
b. "Maintenance" shall mean repairs, bug fixes and other maintenance or
upkeep to the System excluding: (i) System operational instruction;
(ii) installation of Specialized Customizations and Improvements or
Upgrades and Improvements, as provided in subparagraph 3.b.i., (iii)
administration of diskspace, user I.D.'s, back-ups, archives and
restores, and (iv) repairs necessitated by modifications to the System
not authorized by RiverRock.
LICENSE AGREEMENT Page 1
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c. "Partnership Agreement" shall mean that certain Agreement of Limited
Partnership of RiverRock Systems, Ltd., dated _________________, and
entered into between CapRock, TTI and David E. Thompson.
d. "Specialized Customizations and Improvements" shall mean
customizations or improvements to the System specifically requested by
CapRock and that: (i) have not been previously developed for a third
party; (ii) are not currently being developed for a third party; and
(iii) are not described on and/or included within Schedule C to the
Partnership Agreement.
e. "System" shall mean that certain computer program, in object code
form, initially developed by CapRock and TTI (with CapRock and TTI
assigning all of their respective rights to the System developments to
RiverRock as part of the Partnership Agreement and as more fully
documented herein) for use as a computer, rating, billing and customer
care, accounting and reporting system, commonly referred to as the SQL
Billing System.
f. "TTI" shall mean Thompson Technology, Inc., a Texas corporation.
g. "Upgrades and Improvements" shall mean any and all updates, upgrades,
new versions, enhancements and improvements to the System (excluding
only "Specialized Customizations and Improvements") as may be
developed by RiverRock internally and offered to RiverRock's
customers generally.
2. GRANT OF RIGHTS.
a. RiverRock hereby grants to CapRock and CapRock hereby accepts a
license (the "License") to use the System during the Term.
b. The License shall be perpetual, except as terminated pursuant to the
terms hereof.
c. The License will be royalty-free.
d. The License will be non-exclusive.
e. The License will be limited to use of the System on one server at a
central billing site, but shall permit LAN and WAN connectivity. For
purposes of LAN and WAN connectivity, the System software will be
stored on hardware located on one server at a central site, but
CapRock shall be permitted to link up to 250 terminals (whether
locally networked or accessed via modem or other communications
feature) with such terminals and/or PCs having sufficient System's
software, if any, to permit client functionality throughout the
terminals connected to the server. The license for any additional
terminals will be granted for consideration consistent with market
rates.
LICENSE AGREEMENT Page 2
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f. The License will be non-sublicensable and shall only be assignable
pursuant to the terms of paragraph 12. below.
3. FINANCIAL OBLIGATIONS AND ACCOUNTING.
a. ROYALTY. RiverRock agrees that the grant of the License to the System
to CapRock shall be royalty-free.
b. UPGRADES AND IMPROVEMENTS.
i. During the Initial Commitment Period, RiverRock shall promptly
make available, and if approved by CapRock, promptly deliver to
CapRock all Upgrades and Improvements to the System, at no charge
to CapRock with such Upgrades and Improvements, upon the delivery
thereof, to constitute a portion of the System and to be governed
by the terms hereof. "Promptly," as used in this paragraph,
shall mean a time of delivery no later than the earlier of: (i)
reasonable business practice; (ii) thirty (30) days after
completion and final testing of the Upgrades and Improvements;
and (iii) the least amount of time of guaranteed delivery of
Upgrades and Improvements made to other RiverRock customers
(provided, however, that if Upgrades and Improvements are created
for a third party, RiverRock may install such Upgrades and
Improvements for such third party before making available and, if
accepted by CapRock, delivering such Upgrades and Improvements to
CapRock). CapRock will pay reasonable fees and expenses
associated with the installation of the Upgrades and
Improvements, such fees and expenses to be no greater than
RiverRock's customary billing practice, but shall have no
responsibility to pay any of RiverRock's development and/or
testing costs.
ii. After the Initial Commitment Period, RiverRock shall promptly
inform CapRock of all available Upgrades and Improvements.
CapRock, at its sole discretion, may decide to purchase one or
more offered Upgrades and Improvements. Upon acceptance of the
Upgrades and Improvements, such Upgrades and Improvements shall
be incorporated into this Agreement, upon installation, or in the
mutual agreement of the parties, CapRock and RiverRock may enter
into a license agreement documenting the grant of the license to
use the Upgrades and Improvements, in either case, for a
consideration consistent with market rates for such Upgrades and
Improvements.
c. SPECIALIZED CUSTOMIZATIONS AND IMPROVEMENTS. During the Term,
CapRock may request Specialized Customizations and Improvements.
RiverRock shall use all reasonable efforts to perform the Specialized
Customizations and Improvements on a timely basis. The compensation
for the Specialized Customizations and
LICENSE AGREEMENT Page 3
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Improvements shall be negotiated in good faith by CapRock and
RiverRock, based on then existing market rates and conditions.
d. MAINTENANCE.
i. During the Initial Commitment Period, RiverRock shall perform
timely Maintenance to the System, at no charge to CapRock.
ii. After the Initial Commitment Period, RiverRock shall offer
Maintenance services to CapRock, at then reasonable business
terms (including, without limitation, length and cost of
agreement) for such services.
iii. RiverRock agrees to provide technical support with regard to use
of the System to CapRock in accordance with RiverRock's ordinary
business practices.
iv. Excluding the matters relating to the Source Code addressed in
paragraph 9. below, if RiverRock fails or refuses to begin
providing Maintenance, promptly, and in any event within three
(3) days after notice thereof by CapRock to RiverRock, or if
RiverRock fails or refuses to continue with good faith analysis
and repair after beginning such Maintenance, either during the
Initial Commitment Period or during any maintenance agreement
term thereafter, and if CapRock is required to use third parties
to provide and/or complete such Maintenance, then RiverRock shall
reimburse CapRock for the reasonable cost of such Maintenance.
4. TERM AND TERMINATION.
a. TERM. The rights granted under this Agreement by RiverRock to CapRock
shall commence upon the Effective Date and shall continue until
terminated pursuant to the terms of this Agreement (the "Term").
b. EARLY TERMINATION. This Agreement shall terminate only upon the
mutual consent of the parties or as described in paragraph 8. below.
5. WARRANTIES.
a. RiverRock does hereby warrant and represent to CapRock as follows:
i. RiverRock has the legal capacity and authority to enter into this
Agreement, to perform RiverRock's obligations hereunder, and to
become legally bound by the terms of this Agreement;
LICENSE AGREEMENT Page 4
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ii. save and except claims that may arise from portions of the System
contributed by CapRock, such contribution as more fully
documented within the Bill of Sale attached hereto as Exhibit
"A", the System, whether in whole or in part, as developed by
RiverRock and/or its agents after the Effective Date, will not
infringe upon or misappropriate any trade secrets, copyrights,
trademarks, patents, privacy, publicity, service marks, or other
third party rights;
iii. save and except claims that may arise from portions of the System
contributed by CapRock, such contribution as more fully
documented within the Bill of Sale attached hereto as Exhibit
"A", the use of the System, as developed by RiverRock and/or its
agents after the Effective Date, whether in whole or in part,
will not infringe upon or misappropriate any trade secrets,
copyrights, trademarks, patents, privacy, publicity, service
marks, or other third party rights;
iv. RiverRock has and will maintain all consents and licenses
necessary to RiverRock's performance hereunder during the Term of
this Agreement;
v. by entering into this Agreement and/or by performing hereunder,
RiverRock is not, and will not be, in violation of any third
party agreement;
vi. all material defects identified during the beta phase of System
development will be corrected through RiverRock's Maintenance
obligations (as described herein); provided, however, that such
warranty and representation does not extend to defects arising
from unauthorized modifications to the System, performed by
CapRock without the consent or direction of RiverRock; and
vii. from and after the beta phase of System development, the System
will materially operate pursuant to the specifications for the
System stated in Exhibit "C" to the Partnership Agreement and in
any documentation prepared by RiverRock, and accepted by CapRock
in writing, and all maintenance and/or repair will be performed
as Maintenance (as described herein); provided, however, that
such warranty and representation does not extend to defects
arising from unauthorized modifications to the System, performed
by CapRock without the consent or direction of RiverRock.
b. CapRock does hereby warrant and represent to RiverRock as follows:
i. CapRock has the legal capacity and authority to enter into this
Agreement, to perform CapRock's obligations hereunder and to
become legally bound by the terms of this Agreement; and
ii. by entering into this Agreement and/or performing hereunder,
CapRock is not, and will not be, in violation of any third party
agreement.
LICENSE AGREEMENT Page 5
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c. THE EXPRESS REPRESENTATIONS AND WARRANTIES STATED HEREIN AND IN THE
PARTNERSHIP AGREEMENT RELATING TO THE OPERATION AND FUNCTIONALITY OF
THE SYSTEM ARE THE ONLY REPRESENTATIONS AND WARRANTIES MADE BY
RIVERROCK RELATING TO THE OPERATION AND FUNCTIONALITY OF THE SYSTEM.
EXPRESSLY EXCLUDED ARE ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE RELATING TO THE SYSTEM.
6. RIVERROCK INDEMNIFICATION.
a. RiverRock hereby agrees to indemnify, hold harmless and defend CapRock
and the CapRock Related Parties, as defined below, from and against
any and all "RiverRock Claims", which shall mean any and all damages,
demands, claims, losses, causes of action, liabilities, lawsuits,
judgments and expenses (including, without limitation, reasonable
attorneys' fees and expenses) arising from, relating to or in
connection with one (1) or more of the following:
i. a material breach of this Agreement by RiverRock;
ii. a claim that the System, as developed by RiverRock and/or its
agents after the Effective Date, whether in whole or in part,
infringes upon or misappropriates a patent, copyright, trademark,
trade secret, privacy, publicity or other proprietary right of
any third party; or
iii. a claim that the use of the System, as developed by RiverRock
and/or its agents after the Effective Date, infringes upon or
misappropriates a patent, copyright, trademark, trade secret,
privacy, publicity or other proprietary right of any third party.
b. For purposes of subparagraphs 6.a. and 6.b. and paragraph 23. below,
the term "CapRock Related Parties" shall mean predecessors, permitted
successors, permitted assigns, officers, directors, shareholders,
employees, agents and representatives of CapRock. CapRock agrees to
notify RiverRock of any such RiverRock Claims within a reasonable time
after CapRock learns of same. RiverRock, at its own expense, shall
defend CapRock and the CapRock Related Parties from any and all
RiverRock Claims. CapRock and the CapRock Related Parties reserve the
right to participate in any defense of the RiverRock Claims with
counsel of their choice, and at their own expense. In the event
RiverRock fails to provide a defense, then, in addition to all other
RiverRock Claims, RiverRock shall be liable for paying the reasonable
attorneys' fees and expenses incurred by CapRock and the CapRock
Related Parties regarding
LICENSE AGREEMENT Page 6
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the defense of the RiverRock Claims. CapRock and the CapRock Related
Parties, as applicable, agree to reasonably assist in the defense of
the RiverRock Claims.
c. No settlement of the RiverRock Claims shall be valid or binding
without the prior approval of RiverRock, which approval shall not be
unreasonably delayed or withheld. No settlement may include any
admission of fault or liability on the part of the indemnified party
without the prior written consent of the indemnified party.
d. The parties agree that claims arising from the following shall be
excluded from the representations and warranties coverage of RiverRock
as set forth in paragraphs 6.a.ii. and 6.a.iii above: (1) claims that
may arise from portions of the System contributed by CapRock, such
contribution as more fully documented within the Bill of Sale attached
hereto as Exhibit "A"; and (2) claims that may arise from unauthorized
modifications to the System, performed by CapRock without the consent
or direction of RiverRock.
7. CAPROCK INDEMNIFICATION.
a. CapRock hereby agrees to indemnify, hold harmless and defend RiverRock
and the RiverRock Related Parties, as defined below, from and against
any and all "CapRock Claims", which shall mean any and all damages,
demands, claims, losses, causes of action, liabilities, lawsuits,
judgments and expenses (including, without limitation, reasonable
attorneys' fees and expenses) arising from or relating to a material
breach of this Agreement by CapRock and arising from unauthorized
modifications to the System, performed by CapRock without the consent
or direction of RiverRock.
b. For purposes of subparagraphs 7.a. and 7.b. and paragraph 23. below,
the term "RiverRock Related Parties" shall mean predecessors,
permitted successors, permitted assigns, officers, partners (including
the officers, directors and shareholders of such partners), employees,
agents and representatives of RiverRock. RiverRock agrees to notify
CapRock of any such CapRock Claims within a reasonable time after
RiverRock learns of same. CapRock, at its own expense, shall defend
RiverRock and the RiverRock Related Parties from any and all CapRock
Claims. RiverRock and the RiverRock Related Parties reserve the right
to participate in any defense of the CapRock Claims with counsel of
their choice, and at their own expense. In the event CapRock fails to
provide a defense, then, in addition to all other CapRock Claims,
CapRock shall be liable for paying the reasonable attorneys' fees and
expenses incurred by RiverRock and the RiverRock Related Parties
regarding the defense of the CapRock Claims. RiverRock and the
RiverRock Related Parties, as applicable, agree to reasonably assist
in the defense of the CapRock Claims.
c. No settlement of the CapRock Claims shall be valid or binding without
the prior approval of CapRock, which approval shall not be
unreasonably delayed or withheld.
LICENSE AGREEMENT Page 7
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No settlement may include any admission of fault or liability on the
part of the indemnified party without the prior written consent of
the indemnified party.
8. REMEDIES.
a. REMEDIES UPON A BREACH BY RIVERROCK: In the event of a material
breach of this Agreement by RiverRock, and a failure by RiverRock to
cure such material breach within thirty (30) days after delivery by
CapRock of written notice of such material breach to RiverRock,
CapRock shall be permitted to pursue all remedies available at law or
equity, including, without limitation, a termination of this
Agreement. Notwithstanding the preceding, the right of CapRock to
terminate this Agreement after such thirty (30) day period shall be
deferred, if, and only if: (i) the breach relates to the operation of
the System or the provision of Maintenance; and (ii) RiverRock has
begun the Maintenance within the original thirty (30) day period and
such Maintenance has continued with good faith analysis and repair.
If for any ten (10) day period, RiverRock shall cease such good faith
analysis and repair, CapRock may pursue all remedies at law or equity,
including, without limitation, termination of this Agreement, with
such termination effective upon receipt of written notice by
RiverRock. Notwithstanding any other terms hereof, RiverRock shall
have no liability for consequential, exemplary or incidental damages
relating to or arising out of the operation or functionality of the
System other than the obligations to perform Maintenance on the System
and/or the provision of the Upgrades and Improvements as described in
this Agreement, and the other remedies set forth in the Partnership
Agreement.
b. REMEDIES UPON A BREACH BY CAPROCK: In the event of a material breach
of this Agreement by CapRock and CapRock's failure to cure such
material breach within thirty (30) days from CapRock's receipt of a
written notice of default from RiverRock, RiverRock's shall be
permitted to pursue all remedies available at law or equity; provided,
however, that RiverRock may only terminate the License upon the
following:
i. continued failure of CapRock to pay any fees or payments
described herein for thirty (30) days after written notice of
such failure is delivered by RiverRock to CapRock; or
ii. material breach of the Agreement, other than as described in
subparagraph 8.b.i. above or as a result of a Source Code
Disclosure, and the continuation of such material breach for
thirty (30) days after delivery of written notice by RiverRock to
CapRock identifying such material breach. The parties
acknowledge and agree that a Source Code Disclosure shall mean a
disclosure of the Source Code other than as permitted by this
Agreement. Upon a Source Code Disclosure, RiverRock may pursue
against CapRock or third
LICENSE AGREEMENT Page 8
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parties, and CapRock agrees to cooperate in pursuing remedies
against third parties, all remedies at law or in equity save and
except that such remedy shall not include termination of the
License.
If a dispute exists as to whether or not a fee or payment is due or if
a material breach of the Agreement has occurred, either party may
submit this dispute to the ADR provisions (the "ADR Proceedings") of
paragraph 24. below for resolution. If a party hereto (the "Alleging
Party") submits a fee, payment or material breach dispute to the ADR
Proceedings, the termination rights of the other party hereto (the
"Non-Alleging Party"), if any, shall be deferred until the Non-
Alleging Party receives a favorable outcome from the ADR Proceedings
finding such fee or payment is due or that a material breach by the
Alleging Party occurred, and the continuation of such failed payment
or breach for ten (10) days after the Alleging Party's receipt of
notice of such ADR determination.
c. NON-WAIVER: Pursuit of any remedy by either party shall not
constitute a waiver of any other right or remedy by such party under
this Agreement or under applicable law.
9. SOURCE CODE.
a. Upon execution of this Agreement, RiverRock shall deliver to the
CapRock Lockbox Representative a complete copy of the source code for
the System (the "System Source Code"). With the delivery of each
Upgrade and Improvement or Specialized Customizations and
Improvements, RiverRock shall deliver to the CapRock Lockbox
Representative the System Source Code supporting the same.
Periodically, no more often than twice during any calendar year,
CapRock may request, and RiverRock shall deliver a complete and
current copy of the System Source Code. Upon any delivery of a
revised and/or updated full copy of the System Source Code, CapRock
shall return all prior copies of the System Source Code to RiverRock.
As used herein, the "CapRock Lockbox Representative" shall mean two
officers of CapRock, as agreed upon by CapRock and RiverRock. The
initial CapRock Lockbox Representative shall be Tim Rogers and Jere
Thompson. The CapRock Lockbox Representatives may only be replaced or
removed by the written agreement of both CapRock and RiverRock. If
there is ever a refusal or excessive delay (exceeding ten (10) days
after written notice) of RiverRock in reasonably approving a CapRock
Lockbox Representative, the parties acknowledge and agree that the
CapRock Lockbox Representative shall be the individual serving in the
following officer position of CapRock, to be selected in the following
successive order: Chief Executive Officer, Executive Vice President,
President and Chief Financial Officer. After such designation,
RiverRock agrees to execute any and all reasonable documentation
necessary to provide such individual Lockbox (as defined below)
access. Upon request by the President of RiverRock, the CapRock
Lockbox Representative shall
LICENSE AGREEMENT Page 9
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accompany a RiverRock representative, at such time reasonably
requested by RiverRock, for purposes of inspection of the content
of the Lockbox.
b. Upon receipt of the System Source Code, the CapRock Lockbox
Representative shall deliver the same to a safe deposit box (the
"Lockbox") at a financial institution (the "Lockbox Institution")
mutually agreed upon by CapRock and RiverRock. The initial Lockbox
Institution shall be ________________________. The Lockbox
Institution may only be changed by the written agreement of both
CapRock and RiverRock. The only persons having authority to access
the Lockbox will be the CapRock Lockbox Representatives.
c. If CapRock identifies what it in good faith believes to be a System
error causing a malfunction to the System operation, CapRock shall
contact a RiverRock Contact (the "Initial Error Notice"). As used
herein, the initial "RiverRock Contacts" shall mean any RiverRock
employee, including, without limitation, David E. Thompson. From time
to time, by written notice, RiverRock may change and/or limit the
RiverRock Contacts, but at no time shall the number of RiverRock
Contacts be less than four (4); provided, however, that if the total
number of RiverRock employees is less than four (4), the number of
RiverRock Contacts shall be equal to the number of RiverRock
employees.
d. The RiverRock Contacts shall respond to CapRock with reasonable
suggestions, if any, as to how to address the identified error or to
identify the time frame in which RiverRock can begin an analysis and
repair.
e. If within three (3) days from the Initial Error Notice, RiverRock has
not begun a good faith analysis concerning, and good faith efforts
with regard to, the repair of the identified error, the CapRock
Lockbox Representatives, or either of them, shall have the authority
to, and may, retrieve the System Source Code from the Lockbox and
deliver the System Source Code to the CapRock System Analyst. Prior
to retrieval of the System Source Code from the Lockbox, CapRock shall
provide notice to RiverRock by e-mail, telephone message or fax;
provided, however, that CapRock has no obligation to await a response
to such e-mail, telephone message or fax prior to retrieving the
System Source Code. The initial "CapRock System Analyst" shall be
Alan Winn. The CapRock System Analyst may be changed only by the
written agreement of RiverRock and CapRock, such agreement not to be
unreasonably withheld or delayed. If it becomes necessary to
designate a replacement, each of RiverRock and CapRock agree to
cooperate reasonably and in good faith regarding designation of a
replacement CapRock System Analyst. However, if a CapRock System
Analyst has not been agreed upon, within ten (10) days of written
request from CapRock to RiverRock for such agreement, CapRock shall
designate CapRock's highest ranking programmer as the CapRock System
Analyst.
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f. For seven (7) days after removal of the System Source Code from the
Lockbox, the CapRock System Analyst shall have the authority to review
the System Source Code with the design of identifying and correcting
the identified System error. While other personnel, whether CapRock
or otherwise, may provide assistance to the CapRock System Analyst's
efforts to correct the System error, such other personnel shall not
have access or the authority to review the System Source Code. If
during such seven (7) day period, RiverRock personnel responds to the
Initial Error Notice and in good faith begins substantial analysis and
repair of the identified error, the System Source Code will be
returned to the Lockbox and the CapRock System Analyst will turn error
analysis and repair over to RiverRock.
g. If after the seven (7) day period described in the preceding
subparagraph the CapRock System Analyst has not been able to repair
the System error and if RiverRock has still failed to begin good faith
analysis and repair efforts, CapRock has the authority to hire a third
party systems analyst, whether an individual or firm (the "Third Party
System Analyst") to begin repair efforts. The Third Party System
Analyst shall have access to the System Source Code to facilitate
these repairs. If RiverRock responds to the Initial Error Notice and
in good faith begins substantial analysis and repair of the identified
error during the period that the Third Party System Analyst has access
to the System Source Code, then the System Source Code will be
returned to the Lockbox and the Third Party System Analyst will turn
error analysis and repair over to RiverRock.
h. The System Source Code will only be revealed to the CapRock System
Analyst or the Third Party System Analyst after such party has
executed a non-disclosure and confidentiality agreement in a form
agreeable to both RiverRock and CapRock.
i. The parties acknowledge that the provisions of this paragraph 9. are
unique based upon the special relationship existing between the
parties. If the License is assigned by CapRock to any entity other
than a CapRock Permitted Assignee, as defined in paragraph 12. below,
or if CapRock sells all or substantially all of its assets or equity
to an entity other than a CapRock Permitted Assignee, this paragraph
shall be deleted in its entirety.
j. Except as permitted by the terms and conditions of this paragraph 9,
CapRock agrees not to disclose the System Source Code to any party.
k. Upon termination of this paragraph 9 or upon termination of this
Agreement, CapRock agrees to return all copies of the System Source
Code to RiverRock.
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10. CONFIDENTIALITY.
a. "Confidential Information" shall include, but not be limited to,
financial information, business plans, customer lists, billing
information, software source code technology, software object code
technology, other trade secrets, personnel information, and any other
material known to be or marked as confidential or proprietary.
b. It is understood and agreed that any Confidential Information of
either party hereto that may from time to time be made available or
become known to the other party hereto is to be treated as
confidential, is to be copied only as necessary to further the purpose
of this Agreement, is to be used solely in connection with performance
under this Agreement, and is to be disclosed only to employees who
have a need for access; provided, however, that the System Source Code
shall not be copied and may only be used pursuant to the terms and
conditions of paragraph 9.
c. In order to protect the confidentiality of the other party's
Confidential Information, each party hereto agrees to use measures
similar to or more restrictive than those measures each party uses to
protect its own similar Confidential Information; provided that, at a
minimum, the measures to be taken shall be reasonable and shall be
customary in the industry.
d. "Confidential Information" shall NOT include information that:
i. is now or subsequently becomes generally available to the public
with the prior written consent of the owner of such information;
ii. is released, in writing, by the owner of such information for
general publication;
iii. is independently developed by the receiving party without the use
of any Confidential Information or any other information received
in violation of a nondisclosure and/or confidentiality agreement;
or
iv. the receiving party lawfully obtains from a third party who has
the lawful right, in writing, to transfer or disclose such
information, without restriction.
e. Notwithstanding anything contained herein to the contrary, it shall
not be a breach of this provision for either party to disclose such
information required to be disclosed in connection with an
administrative, regulatory or judicial process or proceeding;
provided, however, that prompt notice to the non-disclosing party is
given of the possibility of such disclosure and that the party which
may be compelled to disclose shall use all reasonable efforts to
resist disclosure and to otherwise protect the
LICENSE AGREEMENT Page 12
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information from further disclosure, including, without limitation,
seeking a protective order or similar ruling on the proceeding.
11. ENTIRE AGREEMENT. Except as may be contained in the Partnership
Agreement and its related documents (including, without limitation, the
Management Services Agreement), this Agreement and the Exhibits attached hereto
constitute the entire understanding between RiverRock and CapRock regarding the
subject matter hereof. No prior or present agreements or representations
regarding the subject matter hereof shall be binding upon any of the parties
hereto unless incorporated in this Agreement. No modification or change in this
Agreement shall be valid or binding upon the parties unless in writing and
executed by the parties to be bound thereby.
12. ASSIGNMENT. This Agreement is unique and personal and may not be
assigned except to a CapRock Permitted Assignee or except with the prior written
consent of both parties. As used herein, a "CapRock Permitted Assignee" shall
mean any entity to which the security holders of CapRock shall maintain direct
or indirect control. The parties agree that the occurrence of any one (1) or
more of the following shall cause a loss of "direct or indirect control" of the
assigning party (the "Assignor") and shall not be permitted except with the
prior written consent of the other party hereto:
a. the issuance or Transfer of an amount of the Assignor's securities or
other equity to elect a majority of Assignor's board of directors,
general partners, or other controlling body; or
b. the Transfer of all or substantially all of Assignor's assets, whether
in one transaction or a series of related transactions; or
c. the reorganization, merger or consolidation of Assignor with any other
entity with the reasonably likely result that the owners of the
Assignor on the date of the signing of such agreement relating to such
reorganization, merger or consolidation will not have sufficient
voting power after giving effect to such transaction to elect a
majority of the board of directors, general partners or other
controlling body of the surviving entity.
As used herein this paragraph 12., "Transfer" shall mean any sale, assignment,
transfer, lease or other disposal of property. Without limiting the foregoing,
the parties specifically acknowledge and agree that CapRock may assign its
rights under this Agreement to any one of the resultant entities arising from
that certain Agreement and Plan of Merger and Plan of Exchange among IWL
Holdings Corp., IWL Communications Incorporated, IWL Acquisition Corp., CapRock
Communications Corp., CapRock Acquisition Corp. and CapRock Fiber Network, Ltd.
dated on or about February 16, 1998.
13. CHOICE OF LAW, VENUE AND SERVICE OF PROCESS. This Agreement shall be
construed in accordance with the laws of the State of Texas and applicable
United States federal law and all claims and/or lawsuits in connection with this
Agreement must be brought in Dallas County, Texas, wherein exclusive venue shall
lie.
LICENSE AGREEMENT Page 13
<PAGE>
14. ATTORNEYS' FEES. Except as otherwise provided herein, in the event of
litigation regarding this Agreement, the prevailing litigant shall be allowed to
recover the prevailing litigant's attorneys' fees, expenses, and costs of court
from the losing litigant.
15. DELIVERY OF NOTICES AND DELIVERY OF PAYMENTS. Unless otherwise
directed in writing by the parties, all notices given hereunder and all payments
to be made hereunder shall be sent to the addresses, as applicable, set forth on
the signature page hereof. All notices, requests, consents and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or three (3) days after the
date deposited in the United States Postal Service, postage prepaid, by
certified mail, return receipt requested, or telegraphed and confirmed, or
delivered by electronic facsimile and confirmed. Any notice to CapRock shall
also be sent to its counsel: William D. Hayward, Esquire, Hiersche, Martens,
Hayward, Drakeley & Urbach, P.C., 15303 Dallas Parkway, Suite 700, LB 17,
Dallas, Texas 75248. Any notice to RiverRock shall also be sent to its
counsel: Whit Roberts, Esquire, Locke Purnell Rain Harrell, 2200 Ross Avenue,
Suite 2200, Dallas, Texas 75201-6776.
16. NO PARTNERSHIP, ETC. This Agreement does not constitute and shall not
be construed as constituting a partnership or joint venture between CapRock and
RiverRock. Neither party shall have any right to obligate or bind the other
party in any manner whatsoever, and nothing herein contained shall give, or is
intended to give, any rights of any kind to any third persons.
17. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which will be deemed to be an original, and each of which alone and all
of which together, shall constitute one and the same instrument, but in making
proof of this Agreement it shall not be necessary to produce or account for each
copy of any counterpart other than the counterpart signed by the party against
whom this Agreement is to be enforced. This Agreement may be transmitted by
facsimile, and it is the intent of the parties for the facsimile (or a photocopy
thereof) of any autograph printed by a receiving facsimile machine to be an
original signature and for the facsimile (or a photocopy thereof) and any
complete photocopy of the Agreement to be deemed an original counterpart.
18. CAPTIONS. All captions in this Agreement are intended solely for the
convenience of the parties, and none shall effect the meaning or construction of
any provision.
19. FREE NEGOTIATION. The terms and conditions of this Agreement have
been negotiated fully and freely among the parties. Accordingly, the
preparation of this Agreement by counsel for a given party will not be material
to the construction hereof, and the terms of this Agreement shall not be
strictly construed against such party.
20. SEVERABILITY. If any provision of this Agreement shall be held
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not in any manner affect or render invalid or
unenforceable any other provisions of this Agreement. This Agreement shall be
carried out as if any such invalid or unenforceable provision were not contained
LICENSE AGREEMENT Page 14
<PAGE>
herein, and in place thereof, the parties desire that a court of competent
jurisdiction reform such part, term or provision in such manner as to
approximate the intent of the parties as expressed in this Agreement.
21. SURVIVAL. The following provisions shall survive the expiration or
earlier termination of this Agreement: paragraphs 6., 7., 9.k., 10., 13., 21.
and 23.
22. CONTRIBUTION OF SYSTEM OWNERSHIP. As noted above, and as more fully
described in the Partnership Agreement, in consideration of the rights and
obligations set forth herein, and in the Partnership Agreement CapRock and TTI
have agreed to contribute all of their respective ownership rights in and to the
System as part of their respective capital contributions to the Partnership.
Attached hereto as Exhibits "A" and "B" are copies of Bills of Sale and
Assignment which CapRock and TTI agree to execute with execution of this
Agreement to confirm this transfer and conveyance and which are hereby
incorporated by reference.
23. CAPROCK AND TTI INDEMNIFICATION OBLIGATIONS.
a. CapRock hereby agrees to indemnify, hold harmless and defend
RiverRock, the RiverRock Related Parties, as defined in subparagraph
7.b. above, TTI and the TTI Related Parties, as defined below, from
and against all "CapRock Systems Claims," which shall mean any and all
damages, demands, claims, losses, causes of action, liabilities,
lawsuits, judgments and expenses (including, without limitation,
reasonable attorneys' fees and expenses) arising from, relating to or
in connection with one (1) or more of the following:
i. a claim that any part of the System, as contributed to RiverRock
by CapRock, whether in whole or in part, infringes upon or
misappropriates a patent, copyright, trademark, trade secret,
privacy, publicity or other proprietary right of any third party;
or
ii. a claim that the use of any part of the System, as contributed to
RiverRock by CapRock, whether in whole or in part, infringes upon
or misappropriates a patent, copyright, trademark, trade secret,
privacy, publicity or other proprietary right of any third party.
b. For purposes of subparagraphs 23.a. and 23.b. "TTI Related Parties"
shall mean predecessors, successors, assigns, officers, directors,
shareholders, employees, agents and representatives of TTI. RiverRock
and/or TTI agree to notify CapRock of any such CapRock Systems Claims
within a reasonable time after RiverRock and/or TTI learns of same.
CapRock, at its own expense, shall defend RiverRock, the RiverRock
Related Parties, TTI and the TTI Related Parties from any and all
CapRock Systems Claims. RiverRock, the RiverRock Related Parties, TTI
and the TTI Related Parties reserve the right to participate in any
defense of the CapRock Systems Claims with
LICENSE AGREEMENT Page 15
<PAGE>
counsel of their choice, and at their expense. In the event
CapRock fails to provide a defense, then, in addition to all other
CapRock Systems Claims, CapRock shall be liable for paying the
reasonable attorneys' fees and expenses incurred by RiverRock, the
RiverRock Related Parties, TTI and the TTI Related Parties
regarding the defense of the CapRock Systems Claims. RiverRock,
the RiverRock Related Parties, TTI and the TTI Related Parties, as
applicable, agree to reasonably assist in the defense of the
CapRock Systems Claims.
c. No settlement of the CapRock Systems Claims shall be valid or binding
without the prior approval of each of RiverRock and TTI, which
approvals shall not be unreasonably delayed or withheld. No
settlement may include any admission of fault or liability on the part
of the indemnified party without the prior written consent of the
indemnified party.
d. TTI hereby agrees to indemnify, hold harmless and defend RiverRock,
the RiverRock Related Parties, as defined in subparagraph 7.b. above,
CapRock and the CapRock Related Parties, as defined in subparagraph
6.b. above, from and against all "TTI Systems Claims," which shall
mean any and all damages, demands, claims, losses, causes of action,
liabilities, lawsuits, judgments and expenses (including, without
limitation, reasonable attorneys' fees and expenses) arising from,
relating to or in connection with one (1) or more of the following:
i. a claim that any part of the System, as contributed to RiverRock
by TTI, whether in whole or in part, infringes upon or
misappropriates a patent, copyright, trademark, trade secret,
privacy, publicity or other proprietary right of any third party;
or
ii. a claim that the use of any part of the System, as contributed to
RiverRock by TTI, whether in whole or in part, infringes upon or
misappropriates a patent, copyright, trademark, trade secret,
privacy, publicity or other proprietary right of any third party.
e. RiverRock and CapRock agree to notify TTI of any such TTI Systems
Claims within a reasonable time after RiverRock and/or CapRock learns
of same. TTI, at its own expense, shall defend RiverRock, the
RiverRock Related Parties, CapRock and the CapRock Related Parties
from any and all TTI Systems Claims. RiverRock, the RiverRock Related
Parties, CapRock and the CapRock Related Parties reserve the right to
participate in any defense of the TTI Systems Claims with counsel of
their choice, and at their expense. In the event CapRock fails to
provide a defense, then, in addition to all other TTI Systems Claims,
TTI shall be liable for paying the reasonable attorneys' fees and
expenses incurred by RiverRock, the RiverRock Related Parties, CapRock
and the CapRock Related Parties regarding the defense of the TTI
Systems Claims. RiverRock, the RiverRock Related Parties, CapRock and
LICENSE AGREEMENT Page 16
<PAGE>
the CapRock Related Parties, as applicable, agree to reasonably assist
in the defense of the TTI Systems Claims.
f. No settlement of the TTI Systems Claims shall be valid or binding
without the prior approval of each of RiverRock and CapRock, which
approvals shall not be unreasonably delayed or withheld. No
settlement may include any admission of fault or liability on the part
of the indemnified party without the prior written consent of the
indemnified party.
24. ALTERNATIVE DISPUTE RESOLUTION.
a. MEDIATION. The parties agree to submit any dispute arising out of
paragraph 8. of this Agreement to non-binding mediation prior to
bringing such claim, controversy or dispute in an arbitral tribunal,
court or any other tribunal. The mediation shall be conducted in
Dallas, Texas, through either an individual mediator or a mediator
appointed by a mediation services organization or body experienced in
the mediation of general business disputes, agreed upon by the parties
and, failing such agreement within a reasonable period of time after a
party has notified the other party of its desire to seek mediation of
such dispute (not to exceed ten (10) days), by the American
Arbitration Association in accordance with its rules governing
mediation. The costs and expenses of mediation, including
compensation and expenses of the mediator (and except for the
attorneys' fees incurred by the parties), shall be borne by the
parties equally.
b. ARBITRATION.
i. If the parties are unable to resolve the claim, controversy or
dispute within sixty (60) days after the mediator has been
chosen, then any such controversy or dispute shall be finally
settled by arbitration in accordance with the terms hereof. Such
arbitration may be initiated by any party serving upon the other
party notice (1) stating that the notifying party desires to have
such controversy reviewed by a board of the arbitrators, and
(2) naming one person whom such party chooses to act as one of
the three arbitrators. Within fifteen (15) days after receipt of
such a notice, the other party shall designate one person to act
as arbitrator and shall notify the party requesting arbitration
of such designation and the name of the person so designated. If
the party upon whom a request for arbitration is served shall
fail to designate its arbitrator within fifteen (15) days after
receipt of such a notice, then the arbitrator designated by the
party requesting arbitration shall act as the sole arbitrator to
resolve the controversy at hand.
ii. If the parties have designated arbitrators the two arbitrators
designated shall promptly select a third arbitrator. If the two
arbitrators chosen by the parties
LICENSE AGREEMENT Page 17
<PAGE>
hereto are not able to agree on such third arbitrator within
thirty (30) days after the second arbitrator is designated,
unless such time is extended by the parties, then either
arbitrator, on five (5) days' notice to the other, shall apply
to the American Arbitration Association to designate and appoint
such third arbitrator as promptly as practicable.
iii. The parties agree that all mediators and arbitrators chosen
pursuant to Sections 24.a. and 24.b. above shall not in any
manner be related to or affiliated with CapRock or RiverRock.
iv. The arbitral proceedings shall be conducted in Dallas, Texas in
accordance with and subject to the commercial arbitration rules
of the American Arbitration Association in effect from time to
time.
v. The decision in writing of the arbitrator(s) so selected or
appointed shall be final and conclusive upon both parties. The
costs and expenses of arbitration, including the compensation and
expenses of the arbitrator(s), shall be borne by the parties as
the arbitrator(s) may determine. Either party may apply to any
court which has jurisdiction for an order conforming the award.
Any right of either party to judicial action on any matter
subject to arbitration hereunder is hereby waived, except suit to
enforce the arbitration award.
25. OWNERSHIP OF THE SYSTEM. From and after execution of the Partnership
Agreement and this Agreement, including, without limitation, execution and
delivery of the Bill of Sales and Assignments attached hereto, and subject to
the rights granted to CapRock herein, title to and all applicable rights to
patents, copyrights, trademarks and trade secrets in the System, any Upgrades
and Improvements, any Specialized Customizations and Improvements and any other
modifications made to the System, whether or not authorized by RiverRock, shall
be the property of RiverRock.
LICENSE AGREEMENT Page 18
<PAGE>
By signing in the spaces provided below, the parties have agreed to all of
the terms and conditions set forth in this Agreement.
AGREED: AGREED:
RIVERROCK SYSTEMS, LTD. CAPROCK COMMUNICATIONS
CORP.
By: Thompson Technology, Inc.
General Partner
By: /s/ David E. Thompson By: /s/ Tim Rogers
------------------------------ ---------------------------------
Name: David E. Thompson Name: Tim Rogers
---------------------------- -------------------------------
Title: President Title: Executive V.P.
--------------------------- ------------------------------
Address: 4409 Shoal Creek Blvd. Address: 13455 Noel Road, Suite 1925
------------------------- ----------------------------
Austin, TX 78756 Dallas, Texas 75240
- --------------------------------- ------------------------------------
Telephone: 512-467-2171 Telephone: 972-780-4800
----------------------- --------------------------
Telecopier: 512-467-2191 Telecopier: 972-788-4243
---------------------- -------------------------
Date of Execution: June 16, 1998 Date of Execution: June 16, 1998
--------------- ------------------
AGREED FOR PURPOSES OF
PARAGRAPHS 22. AND 23. ONLY:
THOMPSON TECHNOLOGY, INC.
By: /s/ David E. Thompson
------------------------------
Name: David E. Thompson
----------------------------
Title: President
---------------------------
Address: 4409 Shoal Creek Blvd.
-------------------------
Austin, TX 78756
- ---------------------------------
Telephone: 512-467-2171
-----------------------
Telecopier: 512-467-2191
----------------------
Date of Execution: June 16, 1998
---------------
LICENSE AGREEMENT Page 19
<PAGE>
EXHIBIT "A"
BILL OF SALE AND ASSIGNMENT
This Bill of Sale and Assignment is made and entered into effective the
____ day of May, 1998, in Dallas, Texas, by and between CAPROCK COMMUNICATIONS
CORP., a Texas corporation ("CapRock"), and RIVERROCK SYSTEMS, LTD., a Texas
limited partnership ("RiverRock" or "Transferee").
WHEREAS, effective this date, CapRock did enter into and execute that
certain Agreement of Limited Partnership of RiverRock Systems, Ltd. (the
"Partnership Agreement"); and
WHEREAS, as part of CapRock's capital contribution to RiverRock, CapRock
did agree to transfer and assign all of its right, title and interest in and to
the SQL Billing System (the "System") to RiverRock, with CapRock receiving a
non-exclusive license with regard to future use of the System, all as more fully
described in the Partnership Agreement; and
WHEREAS, the parties hereto desire to enter into this Bill of Sale and
Assignment to document the foregoing;
NOW THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, CapRock and Transferee hereby agree as follows:
1. CapRock does hereby convey, transfer, assign, set over and deliver to
Transferee all of its right, title and interest in and to that certain software
program titled the SQL Billing System, including any and all source code, object
code, algorithms, drawings, schematics, modules, routines, subroutines,
techniques, other documentation and the like, and whether such coding or other
related material is in final, beta or any other stages of progress (the
"Software");
2. In further recognition of the full transfer of the Software, CapRock
hereby CONVEYS, QUITCLAIMS, GRANTS, TRANSFERS and ASSIGNS to Transferee and
Transferee hereby accepts from CapRock the CONVEYANCE, QUITCLAIM, GRANT,
TRANSFER and ASSIGNMENT, of all CapRock's right, title and interest, of any kind
and nature, free from all liens, claims and encumbrances, throughout the world,
in perpetuity, in and to the Software, and in and to all derivatives which may
be made therefrom (the "Derivatives"), in all media existing today and/or
hereafter developed, including, without limitation, all rights to sue for past
infringement in and to the Software and including the copyrights, trademarks,
service marks, patents, knowhow, inventions, discoveries, trade secrets,
proprietary and confidential information relating in and to the Software and the
Derivatives, and all extensions and renewals thereof.
LICENSE AGREEMENT Page 20
<PAGE>
3. The terms and conditions of this Bill of Sale and Assignment shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto.
4. THIS BILL OF SALE AND ASSIGNMENT IS MADE PURSUANT TO AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND
APPLICABLE FEDERAL LAW. THE APPROPRIATE STATE OR FEDERAL COURTS LOCATED IN
DALLAS COUNTY, TEXAS, SHALL HAVE JURISDICTION OVER ALL MATTERS ARISING UNDER
THIS BILL OF SALE AND ASSIGNMENT AND SHALL BE THE PROPER FORUMS IN WHICH TO
ADJUDICATE SUCH MATTERS.
5. In case of any one or more of the provisions of this Bill of Sale and
Assignment shall, for any reason, be held to be invalid, illegal, or
unenforceable in any effect, any other provision hereof and this instrument
shall be construed as if such invalid, illegal, or unenforceable provision(s)
had never been contained herein. Such invalid, illegal, or unenforceable
provision(s) shall be given effect to the maximum extent permitted by law.
6. The terms and conditions of this Bill of Sale and Assignment have been
negotiated fully and freely among the parties hereto, all of whom have had the
full and complete opportunity to be represented by legal counsel. This Bill of
Sale and Assignment may not be modified or amended except by an instrument in
writing executed by both CapRock and Transferee.
7. CapRock does hereby bind itself and its successors and assigns to
forever warrant and defend the title to the Software unto Transferee, against
all persons whosoever claiming, or to claim the same, or any part thereof.
CapRock does hereby represent and warrant to Transferee that: (a) the Software
does not infringe on any intellectual property right of any person or entity and
is hereby transferred and assigned to Transferee free and clear of any and all
claims, liens and encumbrances; (b) CapRock has all right and authority to enter
into and fulfill the terms of this Bill of Sale and Assignment; and (c) CapRock
owns fifty percent (50%) of the System and is transferring all such ownership to
RiverRock.
IN WITNESS WHEREOF, the undersigned parties hereto have executed this Bill
of Sale and Assignment effective the date first above written.
CAPROCK COMMUNICATIONS CORP. RIVERROCK SYSTEMS, LTD.
By: Thompson Technology, Inc.
General Partner
By: /s/ Tim Rogers By: /s/ David E. Thompson
------------------------------ --------------------------------
Name: Tim Rogers Name: David E. Thompson
---------------------------- ------------------------------
Title: Executive Vice President Title: President
--------------------------- -----------------------------
Date of Execution: June 16, 1998 Date of Execution: June 16, 1998
--------------- -----------------
LICENSE AGREEMENT Page 21
<PAGE>
EXHIBIT "B"
BILL OF SALE AND ASSIGNMENT
This Bill of Sale and Assignment is made and entered into effective the
____ day of May, 1998, in Dallas, Texas, by and between THOMPSON TECHNOLOGY,
INC. a Texas corporation ("TTI"), and RIVERROCK SYSTEMS, LTD., a Texas limited
partnership ("RiverRock" or "Transferee").
WHEREAS, effective this date, TTI did enter into and execute that certain
Agreement of Limited Partnership of RiverRock Systems, Ltd. (the "Partnership
Agreement"); and
WHEREAS, as part of TTI's capital contribution to RiverRock, TTI did agree
to transfer and assign all of its right, title and interest in and to the SQL
Billing System (the "System") to RiverRock; and
WHEREAS, the parties hereto desire to enter into this Bill of Sale and
Assignment to document the foregoing;
NOW THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, TTI and Transferee hereby agree as follows:
1. TTI does hereby convey, transfer, assign, set over and deliver to
Transferee all of its right, title and interest in and to that certain software
program titled the SQL Billing System, including any and all source code, object
code, algorithms, drawings, schematics, modules, routines, subroutines,
techniques, other documentation and the like, and whether such coding or other
related material is in final, beta or any other stages of progress (the
"Software");
2. In further recognition of the full transfer of the Software, TTI
hereby CONVEYS, QUITCLAIMS, GRANTS, TRANSFERS and ASSIGNS to Transferee and
Transferee hereby accepts from TTI the CONVEYANCE, QUITCLAIM, GRANT, TRANSFER
and ASSIGNMENT, of all TTI's right, title and interest, of any kind and nature,
free from all liens, claims and encumbrances, throughout the world, in
perpetuity, in and to the Software, and in and to all derivatives which may be
made therefrom (the "Derivatives"), in all media existing today and/or hereafter
developed, including, without limitation, all rights to sue for past
infringement in and to the Software and including the copyrights, trademarks,
service marks, patents, knowhow, inventions, discoveries, trade secrets,
proprietary and confidential information relating in and to the Software and the
Derivatives, and all extensions and renewals thereof.
LICENSE AGREEMENT Page 22
<PAGE>
3. The terms and conditions of this Bill of Sale and Assignment shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto.
4. THIS BILL OF SALE AND ASSIGNMENT IS MADE PURSUANT TO AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND
APPLICABLE FEDERAL LAW. THE APPROPRIATE STATE OR FEDERAL COURTS LOCATED IN
DALLAS COUNTY, TEXAS, SHALL HAVE JURISDICTION OVER ALL MATTERS ARISING UNDER
THIS BILL OF SALE AND ASSIGNMENT AND SHALL BE THE PROPER FORUMS IN WHICH TO
ADJUDICATE SUCH MATTERS.
5. In case of any one or more of the provisions of this Bill of Sale and
Assignment shall, for any reason, be held to be invalid, illegal, or
unenforceable in any effect, any other provision hereof and this instrument
shall be construed as if such invalid, illegal, or unenforceable provision(s)
had never been contained herein. Such invalid, illegal, or unenforceable
provision(s) shall be given effect to the maximum extent permitted by law.
6. The terms and conditions of this Bill of Sale and Assignment have been
negotiated fully and freely among the parties hereto, all of whom have had the
full and complete opportunity to be represented by legal counsel. This Bill of
Sale and Assignment may not be modified or amended except by an instrument in
writing executed by both TTI and Transferee.
7. TTI does hereby bind itself and its successors and assigns to forever
warrant and defend the title to the Software unto Transferee, against all
persons whosoever claiming, or to claim the same, or any part thereof. TTI does
hereby represent and warrant to Transferee that: (a) the Software does not
infringe on any intellectual property right of any person or entity and is
hereby transferred and assigned to Transferee free and clear of any and all
claims, liens and encumbrances; (b) TTI has all right and authority to enter
into and fulfill the terms of this Bill of Sale and Assignment; and (c) TTI owns
fifty percent (50%) of the System and is transferring all such ownership to
RiverRock.
IN WITNESS WHEREOF, the undersigned parties hereto have executed this Bill
of Sale and Assignment effective the date first above written.
THOMPSON TECHNOLOGY, INC. RIVERROCK SYSTEMS, LTD.
By: Thompson Technology, Inc.
General Partner
By: /s/ David E. Thompson By: /s/ David E. Thompson
------------------------------ --------------------------------
Name: David E. Thompson Name: David E. Thompson
---------------------------- ------------------------------
Title: President Title: President
--------------------------- -----------------------------
Date of Execution: June 16, 1998 Date of Execution: June 16, 1998
--------------- -----------------
LICENSE AGREEMENT Page 23
<PAGE>
June 11, 1998
LICENSE AGREEMENT Page 24
<PAGE>
Exhibit 23.1
The Board of Directors
CAPROCK TELECOMMUNICATIONS CORP.
(formerly CapRock Communications Corp.)
We consent to the use of our report related to CapRock Telecommunications Corp.
included herein and to the reference to our firm under the headings "Summary
Selected Historical Financial Data of Telecommunications," "Selected Historical
Financial Data of Telecommunications" and "Experts" in the joint proxy
statement/prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
July 9, 1998
<PAGE>
Exhibit 23.2
The Partners
CapRock Fiber Network, Ltd.
We consent to the use of our report related to CapRock Fiber Network, Ltd.
included herein and to the reference to our firm under the headings "Summary
Selected Historical Financial Data of the Partnership," "Selected Historical
Financial Data of the Partnership" and "Experts" in the joint proxy
statement/prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
July 9, 1998
<PAGE>
Exhibit 23.3
The Board of Directors
IWL Communications, Inc. and Subsidiaries
We consent to the use of our report related to IWL Communications, Inc. and
Subsidiaries included herein and to the reference to our firm under the headings
"Summary Selected Consolidated Historical Financial Data of IWL", "Selected
Historical Financial Data of IWL" and "Experts" in the joint proxy
statement/prospectus.
KPMG PEAT MARWICK LLP
Houston, Texas
July 9, 1998
<PAGE>
Exhibit 23.4
The Board of Directors
CapRock Communications Corp.
(formerly IWL Holdings Corporation)
We consent to the use of our report related to CapRock Communications Corp.
included herein and to the reference to our firm under the heading "Experts" in
the joint proxy statement/prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
July 9, 1998
<PAGE>
Exhibit 23.5
The Board of Directors
CAPROCK TELECOMMUNICATIONS CORP.
(formerly CapRock Communications Corp.)
The Partners of CAPROCK FIBER NETWORK, LTD.
We consent to the use of our report related to CapRock Telecommunications
Corp. and CapRock Fiber Network, Ltd. included herein and to the reference to
our firm under the headings "Summary Selected Historical Financial Data of
Telecommunications," "Summary Selected Historical Financial Data of the
Partnership," "Selected Historical Financial Data of Telecommunications,"
"Selected Historical Financial Data of the Partnership," and "Experts" in the
joint proxy statement/prospectus.
Burds Reed & Mercer, P.C.
Dallas, Texas
July 9, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF HUGHES & LUCE, L.L.P.
The opinion of Hughes & Luce, L.L.P. regarding certain federal income
tax matters set forth in Exhibit 8.2 to the CapRock Communications Corp.
Registration Statement on Form S-4 (the "Registration Statement") may be
filed as an exhibit to the Registration Statement. Hughes & Luce, L.L.P. also
consents to the reference to this firm as having passed on the validity of
certain federal income tax matters under the caption "Legal Matters" in the
prospectus that constitutes a part of the Registration Statement. In giving
this consent, we do not admit that we are included in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
